[Federal Register Volume 86, Number 39 (Tuesday, March 2, 2021)]
[Notices]
[Pages 12237-12244]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-04217]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91199; File No. SR-OCC-2021-003]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Establish OCC's Persistent 
Minimum Skin-in-the-Game

February 24, 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 February 10, 2021, the Options Clearing 
Corporation (``OCC'' or ``Corporation'') 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. 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.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change would amend OCC's Rules, Capital 
Management Policy, and certain other OCC policies to establish a 
persistent minimum level of OCC's own pre-funded financial resources 
(commonly referred to as ``skin-in-the-game'') that OCC would 
contribute to cover default

[[Page 12238]]

losses or liquidity shortfalls. Amendments to OCC's Rules are included 
in Exhibit 5a of filing SR-OCC-2021-003. Amendments to OCC's Capital 
Management Policy are included in confidential Exhibit 5b of filing SR-
OCC-2021-003. OCC would also make conforming changes to the Default 
Management Policy, Clearing Fund Methodology Policy, and Recovery and 
Orderly Wind-Down Plan (``RWD Plan''), which can be found in 
confidential Exhibits 5c, 5d, and 5e of filing SR-OCC-2021-003, 
respectively, to reflect the amended default waterfall (i.e., the 
financial resources OCC would use to address default losses and 
liquidity shortfalls, listed in the order OCC would utilize them). 
Material proposed to be added is marked by underlining, and material 
proposed to be deleted is marked with strikethrough text. All terms 
with initial capitalization that are not otherwise defined herein have 
the same meaning as set forth in the OCC By-Laws and Rules.\3\
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    \3\ 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
    OCC is proposing to amend OCC's Rules, Capital Management Policy, 
and certain other policies to establish a persistent minimum level of 
skin-in-the-game that OCC would contribute to cover default losses or 
liquidity shortfalls, which would consist of a minimum amount of OCC's 
own pre-funded resources that OCC would charge prior to charging a loss 
to the Clearing Fund (as defined below, the ``Minimum Corporate 
Contribution'') and, as OCC's Rules currently provide, applicable funds 
held in trust in respect to OCC's Executive Deferred Compensation Plan 
(``EDCP'') (such funds, as defined in OCC's Rules, being the ``EDCP 
Unvested Balance'') that would be charged pari passu with the Clearing 
Fund deposits of non-defaulting Clearing Members. The persistent 
minimum level of skin-in-the-game would establish a floor for the pre-
funded resources OCC would contribute to cover default losses and 
liquidity shortfalls. In addition to this minimum, OCC would continue 
to commit its liquid net assets funded by equity (``LNAFBE'') \4\ 
greater than 110% of its Target Capital Requirement prior to charging a 
loss to the Clearing Fund.
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    \4\ International standards and the Commission's Rules 
established minimum LNAFBE requirements for financial market 
infrastructures and covered clearing agencies, respectively. See 
CPSS-IOSCO, Principles for financial market infrastructures, at 
Principle 15 (Apr. 16, 2012), available at http://www.bis.org/publ/cpss101a.pdf; 17 CFR 240.17Ad-22(e)(15). The Capital Management 
Policy defines ``LNAFBE'' as the level of cash and cash equivalents, 
no greater than Equity, less any approved adjustments (i.e., agency-
related liabilities such as Section 31 fees held by OCC).
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Background
    In January 2020, OCC implemented its Capital Management Policy, by 
which OCC (a) determines the amount of Equity \5\ sufficient for OCC to 
meet its regulatory obligations and to serve market participants and 
the public interest (as defined in OCC's Rules, the ``Target Capital 
Requirement''), (b) monitors Equity and LNAFBE levels to help ensure 
adequate financial resources are available to meet general business 
obligations; and (c) manages Equity levels, including by (i) adjusting 
OCC's fee schedule (as appropriate) and (ii) establishing a plan for 
accessing additional capital should OCC's Equity fall below certain 
thresholds (the ``Replenishment Plan'').\6\ In addition, OCC's Rules, 
the Capital Management Policy, and associated policies provide for the 
use of OCC's current and retained earnings in excess of 110% of the 
Target Capital Requirement (i.e., the ``Early Warning'' threshold under 
OCC's Replenishment Plan) to cover losses arising from a Clearing 
Member's default.\7\ While OCC's Rules previously provided for OCC to 
contribute its own capital to cover default losses at the Board's 
discretion, the Capital Management Policy changes made the contribution 
of such excess capital obligatory.\8\
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    \5\ The Capital Management Policy defines ``Equity'' as 
shareholders' equity as shown on OCC's Statement of Financial 
Condition.
    \6\ See Exchange Act Release No. 88029 (Jan. 24, 2020), 85 FR 
5500 (Jan. 30, 2020) (File No. SR-OCC-2019-007) (hereinafter, 
``Order Approving Capital Management Policy'').
    \7\ Id. at 5502.
    \8\ Use of excess capital to cover losses arising from the 
default of a bank or other clearing agency that is not otherwise 
associated with a Clearing Member default remains at the Board's 
discretion. See Rule 1006(e)(ii).
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    In the event of a Clearing Member default, OCC would contribute 
excess capital to cover losses remaining after applying the margin 
assets and Clearing Fund contribution of the defaulting Clearing Member 
and before charging the Clearing Fund contributions of non-defaulting 
Clearing Members. Should OCC's excess capital be insufficient to cover 
the loss, OCC also has another tranche of OCC resources in addition to 
the Clearing Fund; namely, the EDCP Unvested Balance.\9\ In the event 
of a default loss, the EDCP Unvested Balance is contributed pari passu 
with the Clearing Fund contributions of non-defaulting Clearing 
Members.
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    \9\ As defined in OCC's Rules, the EDCP Unvested Balance 
consists of funds (x) deposited on or after January 1, 2020 in 
respect of its EDCP and (y) in excess of amounts necessary to pay 
for benefits accrued and vested under the EDCP at such time.
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    The implementation of OCC's Capital Management Policy marked the 
first time OCC committed OCC's own pre-funded financial resources into 
OCC's approach to capital management and resiliency. In particular, OCC 
believes that the inclusion of the EDCP Unvested Balance is a powerful 
alignment of interest between management and Clearing Members. OCC 
takes seriously the interest of the industry and international 
regulators in seeing more significant skin-in-the-game commitments at 
central counterparties.
    To that end, OCC has reviewed feedback received in connection with 
the initial filing of the Capital Management Plan, relevant papers from 
industry participants and stakeholders concerning skin-in-the-game, and 
regulatory regimes in jurisdictions outside the United States. For one, 
a comment submitted in connection with the Capital Management Policy's 
filing urged OCC to implement a ``minimum amount of skin-in-the-game 
that `scales with risk and is defined and funded upfront' and . . . `to 
define a level of [skin-in-the-game] ex ante that would always be 
readily available in case of a default loss.' '' \10\ OCC has also 
reviewed the paper, ``A Path Forward for CCP Resilience, Recover, and 
Resolution,'' originally released in October 2019 with nine signatories 
and re-released in March of 2020 with ten additional signatories, 
representing major buy-side and sell-side firms in the markets OCC 
serves.\11\ One of the paper's significant

