[Federal Register Volume 88, Number 91 (Thursday, May 11, 2023)]
[Notices]
[Pages 30373-30377]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-10029]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97439; File No. SR-OCC-2023-002]
Self-Regulatory Organizations; the Options Clearing Corporation;
Order Granting Approval of Proposed Rule Change by the Options Clearing
Corporation Concerning the Amendment of Its Clearing Membership
Standards
May 5, 2023.
I. Introduction
On March 3, 2023, the Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2023-002 pursuant to section 19(b) of the
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
\2\ thereunder. The proposed rule change concerns proposed changes to
OCC's standards for its members. The proposed rule change was published
for public comment in the Federal Register on March 21, 2023.\3\ The
Commission has received no comments regarding the proposed rule change.
For the reasons discussed below, the Commission is approving the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 97150 (Mar. 15, 2023),
88 FR 17046 (Mar. 21, 2023) (File No. SR-OCC-2023-002) (``Notice of
Filing'').
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II. Background \4\
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\4\ 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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OCC acts as the central counterparty (``CCP'') for all listed
options in the U.S., as well as for certain futures. It provides
clearing services to its members, which are financial organizations
that, in turn, facilitate the clearing and settlement of their customer
transactions or proprietary transactions through OCC. OCC is proposing
to change its rules that address standards for its membership by (i)
expanding its membership types and updating its membership requirements
and associated processes, including on-boarding and off-boarding
procedures; (ii) amending members' financial responsibility standards;
(iii) amending members' operational requirements; and (iv) changing
rules governing disciplinary actions.
(i) Member Eligibility, On-Boarding, and Termination
OCC proposes rule changes to expand the types of entities that are
eligible to become Clearing Members, while removing distinctions
between certain membership categories to ensure consistent requirements
across members. The proposed rule changes would also consolidate and
streamline the procedures and requirements for admitting new members.
Further, the proposed rule changes would allow a member to elect to
voluntarily terminate its membership.
Currently, OCC's Articles and By-Laws permit three different types
of institutions eligible for clearing membership: (i) broker-dealers,
(ii) futures commission merchants, and (iii) non-U.S. securities firms.
The proposed rule change would expand the list of eligible institutions
to include certain banks.\5\ OCC proposes limiting bank membership to
clearing proprietary activity only. The proposed rules would also
require a bank member to provide assurances regarding its activities
and ability to contribute collateral.
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\5\ OCC also proposes relocating the list of eligible
institutions in its rules from Article V of the By-Laws to new Rule
201(a)(1) through (a)(3).
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In addition to expanding its list of eligible institutions to
include banks, OCC proposes additional revisions to member eligibility.
For example, proposed Rule 201(b)(5) would clearly state the types of
members who may clear stock loan transactions (i.e., broker-dealers,
non-U.S. securities firms, or banks). Similarly, proposed Rule 201(d)
requires that each member meet standards related to risk management
capability, in addition to the current requirements related to
financial and operational capabilities.
The proposed rule change is designed to accommodate the admission
of non-U.S. Clearing Members other than Canadian Clearing Members.\6\
Broadly, the changes would require that such members not conduct
transactions or activities that would result in the imposition of
taxes, withholding, or reporting obligations with respect to amounts
paid or received by OCC (other than U.S. federal and state income taxes
imposed on OCC's income).\7\
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\6\ OCC also proposes relocating existing Article V, Section 1,
paragraph (e) of the By-Laws and Rule 310(d) to new Rule 202.
\7\ Relatedly, OCC also proposes to move various defined terms
from its Bylaws to Chapter 1 of its Rules, such as: Canadian
Clearing Member, FATCA, FATCA Compliant, FFI Clearing Member, Non-
U.S. Regulatory Agency, Non U.S. Securities Firm, Qualified
Intermediary Assuming Primary Withholding Responsibility, and
Qualified Derivatives Dealer.
