[Federal Register Volume 90, Number 102 (Thursday, May 29, 2025)]
[Notices]
[Pages 22807-22818]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-09624]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103106; File No. SR-OCC-2025-006]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change by The Options Clearing
Corporation Concerning the Adoption of the Amended and Restated
Participant Exchange Agreement (``New RPEA'') Between OCC and Each of
the National Securities Exchanges That List Equity Options
May 22, 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 May 13, 2025, The Options Clearing Corporation
(``OCC'' or ``Corporation'') 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. The Commission is publishing this notice to solicit
comments on 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.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
This proposed rule change is designed to replace the current
Restated Participant Exchange Agreement (``Existing RPEA'') with the
New RPEA to (1) enhance the operational and business practices between
the parties, (2) account for any intervening amendments and changes to
relevant law and/or OCC By-Laws and Rules, and (3) eliminate provisions
that are out-of-date.
The proposed changes are included as Exhibit 5 to File No. SR-OCC-
2025-006. This proposed rule change does not require any changes to the
text of OCC's By-Laws or Rules. All terms with initial capitalization
that are not otherwise defined herein have the same meaning as set
forth in the New RPEA or OCC's By-Laws and Rules.\3\
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\3\ OCC's By-Laws and Rules can be found on OCC's public website
at 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
[[Page 22808]]
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
OCC is the sole clearing agency for standardized equity options
listed on national securities exchanges registered with the Commission.
With limited exceptions, OCC's Rules and By-Laws largely are directed
at (i) establishing guidelines related to OCC's governance and clearing
operations and (ii) the rights and obligations of OCC's Clearing
Members. In contrast, OCC's relationship with the national securities
exchanges that list options (each an ``Exchange,'' and collectively,
the ``Exchanges'') is largely governed by an agreement between OCC and
the Exchanges. This agreement sets out the terms and conditions under
which OCC will provide clearing services to the Exchanges for the
options listed on the Exchanges. The agreement was last amended in
2007, and as a result, it contains certain provisions that are not
current or do not address current interactions between OCC and the
Exchanges and are no longer appropriate to include in the agreement
governing OCC's clearance and settlement services for the Exchanges.
Consequently, OCC proposes to update the agreement to (a) reflect
current, enhanced, or implied but not specifically stated operational
and business practices between OCC and the Exchanges, which may address
technology or industry changes or developments that necessitate new or
updated agreement terms or incorporate adopted best practices for
contract terms, (b) align the agreement with current law and/or OCC's
rules, (c) eliminate provisions that are out of date or update
provisions to reflect current industry terminology, (d) acknowledge the
legal and regulatory landscape of the options industry that affect the
interactions between OCC and the Exchanges by recognizing such factors
within the agreement, and (e) improve overall readability of the
document through the incorporation of intervening amendments and
changes into the agreement. This proposal is not intended to affect the
rights or obligations of Clearing Members or other market participants.
1. Purpose
Pursuant to Article VIIA, Section 4 and Article VIIB, Section 4 of
the OCC By-Laws,\4\ prior to clearing through OCC, each Exchange must
enter into an agreement with OCC and each of the other Exchanges.\5\
This agreement is referred to as the ``participant exchange agreement''
within OCC By-Laws and Rules. The participant exchange agreement
establishes the terms and conditions pursuant to which OCC provides
clearing services to the Exchanges. More specifically, among other
things, the participant exchange agreement: (i) governs the business
relationships between the Exchanges and OCC, and the relationships
among the Exchanges themselves, in respect of such matters as the
listing, registration, clearance, issuance, and exercise of option
contracts traded on the respective Exchanges and the preparation of
options disclosure documents; (ii) provides for indemnification by each
Exchange of OCC, its officers and directors and the other Exchanges and
their respective governors, directors, and officers with respect to
information about an Exchange contained in any registration statement
of OCC or other document required to be filed by OCC with any
regulatory authority, or in any options disclosure document; (iii)
provides for indemnification by OCC of the Exchanges and their
respective governors, directors, and officers with respect to
information contained in any registration statement of OCC or other
document required to be filed by OCC with any regulatory authority, or
in any options disclosure document; and (iv) specifies certain areas of
authority reserved to OCC and the Exchanges, respectively.
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\4\ See note 1 supra.
\5\ Article VIIA, Section 4 of OCC's By-Laws applies to ``Equity
Exchanges,'' which are Exchanges that are OCC shareholders. Article
VIIB, Section 4 of OCC's By-Laws applies to ``Non-Equity
Exchanges,'' which do not own shares in OCC, but rather, have
purchased a promissory note of OCC. See OCC's By-Laws supra note 1.
Both types of Exchanges are required to enter into a participant
exchange agreement with OCC and the other Exchanges prior to
becoming an OCC participant Exchange. The participant exchange
agreement for Non-Equity Exchanges is required to be of
substantially the same tenor as the participant exchange agreement
entered into by each of the Equity Exchanges. Accordingly, OCC has
entered into one participant exchange agreement with both the Equity
Exchanges and the Non-Equity Exchanges (collectively, the
``participant exchanges'').
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In addition to OCC's By-Laws, OCC is subject to the Commission's
2016 covered clearing agency rules (``CCA's''),\6\ which establish
additional standards that OCC must meet as a clearing agency designated
as a Systemically Important Financial Market Utility. Among other
things, these rules require OCC to establish, implement, maintain, and
enforce policies and procedures reasonably designed to:
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\6\ 17 CFR 240.17Ad-22(e).
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identify, monitor, and manage risks related to any link \7\ the
covered clearing agency establishes with one or more . . . trading
markets.\8\
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\7\ 17 CFR 240.17Ad-22(a)(8). A ``link'' for purposes of SEC
Rule 17Ad-22(e)(20) means ``a set of contractual and operational
arrangements between two or more clearing agencies, financial market
utilities, or trading markets that connect them directly or
indirectly for the purposes of participating in settlement, cross
margining, expanding their services to additional instruments or
participants, or for any other purposes material to their
business.''
\8\ 17 CFR 240.17Ad-22(e)(20).