[[Page 12239]]

recommendations is that central counterparties should have skin-in-the-
game in a more defined manner.\12\ In contrast, OCC's current variable 
approach to skin-in-the-game does not guarantee a defined amount would 
be available as skin-in-the-game. Additionally, as OCC seeks 
recognition in the European Union and the United Kingdom, OCC is 
cognizant of the European Market Infrastructure Regulation's (``EMIR'') 
expectation that skin-in-the-game be a minimum of 25% of the central 
counterparty's regulatory capital requirement.\13\ Under the current 
Capital Management Policy, excess capital is not dedicated solely as 
skin-in-the-game and it is possible that OCC's capital in excess of 
110% of its Target Capital Requirement would be less than 25% of OCC's 
Target Capital Requirement.
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    \10\ Order Approving Capital Management Policy, 85 FR at 5507 
(quoting comments submitted by FIA).
    \11\ See ABN AMRO Clearing Bank N.V., et al., A Path Forward for 
CCP Resilience, Recovery, and Resolution (March 10, 2020), available 
at https://www.jpmorgan.com/solutions/cib/markets/a-path-forward-for-ccp-resilience-recovery-and-resolution.
    \12\ While OCC agrees with the paper's authors that central 
counterparties should have meaningful skin-in-the-game, OCC does not 
agree with the level of skin-in-the-game recommended in the paper. 
See Optimizing Incentives, Resilience and Stability in Central 
Counterparty Clearing: Perspectives on CCP Issues from a Utility 
Model Clearinghouse (September 22, 2020), available at https://www.theocc.com/Newsroom/Insights/2020/09-22-Optimizing-Incentives,-Resilience-and-Stabil.
    \13\ Though OCC, as a non-EU central counterparty, would not be 
subject directly to the EMIR standards or the supervision of the 
European Securities and Markets Authority (``ESMA''), OCC has 
considered the EMIR standards as part of its bid to seek third-
country recognition in Europe and the United Kingdom. OCC is seeking 
recognition to address European bank capital requirements set to go 
into effect next year that would require European banks to set aside 
additional capital for exposure to central counterparties that are 
not ``qualified CCPs'' in Europe. In order to become a qualified 
CCP, ESMA and the regulatory authority in a non-EU jurisdiction must 
reach an agreement that their regulatory regimes for central 
counterparties are equivalent. As of the date of this filing, the 
Commodity Futures Trading Commission (``CFTC'') has reached an 
agreement with ESMA on the equivalence of their regulatory regimes.
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    To address the concerns raised by these market participants, 
further strengthen OCC's pre-funded financial resources, further align 
the interests of OCC's management and Clearing Members, and align OCC's 
skin-in-the-game with international standards, OCC is filing this 
proposed rule change, which would establish a persistent minimum amount 
of skin-in-the-game that would be used to cover default losses and 
liquidity shortfalls. This skin-in-the-game proposal is part of a 
broader set of decisions announced by OCC to lower the cost of clearing 
for its members,\14\ including a fee decrease effective September 1, 
2020.\15\ OCC also discussed these changes on calls with OCC's Non-
Equity Exchanges, Clearing Members, and other market participants, 
including discussions with the SIFMA Options Committee and FIA and open 
calls with OCC Clearing Members. Members expressed that the proposed 
addition of a minimum level of skin-in-the-game would be a welcome 
enhancement by OCC. One market participant expressed its appreciation 
for OCC's commitment to resiliency, but renewed concerns it had raised 
in connection with OCC's Capital Management Policy about increases in 
OCC's capital and, if OCC were sold, a more commercial orientation 
monetized with higher fees. As OCC stated with respect to the 
establishment of the Capital Management Policy,\16\ OCC believes that 
this view is well outside the scope of the Capital Management Policy 
and this proposed rule change, but will continue to engage with 
Clearing Members and other market participants to address any concerns. 
While questions were raised in these conversations, no specific 