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The proposed rule change would consolidate the admission procedures
and requirements and modify such admission procedures and requirements
to help streamline the application review process.\8\ For example,
proposed Rule 203(b) would include information about expedited approval
through OCC's Risk Committee, if the approval of the applicant is
appropriate for the protection of investors and the public interest.
Moreover, proposed Rule 203(c) would allow for Clearing Members to
clear additional types of transactions by requesting authorization from
OCC through a business expansion request.
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\8\ OCC also proposes relocating existing Article V, Section 2
and Article V, Section 1, Interpretation and Policy .03, clause (e)
of the By-Laws to new Rule 203.
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The proposed rule change would amend the conditions for admission
as an OCC member.\9\ Such amendments would impose requirements on
applicants (e.g., an applicant must notify OCC in writing if it is or
becomes subject to Statutory Disqualification) \10\
[[Page 30374]]
as well as make less substantive updates (e.g., removal of a
duplicative choice of law provision addressed elsewhere in OCC's
rules). The changes also describe, with minor clarifying changes, the
terms of a new member's initial contribution and agreements;
disapproval where an applicant engages in acts or practices
inconsistent with ``just and equitable principles of trade;'' and other
admission conditions.
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\9\ OCC also proposes consolidating such provisions currently
set forth in existing Article V, Section 3 and various other
portions of Article V of the By-Laws into new Rule 204.
\10\ OCC proposes to move the definition of Statutory
Disqualification from its By-Laws to Chapter 1 of its rules, move
the majority of its current Rule 217 regarding Statutory
Disqualification to proposed Rule 308, and remove certain provisions
related to hearings that are duplicative of authority under OCC's
rules.
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The proposed rule change would adopt new Rule 212 to address
circumstances in which a Clearing Member may elect to voluntarily
terminate its membership. OCC's current Rules include information about
voluntary membership termination, but only under certain specific
circumstances, such as if the member's Clearing Fund contribution is
increased as a result of an amendment of the Rules,\11\ or during a
cooling-off period.\12\ Among other things, proposed Rule 212 would
provide that a Clearing Member may elect to voluntarily terminate its
membership by providing written notice to OCC that specifies a desired
date for its withdrawal from membership. The terminating Clearing
Member will be required to close out or transfer all open positions
with OCC by the termination date.
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\11\ See OCC Rule 1002(e).
\12\ See OCC Rule 1006(h)(C). Proposed Rule 212(d) would clarify
that any Voluntary Termination Notice provided during a cooling-off
period implemented pursuant to Rule 1006(h) would be subject to the
requirements of Rule 1006(h).
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Additionally, OCC proposes to relocate existing rules,\13\ remove
distinctions between certain membership categories to ensure consistent
requirements across members,\14\ and remove rules regarding
implementation dates that have already passed.\15\
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\13\ OCC proposes to relocate requirements applicable to
Canadian Hedge Clearing Members on behalf of which CDS maintains an
identifiable sub-account at DTC to existing Rule 2201, which
addresses instructions provided to OCC. Specifically, OCC would
propose relocating portions of existing Article V, Section 1,
Interpretation and Policy .07 to Rule 2201(c) and (d).
\14\ OCC proposes to replace the following distinct membership
categories with general references to ``Clearing Member'' and make
them subject to the standards for all Clearing Members: Canadian
Hedge Clearing Member; Domestic Clearing Member; Exempt Non-U.S.
Clearing Member; Futures-only affiliated Clearing Member; Hedge
Clearing member; Managed Clearing Member; Managing Clearing Member;
and Market Loan Clearing Member. OCC proposes to maintain the
concept of Appointing Clearing Members and Appointed Clearing
Members, but these members would no longer be subject to distinct or
different membership standards.
\15\ OCC proposes to remove defined terms ``Section 871(m)
Effective Date'' and ``Section 871(m) Implementation Date'' as well
as references to these terms because these dates have passed and the
defined terms are no longer necessary.
