[Federal Register Volume 87, Number 173 (Thursday, September 8, 2022)]
[Notices]
[Pages 55048-55053]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-19417]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95670; File No. SR-OCC-2022-803]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of No Objection to Advance Notice Related to an Expansion of The 
Options Clearing Corporation's Non-Bank Liquidity Facility Program as 
Part of Its Overall Liquidity Plan

September 2, 2022.

I. Introduction

    On July 7, 2022, the Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') advance 
notice SR-OCC-2022-803 (``Advance Notice'') pursuant to Section 
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, entitled Payment, Clearing and Settlement 
Supervision Act of 2010 (``Clearing Supervision Act'') \1\ and Rule 
19b-4(n)(1)(i) \2\ under the Securities Exchange Act of 1934 
(``Exchange Act'') \3\ in connection with a proposed change to its 
operations to expand capacity under OCC's program for accessing 
additional committed sources of liquidity that do not increase the 
concentration of OCC's counterparty exposure (``Non-Bank Liquidity 
Facility'') as part of OCC's overall liquidity plan.\4\ The Advance 
Notice was published for public comment in the Federal Register on July 
26, 2022.\5\ The Commission has received comments regarding the changes 
proposed in the Advance Notice.\6\ The Commission is hereby providing 
notice of no objection to the Advance Notice.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ 15 U.S.C. 78a et seq.
    \4\ See Notice of Filing, infra note 5, at 87 FR 44477.
    \5\ See Exchange Act Release No. 95327 (Jul. 20, 2022), 87 FR 
44477 (Jul. 26, 2022) (File No. SR-OCC-2022-803) (``Notice of 
Filing'').
    \6\ Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm.
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II. Background 7
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    \7\ Capitalized terms used but not defined herein have the 
meanings specified in OCC's Rules and By-Laws, available at https://www.theocc.com/about/publications/bylaws.jsp.
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    As the sole clearing agency for standardized U.S. securities 
options listed on national securities exchanges registered with the 
Commission (``listed options''), OCC is obligated to make certain 
payments. In the event of a Clearing Member default, OCC would be 
obligated to make payments, on time,

[[Page 55049]]