suggestions were made.
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    \14\ OCC announced these decisions in a press release and letter 
to Clearing Members. See Press Release, OCC To Lower Costs for Users 
of U.S. Equity Derivatives Markets (Aug. 3, 2020), available at 
https://www.theocc.com/Newsroom/Press-Releases/2020/08-03-OCC-To-Lower-Costs-for-Users-of-US-Equity-De; ``Letter to Clearing Member 
Firms--OCC to Lower Costs for Users of U.S. Equity Derivative 
Markets'' (Aug. 3, 2020), available at https://www.theocc.com/Newsroom/Views/2020/08-03-Letter-to-Clearing-Member-Firms.
    \15\ See Exchange Act Release No. 89534 (Aug. 12, 2020), 85 FR 
50858 (Aug. 18, 2020) (File No. SR-OCC-2020-009).
    \16\ See Exhibit 3g to File No. SR-OCC-2019-007.
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Proposed Changes
    In order to establish a persistent minimum amount of skin-in-the-
game, OCC is proposing to: (a) Amend OCC's Rules to define the Minimum 
Corporate Contribution, insert the Minimum Corporate Contribution in 
OCC's default waterfall as provided in Rule 1006, provide for how OCC 
would calculate any LNAFBE greater than 110% of its Target Capital 
Requirement OCC would contribute in addition to the Minimum Corporate 
Contribution, and provide a time by which OCC would reestablish the 
Minimum Corporate Contribution if and when OCC uses it to cover default 
losses; (b) amend the Capital Management Policy to exclude the Minimum 
Corporate Contribution from OCC's measurement of its LNAFBE against its 
Target Capital Requirement and from OCC's calculation of the Early 
Warning and Trigger Event, to ensure that OCC may maintain the Minimum 
Corporate Contribution exclusively for default losses while retaining 
access to replenishment capital in the event OCC suffers an operational 
loss that reduces its Equity below those thresholds; and (c) apply 
conforming changes to the Default Management Policy, Clearing Fund 
Methodology Policy, and the RWD Plan to reflect that in the event of a 
default loss or liquidity shortfall, the Minimum Corporate Contribution 
would be charged after contributing the margin and Clearing Fund 
deposit of a default member and before the contribution of OCC's LNAFBE 
in excess of 110% of OCC's Target Capital Requirement, both before OCC 
charges the Clearing Fund deposits of non-default Clearing Members and 
the EDCP Unvested Balance on a pro rata basis.
(a) Amendments to OCC's Rules
    To establish and maintain a persistent minimum level of skin-in-
the-game, OCC proposes to amend its Rules to (1) define the Minimum 
Corporate Contribution; (2) revise OCC's default waterfall to more 
clearing define the skin-in-the-game resources OCC would contribute to 
a default loss; (3) provide for how OCC would calculate any LNAFBE 
greater than 110% of the Target Capital Requirement it would contribute 
after exhausting the Minimum Corporate Contribution; and (4) provide 
for how OCC would replenish the Minimum Corporate Contribution after 
each chargeable default loss.
(1) Defining the Minimum Corporate Contribution
    OCC would establish a persistent minimum level of skin-in-the-game 
by first amending OCC's Rules to define the Minimum Corporate 
Contribution in Chapter I of the Rules to mean the minimum level of 
OCC's own funds maintained exclusively to cover credit losses or 
liquidity shortfalls, the level of which OCC's Board shall determine 
from time to time. As OCC's own funds, OCC would hold the Minimum 
Corporate Contribution in accordance with OCC's By-Laws governing the 
investment of OCC's funds \17\ and OCC's policies and procedures 
governing cash and investment management. Specifically, OCC maintains 
uninvested OCC cash in demand deposits and any investments of funds 
maintained to satisfy the Minimum Corporate Contribution would be 
limited to overnight reverse repurchase agreements involving U.S. 
Government Treasury Securities, consistent with OCC's same-day 
liquidity needs for such funds.
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    \17\ See OCC By-Laws Art. IX, Sec. 1.
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    While the proposed definition would give OCC's Board discretion in 
setting the Minimum Corporate Contribution,

[[Page 12240]]