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(ii) Financial Responsibility Standards
OCC proposes to eliminate the current distinction between initial
and ongoing capital requirements for its members.\16\ OCC also proposes
to increase the minimum financial requirements for members and set out
requirements for banks as a new member category.\17\ The current
broker-dealer and FCM minimum requirement of $2.5 million in initial
capital and adjusted net capital would be increased to $10 million in
net capital and adjusted net capital.\18\ Similarly, OCC proposes to
set capital requirements for Canadian Investment Dealers and Non-U.S.
Securities Firms at $10 million generally.\19\ The proposed rule change
also introduces capital requirements for banks as a new type of
Clearing Member. Specifically, U.S. banks would be required to maintain
Tier 1 Capital of at least $500 million, a Tier 1 Capital Ratio greater
than 6%, and be either ``well-capitalized'' or ``adequately-
capitalized'' as measured by prompt corrective action (``PCA'') capital
category ratios applicable to such U.S. Banks. OCC represents that,
upon Commission approval of the proposed rule change, OCC would provide
a six-month grace period for existing Clearing Members to meet the
proposed increase in capital requirements.\20\
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\16\ OCC proposes to replace current Rules 301 and 302, which
set forth initial financial requirements and ongoing net capital
requirements, respectively, with new Rule 301.
\17\ OCC would continue not to permit opening purchase
transactions, opening sale transactions, or entering into a Stock
Loan by members not meeting such standards. OCC proposes to move the
language related to this requirement from current Rule 302(a) to
proposed Rule 301(b). The proposed rule change would also delete
existing Rule 309A, which sets forth minimum capital and other
requirements for Appointed Clearing Members because these concepts
are no longer a distinct membership type.
\18\ For broker-dealers, the minimum net capital would be equal
to the greater of (i) $10 million; (ii) 6\2/3\% of its aggregate
indebtedness (in the case of a broker-dealer that does not elect to
operate pursuant to the alternative net capital requirements); or
(iii) 2% of its aggregate debit items (in the case of a broker-
dealer that elects to operate pursuant to the alternative net
capital requirements). For FCMs, the minimum net capital would be
equal to the greater of (i) $10 million or (ii) any other minimum
financial requirements established by regulation of the Commodity
Futures Trading Commission.
\19\ The change would increase the current warning reserve
requirement from $2.5 million to $10 million for Canadian Investment
Dealers.
\20\ See Notice of Filing, 88 FR at 17052.
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(iii) Operational Requirements
OCC proposes changes to rules governing certain operation
requirements and processes for its members. As described below, such
changes include, but are not limited to, the acceptance of e-
signatures, record retention requirements, and the consolidation of
existing rules.\21\
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\21\ OCC also proposes relocating its current Rule 203
(requiring members to establish and maintain a bank account in a
Clearing Bank for each account maintained by it with OCC) to
proposed Rule 206. OCC proposes no changes to the text of current
Rule 203.
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OCC proposes changes to its rules designed to reflect changes in
technology. OCC proposes to expand its rules to permit the reliance on
electronic signatures, in addition to reliance on an original
signature.\22\ Additionally, OCC proposes to remove references to
authorization stamps as a security measure because OCC no longer uses
such stamps.\23\ Additionally, OCC proposes removing its current Rule
204 that requires members to designate physical locations as clearing
offices of the Clearing Member, because the rule is no longer relevant
to OCC's operations or to its Clearing Members given the migration of
trading, clearance and settlement activities to electronic means.
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\22\ OCC stated that the change is intended to better reflect
evolving technology and the means by which signatures generally may
be accepted. See Notice of Filing, 88 FR at 17051. OCC also proposes
to renumber current Rule 202, which discusses such signature
requirements, as new Rule 205.
\23\ OCC proposes to renumber its current Rule 212 regarding
security measures (including authorization stamps) as proposed Rule
209.
