[Federal Register Volume 90, Number 87 (Wednesday, May 7, 2025)]
[Notices]
[Pages 19346-19359]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-07905]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102962; File No. SR-OCC-2025-005]
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
Modifications to OCC's Recovery and Orderly Wind-Down Plan (``RWD
Plan'' or ``Plan'') To Align With the Recently Adopted SEC RWD Rule
May 1, 2025.
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 April 17, 2025, The Options Clearing
Corporation (``OCC'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared primarily by
OCC. On April 28, 2025, OCC filed Partial Amendment No. 1 to the
proposed rule change to make certain changes to the narrative
description of the filing as well as the exhibits provided by OCC.\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\ Partial Amendment No. 1 corrects an error in OCC's original
narrative description of the proposed rule change. The amendment
also modified the Exhibit 5 to File No. SR-OCC-2025-005 to
accurately mark the proposed changes against the currently effective
RWD Plan and makes conforming changes to the narrative description
of the proposed rule change.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
This proposed rule change would make modifications to OCC's
Recovery and Orderly Wind-Down Plan (``RWD Plan'' or ``Plan'') in an
effort to achieve compliance with the Commission's recently adopted
content requirements \4\ for recovery and orderly wind-down plans
(``RWPs'') of covered clearing agencies \5\ (``CCAs'') that became
effective on January 17, 2025. CCAs, like OCC, must file with the
Commission any proposed rule changes no later than April 17, 2025, and
any proposed rule changes must be effective by December 15, 2025.
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\4\ See Securities Exchange Act Release No. 101446 (Oct. 25,
2024), 89 FR 91000 (Nov. 18, 2024) (File No. S7-10-23) (``SEC
Adopting Release''), https://www.govinfo.gov/content/pkg/FR-2024-11-18/pdf/2024-25570.pdf.
\5\ The term ``covered clearing agency'' is defined in Exchange
Act Rule 17Ad-22(a) to mean ``a registered clearing agency that
provides the services of a central counterparty or central
securities depository.'' 17 CFR 240.17Ad-22(a).
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In addition to the proposed modifications that OCC believes are
necessary to comply with the recently adopted content requirements for
RWPs of CCAs, OCC is also including proposed modifications to its RWD
Plan that reflect changes identified during OCC's annual review
process. The proposed changes related to the Commission's adoption of
content requirements for RWPs and the proposed changes identified
during OCC's annual review process are differentiated throughout this
filing and described in further detail below.
The proposed changes to OCC's RWD Plan are contained in
confidential Exhibit 5 [sic] to SR-OCC-2025-005. Material proposed to
be added is marked by underlining and material proposed to be deleted
is marked with strikethrough text to File No. SR-OCC-2025-005. All
terms with initial capitalization that are not otherwise defined herein
have the same meaning as set forth in the OCC By-Laws and Rules.\6\
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\6\ 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
As the sole clearing agency for standardized equity options listed
on national securities exchanges registered
[[Page 19347]]
with the Commission, and with respect to OCC's clearance and settlement
of futures and stock loan transactions, OCC is subject to regulations
that impose requirements on OCC to maintain policies and procedures
that comprehensively manage the risks borne by OCC as a central
counterparty. This includes the management of risks such as legal,
credit, operational, general business and liquidity risks. One such
regulation OCC is subject to is Rule 17Ad-22(e)(3)(ii),\7\ which
requires CCAs to include plans for the recovery and orderly wind-down
of a CCA necessitated by credit losses, liquidity shortfalls, losses
from general business risk or any other losses. In accordance with this
rule, OCC formalized and updated its RWD Plan on August 23, 2018 \8\ to
promote effective risk management and to help ensure OCC remains
resilient under normal market conditions and in periods of market
stress.
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\7\ 17 CFR 240.17ad-22(e)(3)(ii).
\8\ See Securities Exchange Act Release No. 83918 (Aug. 23,
2018), 83 FR 44091 (Aug. 29, 2018) (SR-OCC-2017-021).
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OCC's existing RWD Plan describes OCC's ability to continue to
provide its critical services in the event of severe financial and/or
operational stress. It also describes OCC's approach to a wind-down in
the unlikely event that it experiences a severe stress that causes it
to exhaust its available tools and resources. In addition to the RWD
Plan, OCC also maintains a separate document, the ``RWD Plan Supporting
Information,'' that provides background and context for parties that
are reviewing the RWD Plan or utilizing it as part of an actual
recovery or wind-down. The RWD Plan Supporting Information does not
constitute a stated policy, practice, or interpretation of OCC and is,
by its nature, prone to change.\9\
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\9\ OCC has included a draft of the RWD Plan Supporting
Information as confidential Exhibit 3 [sic] to SR-OCC-2025-005.
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Recently, the Commission adopted new requirements applicable to
CCAs (the ``SEC RWD Rule'') that supplement existing Rule 17Ad-
22(e)(3)(ii), and establish specific elements required in RWPs. The SEC
RWD Rule is found in 17 CFR 240.17ad-26 (``Rule 17Ad-26'') and helps to
ensure that a CCA's planning for recovery and orderly wind-down is
effective and can promote financial stability in periods of market
stress. The SEC RWD Rule requires, among other things, that RWPs:
(i) Identify and describe their core payment, clearing, and
settlement services and address how the CCA would continue to provide
such core services in the event of a recovery and during an orderly
wind-down, including the (a) identification of the staffing roles
necessary to support such core services, and (b) analysis of how such
staffing roles necessary to support such core services would continue
in the event of a recovery and during an orderly wind-down.\10\
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\10\ 17 CFR 240.17ad-26(a)(1).
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(ii) Identify and describe any service providers for core services,
specifying which core services each service provider supports, and (ii)
address how the CCA would ensure that service providers for core
services would continue to perform in the event of a recovery and
during an orderly wind-down, including consideration of its written
agreements with such service providers and whether the obligations
under those written agreements are subject to alteration or termination
as a result of initiation of the recovery and orderly wind-down
plan.\11\
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\11\ 17 CFR 240.17ad-26(a)(2).
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(iii) Identify and describe scenarios that may potentially prevent
the CCA from being able to provide its core services identified in Rule
17Ad-26(a)(1) as a going concern, including (a) uncovered credit
losses, (b) uncovered liquidity shortfalls, and (c) general business
losses.\12\
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\12\ 17 CFR 240.17ad-26(a)(3).
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(iv) Identify and describe (a) criteria that could trigger the
CCA's implementation of the recovery and orderly wind-down plans and
(b) the process that the CCA uses to monitor and determine whether the
criteria have been met, including the governance arrangements
applicable to such process.\13\
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\13\ 17 CFR 240.17ad-26(a)(4).
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(v) Identify and describe the rules, policies, procedures and any
other tools or resources on which the CCA could rely in a recovery or
orderly wind-down, and address how the rules, policies, procedures and
any other tools or resources identified would ensure timely
implementation of the RWP.\14\
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\14\ 17 CFR 240.17ad-26(a)(5), (6).
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(vi) Require the covered clearing agency to inform the Commission
as soon as practicable when the CCA is considering implementing a
recovery or orderly wind-down.\15\
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\15\ 17 CFR 240.17ad-26(a)(7).
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(vii) Include procedures for testing the CCA's ability to implement
the RWPs at least every 12 months, including by (a) requiring the CCA's
participants and, when practicable, other stakeholders to participate
in the testing of its plans; (b) requiring that such testing would be
in addition to testing pursuant to paragraph (e)(13) of 17 CFR
240.17ad-22; (c) providing for reporting the results of the testing to
the CCA's board of directors and senior management; and (d) specifying
the procedures for, as appropriate, amending the plans to address the
results of such testing.\16\
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\16\ 17 CFR 240.17ad-26(a)(8).
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(viii) Include procedures requiring review and approval of the
plans by the board of directors of the CCA at least every 12 months or
following material changes to the CCA's operations that would
significantly affect the viability or execution of the plans, with such
review informed, as appropriate, by the CCA's testing of the plans.\17\
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\17\ 17 CFR 240.17ad-26(a)(9).
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OCC believes that its current RWD Plan incorporates several of the
content requirements above. OCC's RWD Plan already identifies its
critical services provided to market participants and considers the
impact that any interruption to a particular service may have on OCC's
participants. In addition, OCC's RWD Plan identifies four hypothetical
stress scenarios that could threaten OCC's viability as a going concern
and provides a description for how OCC would respond in each scenario.
OCC's RWD Plan describes the criterion that could trigger the
implementation of a recovery or wind-down and identifies its enhanced
risk management and recovery tools upon which OCC relies in times of
extreme stress. Furthermore, OCC already maintains written procedures
for testing the implementation of the Plan and review of the Plan by
the Board.
However, to implement a compliant approach with those requirements
for which OCC believes changes will be necessary, OCC is proposing to
revise its RWD Plan such that the proposed changes: (i) address how OCC
would continue to provide its core services in the event of a recovery
and during a wind-down through the identification of staffing roles
necessary to support OCC's core services and an analysis of how such
staffing roles would continue in the event of a recovery or during a
wind-down; (ii) identify a subset of OCC's service providers that are
necessary to ensure the continued delivery of core services throughout
a recovery or wind-down and address the continued performance of such
service providers in the event of recovery or during a wind-down; (iii)
describe OCC's process used to monitor the criteria that could trigger
implementation of a recovery or wind-down; (iv) describe OCC's
responsibility to notify the Commission when OCC is considering the
implementation of a
[[Page 19348]]
recovery or wind-down; and (v) describe OCC's approach for testing its
ability to implement the RWD Plan at least every 12 months, including
the involvement of other stakeholders participating in the test. OCC
also plans to revise its RWD Plan to replace, when necessary, the term
``critical'' services with ``core'' services to improve clarity and
consistency with SEC Rule 17Ad-25(i),\18\ which concerns the governance
of service providers for core services. OCC believes that the proposed
changes described above will allow OCC to appropriately comply with the
SEC RWD Rule by including the proposed provisions in the RWD Plan.
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\18\ 17 CFR 240.17ad-25(i).