the Board has approved an initial Minimum Corporate Contribution that 
sets OCC's total persistent skin-in-the-game (i.e., the sum of the 
Minimum Corporate Contribution and OCC's current EDCP Unvested Balance) 
at 25% of OCC's Target Capital Requirement. In setting the initial 
Minimum Corporate Contribution, OCC's Board considered factors 
including, but not limited to, the regulatory requirements in each 
jurisdiction in which OCC is registered or in which OCC is actively 
seeking recognition, the amount similarly situated central 
counterparties commit of their own resources to address participant 
defaults, the EDCP Unvested Balance, OCC's LNAFBE greater than 110% of 
its Target Capital Requirement, projected revenue and expenses, and 
other projected capital needs.
(2) Revising OCC's Default Waterfall
    OCC would also amend OCC Rule 1006 to insert the Minimum Corporate 
Contribution in OCC's default waterfall after contributing a defaulting 
Clearing Member's margin and Clearing Fund deposit, and before 
contributing OCC's LNAFBE greater than 110% of OCC's Target Capital 
Requirement, both of which OCC would exhaust before charging a loss to 
the Clearing Fund and the EDCP Unvested Balance, pari passu with the 
Clearing Fund deposits of non-defaulting Clearing Members. So placed, 
OCC believes that the Minimum Corporate Contribution would demonstrate 
OCC's institutional commitment to its ongoing financial surveillance of 
clearing members and the establishment and maintenance of a prudent and 
effective margin methodology. A draw against the Minimum Corporate 
Contribution and the associated requirement to replenish, as discussed 
below, would provide fewer resources to meet other corporate 
commitments. Accordingly, the proposal would further align OCC's and 
its management's interests with those of non-defaulting Clearing 
Members.
    OCC would also remove references to ``retained earnings'' or 
``current or retained earnings'' in OCC Rule 1006(b), Rule 1006(e)(i), 
Rule 1006(e)(ii), and the second sentence of Rule 1006(e)(iii), and 
replace them with references to the contribution of the ``Minimum 
Corporate Contribution'' and ``the Corporation's liquid net assets 
funded by equity that are greater than 110% of its Target Capital 
Requirement.'' The refences to ``retained earnings'' or ``current or 
retained earnings'' are legacy terms used prior to OCC's implementation 
of the Capital Management Policy.\18\ OCC is proposing to replace these 
references in OCC's Rules to better identify the funds OCC's would 
contribute in terms that align with OCC's Capital Management Policy.
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    \18\ OCC first established discretionary use of OCC's current or 
retained earnings to cover default losses in Article VIII (Clearing 
Fund) of OCC's By-Laws. See Exchange Act Release No. 15493 (Jan. 4, 
1979), 44 FR 3802 (Jan. 18, 1979) (File No. SR-OCC-79-01). When OCC 
moved the provisions governing the Clearing Fund from OCC's By-Laws 
to the Rules in 2018, the provisions governing the usage of the 
Clearing Fund became Rule 1006(e). See Exchange Act Release No. 
83735 (July 27, 2018), 83 FR 37855 (Aug. 2, 2018) (File No. SR-OCC-
2018-008).
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(3) Calculating LNAFBE Available as Skin-in-the-Game
    Because OCC proposes to replace references to ``current or retained 
earnings,'' OCC would also delete the first sentence of Rule 
1006(e)(iii), which currently provides for how OCC determines its 
``current earnings'' for purposes of the amount available to cover 
losses under Rule 1006(e)(i) and Rule 1006(e)(ii). In its place, the 
first sentence of Rule 1006(e)(iii) would set out how OCC would 
determine its LNAFBE for purposes of contributing LNAFBE greater than 
110% of the Target Capital Requirement to cover default losses and 
liquidity shortfalls. Specifically, similar to how the Rules currently 
provide for the calculation of ``current earnings,'' OCC would 
determine its LNAFBE based on OCC's unaudited financial statements at 
the close of the calendar month immediately preceding the occurrence of 
the loss or deficiency under paragraphs (e)(i) or (e)(ii), less an 
amount equal to the aggregate of all refunds made or authorized to be 
made or deemed to have been made during the fiscal year in which such 
loss or deficiency occurs if the refund is not reflected on such 
unaudited financial statements. Accordingly, OCC would retain the 
priority given to the payment of refunds that OCC has declared, but not 
yet issued, as currently provided by OCC Rule 1106(e)(iii), when 
calculating the amount of LNAFBE available to cover a default loss 
after contributing the Minimum Corporate Contribution.
    OCC would further amend Rule 1006(e)(iii) to provide that in no 
event shall OCC be required to contribute an amount that would cause 
OCC's LNAFBE to fall below 110% of the Target Capital Requirement at 
the time changed. The Capital Management Policy, in accordance with SEC 
Rule 17Ad-22(e)(15)(ii)(A),\19\ currently requires that the funds OCC 
maintains to satisfy its Target Capital Requirement be separate from 
OCC's resources to cover participant defaults and liquidity shortfalls. 
Accordingly, should a default occur in a month during which OCC suffers 
an operational loss that decreases the value of its excess capital 
available as skin-in-the-game below what is reflected on the unaudited 
financial statement at the close of the previous month,\20\ OCC would 
be able to take into account the decrease in its excess capital when 
calculating its available LNAFBE above 110% of the Target Capital 
Requirement. In addition, OCC would renumber as Rule 1006(e)(iv) the 
last sentence of Rule 1006(e)(iii). That sentence, which concerns a 
defaulting Clearing Member's continuing obligation for losses OCC 
charges to OCC's own capital, is conceptually distinct from the rest of 
Rule 1006(e)(iii) and, accordingly, deserves to be addressed 
separately.
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    \19\ 17 CFR 240.17Ad-22(e)(15)(ii)(A).
    \20\ Under OCC's current rules, LNAFBE greater than 110% of the 
Target Capital Requirement and the EDCP Unvested Balance are 
committed to cover both operational losses and default losses. In 
the event OCC experiences operational losses and default losses in 
short succession, OCC would contribute these resources in the manner 
specified by OCC's Rules to the event that occurred first.
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(4) Replenishing the Minimum Corporate Contribution
    Finally, OCC would add a new paragraph to Rule 1006(e)--Rule 
1006(e)(v)--to provide for a 270 calendar-day period during which the 
Minimum Corporate Contribution, once charged, would be reduced to the 
remaining unused portion. OCC believes that 270 calendar days, or 
approximately nine months, is sufficient time for OCC to accumulate the 
funds necessary to reestablish the Minimum Corporate Contribution. In 
making this determination, OCC used the same analysis employed to set 
the Early Warning and Trigger Event under its Replenishment Plan, both 
of which are based on the time OCC estimates it would take to 
accumulate 10% of its Target Capital Requirement.\21\ Specifically, OCC 
took into account its typical monthly earnings and the amount of 
earnings that would be needed to replenish the Minimum Corporate 
Contribution on an after-tax basis. Proposed Rule 1006(e)(v) would also 
provide that OCC shall notify Clearing Members of any such reduction to 
the Minimum Corporate Contribution.
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    \21\ See Order Approving Capital Management Policy, 85 FR at 
5510-11. OCC has included this analysis as part of confidential 
Exhibit 3 to File No. SR-OCC-2021-003.
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    Each chargeable loss would trigger a new 270-day period. As such, 
proposed

