[Federal Register Volume 89, Number 51 (Thursday, March 14, 2024)]
[Notices]
[Pages 18685-18687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-05368]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99701; File No. SR-OCC-2024-002]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Proposed Rule Change Concerning Amendments to The 
Options Clearing Corporation's Rules, By-Laws, and Certain Clearing 
Member Documents

March 8, 2024.

I. Introduction

    On January 10, 2024, the Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2024-002 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 would amend the OCC Rules, By-
Laws, and certain Clearing Member documents \3\ in connection with the 
recent amendments adopted by the Commission to Rule 15c6-1(a) \4\ under 
the Exchange Act. The proposed rule change was published for public 
comment in the Federal Register on January 25, 2024.\5\ The Commission 
has received no comments regarding the proposed rule change. This order 
approves the proposed rule change (hereinafter defined as ``Proposed 
Rule Change'').
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Clearing Member documents consist of contracts and 
forms, that in conjunction with OCC's By-Laws and Rules, establish 
and govern the relationship between OCC and each Clearing Member. 
See Exchange Act Release No. 73577 (Nov. 12, 2014), 79 FR 68733 
(Nov. 18, 2014) (File No. SR-OCC-2014-020).
    \4\ 17 CFR 240.15c6-1(a).
    \5\ Securities Exchange Act Release No. 34-99392 (January 25, 
2024), 89 FR 5069 (Jan. 19, 2024) (File No. SR-OCC-2024-002) 
(``Notice of Filing'').
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II. Background

    OCC is the sole clearing agency for standardized equity options 
listed on national securities exchanges registered with the Commission, 
including options that contemplate the physical delivery of equities 
cleared by the National Securities Clearing Corporation (``NSCC'') in 
exchange for cash (``physically settled'' options).\6\ The standard 
settlement cycle for most such equities is two business days after the 
trade date (T+2). On February 15, 2023, the Commission adopted 
amendments to Rule 15c6-1(a) to shorten the standard settlement cycle 
for most broker-dealer transactions to one business day after the trade 
date (T+1).\7\ OCC proposes three categories of changes in connection 
with the shortening of the settlement cycle, all of which OCC intends 
to implement on May 28, 2024, which is the compliance date regarding 
the amendments to Rule 15c6-1(a). First, OCC is proposing timing 
changes to certain internal processes to ensure those processes are 
completed in a timeframe that will accommodate a T+1 standard 
settlement cycle. Where necessary, OCC also is making conforming 
changes to its internal documentation for these and other processes to 
ensure that they too reflect and are consistent with a T+1 standard 
settlement cycle. Second, OCC is proposing to amend its rules to 
eliminate the possibility of late exercise. This is because the 
relevant processing and other timelines necessary to accommodate a T+1 
standard settlement cycle are too compressed to allow OCC to 
accommodate late exercise.
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    \6\ 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.
    \7\ See Securities Exchange Act Release No. 96930 (Feb. 15, 
2023), 88 FR 13872 (Mar. 6, 2023) (File No. S7-05-22).
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A. Timeframe Changes

    OCC proposes changes regarding settlement timing both through NSCC 
and on a broker-to-broker basis as well as in OCC's stock loan 
programs. Regarding transactions settling through NSCC, for example, 
OCC proposes to limit the authority of its officers to extend or 
postpone settlement to no more than one business day (as opposed to two 
business days) under OCC's Rule 901. For transaction settling on a 
broker-to-broker basis, OCC proposes changing the delivery date for 
physically-settled options under OCC Rule 903 from the ``second'' to 
the ``first'' business day following exercise.\8\ OCC also proposes 
similar changes to the rules governing its stock loan programs.\9\
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    \8\ OCC proposes similar changes related to the timing of 
settlement for other relevant contracts, such as futures contracts 
and stock loan transactions.
    \9\ Such changes would update the timing termination (under 
Article XXI, Section 2(c) of OCC's By-Laws as well as OCC Rule 
2209A(d)) and the failure of a recall transaction (under OCC Rule 
2209A(a)(3).
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    Separately, OCC proposes changes regarding Clearing Member 
appointments, escrow deposits, and Treasuries. OCC proposes to change 
the timing of appointments that must occur following execution, but 
prior to settlement, such as when a Canadian Clearing Member 
appointments CDS Clearing and Depository Services Inc. to act on the 
member's behalf with respect to the settlement of exercised or matured 
cleared securities in its accounts through NSCC.\10\ OCC also proposes 
streamlining changes, such as replacing references to the specific 
business day for release of certain escrows deposits with a reference 
to OCC's Operations Manual.\11\ Finally, OCC proposes to revise Rule 
1302 concerning the delivery of underlying securities and Rule 1302B 
concerning the delivery of underlying Treasury securities. 
Specifically, in these two rules, OCC proposes to update references 
from the ``second'' business day to the ``first'' business day with 
respect to applicable deadlines specified.
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    \10\ Such changes include changes both to OCC's public rulebook 
(e.g., OCC Rule 901(f)) as well as related documents, such as OCC's 
``Appointment of CDS--Stock Settlement Form.''
    \11\ The Operations Manual would state that this release of 
collateral would occur on the next business day following the 
expiration date.
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    To align the rest of OCC's Rules, By-Laws, and Clearing Member 
documents to the T+1 settlement cycle, OCC is

