[Federal Register Volume 89, Number 131 (Tuesday, July 9, 2024)]
[Notices]
[Pages 56452-56456]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-14971]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100455; File No. SR-OCC-2024-006]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change by The Options Clearing 
Corporation Concerning Amendments to Its Rules and Comprehensive Stress 
Testing & Clearing Fund Methodology, and Liquidity Risk Management 
Description

July 2, 2024.

I. Introduction

    On May 2, 2024, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change (the 
``Proposed Rule Change'') to amend its Comprehensive Stress Testing & 
Clearing Fund Methodology, and Liquidity Risk Management Description 
(``Methodology Description'') to incorporate additional stress 
scenarios into OCC's financial resource sufficiency monitoring and its 
Rules to clarify OCC's practice of collecting additional collateral 
from its members based on such monitoring. The Proposed Rule Change was 
published for comment in the Federal Register on May 21, 2024.\3\ The 
Commission has not received any comments on 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. 100147 (May 15, 2024), 
89 FR 44752 (May 21, 2024) (File No. SR-OCC-2024-006) (``Notice'').
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II. Description of the Proposed Rule Change

    As a clearing agency, OCC faces a number of risks including credit 
and

[[Page 56453]]

liquidity risk.\4\ OCC manages its credit and liquidity risk, in part, 
by performing daily stress testing \5\ that covers a wide range of 
scenarios.\6\
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    \4\ Credit Risk is the risk that a counterparty will be unable 
to meet fully its financial obligations when due, or at any time in 
the future. Liquidity Risk is the risk that a counterparty will have 
insufficient funds to meet its financial obligations as and when 
expected, although it may be able to do so in the future. Bank for 
International Settlements & International Organization of Securities 
Commissions, Principles for Financial Market Infrastructures, 
https://www.bis.org/cpmi/publ/d101a.pdf.
    \5\ Stress testing is the estimation of credit or liquidity 
exposures that would result from the realization of potential stress 
scenarios, such as extreme price changes, multiple defaults, or 
changes in other valuation inputs and assumptions. 17 CFR 240.17Ad-
22(a).
    \6\ Notice, 89 FR at 44753; see OCC Rule 609, OCC Rule 1001.
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    OCC groups its stress testing scenarios into different categories, 
including Sufficiency Scenarios and Informational Scenarios.\7\ 
Sufficiency Scenarios are designed to measure the potential exposures 
that a Clearing Member Group's portfolios present relative to OCC's 
credit and liquidity resources so that OCC can determine the potential 
need to call for additional collateral, either as margin or as Clearing 
Fund collateral, or adjust the forms of collateral on deposit.\8\ 
Specifically, depending on Sufficiency Scenario results, OCC Rules 609 
or 1001 may allow or require OCC to call for additional margin or 
Clearing Fund resources from a Clearing Member.\9\ Moreover, under OCC 
Rules 601 and 609, OCC could require that a Clearing Member provide 
additional resources in the form of cash.\10\ In contrast, OCC uses 
Informational Scenarios to monitor and assess the size of OCC's 
prefunded financial resources against a wide range of stress scenarios 
for informational and risk monitoring purposes.\11\ These scenarios are 
not used to determine the size of OCC's financial resources; however, 
OCC's Risk Committee may approve adjustments with respect to how OCC 
categorizes these scenarios.\12\ For example, OCC's Risk Committee 
could approve the recategorization of an Informational Scenario as a 
Sufficiency Scenario.\13\
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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.
    \8\ Notice, 89 FR at 44753.
    \9\ Id.
    \10\ Id. at 44754 n.20.
    \11\ Id. at 44753.
    \12\ Id.
    \13\ Id.
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    The Proposed Rule Change would make three groups of changes related 
to OCC's Sufficiency Scenarios. First, it would recategorize two 
Informational Scenarios as Sufficiency Scenarios by making changes to 
the Methodology Description.\14\ As a result, the two recategorized 
scenarios would be used to determine potential calls for additional 
collateral. Second, the Proposed Rule Change would add detail to OCC's 
Rules outlining circumstances under which OCC could require Clearing 
Members to contribute additional collateral due to the results of 
Sufficiency Scenarios. Third, the Proposed Rule Change would make minor 
formatting and grammatical changes to the Methodology Description and 
the Rules.
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    \14\ The Methodology Description describes the Comprehensive 
Stress Testing and Clearing Fund Methodology, and Liquidity Risk 
Management Description that OCC uses to analyze the adequacy of its 
financial resources and to challenge its risk management framework. 
Id. at 44573 n.5.
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A. Recategorization of Scenarios