related to that member's clearing transactions. To meet such payment 
obligations, OCC maintains access to cash from a variety of sources, 
including a requirement for members to pledge cash collateral to OCC 
and various agreements with banks and other counterparties (``liquidity 
facilities'') to provide OCC with cash in exchange for collateral, such 
as U.S. Government securities. OCC routinely considers potential market 
stress scenarios that could affect such payment obligations. Based on 
such considerations, OCC now believes that it should seek to expand its 
liquidity facilities to increase OCC's access to cash to manage a 
member default.\8\
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    \8\ See Notice of Filing, 87 FR at 44477.
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    OCC's liquidity plan already provides access to a diverse set of 
funding sources, including banks (i.e., OCC's syndicated credit 
facility),\9\ the Non-Bank Liquidity Facility program (defined 
above),\10\ and Clearing Members' Clearing Fund Cash Requirement.\11\ 
OCC currently maintains $8 billion in qualifying liquid resources,\12\ 
consisting of $5 billion of required Clearing Fund cash contributions, 
$2 billion in the syndicated bank credit facility, and $1 billion in 
the Non-Bank Liquidity Facility. OCC intends to increase such resources 
by $2.5 billion to a new total of $10.5 billion. OCC's proposed 
expansion of its liquidity plan includes several components: (1) 
creating a new committed repurchase facility with a commercial bank 
counterparty (``Bank Repo Facility''); \13\ (2) expanding OCC's 
existing Non-Bank Liquidity Facility program; \14\ (3) expanding OCC's 
existing syndicated credit facility; and (4) establishing a target for 
the aggregate amount of all external liquidity resources (i.e., the 
syndicated credit facility, Bank Repo Facility and the Non-Bank 
Liquidity Facility).\15\ The Advance Notice concerns the second 
component described above, namely, a change to OCC's operations to 
expand its Non-Bank Liquidity Facility program.\16\
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    \9\ See Exchange Act Release No. 88971 (May 28, 2020), 85 FR 
34257 (Jun. 3, 2020) (File No. SR-OCC-2020-804).
    \10\ See Exchange Act Release No. 89039 (Jun. 10, 2020), 85 FR 
36444 (Jun. 16, 2020) (File No. SR-OCC-2020-803) (``Notice of No 
Objection to 2020 Advance Notice''); Exchange Act Release No. 76821 
(Jan. 4, 2016), 81 FR 3208 (Jan. 20, 2016) (File No. SR-OCC-2015-
805) (``Notice of No Objection to 2015 Advance Notice''); Exchange 
Act Release No. 73979 (Jan. 2, 2015), 80 FR 1062 (Jan. 8, 2015) 
(File No. SR-OCC-2014-809) (``Notice of No Objection to 2014 Advance 
Notice'').
    \11\ See OCC Rule 1002.
    \12\ See 17 CFR 240.17Ad-22(a)(14) (defining qualifying liquid 
resources).
    \13\ In a separate advance notice, OCC is proposing to enter a 
new MRA with a commercial bank counterparty. See Exchange Act 
Release No. 95326 (Jul. 20, 2022), 87 FR 44457 (Jul. 26, 2022) (File 
No. SR-OCC-2022-802).
    \14\ See Notice of Filing, 87 FR at 44477.
    \15\ As discussed below, OCC would be required to file an 
advance notice with the Commission if it were to seek to reduce the 
commitments under the Non-Bank Liquidity Facility so as to reduce 
external liquidity below the $3 billion target.
    \16\ The third and fourth components of OCC's proposed expansion 
of its liquidity plan are briefly discussed below.
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    Under OCC's existing Non-Bank Liquidity Facility program, OCC 
maintains a series of arrangements to access cash in exchange for 
Government securities (``Eligible Securities'') deposited by Clearing 
Members in respect of their Clearing Fund requirements to meet OCC's 
settlement obligations. Currently, the aggregate amount OCC may seek 
through the Non-Bank Liquidity Facility program is limited to $1 
billion.\17\ Through this Advance Notice, OCC is proposing to remove 
the $1 billion funding limit and increase the capacity of its Non-Bank 
Liquidity Facility to an amount to be determined by OCC's Board from 
time to time, based on OCC's liquidity needs at the time and a number 
of other factors.\18\ Instead of retaining the $1 billion funding limit 
for the Non-Bank Liquidity Facility program, OCC proposes to establish 
a target across all external liquidity resources of at least $3 
