[Federal Register Volume 86, Number 247 (Wednesday, December 29, 2021)]
[Notices]
[Pages 74153-74156]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-28327]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93867; File No. SR-OCC-2021-013]


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

December 23, 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 December 17, 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 primarily 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 would revise OCC's schedule of fees, 
effective January 1, 2022, to update the maximum contingent Operational 
Loss Fee listed in OCC's schedule of fees in accordance with OCC's 
Capital Management Policy. Proposed changes to OCC's schedule of fees 
are included as Exhibit 5 to File Number SR-OCC-2021-013. 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, Uthe 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 1, 2022, 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.'' \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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    OCC's Capital Management Policy 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, less the Minimum Corporate 
Contribution,\9\ fall

[[Page 74154]]

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.\10\ Based on the Board-approved Target Capital 
Requirement for 2022 of $268 million, a Trigger Event would occur if 
OCC's Equity less the Minimum Corporate Contribution falls below $241.2 
million at any time or below $268 million for a period of 90 
consecutive calendar days.
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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\ The Minimum Corporate Contribution is defined in the Capital 
Management Policy as the minimum level of OCC's own funds maintained 
exclusively to cover credit losses or liquidity shortfalls, the 
level of which the OCC's Board of Directors (``Board'') shall 
determine from time to time. See Exchange Act Release No. 92038 (May 
27, 2021), 86 FR 29861, 29862 (June 3, 2021) (File No. SR-OCC-2021-
003). For 2022, the Board has approved a Minimum Corporate 
Contribution of $59 million. When combined with the unvested funds 
held in respect of OCC's Executive Deferred Compensation Plan 
contributed after January 1, 2020 (the ``EDCP Unvested Balance,'' as 
defined in OCC's Rules), OCC's persistent minimum level of skin-in-
the-game for 2022 would be $67 million, or 25% of OCC's Target 
Capital Requirement. In addition to this minimum level, OCC would 
also contribute liquid net assets funded by equity greater than 110% 
of the Target Capital Requirement. See OCC Rule 1006(e).
    \10\ See Exchange Act Release No. 91199 (Feb. 24, 2021), 86 FR 
12237, 12241 (Mar. 2, 2021) (File No. SR-OCC-2021-003) (amending 
OCC's replenishment plan, including the measurement for a Trigger 
Event, to account for the establishment of OCC's persistent minimum 
skin-in-the-game).
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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 to be sufficient for a recovery or 
orderly wind-down of critical operations and services (``RWD 
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\ See Order Approving OCC's Capital Management Policy, 85 FR 
at 5503.
    \12\ Id.
    \13\ 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 Exchange Act Release No. 83918 (Aug. 23, 2018), 
83 FR 44091, 44094 (Aug. 29, 2018) (File No. SR-OCC-2017-021).
    \14\ See 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, and OCC's projected effective tax rate.\15\ The 
current Operational Loss Fee listed in OCC's schedule of fees is the 
Adjusted RWD Amount calculated based on OCC's 2021 corporate budget. 
Budgeted operating expenses in 2022 are higher than the 2021 budgeted 
operating expenses. This proposed rule change would revise the maximum 
Operational Loss Fee to reflect the Adjusted RWD Amount based on OCC's 
2022 budget,\16\ as follows:
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    \15\ See Order Approving OCC's Capital Management Policy, 85 FR 
at 5501 n.20, 5503.
    \16\ Confidential data and analysis evidencing the calculation 
of the Adjusted RWD Amount based on OCC's 2022 corporate budget is 
included in Exhibit 3 to File Number SR-OCC-2021-013.

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          Current fee schedule                Proposed fee schedule
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$143,066,667.00 less the aggregate       $157,000,000 less the aggregate
 amount of Operational Loss Fees          amount of Operational Loss
 previously charged and not refunded as   Fees previously charged and
 of the date calculated, divided by the   not refunded as of the date
 number of Clearing Members at the time   calculated, divided by the
 charge.                                  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 the date of this filing, the maximum Operational Loss Fee 
per Clearing Member would be $1,467,290.
    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.\17\ 
Consistent with OCC's recently revised approach to its persistent 
minimum skin-in-the-game, OCC would conform the threshold in the 
schedule of fees to reflect that consistent with OCC's Capital 
Management Policy, the Trigger Event threshold is measured against 
Equity less the Minimum Corporate Contribution.
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    \17\ 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 $268 million.
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    OCC proposes to make the fee change effective January 1, 2022, 
because the Board approved the Adjusted RWD Amount upon which the 
Operational Loss Fee is based for 2022 and the time required to self-
certify the proposed change with the Commodity Futures Trading 
Commission (``CFTC'').
(2) Statutory Basis
    OCC believes the proposed rule change is consistent with the Act 
\18\ 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,\19\ 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 designed to 
replenish OCC's Equity in the form of liquid net assets in the event 
that OCC's Equity, less the Minimum Corporate Contribution reserved as 
the primary portion of OCC's minimum persistent skin-in-the-game, 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

[[Page 74155]]

critical operations and services) and thereby facilitate compliance 
with Rule 17Ad-22(e)(15)(iii).\20\ 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.\21\ Therefore, 
OCC believes the proposed maximum Operational Loss Fee sized to OCC's 
Adjusted RWD Amount is reasonable.
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    18\\ 15 U.S.C. 78a et seq.
    \19\ 15 U.S.C. 78q-1(b)(3)(D).
    \20\ 17 CFR 240.17Ad-22(e)(15)(iii).
    \21\ 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.'' \22\ Neither 
the SEC nor OCC has observed any correlation between measures of 
Clearing Member utilization or OCC's benefit to Clearing Members \23\ 
and its risk of operational loss.\24\ 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.\25\
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    \22\ See Order Approving OCC's Capital Management Policy, 85 FR 
at 5506.
    \23\ 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.'')
    \24\ 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.
    \25\ 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 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).\26\ 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.'' \27\ 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.\28\ 
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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    \26\ 17 CFR 240.17Ad-22(e)(15)(iii).
    \27\ 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).
    \28\ 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,\29\ 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,\30\ and Rule 19b-4 
under the Act.\31\ The Capital Management Policy specifies that the 
maximum Operational Loss Fee shall be the Adjusted RWD Amount.\32\ 
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 and OCC's current Capital Management Policy, as recently 
amended to reflect the establishment of the Minimum Corporate 
Contribution.\33\ 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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    \29\ 15 U.S.C. 78s(g)(1).
    \30\ 15 U.S.C. 78s(b).
    \31\ 17 CFR 240.19b-4.
    \32\ Order Approving OCC's Capital Management Policy, 85 FR at 
5503.
    \33\ See supra notes 9 and 10, and accompanying text.
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(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 21, 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.

[[Page 74156]]

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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-OCC-2021-013 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-2021-013. 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 (https://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-2021-013 and 
should be submitted on or before January 19, 2022.

    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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Eduardo A. Aleman,
Deputy Secretary.
 [FR Doc. 2021-28327 Filed 12-28-21; 8:45 am]
 BILLING CODE 8011-01-P