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OCC initially entered into a participant exchange agreement in
January 1975. The participant exchange agreement was restated in July
1983 and five stand-alone amendments subsequently were executed through
2007, establishing the Existing RPEA. This proposed rule change would
amend and update the Existing RPEA to (1) reflect current, enhanced, or
implied but not specifically stated practices between OCC and the
Exchanges, (2) align the agreement with current law and/or OCC's rules,
(3) eliminate provisions that are out of date or update terms to
reflect current industry terminology, (4) acknowledge the legal and
regulatory landscape of the options industry that affect the
interactions between OCC and the Exchanges by recognizing such factors
within the agreement, thereby aligning legal and regulatory
requirements with the New RPEA, and (5) improve overall readability of
the document through the incorporation of intervening amendments and
changes into the agreement.
Proposed Changes to the Existing RPEA
General changes throughout the New RPEA include (i) changing
references from ``the Corporation'' to ``OCC'' to align the New RPEA
with OCC's current brand identity and (ii) changing references to
exchanges from ``Participating Exchange'' to ``Exchange.'' The
remaining changes are described below.
Introductory Paragraphs
The introductory paragraphs of the Existing RPEA are changed to
note that the New RPEA amends and supersedes the Existing RPEA and
subsequent amendments. The Existing RPEA also sets forth the parties to
the RPEA as of
[[Page 22809]]
July 1983, which was the last time the Existing RPEA was restated in
its entirety. OCC proposes to remove the names of the specific
Exchanges that are parties to the participant exchange agreement so
that new Exchanges may be added to the agreement without necessitating
a change to the introductory paragraphs.
Lastly, OCC intends to incorporate references to OCC's By-Laws to
clarify that the New RPEA applies to Equity and Non-Equity Exchanges in
satisfaction of the requirements in both Article VIIA and Article VIIB
of OCC's By-Laws.\9\
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\9\ See note 3 supra.
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Section 1--Exchange Authority To Trade Options
OCC proposes to amend Section 1 to remove the provision allowing
national securities associations to become parties to the New RPEA. No
parties to the Existing RPEA are national securities associations and
the parties do not anticipate that any such entity will become a party
to the agreement in the future. OCC also proposes to add a threshold
representation from both OCC and the Exchanges that OCC and each
Exchange is and will remain in compliance with the Securities Exchange
Act of 1934, as amended (the ``Exchange Act''), and its own Exchange
rules, and each party will use reasonable efforts to come back into
compliance in the event a party can no longer make the representation.
Lastly, OCC proposes to (i) clarify that, in addition to its By-Laws,
OCC issues options pursuant to its Rules and (ii) add a defined term
for the OCC Rules and By-Laws.
Section 2--Registration and Qualification of Options To Be Renamed
``Selection of Underlying Interests''
OCC proposes to delete Section 2 of the Existing RPEA in its
entirety as the provisions are out of date and no longer necessary.
Section 2 of the Existing RPEA describes OCC's obligations to register
options listed for trading by the Exchanges pursuant to the Exchange
Act and the Securities Act of 1933, as amended (the ``Securities
Act''). However, the Commission's 2003 adoption of Securities Act Rule
238 and Exchange Act Rule 12a-9, provided that Securities Act and
Exchange Act registrations are not required for standardized
options.\10\ In addition, the provisions in Section 2(g) of the
Existing RPEA related to registration of listed options under state
blue sky laws are no longer necessary due to 1996 amendments to Section
18 of the Securities Act.\11\ Section 18, as amended, exempts ``covered
securities'' from state regulation.\12\ The term ``covered securities''
includes listed options.\13\
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\10\ See Exemption for Standardized Options From Provisions of
the Securities Act of 1933 and From the Registration Requirements of
the Securities Exchange Act of 1934, Release Nos. 33-8171 and 34-
47082, 68 FR 188 (Jan. 2, 2003) (File No. S7-29-02) (exemption for
standardized options from provisions of the Securities Act and from
the registration requirements of the Exchange Act).
\11\ See Securities Exchange Act Release Nos. 53799 (May 12,
2006), 71 FR 29195 (May 19, 2006) and 54071 (June 29, 2006), 71 FR
38922 (July 10, 2006).
\12\ 15 U.S.C 77r(a).
\13\ 15 U.S.C 77r(b)(1).
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Section 3 of the Existing RPEA, which relates to the selection of
underlying securities on which the Exchanges may list options for
trading, would be renumbered as Section 2 in the New RPEA. OCC proposes
to clarify in subsection (a) that an (i) Exchange must list options in
accordance with the relevant Exchange's rules, and (ii) that such
options also must be addressed in the Options Disclosure Document.\14\
Such clarifications incorporate into the agreement the legal and
regulatory basis of requirements Exchanges must meet before OCC may
issue and clear specific products. Subsection (a) also defines the term
``Underlying Interests'' for those underlying securities on which the
Exchanges may list options. OCC proposes to update the list of
permitted Underlying Interests to (i) add types of underlying interests
not explicitly listed in the Existing RPEA because such interests, some
of which did not exist at the time when the Existing RPEA was first
executed such as exchange traded funds, were not contemplated for
listed options at that time but have since become acceptable underlying
securities to listed options, and (ii) remove from the list those
interests which currently do not underlie listed options because such
interests do not align with interest types OCC is prepared to clear.
Specifically, OCC proposes to remove the following from the list of
permitted Underlying Interests: U.S. Treasury bonds, notes, or bills;
top tier bank certificates of deposit; mortgage pass-through securities
guaranteed by the Government National Mortgage Association; and
corporate debt securities listed on national securities exchanges.
Further, OCC proposes to add the following to the list of permitted
Underlying Interests: exchange trades funds; American Depository
Receipts; American Depository Shares; exchange traded notes; and
securities indexes. The Existing RPEA allows OCC to expand the list of
permitted Underlying Interests. OCC proposes to require that such
expansion be only to securities or financial instruments conforming to
the requirements of the RPEA. The purpose of this change is to
eliminate provisions that are out of date while also reflecting the
current operational and business practices between OCC and the
Exchanges to address industry developments, such as new underlying
interests that were not available in 1983. This will modernize the list
of underlying interests and provide greater certainty to the Exchanges
concerning the types of options contracts OCC has the authority to
clear and settle. These updated terms retain the flexibility found in
the Existing RPEA by allowing for other underlying interests when
approved by the Board of Directors of the OCC pursuant to Section
3(a)(viii)
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\14\ The June 2024 version of Characteristics and Risks of
Standardized Options, also referred to as the ``Options Disclosure
Document'' (``ODD''), is located at: https://www.theocc.com/getmedia/a151a9ae-d784-4a15-bdeb-23a029f50b70/riskstoc.pdf;.