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1. Purpose
The purpose of this proposed rule change by OCC is to modify its
RWD Plan to implement changes that are designed to comply with the
content requirements in the SEC RWD Rule.\19\ The Commission clarifies
in its Adopting Release that by establishing requirements related to
core services and service providers, the identification of scenarios,
triggers, and tools for recovery and orderly wind-down, and robust
processes for implementation, notification, testing and board review
and approval, new Rule 17Ad-26 helps ensure that CCAs can successfully
plan for and navigate highly stressed or extreme market conditions,
where events may occur or conditions deteriorate rapidly.\20\ In
addition, the SEC RWD Rule promotes three important objectives: (i)
bolstering the existing RWPs at CCAs, (ii) codifying some existing RWP
elements to ensure that these elements remain in the plans over time;
and (iii) establishing that the RWP of any new CCA would contain each
of the elements specified in the SEC RWD Rule.\21\ The purpose of the
proposed changes to OCC's RWD Plan is to support these objectives to
reduce systemic risk, better prepare for and respond to extreme stress,
and ultimately increase OCC's resiliency.
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\19\ 17 CFR 240.17ad-26.
\20\ SEC Adopting Release, see supra note 3, at 91016.
\21\ See Release No. 97516 (May 17, 2023), 88 FR 34708, 34709
(May 30, 2023) (``RWP Proposing Release''), https://www.govinfo.gov/content/pkg/FR-2023-05-30/pdf/2023-10889.pdf.
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In addition to the proposed changes that OCC believes are necessary
to comply with the SEC RWD Rule, OCC also proposes a series of changes
to the RWD Plan that were identified during OCC's annual review
process. While the proposed changes to OCC's RWD Plan are described in
further detail below, thematically, they consist of the following:
i. Proposed changes to OCC's RWD Plan identified to achieve
compliance with the SEC RWD Rule:
Revisions to Chapter 3 of the RWD Plan to address how OCC
would continue to provide its core services in the event of a recovery
or wind-down by identifying OCC's key staffing roles necessary to
support such core services in the event of a recovery or wind-down.
Revisions to Chapter 3 of the RWD Plan to include the
identified subset of OCC's service providers that are necessary to
ensure the continued delivery of OCC's core services in the event of a
recovery or wind-down. These revisions include relocating a portion of
this information from the RWD Supporting Information into the RWD Plan.
Revisions to Chapter 4 of the RWD Plan to describe OCC's
process for monitoring the criteria that could trigger OCC's
implementation of the RWD Plan.
Revisions to Chapter 4 and Chapter 5 of the RWD Plan to
provide specific requirements for OCC to inform the Commission as soon
as practicable when OCC is considering implementing a recovery or a
wind-down.
Revisions to Chapter 5 of the RWD Plan to include an
analysis of how OCC's key staffing roles would continue in the event of
a recovery or wind-down.
Revisions to Chapter 6 of the RWD Plan to clarify OCC's
process for testing the RWD Plan, including the involvement of other
stakeholders participating in the test, and the roles and
responsibilities for reviewing the testing results.
General revisions to the RWD Plan to achieve compliance
with the SEC RWD Rule include: (i) replacing the term ``critical'' with
``core'' when referencing OCC's ``core services,'' (ii) updating
sections throughout Chapter 2 and 3 that address OCC's
interconnectedness with third-parties to incorporate descriptions for
OCC's identified subset of service providers for core services, and
(iii) replacing reference to OCC's list of ``Tier 1 Vendors'' or
``vendors'' with OCC's list of ``service providers for core services''
since OCC has modified its existing Tier 1 Vendor list to align with
the requirements in the SEC RWD Rule as it relates to service providers
for core services.\22\
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\22\ 17 CFR 240.17ad-26(a)(2).
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ii. Proposed changes to OCC's RWD Plan identified during OCC's
annual review process:
Revisions to Chapter 2 of the RWD Plan to update the role
descriptions of OCC's Management to align with OCC's existing
organizational structure, and to provide clarity around OCC's Bank
Credit Facility.
Revisions to Chapter 3 of the RWD Plan to update OCC's
support functions and department ratings to align with OCC's existing
organizational structure.
Revisions to Chapter 4 of the RWD Plan to incorporate
updated information based on recent changes to OCC's Capital Management
Policy, approved by the Commission in SR-OCC-2024-012,\23\ and to
incorporate information related to OCC's enhanced risk management and
recovery tools in the event of a non-default or operational loss.
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\23\ See Securities Exchange Act Release No. 101151 (Sept. 24,
2024), 89 FR 79668 (Sept. 30, 2024) (SR-OCC-2024-012).
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Revisions to Chapter 7 of the RWD Plan to provide
additional clarification and granularity on OCC's detailed stress
scenarios.
General revisions to the RWD Plan identified during OCC's
annual review process include:
[ssquf] replacing the term ``Executive Chairman'' with
``Chairman,'' and ``Chief Legal Officer and General Counsel'' with
``General Counsel and Corporate Secretary'' to align with OCC's
existing organizational structure;
[ssquf] updating the description of ``liquidity loss'' under OCC's
recovery trigger to align with OCC's current business practices;
[ssquf] updating OCC's internal list of critical support functions
to remove ``External Relations'' as an identified critical support
function to reflect OCC's current organizational structure;
[ssquf] eliminating outdated information such as the previous
location of OCC's facility that no longer exists;
[ssquf] updating the name of OCC's working group to reflect the
combination of two pre-existing working groups;
[ssquf] updating the name of OCC's procedures to reflect current
titling;
[ssquf] updating the title of Scenario 4 referenced in Section 1.3
and 4.4.4 from ``General Business and Operational Risk'' to ``Default
and General Business Risk'' to remain consistent with the existing
title in Section 7.1.4;
[ssquf] updating all referenced data points to reflect current
information including: (a) the number of personnel in each identified
critical support function described in Chapter 3, (b) the maximum
number of reductions in personnel that each support function can absorb
without compromising
[[Page 19349]]
OCC's ability to provide its core services during a liquidation, as
described in Chapter 5, and (c) the dollar amounts referenced in the
four hypothetical stress scenarios in Chapter 7; and
[ssquf] formatting and grammatical changes, such as capitalizing
defined terms, deleting unnecessary or redundant language, updating
section numbering as necessary, and conforming references to relevant
SEC Rules.
Proposed Changes
A summary description of the proposed changes to the RWD Plan to
achieve compliance with the SEC RWD Rule is provided in Section 1. A
separate summary description of the proposed changes to the RWD Plan
identified during OCC's annual review process is provided in Section 2.
1. Proposed Changes in Effort To Achieve Compliance With SEC RWD Rule
Chapter 3: Core Services and Critical Support Functions
Chapter 3 of the RWD Plan identifies OCC's (i) ``Critical
Services,'' as (i) clearing and settlement services and (ii) pricing
and valuation services, which if discontinued, could have a systemic
impact on the financial system. Chapter 3 of the RWD Plan also
identifies OCC's ``Critical Support Functions,'' as functions within
OCC that must continue in some capacity for OCC to be able to continue
providing its Critical Services. Throughout OCC's RWD Plan and
specifically detailed in Chapter 3, OCC's proposed changes would
replace the term ``Critical Services'' with ``Core Services'' as it
relates to OCC's core payment, clearance, and settlement services. OCC
believes this proposed change would align with the SEC RWD Rule \24\
and improve clarity and consistency with terminology in other rules,
such as Rule 17Ad-25(i),\25\ which concerns the governance of ``service
providers for core services.'' OCC's proposed change, as it relates to
the replacement of ``Critical Services'' with ``Core Services'' is also
detailed in footnote 1 of Chapter 1 and provides that SEC Rule 17Ad-
26(a)(1) replaces ``critical'' with ``core'' when referencing payment,
clearing, and settlement services to improve clarity and consistency
with terminology in other SEC rules. The proposed footnote also
provides that this replacement of the descriptive term ``critical''
with ``core'' does not affect OCC's identification of those services,
and past guidance related to ``critical'' services will be used in the
same manner and only referred to as ``critical'' when quoted or
paraphrased from external sources. To further improve clarity and
consistency with SEC Rule 17Ad-26(a)(1) \26\ as it relates to the
replacement of ``Critical Services'' with ``Core Services,'' OCC's
proposed changes also update the first sentence of Section 1.2 in
Chapter 1 of the Plan. Currently, the Plan states that CPSS-IOSCO and
FSB have provided guidance on the identification of Critical Services.
OCC's proposed changes provide that OCC has identified its core
payment, clearing, and settlement services based on CPSS-IOSCO and FSB
guidance on the identification of Critical Servies. For grammatical
accuracy, OCC's proposed changes also remove the language ``have
provided'' to align with the proposed updates in the sentence.
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\24\ 17 CFR 240.17ad-26(a)(1).
\25\ 17 CFR 240.17ad-25(i).
\26\ 17 CFR 240.17ad-26(a)(1).
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The SEC RWD Rule requires that OCC's RWD Plan identify staffing
roles necessary to support OCC's core services and provide an analysis
of how such staffing roles would continue in the event of a recovery or
wind-down.\27\ To support this requirement, OCC's proposed changes to
Chapter 3 include the addition of a new section titled ``Key Staffing
Roles.'' Within this section, OCC's proposed changes identify the
individual key staffing roles, listed under their respective support
functions, that are necessary for OCC to continue providing its core
services in the event of a recovery or wind-down. OCC's proposed
changes include key staffing roles under the Business Operations,
Corporate, Corporate Finance, Financial Risk Management, and
Information Technology functions. OCC's proposed changes provide that
while each of the roles listed is necessary to support OCC's core
services in the event of recovery or wind-down, one employee may be
able to fulfill the responsibilities of more than one role. Additional
proposed changes are described in Chapter 5 of the RWD Plan that
include the analysis of such key staffing roles necessary to support
OCC's core services and how those roles would continue in the event of
a recovery or during a wind-down.
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\27\ Id.