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OCC proposes changes to its rules regarding various submissions and
reports between OCC and its members. OCC proposes to align its rules
regarding the submission to and retrieval from OCC of documents by
Clearing Members.\24\ The proposed rules also permit OCC to disregard
untimely submissions from a Clearing Member, except in unusual or
unforeseen circumstances. Additionally, OCC proposes to require that it
post proposed rule changes on its website after (rather than before)
filing such changes to provide notice to members.\25\
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\24\ To facilitate this alignment, OCC proposes to combine its
current Rules 205 (submissions by members) and 206 (retrievals from
OCC) into proposed Rule 207.
\25\ Rule 19b-4(l) under the Exchange Act requires OCC to post
each proposed rule change to its website within two business days of
filing such change. 17 CFR 240.19b-4(l). OCC further proposes to
consolidate its current Rules 208, 211, and 213 (regarding reports
and notices by OCC) in proposed Rule 211 subject to the
modifications described here.
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OCC also proposes to reorganize and update various rules pertaining
to member processes and operational requirements. With regard to member
processes, OCC proposes to streamline its rule regarding record
retention requirements for Clearing Members to state that such
requirements apply to all
[[Page 30375]]
confirmed trade data required pursuant to the By-Laws and Rules,
including confirmed trade information reported to OCC under Rule
401.\26\ With regard to operational requirements, OCC proposes to
consolidate existing provisions regarding Clearing Members' operational
capability in proposed Rule 302.\27\ In addition to consolidation, OCC
proposes the following changes to such requirements:
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\26\ OCC's current rule requires retention of such information
by referencing specific types of information by product (e.g., the
series, trade price, and trade date with respect to confirmed trades
in BOUNDS). In addition to the modifications described here, OCC
proposes to renumber its current Rule 207 regarding record retention
requirements as proposed Rule 208.
\27\ Proposed Rule 302 is a consolidation of requirements set
forth in the existing By-Laws and the Rules, including Article V,
Section 1, Interpretations and Policies .02, .07 and .07A of the By-
Laws and current Rule 201.
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Adopt a new general statement requiring members to meet
OCC's operational capability, experience and competence standards;
Require that an authorized representative of each Clearing
Member be available during regular and overnight business hours;
Simplify and standardize the record keeping requirements
applicable to each Clearing Member;
Clarify that each Clearing Member must be able to
participate in applicable operational and default management
activities; and
Make additional minor clarifying changes.
Proposed Rule 302 would also set forth the requirement that
Clearing Members must maintain operationally sufficient facilities,
systems, and procedures to discharge their clearing functions in a
timely and efficient manner. The proposed rule also provides additional
operational requirements for Clearing Members that effect transactions
in physically-settled equity options and stock futures, or participate
in OCC's stock loan programs.
Further, OCC proposes to apply its existing rules regarding an
applicant's financial, operations, and risk management personnel to OCC
Clearing Members.\28\ Under OCC's current rules, different personnel
requirements exist for applicants and Clearing Members. OCC's proposal
would make such requirements the same for both. In addition to applying
the personnel requirements for applicants to Clearing Members, OCC
proposes to change such standards as follows. Proposed Rule 303(a)
would provide that every applicant and Clearing Member must employ
personnel or maintain contractual arrangements with third-party service
providers acceptable to OCC with substantial experience in clearing the
kind(s) of cleared contracts applicable to the applicant or Clearing
Member. Proposed paragraph (b) would require Clearing Members to employ
personnel or retain third-party service providers responsible for
Clearing Members' compliance with applicable net capital, recordkeeping
and other financial, operational, and risk management rules. Proposed
paragraph (c) would require Clearing Members to ensure that they employ
an appropriate number of clearing operations personnel or retain third-
party service providers with requisite capability, experience, and
competency, among other requirements. The proposed Rule also sets forth
additional requirements for contractual arrangements with third-party
personnel, as well as requirements for replacing relevant personnel or
third-party providers who are being separated or terminated from OCC.