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OCC proposes to delete and replace existing subparagraph (b). OCC
proposes to delete subparagraph (b) because it is out of date as it
relates to OCC's former obligation to register options for trading. OCC
proposes to add a new subsection (b) to specifically articulate that
OCC has the authority to disapprove for clearing purposes any new
options an Exchange proposes to list that materially impacts OCC's risk
profile, that presents new risk, impacts OCC's risk models, or creates
third party risks (defined as ``New Product Risk''). New subparagraph
(b) requires OCC to work with the Exchange to mitigate any such risk,
if feasible, and to otherwise notify an Exchange of a disapproval of a
new product. These proposed changes reflect current and enhanced
operational and business practices between OCC and the Exchanges to
address industry changes in terms of risk assessment and management of
new products. Finally, OCC proposes to add a provision in new Section 2
to recognize that Exchanges must submit new products to OCC in
accordance with the Options Listing Procedure Plan.\15\ This proposed
change
[[Page 22810]]
acknowledges the legal and regulatory landscape of the options industry
that affect the interactions between OCC and the Exchanges because the
OLPP serves as the national market plan that establishes the
requirements Exchanges must follow when they submitting a new option
class to OCC. OCC also proposes minor conforming changes to the
remainder of new Section 2.
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\15\ OCC and the Exchanges have entered into the `PLAN FOR THE
PURPOSE OF DEVELOPING AND IMPLEMENTING PROCEDURES DESIGNED TO
FACILITATE THE LISTING AND TRADING OF STANDARDIZED OPTIONS SUBMITTED
PURSUANT TO SECTION 11A(a)(3)(B) OF THE SECURITIES EXCHANGE ACT OF
1934,' which also is referred to as ``The Options Listing Procedure
Plan'' or ``OLPP.'' The OLPP generally describes (i) the process
related to the selection of option classes and new option series,
(ii) Exchanges' rights to review the eligibility of a new option
class, (iii) the process related to selecting option classes for the
Penny Interval Program, (iv) the process related to adjustments to
option classes, (v) the admission of Exchanges as ``Plan Sponsors''
of the OLPP, and (vi) the loss of eligibility for an Exchange as a
Plan Sponsor of the OLPP.
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Section 3--Expiration Dates, Exercise Prices and Units of Trading
Section 4 of the Existing RPEA, which describes the process related
to establishing expiration dates, exercise prices, and units of trading
will be renumbered to Section 3. OCC proposes to remove references to
specific times by which Exchanges must notify OCC when opening new
series of options for trading because such timeframes were necessary
decades prior when adding new series and notifying other exchanges of
newly added series was a much more manual process but are now no longer
needed. Technology advancements now allow for an ease and quickness to
the series adds process with Exchanges utilizing OCC system
functionality to add or view new series. These removals eliminate
provisions that are out of date. Additionally, the New RPEA will state
that each Exchange, rather than the Securities Committee,\16\ is
responsible for determining units of trading and that each Exchange
must communicate this information to OCC. Prior to 2018, panels of the
Securities Committee were convened to make contract adjustment
determinations for option contracts whose underlying securities were
subject to a corporate action event, for example a merger or stock
split. These panels voted to create non-standard option deliverables in
response to certain corporate actions. As a result, these panels
determined the unit of trading in certain situations, and the inclusion
of this provision in the current RPEA was an acknowledgement of the
role of the Securities Committee established in Article VI, Section 11
of the OCC By-Laws. With the implementation of an OCC rule change in
2018, the authority to make contract adjustment determination
transferred from panels of the Securities Committee to the OCC.\17\
Consequently, the removal of the reference to the Securities Committee
removes a provision that is out dated. OCC proposes to replace
Securities Committee with the Exchanges because Section 3 of the New
RPEA will address those option characteristics that are determined by
Exchanges at the time an option is opened for trading, and unit of
trade is one such characteristic. Consequently, the proposed change
reflects the current business practice between OCC and the Exchanges.
The proposed change also acknowledges that, as the standard for the
industry, the unit of trading will ordinarily be 100 at the time an
option is opened for trading, and that a deviation from the standard
may not necessarily be permissible under the OCC's Rules and By-Laws
absent an amendment.
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\16\ The Securities Committee is established under Article VI,
Section 11 of the By-Laws to make certain recommendations with
respect to cleared contracts, such as statements of policy or
interpretations having general application to specified types of
contract adjustments.
\17\ See Securities Exchange Act Release No. 34-69977 (July 11,
2013), 78 FR 42815 (July 17, 2013). Although the amendment to the
OCC By-Laws was approved in 2013, its implementation was delayed
until an amendment to the Options Disclosure Document (ODD)
reflecting the change to the adjustment determination authority was
made. The ODD amendment was effective on October 31, 2018, as
referenced in OCC Information Memo 43927.pdf (theocc.com)
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Section 4--List of Options
Existing Section 5 will be renumbered to Section 4, along with
minor clarifying and conforming changes related to the defined terms
``Participating Exchange,'' ``underlying securities,'' and ``the
Clearing Corporation.'' Additionally, with the expansion of the number
of expirations available outside of the standard monthly expiration
cycle, the reference to ``expiration months'' has been changed to
``expiration dates.'' Finally, the requirement that Exchanges make
available product lists ``in reasonable quantities'' upon request has
been removed as out of date because of the electronic manner in which
the Exchanges currently provide such information to OCC. These proposed
changes will remove provisions of the Existing RPEA that are out-of-
date and will support intervening amendments and changes to relevant
OCC By-Laws and Rules.
Section 5--Delisting of Options
OCC proposes to add a new Section 5 to set forth conditions the
Exchanges will establish before seeking to delist an option. Other than
as required in the OLPP, each Exchange will agree to continue to list
and make trading for that option available until all open interest is
closed out at OCC for those options. This provision will enhance the
operational and business practices between OCC and the Exchanges by
reducing the risk that Clearing Members could have open interest in
options with no mechanism to close out those positions.