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The SEC RWD Rule requires OCC's RWD Plan to identify and describe
any service provider for core services, specify which core services
each service provider supports, and address how OCC would ensure that
such service provider for core services would continue to perform in
the event of a recovery or during a wind-down.\28\ OCC's proposed
changes to Chapter 3 include the addition of a new section titled
``Service Providers for Core Services,'' which incorporates information
that was moved from the RWD Supporting Information into the RWD Plan.
Under this new section, OCC's proposed changes provide that OCC has
identified the service providers that support core services and upon
which OCC relies to provide those core services. OCC's proposed changes
also provide that OCC's Board is responsible for oversight of service
providers that provide core services for OCC, including the review of
risk assessments for current vendors and approving terms for new
vendors that will provide core services for OCC. More specifically,
OCC's proposed changes (i) revise OCC's Tier 1 Vendor List in the RWD
Supporting Information to align with OCC's identified subset of service
providers for core services, and (ii) relocate this information from
the RWD Supporting Information into the RWD Plan. OCC's proposed
changes in this section also describe the subset of OCC's service
providers that support OCC's core services and specify which core
services that each service provider supports. OCC's proposed changes
depict this information in a table that outlines the type of service
provider, including: (i) vendors, (ii) financial market utilities,
(iii) banks, (iv) liquidity providers, and (v) liquidation agents.
OCC's proposed changes also identify the third-party name, describe
OCC's relationship with that third-party, and describe which core
service, either (i) clearance and settlement services or (ii) pricing
and valuation services, that the third-party supports. OCC's proposed
changes also clarify in a footnote that OCC maintains multiple
relationships with some of the services providers in the provided list.
OCC's proposed changes also state that additional information related
to OCC's service providers for core services, as well as a more
extensive list of service providers supporting OCC, is available and
may be obtained from OCC's Third-Party Risk Management Department upon
request. As a result of this proposed change described in Chapter 3,
OCC also proposes to update information in Chapter 2 under the second
paragraph of the section titled ``Interconnections with Vendors.''
OCC's proposed changes provide, in part, that OCC maintains a more
extensive list of service providers supporting OCC, and that the list
of those additional vendors may be obtained from OCC's Third-Party Risk
[[Page 19350]]
Management department upon request. OCC proposes to eliminate the
reference to Tier 1 Vendors as OCC no longer categorizes vendors in
such a way. Additionally, while the list of OCC's identified service
providers for core services will remain relatively consistent, the list
of additional vendors supporting OCC is dynamic. To eliminate the risk
that the information related to the additional vendors becomes
inaccurate or outdated if maintained in the RWD Supporting Information
document, OCC believes it is necessary to include that the list can be
obtained by OCC's Third-Party Risk Management department upon request,
and eliminate the reference that states ``the list of additional
vendors needed to support recovery and wind-down is also included in
the RWD Plan Supporting Information.''
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\28\ 17 CFR 240.17ad-26(a)(2).
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To more closely align with the SEC RWD Rule \29\ that requires OCC
to address how it would ensure service providers for core services
would continue to perform in the event of a recovery and during a wind-
down, OCC's proposed changes to the Plan modify section 5.4, ``Key
Agreements to be Maintained,'' and relocate that section from Chapter 5
into Section 3.8 of Chapter 3. Within this new section in Chapter 3,
OCC's Plan provides that OCC's critical interconnections are essential
to the continued provision of OCC's core services and that it is
imperative that these relationships are maintained during the execution
of the Plan. OCC's proposed changes eliminate the reference that these
relationships are imperative to be maintained only during ``the
execution of the WDP,'' and provide that it is imperative these
relationships are maintained during ``a recovery or wind-down'' to more
closely align with the SEC RWD Rule.\30\ OCC's Plan also provides that
OCC has adopted a Material Agreements Policy that is designed to
identify and periodically review agreements with exchanges and service
providers for core services. OCC's proposed changes provide that a list
of key agreements is available upon request as indicated in the RWD
Plan Supporting Information. To provide a more concise description of
OCC's Material Agreements Policy, OCC's proposed changes eliminate the
provision that the agreements are necessary to facilitate OCC's core
services (clearing and settlement services and pricing and valuation
services), including the agreement establishing the critical
interconnections set forth in Section 2.8 and Section 3.7, and replace
that provision with proposed changes that provide the agreements are
with exchanges and service providers for core services. OCC's existing
Plan provides that none of the agreements contains a ``material adverse
change'' clause that would permit the counterparty to terminate the
agreement and discontinue the provision of services in the event the
Plan is implemented. To align more closely with the SEC RWD Rule \31\
that requires OCC to address how it would ensure the service provider
for core services would continue to perform in the event of a recovery
or during a wind-down, OCC's proposed changes modify this language to
clarify that the absence of a material adverse change clause, which
results in the counterparty not being permitted to terminate the
agreement and discontinue the provision of services, is applicable ``in
the event of a recovery or during a wind-down.'' OCC's existing Plan
provides that the Legal Department will review the agreements listed in
the RWD Plan Supporting Information to ensure that no renewals or
expirations of such agreements will occur during the expected duration
of the Plan. Finally, OCC's proposed changes provide minor clarifying
edits to this section, including (i) adding the word ``key'' before
agreements, (ii) modifying the language from the provision that
provides OCC's Legal Department will ``ensure that no renewals or
expirations of such agreements will occur'' to OCC's Legal Department
will ``determine whether any renewals or expirations of such agreements
will occur,'' and (iii) adding language that the Legal Department will
``counsel the business accordingly'' after such review.
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\29\ Id.
\30\ Id.
\31\ Id.
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OCC believes that relocating the ``Key Agreements to be
Maintained'' section from Chapter 5, which focuses solely on wind-
downs, into Chapter 3 that outlines OCC's service provider for core
services, more closely aligns with the contents in the SEC RWD Rule
that requires OCC to ensure services provided for core services would
continue to perform in the event of a recovery or during a wind-down.
Chapter 4: Recovery Plan
Chapter 4 of the RWD Plan constitutes OCC's Recovery Plan. The
purpose of the Recovery Plan is to provide succinct information about
OCC's Enhanced Risk Management and Recovery Tools, as defined in the
RWD Plan, and to demonstrate the ways in which OCC's risk management
tools, Enhanced Risk Management and Recovery Tools, as well as other
available resources, can be applied in stylized hypothetical scenarios
considering extreme stress events that could be sufficient to threaten
OCC's viability as a going concern.
The SEC RWD Rule requires that the RWD Plan identify and describe
the process that OCC uses to monitor and determine whether the criteria
have been met.\32\ To align with this requirement, OCC's proposed
changes to Chapter 4 add a new section titled ``Trigger Monitoring,''
which describes OCC's approach used to determine how the critera that
could trigger the implementation of the RWD Plan has been met and OCC's
process to monitor that criteria. OCC's proposed changes provide that
OCC's trigger monitoring is performed through several processes at OCC.
OCC's proposed changes provide that OCC's Default Management Policy and
underlying procedures are used in monitoring the resources of the
default waterfall, including the Clearing Fund deposits of non-
defaulting members which encapsulate the Credit Loss trigger. OCC's
proposed changes also provide that as part of the Clearing Fund
Methodology Policy and underlying procedures, the Financial Risk
Management team is responsible for monitoring the Liquidity Loss
trigger through daily monitoring and reporting of the Clearing Member
payment obligations and forecasted liquidity demands. In addition,
OCC's proposed changes also provide that OCC's Technology Operations
Policy and underlying procedures govern the monitoring of OCC systems
and applications for the Operational Disruption trigger. OCC's proposed
changes provide that OCC's IT staff are responsible for server,
network, storage, application, mainframe, and cloud asset monitoring
for OCC systems. OCC's proposed changes describe that through OCC's
Capital Management Policy and underlying procedures, the Corporate
Finance team monitors and reports on the capital levels of the company
and regulatory compliance for capital requirements, and these metrics
are the tenets of OCC's General Business Loss trigger. Finally, OCC's
proposed changes also provide that through the underlying procedures
mentioned above, the support function lead or delegate is responsible
for notifying the Crisis
[[Page 19351]]
Management Team of a breach of any of the Recovery Triggers.
---------------------------------------------------------------------------
\32\ 17 CFR 240.17ad-26(a)(4). The SEC RWD Rule also requires
identification and description of the criteria that could trigger
implementation of OCC's recovery plan; however, OCC believes that
the current text of the RWD Plan is sufficient to address this
requirement without amendment.
---------------------------------------------------------------------------
Chapter 4 of the RWD Plan describes that the General Counsel and
Corporate Secretary is responsible for notifying regulators, including
the Commission, of the occurrence of a Recovery Trigger Event. The SEC
RWD Rule requires that OCC inform the Commission as soon as practicable
when OCC is considering implementing a recovery or orderly wind-
down.\33\ To promote clarity and align with this requirement, OCC's
proposed changes include the specific language that the General Counsel
and Corporate Secretary be responsible for notifying the SEC, the
Federal Reserve Bank, and the CFTC (and the FDIC, to the extent
applicable) ``as soon as practicable when OCC is considering the
implementation of a recovery.''
---------------------------------------------------------------------------
\33\ 17 CFR 240.17ad-26(a)(7).
---------------------------------------------------------------------------
Chapter 5: Wind-Down Plan
Chapter 5 of the RWD Plan constitutes OCC's wind-down plan, which
establishes the objectives for a resolution process where OCC seeks to
continuously deliver its core services, even though its viability as a
going concern is threatened, and to provide a menu of actions that
OCC's Management, Board and Stockholder Exchanges can consider to
effectuate this resolution process. Chapter 5 of the Plan also provides
a discussion on the maximum number of reductions in OCC staff that each
support function could absorb without compromising OCC's ability to
provide its core services during a liquidation. The SEC RWD Rule
requires that RWP's provide an analysis of how key staffing roles
necessary to support OCC's core services would continue in the event of
a recovery or wind-down.\34\ To support this requirement, OCC's
proposed changes to Chapter 5 under the ``Targeted Reduction in Force''
section describe that while staff reductions are an attempt to limit
OCC's expenses, Management's primary responsibility is retaining key
staffing roles, identified in Chapter 3, such that OCC is able to
continue providing core services. OCC's proposed changes provide that
OCC's Management may need to offer additional compensation to retain
key staff while simultaneously reducing other staff during a wind-down.
