[Federal Register Volume 88, Number 222 (Monday, November 20, 2023)]
[Notices]
[Pages 80781-80783]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-25545]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98932; File No. SR-OCC-2023-007]
Self-Regulatory Organizations; Options Clearing Corporation;
Notice of Filing of Partial Amendment No. 1 and Order Instituting
Proceedings To Determine Whether To Approve or Disapprove a Proposed
Rule Change, as Modified by Partial Amendment No. 1, Concerning
Modifications to the Amended and Restated Stock Options and Futures
Settlement Agreement Between The Options Clearing Corporation and the
National Securities Clearing Corporation
November 14, 2023.
I. Introduction
On August 10, 2023, the Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2023-007 (``Proposed Rule Change'')
pursuant to Section 19(b) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to modify the
Amended and Restated Stock Options and Futures Settlement Agreement
dated August 5, 2017, between OCC and National Securities Clearing
Corporation, OCC's rules related to liquidity risk management, and
OCC's rules related to default management in connection with the
proposed modifications to the Existing Accord.\3\ The Proposed Rule
Change was published for public comment in the Federal Register on
August 30, 2023.\4\ The Commission has received no comments regarding
the Proposed Rule Change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Notice of Filing infra note 4, at 88 FR 59976.
\4\ Securities Exchange Act Release No. 98215 (Aug. 24, 2023),
88 FR 59976 (Aug. 30, 2023) (File No. SR-OCC-2023-007) (``Notice of
Filing''). OCC also filed a related advance notice (SR-OCC-2023-801)
(``Advance Notice'') with the Commission pursuant to Section
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, entitled the Payment, Clearing, and
Settlement Supervision Act of 2010 and Rule 19b-4(n)(1)(i) under the
Exchange Act. 12 U.S.C. 5465(e)(1). 15 U.S.C. 78s(b)(1) and 17 CFR
240.19b-4, respectively. The Advance Notice was published in the
Federal Register on August 30, 2023. Securities Exchange Act Release
No. 98214 (Aug. 24, 2023), 88 FR 59988 (Aug. 30, 2023) (File No. SR-
OCC-2023-801).
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On September 25, 2023, pursuant to Section 19(b)(2) of the Exchange
Act,\5\ the Commission designated a longer period within which to
approve, disapprove, or institute proceedings to determine whether to
approve or disapprove the Proposed Rule Change.\6\ On November 8, 2023,
OCC filed a Partial Amendment No. 1 to the Proposed Rule Change.\7\ The
Commission is publishing this notice to solicit comments on Partial
Amendment No. 1 from interested persons and is instituting proceedings,
pursuant to Section 19(b)(2)(B) of the Exchange Act,\8\ to determine
whether to approve or disapprove the proposed rule change, as modified
by the Partial Amendment No. 1 (hereinafter defined as ``Proposed Rule
Change'').
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\5\ 15 U.S.C. 78s(b)(2).
\6\ Securities Exchange Act Release No. 98508 (Sep. 25, 2023),
88 FR 67407 (Sep. 29, 2023) (File No. SR-OCC-2023-007).
\7\ Partial Amendment No. 1 delays implementation of the
proposed change. As amended, OCC would implement the proposed rule
change within 90 days of receiving all necessary regulatory
approvals and would announce the specific date of implementation on
its public website at least 14 days prior to implementation. The
delay is proposed in light of the technical system changes that are
required to implement the liquidity stress testing enhancements and
to be able to provide sufficient notice to Clearing Members
following receipt of approval.
\8\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposed Rule Change
NSCC is a clearing agency that provides clearing, settlement, risk
management, and central counterparty services for trades involving
equity securities. OCC is the sole clearing agency for standardized
equity options
[[Page 80782]]
listed on national securities exchanges registered with the Commission,
including options that contemplate the physical delivery of equities
cleared by NSCC in exchange for cash (``physically settled''
options).\9\ OCC also clears certain futures contracts that, at
maturity, require the delivery of equity securities cleared by NSCC in
exchange for cash. As a result, the exercise and assignment of certain
options or maturation of certain futures cleared by OCC effectively
results in stock settlement obligations to be cleared by NSCC (``E&A
Activity''). NSCC and OCC maintain a legal agreement, generally
referred to by the parties as the ``Accord'' agreement, that governs
the processing of such E&A Activity for firms that are members of both
OCC and NSCC (``Common Members'').