Section 6--Singly Listed Options
OCC proposes to add a new Section 6 to set forth the conditions for
options that are listed on only one Exchange. This proposed addition
will reflect enhanced operational and business practices between OCC
and the Exchanges to address the situation in which an underlying price
may not be available or accurate. Such situations may be disruptive to
the functioning of the options industry, and the proposed language will
allow OCC to seek the help of the listing exchange to determine an
accurate settlement price. As a result, where only one Exchange is the
listing entity for an option and the settlement price for such a singly
listed option is deemed by OCC to be inaccurate, unreliable,
unavailable, or inappropriate, that Exchange agrees to work with OCC to
determine reliable settlement prices in accordance with OCC By-Laws and
Rules. Such Exchanges may seek out additional information about the
underlying security from the primary listing market. Finally, in new
Section 6 the Exchanges will agree to use commercially reasonable
efforts to list a singly listed options until all open interest is
closed out at OCC. Under the proposed RPEA, an Exchange would be
required to notify OCC when it concludes that it can no longer list a
singly listed option that has open interest and must take reasonable
steps to permit listing and trading on an alternate Exchange.
Section 7--Exchange Data
The amount and speed of the flow of data between OCC and the
Exchanges has grown substantially since the Existing RPEA was first
executed due to technological advancements and the growth of the
industry. As a result, OCC receives a substantial amount of data from
Exchanges currently. OCC also processes and sends out data based on
data received from Exchanges. Consequently, OCC proposes adding new
Section 7 to govern the use of ``Exchange Data'' because such new
language will reflect current operational and business practices
between OCC and the Exchanges. Proposed Exhibit A to the New RPEA
contains a description of such Exchange Data, which includes real time
and daily values of options and Underlying Interests, and the final
settlement value of Underlying Interests. New Section 7 would grant OCC
a license in Exchange Data for purposes of (i) performing clearing
services for the
[[Page 22811]]
Exchanges, (ii) performing investor education activities, and (iii)
complying with OCC's regulatory obligations. The Exchanges also agree
to provide OCC with a final settlement value when OCC is not able to
determine the value.
The proposed language also establishes the term Derived Data and
defines the ways in which OCC may use Derived Data based on data
received from the Exchanges. Additionally, the Reporting Authority will
be those entities identified in the OCC By-Laws and Rules. The proposed
language also states that Exchanges will provide the Daily Values of
Underlying Interests and Options and that such values are transferred
to OCC on each Trading Day. Reference to Exercise Settlement Amount is
included in the agreement and the requirement that Exchanges determine
such amount aligns with the process established in the OCC By-Laws.
These proposed additions reflect current operational and business
practices between OCC and the Exchanges while also acknowledging the
legal and regulatory landscape of the options industry that affect the
interactions between OCC and the Exchanges, namely the pricing
structure and requirements established in the OCC By-Laws and Rules.
New Section 7 adds the requirement that an Exchange will make
Exchange Data available to OCC for Options while open interest exists
for a specific option listed by the Exchange. This requirement will
reflect enhanced operational and business practices between OCC and the
Exchanges and help ensure the continued proper functioning of the
market for an option by requiring that the Exchanges that list an
option continue to provide the pricing needed to support an option
while open interest exists on the option.
New Section 7 places certain limitations on OCC's use of Exchange
Data. More specifically, OCC may not use Exchange Data to create or
calculate any index or other financial instrument, investment product,
or investment strategy without an Exchange's prior consent. OCC may
redistribute Exchange Data to third parties (as described in proposed
Exhibit B to the New RPEA), but only pursuant to a written market data
agreement that is consistent with the provisions of new Section 7.
Market data agreements must contain a disclaimer of warranties, waivers
of liability for the contents of the Exchange Data, and indemnification
provisions. Under the proposed RPEA OCC would be limited to certain
third parties to whom OCC can redistribute data (e.g., Clearing
Members) and the kind of data that OCC would be permitted to
redistribute (e.g., no real-time data). OCC would be obligated to stop
redistributing Exchange Data to third parties that fail to comply with
the limitations of new Section 7. The Exchanges also would retain the
right to audit OCC's use and redistribution of Exchange Data.
New Section 7 provides that Exchange Data, including intellectual
property rights therein, remains the property of the Exchanges. OCC
will acknowledge the proprietary nature of the Exchange Data and that
the Exchange Data remains the property of the Exchanges. New Section 7
also states that the New RPEA will not modify any existing data
agreements between OCC and an Exchange. To incorporate adopted best
practices for contract terms, new Section 7 states that Exchanges may
make changes to Exchange Data and establishes that an Exchange will
give OCC at least 60 days notice in advance of such change, in most
cases. The notice period will provide OCC with the time to prepare for
the change, and OCC will cooperate with an Exchange in addressing any
such change.
Section 8--Comparison of Options Transactions
OCC proposes to renumber Section 6 to Section 8 in the New RPEA.
OCC also proposes to delete the option for an Exchange to retain OCC to
provide comparison services as out of date because OCC has not been
retained by the Exchanges to perform such services. Since the Exchanges
have not previously requested this service, OCC proposes to remove this
provision. Section 8 also creates a defined terms for ``Trading Day,''
i.e., a day on which an Exchange is open for trading, and ``Matched
Trade(s),'' which replaces the previously used term, ``matched
trades.'' \18\ Although the change to ``Matched Trade(s)'' is
stylistic, the addition of ``Trading Day'' is intended to reflect
current industry terminology for clarification purposes. OCC also
proposes to add a new provision to Section 8 that would require OCC to
provide at least 60 days' prior notice to the Exchanges of a change to
the time by which an Exchange must report comparisons to OCC in order
to enhance operational practices between OCC and the Exchanges by
providing the Exchanges with sufficient notice to prepare for the
change. OCC also proposes minor clarifying and conforming changes to
Section 8 with respect to use of the terms ``the Clearing Corporation''
and ``underlying security.''
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\18\ The meaning of ``Matched Trades'' under the New RPEA would
be the same as the meaning of ``matched trades'' under the Existing
RPEA. Only the capitalization of the term would change.