billion, which is the current aggregate amount of external 
liquidity.\19\ OCC is not, as part of this Advance Notice, requiring 
its members or other market participants to provide additional or 
different collateral to OCC. Rather, the purpose of the proposal is to 
provide OCC with increased capacity for accessing cash to meet its 
payment obligations, including in the event that one of its members 
fails to meet its payment obligations to OCC.\20\
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    \17\ In 2020, OCC set the aggregate amount it may seek through 
the Non-Bank Liquidity Facility program to an amount up to $1 
billion. See Notice of No Objection to 2020 Advance Notice, 85 FR at 
36446. $1 billion is the same as the aggregate value established at 
the inception of the Non-Bank Liquidity Facility program. See Notice 
of No Objection to 2014 Advance Notice, 80 FR at 1064 & n.11. In 
2015, OCC filed an advance notice that set an aggregate value of at 
least $1 billion and up to $1.5 billion. See Notice of No Objection 
to 2015 Advance Notice, 81 FR at 3208.
    \18\ OCC's Board has authorized OCC to seek up to an additional 
$2.5 billion in external liquidity.
    \19\ See Notice of Filing, 87 FR at 44479.
    \20\ See OCC Rule 1006(f)(1)(A). OCC may also use the Clearing 
Fund to address liquidity shortfalls arising from the failure of any 
bank, securities or commodities clearing organization, or investment 
counterparty to perform any obligation to OCC when due. See OCC Rule 
1006(f)(1)(C); Exchange Act Release No. 94304 (Feb. 24, 2022), 87 FR 
11776 (Mar. 2, 2022) (File No. SR-OCC-2021-014).
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    With respect to OCC's overall liquidity plan, the Non-Bank 
Liquidity Facility program reduces the concentration of OCC's 
counterparty exposure by diversifying its base of liquidity providers 
among banks and non-bank, non-Clearing Member institutional investors, 
such as pension funds or insurance companies.
    The currently approved Non-Bank Liquidity Facility consists of two 
parts: a Master Repurchase Agreement (``MRA''), and confirmations with 
one or more institutional investors, which contain certain 
individualized terms and conditions of transactions executed between 
OCC, the institutional investors, and their agents. The MRA is 
structured so that the buyer (i.e., the institutional investor) would 
purchase Eligible Securities from OCC from time to time.\21\ OCC, the 
seller, would transfer Eligible Securities to the buyer in exchange for 
a buyer payment to OCC in immediately available funds (``Purchase 
Price''). The buyer would simultaneously agree to transfer the 
purchased securities back to OCC at a specified later date 
(``Repurchase Date''), or on OCC's demand against the transfer of funds 
from OCC to the buyer, where the funds would be equal to the 
outstanding Purchase Price plus the accrued and unpaid price 
differential (together, ``Repurchase Price'').
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    \21\ OCC would use Eligible Securities that are included in 
Clearing Fund contributions by Clearing Members and margin deposits 
of any Clearing Member that has been suspended by OCC for the 
repurchase arrangements. OCC Rule 1006(f) and OCC Rule 1104(b) 
authorize OCC to use these sources to obtain funds from third 
parties through securities repurchases. The officers who may 
exercise this authority include the Executive Chairman, Chief 
Executive Officer, and Chief Operating Officer.
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    The confirmations establish tailored provisions of repurchase 
transactions permitted under the Non-Bank Liquidity Facility that are 
designed to reduce concentration risk and promote certainty of funding 
and operational effectiveness based on the specific needs of a party. 
For example, OCC would only enter into confirmations with an 
institutional investor that is not a Clearing Member or affiliated 
bank, such as a pension fund or an insurance company, in order to allow 
OCC to access stable and reliable sources of funding without increasing 
the concentration of its exposure to counterparties that are affiliated 
banks, broker-dealers, or futures commission merchants. In addition, 
any such institutional investor is obligated to enter repurchase 
transactions even if OCC experiences a material adverse

