[Federal Register Volume 89, Number 175 (Tuesday, September 10, 2024)]
[Notices]
[Pages 73466-73485]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-20329]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100930; File No. SR-OCC-2024-011]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change, as Modified by Partial 
Amendment No. 1, by The Options Clearing Corporation Concerning Its 
Stock Loan Programs

September 4, 2024.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on August 22, 2024, The Options Clearing 
Corporation (``OCC'' or ``Corporation'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
primarily by OCC. On September 3, 2024, OCC filed a partial amendment 
(``Partial Amendment No. 1'') to the proposed rule change.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as modified by Partial Amendment No. 1 (hereafter 
``the proposed rule change''), from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Partial Amendment No. 1, OCC corrected an error in 
Exhibit 5A to SR-OCC-2024-011 without changing the substance of the 
proposed rule change. Partial Amendment No. 1 does not materially 
alter the substance of the proposed rule change or raise any novel 
regulatory issues.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    This proposed rule change would address limitations in the 
structure of OCC's Stock Loan/Hedge (``Hedge'') Program and Market Loan 
Program (together, the ``Stock Loan Programs'') by creating the 
framework for a single, enhanced program designed to support current 
and future needs. The proposed enhancements would, among other things, 
(i) combine into the Market Loan Program favorable aspects of both 
Stock Loan Programs, including the submission of bilaterally negotiated 
transactions; (ii) conform the terms of stock loans submitted under the 
Market Loan Program (``Market Loans'') more closely to the provisions 
most commonly included in stock loan transactions executed under 
standard loan market documents; (iii) provide a uniform guaranty of 
terms across Market Loans, regardless of how those Market Loans are 
initiated under the enhanced program; (iv) support transactions under 
both Stock Loan Programs through OCC's new clearance and settlement 
system; and (v) reorganize, restate, and consolidate provisions of 
OCC's By-Laws and Rules governing the Stock Loan Programs.
    The proposed amendments to OCC's Rules and By-Laws can be found in 
Exhibit 5A and Exhibit 5B to File No. SR-OCC-2024-011, respectively. 
Proposed conforming changes to OCC's internal Margin Policy and 
Recovery and Wind-Down (``RWD'') Plan, which can be found in 
confidential Exhibits 5C and 5D to File No. SR-OCC-2024-011, 
respectively. Material proposed to be added is marked by underlining 
and material proposed to be deleted is marked with strikethrough text. 
For ease of presentation and to distinguish between changes to rule 
text versus relocation of existing rule text, Exhibits 5A and 5B to 
File No. OCC-2024-011 contain bracketed text to indicate when existing 
text has been relocated from the By-Laws to the Rules with changes as 
marked. That bracketed text describes changes that would be performed 
upon implementation of File No. SR-OCC-2024-011, but it is not intended 
to be rule text. All terms with initial capitalization that are not 
otherwise defined herein have the same meaning as set forth in the By-
Laws and Rules.\4\
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    \4\ OCC's By-Laws and Rules can be found on OCC's public 
website: https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. OCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its capacity as a central counterparty registered with the 
Commission, OCC currently operates two programs through which it clears 
stock loan transactions: the Hedge Program and the Market Loan Program. 
Under both Stock Loan Programs, OCC becomes the lender to the borrower 
and the borrower to the lender, thereby guaranteeing the return of the 
full value of cash collateral to the Borrowing Clearing Member and the 
return of the Loaned Stock (or value of that Loaned Stock) to the 
Lending Clearing Member. Under the Market Loan Program, OCC also offers 
certain additional guarantees, discussed in more detail below, with 
respect to other payment obligations arising from the stock loan 
transactions (e.g., dividend equivalent payments and rebate payments). 
As a result of OCC's novation of cleared stock loan transactions, the 
rights and obligations of the Borrowing and Lending Clearing Members 
are thereafter governed by OCC's By-Laws and Rules.\5\ OCC's By-Laws 
and Rules also provide for, among other things, how Clearing Members 
initiate Stock Loans at OCC, how those Stock Loans are recorded in 
OCC's books and records, how returns and recalls are processed, and 
risk management procedures specific to Stock Loans in the event that 
OCC suspends one of the Clearing Member counterparties.
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    \5\ Terms provided under a Master Stock Lending Agreement 
(``MSLA'') between the parties to a Stock Loan may remain in effect 
as between the parties to the extent they are not inconsistent with 
the By-Laws and Rules, but do not impose any obligation on OCC. See 
OCC Rule 2202(b).
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    As announced in 2022, OCC intends to replace its current clearance 
and settlement system (ENCORE) with a streamlined operational framework 
for clearance and settlement (Ovation).\6\ The move to Ovation gives 
OCC the opportunity to address limitations in the structure of OCC's 
Stock Loan Programs and enhance OCC's stock loan services to support 
current and future needs.\7\ OCC proposes a number of amendments to its 
By-Laws and Rules designed to,

[[Page 73467]]

among other things, (i) combine into the Market Loan Program favorable 
aspects of both Stock Loan Programs, including the submission of 
bilaterally negotiated transactions; (ii) conform the terms of Market 
Loans cleared by OCC more closely to the provisions most commonly 
included in stock loan transactions executed under standard loan market 
documents; (iii) provide a uniform guaranty of terms across Market 
Loans, regardless of how those Market Loans are initiated under the 
enhanced program; (iv) support transactions under both Stock Loan 
Programs through OCC's new clearance and settlement system; and (v) 
reorganize, restate, and consolidate provisions of OCC's By-Laws and 
Rules governing the Stock Loan Programs.
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    \6\ See OCC Announces New Platform Name and Launches Enhanced 
Transformation website (May 10, 2022), https://www.theocc.com/newsroom/views/2022/05-10-occ-announces-new-platform-name-and-launches-enhanced-transformation-website.
    \7\ As discussed in more detail below, OCC's current programs 
are limited by certain inefficient legacy practices including, for 
example: (1) position-based recordkeeping that does not align with 
the contract-level accounting that is common throughout the stock 
loan industry, which adds complexity to the process of ensuring that 
all parties are in alignment on the state of their stock loans; (2) 
workflows that involve settlement of delivery versus payment 
obligations at the Depository prior to clearance or settlement at 
OCC, which adds further complexity to the reconciliation process and 
can lead to position breaks; and (3) payment flows common to stock 
loans that are not guaranteed under OCC's Hedge Loan program and 
must currently be settled as between the parties away from OCC.
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    OCC believes these changes will address certain pain points that 
OCC's members have raised and enhance the overall process. In 
particular, the proposed changes would allow members who currently 
participate in the Hedge Loan Program to submit transactions through an 
improved workflow to the Market Loan Program, under which the 
counterparties will benefit from OCC's enhanced guaranty and the 
efficiency of allowing OCC's systems to handle certain post-trade 
transactions that Hedge Loan Program participants must currently 
address bilaterally with each of their counterparties, away from OCC. 
In addition, the proposed changes would align how OCC records stock 
loan transactions in its books and records with an industry-standard, 
contract-level approach, which is expected to alleviate operational 
burdens on members that must currently reconcile their internal records 
with OCC's position-based records on a daily basis.
    These enhancements would also serve as a foundation for 
consolidating OCC's Hedge Loan and Market Loan Programs. As discussed 
more fully below, OCC intends to eventually decommission the Hedge 
Program, after which the Market Loan Program would become OCC's single 
Stock Loan Program. OCC would take a phased approach to decommissioning 
the Hedge Program and would commence its Hedge Program phase-out plan 
only after conferring with Clearing Members that they are prepared for 
the transition.
(1) Purpose
Background
Stock Loan Initiation
    In the Hedge Program, OCC acts as the principal counterparty for 
stock loans that are executed bilaterally between Clearing Members and 
sent to OCC for clearance and settlement. Prospective Lending and 
Borrowing Clearing Members identify each other (independent of OCC), 
agree to bilaterally negotiated terms of the Hedge Loan, and then send 
the details of the stock loan to the Depository, the Depository Trust 
Company (``DTC''), with a certain ``reason code,'' \8\ which designates 
the stock loan as a Hedge Loan for guarantee and clearance at OCC. The 
Lending Clearing Member then instructs DTC to transfer a specified 
number of shares of Eligible Stock to the account of the Borrowing 
Clearing Member versus transfer of the appropriate amount of cash 
collateral to the account of the Lending Clearing Member. This current 
process, in which settlement at DTC occurs before clearance at OCC, 
adds complexity to balancing and reconciliation under the current Hedge 
Program.
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    \8\ Unique reason codes were created by DTC for Clearing Members 
to designate stock loan transactions intended to be sent to OCC for 
novation and guarantee.
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    In the Market Loan Program, stock loans are initiated through the 
matching of bids and offers that are agreed upon by the Market Loan 
Clearing Members or otherwise matched through a Loan Market. A Loan 
Market is an electronic platform that supports securities lending and 
borrowing transactions in the Market Loan Program by matching lenders 
and borrowers based on loan terms that each party is willing to 
accept.\9\ In order to initiate a Market Loan, the Loan Market sends a 
matched transaction to OCC, which in turn sends two separate but linked 
settlement instructions to DTC to effect the movement of Eligible Stock 
and cash collateral between the accounts of the Market Loan Clearing 
Members through OCC's account at DTC.
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    \9\ Currently, one Loan Market operates within OCC's Market Loan 
Program--Automated Equity Finance Markets, Inc. (``AQS''), a 
subsidiary of Equilend Holdings LLC (``Equilend'').
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Scope of OCC's Guaranty
    Regardless of whether a transaction is initiated under the Hedge 
Program or Market Loan Program, OCC novates the transaction and becomes 
the lender to the Borrowing Clearing Member and the borrower to the 
Lending Clearing Member.\10\ As the principal counterparty to the 
Borrowing and Lending Clearing Members, OCC guarantees the return of 
the full value of cash collateral to a Borrowing Clearing Member and 
guarantees the return of the Loaned Stock (or value of that Loaned 
Stock) to the Lending Clearing Member. Under the Market Loan Program, 
OCC also provides a limited guaranty of substitute dividend \11\ and 
rebate payments,\12\ in each case limited to the amount OCC has 
collected in margins from the responsible Market Loan Clearing Member 
based upon instructions received by the Loan Market prior to the 
payment date. Under the Hedge Program, OCC does not currently offer a 
guaranty of dividends or distributions, which must be resolved 
bilaterally between the Borrowing and Lending Clearing Members.
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    \10\ See OCC Rules 2202(b) and 2202A(b).
    \11\ The terms ``substitute dividend'' or ``dividend equivalent 
payment'' in respect of a stock loan transaction means a payment 
made by the Borrowing Clearing Member to the Lending Clearing Member 
to reflect any cash dividend or distribution made with respect to 
the Loaned Stock during the term of the stock loan.
    \12\ In respect of a stock loan transaction, a rebate is 
typically a fee payable from the Lending Clearing Member to the 
Borrowing Clearing Member, expressed as a rate based on the amount 
of cash Collateral held by the Lending Clearing Member (``Positive 
Rebate''). However, if the rebate rate is negative (``Negative 
Rebate''), the fee is payable from the Borrowing Clearing Member to 
the Lending Clearing Member.
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Mark-to-Market Payments
    After novation, as part of the guaranty, OCC processes mark-to-
market payments for all cleared stock loans on a daily basis to 
collateralize all loans to the negotiated levels. Mark-to-market 
payments are based on the value of the loaned securities and made 
between Clearing Members using OCC's cash settlement system. In the 
Hedge Program, the percentage of the value of the loaned securities, 
either 100% or 102%, and the preferred mark-to-market rounding are 
dependent upon the terms of the Master Securities Loan Agreement 
(``MSLA'') between the two Clearing Member parties to the transaction. 
Currently, members may select between several default rates to which 
the mark price would be rounded to the nearest interval (1.00, .05, 
0.25, 0.10, 0.05, and 0.01). In the Market Loan Program, all Market 
Loans are collateralized based on the rate and rounding convention 
established by the Loan Market--currently 102% with rounding to the 
nearest dollar.
    In both Stock Loan Programs, daily mark-to-market of cash 
collateral typically are settled in the firm lien account or combined 
Market-Makers' account of the Clearing Member.\13\ Settlements 
generally are combined and netted against other OCC settlement 
obligations in a Clearing Member's account, including trade premiums 
and margin deficits. Clearing Member open positions in the Stock Loan 
Programs are factored into the Clearing Member's

[[Page 73468]]

overall margin \14\ and Clearing Fund contribution requirements.\15\
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    \13\ See OCC Rule 2201(a)(iii); Rule 2201A(a)(iii).
    \14\ See OCC Rules 601, 2203 & 2203A.
    \15\ See OCC Rule 1001.
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Position Aggregation
    OCC aggregates all stock loan positions and stock borrow positions 
of a Clearing Member relating to the same Eligible Stock for reporting 
and margin calculation purposes. OCC separately identifies stock loan 
and stock borrow positions resulting from each of the Stock Loan 
Programs, and such positions are not fungible with positions resulting 
from the other program. Position aggregation in both Stock Loan 
Programs is a legacy practice and does not follow industry-standard 
book-keeping practices. Because of position aggregation, certain 
industry standard post-trade activity must be performed bilaterally 
away from OCC, such as re-rate transactions that change the rebate rate 
on an individual loan.
Dividends and Distributions
    Dividend equivalent payments for the Market Loan Program are 
ordinarily effected through DTC's Dividend Service. If a Loan Market 
has advised OCC that the dividend or distribution for such Market Loan 
is not tracked by DTC's Dividend Service, or if OCC determines, in its 
discretion, to remove a Market Loan from the Dividend Service, OCC Rule 
2206A(a)(ii) currently provides that dividend equivalent payments are 
effected through OCC's cash settlement system the day following the 
expected dividend or distribution payment date. OCC Rule 2206A(a)(ii) 
further provides that the calculation of the margin in respect of 
dividend equivalent payments shall be solely based on calculations 
provided by the Loan Market, and OCC shall have no responsibility to 
verify the accuracy of the Loan Market's calculation. In addition, OCC 
Rule 2206A(a)(iii) provides that with respect to non-cash dividends and 
distributions, a Loan Market may determine in its discretion to fix a 
cash settlement value for which the Loan Market may instruct OCC to 
effect collection and payment. In the event of a Borrowing Clearing 
Member's default, OCC guarantees dividend equivalent payments to the 
extent that OCC has collected margin equal to such dividend equivalent 
according to the instructions provided by the Loan Market.
Termination of Stock Loans
    Hedge Loans are typically terminated when either (i) a Borrowing 
Clearing Member instructs DTC to transfer a specified quantity of the 
Loaned Stock to the Lending Clearing Member against payment of the 
settlement price by the Lending Clearing Member to the Borrowing 
Clearing Member, after which DTC notifies OCC of the transaction with 
special codes after the transaction has settled; or (ii) the Lending 
Clearing Member gives notice to the Borrowing Clearing Member that the 
Lending Clearing Member is terminating the Stock Loan, or a portion 
thereof and specifies the number of shares of the Loaned Stock in 
respect of which the Lending Clearing Member is terminating the Stock 
Loan.\16\ The current process of initiating return transactions for the 
Hedge Program through DTC can lead to position breaks if the return 
transactions are not properly coded. Market Loans are typically 
terminated by a Market Loan Clearing Member giving notice to the 
relevant Loan Market calling for the recall or return of a specified 
quantity of the Loaned Stock.\17\ The Loan Market then sends details of 
the matched return/recall transaction to OCC, which validates the 
transaction and sends a pair of delivery orders to DTC in connection 
with the recall/return.
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    \16\ See OCC Rule 2209(a).
    \17\ See OCC Rule 2209A(a).
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    However, in certain circumstances when a Clearing Member under 
either Stock Loan Program fails to return the specified quantity of 
Loaned Stock or to pay the applicable settlement price for a Loaned 
Stock, the counterparty Clearing Member may choose to execute a ``buy-
in'' or ``sell-out'' of the Loaned Stock on its own.\18\ The Clearing 
Member executing a buy-in or sell-out is then required to provide 
notice to OCC and its counterparty, in the case of a Hedge Loan,\19\ or 
the Loan Market, in the case of a Market Loan,\20\ of the buy-in or 
sell-out after execution is complete. Termination is not complete until 
the records of OCC, which are the official record of open and closed 
stock loan transactions, reflect the termination of the Stock Loan, and 
Clearing Members remain liable for all obligations related to open 
stock loan positions as reflected in the records of OCC.
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    \18\ See OCC Rule 2209(b), (f); Rules 2209A(b), (c).
    \19\ See OCC Rule 2209A(b), (f).
    \20\ See OCC Rule 2209A(b)(1), (c)(1).
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Offset and Re-Matching of Matched-Book Positions
    A portion of the activity in OCC's Hedge Program relates to what is 
often referred to as matched-book activity, when a Hedge Clearing 
Member maintains in an account a stock loan position for a specified 
number of shares of an Eligible Stock reflecting a stock lending 
transaction with one Hedge Clearing Member (the Borrowing Clearing 
Member) and also maintains in that same account a stock borrow position 
for the same number, or lesser number, of shares of the same Eligible 
Stock with another Hedge Clearing Member (the Lending Clearing Member) 
(such positions being ``Matched-Book Positions''). In the event of a 
Clearing Member suspension, OCC has authority to re-match Matched-Book 
Positions of the defaulting Clearing Member in the Hedge Loan 
Program.\21\ Such re-matching in suspension eliminates risk associated 
with price dislocation if OCC were required to instruct the surviving 
lender to buy-in and the surviving borrower to sell-out the same 
quantity of Loaned Stock in order to unwind the Matched-Book Positions.
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    \21\ See OCC Rule 2212.
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Canadian Clearing Members
    OCC expanded the Hedge Program to accommodate Canadian Hedge 
Clearing Members in 2013.\22\ To be eligible for the Hedge Program, a 
Canadian Clearing Member must appoint CDS Clearing and Depository 
Services Inc. (``CDS''), Canada's national securities depository, to 
act as its agent through CDS's arrangements with DTC and the National 
Securities Clearing Corporation (``NSCC'') to provide cross-border 
service to clear and settle trades with U.S. counterparties.\23\ 
Currently, Canadian Clearing Members are not eligible for the Market 
Loan Program.
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    \22\ See Exchange Act Release No. 69534 (May 8, 2013), 78 FR 
28267 (May 14, 2013) (File No. SR-OCC-2013-03).
    \23\ See OCC Rule 302(e), (f)(1).
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    Canadian Clearing Members are also subject to additional 
requirements intended to allow OCC to perform its clearance and 
settlement services free from tax withholding obligations with respect 
to payments to such members. Specifically, OCC has established rules to 
address the application of Section 871(m) of the Internal Revenue Code 
of 1986, as amended (``I.R.C.'') \24\ to listed options transactions 
effective on January 1, 2017.\25\ Section 871(m) imposes a 30% 
withholding tax on ``dividend equivalent'' payments that are made or