The proposed modifications to the existing financial, operations, and
risk management personnel requirements include eliminating the
requirements for Managed Clearing Members and Managing Clearing
Members, and removing references to facilities management agreements,
Managing Clearing Members and Managed Clearing Members. These
requirements, in current Rule 309, would be replaced by proposed Rule
303's more general rules for outsourcing third-party service providers.
According to OCC, the modifications are intended to reduce
administrative burdens and provide OCC and its Clearing Members with
greater flexibility.\29\
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\28\ As an organizational matter, OCC proposes to consolidate
the personnel requirements set forth in Article V, Section 1 of the
By-Laws as well as current Rule 214 in proposed Rule 303.
\29\ See Notice of Filing, 88 FR 17055.
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OCC proposes to add two new rule provisions designed to expand its
rules related to operational and default management testing.\30\ The
first would state that OCC will periodically designate Clearing Members
required to participate in business continuity and disaster recovery
testing. The second would state that OCC may require Clearing Members
to participate in other operational and connectivity testing and
related reporting requirements that OCC deems necessary to ensure the
continuing operational capability of the Clearing Members and the
continuing ability of OCC to perform its clearing, settlement, and risk
management activities.
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\30\ As an organizational matter, OCC proposes to move existing
Rule 218 regarding operational and default management testing to
proposed Rule 304 subject to the changes described here.
Additionally, OCC proposes a few non-material changes (e.g.,
replacing ``will'' with ``shall'').
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OCC proposes three sets of changes to its rules regarding
notification and reporting requirements for Clearing Members.\31\
First, OCC proposes to add a rule stating that each Clearing Member
must provide to OCC such notices, reports, documentation, or other
information required in the Rules and any other requirements
promulgated by OCC. In contrast, OCC's current rules prescribe a series
of narrow notice requirements under specific circumstances such as
currently requiring ``prompt'' written notice (rather than 30-day prior
written notice).
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\31\ These requirements would be consolidated from various
provisions of the By-Laws and Rules, including existing Article V,
Section 1, Interpretations and Policies .03 and .07 of the By-Laws
and Rules 201(b), 215, 216, 217(b), 303, 306, 308, and 310(a)-(c).
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Second, OCC proposes to change the requirements for event-based
reporting by Clearing Members.\32\ Specifically, proposed Rule 306A(a)
would require Clearing Members to provide early-warning notices to OCC
of any financial or operational difficulty, or any instances where a
Clearing Member fails to meet certain financial or operational
thresholds, depending on the nature of the Clearing Member's business.
For example, if the Clearing Member is a fully-registered broker-dealer
and fails to meet specific thresholds for net capital, it would need to
provide an early-warning notice to OCC. The proposed rule also provides
the specific circumstances where early-warning notices would be
required from other Clearing Member types, such as fully-registered
FCMs, non-U.S. securities firms, and banks. Proposed Rule 306A(b) sets
forth the requirements for Clearing Members to report material changes
to their organizational structure, finances, or operations; their
intentions to enter into, terminate, or alter outsourcing activities;
and provide other types of event-based reporting or responses to
information requests from OCC. Proposed Rule 306A(c) provides the
statutory disqualification notification requirements for Clearing
Members.
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\32\ OCC's current event-based reporting requirements for
members, set forth in existing Article V, Section 1, Interpretations
and Policies .03 (clause (c)) and .07 of the By-Laws and existing
Rules 201(b), 215, 217(b) and 303, would be consolidated in proposed
Rule 306A.
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Third, OCC proposes to change the requirements for periodic
reporting by Clearing Members.\33\ The proposed rule
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would cover periodic reporting of financial reports and annual audited
financial statements, as well as the timing and frequency of such
reporting, including providing OCC discretion to allow for extensions.
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\33\ OCC's current periodic reporting requirements for members,
set forth in existing Rules 216, 306, 308 and 310(a)-(c), would be
consolidated in proposed Rule 306B.