    OCC's Methodology Description lists a subset of the Sufficiency 
Scenarios that have been implemented in OCC's stress testing system. 
The Sufficiency Scenarios on this list are historical scenarios that 
replicate historical events under current market conditions. For 
example, among the listed Sufficiency Scenarios are scenarios that 
replicate the largest rally/decline in 2008.
    To replicate historical events in its current Sufficiency 
Scenarios, OCC applies one of three price shocks to risk factors in a 
predetermined order, also referred to as a waterfall.\15\ As its first 
choice for a price shock, OCC uses the returns of the risk factor 
observed during the historical event. If such returns do not exist, or 
are otherwise unavailable, OCC uses the market return from the risk 
factor's corresponding sector as the price shock. If neither the risk 
factor return nor the market sector return is available, OCC uses a 
beta approach to set the price shock.\16\ Currently, OCC applies this 
waterfall to determine price shocks for the 2008 largest rally/decline 
Sufficiency Scenarios.
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    \15\ Risk factors are products or attributes whose historical 
data are used to estimate and simulate the risk for an associated 
product. Id. at 44574 n.12.
    \16\ Beta is the sensitivity of a security with respect to its 
corresponding risk driver. Id. at 44754 n.14. Examples of risk 
drivers include price and volatility with respect to equity 
securities. Different categories of products--for example, 
collateral positions in U.S. Government Securities versus Canadian 
Government Securities--have different risk drivers. Id. at 44754 
n.15. The risk driver shock is the return of a risk driver from a 
historical event. Id. at 44754. The beta approach is the application 
of the shock of a risk driver to the beta of the related risk 
factor, which generates a ``risk driver beta derived price shock.''
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    Some of OCC's Informational Scenarios use a different approach to 
determine the price shock applied to risk factors than the existing 
Sufficiency Scenarios use, which yields different outcomes. For 
example, some existing Informational Scenarios are variations of the 
2008 largest rally/decline Sufficiency Scenarios that directly apply 
the risk driver beta-derived price shock as the price shock instead of 
using the waterfall approach. As part of the regular review of the 
output of its stress scenarios, OCC found that the variations of the 
2008 largest rally/decline Informational Scenarios described above 
yielded exposures that were consistently higher than those generated by 
the corresponding Sufficiency Scenarios.\17\ To enhance its ability to 
manage risks, OCC proposes recategorizing such variations of the 2008 
largest rally/decline scenarios from Informational Scenarios to 
Sufficiency Scenarios by adding them to the Sufficiency Scenarios 
listed in OCC's Methodology Description.\18\ This would allow the 
newly-recategorized Sufficiency Scenarios to be used to drive the size 
of the Clearing Fund and calls for additional margin, which is not the 
case while they remain categorized as Informational Scenarios.\19\
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    \17\ Id. at 44753.
    \18\ Id.
    \19\ Id.
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B. Changes to the Rules Related to Intra-Day Margin and the Clearing 
Fund

    OCC also proposes changes to its Rules to clarify OCC's practice of 
collecting additional collateral from its members based on stress 
scenario monitoring. Specifically, OCC proposes changes to Rule 609, 
which governs intra-day margin, and Rule 1001(c), which governs intra-
month clearing fund sizing adjustments. OCC proposes these changes to 
align the Rules with OCC's current practices and procedures.\20\
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    \20\ Id. at 44754-55.
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    Some of the proposed changes to Rule 609 clarify OCC's approach to 
situations where a Clearing Member Group is subject to an intra-day 
margin call under more than one Sufficiency Stress Test. Rule 609(a)(5) 
currently provides that OCC may require the Clearing Member Group 
responsible for a stress test exposure to deposit intra-day margin if a 
Sufficiency Stress Test identifies an exposure that exceeds 75% of the 
current Clearing Fund requirement less deficits.\21\ In the event of 
such a margin call, OCC's current practice is to compare the margin 
call amount to existing intra-day margin call amounts for the monthly 
period under OCC Rule

[[Page 56454]]