[[Page 73469]]

deemed to be made to non-U.S. persons with respect to certain 
derivatives that reference equity of a U.S. issuer. OCC Rule 202 
provides that Clearing Members that are non-U.S. entities for U.S. 
federal tax purposes (``FFI Clearing Members'') must establish to the 
OCC's satisfaction that the member's conduct of transactions or 
activities with or through OCC will not result in the imposition of 
taxes or 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 net income).\26\ When taxes or obligations would be 
imposed but for the qualification of a member for a special U.S. or 
foreign tax status, ongoing membership of such members is conditioned 
on the member to qualify for, maintain, and document such status to 
OCC's satisfaction.\27\ In addition, an FFI Clearing Member is 
prohibited from conducting transactions with or through OCC that would 
result in the imposition of taxes or 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 net income).\28\ 
Notwithstanding these requirements, which OCC implemented to facilitate 
the clearance and settlement of listed options transactions, OCC has no 
current tax withholding or reporting obligations for Canadian Hedge 
Clearing Members' transactions under the Hedge Program because 
substitute dividend payments are handled bilaterally between Hedge 
Clearing Members, away from OCC.
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    \24\ 26 U.S.C. 871(m).
    \25\ In September 2015, the Treasury Department adopted final 
regulations based on a proposal issued in December 2013 expanding 
the types of derivatives to which Section 871(m) applies to include 
certain listed options transactions with an effective date of 
January 1, 2017. See T.D. 9734, 80 FR 56866 (Sept. 18, 2015). The 
Treasury Department adopted final regulations providing additional 
guidance on section 871(m) in January 2017. See T.D. 9815, 82 FR 
8144 (Jan. 24, 2017).
    \26\ OCC Rule 202(a).
    \27\ See OCC Rule 202. FFI Clearing Members satisfy this 
requirement by (1) entering into a ``qualified intermediary 
agreement'' with the Internal Revenue Service (``IRS'') under which 
the Clearing Member assumes primary withholding responsibility (such 
member being a ``Qualified Intermediary Assuming Primary Withholding 
Responsibility'') and qualifies under IRS procedures for exemption 
from withholding under the Foreign Account Tax Compliance Act 
(``FATCA''), 26 U.S.C. 1471-1474, such that OCC is not required to 
withhold any amount with respect to any payment or deemed payment to 
such FFI Clearing Member under FATCA or Chapter 3 of subtitle A of 
the I.R.C. (``Chapter 3''), 26 U.S.C. 1441-1446, for transactions in 
the FFI Clearing Member's customer accounts; and (2) entering into 
an agreement with the IRS that permits OCC to make dividend 
equivalent payments or deemed payments to such FFI Clearing Member 
free from U.S. withholding tax for transactions or activity in the 
FFI Clearing Member's capacity as principal through its firm account 
(such member being a ``Qualified Derivatives Dealer'').
    \28\ See OCC Rule 202(b)(1).
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Proposed Changes
    OCC is proposing a number of amendments to enhance the structure 
and operation of the Stock Loan Programs discussed above and provide a 
framework for combining those programs into a single Stock Loan 
Program. First, OCC proposes to make several changes to the rules 
governing its Market Loan Program. Specifically, the proposed rule 
change would enhance OCC's Market Loan Program by:

    (a) expanding the Market Loan Program to include bilaterally 
negotiated stock loans submitted by Clearing Members directly to 
OCC, for which the original counterparties shall remain paired in 
OCC's system for purposes of post-trade activity, including 
modifications, recalls, and returns;
    (b) allowing for and recognizing supplementary or additional 
terms under an MSLA between the counterparties to such bilaterally 
negotiated transactions submitted under the Market Loan Program, as 
OCC's Rules currently recognize under the Hedge Loan Program;
    (c) fixing cash collateral delivered and returned versus a 
bilaterally negotiated Market Loan submitted directly to OCC at 
102%, as is the current practice for Market Loans submitted through 
a Loan Market, and allowing Clearing Members to select a default 
rate at which mark-to-market payments would be rounded to the 
nearest level for Market Loans submitted directly to OCC, as is the 
current practice for Hedge Loans;
    (d) allowing for Clearing Members to cancel pending transactions 
by sending instructions directly to OCC as opposed to through a Loan 
Market;
    (e) establishing rules for affirmation of Market Loan 
transactions submitted by Clearing Members directly to OCC, as 
opposed to through a Loan Market;
    (f) allowing OCC's clearance and settlement system to calculate 
and handle cash distributions, including substitute dividends and 
rebates;
    (g) allowing OCC's clearance and settlement system to accept and 
handle contract modifications agreed to by the parties to 
bilaterally negotiated contracts submitted through the Market Loan 
Program, including modifications to rebate rate, interest rate 
benchmark, and loan terms;
    (h) implementing additional OCC controls over the buy-in process 
in the case of the Borrowing Clearing Member's failure to deliver 
the Loaned Stock following a recall by the Lending Clearing Member 
in situations other than the suspension of the Borrowing Clearing 
Member under Chapter XI of the Rules;
    (i) supporting Canadian Clearing Members in the Market Loan 
Program while preventing certain transactions that could otherwise 
introduce tax withholding obligations; and
    (j) providing that in lieu of being a participant at the 
Depository for purposes of delivering or receiving Eligible Stock in 
connection with the initiation and termination of Market Loans, an 
Appointing Clearing Member may appoint an Appointed Clearing Member 
who is a member of the Depository to deliver or receive Eligible 
Stock, in the same way as how the Rules currently allow for 
Appointed Clearing Members to deliver or receive underlying 
securities arising from the exercise or maturity of an Appointing 
Clearing Member's physically-settled equity options or stock 
futures.

    As discussed in more detail below, OCC intends that with these 
enhancements to the Market Loan Program, OCC would eventually 
decommission the Hedge Program, after which the Market Loan Program 
would become OCC's single stock loan program. In the interim, however, 
and in addition to enhancements (a) through (j) to the Market Loan 
Program, the proposed rule changes would apply amendments to both Stock 
Loan Programs for the transition to OCC's new clearance and settlement 
system by:

    (k) replacing OCC's current practice of aggregating new stock 
loan positions and stock borrow positions for the same Clearing 
Member in the same Eligible Stock with contract-level accounting, 
consistent with industry-standard bookkeeping practices;
    (l) aligning settlement of daily mark-to-market of cash 
collateral through the account in which the stock borrow or stock 
loan position sits, rather than requiring that mark-to-market 
settlement occur in a Clearing Member's firm lien account or 
combined Market-Makers' account;
    (m) simplifying the mark-to-market calculation to focus on the 
change to the contract value of a Clearing Member's Stock Loans; and
    (n) allowing for re-matching of Matched-Book Positions across 
OCC's Stock Loan Programs in the event of a Clearing Member default.

    In conjunction with these changes to the Stock Loan Programs, OCC 
would also make certain other clarifying, conforming, and 
organizational changes to OCC's By-Laws and Rules, and rule-filed 
policies that reference those By-Laws or Rules. In particular, OCC 
would reorganize, restate, and consolidate provisions of OCC's By-Laws 
governing the Stock Loan Programs into Chapter XXII (Hedge Loan 
Program) and Chapter XXIIA (Market Loan Program) of OCC's Rules, as 
amended by this proposed rule change. As part of these changes, OCC 
would preserve the governance requirements concerning amendments to the 
stock loan-related By-Laws migrated to the Rules by amending Article 
XI, Section 2 of the OCC By-Laws.
Plan To Consolidate OCC's Stock Loan Programs
    OCC plans to consolidate its Stock Loan Programs into a single, 
enhanced stock loan program. OCC intends to achieve this consolidation 
in three phases. The first phase, which is described in this proposed 
rule change, would enhance the Market Loan Program in a way that would 
allow that

[[Page 73470]]

program to eventually become OCC's single, enhanced stock loan program. 
The first phase will also involve certain enhancements to both the 
Hedge and Market Loan Programs in connection with the implementation of 
OCC's new system for clearance and settlement. After OCC implements the 
enhancements and the new clearance and settlement system becomes OCC's 
system of record, OCC will begin authorizing and encouraging Hedge 
Clearing Members to begin submitting bilateral transactions through the 
enhanced Market Loan Program. While OCC would require Hedge Clearing 
Members to provide the appropriate documentation and certifications 
required of Market Loan Clearing Members and submit to certification 
testing prior to utilizing the enhanced program, OCC does not plan to 
require business expansions for Hedge Clearing Members migrating to the 
Market Loan Program because they are already approved for stock loan 
activity.\29\ Currently, the business expansion for Market Loan Program 
participation serves mainly to ensure that the Clearing Member is 
properly subscribed through a Loan Market, which will no longer be 
necessary to participate in the Market Loan Program.
---------------------------------------------------------------------------

    \29\ Currently, a Clearing Member that participates in the Hedge 
Loan Program that desires to expand its participation into the 
Market Loan Program is subject to a business expansion review under 
OCC's Third-Party Risk Management Framework. See Third-Party Risk 
Management Framework, available at https://www.theocc.com/risk-management/risk-management-framework (providing for assessments for 
Clearing Member onboarding, including with respect to expanded 
relationships).
---------------------------------------------------------------------------

    During the second phase, which also is covered by this proposed 
rule change, OCC would encourage Clearing Members to transition to the 
Market Loan Program and would monitor the movement of activity from the 
Hedge Program to the enhanced Market Loan Program. Based on interest 
expressed by Clearing Members,\30\ OCC anticipates that Clearing 
Members will be motivated to migrate activity to the Market Loan 
Program because of OCC's expanded guarantee under that program and the 
operational enhancements under this proposed rule change. Once 
transition plans for each Clearing Member are understood, OCC would 
announce that on a future date, OCC will no longer accept new loans 
through the Hedge Program, but would continue to support existing Hedge 
Loans. The decision to make this announcement will be made by OCC's 
Chief Executive Officer or Chief Operating Officer based upon factors 
including, but not limited to, the number of participants that are able 
to conduct business under the enhanced Market Loan Program, the amount 
of transactions flowing through the enhanced Market Loan Program, the 
proportion of loan balances between the two Stock Loan Programs, and 
feedback from members about when they expect to be ready to migrate 
fully to the enhanced Market Loan Program. OCC's goal is to transition 
all Hedge Program participants to the enhanced Market Loan Program 
within a year after implementing the enhanced program. Beginning on the 
announced date, existing Hedge Loans will naturally terminate through 
return or recall instructions until none are left. OCC does not expect 
that this period will last more than six months from the announced date 
given the average term for stock loans.
---------------------------------------------------------------------------

    \30\ OCC has provided results of a survey and other informal 
discussions with Clearing Members concerning the enhancements to the 
OCC's Stock Loan Programs in confidential Exhibit 3B to SR-OCC-2024-
011. Members have expressed interest in the enhancements such as 
having the rebate amounts calculated, settled, and guaranteed by 
OCC. The migration from Hedge to the Market Loan Program is 
necessary for such expansion to OCC's services.
---------------------------------------------------------------------------

    This second phase would be reflected in proposed Rule 2213(e)(2), 
which would address the termination of the Hedge Loan Program. Section 
2(c) of OCC By-Law Article XXI, which would become OCC Rule 2213(e)(1) 
as part of the reorganization of the Stock Loan By-Laws and Rules, 
already provides OCC authority, upon two business days' notice to 
Clearing Members, to terminate the outstanding Hedge Loans relating to 
one or more particular Eligible Stock at its sole discretion for 
certain enumerated reasons, including the impending termination of that 
business on the part of OCC. OCC Rule 2213(e)(2) would allow OCC to 
take a phased approach to terminating the Hedge Loan Program by first, 
upon approval by the Chief Executive Officer or Chief Operating 
Officer, announcing that OCC will cease to accept the initiation of new 
Hedge Loans. OCC Rule 2213(e)(2) also would provide that the 
determination to terminate the Hedge Loan Program will be made based 
upon factors including, but not limited to, the number of participants 
that are able to conduct business under the Market Loan Program, the 
amount of transactions flowing through the Market Loan Program, the 
proportion of loan balances between the two Stock Loan/Hedge Programs 
and the Market Loan Program, and feedback from members about when they 
expect to be ready to migrate fully to the Market Loan Program. During 
this phasing out, Clearing Members would be allowed to maintain open 
positions in Hedge Loans until termination of those positions through 
returns and recalls initiated by the Clearing Members.
    The third phase, which is not covered by this proposed rule change, 
would be the ultimate decommission of the Hedge Program Rules. Once all 
Hedge Loans terminate through return or recall, OCC intends to file 
another proposed rule change that would remove the Hedge Program from 
OCC's By-Laws and Rules. Thereafter, the Market Loan Program would then 
become OCC's single ``Stock Loan Program.'' Until then, OCC is 
proposing to amend its Rules to avoid ambiguity by using ``Hedge Loan'' 
instead of ``Stock Loan'' when referring to Stock Loans under the Hedge 
Program unless in reference to Stock Loans under either of the Stock 
Loan Programs, consistent with the current definition of that term in 
Article I of the By-Laws.
Market Loan Program Enhancements
    OCC proposes enhancements to the Market Loan Program that would (a) 
expand the Market Loan Program to allow for submission of Market Loans 
bilaterally negotiated by Clearing Members; (b) recognize MSLAs under 
the Market Loan Program; (c) fix the value of cash collateral delivered 
and returned versus the Loaned Stock at 102% of the value of the Loaned 
Stock, as Market Loans are currently collateralized, and allow for 
flexible pricing, as under the current Hedge Loan Program; (d) provide 
for the cancellation of pending transactions that have not yet been 
accepted by OCC; (e) establish rules for affirmation of Market Loan 
transactions submitted by Clearing Members directly to OCC; (f) 
facilitate the calculation and processing of cash distributions, 
including substitute dividends and rebate payments, by OCC's new 
clearance and settlement system, rather than by a Loan Market; (g) 
provide for modification of Market Loan terms agreed to by Market Loan 
Clearing Members; (h) implement additional OCC controls over the buy-in 
process in the case of a Borrowing Clearing Member's failure to deliver 
after the Lending Clearing Member initiated a recall, as well as to 
prepare those controls and OCC's other Market Loan and Hedge Loan Rules 
for the shortening of the standard settlement cycle for securities 
transactions; (i) support Canadian Clearing Members in the Market Loan 
Program while preventing certain transactions that could introduce tax 
withholding obligations; and (j) provide a framework for allow an 
Appointing Clearing Member to settle its Market Loan

