[Federal Register Volume 86, Number 15 (Tuesday, January 26, 2021)]
[Notices]
[Pages 7124-7127]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-01582]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90941; File No. SR-OCC-2021-001]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Update The Options Clearing Corporation's Operational Loss Fee Pursuant 
to Its Capital Management Policy

January 19, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on January 8, 2021, The Options Clearing 
Corporation (``OCC'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by OCC. OCC 
filed the proposed rule change pursuant to Section 19(b)(3)(A)(ii) \3\ 
of the Act and Rule 19b-4(f)(2) \4\ thereunder so that the proposal was 
effective upon filing with the Commission. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change by OCC would revise OCC's schedule of 
fees, effective January 21, 2021, to implement a change in the maximum 
contingent Operational Loss Fee in accordance with OCC's Capital 
Management Policy. Proposed changes to OCC's schedule of fees are 
attached as Exhibit 5 to File Number SR-OCC-2021-001. Material proposed 
to be added to OCC's schedule of fees as currently in effect is 
underlined and material proposed to be deleted is marked in 
strikethrough text. All capitalized terms not defined herein have the 
same meaning as set forth in the OCC By-Laws and Rules.\5\
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    \5\ OCC's By-Laws and Rules can be found on OCC's public 
website: https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. OCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(1) Purpose
    The purpose of this proposed rule change is to revise OCC's 
schedule of fees, effective January 21, 2021, to update the maximum 
aggregate Operational Loss Fee that OCC would charge Clearing Members 
in equal shares in the unlikely event that OCC's shareholders' equity 
(``Equity'') falls below certain thresholds defined in OCC's Capital 
Management Policy. The proposed fee change is designed to enable OCC to 
replenish capital to comply with Rule 17Ad-22(e)(15) under the Exchange 
Act, which requires OCC, in pertinent part, to ``hold[ ] liquid net 
assets funded by equity to the greater of either (x) six months . . . 
current operating expenses, or (y) the amount determined by the board 
of directors to be sufficient to ensure a recovery or orderly wind-down 
of critical operations and service'' \6\ and ``[m]aintain[ ] a viable 
plan, approved by the board of directors and updated at least annually, 
for raising additional equity should its equity fall close to or below 
the amount required [to be held].'' \7\
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    \6\ See 17 CFR 240.17Ad-22(e)(15)(ii).
    \7\ See 17 CFR 240.17Ad-22(e)(15)(iii).
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    In January 2020, the SEC approved OCC's Capital Management Policy, 
which includes OCC's replenishment plan.\8\ Pursuant to the Capital 
Management Policy, OCC would charge an Operational Loss Fee in equal 
shares to Clearing Members to raise additional capital should OCC's 
Equity fall below certain defined thresholds relative to OCC's Target 
Capital Requirement (i.e., a ``Trigger Event''), after first applying 
the unvested balance held in respect of OCC's Executive Deferred 
Compensation Program.\9\ Based on the current Board-approved Target 
Capital Requirement of $250 million, a Trigger Event would occur if 
OCC's Equity falls below $225 million at any time or below $250 million 
for a period of 90 consecutive calendar days.\10\
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    \8\ See Exchange Act Release No. 88029 (Jan. 24, 2020), 85 FR 
5500 (Jan. 30, 2020) (File No. SR-OCC-2019-007) (``Order Approving 
OCC's Capital Management Policy'').
    \9\ Id. at 5503.
    \10\ OCC's Capital Management Policy defines a ``Trigger Event'' 
as when OCC's Equity falls below 90% of OCC's Target Capital 
Requirement (i.e., the amount of Equity determined by OCC's Board to 
be sufficient for OCC to meet its regulatory obligations and to 
serve market participants and the public interest) or remains below 
the Target Capital Requirement for ninety consecutive calendar days. 
See id. at 5510.
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    In the unlikely event those thresholds are breached, OCC would 
charge an Operational Loss Fee in an amount to raise Equity to 110% of 
OCC's Target Capital Requirement, up to the maximum Operational Loss 
Fee identified in OCC's schedule of fees less the amount of any 
Operational Loss Fees previously charged and not refunded.\11\ OCC 
calculates the maximum aggregate Operational Loss Fee based on the 
amount determined by the Board of Directors to be sufficient for a 
recovery or orderly wind-down of critical operations and services 
(``RWD

[[Page 7125]]