Furthermore, OCC's proposed changes describe that OCC makes appropriate
adjustments to its staffing estimate for resolution cost to account for
retention bonuses.
---------------------------------------------------------------------------
\34\ 17 CFR 240.17ad-26(a)(1).
---------------------------------------------------------------------------
Similar to OCC's proposed changes in Chapter 4 regarding OCC's
notification requirements to the Commission during a recovery, OCC's
proposed changes to Chapter 5 under the Exhibit titled ``WDP Trigger
Event'' also clarify OCC's responsibility to inform the Commission as
soon as practicable when OCC is considering implementing a wind-down.
Specifically, OCC's proposed changes provide, in part, that as soon as
practicable when the Board is considering the decision to enact a wind-
down, OCC must immediately inform OCC's regulators. OCC believes this
proposed change aligns with the requirements in the SEC RWD Rule as it
relates to informing the Commission when a CCA is considering
implementing a recovery or orderly wind-down.\35\
---------------------------------------------------------------------------
\35\ 17 CFR 240.17ad-26(a)(7).
---------------------------------------------------------------------------
Chapter 6: RWD Plan Governance
Chapter 6 of OCC's RWD Plan details the governance of OCC's RWD
Plan, including the governance structure for approval of the Plan and
maintenance of the Plan on an on-going basis. The SEC RWD Rule requires
that RWPs include procedures for testing the CCA's ability to implement
the RWPs at least every 12 months, including by (a) requiring the CCA's
participants and, when practicable, other stakeholders to participate
in the testing of its plans; (b) requiring that such testing would be
in addition to testing pursuant to paragraph (e)(13) of 17 CFR
240.17ad-22; (c) providing for reporting the results of the testing to
the CCA's board of directors and senior management; and (d) specifying
the procedures for, as appropriate, amending the plans to address the
results of such testing.\36\ To align with this requirement, OCC's
proposed changes to Chapter 6 provide that the governance structure
includes the development and execution of annual testing of OCC's
ability to implement its RWD Plan, including the involvement of OCC's
participants and, when practicable, other stakeholders, with results of
the testing reported to OCC's Board. OCC's proposed changes also
provide that testing of OCC's RWD Plan is governed by its Risk
Management Framework and Default Management Policy, including
underlying procedures. OCC's proposed changes also outline the roles
and responsibilities for the RWD Plan, including (i) OCC's Management
Committee review the RWD Plan testing results, (ii) the Working Group
develop, draft and validate the RWD Plan and annual testing plan,
participate in testing of the Plan, and incorporate into the RWD Plan
any lessons learned from workshops or testing, and (iii) the Working
Group Chair or Delegate be responsible for the coordination and
facilitation of the RWD Plan testing and execution. OCC believes these
proposed changes align with the testing requirements in the SEC RWD
Rule.\37\
---------------------------------------------------------------------------
\36\ 17 CFR 240.17ad-26(a)(8).
\37\ Id.
---------------------------------------------------------------------------
The SEC RWD Rule also requires that RWPs include procedures
requiring review and approval of the plans by the board of directors at
least every 12 months or following material changes to the CCA's
operations that would significantly affect the viability or execution
of the plans, with such review informed, as appropriate, by the CCA's
testing of the plans.\38\ Chapter 6 of the Plan already outlines that
at least once every 12 months, the Risk Committee will review, and if
appropriate, recommend approval of the RWD Plan to the Board. OCC's
proposed changes add language to this section that provides ``including
any revisions informed by testing results,'' to more closely align with
the requirements in the SEC RWD Rule.\39\
---------------------------------------------------------------------------
\38\ 17 CFR 240.17ad-26(a)(9).
\39\ Id.
---------------------------------------------------------------------------
General revisions to the RWD Plan to address OCC's
interconnectedness with third-parties in effort to achieve compliance
with the SEC RWD Rule.
Chapter 2 of the RWD Plan addresses, in part, OCC's
interconnections, both financial and operational, with various third-
parties. To align with the identified subset of OCC's service providers
for core services described in Chapter 3, OCC's proposed changes to
Chapter 2 identify ``escrow banks'' and ``liquidation agents'' in the
bulleted list and in the sub-sections under the section titled
``External Interconnectedness'' and provide descriptions for these
interconnections. Specifically, OCC's proposed changes add a new
section titled ``Interconnections with Escrow Banks'' and provide that
OCC has financial and operational interconnections with escrow banks,
and that OCC's Escrow Deposit Program allows a customer of an OCC
Clearing Member to use cash deposited with the Escrow Bank as
supporting collateral backing Escrow Deposits. OCC's proposed changes
provide that each customer must enter into a Tri-Party Agreement with
the Bank and OCC in order to use cash. As it relates to
interconnections with liquidation agents, OCC's proposed changes add a
new section titled ``Interconnections with Liquidation Agents'' and
provide that OCC has financial and operational interconnections with
liquidation agents
[[Page 19352]]
and that liquidation agents may be charged with the duty of winding up
the affairs of a defaulting Clearing Member. OCC's proposed changes
provide that OCC has several risk management tools available to re-
establish a matched book after a Clearing Member default. Furthermore,
OCC's proposed changes provide that one of the tools that can be used
by OCC to re-establish a matched book includes open market transactions
executed by OCC's liquidation agent (i.e., liquidation of the
defaulter's portfolio). Because OCC's list of service providers for
core services was relocated from the RWD Supporting Information into
the RWD Plan, OCC's proposed changes throughout Chapter 2 also clarify
that a list of the interconnections with each identified third-party is
contained in OCC's service providers for core services section of the
RWD Plan.
As it relates to interconnections discussed in Chapter 3, OCC's
proposed changes to the section titled ``Shared Critical External
Interconnections'' identify escrow banks and liquidation agents as
critical external interconnections that OCC relies upon to conduct its
core services. Although Clearing Members and exchanges are critical
external interconnections for OCC, OCC does not view such a membership
relationship or exchange relationship to mean that they are service
providers to OCC. Therefore, OCC's proposed changes eliminate reference
that exchanges are necessary for OCC to maintain the provision of its
core services. Additionally, OCC's proposed changes eliminate reference
that Clearing Members are necessary to ensure the provision of OCC's
core services. Within this provision, OCC's proposed changes include
escrow banks as a necessary category to ensure the provision of OCC's
core services. OCC's proposed changes also eliminate the provision
``but each OCC interconnection with a particular Clearing Member,
settlement bank, or custodian bank relationship is not necessarily
critical to OCC's provision of Critical Services, given the number of
institutions within each category upon which OCC relies'' as this
language is not consistent with OCC's service providers for core
services list and the SEC RWD Rule requiring the identification of such
service providers.\40\
---------------------------------------------------------------------------
\40\ 17 CFR 240.17ad-26(a)(2).
---------------------------------------------------------------------------
2. Proposed Changes Identified During OCC's Annual Review Process
Chapter 1: Executive Summary
Under Section 1.7, ``WDP Trigger Event,'' OCC proposes a minor edit
to update an incorrect statement. OCC's proposed change provides that
OCC has identified a single trigger event based on a determination that
recovery efforts have ``not'' been, or are unlikely to be, successful
in returning OCC to viability as a going concern that--if occurring
during OCC's recovery efforts--would signal initiation of the WDP.
OCC's proposed addition of the word ``not'' in this sentence promotes
clarity and consistency with the explanation of OCC's Trigger Event.
OCC also proposes a minor formatting change which includes the
relocation of the header ``Exhibit 1-2: WDP Trigger Event'' from below
the WDP Trigger description box to above the description box. This
change is intended solely to promote clarity for the reader.
Chapter 2: OCC Overview
Chapter 2 of the RWD Plan provides a detailed description of OCC's
business and the necessary context for the discussion and analysis of
OCC's core services in Chapter 3, as well as the context for the
discussion and analysis of OCC's resolution process in Chapter 5. OCC's
proposed changes to Chapter 2 identified during OCC's annual review
process modify the section on OCC's Management structure to reflect
OCC's existing organizational structure. For example, OCC's proposed
changes update the role descriptions of OCC's Management based on
current information at OCC, including oversight responsibility of a
specific role and the organizational reporting structure for that
position. To include a complete and accurate overview of OCC's current
Management Committee members, OCC's proposed changes relocate the
``Chief External Relations Officer'' description and add the ``Chief
Clearing and Settlement Services Officer'' description to Exhibit 2-3.
OCC's proposed changes provide that the Chief Clearing and Settlement
Services Officer is responsible for the oversight of the Business
Operations department, which includes Collateral Services, Market
Operations, Corporate Actions, and Participant Services and Solutions.
OCC's proposed changes relocate the description of the ``Chief External
Relations Officer'' to reflect OCC's current organizational structure
that no longer requires the Chief External Relations Officer to report
to the Executive Chairman. In addition, because OCC's Corporate
Communications support function was moved from the External Relations
Department into the Human Resources Department, OCC's proposed changes
update the description of the ``Chief External Relations Officer'' to
remove the language that provides the Chief External Relations Officer
is also responsible for the oversight of the Corporate Communications
department, which is responsible for developing and delivering all
external communication for OCC and key internal communication to OCC
employees. Under the ``Governance Structure'' section in Chapter 2,
OCC's proposed changes clarify that OCC's Board is responsible for
review of disciplinary hearings in addition to appeals. This proposed
change was included to reflect the current responsibility of OCC's
Board. In the section of Chapter 2 titled ``Facilities,'' OCC's
proposed changes eliminate the Jersey City Business Center as a
referenced facility that houses OCC's personnel, since that location is
no longer in existence. OCC's proposed changes also update specific
language in the section titled ``Service Level Agreement'' to provide
that Service Level Agreements (``SLAs'') record a common understanding
about services, priorities, responsibilities, data protection,
guarantees, and warranties between OCC and ``certain'' vendors, rather
than ``the'' vendors. This proposed change is aimed to limit ambiguity
with reference to vendors impacted by SLAs. To remain consistent with
OCC's transition to a non-executive chairman governance structure,
OCC's proposed changes eliminate certain provisions under the
``Management Structure'' section of Chapter 2. Specifically, OCC's
proposed changes eliminate the provisions that state ``OCC's Executive
Chairman serves as the Chairman of OCC's Board. The Executive Chairman
is responsible for certain aspects of the OCC's business.'' These
proposed changes align with OCC's existing governance structure which
does not maintain an executive chairman position.