[[Page 18686]]

proposing to change the timeframes in its documents that are related to 
the current T+2 standard settlement cycle by changing all references to 
``T+2'' to ``T+1.'' As noted in the Notice of Filing, OCC proposes to 
change various sections of its rule book that relate to the current T+2 
settlement cycle.\12\
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    \12\ See Notice of Filing, 89 FR at 5071 (listing the following 
rules to be revised OCC Rule 901, OCC Rule 903, OCC Rule 1302, OCC 
Rule 1302B, OCC Rule 1503, OCC Rule 2201, OCC Rule 2208, OCC Rule 
2209A, OCC Rule 2502 as well as Article XXI of OCC's By-Laws).
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B. Provisions Related to Late Exercise

    The underlying equity securities for physically-settled options and 
futures cleared by OCC are cleared and settled by the National 
Securities Clearing Corporation (``NSCC''). As a result, the exercise 
and assignment of such physically-settled options and 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,'' that 
governs the processing of E&A Activity.\13\
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    \13\ See Notice of Filing, 89 FR at 5071.
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    OCC's current rules require Clearing Members to submit exercise 
notices,\14\ but also provide a process for late exercise notices.\15\ 
The late exercise notice process does not support routine operations, 
but instead is intended for extenuating circumstances.\16\ Such rules 
set out deadlines by which late exercises must be received by OCC and 
subject Clearing Members to, among other things, potential disciplinary 
actions and liabilities for late filing fee.\17\
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    \14\ See OCC Rules 801 and 805.
    \15\ Id.
    \16\ See Notice of Filing, 89 FR at 5071.
    \17\ Id.
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    As indicated by OCC in the Notice, reducing the standard settlement 
time to T+1 will reduce the time available to OCC and NSCC to transmit 
information and perform operational and risk management steps 
associated with the processing of E&A Activity under the Accord.\18\ 
Further, although OCC's current rules contemplate the possibility that 
a Clearing Member could submit a late exercise notice, the transition 
to a T+1 settlement cycle would require settlement activity from a late 
exercise to be sent to NSCC for same-day settlement, which would be 
inconsistent with the Accord.\19\ As a result of these operational 
challenges, OCC is proposing to no longer accommodate late exercises 
after the move to T+1.\20\
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    \18\ See Notice of Filing, 89 FR at 5071.
    \19\ However, OCC would continue to maintain deadlines for 
receiving exercise notices. See Notice of Filing, 89 FR at 5069.
    \20\ More specifically, the timing of late-exercise activity 
would not allow for the transfer of the settlement guaranty between 
OCC and NSCC. Settlement activity resulting from a late exercise 
would need to be sent to NSCC for same-day settlement; however, 
same-day settlement is not supported by the Accord, which would 
result in late-exercise activity not being guaranteed by NSCC. 
Further changes to the Accord would be necessary to allow for same-
day settlement, which are not currently contemplated between OCC and 
NSCC. See Securities Exchange Act Release No. 99426 (January 30, 
2024), 89 FR 5974 (January 24, 2024) (File No. SR-OCC-2023-007).
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    In connection with this change, OCC is proposing to remove language 
in Rule 801 that requires a Clearing Member to prepare and preserve a 
memorandum describing the error that gave rise to a late filing. 
Similarly, in Rule 805, OCC is proposing to remove language that allows 
Clearing Members to file late exercise notices subject to a final 
deadline for submission. OCC would continue to allow members to correct 
bona fide errors; however, under the proposed rules, such corrections 
must be made prior to daily processing timelines.\21\
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    \21\ See Notice of Filing, 89 FR at 5071 n.24.
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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.\22\ Under the Commission's 
Rules of Practice, the ``burden to demonstrate that a proposed rule 
change is consistent with the Exchange Act and the rules and 
regulations issued thereunder . . . is on the self-regulatory 
organization [`SRO'] that proposed the rule change.'' \23\ The 
description of a proposed rule change, its purpose and operation, its 
effect, and a legal analysis of its consistency with applicable 
requirements must all be sufficiently detailed and specific to support 
an affirmative Commission finding,\24\ and any failure of an SRO to 
provide this information may result in the Commission not having a 
sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the applicable rules and 
regulations.\25\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\26\
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    \22\ 15 U.S.C. 78s(b)(2)(C).
    \23\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \24\ Id.
    \25\ Id.
    \26\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
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    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 Section 17A(b)(3)(F) of the Exchange Act,\27\ and Rule 
17Ad-22(e)(1) \28\ thereunder as described in detail below.
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    \27\ 15 U.S.C. 78q-1(b)(3)(F).
    \28\ 17 CFR 240.17Ad-22(e)(1).
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A. 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 to foster cooperation and coordination between persons engaged in 
the clearance and settlement of securities transactions.\29\ Based on 
its review of the record, and for the reasons described below, the 
changes described above are consistent with fostering cooperation and 
coordination between with persons engaged in the clearance and 
settlement of securities transactions.
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    \29\ 15 U.S.C. 78q-1(b)(3)(F).
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    OCC clears both securities options listed on Commission-registered 
national securities exchanges as well as futures for which such 
securities are the underliers. Such listed options and futures may 
result in the physical delivery of equities. OCC's rules describe the 
timing and process for effecting such settlement either through 
facilities of NSCC or on a broker-to-broker basis. Similarly, OCC's 
rules contemplate the clearance and settlement of stock loan 
transactions, also involving the physical delivery of equities. As 
described above, OCC proposes changes to its rules governing such 
processes to align with the shortening of the settlement cycle for most 
broker-dealer transactions. Further, as described in the Notice of 
Filing, OCC proposes to implement such changes by May 28, 2024, which 
is the compliance date regarding the amendments to Rule 15c6-1(a).\30\ 
Such changes would support coordination with industry participants 
engaged in the clearance and settlement of securities transactions both 
in terms of