[[Page 12241]]

Rule 1006(e)(v) is designed to allow OCC to manage multiple defaults 
within a 270-day period by eliminating the risk that a successive 
default would exhaust the resources needed to reestablish the Minimum 
Corporate Contribution by the end of the initial 270-day period. And 
while a successive default loss that does not impact excess LNAFBE \22\ 
available to replenish the Minimum Corporation Contribution would 
nevertheless trigger another 270-day period during which the Minimum 
Corporate Contribution would be reduced to the remaining unused portion 
after the first two defaults, any LNAFBE greater than 110% of the 
Target Capital Requirement would continue to be available to cover 
successive default losses. In the very unlikely event that OCC 
experiences an operational loss or a drop in revenue from clearing fees 
that threatens its ability to reestablish the Minimum Corporate 
Contribution at the end of the 270-day period, OCC would likely file a 
rule change to extend the period rather than act to lower the Minimum 
Corporate Contribution, dependent on the Board's consideration of the 
same non-exclusive list of factors that the Board would consider when 
determining whether to adjust the Minimum Corporate Contribution, 
discussed below.
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    \22\ As described below, OCC is proposing to amend the Capital 
Management Policy to exclude the Minimum Corporate Contribution from 
the definition of LNAFBE. As a result, a second default loss covered 
exclusively by the Minimum Corporate Contribution would not impact 
OCC's level of LNAFBE.
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(b) Amendments to the Capital Management Policy
    Consistent with the proposed changes to OCC's Rules, OCC would 
amend the portions of the Capital Management Policy that concern OCC's 
usage of excess capital to cover default losses to more specifically 
identify the resources OCC would contribute to default losses; namely, 
the Minimum Corporate Contribution and LNAFBE above 110% of the Target 
Capital Requirement. OCC would clarify that after exhausting the 
Minimum Corporate Contribution, OCC would continue to offset default 
losses with LNAFBE, rather than ``Equity,'' above 110% of the Target 
Capital requirement. This change is not intended to change OCC's 
current obligations. Rather, OCC intends to conform the Capital 
Management Policy so that the terms are consistent with those used in 
the proposed Rules, other requirements in the Capital Management 
Policy, and OCC's regulatory obligations. Specifically, the Capital 
Management Policy provides that the resources held to meet the Target 
Capital Requirement must be liquid assets separate from OCC's resources 
to cover participant defaults and liquidity shortfalls, consistent with 
SEC Rule 17Ad-22(e)(15)(ii)(A).\23\ Because Equity typically exceeds 
LNAFBE and because any funds OCC would contribute to cover a default 
loss would need to be liquid assets, contributing liquid assets in 
excess of LNAFBE greater than 110% of the Target Capital Requirement 
would be inconsistent with the Capital Management Policy.
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    \23\ See 17 CFR 240.17Ad-22(e)(15)(ii)(A).
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    In addition, OCC would amend the Capital Management Policy's list 
of capital management actions with a material impact on current or 
future levels of Equity, replacing ``use of current and retained 
earnings greater than 100% of the Target Capital Requirement'' with 
``use of excess capital,'' to align with the title of the Capital 
Management Policy's ``Excess Capital Usage'' section. That section 
would also be updated to include a discussion of the factors that the 
Board would consider in establishing and adjusting the Minimum 
Corporate Contribution. Factors the Board would consider include, but 
are not limited to, the regulatory requirements in each jurisdiction in 
which OCC is registered or in which OCC is actively seeking 
recognition, the amount similarly situated central counterparties 
commit of their own resources to address participant defaults, the 
current and projected level of the EDCP Unvested Balance, OCC's LNAFBE 
greater than 110% of its Target Capital Requirement, projected revenue 
and expenses, and other projected capital needs. While the Capital 
Management Policy would provide that the Board would review Minimum 
Corporate Contribution annually, the Board would retain authority to 
change the Minimum Corporate at its discretion. In addition, the 
Capital Management Policy would be updated to include the substance of 
and references to proposed Rule 1006(e)(v), which, as discussed above, 
provides for a 270-day period following a chargeable loss during which 
the Minimum Corporate Contribution is reduced to its remaining unused 
portion.
    OCC would also amend the definition of LNAFBE in the Capital 
Management Policy to specifically exclude the Minimum Corporate 
Contribution, which would be dedicated to cover default losses. The 
Capital Management Policy defines LNAFBE as the level of cash and cash 
equivalents, no greater than Equity, less any approved adjustments. The 
definition currently specifies the exclusion of ``agency-related 
liabilities, such as Section 31 fees'' as the only approved adjustment. 
OCC would amend the definition to add the Minimum Corporate 
Contribution as another example of an approved exemption to the 
calculation of LNAFBE. As discussed in more detail in the discussion of 
the statutory basis for these proposed changes below, this proposed 
amendment to the definition of LNAFBE is intended to ensure that OCC 
does not double count resources committed to cover default losses as 
resources available to satisfy regulatory requirements concerning the 
amount of LNAFBE or other financial resources OCC must maintain to 
cover operational costs and potential business losses. For similar 
reasons, OCC would amend the Capital Management Policy's discussion of 
OCC's Replenishment Plan to add that in the event of an operational 
loss, OCC shall first use Equity, ``less the Minimum Corporate 
Contribution,'' above 110% of Target Capital. This amendment reflects 
that the funds maintained for the Minimum Corporate Contribution are 
not funds available to cover operational losses.
    With respect to OCC's Replenishment Plan, OCC would also amend the 
definitions of the Early Warning and Trigger Event to exclude the 
Minimum Corporate Contribution from the calculation of those thresholds 
so that OCC maintains access to replenishment capital in the event 
operational losses materialize while still maintaining the Minimum 
Corporate Contribution exclusively to cover default losses. As 
described above, the Early Warning and Trigger Event are the thresholds 
for actions under OCC's Replenishment Plan. Currently, the Early 
Warning and Trigger Event thresholds are defined with respect to OCC's 
Equity falling below certain thresholds. OCC is proposing to amend 
those definitions so that the Early Warning and Trigger Event occur 
when Equity ``less the Minimum Corporate Contribution'' falls below 
those same thresholds. These changes would ensure that OCC may maintain 
the Minimum Corporate Contribution exclusively to address default 
losses--the effect of which would be to increase Equity relative to 
LNAFBE--while still maintaining access to its Replenishment Plan should 
OCC's Equity, less the Minimum Corporate Contribution, fall close to or 
below the Target Capital Requirement.