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\9\ The term ``physically-settled'' as used throughout the OCC
Rulebook refers to cleared contracts that settle into their
underlying interest (i.e., options or futures contracts that are not
cash-settled). When a contract settles into its underlying interest,
shares of stock are sent (i.e., delivered) to contract holders who
have the right to receive the shares from contract holders who are
obligated to deliver the shares at the time of exercise/assignment
in the case of an option and maturity in the case of a future.
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Under certain circumstances, the Accord currently allows NSCC not
to guaranty the settlement of securities arising out of E&A Activity
for a defaulted Common Member. To the extent NSCC chooses not to
guaranty such transactions, OCC would have to engage in an alternate
method of settlement outside of NSCC to manage the default of the
Common Member, which presents two issues. First, based on historical
data, the cash required for such alternative settlement could be as
much as $300 billion.\10\ Second, settlement outside of NSCC introduces
significant operational complexities.\11\
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\10\ See Notice of Filing, 88 FR at 59977.
\11\ See id.
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OCC proposes to revise the Accord to address the liquidity and
operational issues that arise under the current Accord. Specifically,
the proposed changes to the Accord would require NSCC to guaranty the
positions of a defaulting Common Member if OCC makes a payment to cover
the incremental risk posed by such positions (the ``Guaranty
Substitution Payment'' or ``GSP''). Based on historical data, the GSP
could be as much as $6 billion (in contrast with the potential $300
billion required for alternative settlement).\12\
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\12\ See id.
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The total amount owed by the Common Member would be a combination
of the member's unpaid deposit to the NSCC Clearing Fund (``Required
Fund Deposit'') \13\ and Supplemental Liquidity Deposit.\14\ The SLD
portion of the GSP would be the unpaid SLD associated with any E&A
Activity. The Required Fund Deposit portion of the GSP, however, would
be estimated by reference to the day-over-day change in gross market
value of the Common Member's positions at NSCC as a proxy for
estimating what percentage of the member's Required Fund Deposit is
attributable to E&A Activity. OCC acknowledges that this methodology
overestimates or underestimates the Required Fund Deposit attributable
to a Common Member's E&A activity, but states that current technology
constraints prohibit NSCC from performing a precise calculation of the
GSP on a daily basis for every Common Member.\15\
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\13\ The Required Fund Deposit is calculated pursuant to Rule 4
(Clearing Fund) and Procedure XV (Clearing Fund Formula and Other
Matters) of the NSCC Rules. See Notice of Filing, 88 FR at 59979,
n.27.
\14\ Under the NSCC Rules, NSCC collects additional cash
deposits from those Members who would generate the largest
settlement debits in stressed market conditions, referred to as
``Supplemental Liquidity Deposits'' or ``SLD.'' See Rule 4A of the
NSCC Rules. See also Notice of Filing, 88 FR at 59979, n.28.
\15\ See Notice of Filing, 88 FR at 59979-80. OCC and NSCC have
agreed that performing the necessary technology build at this time
would delay the implementation of this proposal. Therefore, NSCC
would consider incorporating those technology updates into future
revisions to the Accord, for example in connection with a move to a
shorter settlement cycle in the U.S. equities markets. See Notice of
Filing, 88 FR at 59980, n.31.
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In addition to revising the Accord, OCC also proposes changes to
its rules in connection with the proposed changes to the Accord. For
example, OCC proposes to change its rules to permit payment of the GSP
to NSCC. OCC further proposes to revise its rules related to liquidity
risk management to account for the potential need to make such a
payment to NSCC. OCC proposes to incorporate the GSP into its stress
testing framework as a liquidity demand and would estimate the
potential demand based on the peak GSP observed over a one-year
lookback.\16\ Such stress testing would be based on the total GSP,
rather than the portion estimated to arise out of E&A activity.
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\16\ Because not all types of expirations are the same with
respect to the notional amount of activity sent by OCC to NSCC, OCC
proposes to use five separate categories of expirations with
potentially different GSP amounts to apply. See Notice of Filing, 88
FR at 59986 (defining the following five categories: standard
monthly expiration, end of week expirations, end of month
expiration, bank holiday expirations, and daily expirations).