Amount''),\12\ which is determined based on the assumptions in OCC's 
Recovery and Orderly Wind-Down Plan (``RWD Plan'').\13\ In order to 
account for OCC's tax liability for retaining the Operational Loss Fee 
as earnings, OCC may apply a tax gross-up to the RWD Amount (``Adjusted 
RWD Amount'') depending on whether the operational loss that caused 
OCC's Equity to fall below the Trigger Event thresholds is tax 
deductible.\14\
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    \11\ Id. at 5503.
    \12\ Id.
    \13\ See Exchange Act Release No. 83918 (Aug. 23, 2018), 83 FR 
44091, 44094 (Aug. 29, 2018) (SR-OCC-2017-021) (``Order Approving 
OCC's RWD Plan'').
    \14\ Order Approving OCC's Capital Management Policy, 85 FR at 
5503.
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    The RWD Amount and, in turn, the Adjusted RWD Amount are determined 
annually based on OCC's corporate budget, the assumptions articulated 
in the RWD Plan,\15\ and OCC's projected effective tax rate.\16\ The 
current Operational Loss Fee listed in OCC's schedule of fees is the 
Adjusted RWD Amount calculated based on OCC's 2020 corporate budget. 
Budgeted operating expenses in 2021 are slightly higher than the 2020 
budgeted operating expenses. This proposed rule change would revise the 
maximum Operational Loss Fee to reflect the Adjusted RWD Amount based 
on OCC's 2021 budget,\17\ as follows:
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    \15\ The RWD Plan states OCC's basic assumptions concerning the 
resolution process, including assumptions about the duration of the 
resolution process, the cost of the resolution process, OCC's 
capitalization through the resolution process, the maintenance of 
Critical Services and Critical Support Functions, as defined by the 
RWD Plan, and the retention of personnel and contractual 
relationships. See Order Approving OCC's RWD Plan, 83 FR at 44094.
    \16\ See Order Approving OCC's Capital Management Policy, 85 FR 
at 5501 n.20, 5503.
    \17\ Confidential data and analysis evidencing the calculation 
of the Adjusted RWD Amount based on OCC's 2021 corporate budget is 
included in Exhibit 3 to File Number SR-OCC-2021-001.