[[Page 18687]]

substance and timing of implementation.
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    \30\ See Notice of Filing, 89 FR at 5073.
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    As described above, OCC has asserted that the processes required to 
effect settlement on a T+1 basis would also impact OCC's current late 
exercise processes. Unlike the other changes, however, a T+1 settlement 
cycle would provide insufficient time to accommodate OCC's late 
exercise processes. To avoid operational challenges and inconsistencies 
with the Accord, OCC proposes to remove the late exercise process 
entirely from its rules while continuing to allow members to correct 
bona fide errors within daily processing deadlines. Additionally, as 
noted in the Notice of Filing, OCC's current late exercise processing 
does not support routine operations, but rather, is intended only for 
extenuating circumstances and may carry with it a fine.\31\ Removal of 
the process for late exercise, therefore, would not disrupt OCC's 
routine clearance and settlement processes. OCC's proposed removal of 
its late exercise processes, as part of the move to a shortened 
settlement cycle, would, therefore, promote the prompt and accurate 
clearance and settlement of securities transactions by avoiding the 
potential delays that would be caused by allowing late exercises.
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    \31\ See Notice of Filing, 89 FR at 5071.
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    Accordingly, the changes proposed to accommodate a shortened 
settlement cycle are consistent with the requirements of Section 
17A(b)(3)(F) of the Exchange Act.\32\
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    \32\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(1) Under the Exchange Act

    Rule 17Ad-22(e)(1) under the Exchange Act 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.\33\ In adopting 
Rule 17Ad-22(e)(1), the Commission provided guidance that a covered 
clearing agency generally should consider in establishing and 
maintaining policies and procedures that address legal risk.\34\ The 
Commission stated that a covered clearing agency should consider, inter 
alia, whether its contracts are consistent with relevant laws and 
regulations.\35\
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    \33\ 17 CFR 240.17Ad-22(e)(1).
    \34\ See Securities Exchange Act Release No. 78961 (Sept. 28, 
2016), 81 FR 70786, 70802 (Oct. 13, 2016) (S7-03-14).
    \35\ See id.
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    On February 15, 2023, the Commission adopted a final rule to 
shorten the standard settlement cycle for most broker-dealer 
transactions from two business days after the trade date to one 
business day after the trade date.\36\ As described above, the proposed 
changes are designed to ensure that OCC's processes and Rules and other 
documentation are both consistent with and accommodate a T+1 standard 
settlement cycle. The proposed changes are, therefore, consistent with 
the rules and regulations applicable to OCC, and, as a result, will 
provide a well-founded legal basis for OCC's continued operations after 
the transition to a T+1 standard settlement cycle. The proposed changes 
are, accordingly, consistent with the requirements of Rule 17Ad-
22(e)(1) under the Exchange Act.\37\
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    \36\ See Securities Exchange Act Release No. 96930 (Feb. 15, 
2023), 88 FR 13872 (Mar. 6, 2023) (File No. S7-05-22).
    \37\ 17 CFR 240.17Ad-22(e)(1).
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IV. 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 \38\ and the rules and regulations thereunder.
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    \38\ 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,\39\ that the proposed rule change (SR-OCC-2024-002), 
hereby is, approved.
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    \39\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-05368 Filed 3-13-24; 8:45 am]
BILLING CODE 8011-01-P