[[Page 73471]]

activity through an Appointed Clearing Member in lieu of maintaining 
membership at a Depository.
(a) Bilaterally Negotiated Market Loans
    OCC is proposing to expand the Market Loan Program to include 
bilaterally negotiated Market Loans submitted directly by Clearing 
Members. Under the Market Loan Program, OCC currently accepts 
electronic messages from the Loan Market for new loans and returns. OCC 
would expand the Market Loan Program to accept submissions directly 
from Clearing Members (or their third-party service providers). 
Following the affirmation of a new loan or return, OCC would instruct 
DTC to settle the transaction using the account of the lender, the 
borrower, or the Appointed Clearing Members, or using OCC's DTC 
account. While there would be two separate avenues for submitting loans 
(i.e., through a Loan Market or direct submission of bilaterally 
negotiated Loans to OCC), the scope of OCC's guaranty and post-trade 
processing for all transactions would be uniform. By allowing for 
automated submission of transactions to OCC prior to DTC settlement and 
by controlling the settlement process, the enhanced program would help 
reduce the burden and risks associated with the balancing and 
reconciliation under the current Hedge Program.\31\ As under the 
current Hedge Program, counterparties to bilaterally negotiated 
contracts submitted through the Market Loan Program would remain paired 
in OCC's system for purposes of recalls, returns, and contract 
modifications.
---------------------------------------------------------------------------

    \31\ Surveys of stock loan industry participants indicate most 
firms have a significant spend for stock loan post-trade and 
reconciliation processing. Based on this industry feedback, OCC 
believes that a service that can provide operational efficiencies 
and further reduce manual processing and operational risk would be 
well received. OCC's review of this feedback is provided in 
confidential Exhibit 3B to SR-OCC-2024-011.
---------------------------------------------------------------------------

    Because certain proposed Rules would apply differently to Loans 
matched anonymously through a Loan Market and those that would be 
initiated bilaterally, whether through a Loan Market or with OCC 
directly, OCC would add definitions of ``Anonymous Market Loan'' and 
``Disclosed Market Loan'' to OCC Rule 101. Anonymous Market Loans would 
be defined as those initiated through a Loan Market and for which the 
identities of the Lending Clearing Member and Borrowing Clearing Member 
are not disclosed to each other. Disclosed Market Loans would be 
defined to include either those Market Loans (i) initiated through a 
Loan Market and for which the identities of the Lending Clearing Member 
and Borrowing Clearing Member are disclosed to each other, or (ii) 
initiated directly between the Lending Clearing Member and Borrowing 
Clearing Member away from a Loan Market such that the identities of the 
Lending Clearing Member and Borrowing Clearing Member are disclosed to 
each other. Paragraph (h) to proposed OCC Rule 2202A (Initiation of 
Market Loans) would provide that a Market Loan may be either an 
Anonymous Market Loan or a Disclosed Market Loan. Paragraph (a) to 
proposed OCC Rule 2206A (Maintaining Stock Loan and Stock Borrow 
Positions in Accounts) would provide that the identities of the Lending 
Clearing Member and Borrowing Clearing Member would be elements 
identified for stock loan positions and stock borrow positions 
resulting from Disclosed Market Loans.
    To expand the Market Loan Program to bilateral transactions, OCC 
would amend OCC Rule 2202A. Specifically, the proposed rule change 
would amend current OCC Rule 2202A(a)(i), which would be renumbered to 
OCC Rule 2202A(a)(1) as part of the restatement of the Stock Loan 
Program rules, to add that, in addition to initiation through a Loan 
Market, a Market Loan may be initiated when a Lending Clearing Member 
and Borrowing Clearing Member send details of a stock loan between the 
two Clearing Members directly to OCC. To ensure that the original 
counterparties to such a Disclosed Market Loan remain paired in OCC 
system, notwithstanding OCC's novation, OCC would also amend current 
Article XXIA, Section 5 of OCC's By-Laws (Maintaining Stock Loan and 
Stock Borrow Positions in Accounts), which would become OCC Rule 2206A, 
by adding a new sentence to the beginning of that provision that 
introduces the concept of ``matched pairs,'' consistent with the OCC 
By-Law's definition of Hedge Loans.\32\
---------------------------------------------------------------------------

    \32\ See By-Law Art. I, Sec.  1.H.(2).
---------------------------------------------------------------------------

    In addition to providing for the initiation of bilateral Market 
Loans, OCC would also amend its Rules to accommodate direct submission 
of other types of post-trade transactions for which the Rules currently 
rely on actions taken by a Loan Market. Specifically, OCC would amend 
the first paragraph of current OCC Rule 2209A(a) (Termination of Market 
Loans), which would be numbered as OCC Rule 2216A(a) as part of the 
broader reorganization of the Market Loan Program Rules, and new OCC 
Rule 2214A (Modifications) by providing that termination or 
modification of a Market Loan, respectively, may be initiated either 
through a Loan Market or OCC, depending on the way in which the Loan 
was initiated. Such instructions would be made through the Loan Market 
for Anonymous Market Loans; through OCC for Disclosed Market Loans 
initiated through OCC directly; and through either the Loan Market or 
OCC for Disclosed Market Loans initiated through a Loan Market. OCC 
would similarly amend the definitions of ``Recall'' and ``Return,'' as 
migrated from the By-Laws to OCC Rule 101, to reflect the separate 
channels for initiating such a transaction. OCC would also make other 
conforming changes to the text of the Rules to reflect submission of 
bilaterally negotiated loans directly to OCC:
     Throughout the rules governing the Market Loan Program, 
OCC would also remove references to ``matching'' or ``matched'' 
transactions (i.e., matched through a Loan Market) to reflect that 
Market Loan transactions could also be initiated bilaterally, either 
through a Loan Market or directly with OCC.\33\
---------------------------------------------------------------------------

    \33\ See OCC By-Law Art. I, Sec.  1.L.(5) (defining ``Loan 
Market'' as ``an electronic platform . . . that supports securities 
lending and borrowing transactions by lenders and borrowers based on 
loan terms that each party is willing to accept''); OCC Rules 
2202A(a)(i) (``If the matched transaction passes [OCC]'s validation 
process . . .''); 2202A(a)(ii) (``previously reported matched 
transaction'' and ``related matched transaction''); 2202A(b) (``the 
matched stock loan transaction submitted by the Loan Market''); 
2209A(a)(1) (``matched return/recall transaction'').
---------------------------------------------------------------------------

     The definition of ``Market Loan Program,'' as migrated 
from Section 1 of Article I of the OCC By-Laws to OCC Rule 101, would 
be amended to recognize that Market Loans may be initiated either 
through a Loan Market or through direct submission of bilaterally 
negotiated Loans to OCC.
(b) Recognizing MSLAs
    Parties to a bilaterally negotiated stock loan transaction 
typically execute an MSLA. Under current OCC Rule 2202(b), Hedge 
Clearing Members are permitted to establish and maintain additional 
terms under the MSLA that are not extinguished through OCC's novation 
provided that the additional terms are not inconsistent with anything 
in OCC's By-Laws or Rules. Examples of such additional or supplementary 
terms include a term structure or fees for buy-in transactions. The 
proposed rule change would add the same provision to the Market Loan 
Program in proposed OCC Rule 2202A(b)(2)(E). As described below, the 
recognition of MSLAs within the Market Loan Program would also

[[Page 73472]]

facilitate the re-matching of Matched Book Positions in suspension 
because OCC would give priority to re-matching counterparties with 
existing MSLAs, both when re-matching within and across the Stock Loan 
Programs.
(c) Collateral and Mark-to-Market Pricing
    To accommodate the submission of bilaterally negotiated Market 
Loans directly to OCC, OCC proposes to establish rules that would fix 
the collateral for Market Loans at 102%--the same rate at which Market 
Loans submitted through a Loan Market are collateralized today. 
Specifically, OCC would amend current OCC Rule 2204A (Mark-to-Market 
Payments), which would become proposed OCC Rule 2209A per the 
reorganization discussed below, to provide in proposed paragraph (b) 
(Market-to-Market Payment Amount) that the collateralization rate for 
all Market Loans would be 102%, regardless of whether initiated through 
a Loan Market or submitted directly to OCC. Accordingly, OCC would 
delete the current text in Rule 2204A and the definition of the term 
``Collateral'' in Article XXIA of the OCC By-Laws, as migrated to OCC 
Rule 101, that provides that the collateralization rate shall be set by 
the relevant Loan Market. OCC believes that fixing collateral at 102% 
would help to preserve the compatibility of OCC's cleared offering with 
standard practices for over-the-counter (``OTC''), uncleared stock 
loans while minimizing complexity in OCC's risk management processes.
    OCC previously considered standardizing collateralization at 100% 
because in a cleared transaction, OCC's guaranty replaces the 
additional collateral in protecting Lenders from market risk in the 
event of a counterparty default. In a survey OCC submitted to all 
Clearing Members who participate in OCC's Stock Loan Programs, the vast 
majority of respondents objected to a proposal to standardize 
collateralization at 100%.\34\ The most common reasons cited for this 
objection were (i) desire to align the collateral amount and mark-to-
market cashflows for members who commonly have uncleared positions at 
the OTC-standard 102% and a matching position within clearing; and (ii) 
loss of the additional 2% in collateral would materially reduce what 
the income lenders earn by investing the cash collateral, which is one 
of the reasons lenders choose to lend their shares. In response to this 
feedback, OCC now proposes to fix collateral at 102%, which would align 
OCC's offering with standard OTC practices and with OCC's current 
practice within the Market Loan Program. Fixing the collateral at a 
single rate--as under the current Market Loan Program--would also 
minimize complexity in OCC's risk management of stock loan positions by 
establishing a single rate across all Market Loans.
---------------------------------------------------------------------------

    \34\ OCC has included a copy of the survey results in 
confidential Exhibit 3B to SR-OCC-2024-011.
---------------------------------------------------------------------------

    OCC also proposes to establish rules that would allow Clearing 
Members submitting Market Loans directly to OCC to select the default 
rate at which mark-to-market payments would be rounded up to the 
nearest level, which is the current practice for Hedge Loans. 
Specifically, OCC would amend OCC Rule 2201A (Instructions to the 
Corporation), which would become proposed OCC Rule 2207A, to reflect 
that the default rate is one of the standing instructions that Market 
Loan Clearing Members must submit with respect to Market Loans 
submitted directly to OCC. Rounding rates for Market Loans submitted 
through a Loan Market would not change. If the default rate differs 
between a Borrowing Clearing Member and a Lending Clearing Member, the 
Lending Clearing Member's default rate would govern the Market Loan. 
When surveyed, Clearing Members cited the same reasons for supporting 
flexibility in pricing as they did in objecting to fixing collateral at 
100%.\35\ OCC currently offers this flexibility in the Hedge Program 
today. OCC believes that offering the same flexibility with respect to 
bilaterally negotiated Market Loans submitted to OCC directly will aid 
Clearing Members in aligning cash flows between cleared and OTC stock 
loan transactions.
---------------------------------------------------------------------------

    \35\ OCC has included a copy of the survey results in 
confidential Exhibit 3B to SR-OCC-2024-011.
---------------------------------------------------------------------------

(d) Cancellation of Pending Transactions
    To facilitate the acceptance of bilaterally negotiated contracts in 
the Market Loan Program, OCC is proposing to modify its Rules that 
concern the cancellation of pending transactions to accommodate the 
submission of cancellation instructions by Clearing Members, in 
addition to a Loan Market. Under current OCC Rule 2202A(a)(ii), a Loan 
Market may instruct OCC to disregard a previously reported matched 
transaction that is pending settlement at DTC, after which OCC 
instructs DTC to cancel the previously issued delivery order. Upon 
confirmation that DTC has processed such cancellation instructions, the 
related matched transaction is deemed null and void and given no 
effect. OCC has no obligation to any Market Loan Clearing Member in 
acting pursuant to a Loan Market's instruction to disregard a 
previously reported transaction. The proposed rule change would amend 
OCC Rule 2202A(a)(ii), which would be renumbered as proposed OCC Rule 
2202A(a)(2), to recognize the ability of a Market Loan Clearing Member 
to submit an instruction to cancel a pending transaction directly to 
OCC for bilaterally negotiated transactions submitted under the Market 
Loan Program.
    The proposed changes would also add a new OCC Rule 2215A 
(Cancelation of Pending Instructions) to address the cancellation of 
pending post-trade instructions other than cancellation of loan 
initiation under Rule 2202A. For example, under OCC's current OCC Rule 
2202A, Hedge Clearing Members currently have the capability to cancel 
return instructions or recall instructions pending with DTC. Similarly, 
Market Loan Clearing Members currently may cancel pending transactions 
by issuing a cancellation instruction to the Loan Market, which may 
then instruct OCC to disregard a previously reported transaction under 
current OCC Rule 2202A(a)(ii). This new OCC Rule 2215A would preserve 
that ability under the enhanced program by allowing members that submit 
bilaterally negotiated Market Loans to issue cancellation instructions 
directly to OCC, as they do now to DTC and the Loan Market.
(e) Transaction Affirmation
    Currently, Market Loan Program transactions are presumed matched 
when sent to OCC by a Loan Market. OCC would establish a transaction 
affirmation process for loans submitted directly to OCC, rather than 
through a Loan Market:
     New Loans: Counterparties to a new loan would be required 
to affirm the transaction details prior to OCC submitting the new loan 
to DTC for settlement. New loans that are not affirmed by the time that 
OCC stops accepting instructions for the day would be rejected. This 
affirmation process would be reflected in proposed OCC Rule 
2202A(a)(1), which would provide that a Market Loan is initiated when 
(i) the Loan Market sends details of a stock loan transaction to OCC or 
(ii) a Lending Clearing Member and Borrowing Clearing Member send 
details to OCC of a stock loan transaction between them and such 
details, as applicable, are either matched by OCC or affirmed by the 
Clearing Members.
     Returns: Provided that the Borrowing Clearing Member 
initiated a

[[Page 73473]]

return within OCC's timeframe for submitting such instruction on a 
stock loan business day, the Lending Clearing Member would have the 
opportunity to affirm or reject the initiation of a return by a cut-off 
time on the same business day.\36\ Any returns pending after that cut-
off time would be deemed affirmed and submitted to DTC for processing. 
This auto-affirmation would be reflected in proposed OCC Rule 
2216A(a)(2). Based on conversations with Clearing Members, OCC believes 
this affirmation process balances Lending Clearing Members' desire to 
have the opportunity to affirm or reject return instructions, while 
also addressing Borrowing Clearing Members' concerns that delay in 
affirmation or allowing the transaction to pend indefinitely could have 
regulatory consequences for the Borrowing Clearing Member.\37\
---------------------------------------------------------------------------

    \36\ OCC anticipates that upon implementation of these proposed 
changes, the cut-off for rejections will be 30 minutes prior to 
DTC's standard settlement submission deadline.
    \37\ OCC's settlement procedures for Stock Loan termination are 
intended to facilitate its Clearing Member's compliance with 
requirements under applicable rules of the Commission and self-
regulatory organizations, including the requirements imposed by 
Regulation SHO. See Exchange Act Release No. 59294 (Jan. 23, 2009), 
74 FR 5958 (Feb. 3, 2009) (SR-OCC-2008-20). However, the ultimate 
responsibility for compliance with Regulation SHO rests with the 
Clearing Member, and OCC has no liability for any Clearing Member's 
failure to comply with its obligations. See, e.g., OCC Rules 
2209A(g) (``[OCC] shall not be held liability for any Clearing 
Member's failure to comply with its responsibilities and obligations 
under the federal and state securities laws, including, but not 
limited to, Regulation SHO, or any applicable rules of the relevant 
Loan Market or any exchange or self-regulatory organization.'').
---------------------------------------------------------------------------

     Recalls: Recalls would not need to be affirmed. Per 
standard MSLA terms, a Borrowing Clearing Member will be deemed to have 
affirmed the initiation of a recall provided that the Lending Clearing 
Member requested the return of the specific quantity of Loaned Stock no 
earlier than the standard settlement date that would apply to a 
purchase or sale of the Loaned Stock in the principal market of such 
Loaned Stock.\38\ This understanding would be added to proposed OCC 
Rule 2216A(a)(3).
---------------------------------------------------------------------------

    \38\ The standard settlement cycle currently corresponds with 
the one stock loan business day after submission of the recall. See 
OCC Rule 2209A(a)(3).
---------------------------------------------------------------------------