[[Page 55050]]

change,\22\ funds must be made available to OCC within 60 minutes of 
OCC's delivering Eligible Securities, and the institutional investor is 
not permitted to rehypothecate purchased securities.\23\ Additionally, 
the confirmations set forth the term and maximum dollar amounts of the 
transaction permitted under the MRA.
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    \22\ A ``material adverse change'' is typically defined 
contractually as a change that would have a materially adverse 
effect on the business or financial condition of a company.
    \23\ See Notice of No Objection to 2014 Advance Notice, 80 FR at 
1064.
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    In 2020, OCC set the aggregate amount it may seek through the Non-
Bank Liquidity Facility program to an amount of up to $1 billion.\24\ 
OCC has since secured commitments from multiple pension funds in an 
aggregate amount of $1 billion. Since setting and securing commitments 
up to that aggregate commitment limit, OCC has experienced an increase 
in its stressed liquidity demands. Under OCC's Liquidity Risk 
Management Framework (``LRMF''), OCC performs daily liquidity stress 
testing to assess its Base Liquidity Resources \25\ and Available 
Liquidity Resources \26\ against OCC's liquidity risk tolerance 
(``Adequacy Scenarios''). Based in part on the results of this stress 
testing, OCC has periodically adjusted Clearing Member's Clearing Fund 
Cash Requirement to ensure that OCC maintains sufficient liquidity 
resources to cover its liquidity risk exposures at all times.\27\ 
Through this Advance Notice OCC proposes a change to its Non-Bank 
Liquidity Facility program to give OCC greater capacity to source 
liquidity from its non-bank liquidity providers as needed.
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    \24\ See Notice of No Objection to 2020 Advance Notice, 85 FR at 
36446. $1 billion is the same as the aggregate value established at 
the inception of the Non-Bank Liquidity Facility program. See Notice 
of No Objection to 2014 Advance Notice, 80 FR at 1064 & n.11. In 
2015, OCC filed an advance notice that set an aggregate value of at 
least $1 billion and up to $1.5 billion. See Notice of No Objection 
to 2015 Advance Notice, 81 FR at 3208.
    \25\ The LRMF defines ``Base Liquidity Resources'' to mean the 
amount of committed liquidity resources maintained at all times by 
OCC to meet its Cover 1 liquidity resource requirements under the 
applicable regulations. Base Liquidity Resources are comprised of 
qualifying liquid resources in the form of Clearing Fund cash 
deposited in respect of the Clearing Fund Cash Requirement and 
assets that are readily available and convertible into cash (i.e., 
U.S. Government securities) through prearranged funding 
arrangements, such as the Non-Bank Liquidity Facility.
    \26\ The LRMF defines ``Available Liquidity Resources'' to 
include Base Liquidity Resources plus allowable Clearing Fund cash 
deposited in excess of the Clearing Fund Cash Requirement. Any 
Clearing Member request to substitute U.S. Government securities for 
cash deposits in excess of such Clearing Member's proportionate 
share of the Clearing Fund Cash Requirement is subject to a two-day 
notice period. See OCC Rule 1002(a)(iv).
    \27\ In response to increased stressed liquidity demands in 
2021, OCC exercised authority under OCC Rule 1002(a) to increase the 
Clearing Fund Cash Requirement from $3.5 billion to $4 billion in 
July 2021, and from $4 billion to $5 billion in October 2021.
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The Proposed Change
    In order to give OCC greater capacity to source liquidity from 
external liquidity providers as needed, OCC would modify the Non-Bank 
Liquidity Facility program to remove the aggregate commitment limit of 
$1 billion, identified in the 2020 advance notice.\28\ OCC proposes 
that its Board of Directors (``Board'') set, by resolution and from 
time to time, the level of aggregate commitments under the program to 
ensure that OCC maintains sufficient liquidity resources to cover its 
liquidity risk exposures at all times.\29\
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    \28\ See Notice of No Objection to 2020 Advance Notice, 85 FR at 
36446.
    \29\ In setting the level of aggregate commitments for the Non-
Bank Liquidity Facility, the Board would consider factors including, 
but not limited to: (1) the size and make-up of the Clearing Fund; 
(2) the aggregate amount of OCC's other liquidity sources; and (3) 
changing market and business conditions.
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    OCC's Board has authorized OCC to seek up to an additional $2.5 
billion in external liquidity, including through the Non-Bank Liquidity 
Facility, which would give OCC access to a total of $5.5 billion in 
external liquidity.\30\ For the additional $2.5 billion, OCC expects 
that it will source $1.5 billion from bank counterparties and $1 
billion under the Non-Bank Liquidity Facility. In the event that OCC is 
unable to obtain the full $1.5 billion from its bank counterparties, 
however, OCC would source the full $2.5 billion under the Non-Bank 
Liquidity Facility program.\31\
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    \30\ OCC performs daily liquidity stress testing to assess its 
liquidity resources. See Notice of Filing, 87 FR at 44478. Based on 
the results of such stress testing, OCC increased Clearing Fund 
requirements twice in 2021. Id. OCC management recommended that OCC 
increase the capacity of its Non-Bank Liquidity Facility, which 
would provide OCC flexibility in how it increases liquidity 
resources in response to stress testing. See Confidential Exhibit 3 
to File No. SR-OCC-2022-803.
    \31\ See Notice of Filing, 87 FR at 44479.
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    Removing the present $1 billion funding limit to the Non-Bank 
Liquidity Facility program would remove one of the specified terms that 
could require OCC to file an advance notice.\32\ Consistent with the 
proposal to establish a target for external liquidity, and drawing from 
applicable conditions for filing advance notices with respect to 
renewals of OCC's syndicated credit facility and proposed Bank Repo 
Facility, OCC would submit another advance notice to execute individual 
commitments under the Non-Bank Liquidity Facility only if: (1) OCC 
should seek to execute a commitment at a level that would have the 
effect of reducing total external liquidity below the target of $3 
billion; (2) OCC should seek to change the terms and conditions of the 
MRA or commitments thereunder in a manner that materially affects the 
nature or level of risk presented by OCC; \33\ or (3) OCC should seek 
to execute a commitment with a counterparty that has experienced a 
negative change to its credit profile or a material adverse change 
since OCC last executed a commitment with that counterparty. Consistent 
with another prior advance notice, OCC may consider changes to (1) 
liquidity providers, provided that any new counterparty is subject to a 
credit review under OCC's Third-Party Risk Management Framework; \34\ 
and (2) term lengths consistent with those approved by OCC's Board, 
considering factors including, but not limited to, the initial 
committed length of the term, market conditions, and OCC's liquidity 
needs.\35\ OCC would not consider additional counterparties or 
different commitment terms within these specified parameters as 
materially altering the terms and conditions of MRAs or commitments