609(a)(5). A new margin call is issued when the margin call amount is 
greater than existing intra-day margin call amounts under Rule 
609(a)(5). The updated margin call amount would remain in effect until 
either the next monthly resizing of the Clearing Fund, or the amount is 
superseded by a larger margin call amount.\22\ To reflect this current 
practice,\23\ and consistent with the Clearing Fund Methodology 
Policy,\24\ OCC proposes adding language to Rule 609(a)(5) noting that 
if a Clearing Member Group is subject to intra-day margin calls under 
more than one Sufficiency Stress Test, the largest call will be applied 
and remain in effect until the next monthly resizing.\25\
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    \21\ Id. at 44754; OCC Rule 609(a)(5).
    \22\ Notice, 89 FR at 44754.
    \23\ Id.
    \24\ Securities Exchange Act Release No. 83406 (June 11, 2018), 
83 FR 28018, 28025 (June 15, 2018) (File No. SR-OCC-2018-008).
    \25\ While a margin call imposed as the result of a Sufficiency 
Stress Test will remain in effect until the next monthly Clearing 
Fund resizing, the imposition of such a margin call would not 
preclude OCC from making additional margin calls driven by 
subsequent Sufficiency Stress Tests prior to the monthly resizing.
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    Separately, OCC proposes to conform Rule 609(a)(5) to OCC's 
existing policies.\26\ As noted above, current Rule 609(a)(5) requires 
the Clearing Member Group responsible for a stress test exposure to 
deposit margin intra-day if a Sufficiency Stress Test identifies an 
exposure that exceeds 75% of the current Clearing Fund requirement less 
deficits. OCC's Clearing Fund Methodology Policy contains similar 
language with a notable difference. Specifically, the Clearing Fund 
Methodology Policy does not include the ``less deficits'' language, 
while such language is in OCC Rule 609(a)(5).\27\ This language was 
removed from the Clearing Fund Methodology Policy in an effort to 
conform the Clearing Fund Methodology Policy to changes to OCC's Rules, 
shortening the number of days a Clearing Member has to meet funding 
obligations related to the Clearing Fund.\28\ Given the previous change 
to its rules, OCC considers the ``less deficits'' language in each 
document unnecessary.\29\ As such, OCC proposes removing the ``less 
deficits'' language from Rule 609(a)(5) to promote consistency within 
its rules.\30\
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    \26\ Notice, 89 FR at 44755.
    \27\ Id.
    \28\ Securities Exchange Act Release No. 94950 (May 19, 2022), 
87 FR 31916, 31918 (May 25, 2022) (File No. SR-OCC-2022-004). Prior 
to approval of SR-OCC-2022-004, Clearing Members had two days to 
deposit additional required Clearing Fund assets. In SR-OCC-2022-
004, OCC proposed to shorten this period. Id.; Notice, 89 FR at 
44755.
    \29\ Notice, 89 FR at 44755.
    \30\ Id.
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    OCC also proposes changes to Rule 1001(c) to reflect its current 
practices.\31\ Rule 1001(c) currently indicates that, if at any time 
between regular monthly calculations of the size of the Clearing Fund a 
Sufficiency Stress Test identifies a breach that exceeds 90% of the 
size of the Clearing Fund requirement (less any margin collected as a 
result of a Sufficiency Stress Test breach pursuant to Rule 609), the 
calculated size of the Clearing Fund shall be increased. As is 
reflected in OCC's Clearing Fund Methodology Policy, OCC's current 
practice is to include margin called, rather than only margin 
collected, in the amount subtracted in the calculation from Rule 
1001(c).\32\ To align the descriptions in OCC's Rules with OCC's 
current practices, OCC proposes adding ``or to be collected'' to the 
text or Rule 1001(c).\33\
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    \31\ Id.
    \32\ Id. at 44755 n.27.
    \33\ Id. at 44755.
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C. Minor Formatting and Grammatical Changes

    OCC also proposes several minor formatting and grammatical changes 
to its rules. In the Methodology Description, OCC proposes minor edits 
to correct the formatting of footnotes. Additionally, in the Rules, OCC 
proposes replacing the words ``such that'' with ``from'' and adding the 
word ``that'' to Rule 609(a)(5) so that it reads ``stress test 
exposures from a Sufficiency Stress Test (as defined in Rule 1001(a)) 
that identifies an exposure'' instead of ``stress test exposures such 
that a Sufficiency Stress Test (as defined in Rule 1001(a)) identifies 
an exposure.''