     Contract Modifications: Contract modifications to the 
rebate rate, interest rate benchmark, or loan term submitted by either 
a Borrowing Clearing Member or Lending Clearing Member, the proposed 
Rule amendments for which are discussed below, would not become 
effective until affirmed by both parties. This affirmation requirement 
would be added to new OCC Rule 2214A(a).
     Buy-Ins & Sell-Outs: For Market Loans submitted directly 
through the Corporation, the Borrowing Clearing Member and Lending 
Clearing will be given the opportunity to affirm or reject a buy-in or 
sell-out, respectively, by a cut-off time specified by OCC on the stock 
loan business day the buy-in or sell-out transaction is received by 
OCC. If the Clearing Member does not affirm or reject the buy-in or 
sell-out by that time, OCC would deem the buy-in or sell-out to be 
complete if OCC determines that the Buy-In or Sell-Out Costs for the 
Loaned Stock initiated is more than the lowest market price and less 
than the highest market price for the Loaned Stock on the stock loan 
business day the buy-in or sell-out is submitted to OCC.\39\ Otherwise, 
the buy-in or sell-out would be rejected. As with buy-ins and sell-outs 
under the Hedge Program today,\40\ any objection that the contraparty 
has with respect to the timeliness of the buy-in or sell-out or the 
reasonableness of the Buy-In or Sell-Out Costs are matters that must be 
resolved between the Lending Clearing Member and the Borrowing Clearing 
Member, away from OCC. These understandings and processes would be 
reflected in paragraphs (b)(2)(B) and (c)(2) of proposed OCC Rule 
2216A.
---------------------------------------------------------------------------

    \39\ OCC would evaluate the price per share paid or received 
against market prices on that stock loan business day, consistent 
with the Clearing Member's obligation to immediately give OCC 
written notice of the buy-in or sell-out. In making its 
determination, OCC would account for transaction costs, fees or 
interest paid or incurred in connection with the buy-in and sell-out 
that may be included in the Buy-In and Sell-Out Costs provided by 
the Clearing Member executing the buy-in or sell-out.
    \40\ See OCC Rule 2209(b), (f).
---------------------------------------------------------------------------

    To support Clearing Members in making the affirmations required 
under these rules, OCC's new stock loan system would support automatic 
affirmation based on system settings that could be selected by the 
Clearing Member.\41\ Through OCC's new clearance and settlement system, 
Clearing Members will be able to create and manage standing 
instructions for affirmation of their Market Loans based on variables 
including the type of transaction, the counterparty, the amount, or the 
rebate rate. For example, a member would be able to set instructions 
to: (i) affirm every transaction; (ii) limit affirmation to a certain 
set of counterparties; (iii) establish more granular rules, such as 
affirming any transaction with a rebate rate less than 250 basis 
points; or (iv) combine one or more of the above instructions. When new 
loans are received, the system would check whether there is a standing 
instruction that applies to the new loan. If no instruction is found, 
then the new loan would be pended for affirmation, subject to the above 
referenced Rules. If a standing instruction applies, then OCC would 
follow that instruction as satisfaction of the affirmation requirement. 
Authority to permit such standing instructions currently exists under 
current OCC Rule 2201A (Instructions to the Corporation), the 
applicable provision of which would be renumbered OCC Rule 2207A(a)(2).
---------------------------------------------------------------------------

    \41\ Buy-ins and sell-outs under OCC Rule 2216A would require 
manual affirmation, subject to automatic affirmation following a 
cut-off time discussed above.
---------------------------------------------------------------------------

(f) Cash Distributions
    The proposed changes would allow OCC to calculate and effect cash 
entitlements through its new clearance and settlement system, including 
dividends, distributions and rebates. OCC proposes to revise paragraphs 
(a)(ii) and (a)(iii) of current OCC Rule 2206A (Dividends and 
Distributions; Rebates), renumbered as proposed OCC Rule 2211A(b) and 
(c), to reflect that under OCC's new clearance and settlement system, 
OCC shall assume responsibility for calculating the margin add-on 
collected with respect to dividend equivalent payments. While OCC shall 
continue to effect dividend equivalent payments primarily through the 
facilities of DTC using its dividend tracking service, OCC would effect 
the payments through OCC's new clearance and settlement system if OCC 
determines that the dividend or distribution for a Market Loan is not 
tracked through DTC's dividend tracking service or if OCC has 
determined to remove a Market Loan from the dividend tracking service, 
as under OCC's current Rules. In addition, OCC would continue to add 
non-cash dividends and distributions to the Loaned Stock if OCC 
determines that such dividends and distributions are legally 
transferable and the transfer can be effected through DTC. The 
determination to fix a cash value for non-cash dividends and 
distributions not added to the Loaned Stock would be OCC's under the 
proposed changes, rather than the Loan Market. Because OCC will no 
longer be reliant on the Loan Market for OCC's margin add-on process 
and settlement of dividend equivalent payments, OCC proposes to 
eliminate the limitations under the current Rule, including the current 
provision that OCC's guaranty is limited by the amount of margin OCC 
collected in reliance on the Loan Market's calculation. This change 
would not have any effect on OCC's margin methodology. OCC would 
continue to

[[Page 73474]]

collect a margin add-on for such cash distributions.
    The proposed changes would also add paragraph (d) to proposed OCC 
Rule 2211A to address the rights of a Lending Clearing Member with 
respect to optional dividends (i.e., a dividend the shareholder can 
elect to receive in cash, stock, or some combination of the two). 
Proposed OCC Rule 2211A(d) would provide that a Lending Clearing Member 
will have the right to elect an option only if it recalls the Loaned 
Stock in time to make such election. If the Lending Clearing Member 
does not recall the Loaned Stock, the Lending Clearing Member would be 
entitled to receive the default option set by the issuer of the Loaned 
Stock. OCC understands this proposed rule would match the Loan Market's 
current process for optional dividends. Because optional dividends on 
Market Loans are currently governed by the Loan Market's processes, 
OCC's rules do not currently address the rights of a Lending Clearing 
Member with respect to optional dividends.
    OCC would also amend its rules to facilitate calculation, 
collection, and payment of rebates under the new clearance and 
settlement system. OCC Rule 2206A(b) currently provides that OCC 
generally will collect and pay rebate payments on a monthly basis as 
instructed by the Loan Market. As with dividend equivalent payments, 
the Loan Market is currently responsible for calculation of the rebate 
payments. OCC would amend OCC Rule 2206A(b), which would be renumbered 
OCC Rule 2211A(e), to reflect that OCC shall assume responsibility for 
calculating rebate payments under its new clearance and settlement 
system. OCC also proposes to amend the Rule so that OCC will be 
prepared if and when the stock loan industry transitions to daily, 
rather than monthly, collection of rebate payments. Because OCC 
anticipates that upon implementation of the new system, OCC will 
continue to calculate and collect rebate on a monthly basis, proposed 
OCC Rule 2211A(e) would provide that the calculation and collection of 
rebate payments could also be made on such other basis, not to exceed 
monthly.
(g) Market Loan Modifications
    OCC is proposing to add a new rule to support contract 
modifications to the Market Loan Program made possible by the change to 
contract-level recordkeeping, discussed below. Modifications agreed to 
by the Market Loan Clearing Members over the life of a Market Loan 
would be accepted by OCC and handled by OCC's new clearance and 
settlement system. Specifically, modifications would be permitted 
regarding the (a) rebate rate; (b) interest rate benchmark; and (c) 
loan term. Any modifications would be maintained in OCC's books and 
records at the contract level. OCC's new clearance and settlement 
system would allow, but not require, submission of these terms.\42\ The 
channel through which modification requests would be processed would be 
determined by the manner in which the loan was initiated. Clearing 
Members would be required to submit post-trade transactions for 
Anonymous Market Loans through the Loan Market on which the transaction 
was initiated, consistent with current practice. Clearing Members may 
submit post-trade transactions for Disclosed Market Loans to OCC 
directly or, if the Disclosed Market Loan was submitted through a Loan 
Market, Clearing Members would have the option of submitting the post-
trade transaction through the Loan Market.
---------------------------------------------------------------------------

    \42\ See infra item (k) (Contract-Level Recordkeeping).
---------------------------------------------------------------------------

    The proposed change would add a new rule, which would be numbered 
OCC Rule 2214A as part of the broader proposed reorganization of 
Chapter XXIIA. In addition to specifying the terms subject to 
modification, proposed OCC Rule 2214A would provide that OCC shall 
update the relevant terms in its books and records if, as applicable, 
(1) the Loan Market notifies OCC that the parties agreed to the 
modification, or, (2) with respect to Market Loans initiated directly 
through OCC, the parties provided OCC with matching or affirmed 
instructions, as discussed above. OCC would provide notice of the 
modified terms in the daily reports that OCC is required to make 
available to Market Loan Clearing Members under proposed OCC Rule 
2210A.
(h) Buy-In Controls and Settlement Cycle
    The proposed changes would also provide OCC with additional 
controls over the buy-in process for the recall of a Market Loan 
initiated by a Lending Clearing Member if the Borrowing Clearing Member 
fails to return the Loaned Stock in situations other than suspension of 
the Borrowing Clearing Member.\43\ Under current OCC Rule 2209A, a 
Lending Clearing Member is entitled to initiate a buy-in if a recall 
transaction fails to settle by the Settlement Time on the first stock 
loan business day after submitting the recall.\44\ Under OCC's current 
rules, the Borrowing Clearing Member may return the Loaned Stock up 
until the time that the Lending Clearing Member that initiated the 
return or recall provides written notice to the Loan Market that it has 
executed the buy-in or sell-out. This process can lead to situations in 
which the Borrowing Clearing Member may return the Loaned Stock during 
the period between when buy-in becomes permissible, but before the 
Lending Clearing Member executes the transaction and provides written 
notice.
---------------------------------------------------------------------------

    \43\ As a practical matter, if the Borrowing Clearing Member 
initiates a return, it would have the shares in its possession to 
return. Accordingly, the proposed controls are limited to buy-ins 
following failure to deliver initiated by a recall by the Lending 
Clearing Member.
    \44\ See OCC Rule 2209A(a)(3).
---------------------------------------------------------------------------

    OCC proposes to provide for enhanced controls over the buy-in 
process by amending current OCC Rule 2209A(b), which would be 
renumbered OCC Rule 2216A(b) as part of the reorganization of Chapter 
XXIIA of OCC's Rules. Proposed OCC Rule 2216A(b) would be amended to 
provide that upon timely notice from the Lending Clearing Member that 
it intends to execute a buy-in after a Borrowing Clearing Member fails 
to return the Loan Stock following a recall transaction, OCC would 
prevent the Borrowing Clearing Member from returning the Loaned Stock 
while the Lending Clearing Member executes the buy-in. Until such time 
as the Lending Clearing Member provides such notice, OCC would 
recognize the Borrowing Clearing Member's return of the Loaned Stock. 
The stock loan and stock borrow positions would remain open until such 
time as the Lending Clearing Member provides notice that the buy-in is 
complete.
(i) Supporting Canadian Clearing Members
    As described above, Canadian Clearing Members are currently limited 
to participation in OCC's Hedge Program. The proposed changes would 
support Canadian Clearing Members in the Market Loan Program while 
preventing certain transactions that could give rise to tax withholding 
obligations.
    First, OCC would revise certain of OCC's current By-Laws and Rules 
to recognize Canadian Clearing Members as potential participants in the 
Market Loan Program and address certain unique operational capabilities 
that will be required to support that participation:
     OCC would revise paragraph (f) of OCC Rule 302 
(Operational Capability) to include Canadian Clearing Members as among 
those members that qualify for participation in the Market Loan

[[Page 73475]]

Program, including by providing for such Canadian Clearing Members to 
settle transactions through a CDS sub-account at the Depository, as 
they do under the Hedge Program today.
     OCC would further revise and restate paragraph (f) to 
consolidate the subparagraphs specific to the operational requirements 
for participation in the Hedge Loan Program and the Market Loan 
Program. The current division can be attributed to the evolution of 
those programs, which led OCC to make approval for participation in the 
Hedge Loan Program--OCC's initial Stock Loan Program--a condition for 
participation in the Market Loan Program. The proposed changes would 
consolidate the provisions so that the present division does not serve 
as an impediment to the planned decommission of the Hedge Loan Program. 
Requirements specific to a particular program, or a particular means of 
initiating a Stock Loan through one of the Stock Loan Programs, would 
be amended to delineate the scope of applicability.
     OCC would revise OCC Rule 306A (Event-Based Reporting) to 
reflect that a Canadian Clearing Member's obligation to notify OCC if 
CDS has or likely will cease to act for that Canadian Clearing Member 
extends to such members that participate in both Stock Loan Programs.
     OCC would replicate OCC Rule 2201(c), which concerns a 
Canadian Clearing Member's appointment of CDS for purposes of settling 
Hedge Loan delivery-versus-payment transactions, as proposed OCC Rule 
2207A(c). As such, the same requirements would apply to Canadian 
Clearing Members that participate in the Market Loan Program.
    In making its determination to extend the Market Loan Program to 
Canadian Clearing Members, OCC has also considered OCC's ability to 
offer that program's expanded guaranty to Canadian Clearing Members 
without incurring tax or withholding obligations on the associated 
payment obligations. Under the expanded Market Loan Program, OCC would 
clear and settle the types of cash distributions, such as substitute 
dividend and rebate payments, that OCC does not guarantee under the 
Hedge Program and must be resolved bilaterally by Hedge Clearing 
Members, away from OCC. OCC believes its current Rules already provide 
the framework to allow Canadian Clearing Members to transact under the 
Market Loan Program without imposing tax withholding obligations on 
payments made or received by OCC. As discussed above, OCC currently 
imposes obligations on Canadian Clearing Members intended to allow OCC 
to clear listed options transactions free from tax withholding 
obligations on dividend equivalent payments or deemed payments. Current 
OCC Rule 202 generally would also allow OCC to make substitute dividend 
payments to Canadian Clearing Members as Lending Clearing Members under 
the enhanced Market Loan Program without imposing tax or withholding 
obligations. While OCC understands that, subject to the conditions in 
OCC Rule 202, OCC's payments of substitute dividends to Canadian 
Clearing Members would not be subject to withholding, OCC would report 
substitute dividend payments to the IRS using information provided by 
the Canadian Clearing Members, as OCC currently does for dividend 
equivalent payments or deemed payments to Canadian Clearing Members in 
connection with listed options transactions. Pursuant to current OCC 
Rule 202(b)(5), the Canadian Clearing Member is required to indemnify 
OCC for any loss, liability or expense (including taxes and penalties) 
it may sustain as a result of the member's failure to comply with 
requirements of OCC Rule 202(b).
    Current OCC Rule 202(b) also provides OCC with authority to 
prohibit or limit specific transactions with respect to non-U.S. 
members that may give rise to tax or withholding obligations. Pursuant 
to that authority, OCC expects to impose certain limitations on the 
Market Loan activity of Canadian Clearing Members to address specific 
situations in which tax withholding obligations might otherwise arise, 
including limitations on transactions involving (i) Canadian underlying 
securities, (ii) Positive Rebate, and (iii) Negative Rebate.
(i) Canadian Securities
    Pursuant to OCC Rule 202(b), OCC would preclude Canadian Clearing 
Members from executing Market Loan transactions as a Borrowing Clearing 
Member, whether on behalf of a customer or for its own account, for 
which the Loaned Stock is issued by a Canadian issuer because of tax 
withholding obligations under Canadian law for substitute dividend 
payments that would be owed by the Canadian Clearing Member in its 
capacity as the lender. OCC understands that under Canadian law, the 
loan of a security issued by a Canadian company would be treated as a 
loan of the underlying shares for Canadian tax purposes. The substitute 
dividend paid by the Canadian Clearing Member as the Borrowing Clearing 
Member to OCC, in its capacity as the lender, would be a payment made 
by the Canadian Clearing Member, as a corporation, to OCC of a dividend 
payable on the underlying securities under subparagraph 260(8)(a)(ii) 
of the Income Tax Act (Canada), and the payment would be subject to 
Canadian withholding tax under subsection 212(2) of that act. 
Accordingly, a Borrowing Clearing Member would be precluded from 
initiating a Market Loan in its capacity as a Borrowing Clearing Member 
because the Canadian Clearing Member could not fulfil its obligation 
under OCC's Rules to provide a substitute dividend payment free from 
tax and withholding obligations. OCC understands that no similar tax 
withholding obligation would exist for substitute dividend payments 
with respect to a Canadian underlying security made by OCC, in its 
capacity as the borrower, to a Canadian Clearing Member that was a 
Lending Clearing Member.\45\
---------------------------------------------------------------------------

    \45\ OCC understands that dividends on Eligible Stock of issuers 
that are not Canadian residents are exempt from taxation on 
dividends under subsection 212(2.1) of the Income Tax Act (Canada) 
when paid as part of a fully collateralized stock lending 
arrangement pursuant to 2021 amendments thereto.
---------------------------------------------------------------------------