[[Page 12242]]

(c) Amendments to the Default Management Policy, Clearing Fund 
Methodology Policy, and RWD Plan
    To accommodate the proposed establishment of the Minimum Corporate 
Contribution, OCC proposes conforming changes to other rule-filed 
policies that describe OCC's default waterfall, as set forth in OCC 
Rule 1006. In the Default Management Policy, OCC would delete the 
passage concerning ``Current and Retained Earnings'' in the current 
discussion of OCC's default waterfall and replace it with the Minimum 
Corporate Contribution and LNAFBE greater than 110% of the Target 
Capital Requirement, as provided in the proposed amendments to Rule 
1006 above. OCC would also amend the Default Management Policy's 
definition of ``financial resources'' to include the Minimum Corporate 
Contribution as among those available to address Clearing Member 
defaults and suspensions. In the Clearing Fund Methodology Policy, OCC 
would similarly revise the discussion of the default waterfall in that 
policy's section covering Clearing Fund charges and assessments to 
incorporate the Minimum Corporate Contribution, consistent with the 
proposed amendments to Rule 1006 above. OCC would also amend the 
Clearing Fund Methodology Policy's definitions of OCC's ``Pre-Funded 
Financial Resources'' for the purposes of sizing or measuring the 
sufficiency of the Clearing Fund to include the Minimum Corporate 
Contribution. Finally, OCC would amend the RWD Plan to replace all 
references to ``current or retained earnings'' with the Minimum 
Corporate Contribution and LNAFBE greater than 110% of the Target 
Capital Requirement, or ``skin-in-the-game'' for short, modify certain 
example scenarios concerning use of OCC's Enhanced Risk Management and 
Recovery Tools to account for the proposed Minimum Corporate 
Contribution, and make certain other conforming changes concerning use 
of skin-in-the-game to address liquidity shortfalls and, in the case of 
LNAFBE greater than 110% of the Target Capital Requirement, OCC's 
authority to use skin-in-the-game to address losses resulting from bank 
or securities or commodities clearing organization failures, including 
custody or investment losses.
(2) Statutory Basis
    OCC believes the proposed rule changes are consistent with Section 
17A of the Securities Exchange Act of 1934 (``Exchange Act'') and the 
rules and regulations thereunder. In particular, OCC believes that the 
proposed establishment of the Minimum Corporate Contribution and other 
proposed changes are consistent with Section 17A(b)(3)(F) of the 
Exchange Act \24\ and Rules 17Ad-22(e)(2)(i),\25\ 17Ad-22(e)(4), \26\ 
17Ad-22(e)(15)(ii)(A),\27\ 17Ad-22(e)(15)(iii),\28\ and Rule 17Ad-
22(e)(23) \29\ thereunder for the reasons described below.
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    \24\ 15 U.S.C. 78q-1(b)(3)(F).
    \25\ 17 CFR 240.17Ad-22(e)(2)(i).
    \26\ 17 CFR 240.17Ad-22(e)(4).
    \27\ 17 CFR 240.17Ad-22(e)(15)(ii).
    \28\ 17 CFR 240.17Ad-22(e)(15)(iii).
    \29\ 17 CFR 240.17Ad-22(e)(23).
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    Section 17A(b)(3)(F) of the Exchange Act requires, in part, that 
the rules of OCC be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and, in general, to 
protect investors and the public interest. The proposed revisions to 
the Capital Management Policy's definitions of LNAFBE, Early Warning 
and Trigger Event are designed to ensure that OCC may establish the 
Minimum Corporate Contribution exclusively to cover default losses 
while continuing to maintain sufficient LNAFBE for operational expenses 
such that it could continue to promptly and accurately clear and settle 
securities transactions even if it suffered significant operational 
losses, including by continuing to maintain access to its Replenishment 
Plan should an operational loss cause OCC's Equity, less the Minimum 
Corporate Contribution, to fall close to or below OCC's Target Capital 
Requirement. In other words, conforming these definitions to account 
for the establishment of the Minimum Corporate Contribution, which will 
not be available to cover operational losses, ensures that OCC will 
continue to hold sufficient LNAFBE separate from the Minimum Corporate 
Contribution and maintain access to its Replenishment Plan to absorb 
operational losses and avoid a disruption that could negatively impact 
OCC's prompt and accurate clearing and settlement of transactions. 
Therefore, OCC believes that the proposed amendments to the definitions 
of LNAFBE, Early Warning and Trigger Event under its Capital Management 
Policy, which are reasonably designed to ensure that OCC has sufficient 
LNAFBE to continue operations in the event of an operational loss, are 
consistent with the requirements of Section 17A(b)(3)(F) of the 
Exchange Act by protecting investors and the public interest.\30\
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    \30\ 15 U.S.C. 78q-1(b)(3)(F).
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    Rule 17Ad-22(e)(4) under the Exchange Act provides, in part, that 
OCC establish, implement, maintain and enforce written policies and 
procedures reasonably designed to effectively identify, measure, 
monitor and manage its credit exposures to participants and those 
arising from its payment, clearing and settlement processes, including 
by maintaining sufficient financial resources to cover its credit 
exposure to each participant fully with a high degree of 
confidence.\31\ By providing that OCC shall maintain a minimum level of 
skin-in-the-game--in addition to OCC's LNAFBE greater than 110% of its 
Target Capital Requirement, contributed prior to charging the Clearing 
Fund, as OCC's Rules currently provide--OCC is providing for a minimum 
level of pre-funded financial resources available to cover losses in 
the event of a Clearing Member default, and reducing the amount OCC 
would charge the Clearing Fund contributions of non-defaulting Clearing 
Members. Therefore, OCC believes the amendments to its Rules, the 
Capital Management Policy, and other related policies to establish the 
Minimum Corporate Contribution are consistent with Rule 17Ad-22(e)(4).
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    \31\ 17 CFR 240.17Ad-22(e)(4)(i).
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    OCC also believes that the proposed changes to the definition of 
LNAFBE in OCC's Capital Management Policy, which exclude the Minimum 
Corporate Contribution from the calculation of LNAFBE, are consistent 
with Rule 17Ad-22(e)(15)(ii)(A) under the Exchange Act.\32\ Rule 17Ad-
22(e)(15)(ii)(A) requires that the LNAFBE held by OCC to satisfy the 
minimum LNAFBE required by Rule 17Ad-22(e)(15)(ii) \33\ shall be in 
addition to resources held to cover participant defaults or other 
credit or