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act requires the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
the Proposed Rule Change is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to the 
organization.\34\ 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.'' \35\ 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,\36\ 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.\37\ 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.\38\
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    \34\ 15 U.S.C. 78s(b)(2)(C).
    \35\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \36\ Id.
    \37\ Id.
    \38\ 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 Proposed Rule Change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to OCC. More specifically, for the reasons given 
below, the Commission finds that the Proposed Rule Change is consistent 
with Section 17A(b)(3)(F) of the Act \39\ and Rule 17Ad-22(e)(4) 
thereunder.\40\
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    \39\ 15 U.S.C. 78q-1(b)(3)(F).
    \40\ 17 CFR 240.17Ad-22(e)(4).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Under Section 17A(b)(3)(F) of the Act, OCC's rules, among other 
things, must be ``designed to promote the prompt and accurate clearance 
and settlement of securities transactions . . . derivative agreements, 
contracts, and transactions . . . and 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.'' \41\ Based on its 
review of the record, and for the reasons discussed below, OCC's 
changes are consistent with Section 17A(b)(3)(F) of the Act \42\ 
because they decrease the likelihood of loss mutualization, may 
increase, and cannot decrease, the amount of financial resources that 
OCC collects to address credit losses that could arise from the default 
of a Clearing Member, and support OCC's robust default management 
system.
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    \41\ 15 U.S.C. 78q-1(b)(3)(F).
    \42\ Id.
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    OCC's proposal to elevate Informational Scenarios to Sufficiency 
Scenarios may decrease the likelihood of loss mutualization. As noted 
above, OCC proposes to expand the scope of stress scenarios against 
which OCC monitors its financial resources by elevating, from 
Informational Scenarios to Sufficiency Scenarios, variations on their 
2008 largest rally/decline scenarios, which first apply the risk driver 
beta-derived price shock as the

[[Page 56455]]

price shock as opposed to using the waterfall approach. Once these 
scenarios are elevated to Sufficiency Scenarios, they would be used to 
determine whether it is necessary to call for additional margin intra-
day or an increase to the size of the Clearing Fund intra-month.\43\ By 
elevating the Informational Scenarios to Sufficiency Scenarios, OCC 
creates a wider range of stress scenarios. Having a wider range of 
stress scenarios may, in turn, increase the likelihood that OCC will 
have sufficient collateral on hand to address a default without 
resorting to loss mutualization through the use of non-defaulting 
Clearing Members' contributions to the Clearing Fund. Because it avoids 
loss mutualization, the Proposed Rule Change is consistent with the 
safeguarding of securities and funds which are in OCC's custody or 
control.
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    \43\ OCC Rule 609(a)(5); OCC Rule 1001(c).
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    OCC's proposed changes to its Sufficiency Stress Tests also may 
increase, and cannot decrease, the amount of financial resources that 
OCC collects to address credit losses that could arise from the default 
of a Clearing Member. Based on the impact analyses filed with this 
Proposed Rule Change, the proposed change could result in OCC calling 
for additional resources available for resolving a member default. The 
data provided demonstrates that the proposed scenarios could produce 
more conservative results relative to the current 2008 largest rally/
decline scenarios. Because OCC does not propose removing any of its 
existing Sufficiency Scenarios, the proposed changes could not reduce 
the resources OCC would collect. By maintaining, and potentially 
increasing, the financial resources OCC collects to address credit 
losses that could arise from the default of a Clearing Member, the 
proposed change to OCC's stress tests would potentially help OCC 
recover from the default of a Clearing Member and could make OCC's 
default waterfall more robust. As such, it would increase the 
likelihood that OCC would be able to provide clearing services during 
and after a Clearing Member default, which is consistent with OCC's 
ability to promptly and accurately clear and settle securities 
transactions for participants in the options markets during periods of 
market stress.
    Separately, the proposed changes to conform OCC's Rules 609 and 
1001 to current practice would continue to support OCC's risk 
management systems. As described above, the proposed changes would make 
minor changes, remove unnecessary language, and acknowledge that, when 
determining whether to call for additional collateral based on OCC's 
Sufficiency Stress Tests, if a Clearing Member Group is subject to 
intra-day margin calls under more than one Sufficiency Stress Test, 
only the largest margin call will be applied and remain in effect until 
the next monthly resizing. Further, OCC proposes that it account for 
margin called as a result of a Sufficiency Stress Test breach under 
Rule 609 when determining whether it must increase the size of the 
Clearing Fund. Such changes would not reduce the total resources called 
by OCC. Continuing to require that members contribute resources based 
on the exposures they pose (as measured by the Sufficiency Scenarios) 
would increase the likelihood that OCC would have sufficient resources 
to manage its exposure to such a member in the event of a default. This 
would increase the likelihood that OCC could promptly and accurately 
clear transactions in the event of a default. Additionally, requiring 
members to contribute resources based on the exposures they pose would 
increase OCC's ability to manage a default with the defaulter's 
resources and would reduce the risk that OCC would be required to use 
the resources of other members to manage a default, consistent with 
OCC's ability to safeguard the funds and securities of such non-
defaulting members.
    Further, OCC's rules require that members meet such calls in a 
timely manner.\44\ As a result, OCC's rules do not preclude OCC from 
taking additional steps, such as suspending a member, if it does not 
receive the required resources promptly. Thus, OCC's rules, both 
current and as proposed, allow OCC to act quickly to mitigate potential 
losses and liquidity shortfalls. Such authority reduces the risk that 
OCC would be unable to continue providing clearance and settlement 
services, which is consistent with the promotion of the prompt and 
accurate settlement of securities for the markets OCC serves.
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    \44\ See e.g., OCC Rule 609(a) (requiring that members meet 
intra-day margin calls within one hour of issuance).
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    Based on the foregoing, the Proposed Rule Change is consistent with 
the requirements of Section 17A(b)(3)(F) of the Act.\45\
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    \45\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(4) Under the Act