------------------------------------------------------------------------
          Current fee schedule                Proposed fee schedule
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$141,866,667.00 less the aggregate       $143,066,667.00 less the
 amount of Operational Loss Fees          aggregate amount of
 previously charged and not refunded as   Operational Loss Fees
 of the date calculated, divided by the   previously charged and not
 number of Clearing Members at the time   refunded as of the date
 charge.                                  calculated, divided by the
                                          number of Clearing Members at
                                          the time charge.
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    Since the allocation of the Operational Loss Fee is a function of 
the number of Clearing Members at the time of the charge, the maximum 
Operational Loss Fee per Clearing Member is subject to fluctuation 
during the course of the year. However, if the proposed Operational 
Loss Fee were charged to 107 Clearing Members, the number of Clearing 
Members as of December 31, 2020 for example, the maximum Operational 
Loss Fee per Clearing Member would be $1,337,072.
    OCC would also update the schedule of fees to reflect the levels of 
Equity at which OCC would charge the Operational Loss Fee according to 
the thresholds defined in the Capital Management Policy, as well as the 
level of Equity at which OCC would limit the Operational Loss Fee 
charged, based on OCC's current Target Capital Requirement.\18\
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    \18\ OCC does not propose any change to the thresholds and 
limits defined in the Capital Management Policy. This proposed 
change merely conforms the disclosure in OCC's schedule of fees to 
the current amounts based on the Board-approved Target Capital 
Requirement of $250 million.
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(2) Statutory Basis
    OCC believes the proposed rule change is consistent with the Act 
\19\ and the rules and regulations thereunder. In particular, OCC 
believes that the proposed fee change is also consistent with Section 
17A(b)(3)(D) of the Act,\20\ which requires that the rules of a 
clearing agency provide for the equitable allocation of reasonable 
dues, fees, and other charges among its participants. OCC believes that 
the proposed fee change is reasonable because it is based upon the RWD 
amount and designed to replenish OCC's Equity in the form of liquid net 
assets in the event that OCC's Equity falls close to or below its 
Target Capital Requirement so that OCC can continue to meet its 
obligations as a systemically important financial market utility 
(``SIFMU'') to Clearing Members and the general public should an 
operational losses materialize (including through a recovery or orderly 
wind-down of critical operations and services) and thereby facilitate 
compliance with Rule 17Ad-22(e)(15)(iii).\21\ The maximum Operational 
Loss Fee is sized to ensure that OCC maintains sufficient liquid net 
assets to support its RWD Plan and imposes a contingent obligation on 
Clearing Members that is approximately the same amount as a Clearing 
Member's contingent obligation for Clearing Fund assessments for a 
Clearing Member operating at the minimum Clearing Fund deposit.\22\ 
Therefore, OCC believes the proposed maximum Operational Loss Fee sized 
to OCC's Adjusted RWD Amount is reasonable.
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    \19\ 15 U.S.C. 78a et seq.
    \20\ 15 U.S.C. 78q-1(b)(3)(D).
    \21\ 17 CFR 240.17Ad-22(e)(15)(iii).
    \22\ A Clearing Member operating at the minimum Clearing Fund 
deposit ($500,000) could be assessed up to an additional $1 million 
(the minimum deposit, assessed up to two times), for a total 
contingent obligation of $1.5 million. See OCC Rule 1006(h).
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    OCC also believes that the proposed Operational Loss Fee would 
result in an equitable allocation of fees among its participants 
because it would be equally applicable to all Clearing Members. As the 
Commission has recognized, OCC's designation as a SIFMU and its role as 
the sole covered clearing agency for all listed options contracts in 
the U.S. makes it an integral part of the national system for clearance 
and settlement, through which ``Clearing Members, their customers, 
investors, and the markets as a whole derive significant benefit . . . 
regardless of their specific utilization of that system.'' \23\ Neither 
the SEC nor OCC has observed any correlation between measures of 
Clearing Member utilization or OCC's benefit to Clearing Members \24\ 
and its risk of operational loss.\25\ As a result, OCC believes that 
the proposed change to OCC's fee schedule provides for the equitable 
allocation of reasonable fees in accordance with Section 17A(b)(3)(D) 
of the Act.\26\
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    \23\ See Order Approving OCC's Capital Management Policy, 85 FR 
at 5506.
    \24\ Id. (``The Commission is not aware of evidence 
demonstrating that those benefits are tied directly or positively 
correlated to an individual Clearing Member's rate of utilization of 
OCC's clearance and settlement services.'')
    \25\ Id. (rejecting an objection to the equal allocation of the 
proposed Operational Loss Fee based on the SEC's regulatory 
experience and OCC's analyses of Clearing Member utilization (e.g., 
contract volume) or credit risk (e.g., Clearing Fund size) and the 
various operational and general business risks that could trigger an 
Operational Loss Fee). To date, OCC has observed no correlation 
between Clearing Member utilization or credit risk and OCC's 
potential risk of operational loss. See Confidential Exhibit 3.
    \26\ 15 U.S.C. 78q-1(b)(3)(D).
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    In addition, OCC believes that the proposed rule change is 
consistent with Rule 17Ad-22(e)(15)(iii), which requires that OCC 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to identify, monitor, and manage OCC's 
general business risk, including by

[[Page 7126]]