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(iv) Protective Measures and Disciplinary Actions
OCC proposes to change its rules related to (i) the imposition of
protective measures on Clearing Members who may pose a risk to OCC and
(ii) disciplinary actions OCC may take in response to violations of its
rules. With regard to the imposition of protective measures, OCC
proposes to adopt new Rule 307, which would grant OCC the authority to
impose broader protective measures on a member or applicant that (i) is
approaching or does not meet OCC's minimum membership standards or
fails to provide information such that OCC is unable to determine
whether it meets the minimum membership standards, (ii) presents
increased credit or liquidity risk to OCC, (iii) is subject to enhanced
monitoring and surveillance under OCC's watch level reporting process,
or (iv) whose financial condition, operational capability, or risk
management capability otherwise makes it necessary or advisable, for
the protection of OCC, other Clearing Members, or the general
public.\34\ Although proposed Rule 307 would not provide OCC with
entirely new authority to impose protective measures, it would clarify
that OCC has the authority to impose such measures under a broader set
of circumstances, not just on Clearing Members, but on applicants for
membership as well. Additionally, OCC proposes to modify two of its
current rules regarding the imposition of protective measures on its
members.\35\ OCC proposes to clarify that restrictions on distributions
apply to all qualified regulatory capital (as opposed to funds from
specific accounts), and to provide that OCC may prohibit a Clearing
Member from withdrawing qualified regulatory capital if it is subject
to enhanced monitoring and surveillance under OCC's watch level
reporting process or the distribution could increase OCC's credit or
liquidity risk.\36\ Further, the proposal would permit OCC to impose
activity restrictions as additional protective measures.\37\ The
proposed changes would link certain restrictions on activities to the
potential risks posed by that Clearing Member (e.g., limiting
transactions that increase credit or liquidity risk).\38\ OCC also
proposes to adopt a new Rule 307C that would authorize it to impose
protective measures in the form of additional operational, personnel,
financial resource, or risk management requirements.
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\34\ OCC proposes a conforming change to its Rule 609 regarding
the imposition of intraday margin. Specifically, OCC proposes to
expand the grounds for imposing additional margin requirements to
contemplate not only a member's financial position, but also its
operational and risk management conditions. Similarly, OCC proposes
to add a statement to current Rule 311 (renumbered as proposed Rule
305) authorizing the imposition of protective measures based on a
review of a member's risk management policies, procedures, and
practices.
\35\ OCC's current Rules 304 (restrictions on distributions) and
305 (restrictions on certain transactions, positions, and
activities) would be renumbered as proposed Rules 307A and 307B,
respectively.
\36\ OCC would also remove certain distinctions from its current
rules such that restrictions on distributions would apply
consistently across member types.
\37\ Currently, OCC may impose such restrictions based on
certain broad determinations. The proposed change would align the
threshold with the terms of proposed Rule 307.
\38\ OCC also proposes to remove a non-exhaustive list of
situations in which OCC may impose protective measures.
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With regard to disciplinary actions, OCC proposes to increase the
potential fines for minor rule violations (e.g., increasing the fine
for a first occasion from $300 to $1500).\39\ Additionally, the
proposed rules would reduce the number of minor rule violations within
a twenty-four month period that would result in a disciplinary
proceeding from four to three violations. OCC also proposes to modify
its current Rule 209 to require that any fine levied by OCC for a minor
rule violation that has not been timely contested will be due and
payable immediately upon notice as opposed to within five business days
following the end of each calendar month.\40\
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\39\ In addition to the modification described here, OCC
proposes to consolidate rules regarding minor rule violations.
Specifically, OCC proposes to relocate rule 1201(b), 215(e) and
215(f) and Interpretation and Policy .01 to proposed Rule 1203.
Further, current Rule 1203 would be renumbered as proposed Rule
1204.
\40\ In addition to the modification described here, OCC
proposes to renumber current Rule 209 as proposed Rule 210.