OCC's proposed changes to the ``Bank Credit Facility'' section in
Chapter 2 aim to eliminate the risk of potential inaccuracy within the
Plan by removing the specific reference to numerical data points that
are currently outdated and have the possibility to change in the
future. Specifically, OCC's proposed changes eliminate the reference
that the largest commitment under the Bank Credit Facility by any
single bank affiliated with a Clearing Member is typically less than
$150 million or 7.5% of total Bank Credit Facility
[[Page 19353]]
commitments. OCC's proposed changes add the provision that provides
that within the facility, the amount of the commitment of each bank is
capped to limit the risk posed by any single bank counterparty. These
proposed changes are intended to capture the general concept of the
Bank Credit Facility rather than reference specific numerical data that
has potential to change in the future. OCC believes these proposed
changes will help to promote accuracy within the Plan. Furthermore,
OCC's existing Plan suggests that collateral available to be pledged to
the Bank Credit Facility is limited, in part, to S&P equities. To
reflect updated information, OCC's proposed changes remove ``S&P''
before equities because the list of eligible collateral was expanded
beyond just the components of the S&P 500.
Finally, OCC's proposed changes to Chapter 2 also include minor
formatting and grammatical changes, such as changing ``the'' to ``a'',
eliminating unnecessary words, and capitalizing defined terms such as
``Repo Facility'' and ``Clearing Member.'' Such changes are proposed
solely for internal consistency and grammatical accuracy and would not
define new terms or make any changes to the meaning of the language in
Chapter 2.
Chapter 3: Core Services and Critical Support Functions
OCC's primary changes to Chapter 3 that were identified during
OCC's annual review process include proposed updates to OCC's support
functions and department ratings to align with OCC's existing
organizational structure. For example, OCC's proposed changes reflect
that OCC's Exams and Litigation support function, which was previously
under the Legal Department, was modified such that the Exams support
function was moved from the Legal Department and into the Compliance
Department. OCC's proposed changes also reflect that OCC's Business
Continuity support function was relocated from the Security Services
Department into the Business Operations Department. Additionally, OCC's
proposed changes reflect that the Corporate Communications support
function was moved from the External Relations Department into the
Human Resources Department. OCC's proposed changes update the names of
the support functions and departments to align with OCC's current
organizational structure and add new support functions or eliminate
those support functions no longer in existence. Overall, OCC's proposed
changes to Exhibit 3-3 reflect updates to align with OCC's existing
organizational structure based on changes that occurred from an
administrative perspective to OCC's departments. Furthermore, to
incorporate those updates in department structure to Exhibit 3-3, OCC's
proposed changes also include related updates to the department ratings
based on relocation or renaming of the support function or department.
Based on changes within OCC's department structure, OCC's proposed
changes to Chapter 3 also specify that the External Relations
Department is no longer identified as a Critical Support Function,
because the Corporate Communications team has been moved from the
External Relationship Department into the Human Resources Department.
Based on this change, OCC's proposed changes provide that the External
Relations Department is no longer deemed a ``Critical Support
Function.'' To reflect this, OCC's proposed changes update the title of
Exhibit 3-3 to remove the term ``Critical'' in the heading. Prior to
Exhibit 3-3, OCC's proposed changes in Section 3.4 provide that ``all
but one support function are critical to the provision of OCC's Core
Services identified above.'' OCC's proposed changes also specify that
eleven of the twelve identified support functions are necessary to
deliver OCC's core services, and the External Relations Department is
not included in those twelve.
Lastly, general proposed changes to Chapter 3 that were identified
during OCC's annual review process include (i) updating the number of
personnel employed under each Critical Support Function in Exhibit 3-4
and the description of IT Systems to reflect current data, (ii)
removing the bullet point list of Critical Support Functions listed
above Exhibit 3-3 to eliminate redundancy of information because this
list is already provided earlier in Chapter 3, (iii) removing the word
``subpart'' in the description of Exhibit 3-2 description to reflect
accurate information, (iv) updating the name of OCC's ``Agreement
Review Policy'' to ``Material Agreements Policy'' to reflect the
current name of the Policy, and (v) editing text for grammatical or
formatting purposes. The grammatical and formatting changes are
proposed solely for internal consistency and grammatical accuracy and
would not define new terms or make any changes to the meaning of the
language in Chapter 3.
Chapter 4: Recovery Plan
OCC's proposed changes to Chapter 4 of the RWD Plan identified
during OCC's annual review process include updates to the Plan based on
changes approved by the Commission to OCC's Capital Management Policy
in SR-OCC-2024-012.\41\ To promote clarity throughout the Plan, OCC's
proposed changes abbreviate the phrase ``Liquid Net Assets Funded by
Equity greater than 110% of the Target Capital Requirement'' to
``Excess LNAFBE.'' In addition, OCC's proposed changes replace
reference to ``Equity'' with ``Liquid Net Assets Funded by Equity'' to
align with the updates in the Capital Management Policy.\42\ OCC's
proposed changes define OCC's Minimum Corporate Contribution as ``the
minimum level of OCC funds maintained exclusively to cover credit
losses or liquidity shortfalls and is determined by the Board from time
to time'' to align with the definition in OCC's Capital Management
Policy.\43\
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\41\ See supra, note 22.
\42\ Id.
\43\ Id.
---------------------------------------------------------------------------
OCC's proposed changes to Chapter 4 of the Plan also update the
section titled ``Inventory of Enhanced Risk Management Tools'' to
provide information on how OCC's enhanced risk management tools,
specifically Excess LNAFBE and EDCP Unvested Balance, would be utilized
in the event of a non-default or operational loss. Currently, this
section only describes how OCC's enhanced risk management tools would
be utilized in the event of a default loss. OCC uses a different
methodology in the event of a non-default loss, so OCC's proposed
changes clarify how Excess LNAFBE and EDCP Unvested Balance would be
used in the event of a non-default loss vs. a default loss.
Specifically, OCC's proposed changes provide that in the event of an
operational loss, OCC would first contribute Excess LNAFBE, and if
capital remains below defined levels, will next contribute the EDCP
Unvested Balance. OCC's proposed changes provide that after use of the
Excess LNAFBE and EDCP Unvested Balance, OCC would next charge an
Operational Loss Fee in equal share to each Clearing Member. OCC's
proposed changes provide that in the event of a deficiency due to
default, OCC would utilize its Minimum Corporate Contribution and
Excess LNAFBE in advance of charging a loss or deficiency
proportionately to the Clearing Fund deposits of non-defaulting
Clearing Members. OCC's Plan explains that after use of the Minimum
Corporate Contribution and Excess LNAFBE, OCC would next pay for a loss
out of the Clearing Fund and the EDCP Unvested Balance charged on a
proportionate basis against the sum of the EDCP Unvested Balance and
all
[[Page 19354]]
other Clearing Members' required contributions as calculated at the
time. To more closely align with OCC Rule 1006(b),\44\ OCC's proposed
changes update the previous provision by eliminating the phrase ``pay
for a loss out of the Clearing Fund'' and replace that with ``pay for
any deficiency from the Clearing Fund.'' To further clarify OCC's tools
in the event of default loss vs. a non-default loss in the section
titled ``Implementation, Time Frame and Key Risks,'' OCC's proposed
changes provide that in the event of an operational loss, contribution
of Excess LNAFBE and Unvested EDCP are not subject to heightened
governance or further Board approval.
---------------------------------------------------------------------------
\44\ See supra, note 5.
---------------------------------------------------------------------------
OCC's proposed changes to Chapter 4 include updates to the section
titled ``Clearing Fee Change.'' Under the sub-section titled
``Implementation, Time Frame and Key Risks,'' OCC proposes to edit the
first paragraph to remain consistent with OCC's existing Capital
Management Policy.\45\ OCC's current Plan references, in part, that
implementation [of a clearing fee change] would more likely happen ``if
Shareholders' Equity fell below 110% but remained above 90% of OCC's
Target Capital Requirement.'' Because this information is outdated, OCC
proposes to eliminate it and replace it with language that provides
``based upon the thresholds in OCC's Capital Management Policy.'' OCC
believes that providing a more general reference to OCC's Capital
Management Policy, rather than stating specific numerical details,
eliminates the risk of having inaccurate information in the Plan.
---------------------------------------------------------------------------
\45\ See supra, note 22.
---------------------------------------------------------------------------
OCC's proposed changes to Chapter 4 also include updates to the
section titled ``Minimum Clearing Fund Cash Contribution'' and the
section titled ``Borrowing Against Clearing Fund.'' OCC's proposed
changes to the ``Minimum Clearing Fund Cash Contribution'' section, to
more closely align with Rule 1002(a)(i),\46\ include the word
``minimum'' before the terms ``cash Clearing Fund'' in the specific
provision that explains any such temporary increase in the minimum cash
Clearing Fund requirement must be reviewed by the Risk Committee as
soon as practicable, and in any event within 20 days of the decision to
increase. Under the ``Borrowing Against the Clearing Fund'' section,
OCC's proposed changes eliminate the outdated provision that ``In order
for OCC to borrow under 1006(f), it must first determine that it is
unable to borrow or otherwise obtain such funds on acceptable terms on
an unsecured basis.'' This provision no longer exists in OCC's rules,
and therefore does not apply. Under the ``Implementation, Time Frame
and Key Risks'' section, OCC proposes to clarify the implementation
time frame for borrowing against the Clearing Fund. To align more
closely with OCC Rule 1006(h),\47\ OCC's proposed changes eliminate the
reference that describes ``Clearing Fund cash being increased the
following banking day by 5:30 p.m. Central Time.'' Specifically, OCC's
proposed changes provide that the time frame for implementing this tool
should be no more than several hours, and the Clearing Fund would not
require replenishment by Clearing Members unless and until the
borrowing is deemed to be a charge, at which point cash would be
increased by the first Settlement Time following notification to the
Clearing Member of such deficiency or such later time as provided by
OCC.