(ii) Positive Rebate
    OCC believes that OCC Rule 202 also allows OCC to clear and settle 
Positive Rebate payments to Canadian Clearing Members in connection 
with Market Loans without introducing tax withholding obligations. 
While neither the I.R.C. or IRS regulations specifically provide for 
the treatment of rebate payments, OCC believes that Positive Rebate 
would be treated as interest for U.S. federal tax purposes because 
Positive Rebate compensates the Borrowing Clearing Member for the use 
of the cash collateral by the Lending Clearing Member,\46\ and would 
therefore constitute U.S.-source ``fixed or determinable annual or 
periodic income,'' or ``FDAPI,'' under section 1442 of the I.R.C. While 
U.S.-source FDAPI generally is subject to a 30% U.S. withholding tax 
when paid to a foreign

[[Page 73476]]

corporation, exemptions from withholding apply to (i) payments to a 
Qualified Intermediary in its capacity as an intermediary that has 
accepted primary withholding responsibility, and (ii) interest paid to 
a Canadian Clearing Member that qualifies for an exemption from 
withholding on interest under Article XI of the Convention Between the 
United States of America and Canada with Respect to Taxes on Income, 
October 16, 1980, as amended by subsequent Protocols (the ``Canada 
Treaty'').
---------------------------------------------------------------------------

    \46\ The U.S. Supreme Court has characterized interest as 
``compensation for the use or forbearance of money.'' See Deputy v. 
du Pont, 308 U.S. 488, 498 (1940). Positive Rebate is a payment from 
the Lending Clearing Member to the Borrowing Clearing Member equal 
to the amount of cash collateral posted by the Borrowing Clearing 
Member multiplied by a positive rebate rate. The Lending Clearing 
Member has the right to use the cash collateral during the term of 
the stock loan. Accordingly, Positive Rebate represents a payment by 
the Lending Clearing Member to the Borrowing Clearing Member for the 
right to use the cash collateral and therefore is properly 
characterized as interest.
---------------------------------------------------------------------------

    A Qualified Intermediary that has accepted primary withholding 
responsibility is exempt from U.S. federal withholding on payments from 
a withholding agent, including U.S.-source interest, received in its 
capacity as an intermediary.\47\ Accordingly, OCC understands that 
rebate payments (whether Positive Rebate or Negative Rebate) to a 
Canadian Clearing Member in its capacity as a Qualified Intermediary, 
may be made by OCC free from withholding, consistent with treatment of 
dividend equivalent payments in connection with listed options 
transactions. As discussed above,\48\ Canadian Clearing Members are 
required to be Qualified Intermediaries as a condition of membership 
under OCC Rule 202. As with substitute dividends, OCC would add payment 
of rebates for transactions in a Canadian Clearing Member's capacity as 
a Qualified Intermediary to the current reporting OCC submits to the 
IRS for dividend equivalent payments on listed options, based on 
information to be received from the Canadian Clearing Member pursuant 
to current OCC Rule 202(b)(3).
---------------------------------------------------------------------------

    \47\ See Treas. Reg. 1.1441-1(e)(5)(iv) (``If a withholding 
agent makes a payment of an amount subject to withholding under 
chapter 3, a reportable payment (as defined in section 3406(b)), or 
a withholdable payment to a qualified intermediary that represents 
to the withholding agent that it has assumed primary withholding 
responsibility for the payment, the withholding agent is not 
required to withhold on the payment.'').
    \48\ See supra note 27.
---------------------------------------------------------------------------

    With respect to Positive Rebate payments on Market Loans initiated 
by a Canadian Clearing Member in its capacity as principal, OCC would 
require Canadian Clearing Members to demonstrate, pursuant to OCC Rule 
202, that such payments are subject to exemption from U.S. withholding 
obligations under the Canada Treaty. Article XI(1) of the Canada Treaty 
reduces the rate of withholding from 30% to zero for U.S.-source 
interest beneficially owned by a resident of Canada entitled to treaty 
benefits, provided that income is not attributable to a permanent 
establishment, within the meaning of the Canada Treaty, or effectively 
connected with a trade or business conducted in the United States.\49\ 
Under current OCC Rule 202(b)(2), an FFI Clearing Member must certify 
annually to OCC that the member satisfies the requirements of OCC Rule 
202 by submitting appropriate tax documentation. A Canadian Clearing 
Member participating in the Market Loan Program may evidence its 
entitlement to the benefits of the Canada Treaty with respect to 
interest by providing OCC with a correct and complete IRS Form W-8 BEN-
E. Under OCC's current Rules, a FFI Clearing Member must promptly 
inform OCC in writing if it undergoes a change in circumstances that 
would affect its compliance with Rule 202(b) or otherwise knows or has 
reason to know that it is not, or will not be, in compliance with OCC 
Rule 202(b), in each case, within two days of knowledge thereof.\50\
---------------------------------------------------------------------------

    \49\ See 26 U.S.C. 894; Canada Treaty, Art. XI(1).
    \50\ See OCC Rule 202(b)(4).
---------------------------------------------------------------------------

(iii) Negative Rebate
    Although exemptions for withholding requirements would apply to 
payment of Negative Rebate to a Canadian Clearing Member acting as a 
Qualified Intermediary with respect to customer transactions, OCC 
understands that there is a risk that no exemption from U.S. tax 
withholding would apply to the payment of Negative Rebate to a Canadian 
Clearing Member outside its capacity as a Qualified Intermediary. 
Therefore, pursuant to OCC Rule 202(b), OCC would limit Canadian 
Clearing Members from initiating Market Loans with a Negative Rebate as 
a Lending Clearing Member other than in its capacity as a Qualified 
Intermediary. In addition, OCC would limit Canadian Clearing Members' 
ability to modify the rebate on a Market Loan to a Negative Rebate as a 
Lending Clearing Member other than in its capacity as a Qualified 
Intermediary. OCC's new clearance and settlement system will prevent a 
Canadian Clearing Member from initiating or modifying a Market Loan to 
a Negative Rebate in its capacity as a Lending Clearing Member for its 
firm account.
(j) Provide for Appointed and Appointing Clearing Members
    Currently, OCC Rule 302 requires that all participants in the 
Market Loan Program must be members of the Depository, DTC. As 
discussed above, OCC would also extend the Market Loan Program to 
Canadian Clearing Members by allowing for such members to settle Market 
Loan transactions through a CDS sub-account maintained at DTC. However, 
OCC recently filed and the Commission approved a proposed rule change 
to allow OCC to expand its membership to other types of participants 
who may or may not be members of the Depository, including bank members 
and members of jurisdictions other than the U.S. and Canada.\51\
---------------------------------------------------------------------------

    \51\ See Exchange Act Release No. 97439 (May 5, 2023), 88 FR 
30373, 30373 (May 11, 2023) (SR-OCC-2023-002).
---------------------------------------------------------------------------

    In order to build a framework for accommodating such new types of 
members in the Market Loan Program, OCC proposes to revise OCC Rules 
101, 302 and proposed OCC Rules 2202A, 2207A and 2216A to allow a 
Clearing Member participating in the Market Loan Program (the 
Appointing Clearing Member) to appoint an Appointed Clearing Member to 
make settlement of obligations arising from the initiation or 
termination of Market Loans, in a similar manner to how OCC Rule 901 
currently allows for Appointed and Appointing Clearing Members with 
respect to delivery or receipt of underlying securities arising from 
the exercise of equity options and maturity of stock futures, or how 
OCC Rule 2201 current allows Canadian Clearing Members to appoint CDS 
as its agent for purposes of effective delivery orders for stock loan 
and stock borrow transactions. In lieu of membership at the Depository, 
establishing a relationship with an Appointed Clearing Member would be 
a means by which Clearing Members could access the Market Loan Program. 
Specifically, OCC would revise the current definitions in OCC Rule 101 
for ``Appointed Clearing Member'' and ``Appointing Clearing Member'' to 
reference the initiation and termination of Market Loans. The 
definitions would also refer to proposed Rule 2207A (Instructions to 
the Corporation), which like current OCC Rule 901(f) would contain a 
paragraph providing the mechanism for such appointments. Proposed OCC 
Rules 2202A and 2216A (Termination of Market Loans) would also provide 
for OCC to submit delivery orders to the Depository's account for the 
Appointed Clearing Member in connection with the initiation or 
termination of a Market Loan, respectively.
Enhancements To Facilitate OCC's New Clearance and Settlement System
    In addition to the enhancements (a) through (j) above, which are 
specific to the Market Loan Program, except when

[[Page 73477]]

otherwise indicated, the proposed rule change would also implement 
enhancements to both Stock Loan Programs to support the implementation 
of OCC's new clearance and settlement system. Specifically, the 
proposed changes would (k) replace the legacy practice of position 
aggregation with contract-level recordkeeping; (l) align the settlement 
of daily mark-to-market of cash collateral to accounts; (m) simplify 
the mark-to-market calculation to focus on the change to the contract 
value of a Clearing Member's Stock Loan; and (n) allow for re-matching 
of Matched-Book Positions across both Stock Loan Programs in the event 
of a Clearing Member default and suspension.
(k) Contract-Level Recordkeeping
    OCC proposes to eliminate the legacy practice of aggregating stock 
loan and stock borrow positions for the same Eligible Stock in favor of 
contract-level accounting, consistent with industry-standard 
bookkeeping practices. Under the new contract-based approach, each 
Stock Loan (i.e., a stock loan position or stock borrow position) would 
be a distinct contract and no aggregation would be done when positions 
are recorded in accounts. Every new loan that is recorded will generate 
a new stock borrow position and stock loan position for the number of 
shares lent and borrowed. Contract-level recordkeeping would allow 
Clearing Members to see more precisely the contracts with shares lent 
by lender and borrower, which aligns to industry standard 
recordkeeping. By maintaining stock loan positions and stock borrow 
positions at the contract level, OCC would also be able to record 
additional terms, including but not limited to: (a) rebate rate; (b) 
whether the rebate rate is a fixed or a floating value (and if floating 
the interest rate benchmark); and (c) end date if it is a term loan. 
Clearing Member submission of these additional terms would not be 
mandatory, and OCC would assume that no such terms exist unless 
otherwise directed by its Clearing Members.\52\
---------------------------------------------------------------------------

    \52\ If these additional terms are not recorded on a Market Loan 
submitted to OCC, OCC would not make any assumptions and the fields 
would be left blank in OCC's system.
---------------------------------------------------------------------------

    To implement contract-level recordkeeping, the proposed rule change 
would amend Article XXI, Sections 2 (Hedge Program) and Article XXIA, 
Section 5 (Market Loan Program) of OCC's By-Laws, retained portions of 
which would migrate to become OCC Rules 2203 and 2206A, respectively. 
Specifically, OCC would amend proposed Rule 2203(c)(1)-(2) and 
2206A(b)(1)-(2) to delete the text providing for the aggregation of 
positions, which OCC proposes to eliminate. In addition, OCC would 
delete the last sentence of Article XXI, Section 2(b) and Article XXIA, 
Section 5(b), as relocated to proposed OCC Rules 2203(d)(2)(B) and 
2006A(a)(2), which provide that OCC shall identify stock loan and stock 
borrow positions resulting from Hedge Loans separately from positions 
resulting from Market Loans. Because OCC proposes to eliminate position 
aggregation altogether, this prohibition against aggregating positions 
across programs would no longer be relevant.
    The proposed changes would also allow OCC to record additional 
terms at the contract level. The By-Laws currently provide that upon 
acceptance of a Hedge Loan or Market Loan, OCC creates a stock loan 
position and stock borrow position in the account designated by the 
Lending Clearing Member and Borrowing Clearing Member, respectively, 
that identifies the Eligible Stock, the number of shares loaned, the 
amount of Collateral received, and the identities of the Lending 
Clearing Member or the Borrowing Clearing Member, as applicable.\53\ 
OCC proposes to amend proposed OCC Rules 2203(d)(2)(A) and 2206A(a)(1) 
to provide that in addition to those terms, which are required for 
OCC's acceptance of a Hedge Loan or Market Loan, OCC would record such 
additional terms that the Clearing Members may provide at the contract 
level. Such additional terms could include, but are not limited to, 
rebate rate, interest rate benchmark and loan term. Pursuant to 
proposed additions to proposed OCC Rules 2202(b)(2)(E) and 
2202A(b)(2)(E), recording additional terms that are not associated with 
OCC's guaranty (i.e., rebate rate and interest rate benchmark with 
respect to Hedge Loans, and loan term with respect to both Hedge Loans 
and Market Loans) would not impose any additional obligations on OCC. 
Rather, they would be additional terms as between the parties that 
survive OCC's novation and would be recorded in OCC's system for the 
Clearing Members' convenience.
---------------------------------------------------------------------------

    \53\ See OCC By-Law Art. XXI, Sec.  2(b); Art. XXIA, Sec.  5(a).
---------------------------------------------------------------------------

    In addition to the changes related to proposed OCC Rules 2203 and 
2206A above, OCC would make conforming changes to other provisions to 
reflect the change from position-level to contract-level record 
keeping:
     Current Interpretation and Policy .01 to OCC Rules 2201 
and 2201A (i.e., proposed OCC Rules 2206(b) and 2206A(d) per the 
reorganization discussed below), which concern the transfer of stock 
loan positions or stock borrow positions between Clearing Member 
accounts, would be amended to delete the phrase ``all or any portion 
of'' as it relates to stock loan or stock borrower positions, and the 
text ``provided, that any such transfer will result in the transfer of 
all shares related to the relevant stock loan position or stock borrow 
position'' would be added. These changes reflect that stock loan 
positions and stock borrow positions would be recorded at the contract 
level and would not be aggregated. Accordingly, any transfer of a stock 
loan position or stock borrow position (each representing an individual 
contract) would be for all shares that are the subject of the contract.
     Current Interpretation and Policy .02 to OCC Rule 2201 
(i.e., proposed OCC Rule 2206(c)(1) per the reorganization discussed 
below), which concerns how OCC would apply Hedge Loan return 
instructions received from DTC to a Clearing Member's default account, 
would be modified to eliminate functionality in ENCORE for Clearing 
Members to designate OCC accounts in DTC delivery orders that is not 
currently utilized by Clearing Members participating in the Hedge Loan 
Program and, accordingly, is not being built for the new clearance and 
settlement system. To account for the shift to contract-level 
recordkeeping, OCC would also add OCC Rule 2206(c)(2), which would 
provide that returns will decrease the number of shares borrowed 
beginning with the oldest Hedge Loan between the Borrowing Clearing 
Member and the Lending Clearing Member on OCC's books and records. If 
the return exhausts the oldest Hedge Loan, OCC would decrement the next 
oldest, and so on and so forth.
     Current Interpretation and Policy .02 to OCC Rule 2201A 
(i.e., proposed OCC Rule 2206A(e) per the reorganization discussed 
below), which concerns how Market Loan return instructions would be 
applied to a Clearing Member's accounts, would be amended to reflect 
that if there are insufficient shares in the account designated by the 
delivery order submitted to OCC, or in the default account if the 
delivery order did not specify an account, OCC would reject the return 
instruction rather than fulfill the return to the extent of the shares 
in the designated or default account, as applicable. If an account was 
designated in the delivery order, OCC would fulfill the return based 
only on that account and would reject the return instruction

[[Page 73478]]

if sufficient shares were not available in that account rather than 
applying shares in the default account to cover the excess.
     Current OCC Rule 2209A(a)(2) (i.e., proposed OCC Rule 
2216A(a)(5) per the reorganization discussed below), which concerns the 
termination of Market Loans upon receipt of end-of-day information from 
DTC concerning return or recall delivery orders, would be amended to 
delete the phrase ``and reduce the respective Clearing Members' open 
stock loan and stock borrow positions accordingly.'' This phrase refers 
to adjustments required for aggregated stock loan and stock borrow 
positions, which would not be relevant under the contract-level 
recordkeeping proposal. OCC would also remove the phrase ``the end of 
the day'' with respect to the stock loan activity files it receives 
from DTC because OCC receives and processes such information from DTC 
throughout the business day.
(l) Aligning Mark-to-Market Settlement to Accounts
    Under the proposed rules designed to facilitate OCC's new clearance 
and settlement system, OCC would end the practice of limiting cash 
settlement of daily mark-to-market of cash collateral to the Clearing 
Member's firm account or combined Market-Makers' account. Instead, cash 
settlement will occur in the account in which the stock loan or stock 
borrow position is held. OCC implemented the current structure for 
settlement of mark-to-market payments in 1997 and 1998.\54\ At that 
time, OCC believed that settlement through a firm's lien account would 
prevent premiums by option writers (which constitute customer funds) 
from being netted against stock loan mark-to-market payments from a 
clearing member (which do not constitute customer funds). The 
assumption at the time appears to have been that stock loan 
transactions would be limited to loans initiated by a Clearing Member 
in its capacity as principal. However, fully paid for lending programs 
have developed over the last two decades that allow customers to earn 
returns on their portfolios by allowing their broker to lend their 
shares.
---------------------------------------------------------------------------