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III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Exchange Act directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to such organization.\41\ After carefully
considering the proposed rule change, the Commission finds that the
proposal is consistent with the requirements of the Exchange Act and
the rules and regulations thereunder applicable to OCC. More
specifically, the Commission finds that the proposal is consistent with
Exchange Act sections 17A(b)(3)(B), (F), and (G) \42\ as well as Rules
17Ad-22(e)(2)(i) and 17Ad-22(e)(18),\43\ as described in detail below.
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\41\ 15 U.S.C. 78s(b)(2)(C).
\42\ 15 U.S.C. 78q-1(b)(3)(B), 15 U.S.C. 78q-1(b)(3)(F), and 15
U.S.C. 78q-1(b)(3)(G).
\43\ 17 CFR 240.17Ad-22(e)(2)(i) and 17 CFR 240.17Ad-22(e)(18).
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A. Consistency With Section 17A(b)(3)(B) of the Exchange Act
Section 17A(b)(3)(B) of the Exchange Act requires that the rules of
a clearing agency provide, among other things, that any registered
broker or dealer, bank may become a participant in such clearing
agency.\44\ OCC's rules currently allow for registered broker-dealers
to become members if they meet the applicable membership requirements.
As described above, OCC proposes to expand the list of entities
eligible for membership to include banks. Such expansion includes the
description of specific standards for banks to become Clearing Members.
These standards, including bank-specific financial thresholds,
operational requirements, and risk requirements, are consistent with
the types of standards for other entities already eligible for clearing
membership with OCC, such as broker-dealers and futures commission
merchants. The Commission believes, therefore, that the proposal is
consistent with the requirements of section 17A(b)(3)(B) of the
Exchange Act.
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\44\ 15 U.S.C. 78q-1(b)(3)(B).
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B. Consistency With Section 17A(b)(3)(F) of the Exchange Act
Section 17A(b)(3)(F) of the Exchange Act requires, among other
things, that a clearing agency's rules are designed to promote the
prompt and accurate clearance and settlement of securities transactions
and are not designed to permit the unfair discrimination in the
admission of participants or among participants in the use of the
clearing agency.\45\
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\45\ 15 U.S.C. 78q-1(b)(3)(F).
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As described above, OCC proposes to align and strengthen its
financial responsibility standards for members. OCC also proposes to
modify its operational requirements for members to (i) reflect changes
in technology (e.g., allowing for reliance on electronic signatures);
(ii) remove provisions no longer applicable to current practice (e.g.,
the use of authorization stamps or
[[Page 30377]]
designation of a physical location as a clearing office); and (iii)
expand requirements with regard to members' operational capability,
personnel, and reporting, as well as testing (e.g., participation in
business continuity testing). The Commission believes that such
enhancements to OCC's financial and operational standards for Clearing
Members should help to ensure that OCC's Clearing Members are capable
of meeting their obligations to OCC, which in turn will help ensure
that OCC continues to promote the prompt and accurate clearance and
settlement of securities transactions.
Further, OCC proposes to consolidate its admission procedures and
requirements and modify such admission procedures and requirements to
help streamline the application review process. The Commission believes
that such streamlining should promote consistent application across
membership types, which, in turn may reduce the likelihood of unfair
discrimination in the admission of OCC's Clearing Members. OCC also
proposes to amend its conditions for member admission (e.g., an
applicant must notify OCC in writing if it is or becomes subject to
Statutory Disqualification), and directly address voluntary membership
termination.
The Commission believes, therefore, that the proposal is consistent
with the requirements of section 17A(b)(3)(F) of the Exchange Act.
C. Consistency With Section 17A(b)(3)(G) of the Exchange Act
Section 17A(b)(3)(G) of the Exchange Act requires, among other
things, that the rules of a clearing agency provide that its
participants shall be appropriately disciplined for violation of any
provision of the rules of that clearing agency by expulsion,
suspension, limitation of activities, functions, and operations, fine,
censure, or any other fitting sanction.\46\
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\46\ 15 U.S.C. 78q-1(b)(3)(G).