maintaining a viable plan, approved by the Board and updated at least 
annually, for raising additional equity should its equity fall close to 
or below the amount required under Rule 17Ad-22(e)(15)(ii).\27\ While 
Rule 17Ad-22(e)(15)(iii) does not by its terms specify the amount of 
additional equity a clearing agency's plan for replenishment capital 
must be designed to raise, the SEC's adopting release states that ``a 
viable plan generally should enable the covered clearing agency to hold 
sufficient liquid net assets to achieve recovery or orderly wind-
down.'' \28\ OCC sets the maximum Operational Loss Fee at an amount 
sufficient to raise, on a post-tax basis, the amount determined 
annually by the Board to be sufficient to ensure recovery or orderly 
wind-down pursuant to the RWD Plan.\29\ Therefore, OCC believes the 
proposed change to OCC's schedule of fees is consistent with Rule 17Ad-
22(e)(15)(iii) and the guidance provided by the SEC in the adopting 
release.
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    \27\ 17 CFR 240.17Ad-22(e)(15)(iii).
    \28\ Standards for Covered Clearing Agencies, Exchange Act 
Release No. 78961 (Sept. 28, 2016), 81 FR 70786, 70836 (Oct. 13, 
2016) (File No. S7-03-14).
    \29\ See Order Approving OCC's Capital Management Policy, 85 FR 
at 5510 (``The Operational Loss Fee would be sized to the Adjusted 
RWD Amount, and therefore would be designed to provide OCC with at 
least enough capital either to continue as a going concern or to 
wind-down in an orderly fashion.'')
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    OCC also believes that the proposed fee change is consistent with 
Section 19(g)(1) of the Act,\30\ which, among other things, requires 
every self-regulatory organization to comply with its own rules. OCC 
filed its Capital Management Policy as a ``proposed rule change'' 
within the meaning of Section 19(b) of the Act,\31\ and Rule 19b-4 
under the Act.\32\ The Capital Management Policy specifies that the 
maximum Operational Loss Fee shall be the Adjusted RWD Amount.\33\ 
Because the Adjusted RWD Amount will change annually based, in part, on 
OCC's corporate budget, fee filings are necessary to ensure that the 
maximum Operational Loss Fee in OCC's schedule of fees remains 
consistent with the amount identified in the Capital Management Policy. 
In addition, the amounts associated with the thresholds at which OCC 
would charge the Operational Loss Fee and the limit to the amount would 
change in accordance with the Capital Management Policy are determined 
based upon the level at which the Board sets OCC's Target Capital 
Requirement. Consequently, OCC seeks to amend the amounts identified in 
the schedule of fees to reflect OCC's current Target Capital 
Requirement. Therefore, OCC believes that the proposed change to OCC's 
fee schedule is consistent with Section 19(g)(1) of the Act.
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    \30\ 15 U.S.C. 78s(g)(1).
    \31\ 15 U.S.C. 78s(b).
    \32\ 17 CFR 240.19b-4.
    \33\ Order Approving OCC's Capital Management Policy, 85 FR at 
5503.
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    The proposed rule change is not inconsistent with the existing 
rules of OCC, including any other rules proposed to be amended.

(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act \34\ requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. OCC does not 
believe that the proposed rule change would have any impact or impose a 
burden on competition. Although the proposed Operational Loss Fee 
affects Clearing Members, their customers, and the markets that OCC 
serves, OCC believes that the proposed increase in the Operational Loss 
Fee would not disadvantage or favor any particular user of OCC's 
services in relationship to another user because the proposed 
Operational Loss Fee would apply equally to all Clearing Members. In 
addition, OCC does not believe that the proposed Operational Loss Fee 
imposes a significant burden on smaller firms because the maximum 
Operational Loss Fee imposes a contingent obligation on Clearing 
Members that is approximately the same amount as a Clearing Member's 
contingent obligation for Clearing Fund assessments for a Clearing 
Member operating at the minimum Clearing Fund deposit.\35\ Accordingly, 
OCC does not believe that the proposed rule change would have any 
impact or impose a burden on competition.
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    \34\ 15 U.S.C. 78q-1(b)(3)(I).
    \35\ See note 22, supra.
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments on the proposed rule change were not and are not 
intended to be solicited with respect to the proposed rule change and 
none have been received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Pursuant to Section 19(b)(3)(A)(ii) \36\ of the Act, and Rule 19b-
4(f)(2) thereunder,\37\ the proposed rule change is filed for immediate 
effectiveness as it constitutes a change in fees charged to OCC 
Clearing Members. At any time within 60 days of the filing of the 
proposed rule change, the Commission summarily may temporarily suspend 
such rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act. The 
proposal shall not take effect until all regulatory actions required 
with respect to the proposal are completed.\38\
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    \36\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \37\ 17 CFR 240.19b-4(f)(2).
    \38\ Notwithstanding its immediate effectiveness, implementation 
of this rule change will be delayed until this change is deemed 
certified under CFTC Regulation 40.6.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-OCC-2021-001 on the subject line.

Paper Comments

     Send paper comments in triplicate to Vanessa Countryman, 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2021-001. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the

[[Page 7127]]

Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for website viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE, Washington, DC 20549, on official 
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 
such filing also will be available for inspection and copying at the 
principal office of OCC and on OCC's website at https://www.theocc.com/about/publications/bylaws.jsp.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File Number SR-OCC-2021-001 and 
should be submitted on or before February 16, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
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    \39\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-01582 Filed 1-25-21; 8:45 am]
BILLING CODE 8011-01-P