    Rule 17Ad-22(e)(4) requires covered clearing agencies to establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to effectively identify, measure, monitor, and 
manage its credit exposures to participants and those arising from its 
payment, clearing, and settlement processes by testing the sufficiency 
of its total financial resources available to meet the minimum 
financial resource requirements under Rules 17Ad-22(e)(4)(i) through 
(iii) under the Act.\46\ Under Rule 17Ad-22(e)(4)(vi)(A), OCC's 
policies and procedures should provide that OCC conduct such stress 
testing of its total financial resources once each day using standard 
predetermined parameters and assumptions.\47\
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    \46\ 17 CFR 240.17Ad-22(e)(4)(vi).
    \47\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
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    The Proposed Rule Change is consistent with Rule 17Ad-22(e)(4)(vi) 
because it broadens the scope of stress scenarios that OCC conducts to 
test its financial resources. Expanding the scope of stress scenarios 
against which OCC monitors its financial resources would increase the 
likelihood that OCC maintains sufficient financial resources at all 
times.\48\ This Proposed Rule Change would expand the scope of stress 
scenarios by elevating two Informational Scenarios to Sufficiency 
Scenarios. This expansion could result in the collection of additional 
resources available for resolving a member default, which, in turn, 
would increase the likelihood that OCC maintains sufficient financial 
resources at all times.\49\
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    \48\ See Securities Exchange Act Release No. 90827 (Dec. 30, 
2020), 86 FR 659, 661 (Jan. 6, 2021) (File No. SR-OCC-2020-015); 
Securities Exchange Act Release No. 83735 (July 27, 2018), 83 FR 
37855, 37863 (Aug. 2, 2018) (File No. SR-OCC-2018-008).
    \49\ The Proposed Rule Change does not alter OCC's daily 
implementation of its Sufficiency Stress Tests. Notice, 89 FR at 
44753. Thus, the OCC's Sufficiency Stress Testing continues to be 
consistent with Rule 17Ad-22(e)(4)(vi)(A)'s daily testing 
requirements.
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    Based on the foregoing, the Proposed Rule Change is consistent with 
the requirements of Rule 17Ad-22(e)(4) under the Act.\50\
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    \50\ 17 CFR 240.17Ad-22(e)(4).
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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 Act, 
and in particular, Section 17A(b)(3)(F) of the Act \51\ and Rule 17Ad-
22(e)(4).\52\
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    \51\ 15 U.S.C. 78q-1(b)(3)(F).
    \52\ 17 CFR 240.17Ad-22(e)(4).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
that the

[[Page 56456]]

Proposed Rule Change (SR-OCC-2024-006) be, and hereby is, approved.\53\
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    \53\ In approving the Proposed Rule Change, the Commission 
considered the proposal's impacts on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\54\
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    \54\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-14971 Filed 7-8-24; 8:45 am]
BILLING CODE 8011-01-P