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As described above, OCC proposes to broaden its authority to impose
protective measures on Clearing Members who may pose a risk to OCC.
Such measures include the imposition of financial obligations, such as
additional margin requirements, as well as activity restrictions. OCC
also proposes to raise fines, reduce the threshold for instituting a
disciplinary proceeding, define when fines for uncontested violations
become due, and make other strengthening changes to the way it enforces
and addresses minor rule violations. The Commission believes that
strengthening OCC's ability to respond to risks and violations in this
way is consistent with the requirements of section 17A(b)(3)(G) of the
Exchange Act.
D. Consistency With Rule 17Ad-22(e)(2)(i) of the Exchange Act
Rule 17Ad-22(e)(2)(i) requires that a covered clearing agency
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to provide for governance arrangements
that are clear and transparent.\47\
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\47\ 17 CFR 240.17Ad-22(e)(2)(i).
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OCC's existing membership eligibility requirements, admissions
criteria, and ongoing standards are scattered across OCC's By-Laws and
Rules. As described above, OCC proposes to reorganize, relocate, or
consolidate such rule text into chapters 2 and 3 of OCC's Rules (along
with supporting definitional changes to chapter 1 of OCC's rules).
Further, OCC proposes other non-substantive wording changes throughout
its rules (e.g., changing ``will'' to ``shall''). Because such changes
would improve the readability of OCC's publically available rules,
which, in turn, would make such rules clearer and more transparent to
members and the public, the Commission believes that such changes are
consistent with Rule 17Ad-22(e)(2)(i).\48\
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\48\ 17 CFR 240.17Ad-22(e)(2)(i).
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E. Consistency With Rule 17Ad-22(e)(18) of the Exchange Act
Rule 17Ad-22(e)(18) requires a covered clearing agency to
establish, implement, maintain, and enforce policies and procedures
reasonably designed to, among other things, establish objective, risk-
based, and publically disclosed criteria for participation, which
permit fair and open access by direct participants, require
participants to have sufficient financial resources and robust
operational capacity to meet obligations arising from participation in
the clearing agency, and to monitor compliance with such participation
requirements on an ongoing basis.\49\
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\49\ 17 CFR 240.17Ad-22(e)(18).
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As stated above, OCC proposes to align and strengthen its financial
responsibility standards for members. OCC also proposes to modify its
operational requirements for members to (i) reflect changes in
technology (e.g., allowing for reliance on electronic signatures); (ii)
remove provisions no longer applicable to current practice (e.g., the
use of authorization stamps or designation of a physical location as a
clearing office); and (iii) expand requirements with regard to members'
operational capability, personnel, and reporting, as well as testing
(e.g., participation in business continuity testing). The Commission
believes that such enhancements to OCC's financial and operational
standards should help to ensure that OCC's membership has sufficient
financial resources and robust operational capacity to meet obligations
for participation in OCC. Further, OCC proposes to modify and
consolidate its admission procedures and requirements to help
streamline the application review process. The Commission believes that
such streamlining should promote consistent application across
membership types, which, in turn, would permit fair and open access by
direct participants.
Therefore, the Commission believes, therefore, that the proposal is
consistent with the requirements of Rule 17Ad-22(e)(18) of the Exchange
Act.\50\
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\50\ 17 CFR 240.17Ad-22(e)(18).
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VI. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the
Exchange Act, and in particular the requirements of section 17A of the
Exchange Act \51\ and the rules and regulations thereunder.
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\51\ In approving this proposed rule change, the Commission has
considered the proposed rules' impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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It is therefore ordered, pursuant to section 19(b)(2) of the
Exchange Act,\52\ that the proposed rule change (SR-OCC-2023-002) be,
and hereby is, approved.
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\52\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\53\
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\53\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-10029 Filed 5-10-23; 8:45 am]
BILLING CODE 8011-01-P