    \54\ See Exchange Act Release No. 40083 (June 11, 1998), 63 FR 
33424-01 (Jun 18, 1998) (File No. SR-OCC-98-03); Exchange Act 
Release No. 39738 (Mar. 10, 1998), 63 FR 13082 (Mar. 17, 1998) (File 
No. SR-OCC-97-11).
---------------------------------------------------------------------------

    The proposed change would align mark-to-market cash settlements 
with positions by deleting current OCC Rules 2201(a)(iii) and 
2201A(a)(iii), as relocated to proposed OCC Rules 2207(a)(1)(C) and 
2207A(a)(1)(C), which require Clearing Members to provide OCC with 
standing instructions identifying the Clearing Member's firm accounts 
or combined Market-Makers' accounts from which mark-to-market payments 
are to be made. No standing instruction would be needed because OCC 
will simply settle the mark-to-market payments in whichever account the 
stock loan or stock borrow position is held. In addition, OCC would 
amend current OCC Rules 2204(a) and 2204A(a), the relevant portions of 
which would be renumbered OCC Rules 2209(a) and 2209A(a), respectively, 
to provide that any mark-to-market payment shall be made in the account 
in which the Hedge Loan or Market Loan is held.
    OCC would also delete the last clause to Interpretation and Policy 
.04 to Rule 1104, which concerns the use of a Liquidating Settlement 
Account to satisfy mark-to-market obligations arising from a suspended 
Clearing Member's stock loan or borrow positions in customers' 
accounts. That clause provides for use of the Liquidating Settlement 
Account notwithstanding that such mark-to-market payments may settle in 
another account under current Rules 2201(a) and 2201A(a). This 
clarifying clause would no longer be relevant because of the alignment 
of settlement with the accounts in which the positions are held.
(m) Simplifying Mark-to-Market Calculations
    Because OCC proposes to end the practice of aggregating stock loan 
and stock borrow positions, OCC also proposes to simplify the mark-to-
market calculation described in proposed OCC Rules 2209 and 2209A. 
Currently, the mark-to-market calculation focuses on the value of the 
loaned shares of stock.\55\ Specifically, it takes the quantity of 
stock that is on loan each morning and marks it to a closing price each 
night. Quantities of stock that correspond to new loans put on during 
the day are also marked to the end-of-day closing price. As such, the 
calculation was designed with the practice of aggregating stock loan 
and stock borrow positions for the same Eligible Stock in mind. The 
proposed mark-to-market calculation will instead focus on the change to 
the contract value of a Clearing Member's stock loans. Specifically, 
proposed OCC Rules 2209(b) and 2209A(b) would provide that the mark-to-
market payment will be the amount necessary to cause the amount of 
Collateral to be equal to the Collateral requirement applicable to the 
Stock Loan. For Hedge Loans, the Collateral requirement is either 100% 
or 102% of the mark-to-market value of the Loaned Stock, depending on 
which percentage the parties selected when initiating the Hedge Loan. 
For Market Loans, as discussed above, the Collateral requirement would 
be fixed at 102% of the value of the Loaned Stock, which is the 
collateralization for all Market Loans currently. While this proposed 
amendment would change the way OCC makes mark-to-market calculations, 
the change would have no impact on the results of the calculation.
---------------------------------------------------------------------------

    \55\ See OCC Rules 2204(a); 2204A(a).
---------------------------------------------------------------------------

(n) Re-Matching Matched Book Positions in Suspension Across Stock Loan 
Programs
    The proposed changes would also extend OCC's authority to close out 
and re-establish the Matched-Book Positions of a suspended Clearing 
Member to the Market Loan Program and would allow re-matching in 
suspension across the Hedge and Market Loan Programs. Under the current 
Hedge Program, OCC has authority to terminate Matched-Book Positions by 
offset and re-matching with other Clearing Members.\56\ OCC's authority 
to re-match Matched-Book Positions in suspension facilitates the 
orderly and efficient termination and re-establishment of stock loans 
involving suspended Clearing Members, thereby mitigating operational 
and price dislocation risks that may arise for non-defaulting Clearing 
Members if OCC were required to unwind positions by recalling all 
borrowed securities from specific Borrowing Clearing Members and 
returning those securities to specific Lending Clearing Members. 
Extending such re-matching authority to the Market Loan Program and 
allowing re-matching across OCC's two Stock Loan Programs would also 
align OCC's close-out processes with how OCC already margins stock loan 
and borrow positions. Specifically, stock loan and borrow positions 
covering the same Eligible Stock in either program are treated under 
OCC's margin methodology as fungible and are permitted to offset one 
another in calculating a Clearing Member's margin requirement for the 
relevant account.
---------------------------------------------------------------------------

    \56\ See OCC Rule 2212.
---------------------------------------------------------------------------

    OCC would extend re-matching authority and allow for re-matching 
across programs by inserting a new OCC Rule 2219A to the Rules 
governing the Market Loan Program. The new rule would be similar in 
structure and content to current OCC Rule 2212, which concerns re-
matching in

[[Page 73479]]

suspension for the Hedge Program. Proposed OCC Rule 2219A(a) would 
provide that, in the event that a suspended Clearing Member has 
Matched-Book Positions within the Hedge or Market Loan Programs, OCC 
will, upon notice to affected Clearing Members, close out the suspended 
Clearing Member's Matched-Book Positions to the greatest extent 
possible by (i) the termination by offset of stock loan and stock 
borrow positions that are Matched-Book Positions in the suspended 
Clearing Member's account(s) and (ii) OCC's re-matching in the order of 
priority in paragraph (c) of stock borrow positions for the same number 
of shares in the same Eligible Stock maintained in a designated account 
of a Matched-Book Borrowing Clearing Member against a stock lending 
position for the same number of shares in the same Eligible Stock 
maintained in a designated account of a Matched-Book Lending Clearing 
Member.
    Under proposed OCC Rule 2219A(b), as under current OCC Rule 
2212(b), the Matched-Book Borrowing Clearing Member and Matched-Book 
Lending Clearing Member would not be required to issue instructions to 
DTC to terminate the relevant stock loan and stock borrow positions or 
to initiate new stock loan transactions to reestablish such positions, 
as the affected positions would be re-matched without requiring the 
transfer of securities against the payment of settlement prices.
    Proposed OCC Rule 2219A(c), as under current OCC Rule 2212(c), 
would provide that OCC shall make reasonable efforts to re-match 
Matched-Book Borrowing Clearing Members with Matched-Book Lending 
Clearing Members that maintain MSLAs executed between them, based upon 
information provided by Clearing Members to OCC on an ongoing basis. 
OCC would be entitled to rely on, and would have no responsibility to 
verify, the MSLA records provided by Clearing Members and on record as 
of the time of re-matching. As under current OCC Rule 2212(d), proposed 
Rule OCC 2219A(c)(1) through (13) would require the termination by 
offset and re-matching be done using a matching algorithm in which the 
Matched-Book Positions of the suspended Clearing Member are first 
terminated by offset and then affected Matched-Book Borrowing Clearing 
Members and Matched-Book Lending Clearing Members are re-matched in 
order of priority based first upon whether the re-matched Clearing 
Members have an existing MSLA between them or, in the case of Anonymous 
Market Loans, can be kept anonymous by re-matching with a Matched-Book 
Position that is another Anonymous Market Loan initiated through the 
same Loan Market. OCC believes prioritizing the re-matching of 
Disclosed Market Loans between parties that have MSLAs and re-matching 
that results in maintaining Anonymous Market Loans will limit the 
number of returns that may be initiated for re-matching that results in 
Disclosed Market Loans between parties who have not executed an MSLA.
    Specifically, under the re-matching algorithm, OCC would select the 
largest stock loan or stock borrow position in a given Eligible Stock 
from the suspended Clearing Member's Matched-Book Positions within the 
Hedge Program. The selected positions would then be re-matched with the 
largest available stock borrow or stock loan positions within the Hedge 
Program, as applicable, for the selected Eligible Stock for which a 
MSLA exists between a Matched-Book Borrowing Clearing Member and a 
Matched-Book Lending Clearing Member. OCC would repeat this process 
until all potential re-matching between Matched-Book Borrowing Clearing 
Members and Matched-Book Lending Clearing Members with MSLAs is 
completed for positions within the Hedge Program. Simultaneously, OCC 
would perform the same re-matching process within the Market Loan 
Program for (i) Matched-Book Positions that are Disclosed Market Loans 
for which a MSLA exists between a Matched-Book Borrowing Clearing 
Member and a Matched-Book Lending Clearing Member, and (ii) Matched-
Book Positions that are Anonymous Market Loans initiated through the 
same Loan Market. After re-matching to the extent possible within the 
Market Loan Program based on manner of initiation and trade source, OCC 
would proceed to re-match Matched-Book Positions within the Market Loan 
Program for which an MSLA exists between a Matched-Book Borrowing 
Clearing Member and a Matched-Book Lending Clearing Member, without 
regards to whether Matched-Book Position was part of a Disclosed Market 
Loan or Anonymous Market Loan.
    After matching Matched-Book Positions to the extent possible 
between borrowers and lenders with existing MSLAs within both the Hedge 
Program and the Market Loan Program, OCC would then select the largest 
remaining stock loan or stock borrow positions for a given Eligible 
Stock regardless of whether the position is a Hedge Loan or a Market 
Loan and re-match it with the largest available stock borrow or stock 
loan position for the selected Eligible Stock in the other Stock Loan 
Program for which an MSLA exists between the lenders and borrowers in 
the other Stock Loan Program, regardless of whether the Market Loan 
selected or matched is a Disclosed Market Loan or Anonymous Market 
Loan. OCC would repeat this process until it has rematched all Matched-
Book Positions to the extent possible between parties to existing MSLAs 
between the two Stock Loan Programs.
    After re-matching among lenders and borrowers with existing MSLAs, 
the process would then be repeated for all remaining Matched-Book 
Positions for which MSLAs do not exist between the lenders and 
borrowers. OCC would first complete such rematching to the extent 
possible within each program. The re-matching process would then be 
repeated for all remaining Matched-Book Positions across the Stock Loan 
Programs for which MSLAs do not exist between the lenders and 
borrowers. Remaining positions that are not able to be rematched either 
within or across programs would then be closed-out pursuant to the 
rules governing close-out of Hedge Loans or Market Loans, as 
applicable.
    Under proposed OCC Rule 2219A(d), as under current OCC Rule 
2212(e), in the event Borrowing and Lending Clearing Members are re-
matched through this process, the re-matched positions would be 
governed by the pre-defined terms and instructions established by the 
Lending Clearing Member pursuant to renumbered OCC Rule 2207 (for Hedge 
Loans) or Rule 2207A (for Market Loans). For Matched-Book Positions re-
matched across programs, the resulting re-matched loan would be a Hedge 
Loan. If the re-matched positions were Anonymous Market Loans, the 
resulting Loan would be an Anonymous Market Loan. However, if one of 
the positions was a Disclosed Market Loan or the positions were 
Anonymous Market Loans initiated through different Loan Markets, the 
resulting loan would be a Disclosed Market Loan. Going forward, such a 
Disclosed Market Loan would be deemed to have been initiated through 
OCC, which would facilitate re-matching within the Market Loan Program 
for parties who are not subscribers to a Loan Market. Pursuant to 
proposed OCC Rule 2219A(j), the re-matched Clearing Members may choose 
to execute an MSLA or close-out the re-matched positions in accordance 
with proposed OCC Rules 2213 or 2216A, as applicable.
    Under proposed OCC Rule 2219A(e), which corresponds to the second 
sentence of current OCC Rule 2212(e),

[[Page 73480]]

any change in Collateral requirements arising from a change in the 
terms of stock loan or stock borrow positions between a Lending 
Clearing Member and Borrowing Clearing Member with re-matched positions 
would be included in the calculation of the mark-to-market payment 
obligations on the stock loan business day following the completion of 
the positions adjustments as set forth in proposed OCC Rule 2219A(f).
    Under proposed OCC Rule 2219A(f), as under current OCC Rule 
2212(f), the termination by offset and re-matching of positions would 
be complete upon OCC completing all position adjustments in the 
accounts of the suspended Clearing Member and the Borrowing Clearing 
Members and Lending Clearing Members with re-matched positions and the 
applicable systems reports are produced and provided to the Clearing 
Members reflecting the transactions.
    Under proposed OCC Rules 2219A(g) through (i), from and after the 
time OCC has completed the position adjustments as set forth in 
proposed OCC Rule 2219A(f), the suspended Clearing Member would have no 
further obligations under the By-Laws and Rules with respect to such 
positions; however, a Borrowing Clearing Member with re-matched stock 
borrow positions would remain obligated as a Borrowing Clearing Member 
and a Lending Clearing Member with re-matched stock loan positions 
would remain obligated as a Lending Clearing Member as specified in the 
By-Laws and Rules applicable to the Stock Loan Programs. Furthermore, 
upon notification that OCC has completed the termination by offset and 
re-matching of stock loan and borrow positions, the suspended Clearing 
Member and Borrowing Clearing Members and Lending Clearing Members with 
re-matched positions would be required promptly to make any necessary 
bookkeeping entries at DTC to ensure the accuracy and efficacy of those 
stock loan terms not governed by OCC's By-Laws and Rules. Under 
proposed OCC Rule 2219A(j), as under current OCC Rule 2212(j), 
Borrowing Clearing Members and Lending Clearing Members that have been 
re-matched would be required to work in good faith to either (i) 
reestablish any terms, representations, warranties and covenants not 
covered by the By-Laws and Rules (e.g., establish an MSLA) or (ii) 
terminate the re-matched stock loan or borrow positions in the ordinary 
course pursuant to OCC Rules 2213 or 2216A, as applicable, as soon as 
reasonably practicable.
    Because OCC has designed proposed OCC Rule 2219A to address the 
process for re-matching in suspension in both Stock Loan Programs, OCC 
further proposes to delete current OCC Rule 2212, which concerns re-
matching in suspension for the Hedge Program, and replace it, as 
renumbered to proposed OCC Rule 2217, with a cross-reference to 
proposed OCC Rule 2219A.
By-Laws and Rules Reorganization and Restatement
    OCC would also make a number of other clarifying, conforming, and 
organizational changes to OCC's By-Laws and Rules, and rule-filed 
policies that reference the By-Law and Rules provisions governing the 
Stock Loan Programs.
(a) Reorganization
    OCC proposes to reorganize the provisions of OCC's By-Laws and 
Rules relating to the Stock Loan Programs into newly revised Chapter 
XXII (Hedge Loan Program) and Chapter XXIIA (Market Loan Program). This 
consolidation of rules governing the Stock Loan Programs is similar to 
changes OCC made to migrate By-Laws governing OCC's Clearing Fund and 
membership standards to the Rules.\57\ As part of these changes, OCC 
would preserve the governance requirements concerning amendments to the 
stock loan-related By-Laws migrated to the Rules by amending Article 
XI, Section 2 of the By-Laws.
---------------------------------------------------------------------------

    \57\ See Exchange Act Release No. 97439, supra note 51, 88 FR at 
30377 (membership standards); Exchange Act Release No. 83735 (July 
27, 2018), 83 FR 37855, 36859 (File No. SR-OCC-2018-008) (Clearing 
Fund).
---------------------------------------------------------------------------

    The provisions governing the Stock Loan Programs are currently 
found in Articles XXI and XXIA of OCC's By-Laws and Chapters XXII and 
XXIIA of the OCC Rules. Because the proposed changes to the Stock Loan 
Programs would substantially amend the relevant By-Law and Rule 
provisions, OCC believes that this is an appropriate opportunity to 
consolidate the primary provisions that address the Stock Loan Programs 
into Chapters XXII and XXIIA of the Rules. As a result, the content of 
Articles XXI and XXIA of the By-Laws would be consolidated into 
Chapters XXII, XXIIA and, with respect to definitions, Chapter I of the 
OCC Rules, subject to the proposed amendments described in this rule 
filing. OCC would also migrate to the OCC Rules the definitions 
currently located in Article I of the By-Laws that are specific to the 
Stock Loan Programs.\58\ To account for migrated definitions of terms 
that are used elsewhere in the By-Laws, OCC would revise the By-Law 
definition to refer to the definition of that term in OCC Rule 101.\59\ 
OCC believes that consolidating the provisions governing the Stock Loan 
Programs into one place would provide more clarity around, and enhance 
the readability of, OCC's rules governing the Stock Loan Programs. OCC 
has included a chart mapping the provisions moved from the By-Laws to 
the Rules, and the resulting renumbering of existing Rules, in Exhibit 
3A to File No. SR-OCC-2024-011.
---------------------------------------------------------------------------