[[Page 12243]]

liquidity risks.\34\ The proposed revision to OCC's definition of 
LNAFBE is designed to satisfy Rule 17Ad-22(e)(15)(ii)(A) by providing 
that the proposed Minimum Corporate Contribution, which would be held 
exclusively to cover participant defaults and liquidity shortfalls, 
would be in addition to the LNAFBE that OCC holds to meet or exceed its 
regulatory capital requirements under Rule 17Ad-22(e)(15)(ii)--i.e., 
LNAFBE in an amount equal to 110% of OCC's Target Capital Requirement. 
In addition, the proposed revisions to OCC Rule 1006(e)(iii) and the 
Capital Management Policy--which would specify that OCC's committed 
skin-in-the-game shall include the Minimum Corporate Contribution and 
LNAFBE greater than 110% of the Target Capital Requirements--are 
reasonably designed to ensure that OCC would not be obligated to 
contribute an amount of skin-in-the-game that would cause its LNAFBE to 
fall below the Early Warning threshold intended to ensure OCC maintains 
sufficient LNAFBE to meet its regulatory obligations. As a result, OCC 
believes the proposed amendments to the Capital Management Policy are 
designed to comply with Rule 17Ad-22(e)(15)(ii)(A).
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    \32\ 17 CFR 240.17Ad-22(e)(15)(ii)(A).
    \33\ Rule 17Ad-22(e)(15)(ii), in turn, requires that OCC hold 
LNAFBE to the greater of (x) six months of OCC's current operating 
expenses, or (y) the amount determined by the Board to be sufficient 
to ensure a recovery or orderly wind-down of critical operations and 
services. 17 CFR 240.17Ad-22(e)(15)(ii). OCC's Capital Management 
Policy is reasonably designed to meet this requirement, and Rule 
17Ad-22(e)(15) more broadly, by providing that OCC sets its Target 
Capital Requirement at a level sufficient to maintain LNAFBE at 
least equal to the greater of: (x) Six months of OCC's current 
operating expenses, (y) the amount determined by the Board to be 
sufficient to ensure a recovery or orderly winddown of critical 
operations and services, and (z) the amount determined by the Board 
to be sufficient for OCC to continue operations and services as a 
going concern if general business losses materialize. See Order 
Approving Capital Management Policy, 85 FR at 5501-02. In addition, 
in setting the Target Capital Requirement, OCC's Board considers 
OCC's projected rolling twelve-months' operating expenses to ensure 
that OCC maintains Equity and other financial resources approved by 
the CFTC, as required by CFTC Rule 39.11(a)(2). See id. at 5501 n.19 
(citing 17 CFR 39.11(a)(2)).
    \34\ Id. Similarly, CFTC Rule 39.11(b)(3) provides that a 
derivatives clearing organization (``DCO'') may allocate financial 
resources to satisfy requirements that the DCO possess financial 
resources (i) to enable the DCO to meet obligations notwithstanding 
a default by the clearing member creating the largest financial 
exposure for the DCO in extreme but plausible market conditions, and 
(ii) to enable the DCO to cover its operational costs, but not both. 
See 17 CFR 39.11(b)(3).
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    In addition, OCC believes that the proposed amendments to OCC's 
definition of the Early Warning and Trigger Event thresholds under 
OCC's Replenishment Plan are consistent with Rule 17Ad-22(e)(15)(iii) 
\35\ because excluding the Minimum Corporate Contribution from those 
thresholds would ensure that OCC may continue to access replenishment 
capital in the unlikely event that OCC experiences an operational loss 
while continuing to maintain the Minimum Corporate Contribution 
exclusively to cover default losses. Rule 17Ad-22(e)(15)(iii) requires, 
in part, 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 maintaining a viable 
plan for raising additional Equity should its Equity fall close to or 
below the amount required under Rule 17Ad-22(e)(15)(ii).\36\ By setting 
the threshold triggers by reference to the Target Capital Requirement, 
OCC's Replenishment Plan is designed to require OCC to act to raise 
capital should its Equity fall close to or below the amounts required 
under Rule 17Ad-22(e)(15)(ii). However, the effect of holding the 
Minimum Corporate Contribution would be to increase OCC's Equity 
relative to LNAFBE available to cover potential operational losses. To 
help ensure that OCC holds LNAFBE above its Target Capital Requirement 
and maintains access to replenishment capital, the proposed change 
would exclude the Minimum Corporate Contribution when measuring OCC's 
Equity against the Early Warning and Trigger Event thresholds under its 
Replenishment Plan. Accordingly, OCC believes that the proposed 
amendments to the definitions of the Early Warning and Trigger Event 
thresholds are consistent with Rule 17Ad-22(e)(15)(iii).
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    \35\ 17 CFR 240.17Ad-22(e)(15)(iii).
    \36\ Id. As discussed in note 33, supra, OCC's Target Capital 