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III. Proceedings To Determine Whether To Approve or Disapprove the
Proposed Rule Change and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act to determine whether the Proposed Rule
Change should be approved or disapproved.\17\ Institution of
proceedings is appropriate at this time in view of the legal and policy
issues raised by the Proposed Rule Change. Institution of proceedings
does not indicate that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, the Commission seeks and
encourages interested persons to comment on the Proposed Rule Change,
which would provide the Commission with arguments to support the
Commission's analysis as to whether to approve or disapprove the
Proposed Rule Change.
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\17\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Exchange Act,\18\ the
Commission is providing notice of the grounds for disapproval under
consideration. The Commission is instituting proceedings to allow for
additional analysis of, and input from commenters with respect to, the
Proposed Rule Change's consistency with Section 17A of the Exchange Act
\19\ and the rules thereunder, including the following provisions:
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\18\ Id.
\19\ 15 U.S.C. 78q-1.
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Section 17A(b)(3)(F) of the Exchange Act,\20\ which
requires, among other things, that the rules of a clearing agency are
designed to promote the prompt and accurate clearance and settlement of
securities transactions and derivative agreements, contracts, and
transactions; to assure the safeguarding of securities and funds which
are in the custody or control of the clearing agency or for which it is
responsible; to foster cooperation and coordination with persons
engaged in the clearance and settlement of securities transactions;
and, in general, to protect investors and the public interest;
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\20\ 15 U.S.C. 78q-1(b)(3)(F).
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Rule 17Ad-22(e)(1) under the Exchange Act,\21\ which
requires that a covered clearing agency establish, implement, maintain,
and enforce written policies and procedures reasonably designed to
provide for a well-founded, clear, transparent, and enforceable legal
basis for each aspect of its activities in all relevant jurisdictions;
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\21\ 17 CFR 240.17Ad-22(e)(1).
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Rule 17Ad-22(e)(7) under the Exchange Act,\22\ which
requires, in part,
[[Page 80783]]
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; and
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\22\ 17 CFR 240.17Ad-22(e)(7).
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Rule 17Ad-22(e)(20) under the Exchange Act,\23\ which
requires that a covered clearing agency establish, implement, maintain,
and enforce written policies and procedures reasonably designed to
identify, monitor, and manage risks related to any link the covered
clearing agency establishes with one or more other clearing agencies,
financial market utilities, or trading markets.
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\23\ 17 CFR 240.17Ad-22(e)(17)(i).
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IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the Proposed Rule Change. In particular, the Commission invites
the written views of interested persons concerning whether the Proposed
Rule Change is consistent with Section 17A(b)(3)(F) \24\ and Rules
17Ad-22(e)(1), (e)(7), and (e)(20) \25\ of the Exchange Act, or any
other provision of the Exchange Act, or the rules and regulations
thereunder. Although there do not appear to be any issues relevant to
approval or disapproval that would be facilitated by an oral
presentation of views, data, and arguments, the Commission will
consider, pursuant to Rule 19b-4(g) under the Exchange Act,\26\ any
request for an opportunity to make an oral presentation.\27\
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\24\ 15 U.S.C. 78q-1(b)(3)(F).
\25\ 17 CFR 240.17Ad-22(e)(1), 17 CFR 240.17Ad-22(e)(7), and 17
CFR 240.17Ad-22(e)(20).
\26\ 17 CFR 240.19b-4(g).
\27\ Section 19(b)(2) of the Exchange Act grants to the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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The Commission asks that commenters address the sufficiency of
OCC's statements in support of the Proposed Rule Change, which are set
forth in the Notice of Filing \28\ in addition to any other comments
they may wish to submit about the Proposed Rule Change.
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\28\ See OCC Notice of Filing, supra note 4.
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Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-OCC-2023-007 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-OCC-2023-007. 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
a.m. and 3 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.
Do not include personal identifiable information in submissions;
you should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to File Number SR-OCC-2023-007 and should
be submitted on or before December 11, 2023. Rebuttal comments should
be submitted by December 26, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
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\29\ 17 CFR 200.30-3(a)(31).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-25545 Filed 11-17-23; 8:45 am]
BILLING CODE 8011-01-P