    \58\ See By-Law Art. I, Sec.  1.B.(4), E.(3), H.(1), L.(2), 
L.(5), M.(3)-(4), M.(7)-(9), S. (19), (21)-(23). Rule 101 provides 
that terms in the Rules have the meanings defined in the By-Laws or 
as set forth in the Rules.
    \59\ References to the definition of the terms ``stock borrow 
position'' and ``stock loan position'' in proposed Rule 101 would be 
retained in the By-Laws because these terms are referenced in 
certain other definitions in the By-Laws, as well as Article VI, 
Section 27 of the OCC By-Laws (Close-Out Netting).
---------------------------------------------------------------------------

    To preserve the governance requirements for amendments to the By-
Law provisions that would be migrated to the Rules, OCC would also 
amend Article XI of the By-Laws. Specifically, OCC would amend Article 
XI, Section 2 of the By-Laws, which requires the affirmative vote of 
two-thirds of the directors then in office (but not less than a 
majority of the number of directors fixed by the By-Laws) to amend 
certain enumerated provisions. Specifically, OCC would add Rule 2201, 
Rule 2203, Rule 2204, Rule 2205, Rule 2206(a) and (d), Rule 2213(e)(1), 
Rule 2214(e)(1), Rule 2201A, Rule 2203A, Rule 2204A, Rule 2205A and 
Rule 2206A(a)-(c) and (f) to these enumerated provisions.
(b) Restatement
    In addition to consolidating the By-Laws and Rules specific to the 
Stock Loan Programs within the Rules, OCC proposes to restate those 
provisions and make certain other changes for clarity and consistency. 
The changes would include (i) global changes across the By-Laws and 
Rules to add courtesy titles and standardize terms; (ii) integration of 
Interpretations and Policies within the Stock Loan Program rules into 
the body of the text of the Rules themselves; and (iii) certain other 
administrative or technical changes to the rule text.
(i) Global Changes
    Global changes to be applied across the By-Laws and Rules 
concerning the Stock Loan Programs include:
     Adding courtesy titles to the beginning of paragraphs or 
other subdivisions, where appropriate, to aid the reader in locating 
provisions governing specific topics.
     Replacing references to ``Stock Loan'' that are specific 
to the Hedge Program with ``Hedge Loan'' in order to

[[Page 73481]]

better differentiate between Hedge Loans and Market Loans while the 
Hedge Program is still in place. Use of the defined term ``stock loan'' 
would be retained when referring to either a Hedge Loan or a Market 
Loan or both as the context requires.\60\ Reference to the ``Stock 
Loan/Hedge Program'' would remain unchanged.
---------------------------------------------------------------------------

    \60\ See, e.g., Exhibit 5A to SR-OCC-2024-011, proposed OCC Rule 
101.S.(6), (7), (9), (10); Rules 2201-2206; Rules 2209-2216.
---------------------------------------------------------------------------

     Replacing references to ``Hedge Clearing Member'' or 
``Market Loan Clearing Member'' with ``Clearing Member,'' ``Borrowing 
Clearing Member,'' or ``Lending Clearing Member,'' as applicable, to 
simplify OCC's membership structure and reflect that Clearing Members 
may be authorized to transact in either program.\61\
---------------------------------------------------------------------------

    \61\ See, e.g., Exhibit 5A to SR-OCC-2024-011, proposed OCC Rule 
1006(h)(C); Rule 2202; Rules 2206-2210; Rules 2213- 2214; Rule 2215-
17; Rule 2202A; Rules 2207A-2212A; Rules 2216A-2219A.
---------------------------------------------------------------------------

(ii) Interpretations and Policies
    OCC would also relocate current Interpretations and Policies 
(``I&P'') within Chapters XXI and XXIA of the Rules by moving those 
provisions within the body of the applicable Rules, subject to any 
further amendments discussed herein. The location of the text as 
reorganized within the Rules is included in Exhibit 3A to SR-OCC-2024-
011 and noted in footnotes to the proposed rule text in Exhibit 5A to 
SR-OCC-2024-011.\62\ OCC believes that consolidating the I&Ps, which 
have no less legal effect than the text of the Rules themselves, would 
provide more clarity around, and further enhance the readability of, 
OCC's Rules governing the Stock Loan Programs.
---------------------------------------------------------------------------

    \62\ See, e.g., Exhibit 5A to SR-OCC-2024-011, proposed OCC Rule 
2206(b) (replacing Rule 2201, I&P .01); Rule 2206(c)(1) (replacing 
Rule 2201 I&P .02); Rule 2206(d) (replacing By-Law Art. XXI Sec.  5, 
I&P .01); Rule 2214(e)(1) (replacing By-Law Art. XXI Sec.  2, 
I&P.01); Rule 2206A(d) (replacing Rule 2201A, I&P .01); Rule 
2206A(e) (replacing Rule 2201A, I&P .02); Rule 2206A(f) (replacing 
I&P By-Law Art. XXIA Sec.  5, I&P .01).
---------------------------------------------------------------------------

    In certain instances, OCC is proposing to eliminate the existing 
Interpretations and Policies altogether:
     Interpretations and Policies .01 to current OCC Rules 2202 
and 2202A, which concern the position information OCC provides to 
Clearing Members on an intraday basis, would be deleted because they 
concern a topic covered by and more properly addressed in proposed OCC 
Rules 2210 and 2210A (Daily Reports). The specific information 
referenced in those Interpretations and Policies--i.e., new position, 
transfer positions, returns and cancels--would be integrated into the 
proposed Rules.
     I&P .01 to current OCC Rule 2210 (Suspension of Hedge 
Clearing Members--Pending and Open Stock Loans) and OCC Rule 2210A 
(Suspension of Market Loan Clearing Members--Pending and Open Market 
Loans)--which refers the reader to Interpretation and Policy .02 of OCC 
Rule 1104 for a description of OCC's private auction process--would be 
deleted. In its place, a cross-reference to that description would be 
added to paragraph (b) of that Rule, as renumbered to OCC Rule 2215 per 
the reorganization discussed above.
(iii) Administrative Changes
    OCC would also improve the clarity and readability of certain 
Rules, including by:
     breaking certain lengthy Rule provisions into 
subparagraphs with additional convenience headings to aid the reader in 
navigating the requirements and obligations therein;
     numbering provisions with multiple paragraphs that are 
currently unnumbered, in whole or in part, or with lengthy provisions 
that can be split into multiple paragraphs, and adding convenience 
headings to paragraphs, where such convenience headings would be 
helpful to the reader.\63\
---------------------------------------------------------------------------

    \63\ See, e.g., Exhibit 5A to SR-OCC-2024-011, proposed OCC Rule 
2202(b)(1)-(3); Rule 2203(b)(1)-(2), (c)(1)-(2), (d)(1)-(2); Rule 
2204(a)-(b); Rule 2205(a)-(b); Rule 2207(a)(1)-(3); Rule 2213(b)(1)-
(2); Rule 2214(b)(1)-(6), (c)(1)-(4); Rule 2216(a)-(d); Rule 
2202A(b)(1)-(3); Rule 2206A(a)(1)-(2); Rule 2207A(a)(1)-(3); Rule 
2216A (d)(1)-(2); Rule 2218A(a)-(d).
---------------------------------------------------------------------------

     renumbering subdivisions in Chapters XXII and XXIIA based 
on a consistent numbering convention for (a) paragraphs, (1) 
subparagraphs, and (A) items.\64\
---------------------------------------------------------------------------

    \64\ See, e.g., Exhibit 5A to SR-OCC-2024-011, proposed Rule 
2202(b)(2)(A)-(E).
---------------------------------------------------------------------------

     updating cross-references found throughout the By-Laws and 
Rules based on the proposed reorganization and renumbering.
     improving consistency of the text between similar Hedge 
Program and Market Loan Program rules; \65\
---------------------------------------------------------------------------

    \65\ See, e.g., Exhibit 5A to SR-OCC-2024-011, proposed OCC Rule 
101.C.(4), L.(2), M.(1), S.(2) (conforming language in definitions 
specific to Hedge Loans and Market Loans); Rule 2213 (modifying 
title to ``Termination of Hedge Loans'' based on a similar title for 
current Market Loan Rule 2209A); Rule 2202A(b)(2)(E) (amending the 
Rule for initiation of Market Loans to include novation provisions 
governing Hedge Loans).
---------------------------------------------------------------------------

     deleting duplicative provisions of the Rules that merely 
refer the reader to substantive rights and obligations located 
elsewhere in the Rules; \66\
---------------------------------------------------------------------------

    \66\ See, e.g., Exhibit 5A to SR-OCC-2024-011, proposed OCC Rule 
2202(d) & I&P .01 (deleting duplicative Borrowing Clearing Member 
obligations located in proposed OCC Rules 2209 and 2211); Rule 
2202A(e) (deleting duplicative Borrowing Clearing Member obligations 
located in proposed OCC Rules 2209A and 2211A).
---------------------------------------------------------------------------

    OCC would also make conforming edits to OCC's Margin Policy and the 
Recovery and Orderly Wind-Down Plan (``RWD Plan''). Specifically, OCC's 
Margin Policy references OCC's default management practices under 
current Rules 2211 and 2211A, which provide that OCC may instruct a 
non-defaulting Clearing Member to buy-in or sell-out of positions. The 
proposed rule change would renumber those references to Rules 2216 and 
2218A, respectively. OCC would also amend the description of the margin 
add-on in the Margin Policy to capture the full range of factors that 
determine the margin add-on charge for stock loan activity (i.e., 
collateral rate, mark-to-market pricing, dividends and distributions 
announced by an issuer, and rebate payments). Similarly, references in 
the RWD Plan to Section 2(c) of Article XXI of the By-Laws and Rule 
2209A(d), which refer to OCC's authority to terminate the Stock Loan 
Programs, would be renumbered to proposed Rules 2213(e) and 
2216A(d)(2), respectively, and the excerpted text of those Rules 
appearing in the RWD Plan would be conformed with the text as amended 
by this proposed rule change.
Implementation Timeframe
    OCC will implement the proposed changes at the time Ovation becomes 
OCC's system of record, which is planned to launch no earlier than July 
of 2025.\67\ OCC will announce the implementation date of the proposed 
change by Information Memorandum posted to its public website at least 
four weeks prior to implementation. OCC plans to launch Ovation and 
implement the proposed changes no later than December 31, 2025, and OCC 
will announce another intended implementation date by Information 
Memorandum posted to its public website if the changes will not be 
implemented by that date.
---------------------------------------------------------------------------

    \67\ See https://www.theocc.com/Participant-Resources (linking 
to reference guides and timelines for the launch of Ovation).
---------------------------------------------------------------------------

(2) Statutory Basis
    OCC believes the proposed rule change is consistent with Section 
17A of the Exchange Act and the rules and regulations thereunder. 
Section 17A(b)(3)(F) of the Exchange Act \68\ requires, among other 
things, that the rules of a clearing agency (i) promote the prompt and 
accurate clearance and

[[Page 73482]]

settlement of securities transactions and, to the extent applicable, 
derivative agreements, contracts, and transactions; (ii) assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible; (iii) in 
general, protect investors and the public interest; and (iv) are not 
designed to permit unfair discrimination among participants in the use 
of the clearing agency. OCC believes that the proposed rule change 
would promote the prompt and accurate clearance and settlement of stock 
loan transactions, assure the safeguarding of securities and funds at 
OCC, protect investors and the public interest, and not unfairly 
discriminate among Clearing Members for the reasons below.
---------------------------------------------------------------------------

    \68\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

Enhancements To Facilitate OCC's New Clearance and Settlement System
    As described above, the proposed changes would involve certain 
changes to accommodate OCC's new clearance and settlement system, 
including by transitioning away from the legacy practice of aggregating 
positions in the same Eligible Stock into stock loan and stock borrow 
positions to contract-level record keeping. Contract-level 
recordkeeping would allow Clearing Members to see more precisely the 
contracts with shares lent by lender and borrower, which aligns to the 
record keeping industry standard. Allowing for terms to be recorded at 
the contract level will allow OCC to record other terms at the contract 
level, including terms related to OCC's guaranty of substitute dividend 
and rebate payments. Eliminating position aggregation would also allow 
OCC to simplify the calculation for mark-to-market payments in OCC's 
Rules. And by aligning mark-to-market payments to the accounts in which 
a stock loan position is held, OCC would end the practice of requiring 
cash mark-to-market payments for stock loan or stock borrow positions 
to settle in a Clearing Member's firm lien account or combined Market-
Makers' account. Aligning mark-to-market cash settlements with the 
accounts in which the position is held simplifies OCC's processes and 
reduces complexity. Accordingly, OCC believes that conforming its 
practices for maintaining stock loan and stock borrow positions to 
industry standards and simplifying its processes for marking those 
positions to market helps to promote the prompt and accurate clearance 
and settlement of stock loan transactions, and protect investors and 
the public interest by reducing operational complexity that could cause 
delay and impose costs on market participants.
    The proposed changes to allow for re-matching of Matched-Book 
Positions in suspension also promote the prompt and accurate clearance 
and settlement of securities and derivatives transactions, the 
safeguarding of securities and funds at OCC, and the protection of 
securities investors and the public interest in accordance with Section 
17A(b)(3)(F) of the Exchange Act \69\ and Rule 17Ad-22(e)(13) \70\ and 
(e)(23) \71\ thereunder. Rule 17Ad-22(e)(13) requires covered clearing 
agencies to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to, in part, ensure the covered 
clearing agency has the authority and operational capacity to take 
timely action to contain losses and liquidity demands and continue to 
meet its obligations in the event of a Clearing Member default.\72\ 
Rule 17Ad-22(e)(23) requires covered clearing agencies to maintain 
written policies and procedures reasonably designed to, among other 
things, provide for publicly disclosing all relevant rules and material 
procedures, including key aspects of its default rules and 
procedures.\73\
---------------------------------------------------------------------------

    \69\ 15 U.S.C. 78q-1(b)(3)(F).
    \70\ 17 CFR 240.17Ad-22(e)(13).
    \71\ 17 CFR 240.17Ad-22(e)(23).
    \72\ 17 CFR 240.17Ad-22(e)(13).
    \73\ 17 CFR 240.17Ad-22(e)(23).
---------------------------------------------------------------------------

    As noted above, a significant portion of the activity in OCC's 
Hedge Program relates to matched-book activity. Under the current Hedge 
Program Rules, OCC has authority to perform an orderly close out of a 
suspended Hedge Clearing Member's Matched-Book Positions through the 
termination by offset and rematching of such positions without 
requiring the transfer of securities against the payment of settlement 
prices as currently required under OCC Rule 2211. As a result, the 
Hedge Program rules minimize the potential for operational and 
execution risks and eliminate any risk resulting from potential price 
dislocation between recall and return transactions. Extending this 
authority to the Market Loan Program would provide the same benefits. 
In addition, by allowing re-matching across OCC's Stock Loan Programs, 
the proposed rule change would more closely align OCC's close-out 
process with the assumptions underlying OCC's margin methodology, 
STANS. Specifically, STANS assumes stock loan and borrow positions 
covering the same Eligible Stock in OCC's Stock Loan Programs are 
fungible and are permitted to offset one another in calculating a 
Clearing Member's margin requirement for the relevant account. Allowing 
for re-matching across Stock Loan Programs is consistent with this 
assumption. OCC believes the proposed rule change will strengthen the 
risk management processes in place at OCC by mitigating the risks 
involved in the buy-in/sell-out of Matched-Book Positions as well as 
provide the overall marketplace with more stability with respect to the 
Stock Loan Programs. OCC therefore believes the proposed rule change is 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions, the safeguarding of securities and funds in 
the custody or control of OCC or for which it is responsible and, in 
general, to protect investors and the public interest in accordance 
with Section 17A(b)(3)(F) of the Exchange Act,\74\ and would establish 
default procedures for the Market Loan Program that ensure that OCC can 
take timely action to contain losses and liquidity pressures and 
continue meeting its obligations in the event of a participant default 
in accordance with Rule 17Ad-22(e)(13).\75\
---------------------------------------------------------------------------

    \74\ 15 U.S.C. 78q-1(b)(3)(F).
    \75\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------