---------------------------------------------------------------------------
\46\ See supra, note 5.
\47\ See supra, note 5.
---------------------------------------------------------------------------
Exhibit 4-1 in OCC's RWD Plan illustrates the alignment of OCC's
Recovery Tools to the risk exposures identified in the CPMI-IOSCO 2014
Recovery Report. The exhibit currently depicts OCC's enhanced risk
management and recovery tools, and the risk exposures identified in the
event of a default loss. OCC's proposed changes to the section in
Chapter 4 titled ``Minimum Corporate Contribution, Excess LNAFBE, and
EDCP Unvested Balance'' clarify how OCC's enhanced risk management
tools, specifically Excess LNAFBE and EDCP Unvested Balance, would be
utilized in the event of a non-default loss, in addition to a default
loss. Therefore, OCC's proposed changes update Exhibit 4-1 to align the
tools with the associated risk exposure in the event of a non-default
loss. To reflect this, OCC's proposed changes add a check mark under
legal risk, general business risk and operational risk. Additional
proposed changes to Exhibit 4-1 include replacing the general reference
of OCC's ``Replenishment Plan'' as an enhanced risk management and
recovery tool with a more specific reference to OCC's ``Operational
Loss Fee.'' OCC's Replenishment Plan includes the use of excess LNAFBE,
EDCP Unvested Balance and Operational Loss Fee. Because OCC breaks down
the Replenishment Plan into separate categories for Excess LNAFBE and
EDCP Unvested Balance in the existing table, to remain consistent with
this approach, OCC's proposed changes replace ``Replenishment Plan''
with ``Operational Loss Fee.''
OCC's proposed changes provide additional clarification in the
section in Chapter 4 titled ``Credit Risk Due to Bank or Commodities or
Securities Clearing Organization Failure.'' OCC's proposed changes
include reference to a Repo Bank Facility, in addition to a Bank Credit
Facility, as another available resource to OCC when utilizing its
authority to borrow against the Clearing Fund. OCC's proposed changes
to this section also provide that to address counterparty credit risk,
OCC will utilize its authority to borrow against the Clearing Fund (by
transferring cash or pledging the borrowed collateral to the Bank
Credit Facility or the Repo Facilities) in order to make settlements
for the day. OCC's proposed changes include the additional information
``by transferring cash'' to provide a more complete and accurate
description of OCC's ability to borrow against the Clearing Fund. OCC's
proposed changes to this section aim to clarify that the Bank Credit
Facility is not the only means of borrowing against the Clearing Fund,
rather OCC can borrow the cash or the government securities in the
Clearing Fund, and the government securities can be converted to cash
by either the Bank Credit Facility or the Repo Facilities.
OCC's proposed changes to the section in Chapter 4 titled
``Recovery Trigger Events,'' which are also reflected in Exhibit 1-1,
modify the description of ``liquidity loss'' under OCC's recovery
triggers to limit ambiguity in the description. OCC's existing
description of ``liquidity loss'' provides that it is a significant
depletion of liquidity resources such that OCC may not be able to
address foreseeable liquidity shortfalls to avoid unwinding, revoking,
or delaying the same-day settlement of payment obligations. OCC's
proposed changes to this description eliminate the term ``may'' and
describe ``liquidity loss'' to be a significant depletion of liquidity
resources such that OCC ``forecasts that current available liquidity
resources will'' not be able to address foreseeable liquidity
shortfalls to avoid unwinding, revoking, or delaying the same-day
settlement of payment obligations. This proposed change is intended to
promote clarity by using a more quantitative measure in determining the
result of how OCC constitutes a liquidity loss.
OCC's proposed changes to Chapter 4 also update the title of
Scenario 4 from ``General Business and Operational Risks'' to ``Default
and General Business Risks'' to remain consistent with the
[[Page 19355]]
existing title of Scenario 4 in the Appendix in Chapter 7. Within
Scenario 4, OCC's proposed changes provide accurate reference to the
OCC departments that have identified the universe of relevant
operational and general business risks. These proposed changes include
the elimination of the Business Development Department and the addition
of the Financial Risk Management and Security Services Departments.
OCC's proposed changes to Scenario 4 also aim to replicate the
structure of the other stress scenario descriptions in the RWD Plan to
align with the characteristics of the ``Detailed Stress Scenario 4'' in
Appendix A. Specifically, OCC proposes to replace the generic
description of general business risks and operational risks with a
description of the steps OCC would consider in the event of a member
default followed by a cyber event. Similar to the other scenario
descriptions in the RWD Plan, OCC's proposed changes provide more
details on the specific scenario and the OCC tools that could be used
in this type of scenario. Specifically, OCC's proposed changes provide
that the management of a Clearing Member default would follow the same
path shown in Scenario 1, including the creation of a close-out action
plan, an auction, and use of the resources in the loss allocation
waterfall described above and set forth in both Rule 1006(b) and OCC's
Default Management Policy. OCC's proposed changes provide that the
scenario continues with an operational loss from a cybersecurity event,
which triggers OCC's use of its Replenishment Plan as described in its
Capital Management Policy. OCC's proposed changes describe OCC's tools
in this scenario including Excess LNAFBE, Clearing Fee Change, EDCP
Unvested Balance, and Operational Loss Fee. OCC's proposed changes also
provide that as this scenario incorporates both a credit, default
component and an operational, non-default component, it demonstrates
the use of both tools that are unique to and tools that span, default
and non-default losses. The purpose of shifting the scenario to focus
on a default followed by a cyber event is to align with the Detailed
Stress Scenario 4, outlined in Chapter 7, and to align with the format
of the other scenarios in Section 4.4. OCC believes the proposed change
provides a more precise explanation of the tools that would be
utilized, the description of such tools, and the steps that OCC would
take if the hypothetical scenario were to occur.
Additional proposed changes to Chapter 4 identified during OCC's
annual review process include: (i) updating inaccurate references to
OCC's procedures by removing the reference to ``Bank On-boarding and
Off-boarding Procedure'' and replacing it with reference to
``Settlement Bank Failure Procedure'' as shown in the ``Borrowing
Against the Clearing Fund'' section; (ii) updating the section titled
``Assessment Powers for the Pre-Funded Clearing Fund'' and ``Assessment
Powers Beyond the Pre-Funded Clearing Fund'' to reflect accurate
information within OCC's procedures as it relates to implementation,
time frame and key risks. Specifically, OCC's proposed changes in these
sections provide that Market Risk and Default Management would
calculate the proportional assessment amounts, and Legal would prepare
a notice of Clearing Fund Assessments and a public notice which is
distributed to Member Services to be posted. Currently, these sections
provide that Market and Default Management prepares a draft Notice of
Clearing Fund Assessments and a public notice for review by Legal; and
that following the review, Legal notifies Member Services that the
Notice of Clearing Fund Assessments and public notice may be posted.
Finally, OCC's proposed changes to Chapter 4 include grammatical
and other non-substantive edits to language to provide clarity and
consistency throughout the document.
Chapter 5: Wind-Down Plan
OCC's proposed changes to Chapter 5 of the RWD Plan identified
during OCC's annual review process include updates to the exhibit
titled ``Summary of Targeted Reductions in Force'' to modify the number
of full-time employees, and the number of those employees to be
retained and released, to reflect current data. OCC's proposed changes
also update the comments within each summary of each support function
to reflect current roles and responsibilities of the support function
to be retained. OCC's proposed changes to Chapter 5 also update
outdated information in the sectioned titled ``Termination of Stock
Loan Programs.'' OCC's proposed changes provide that given the nature
of the cessation of OCC's Stock Loan Programs and the potential for
temporary disruption to Stock Loan participants, it is imperative that
the termination of the programs is timely and appropriately
communicated to the regulators and to Clearing Members. OCC's proposed
changes eliminate the inaccurate reference to an increase in the size
of OCC's Clearing Fund.
Minor, non-substantive updates to Chapter 5 identified during the
annual review process include updating grammatical and formatting
language. Specifically, within the section titled ``Merger
Transaction,'' OCC's proposed changes replace ``the'' with ``a'' to
reflect that for purposes of the WDP, a ``Merger Transaction'' means a
merger or consolidation of OCC with another entity, with OCC as a
surviving entity. This change provides clarity that OCC may not be the
sole surviving entity in this situation.
Chapter 7: Appendix
OCC's proposed changes to Chapter 7 of the RWD Plan identified
during OCC's annual review process include modifications to OCC's four
detailed hypothetical scenarios to: (i) update referenced numbers
throughout all detailed scenarios to reflect current data, and (ii)
provide more granular information as it relates assumptions and details
within the scenarios to make each scenario more realistic.
As described in each hypothetical stress scenario 1 through 4,
OCC's existing Plan provides that due to the extremity of the scenario
and potential for negative market wide effects, the Business Continuity
team is contacted to advise the Crisis Management Coordinator to
determine if further actions are required with the CMT Plan. OCC's
proposed changes to stress scenarios 1 through 4 add the language
``including a decision for regulatory notification'' to this provision
to provide an example of what specific further action would be taken
within the scenarios. Other proposed changes within each stress
scenario include (i) updating ``CMT Leader'' to ``Crisis Management
Coordinator'' to reflect the accurate name of the title of the role at
OCC, (ii) deleting information that OCC believes is no longer relevant
in the scenario, (iii) relocating existing information within the
scenario to promote clarity in timeline, and (iv) including clarifying
language to reduce ambiguity in scenario assumptions. A more detailed
description of the proposed changes to the scenarios are described
below.
Proposed Changes to Scenario 1:
In hypothetical stress scenario 1, OCC proposes to update the
scenario such that the first draw after the Clearing Member default
would be a borrowing from the Clearing Fund, rather than a
proportionate charge to the Clearing Fund and unvested EDCP Balance.