[[Page 55051]]

under the Non-Bank Liquidity Facility program.
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    \32\ The facility is designed to allow OCC to seek individual 
commitments from counterparties on specified terms. See e.g., 
Exchange Act Release No. 89039 (Jun. 10, 2020), 85 FR 36444, 36446 
(Jun. 16, 2020) (File No. SR-OCC-2020-803) (stating that OCC may 
negotiate individual commitments within an aggregate commitment 
limit). In 2015, the Commission acknowledged that changes to 
specified terms (e.g., funding levels) would require the further 
submissions to the Commission for review. See Exchange Act Release 
No. 76821 (Jan. 4, 2016), 81 FR 3208, 3209 (Jan. 20, 2016) (File No. 
SR-OCC-2015-805). The terms of the current facility, which OCC 
implemented the terms of its current facility in 2020 following 
publication of a Notice of No Objection from the Commission, set an 
aggregate commitment amount OCC may seek under the Non-Bank Repo 
Facility program at $1 billion so that OCC may negotiate individual 
commitment amounts, each less than $1 billion, with multiple 
counterparties. See Exchange Act Release No. 89039 (Jun. 10, 2020), 
85 FR 36444, 36446 (Jun. 16, 2020) (File No. SR-OCC-2020-803).
    \33\ For the purposes of clarity, OCC would not consider changes 
to pricing or changes in representations, covenants, and terms of 
events of default, to be changes to a term or condition that would 
require the filing of a subsequent advance notice provided that 
pricing is at the then prevailing market rate and changes to such 
other provisions are immaterial to OCC as the seller and do not 
impair materially OCC's ability to draw against the facility.
    \34\ See Third-Party Risk Management Framework, available at 
Documents & Archives, https://www.theocc.com/Company-Information/Documents-and-Archives. While credit monitoring of insurance 
companies that may become liquidity providers would necessarily be 
different than credit monitoring of existing pension fund 
counterparties, any new liquidity would be subject to the same 
credit review for counterparties of the same type.
    \35\ See Notice of No Objection to 2020 Advance Notice, 85 FR at 
36445-46.
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    Provided that none of the conditions under which OCC would file a 
subsequent advance notice are present, OCC would consider a new or 
renewed commitment as being on substantially the same terms and 
conditions as existing commitments under the Non-Bank Liquidity 
Facility program, such that executing such commitments would not be 
subject to the requirement to file an advance notice filing pursuant to 
Section 806(e)(1) of the Clearing Supervision Act.\36\ Conversely, a 
new commitment or renewal under different conditions would necessitate 
OCC providing advance notice to the Commission for consideration.
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    \36\ 12 U.S.C. 5465(e)(1).
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III. Commission Findings and Notice of No Objection

    Although the Clearing Supervision Act does not specify a standard 
of review for an advance notice, the stated purpose of the Clearing 
Supervision Act is instructive: to mitigate systemic risk in the 
financial system and promote financial stability by, among other 
things, promoting uniform risk management standards for systemically 
important financial market utilities (``SIFMUs'') and strengthening the 
liquidity of SIFMUs.\37\
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    \37\ See 12 U.S.C. 5461(b).
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    Section 805(a)(2) of the Clearing Supervision Act authorizes the 
Commission to prescribe regulations containing risk management 
standards for the payment, clearing, and settlement activities of 
designated clearing entities engaged in designated activities for which 
the Commission is the supervisory agency.\38\ Section 805(b) of the 
Clearing Supervision Act provides the following objectives and 
principles for the Commission's risk management standards prescribed 
under Section 805(a): \39\
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    \38\ 12 U.S.C. 5464(a)(2).
    \39\ 12 U.S.C. 5464(b).
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     to promote robust risk management;
     to promote safety and soundness;
     to reduce systemic risks; and
     to support the stability of the broader financial system.
    Section 805(c) provides, in addition, that the Commission's risk 
management standards may address such areas as risk management and 
default policies and procedures, among other areas.\40\
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    \40\ 12 U.S.C. 5464(c).
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    The Commission has adopted risk management standards under Section 
805(a)(2) of the Clearing Supervision Act and Section 17A of the 
Exchange Act (the ``Clearing Agency Rules'').\41\ The Clearing Agency 
Rules require, among other things, each covered clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures that are reasonably designed to meet certain minimum 
requirements for its operations and risk management practices on an 
ongoing basis.\42\ As such, it is appropriate for the Commission to 
review advance notices against the Clearing Agency Rules and the 
objectives and principles of these risk management standards as 
described in Section 805(b) of the Clearing Supervision Act. As 
discussed below, the Commission believes the changes proposed in the 
Advance Notice are consistent with the objectives and principles 
described in Section 805(b) of the Clearing Supervision Act,\43\ and in 
the Clearing Agency Rules, in particular Rule 17Ad-22(e)(7).\44\
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    \41\ 17 CFR 240.17Ad-22. See Exchange Act Release No. 68080 
(Oct. 22, 2012), 77 FR 66220 (Nov. 2, 2012) (S7-08-11). See also 
Covered Clearing Agency Standards, 81 FR 70786. The Commission 
established an effective date of December 12, 2016 and a compliance 
date of April 11, 2017 for the Covered Clearing Agency Standards. 
OCC is a ``covered clearing agency'' as defined in Rule 17Ad-
22(a)(5).
    \42\ 17 CFR 240.17Ad-22.
    \43\ 12 U.S.C. 5464(b).
    \44\ 17 CFR 240.17Ad-22(e)(7).
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A. Consistency With Section 805(b) of the Clearing Supervision Act