    In addition, OCC would use a matching algorithm to re-match stock 
loan and stock borrow positions in order of priority based on the 
largest available stock borrow or stock loan positions, as applicable, 
for the selected Eligible Stock for which a MSLA exists between the 
Borrowing and Lending Clearing Members or for which both positions are 
Anonymous Market Loans. In the event parties to a resulting Disclosed 
Market Loan do not have existing securities lending relationships, 
those members may choose to either work in good faith to reestablish 
any terms, representations, warranties and covenants not governed by 
the By-Laws and Rules (e.g., MSLA) or to terminate the re-matched stock 
loan or borrow positions in the ordinary course pursuant to renumbered 
OCC Rules 2213 and 2216A, as soon as reasonably practicable. The 
proposed rule change therefore provides for an objective process for 
re-matching stock loan and borrow positions and ensures that members 
that initiated Anonymous Market Loans or that have existing securities 
lending relationships are re-matched to the greatest extent possible 
and would still allow for Clearing Members that are re-matched but that 
do not have existing securities lending relationships to terminate such 
positions in the ordinary course pursuant to renumbered OCC Rules

[[Page 73483]]

2213 and 2216A. As a result, OCC believes that the proposed rule change 
is designed to not permit unfair discrimination among participants in 
the use of the clearing agency in accordance with Section 17A(b)(3)(F) 
of the Exchange Act.\76\ Furthermore, the proposed rule change would 
make key aspects of OCC's default procedures with respect to the close 
out of Matched-Book Positions in suspension public by amending OCC's 
Rules, which are posted to OCC's website, consistent with Rule 17Ad-
22(e)(23).\77\
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    \76\ 15 U.S.C. 78q-1(b)(3)(F).
    \77\ 17 CFR 240.17Ad-22(e)(23).
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Market Loan Program Enhancements
    The proposed enhancements specific to the Market Loan Program would 
also promote the prompt and accurate clearance and settlement of stock 
loan transactions and, in general, protect investors and the public 
interest. Allowing for bilaterally negotiated Stock Loans in the Market 
Loan Program would allow OCC to expand its guaranty of cash 
distributions, such as substitute dividend and rebate payments, to such 
loans, limiting existing counterparty risks that remain for Hedge 
Loans, in which such payments must be resolved by the counterparties 
away from OCC. Transitioning bilaterally negotiated transactions to the 
Market Loan Program would also reduce operational burden associated 
with the reconciliation process and risk associated with errors that 
currently occur under the Hedge Program because settlement at DTC 
currently occurs prior to OCC's validation and acceptance of the 
transaction. Under the enhanced Market Loan Program, such bilaterally 
negotiated transactions would be submitted directly to OCC, which would 
validate the trade before sending delivery instructions to DTC, thereby 
helping to identify and resolve any errors prior to settlement 
occurring. Accordingly, OCC believes that expanding the Market Loan 
Program to include direct submission of bilaterally negotiated stock 
loans would promote the prompt and accurate clearance and settlement of 
stock loan transactions and protect investors and the public interest.
    Allowing for the submission of bilateral transactions through the 
Market Loan Program would also help simplify OCC's post-trade 
processing of stock loan transactions. For instance, allowing Borrowing 
Clearing Members to send return instructions directly to OCC for 
bilaterally initiated Market Loans would help eliminate errors in the 
Hedge Program that occur when notices of returns initiated through DTC 
are not received by OCC with the correct reason codes, resulting in 
position breaks. The proposed changes would disclose OCC's process for 
affirming transactions related to bilaterally negotiated Market Loans 
submitted directly to OCC, which would give members opportunities to 
affirm or reject transactions within time-frames specified by OCC, 
after which OCC would either reject the transaction if not affirmed 
(i.e., new loans) or would be deemed affirmed and processed accordingly 
(i.e., returns, buy-ins, sell-outs), thereby avoiding transactions that 
would pend indefinitely. The proposed changes would also accommodate 
modifications to certain terms, such as the rebate rate, interest rate 
benchmark or the loan term, without the need for those loans to be 
returned. The proposed changes would also improve OCC's control over 
the buy-in process by giving OCC the authority to prevent situations in 
which a Borrowing Clearing Member that failed to deliver the Loaned 
Stock in response to a recall instruction then attempts to deliver the 
Loaned Stock after the Lending Clearing Member may initiate a buy-in.
    OCC's new clearance and settlement system would also assume certain 
processes currently performed by a Loan Market, including calculation 
of payments with respect to cash distributions for substitute dividend 
and rebate payments. Consolidating such processing at OCC will help 
ensure consistency across Market Loans, regardless of whether initiated 
through a Loan Market or directly with OCC. Assuming the responsibility 
to calculate such payments would also allow OCC to eliminate Rules 
intended to limit OCC's guaranty for such payments to the margin OCC 
collected in reliance on the Loan Market's determinations. OCC would 
also modify the Market Loan rules concerning the collateralization rate 
and mark-to-market pricing, which are currently set by the Loan Market. 
Fixing collateral at the single rate of 102%, which is the Loan 
Market's rate, would minimize complexity in the evaluation of a 
member's Stock Loan portfolio for the purposes of liquidation in the 
event of a default. Accordingly, OCC believes that these post-trade 
processing enhancements to the Market Loan Program would promote the 
prompt and accurate clearance and settlement of stock loan transactions 
and protect investors and the public interest.
    Finally, the proposed enhancements to support Canadian Clearing 
Members in the Market Loan Program would also promote the prompt and 
accurate clearance and settlement of stock loan transactions, assure 
the safeguarding of securities and funds at OCC, and protect investors 
and the public interest. The introduction of withholding 
responsibilities would introduce new complications and risks into OCC's 
clearance and settlement process and could create uncertainty around 
the settlement of funds at OCC, as discussed in detail in connection 
with OCC's proposed rule change to address the implementation of I.R.C. 
Section 871(m) with respect to OCC's listed options transactions.\78\ 
The proposed rule change would implement prudent, preventive measures 
to protect OCC against the obligation for any withholding (and any 
resulting liability) by (a) applying similar conditions for the payment 
of substitute dividends as those for dividend equivalent payments for 
listed options; (b) preventing a Canadian Clearing Member from 
executing Market Loans in its capacity as a Borrowing Clearing Member 
for Canadian Securities, which may give rise to withholding obligations 
under Canadian law; (c) clarifying Canadian Clearing Member membership 
requirements such that Positive Rebate transactions would be subject to 
exemptions from withholding under U.S. law; and (d) preventing a 
Canadian Clearing Member from executing Market Loans with Negative 
Rebate in its capacity as a Borrowing Clearing Member for its own 
account, which may give rise to withholding obligations under U.S. Law. 
OCC believes these steps are necessary to prevent tax withholding 
obligations that OCC is not currently able to identify or collect. 
Thus, OCC believes the proposed rule change is designed to promote the 
prompt and accurate clearance and

[[Page 73484]]

settlement of securities and derivatives transactions, the safeguarding 
of securities and funds at OCC, and the protection of securities 
investors and the public interest in accordance with Section 
17A(b)(3)(F) of the Exchange Act.\79\
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    \78\ See Exchange Act Release No. 79435 (Nov. 30, 2016), 81 FR 
87984 (Dec. 6, 2016) (File No. SR-OCC-2016-014). As the Commission 
recognized, application of Section 871(m) to listed options 
transactions would ``have significant implications for OCC and its 
Clearing Members''--especially with respect to Non-U.S. Clearing 
Members, for which OCC would be required ``to develop and maintain 
systems (i) to identify transactions that are Section 871(m) 
Transactions, (ii) to determine the amount of any dividend 
equivalents, (iii) to effectuate withholding, and (iv) to remit the 
withheld tax to the IRS.'' Id. at 87986. Treasury has yet to release 
guidance on key aspects of Section 871(m) that would be needed to 
build such systems. See IRS Notice 2024-44, Extension of the Phase-
in Period for the Enforcement and Administration of Section 871(m), 
available at https://www.irs.gov/pub/irs-drop/n-24-44.pdf. Like the 
changes implemented when Section 871(m) went into effect, this 
proposed change would transfer the costs and liability associated 
with tax withholding requirements to the Non-U.S. Clearing Members, 
thereby eliminating the potential uncertainty and risks in the daily 
settlement of funds at OCC that otherwise would be imposed if those 
withholding obligations rested with OCC.
    \79\ 15 U.S.C. 78q-1(b)(3)(F).
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    Furthermore, while the proposed rule change would impose additional 
requirements and restrictions on Canadian Clearing Members, the 
proposed rules are intended to address specific issues and potential 
risks to OCC arising from those Canadian Clearing Members whose 
membership and participation in the Market Loan Program creates 
potential withholding obligations for OCC. Because Canadian Clearing 
Members are already subject to similar requirements to accommodate 
dividend equivalent payments or deemed payments for listed options 
transactions without imposing withholding obligations under Section 
871(m), OCC believes that the additional conditions and requirements 
with respect to participation in the Market Loan Program will not 
impose a significant burden. In addition, the limitations on certain 
transactions OCC proposes because of the heightened risk of withholding 
obligations are narrowly tailored to address the specific risks based 
on the Canadian Clearing Member's role in the transaction and whether 
it is transacting in its capacity as principal or on behalf of a 
customer. Therefore, OCC believes that the proposed rule change is not 
unfairly discriminatory among participants in the use of the clearing 
agency and is therefore consistent with Section 17A(b)(3)(F) of the 
Exchange Act.\80\
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    \80\ Id.
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By-Laws and Rules Reorganization and Restatement
    OCC believes that the proposed reorganization and restatement of 
OCC's By-Laws and Rules specific to OCC's Stock Loan Programs is 
consistent with Section 17A(b)(3)(F) of the Exchange Act \81\ and Rule 
17Ad-22(e)(1),\82\ which requires OCC to, among other things, maintain 
written policies and procedures reasonably designed to ensure a well-
founded, clear, transparent, and enforceable legal basis for each 
aspect of OCC's activities. OCC believes that the proposed 
reorganization improves the clarity and transparency of its By-Laws and 
Rules by consolidating provisions governing the clearance and 
settlement of stock loan transactions in the Rules, rather than split 
across OCC's By-Laws and Rules. Similarly, OCC believes that 
integrating Interpretations and Policies into the text of the Rules 
helps enhance clarity and transparency by placing those provisions 
closer to the text they interpret. In addition, the global changes and 
administrative changes discussed above would apply consistent terms and 
numbering conventions, improve consistency of the text between similar 
Hedge Program and Market Loan Program rules, and remove duplicative 
provisions. Accordingly, OCC believes the proposed changes help ensure 
OCC's By-Laws and Rules, which form the legal basis for OCC's clearance 
and settlement of stock loan transactions, are clear and transparent.
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    \81\ Id.
    \82\ 17 CFR 240.17Ad-22(e)(1).
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(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Exchange Act requires that the rules of 
a clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Exchange Act.\83\ 
With the exception of the Rules specific to Canadian Clearing Members, 
addressed further below, the proposed changes are meant to enhance 
OCC's Stock Loan Programs, and would apply equally to all Clearing 
Members.
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    \83\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    The transition to the Market Loan Program is not expected to impose 
a burden on competition or inhibit access for Clearing Members who 
currently transact exclusively through the Hedge Loan Program because 
the enhanced Market Loan Program would allow for the clearance of 
bilaterally negated transactions submitted to OCC for clearance, as the 
Hedge Loan Program does today. Accordingly, the changes do not require 
any participant in the Hedge Loan Program to transact through a Loan 
Market. In addition, OCC plans to authorize Clearing Members that 
currently participate in the Hedge Loan Program to transact through the 
Market Loan Program without requiring additional onboarding from a 
membership perspective, subject to providing the necessary 
authorizations required of all Market Loan Program participants, 
thereby reducing the administrative burden of the transition. All 
Clearing Members would be subject to training with respect to the new 
ways of submitting transactions through the Market Loan Program. In 
addition, the proposed changes would facilitate, rather than burden, 
competition with respect to Canadian Clearing Members by allowing them, 
for the first time, to participate in the Market Loan Program.
    The proposed rule change could potentially impact or burden 
competition by imposing upon Canadian Clearing Members certain 
requirements and limitations with respect to participation in the 
Market Loan Program. For example, Canadian Clearing Members would be 
required to provide certain documentation to satisfy OCC that 
participation will not impose tax or withholding obligations arising 
from payments under the Market Loan Program, as well as to allow OCC to 
satisfy its own tax reporting obligations. However, OCC does not 
believe that conditioning Canadian Clearing Members' participation on 
compliance with OCC Rule 202 would impose a significant burden on 
competition. Canadian Clearing Members are already subject to ongoing 
certification and reporting provisions of Rule 202 for derivative 
equivalent payments made or deemed to be made to such members with 
respect to options. As a matter of standard practice, Clearing Members 
are required to inform OCC of material changes in, for example, their 
formal organization, ownership structure, or financial condition \84\ 
and are subject to ongoing financial reporting requirements.\85\ OCC 
believes the proposed rule change would impose reasonable reporting and 
notification requirements with respect to Canadian Clearing Members' 
tax compliance status similar to those rules referenced above.
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    \84\ See, e.g., OCC Rules 201 and 303.
    \85\ See OCC Rule 306.
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    The proposed restrictions on certain Market Loan transactions with 
Negative Rebate rates and transactions for which the Loaned Stock is a 
Canadian Security are also narrowly tailored. These restrictions 
address specific issues and potential risks to OCC arising from those 
firms whose membership creates potential withholding obligations for 
OCC. The proposed restriction on transactions with Negative Rebate for 
a Canadian Clearing Member's own account in its capacity as a Lending 
Clearing Member would eliminate the uncertainty in funds settlement 
that would arise if OCC were subject to withholding or tax obligations 
with respect to Negative Rebate payments owed to the Canadian Clearing 
Member. Canadian Clearing Members would not be restricted from entering 
into Market Loans with Negative Rebate as a Lending Clearing Member for 
its customer accounts, for which OCC could make Negative Rebate 
payments free from withholding obligations by virtue of the Canadian 
Clearing Member's status as a Qualified

[[Page 73485]]

Intermediary, or as a Borrowing Clearing Member, either for its own 
account or for its customer accounts.
    The proposed restriction on transactions where the Loaned Stock is 
a Canadian Security when the Canadian Clearing Member is the Borrowing 
Clearing Member would similarly eliminate uncertainty in funds 
settlement that would arise if OCC or the Canadian Clearing Member were 
subject to tax withholding obligations with respect to substitute 
dividends on the Canadian Security. Canadian Clearing Members would not 
be restricted from executing Market Loan transactions on Canadian 
Securities as a Lending Clearing Member. As discussed further above, 
OCC believes that the proposed rule change is necessary to eliminate 
potential complications and risk to its clearance and settlement 
process that would be presented by OCC's potential withholding 
responsibilities (and which would be a direct consequence of providing 
its clearance and settlement services for these Canadian Clearing 
Members). OCC believes the proposed rule change is necessary to promote 
the prompt and accurate clearance and settlement of securities and 
derivatives transactions, to assure the safeguarding of securities and 
funds in the custody or control of OCC or for which it is responsible, 
and in general, to protect investors and the public interest in 
accordance with Section 17A(b)(3)(F) of the Exchange Act.\86\ 
Accordingly, OCC believes any burden on competition that this proposed 
change could be regarded as imposing are necessary and appropriate to 
promote the prompt and accurate clearance and settlement of stock loan 
transactions as required by the Exchange Act. Furthermore, as stated 
above, all of OCC's current Canadian Clearing Members are already 
Qualified Intermediaries, FATCA Compliant, and Qualified Derivatives 
Dealers. Therefore, applying the same requirements as conditions to 
participate in the Market Loan Program would not impose any additional 
burden on those members.
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    \86\ 15 U.S.C. 78q-1(b)(3)(F).
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    For the foregoing reasons, OCC believes that the proposed rule 
change is in the public interest, would be consistent with the 
requirements of the Exchange Act applicable to registered clearing 
agencies, and would not impose a burden on competition that is 
unnecessary or inappropriate in furtherance of the purposes of the 
Exchange Act.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments were not and are not intended to be solicited with 
respect to the proposed rule change and none have been received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rulesregulations/self-regulatory-organization-rulemaking); 
or
     Send an email to [email protected]. Please include 
file number SR-OCC-2024-011 on the subject line.

Paper Comments

     Send paper comments in triplicate to Vanessa Countryman, 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090.

All submissions should refer to file number SR-OCC-2024-011. 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/rulesregulations/self-regulatory-organization-rulemaking). 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/CompanyInformation/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-2024-011 and 
should be submitted on or before October 1, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\87\
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    \87\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-20329 Filed 9-9-24; 8:45 am]
BILLING CODE 8011-01-P