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Section 9--Clearance of Options Transactions
OCC proposes to renumber Section 7 to Section 9 in the New RPEA,
along with minor clarifying and conforming changes related to use of
the terms ``the Clearing Corporation,'' ``underlying security,''
``matched trades,'' and ``Clearing Member.''
Section 10--Acceptance of Options Transactions
OCC proposes to renumber Section 8 to Section 10 in the New RPEA.
OCC also proposes to remove the condition, ``provided it shall have
received payment of the premiums due,'' in respect of which options
transactions OCC clears because the provision is out of date. OCC
accepts all transactions for clearance until such time as a Clearing
Member terminates its membership or OCC declares a Clearing Member to
be in default. Payment of an options premium is not a prerequisite for
OCC's acceptance of transactions.\19\
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\19\ With the implementation of Encore as OCC's clearing system
in 2002, OCC began receiving and processing trades at various times
throughout the day. With this technological capability, trade
premiums were settled by the morning of the next business day.
Consequently, payment of premiums was not a prerequisite to trade
acceptance.
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Section 11--Issuance of Options
OCC proposes to renumber Section 9 to Section 11, along with one
minor conforming change related to use of the term ``the Clearing
Corporation.''
Section 12--No Unfair Discrimination
OCC proposes to renumber Section 10 to Section 12, along with minor
conforming and clarifying changes, which include changing the title of
Section 12 from ``Non-Discrimination'' to ``No Unfair Discrimination''
and a change in the reference to Article VII of the By-Laws to Articles
VIIA and VIIB. OCC proposes the use of ``No Unfair Discrimination'' as
a stylistic change to avoid any indication that OCC is prohibited from
amending its By-Laws and Rules in a way that may permit different
treatment of an Exchange that may no longer meet the requirements to be
a participant at OCC.
Section 13--Limitations of Authority
OCC proposes to renumber Section 11 to Section 13 in the New RPEA,
along with minor changes, which include conforming references to other
sections of the RPEA and OCC By-Laws. Similarly, OCC proposes to add
cross
[[Page 22812]]
references within new Section 13 to other sections within the new RPEA
to improve readability without changing the terms of the RPEA.
Separately OCC proposes to add a new provision stating that OCC may
calculate position limits at the request of the Exchanges even though
OCC is generally precluded from establishing or enforcing position
limits or exercise limits. OCC began calculating position limits in
2003 at the request of the Exchanges and continues to provide position
limits on the OCC website.\20\ This new provision is not designed to
change OCC's rights or obligations but is merely included for the
avoidance of doubt and reflects the current business practice between
OCC and the Exchanges. Similarly, OCC propose to add a parenthetical
noting that the general limit precluding OCC from determining when to
open or restrict trading would not limit OCC's other rights and
obligations under the RPEA.\21\
---------------------------------------------------------------------------
\20\ See OCC Information Memo #19050.
\21\ Such rights and obligations are reflected in Sections 9,
10, and 11 in the New RPEA through references to provisions in the
OCC By-Laws and Rules in general. For example, in concert with the
clearance of trades, OCC Rule 401(a)(1) provides the required
information that an Exchange must send to OCC for a trade to be
accepted. The parenthetical addition to Section 13 (g) of the New
RPEA is included to ensure that OCC's authority regarding the
acceptance of trades from Exchanges is not diminished.
---------------------------------------------------------------------------
Section 14--Margin Requirements of OCC
OCC proposes to renumber Section 12 to Section 14 in the New RPEA,
along with minor conforming changes related to the use of the terms
``the Clearing Corporation'' and ``underlying security.''
Section 15--Financial Requirements for Clearing Members
OCC proposes to renumber Section 13 to Section 15 in the New RPEA.
OCC proposes to change the defined term ``management authority'' to
``Management Authority.'' \22\ OCC also proposes to update the
currently outdated text of the Existing RPEA to include a reference to
``Regulatory Services Agreement'' to recognize that some Exchanges now
outsource surveillance of Clearing Member financial responsibility
standards to third parties. OCC proposes to remove language that
requires Exchanges to notify OCC when a Clearing Member is not in
compliance with OCC's financial responsibility standards because the
Exchanges have indicated that they do not incorporate OCC's financial
responsibility standards into their Exchange monitoring processes. OCC
also proposed to add to the statement that Exchanges will notify OCC of
a financial condition of a Clearing Member that must be reported to the
Securities Investor Protection Corporation by including the phrase ``or
any other resolution authority''. This proposed addition acknowledges
that other authorities may require reporting of such financial
conditions. Separately, OCC proposes to remove reference to in-person
delivery of documents and telephone calls as out of date because
electronic communications are the primary method currently used to
transfer information between OCC and the Exchanges. OCC also proposes
to add clarifying language that an Exchange is required to furnish
materials to OCC with respect to a Clearing Member that is also a
member of the Exchange. This addition is for clarification purposes.
OCC further proposes to change the time requirement for submission of
material from 2:00 p.m. Central Time to 3:00 p.m. Central Time to
reflect enhanced business practices between OCC and the Exchanges.
Additionally, OCC proposes to change the requirement of reporting
materials from ``immediately'' to ``promptly'' to incorporate adopted
best practices for contract terms. Finally, OCC proposes to replace the
outdated reference to OCC's Chairman or any Vice President to a
``Financial Risk Management officer'' to reflect OCC's current
designation of authority.
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\22\ The meaning of ``Management Authority'' under the New RPEA
would be the same as the meaning of ``management authority'' under
the Existing RPEA. Only the capitalization of the term would change.
---------------------------------------------------------------------------
Section 16--Customer Accounts
OCC proposes to renumber Section 14 to Section 16 in the New RPEA,
along with one minor conforming change related to use of the term ``the
Clearing Corporation.''
Existing RPEA Section 16--Maintenance of Offices
OCC proposes to delete Section 16 in the Existing RPEA in its
entirety as outdated. Existing RPEA Section 16 requires OCC to maintain
an office in each of the cities in which the Exchanges are located.
Given the widespread use of electronic communications in financial
services, the increase in the number and various locations of Exchanges
over time, and the ability for Exchanges and OCC to send and receive
information quickly via electronic means, the requirement for OCC to
maintain an office in such locations is outdated.