    The Commission believes that the proposal contained in OCC's 
Advance Notice is consistent with the stated objectives and principles 
of Section 805(b) of the Clearing Supervision Act. Specifically, as 
discussed below, the Commission believes that the changes proposed in 
the Advance Notice are consistent with promoting robust risk 
management, promoting safety and soundness, reducing systemic risks, 
and supporting the stability of the broader financial system.\45\
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    \45\ 12 U.S.C. 5464(b).
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    The Commission believes that the proposed changes are consistent 
with promoting robust risk management, in particular the management of 
liquidity risk presented to OCC. As a central counterparty and a 
SIFMU,\46\ it is imperative that OCC have adequate resources to be able 
to satisfy liquidity needs arising from its settlement obligations, 
including in the event of a Clearing Member default.\47\ To support 
this objective, OCC proposes to remove the $1 billion aggregate 
commitment limit it may seek through the Non-Bank Liquidity Facility 
program, so that OCC's Board could adjust the level of aggregate 
commitments under the program to ensure that OCC maintains sufficient 
liquidity resources to cover its liquidity risk exposures.\48\ The 
Commission believes that approving these changes would give OCC greater 
flexibility to obtain additional liquidity resources in the form of 
commitments under the Non-Bank Liquidity Facility. Therefore, the 
Commission believes that the Advance Notice could increase OCC's access 
to liquidity resources, which in turn would strengthen OCC's overall 
ability to manage its liquidity risk exposures. As such, the Commission 
believes that the proposal would promote robust liquidity risk 
management at OCC consistent with Section 805(b) of the Clearing 
Supervision Act.\49\
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    \46\ See Financial Stability Oversight Council (``FSOC'') 2012 
Annual Report, Appendix A, available at https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
    \47\ See Notice of No Objection to 2014 Advance Notice, 80 FR at 
1065.
    \48\ As proposed, the facility would not limit the total 
aggregate commitments OCC may seek. As a practical matter, OCC 
expressed its intent to source approximately $1 billion in 
additional liquidity under the Non-Bank Liquidity Facility following 
removal of the aggregate commitment limit. See Notice of Filing, 87 
FR at 44479.
    \49\ 12 U.S.C. 5464(b).
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    The Commission also believes that the changes proposed in the 
Advance Notice are consistent with promoting safety and soundness, 
reducing systemic risks, and promoting the stability of the broader 
financial system. By removing the $1 billion aggregate commitment 
limit, OCC will be in a position to increase the aggregate commitments 
of the Non-Bank Liquidity Facility program to $2 billion.\50\ Allowing 
OCC to increase aggregate commitments under the facility would, in 
turn, reduce the likelihood that OCC would have insufficient financial 
resources to address liquidity demands arising out of a Clearing Member 
default. Further, the Commission believes that, to the extent the 
proposed changes are consistent with promoting OCC's safety and 
soundness, they are also consistent with supporting the stability of 
the broader financial system. OCC has been designated as a SIFMU, in 
part, because its failure or disruption could increase the risk of 
significant liquidity or credit problems spreading among financial 
institutions or markets.\51\ The Commission believes that the proposed 
changes would support OCC's ability to

[[Page 55052]]