OCC believes this proposed modification represents a more realistic
approach to how OCC would address the hypothetical scenario. Because
OCC
[[Page 19356]]
typically would approach this scenario in a similar way to how it
approaches its firm-wide default test, where OCC first addresses the
liquidity aspect in a Clearing Member default and whether a borrowing
from the Clearing Fund is necessary, OCC believes it is more realistic
to align the scenario with how OCC currently manages defaults during
its annual firm-wide default test. To account for this proposed change,
OCC proposes to update information described in day 1 of the scenario.
Specifically, under the fifth bullet point in day 1 of OCC's existing
Plan, it describes that the composition of the $5.3 billion of Clearing
Fund assets used by OCC to be: (i) $1.0 billion of Clearing Member A's
cash contribution to the Clearing Fund; and (ii) $4.3 billion, of cash
contributions to the Clearing Fund from non-defaulting Clearing
Members, which is a proportionate charge to the Clearing Fund and
unvested EDCP Balance. OCC's proposed changes modify this statement to
update the numbers to reflect current data and eliminate the provision
that states ``which is a proportionate charge to the Clearing Fund and
unvested EDCP Balance.'' To reflect this update, OCC's proposed changes
provide that the $6.5 billion of cash contributions to the Clearing
Fund from non-defaulting Clearing Members is ``a borrowing from the
Clearing Fund.'' As a result, OCC's proposed changes would also remove
the discussion in day 1 of notifying members of a deficiency because
the initial draw is a borrowing rather than a proportionate charge.
Therefore, OCC proposes to eliminate the provision that provides ``OCC
notifies all non-defaulting Clearing Members of a $5.3 billion
deficiency in the Clearing Fund resulting from a proportionate charge,
thereby requiring all non-defaulting Clearing members to replenish the
$5.3 billion deficiency by 8 a.m. Central Time on Day 2 in accordance
with Rule 1006(h)(A).''
Under day 2 of scenario 1, OCC's proposed changes eliminate two
provisions that OCC believes are no longer applicable in the event of a
realistic scenario. Specifically, OCC's proposed changes eliminate the
provision that states ``All non-defaulting Clearing Members satisfy
their assessment obligations by 8A.M. Central Time, restoring Clearing
Fund to $13.3 billion of which $9.3 billion is in cash.'' OCC's
proposed changes also eliminate the provision that provides
``Accordingly, after the $5.3 billion replenishment on Day 2, OCC's
remaining replenishment power for the cooling-off period is $18.1
billion.'' OCC also proposes to relocate information from day 1 to day
2 to reflect the proposed change regarding the initial draw as a
borrowing, rather than a proportionate charge, from the Clearing Fund.
Specifically, OCC's proposed changes relocate from day 1 to day 2 the
provision that states ``As a result of the Clearing Fund being used
during the Default Management Process, a 15-day rolling cooling-off
period in accordance with Rule 1006(h)(B) commences; during this time,
Clearing Members are not liable for more than 200% of their individual
total Clearing Fund contributions required as of the cooling-off period
trigger event.'' OCC also proposes to incorporate new information to
provide additional clarity in the scenario, including the provision
that states ``OCC determines the previous $8.3 billion outstanding
borrowing to be an actual loss to the Clearing Fund.'' Throughout days
3 through 18 of scenario 1, OCC's proposed changes update the
referenced numbers within the scenario to reflect current data and
eliminate various provisions that OCC believes are no longer relevant
to the scenario. Because OCC's proposed changes establish the initial
draw to be a borrowing from the Clearing Fund on day 1, and the charge
to commence on day 2, as a result, the 15-day cooling off period would
also start on day 2. Therefore, OCC's proposed changes extend the
scenario to last 22 days, instead of 21 days, because a cooling off
period can extend up to 20 days from the initial charge to the Clearing
Fund.
Proposed Changes to Scenario 2:
In hypothetical stress scenario 2, OCC's proposed changes provide
that (1) OCC receives an ``all clear'' message from NSCC, and (2) other
services that Bank A provides to OCC are not impacted. These proposed
changes provide additional information to promote clarity within the
scenario. OCC's proposed changes also provide language within the
assumption that ``more than'' 25 Clearing Members settle through Bank
A. This proposed change provides flexibility on the number of Clearing
Members in the scenario. Currently, OCC's Plan provides that Clearing
members are able to receive wire funds to back up settlement banks. To
clarify that OCC assumes the normal flow of business such that
settlement banks are operating normally related to debit/credit
functionality, OCC proposes to update this sentence to provide that
Clearing Members are able to ``send and'' receive wire funds to ``and
from'' back up settlement banks. These proposed changes are intended to
capture the assumption that functionality between the settlement bank
and Clearing Member is operating without issue. Furthermore, OCC's
proposed changes to Scenario 2 provide clarity around the notification
process. On day 1 of scenario 2, OCC's proposed changes specify that
Collateral Services, rather than a general reference to OCC, becomes
aware of the disruption through internal monitoring of settlement
instructions and external notification. OCC's proposed changes also
provide that Collateral Services informs Financial Risk Management
(``FRM'') and Treasury that Bank A is experiencing an operational
disruption. OCC's proposed changes eliminate the provision that
notification is provided specifically to Market Risk Default Management
when unable to meet the 10:00 a.m. Central Time operational settlement
time. The purpose of this proposed change is to expand the notification
to several groups within the department, not just Market Risk Default
Management. OCC's proposed changes also provide that at 10:00 a.m.,
rather than 10:45 a.m., Bank A informs OCC that there is no ETA on a
resolution and that this could be a prolonged outage. OCC's proposed
changes also provide that formal notification is provided to FRM when
Bank A is unable to meet the 10:00 a.m. Central Time operational
settlement time, and then notification is provided to the Default
Management email distribution list. Because OCC's proposed changes add
a specific provision on formal notification to FRM and the Default
Management Group, OCC's proposed changes eliminate the reference that
MRDM ``escalates the incident to the FRM Default Management Email
Group.'' To add clarity and promote a more realistic approach to the
scenario, OCC's proposed changes provide that the ED, MRDM or delegate
recommends to the Office of the CEO (``OCEO'') to have members enact
alternative settlement procedures and extend settlement via Rule 505
``based on the information provided by Bank A as well as the large
number of first that settle at Bank A.'' To add additional detail,
additionally OCC's proposed changes provide that ``alternative
settlement processing is highly manual and time consuming.'' Finally,
OCC's proposed changes to scenario 2 add clarifying information that
provides ``due to the large number of Clearing Members settling through
Bank A and the extensive manual payment instructions that go along with
enacting alternative settlement, the OCEO authorizes extension of
settlement until the close of Fedwire.'' Although this outcome has
always been
[[Page 19357]]
expected with respect to this scenario in the Plan, OCC believes it is
necessary to specify this information in writing to provide the reader
with more detail and context for the utilization of the Plan.
Proposed Changes to Scenario 3:
In hypothetical stress scenario 3, OCC's proposed changes promote
clarity within the scenario to provide for a more realistic approach.
Under the ``Enhanced Risk Management and Recovery Tools'' section of
scenario 3, OCC's existing Plan describes that depending upon the
issue, OCC and DTC Management collaborate on selecting the appropriate
enhanced risk management and/or recovery tool. For additional context
in this bullet point, OCC proposes to add the provision that provides
``This may include using OCC's Clearing Fund under Rule 1006.'' This
proposed change is intended to promote additional clarity for the
reader and provide context in an example of what may be an appropriate
tool in this situation. OCC's proposed changes in scenario 3 also
relocate information to earlier in the scenario, including the
provision that provides ``DTC confirms they are experiencing an outage
and are working on the problem.'' Additionally, OCC's proposed changes
also relocate the provision that states ``DTC has no ETA on resolution
and does not expect to be resolved by the end of the processing day''
to earlier in the scenario to also promote a more realistic approach to
the scenario. OCC proposes deleting ``As the end of the day is
nearing'' from this relocated text because it is relocated to earlier
in the scenario. OCC's existing Plan provides that Collateral Servies
notifies EquiLend that new and in-flight stock loan trades may not be
cleared. OCC proposes to replace the text ``that new and in-flight
stock loan trades may not be cleared'' with ``on the status of
transactions with DTC'' to promote clarity within the scenario.
OCC's proposed changes add new information in the scenario that
provides if Clearing Members question OCC about the validity of
existing collateral, Business Operations will communicate that Clearing
Members' existing collateral, that has been accepted by DTC, is still
recognized by OCC as reflected in OCC's clearing system. OCC replaces
``Member Services/Collateral Services'' and ``Member Services'' with
``Business Operations'' to reflect the current responsibility of the
department. OCC proposes to incorporate this change to provide clarity
that in a realistic scenario, OCC would not proactively reach out to
Clearing Members validating the existence of their collateral. However,
only if Clearing Members contact OCC and question the validity of their
collateral, then OCC would provide a response. To account for this
change, OCC's proposed changes also remove the language within the
scenario that provides ``they also communicate that Clearing Members'
existing collateral that has been accepted by DTC is still recognized
by OCC as reflected in OCC's clearing system.'' OCC's proposed changes
include a provision within scenario 3 that provides OCC is unable to
enter Stock Loan Re-Purchase Adjustments as those adjustments are
entered directly into the DTC system, and that Business Operations
works with DTC to communicate the adjustments, and DTC makes the
appropriate updates internally. This additional information supports a
more realistic scenario approach. Finally, OCC's proposed changes
remove information that OCC believes is no longer relevant to the
scenario, including the provision that provides ``Market Operations
notifies DTC and NSCC that OCC's processing must begin and kicks off
finalization by 9 p.m. Central Time as an ETA for DTC back online has
not been received.''