Section 17--Operations
OCC proposes to renumber Section 15 to Section 17 and retitle
Section 17 ``Operations.'' OCC proposes amendments to Section 17 to
remove outdated systems scalability reporting and OCC response
protocols. Instead, the New RPEA would require the Exchanges to agree
to provide OCC with supporting documentation, data files, and reports
to OCC as needed in support of its clearing activities. The New RPEA
would also require Exchanges to make representatives available to
discuss any additional OCC information and data needs and to use
commercially reasonable efforts to provide the same.
Under the current RPEA, OCC is obligated to use its best efforts to
maintain sufficient operational capacity to clear new options on behalf
of the Exchanges. OCC proposes to remove details related to
interactions regarding lack of operational capacity to clear a new
underlying and replace the requirement to use best efforts with a
requirement to use commercially reasonable efforts which would allow
OCC to conduct its operations in a manner that is economically
justified and in accordance with commonly accepted commercial
practices. OCC also proposes to change the timing requirement from ``as
expeditiously as possible'' to ``as soon as reasonably practicable''
and to incorporate adopted best practices for contract terms. OCC also
will agree to use commercially reasonable efforts, as opposed to best
efforts as required by the Existing RPEA, to expand operations
capabilities as warranted to facilitate an Exchange's ability to clear
new options which serves to enhance operational and business practices
between OCC and the Exchanges.\23\ Finally, the Exchanges will agree to
comply with OCC operational specifications for options, including
during extended trading hours, which would address the current state of
the industry in which certain trading in extended and overnight trading
hours occurs. By acknowledging that Exchanges will comply with the
OCC's operational specifications for options, the New RPEA will reflect
the current operational practice between OCC and the Exchanges. OCC
also proposes to add a 60-day notice requirement in advance of
implementation or changes to specifications for such trading to enhance
the business practices between
[[Page 22813]]
OCC and the Exchanges by incorporating adopted best practices for
contract terms.
---------------------------------------------------------------------------
\23\ Consistent with the Existing RPEA, the New RPEA will not
permit OCC to clear new options for another Exchange until it has
the capacity to clear options on behalf of the Exchange that made
the first request.
---------------------------------------------------------------------------
Section 18--Financials
OCC proposes to add a new Section 18 to the New RPEA to enhance the
operational and business practices between OCC and the Exchanges by
establishing certain financial requirements for Exchanges and to allow
OCC to monitor for going concern risk. Exchanges that are a party to
the New RPEA as of the effective date will be required to provide to
OCC annual audited financial reports, Form 10K, and Form 10Q, as
applicable. Any Exchange that becomes a party to the New RPEA after the
effective date will be required to provide to OCC quarterly unaudited
financial statements, or Form 10K and Form 10Q, as the case may be, for
a period of three years from the date the Exchange becomes a party to
the New RPEA.
Under the New RPEA, Exchanges would be required to notify OCC if
they experience a 25% or more decrease in shareholder equity or losses
exceeding 25% of shareholder equity. Following such a loss, OCC would
be authorized to request that any such Exchange provide OCC with
quarterly financial reports. Additionally, given the sensitivity of the
information involved, OCC proposes to add confidentiality provisions in
this section that references Section 32 for clarity purposes.
Section 19--Information Technology and Security
Given the widespread use of ever evolving and improving electronic
systems, along with related security concerns since the time the
Existing RPEA became effective, OCC proposes to enhance the operational
and business practices between OCC and the Exchanges by adding a new
Section 19 in the New RPEA to strengthen information security. The New
RPEA requires Exchanges to provide to OCC, and requires OCC to provide
to the Exchanges, contact information, including emergency contact
information, for Exchange and OCC operational and technology personnel,
respectively, to support information technology issues. OCC and the
Exchanges will be obligated to notify the other party of incidents that
could impact a party's ability to provide (i.e., OCC) or receive (i.e.,
an Exchange) services.
Section 19 of the New RPEA would also require the parties' to take
commercially reasonable steps to comply with applicable cybersecurity
regulations, including Regulation SCI.\24\ If an Exchange notifies OCC
of a cyber-related disruption or intrusion to a SCI System that could
reasonably be expected to materially affect OCC's ability to perform
the services for the Exchange, or if OCC has a reasonable basis to
believe that any such disruption is occurring that could materially
impact OCC's ability to perform services for the Exchange, under the
terms of the New RPEA, OCC is permitted to take steps to mitigate any
effects to OCC's operations, including suspending its obligations for
that Exchange under the New RPEA, until OCC determines the incident has
been resolved. Any OCC suspension would not impact trades accepted by
OCC prior to the time of the suspension. OCC and an Exchange
experiencing such a disruption are obligated to consult with each other
to determine an appropriate course of action that could resolve the
incident. OCC also proposes to include that it will use commercially
reasonable efforts to maintain performance of its obligations when
addressing an incident to reflect implied business practices between
the parties whereby OCC would make efforts to continue to support
clearance and settlement.
---------------------------------------------------------------------------
\24\ 17 CFR 242.1000-242.1007.
---------------------------------------------------------------------------
Lastly, under Section 19, the Exchanges agree to accommodate OCC's
connectivity requirements. This includes the maintenance of point-to-
point connections to OCC and redundant connectivity. The parties also
will agree to provide at least 60 days' notice to each other if
connectivity or related requirements change.
Section 20--Exercise Restrictions
OCC proposes to renumber section 17 to Section 20 in the New RPEA,
along with minor clarifying changes. OCC proposes to replace ``index
options'' with ``Options that are cash settled'' and ``other options''
with ``Options that are physically settled'' to utilize industry
terminology that is broader and more descriptive of the products
subject to the provisions. OCC also proposes to add a provision to
allow for an Exchange or OCC to restrict exercises in the case of
government mandated restrictions, such as in the case of a sanctioned
entity or underlying security.
Section 21--Deadlines for Exercise of Options
OCC proposes to renumber Section 18 to Section 21 in the New RPEA,
along with minor conforming changes to use of the terms ``Participating
Exchange'' and ``the Clearing Corporation.''
Section 22--Allocation of Exercise Notices
OCC proposes to renumber Section 19 to Section 22 in the New RPEA,
along with one minor conforming change related to use of the term
``Participating Exchange.''
Section 23--Financial Arrangements
OCC proposes to renumber Section 20 to Section 23 in the New RPEA.