Requirement is reasonably designed to meet or exceed the minimum 
LNAFBE required to satisfy Rule 17Ad-22(e)(15)(ii).
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    OCC also believe that the proposed changes are consistent with Rule 
17Ad-22(e)(2)(i), which requires that covered clearing agencies 
maintain written policies and procedures reasonably designed to provide 
for governance arrangements that are clear and transparent.\37\ The 
proposed changes would align the terminology used in OCC's Rules and 
other rule-filed policies with the terminology of the Capital 
Management Policy, providing better clarity and consistency between 
OCC's governing documents. Specifically, OCC would amend its Rules, 
Capital Management Policy, Default Management Policy, Clearing Fund 
Methodology Policy and RWD Plan to identify OCC's sources of skin-in-
the-game (the Minimum Corporation Contribution, LNAFBE greater than 
110% of the Target Capital Requirement, and the EDCP Unvested Balance) 
and their places within OCC's default waterfall. The proposed 
amendments to the Capital Management Policy would also identify factors 
the Board would consider in setting and adjusting the Minimum Corporate 
Contribution. Accordingly, OCC believes conforming the terms in these 
governance arrangements and identifying factors OCC would consider in 
adjusting the Minimum Corporate Contribution is consistent with Rule 
17Ad-22(e)(2)(i).
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    \37\ 17 CFR 240.17Ad-22(e)(2)(i).
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    Finally, OCC believe that the proposed changes are consistent with 
Rule 17Ad-22(e)(23), which requires covered clearing agencies to 
maintain written policies and procedures reasonably designed to, among 
other things, provide for publicly disclosing all relevant rules and 
material procedures, including key aspects of its default rules and 
procedures.\38\ The proposed changes would amend OCC's Rules to remove 
the pre-Capital Management Policy references to use of ``retained 
earnings'' or ``current and retained earnings'' with respect to the 
sources of OCC's skin-in-the-game, and instead identify the Minimum 
Corporate Contribution and LNAFBE greater than 110% of the Target 
Capital Requirement. The proposed changes would also provide greater 
clarity about how OCC calculates the amount of LNAFBE greater than 110% 
of the Target Capital Requirement based upon the unaudited financial 
statements from the close of the prior month; provided, however, that 
OCC would not be required to contribute an amount that would cause its 
LNAFBE to fall below 110% of the Target Capital Requirement at the time 
charged. The proposed changes to OCC Rules would, in turn, be made 
available on OCC's website. Therefore, OCC believes the proposed 
changes would disclose relevant default rules and procedures to the 
public and to Clearing Members.
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    \38\ 17 CFR 240.17Ad-22(e)(23).
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(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Exchange Act \39\ 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 establishment of a Minimum Corporate 
Contribution and the other attendant changes discussed above have any 
impact, or impose any burden, on competition. As discussed above, OCC 
would charge the Minimum Corporate Contribution to cover a default loss 
or liquidity shortfall after charging the margin and Clearing Fund 
deposit of a default Clearing Member, and before charging OCC's LNAFBE 
above 110% of the Target Capital Requirement, both of which would be 
exhausted before OCC charged a default loss to the Clearing Fund 
deposits of non-defaulting members and the EDCP Unvested Balance on a 
pro rata basis. Accordingly, all Clearing Members would benefit by the 
establishment of the Minimum Corporate Contribution,

[[Page 12244]]

which would provide a persistent minimum level of skin-in-the-game to 
absorb default losses or liquidity shortfalls prior to charging such 
losses to non-defaulting Clearing Members.
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    \39\ 15 U.S.C. 78q-1(b)(3)(I).
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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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self- regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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-2021-003 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-OCC-2021-003. 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 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/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
    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-2021-003 and 
should be submitted on or before March 23, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-04217 Filed 3-1-21; 8:45 am]
BILLING CODE 8011-01-P