continue providing services to the options markets by addressing losses 
and shortfalls arising out of the default of a Clearing Member. OCC's 
continued operations would, in turn, help support the stability of the 
financial system by reducing the risk of significant liquidity or 
credit problems spreading among market participants that rely on OCC's 
central role in the options market. As such, the Commission believes 
the proposed changes are consistent with promoting safety and 
soundness, reducing systemic risks, and promoting the stability of the 
broader financial system.\52\
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    \50\ As noted above, OCC intends to expand its aggregate 
external liquidity by $2.5 billion. While OCC intends to seek $1 
billion of that amount under the Non-Bank Liquidity Facility, the 
removal of the commitment limit would allow OCC to seek additional 
commitments if it is unable to obtain access to external liquidity 
through other facilities.
    \51\ See FSOC 2012 Annual Report, Appendix A, https://home.treasury.gov/system/files/261/here.pdf (last visited Mar. 17, 
2021).
    \52\ 12 U.S.C. 5464(b).
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    The Commission received comments asserting that the proposal would 
put public retirement funds at risk to cover investing choices made by 
Clearing Members.\53\ The Commission has carefully considered the risk 
to investors' retirement funds relative to the benefits of expanding 
the Non-Bank Liquidity Facility. Given that the Non-Bank Liquidity 
Facility has included non-bank institutional investors such as pension 
funds and insurance companies among its liquidity providers since its 
implementation in 2015, and has retained substantially the same terms 
throughout, the Commission does not believe that the proposed expansion 
to the Non-Bank Liquidity Facility would introduce new risks to OCC's 
counterparties.\54\ Further, the terms of the facility would require 
OCC to provide Eligible Securities (e.g., Treasuries) subject to 
haircuts negotiated by OCC and its counterparties to address the 
potential credit risk to OCC's counterparties. Moreover, the terms of 
the facility would require OCC to pay the costs of any covering 
transactions required if OCC were to fail to perform its obligation. As 
described above, the expansion of commitments in the Non-Bank Liquidity 
Facility would reduce the likelihood that OCC would have insufficient 
financial resources resulting from a Clearing Member default. Taken 
together, the Commission believes that the terms of the agreement to 
protect OCC and its counterparties, combined with the reduced 
likelihood of OCC's failure to manage a default, would in fact promote 
the safety and soundness of the U.S. markets.
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    \53\ Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm.
    \54\ When OCC proposed the first iteration of the Non-Bank 
Liquidity Facility, it acknowledged that, like any liquidity source, 
it would involve certain risks. See Exchange Act Release No. 73726 
(Dec. 3, 2014), 79 FR 73116, 73119 (Dec. 9, 2014) (File No. SR-OCC-
2014-809). Upon review of the terms of the facility, the Commission 
stated its belief that the proposal should promote robust risk 
management, promote safety and soundness in the marketplace, reduce 
systemic risks, and support the stability of the broader financial 
system by giving OCC access to additional committed liquidity that 
will help OCC meet its settlement obligations in a timely manner, 
while also limiting the exposure that OCC has to its counterparties. 
See Exchange Act Release No. 73979 (Jan. 2, 2015), 80 FR 1062, 1065 
(Jan. 8, 2015) (File No. SR-OCC-2014-809).
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    The Commission also received comments asserting that ``changing the 
rules regarding advance notice'' (likely referring to OCC not having to 
file an advance notice at renewal) has ``no value to the public.'' \55\ 
The Commission has carefully considered the risk of allowing new or 
renewed commitments under the terms of Non-Bank Liquidity Facility 
without requiring additional advance notice filings from OCC. Given 
that such additional commitments would only be permitted without an 
advance notice if executed on substantially similar terms as the 
current Non-Bank Liquidity Facility, to which the Commission has 
previously not objected, the Commission does not believe that such 
additional commitments would necessarily present a material change to 
the risks that OCC presents. Any change to the Non-Bank Liquidity 
Facility that could materially affect the nature or level of risk posed 
by OCC would necessitate an advance notice filing.\56\
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    \55\ Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm.
    \56\ OCC would submit another advance notice only if: (1) OCC 
should seek to execute a commitment at a level that would have the 
effect of reducing external liquidity below the target of $3 
billion; (2) OCC seeks to change the terms and conditions of the 
agreements underlying the facility or commitments thereunder in a 
manner that materially affects the nature or level of risk presented 
by OCC; or (3) OCC seeks to execute a commitment with a counterparty 
that has experienced a negative change to its credit profile or a 
material adverse change since OCC last executed a commitment with 
that counterparty.
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    Accordingly, and for the reasons stated above, the Commission 
believes the changes proposed in the Advance Notice are consistent with 
Section 805(b) of the Clearing Supervision Act.\57\
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    \57\ 12 U.S.C. 5464(b).
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B. Consistency With Rule 17Ad-22(e)(7) Under the Exchange Act