OCC also proposes to remove the requirements for local banking
relationships as of out date in light of the current electronic and
global nature of banking.
Section 24--Services, Programs and Projects
OCC proposes to renumber Section 21 to Section 24 in the New RPEA.
OCC proposes changes to Section 24 to clarify that services OCC
develops for any Clearing Member or group of Clearing Members, or
programs or projects developed at OCC's own cost will be offered to all
Clearing Members on the same terms and conditions and at the same cost.
The terms of the New RPEA would grant sole and absolute discretion to
OCC for determining whether to undertake programs or projects for a
particular Exchange. These changes reflect the current or enhanced
operational and business practices between OCC and the Exchanges.
Additionally, OCC proposes language to provide further detail on
development costs. The Existing RPEA requires that the Exchange must
pay all associated costs for such programs or projects. OCC proposes to
include new language to clarify that such costs include staffing to
reflect enhanced business practices between OCC and the Exchanges.
Section 25--Access to Books and Records of OCC
OCC proposes to renumber Section 22 to Section 25 in the New RPEA,
along with minor conforming and clarifying changes to use of the term
``the Clearing Corporation'' and ``Participating Exchange.''
Additionally, the New RPEA would state that an Exchange will not have a
right to view another Exchange's Confidential Information so as to
reflect current business practices between OCC and the Exchanges.
Section 26--Indemnification
OCC proposes to renumber Section 23 to Section 26 in the New RPEA,
along with minor conforming and clarifying changes related to use of
the terms ``the Clearing Corporation,'' ``participating Exchange,''
``Clearing Fund,'' ``Clearing Member.'' OCC also proposed to add ``or
noteholder agreement'' to occurrences of
[[Page 22814]]
``stockholders agreement'' in this section since certain exchanges are
subject to the shareholders agreement while other are subject to the
noteholders agreement.\25\ The proposed changes all update references
to OCC Rules and references to section in the New RPEA.
---------------------------------------------------------------------------
\25\ Pursuant to Article VIIA of the OCC By-Laws, Equity
Exchanges are party to the stockholders agreement. Pursuant to
Article VIIB, Non-Equity Exchanges are party to the noteholders
agreement. Non-Equity Exchanges and the noteholders agreement did
not exist when the Existing RPEA was originally executed.
---------------------------------------------------------------------------
Section 27--Additional Parties
OCC proposes to renumber Section 24 to Section 27 in the New RPEA,
along with one minor conforming change to the title of the New RPEA.
Section 28--Notices
OCC proposes to renumber Section 25 to Section 28 in the New RPEA,
along with other minor conforming and clarifying changes related to the
contact information of the parties to the New RPEA. OCC also proposes
to remove the address information of each party because such
information, as contained in the Existing RPEA, is out of date, such
information can change over time, and notices may be given via email.
Consequently, the New RPEA excludes providing physical addresses of
each party.
Section 29--Miscellaneous
OCC proposes to renumber Section 26 to Section 29 in the New RPEA.
The proposed changes to new Section 29 are intended to reflect either
current or implied business practices between OCC and the Exchanges to
incorporate adopted best practices for contract terms. OCC proposes to
clarify in Section 29 that the New RPEA may be assigned by a party only
with the prior written consent of OCC in the case of assignment by an
Exchange or all Exchanges in the case of assignment by OCC. OCC
proposes to remove references to assignment in Section 29(b) and update
assignment provision in Section 29(c). The New RPEA would also allow
for assignment without written consent in the case of a corporate
reorganization or sale of OCC.\26\
---------------------------------------------------------------------------
\26\ The Existing RPEA already allows for assignment without
written consent in the case of a corporate reorganization or sale of
an Exchange.
---------------------------------------------------------------------------
OCC also proposes to add a new provision related to the use of the
parties' names, tradenames, logos, and trademarks (collectively,
``Marks''). More specifically, OCC proposes to add a provision granting
the Exchanges a license to use OCC's Marks and granting OCC a license
to use the Exchanges' Marks. By signing the New RPEA, the parties would
acknowledge the other parties' ownership in their Marks. Licenses will
remain in effect until the termination of the New RPEA, or sooner if a
party notifies the other party that they elect to terminate a license.
The Marks are licensed ``as-is'' and without warranties and must bear
the appropriate trademark symbols where required. Lastly, use of Marks
must comply with applicable laws and regulations and must not be used
for objectionable purposes.
Section 30--Breach of Agreement--Termination
OCC proposes to renumber Section 27 to Section 30 in the New RPEA.
OCC also proposes to add a provision permitting OCC to suspend its
obligations to an Exchange whenever, in OCC's judgment, a suspension is
necessary to comply with, or give full effect to, any waiver or
suspension of OCC's By-Laws, Rules, policies and procedures, or any
other rules issued by OCC.\27\ OCC is obligated to notify the SEC if
OCC takes any such action. The New RPEA would also require OCC to
provide notice to each Exchange of such a suspension. The proposed
additions will acknowledge the regulatory landscape of the options
industry that affect the interactions between OCC and the Exchanges by
recognizing such factors within the agreement, thereby aligning legal
and regulatory requirements contained in the OCC By-Laws and Rules with
the New RPEA.
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\27\ See note 1 supra. Article IX, Section 14 of the OCC By-Laws
gives OCC the authority to waive or suspend its By-Laws or Rules if
(i) an emergency exists and (ii) such suspension, waiver or
extension is necessary or advisable for the protection of OCC or
otherwise in the public interest for OCC to continue to facilitate
the prompt and accurate clearance and settlement of confirmed trades
or other transactions and to provide its services in a safe and
sound manner.
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Proposed changes to Section 30 would provide additional
clarification as to whom at OCC shall approve a suspension by naming
the Chief Executive Officer (``OCC CEO'') as the individual with this
authority or in the event that the OCC CEO is unavailable, the Chief
Operating Officer (``OCC COO'') would have this authority. In the event
that neither the OCC CEO nor the OCC COO are available, the Chief
Security Officer would have this authority. OCC also proposes to
include a statement that the parties will work together in good faith
to minimize a suspension. These changes are intended to enhance the
operational and business practices between the parties by incorporating
best practices for contract terms for clarity purposes.