Proposed Changes to Scenario 4:
In hypothetical stress scenario 4, OCC's proposed changes to the
scenario, at a high-level, aim to make the scenario more realistic by
including more detail including the total size of default to be $145
million. OCC's proposed changes provide that after receiving a
recommendation to borrow $145 million from an Executive Director in
Default Management and approval to borrow the cash from the Clearing
Fund from OCEO, Treasury transfers $145 million in cash from the OCC
Clearing Fund account at the Federal Reserve Bank to BMO. OCC's
proposed changes provide that funds are deposited into an OCC
liquidating settlement account in the name of the defaulting clearing
member to pay start of day settlements. In addition to updating the
relevant numbers in the scenario to account for accurate data, OCC's
proposed changes incorporate additional detail into the scenario. OCC's
proposed changes update an existing provision to provide ``OCC returns
the $70 million to the Clearing Fund account at the Federal Reserve
Bank.'' Later in the scenario, OCC's existing Plan provides that the
auction winning bidder takes possession of the defaulting Clearing
Member's position. OCC proposes to include additional information in
this provision by adding ``and $75 million is returned to Clearing Fund
account at the Federal Reserve Bank to fully repay the borrowing.
Lastly, OCC proposes to add the provision that OCC files a $60 million
insurance claim less a $10 million retention to cover $50 million of
the $90 million loss, and meanwhile, OCC exercises the $75 million
working capital line of credit as needed for liquidity purposes. The
remaining proposed revisions to stress scenario 4 provide additional
granularity within the scenario to promote clarification and provide a
more realistic approach to the scenario. The additional granularity is
proposed solely to give the reader more detail and context without
making any changes to the scenario or tools that OCC would apply in
Scenario 4. Finally, OCC's proposed changes remove information that OCC
believes is no longer relevant to the scenario.
General revisions to the RWD Plan identified during OCC's annual
review process.
OCC's proposed changes throughout the RWD Plan replace the term
``Executive Chairman'' with ``Chairman'' and ``Chief Legal Officer and
General Counsel'' with ``General Counsel'' to align with changes to
OCC's existing organizational structure and descriptions of roles.
OCC's proposed changes also update the name of OCC's Working Group from
the ``Recovery and Wind-Down Working Group'' or ``RWD Plan Working
Group'' to the ``Default and Recovery Working Group'' to reflect the
combination of two prior working groups: the Recovery and Wind-Down
Working Group (also referred to as the RWD Plan Working Group) and the
Default Management Working Group.\48\ OCC's proposed changes also
update the reference from ``Head of Default Management'' to ``Executive
Director, Market Risk and Default Management'' (``ED, MRDM'') to
reflect accurate to role titles. Lastly, OCC's proposed changes
eliminate the reference in Chapter 6 to OCC's ``recovery and resolution
plan,'' and replace it with OCC's ``RWD Plan.'' This change is intended
to promote consistency and align with the titling of the Plan
referenced in OCC's existing Board Charter.
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\48\ Because the two pre-existing working groups contained
multiple points of overlap, OCC combined the pre-existing working
groups to eliminate redundancy, ensure clarity in responsibilities
and streamline the function.
---------------------------------------------------------------------------
2. Statutory Basis
OCC believes the proposed rule change is consistent with Section
17A of the Exchange Act \49\ and Rule 17Ad-22(e)(3)(ii) \50\
thereunder. Section 17A(b)(3)(F) of the Act \51\ requires,
[[Page 19358]]
among other things, that the rules of a clearing agency be designed, in
general, to protect investors and the public interest. OCC believes
that the proposed rule change is consistent with this requirement
because the proposed changes are designed to, as a whole, modify OCC's
existing RWD Plan to provide for effective recovery and orderly wind-
down. OCC's proposed modifications, among other things: (i) identify
OCC's core services to be maintained in a recovery or wind-down, which
include OCC's pricing and valuation services and clearing and
settlement functions, and the related staffing roles that would support
those functions including those within the Business Operations,
Corporate, Financial Risk Management and Information Technology support
functions as described in the proposed Plan; (ii) identify OCC's
service providers for core services, which include vendors, financial
market utilities, banks, liquidity providers, and liquidation agents,
and address how OCC would ensure that such service providers would
continue in a recovery or wind-down through reliance on the absence of
a ``material adverse change'' clause or similar provision (``MAC
Clauses'') in each key agreement with such service provider that would
permit the counterparty to terminate the agreement and discontinue the
provision of services in the event of a recovery or during a wind-down;
(iii) clarify OCC's process used to monitor and determine whether the
criteria that could trigger implementation of a recovery or wind-down
have been met through identifying responsibilities of the Financial
Risk Management, IT, and Corporate Finance teams at OCC; and (iv)
clarify OCC's process for testing the RWD Plan annually, including the
involvement of other stakeholders participating in the test, and the
roles and responsibilities of OCC's Management, Working Group, and
Working Group Delegate or Chair in reviewing the testing results, and
incorporating lessons learned from testing into the Plan. OCC believes
these proposed modifications would help OCC anticipate, better prepare
for and respond to times of extreme market stress or other events that
could lead to a recovery or wind-down. Additionally, OCC believes these
proposed modifications enhance OCC's ability to preserve its financial
stability by proactively identifying mechanisms to ensure the
continuity of OCC's core services and the continuation of the staffing
roles to support those core services in times of a recovery or during a
wind-down. This, in turn, would limit disruption not only to OCC and
its Clearing Members, but to other market participants and the broader
U.S. financial system. OCC believes the proposed changes to its RWD
Plan provide OCC with the tools to effectively address a variety of
potential risks, thereby improving OCC's ability to ultimately maintain
market and public confidence during a time of unprecedented stress.
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\49\ 15 U.S.C. 78q-1.
\50\ 17 CFR 240.17ad-22(e)(3)(ii).
\51\ 15 U.S.C. 78q-1(b)(3)(F).
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For these reasons, OCC believes the proposed changes to its RWD
Plan are reasonably designed to protect investors and the public
interest, in accordance with Section 17A(b)(3)(F) of the Act.\52\
---------------------------------------------------------------------------
\52\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(3)(ii) \53\ requires OCC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to include plans for the recovery and orderly wind-down of the
covered clearing agency necessitated by credit losses, liquidity
shortfalls, losses from general business risk, or any other losses.\54\
As described above, OCC's RWD Plan outlines OCC's plans to recover
from, or wind-down its operations as a result of severe stress brought
about by credit losses, liquidity shortfalls, losses from general
business risk or other losses, including losses from operational
disruption. The proposed modifications to OCC's RWD Plan evaluate,
among other things, how OCC would continue to provide its core services
during a recovery or wind-down and analyze, from a staffing
perspective, how staffing roles necessary to support OCC's core
services would continue in a recovery or during a wind-down.
Additionally, the proposed modifications identify the subset of OCC's
service providers necessary to ensure the continued delivery of its
core services throughout a recovery or wind-down. Further, the proposed
changes explain OCC's process for testing the Plan and the roles and
responsibilities for reviewing the testing results. These proposed
updates enhance OCC's existing RWD Plan and codify its existing
elements to ensure that those elements remain in the Plan over time.
For those reasons, OCC believes that the proposal is consistent with
Rule 17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------
\53\ 17 CFR 240.17ad-22(e)(3)(ii).
\54\ 17 CFR 240.17ad-22(e)(3)(ii).
---------------------------------------------------------------------------
Lastly, OCC believes the proposed changes identified during its
annual review process are also consistent with Rule 17Ad-
22(e)(3)(ii).\55\ These changes, among other things, update the Plan so
that the role descriptions of OCC's Management, the support functions,
and department ratings all align with OCC's existing organizational
structure. The proposed changes also incorporate information related to
OCC's enhanced risk management and recovery tools in the event of a
non-default loss. Furthermore, OCC's proposed changes provide
additional clarification and granularity in each of OCC's detailed
stress scenarios. These proposed changes seek to streamline the
scenarios by updating data points to reflect current information,
eliminating provisions that OCC believes are no longer relevant, and
including new provisions that promote a more realistic approach to each
scenario. OCC believes the proposed changes identified during its
annual review process improve the accuracy of the Plan by incorporating
the most up to date information within the Plan so that OCC can
reasonably anticipate and prepare for the possibility of a recovery or
wind-down. In this regard, OCC believes its proposed rule change is
consistent with Rule 17Ad-22(e)(3)(ii).\56\
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\55\ Id.
\56\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \57\ 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 Act. OCC does not
believe that the proposed rule changes to modify OCC's RWD Plan would
impact or impose any burden on competition.\58\ The proposed
modifications to OCC's RWD Plan, which must be formally filed by April
17, 2025, and effective by December 15, 2025, would promote OCC's
compliance with the SEC RWD Rule. The proposed changes to OCC's RWD
Plan are designed to clearly articulate the newly established
requirements of the SEC RWD Rule including, but not limited to: (i) the
elements related to planning, including the identification and use of
scenarios, triggers, tools, staffing, and service providers for core
services, (ii) the timing and implementation of RWPs and (iii) the
testing and board approval of RWPs. The proposed changes to OCC's RWD
Plan also aim to, among other things, reduce potential losses for its
participants and limit market disruptions by addressing how OCC's core
services would continue in the event of a recovery and during a wind-
down and identifying which staffing roles would deploy the RWP and
supervise its implementation. Overall,
[[Page 19359]]
the proposed changes are designed to promote OCC's effective planning
for a recovery or orderly wind-down by including forward-looking
analyses in OCC's RWD Plan to reduce the occurrence of abrupt or
unanticipated market disruptions.
---------------------------------------------------------------------------
\57\ 15 U.S.C. 78q-1(b)(3)(I).
\58\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
For the foregoing reasons, OCC believes that the proposed changes
are in the public interest, would be consistent with the requirements
of the Act applicable to clearing agencies, and would not impact or
impose a burden on competition.
(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 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 selfregulatory 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 (http://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking);
or
Send an email to [email protected]. Please include
file number SR-OCC-2025-005 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-OCC-2025-005. 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 (http://www.sec.gov/rules-regulations/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/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
Do not include personal identifiable information in submissions;
you should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to file number SR-OCC-2025-005 and
should be submitted on or before May 28, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\59\
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\59\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Asistant Secretary.
[FR Doc. 2025-07905 Filed 5-6-25; 8:45 am]
BILLING CODE 8011-01-P