    Rule 17Ad-22(e)(7)(ii) under the Exchange Act requires that a 
covered clearing agency establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to effectively 
measure, monitor, and manage the liquidity risk that arises in or is 
borne by the covered clearing agency, including measuring, monitoring, 
and managing its settlement and funding flows on an ongoing and timely 
basis, and its use of intraday liquidity by, at a minimum, holding 
qualifying liquid resources sufficient to meet the minimum liquidity 
resource requirement under Rule 17Ad-22(e)(7)(i) \58\ in each relevant 
currency for which the covered clearing agency has payment obligations 
owed to clearing members.\59\ For any covered clearing agency, 
``qualifying liquid resources'' means assets that are readily available 
and convertible into cash through prearranged funding arrangements, 
such as committed arrangements without material adverse change 
provisions, including, among others, repurchase agreements.\60\
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    \58\ Rule 17Ad-22(e)(7)(i) requires OCC to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to effectively measure, monitor, and manage liquidity risk 
that arises in or is borne by OCC, including measuring, monitoring, 
and managing its settlement and funding flows on an ongoing and 
timely basis, and its use of intraday liquidity by, at a minimum, 
maintaining sufficient liquid resources at the minimum in all 
relevant currencies to effect same-day settlement of payment 
obligations with a high degree of confidence under a wide range of 
foreseeable stress scenarios that includes, but is not limited to, 
the default of the participant family that would generate the 
largest aggregate payment of obligation for the covered clearing 
agency in extreme but plausible conditions. 17 CFR 240.17Ad-
22(e)(7)(i).
    \59\ 17 CFR 240.17Ad-22(e)(7)(ii).
    \60\ 17 CFR 240.17Ad-22(a)(14)(ii)(3).
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    The Non-Bank Liquidity Facility provides OCC with prearranged 
commitments to convert assets into cash even if OCC experiences a 
material adverse change, and the Commission believes that the Non-Bank 
Liquidity Facility provides OCC access to qualifying liquid resources 
to the extent that OCC has sufficient collateral to access the 
facility.\61\ The Commission believes, therefore, that the proposed 
changes--to remove the existing aggregate commitment limit, and to 
allow the OCC Board to increase the Non-Bank Liquidity Facility program 
aggregate commitment levels as needed to maintain sufficient 
liquidity--will further enhance OCC's ability to hold qualifying liquid 
resources to meet its liquidity resource requirements, consistent with 
the requirements of Rule 17Ad-22(e)(7)(ii) under the Exchange Act.\62\
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    \61\ OCC would use Eligible Securities that are included in 
Clearing Fund contributions by Clearing Members (separate from any 
required cash contributions to the Clearing Fund) and margin 
deposits of any Clearing Member that has been suspended by OCC for 
the repurchase arrangements. See Notice of Filing, 85 FR at 31235 
n.9.
    \62\ 17 CFR 240.17Ad-22(e)(7)(ii).
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    The Commission received comments raising concerns about the 
inability of liquidity providers to deny funding in

[[Page 55053]]

the event of a material adverse change.\63\ As noted above, under Rule 
17Ad-22(a)(14), committed arrangements, such as repurchase agreements, 
are only qualifying liquid resources where such agreements do not 
include material adverse change provisions.\64\ Moreover, the non-banks 
are voluntarily participating in the facility. These liquidity 
providers may consider the benefits and costs of participation, 
including the adverse change provision, before determining that their 
participation in the facility would be preferable to alternative 
investments and would benefit their shareholders and beneficiaries.
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    \63\ Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm.
    \64\ 17 CFR 240.17Ad-22(a)(14)(ii)(A).
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    Commenters also raised concerns regarding the speed with which a 
counterparty would be required to provide funding.\65\ As discussed 
above, a fundamental attribute of liquidity resources is that OCC can 
quickly access liquidity in the event of a Clearing Member default or 
market disruption. By necessity, funds must be made available to OCC 
within 60 minutes of OCC's delivering Eligible Securities, and the 
institutional investor is not permitted to rehypothecate purchased 
securities. Any requirement to allow liquidity providers to deny or 
delay funding would potentially delay OCC's access to liquidity 
resources, which could negatively affect the safety and soundness of 
the U.S. markets.
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    \65\ Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm.
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    Accordingly, the Commission believes that the changes proposed in 
the Advance Notice are consistent with Rule 17Ad-22(e)(7) under the 
Exchange Act.\66\
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    \66\ 17 CFR 240.17Ad-22(e)(7).
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IV. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act, that the Commission does not object to 
Advance Notice (SR-OCC-2022-803) and that OCC is authorized to 
implement the proposed change as of the date of this notice.

    By the Commission.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-19417 Filed 9-7-22; 8:45 am]
BILLING CODE 8011-01-P