OCC further proposes to update which provisions of the New RPEA an
Exchange must breach for OCC to cease providing clearing services to
that Exchange to conform to any renumbering required by the changes
described above. OCC also proposes to include a catch-all provision to
allow termination in those circumstances where OCC has a reasonable
basis to believe the issuance, clearance, or settlement of options of
an Exchange or the continued performance of services for the Exchange
would cause OCC to be in breach of the Securities Act or Exchange Act.
OCC also proposes to state that OCC will not be obligated to clear
transactions for an Exchange if the Exchange ceases to (i) be
registered as an exchange, (ii) materially abide by the Securities Act
or the Exchange Act, or (iii) be an OCC noteholder or stockholder until
such breach is corrected. OCC proposes this change to acknowledge the
legal and regulatory landscape of the options industry that affect the
interactions between OCC and the Exchanges to ensure that the New RPEA
will align the Securities Act or the Exchange Act and OCC's By-Laws and
Rules. Additionally, OCC proposes to remove, as outdated, a provision
allowing it to terminate the RPEA with an Exchange that ceases to be
registered as a national securities association because, as noted
above, OCC is proposing to remove the provision allowing national
securities associations to become parties to the RPEA. Further, OCC
also proposes to specify that termination requires delivery of a
written notice to the Exchange to reflect enhanced business practices
between OCC and the Exchanges by incorporate adopted best practices for
contract terms.
Section 31--Options Disclosure Document
OCC proposes to renumber Section 28 to Section 31 in the New RPEA.
Consistent with the changes described above, OCC proposes to delete, as
outdated, references to text related to OCC's prior obligation to
register options for trading.\28\ Currently, the RPEA establishes the
Listed Options Disclosure Committee (``LDOC'') to oversee amendments to
and administration of the ODD and that the LDOC is composed of the
Chairman and the Exchange Directors on OCC's
[[Page 22815]]
Board.\29\ OCC also proposes to change the responsibility for chairing
the LDOC from OCC's Chairman of the Board to a designated OCC officer
and to replace participation on the LDOC by Exchange Directors of OCC's
Board to representatives of each Exchange. These proposed changes
reflect the current business practices between OCC and the Exchanges to
address industry developments, namely the addition of exchanges, some
of which do not have a representative on the OCC Board of Directors. As
a result, OCC and the Exchanges have adopted the practice of utilizing
an authorized representative from each Exchange to serve on the LODC.
In an effort to reflect modernized processes already in use around the
manner in which the LODC operates, OCC proposes to include provisions
allowing LODC matters to be addressed using electronic correspondence,
unless this method of communication would be insufficient, in which
case, the Chair of the LODC or two other members of the LODC can call a
meeting of the LODC.
---------------------------------------------------------------------------
\28\ See note 9 supra.
\29\ See note 11 supra. The ODD explains the characteristics and
risks of exchange traded options. Investors must read the ODD prior
to buying or selling an option. The Commission's Rules require that
disclosures about listed options must be furnished to investors in
the form of the ODD. See Exchange Act Rule 9b-1.
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Additional proposed changes in Section 31 are intended to restate
that an Exchange will notify OCC of proposed changes to an Exchange's
rules that would cause information in the ODD to become materially
inaccurate, incomplete, or misleading due to the delisting or change in
the specifications of certain options products. New text proposed to be
included in Section 31 would also require the relevant Exchanges to
provide input and feedback when OCC is drafting amendments to the ODD.
Changes to Section 31 would further highlight OCC's responsibility to
provide drafts of proposed ODD amendments to the Commission for review
and feedback prior to final submission to the Commission.\30\
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\30\ While OCC would coordinate communications with the
Commission, the proposed changes would not remove the right of an
Exchange to communicate directly with the Commission on any issues
that might arise.
---------------------------------------------------------------------------
Proposed changes to Section 31 also include removal of the
statement that OCC will pay costs associated with the meeting of the
LODC. Such a provision is out of date because the LODC does not meet in
person. OCC also proposes to revise the indemnification provisions in
Section 31 to update the provisions such that they apply to the ODD to
reflect enhanced business practices between OCC and the Exchanges to
incorporate adopted practices for contract terms by relocating certain
language to Section 31 and applying it specifically to the ODD.
The Existing RPEA establishes that an Exchange will indemnify OCC
and other Exchanges for omissions or alleged omissions in the ODD and
the indemnification provisions contained in Section 2(g) of the
Existing RPEA will govern such indemnification. OCC proposes language
that extracts much of the language in Section 2(g) and applies it
specifically to the circumstances and requirements of the ODD. OCC will
agree to indemnify the Exchanges for untrue statements or omissions of
material fact unless such statements are made in writing by an Exchange
for use in the ODD or in a case where an Exchange omits a material fact
that would make the ODD misleading. Each Exchange will agree to
indemnify OCC and the other Exchanges for omissions or written untrue
statements of material fact for use in the ODD or in a case where an
Exchange omits a material fact that would make the ODD misleading.
Section 31 also details the notice obligations for a party seeking
indemnification, allows indemnifying parties to participate in any
legal proceedings, allows indemnifying parties to assume the defense of
any claims, describes which parties are responsible for legal fees
under certain circumstances, and allows an indemnifying party to settle
a claim as long as the settlement would not require a contribution by
an indemnified party.
Section 32--Confidentiality
OCC proposes to add a new Section 32 related to confidential
information to explain how this term is defined for purposes of the New
RPEA and to provide certainty that confidential information shared
among the Exchanges and OCC, orally or in writing, may not be released
to third-parties or the public. Such proposed change is intended to
reflect current business practices between OCC and the Exchanges and to
adopt best practices for contract terms. OCC proposes to define
``Confidential Information'' as information, that relates to a party's
products and services, operations, customers, members, prospects, know-
how, design rights, trade secrets, market information, business
affairs, and information provided to the receiving party pursuant to
any requirements in the New RPEA. Any documents created using
Confidential Information also are considered Confidential Information.
Confidential Information will not include information already in the
possession of a receiving party, information already known to the
public, information revealed by a third party, information developed
independently, and anonymized statistical information compiled by a
receiving party using Confidential Information. Recipients of
Confidential Information are obligated to exercise the same degree of
care over a disclosing party's Confidential Information as is does for
its own Confidential Information. Additionally, parties are limited to
using Confidential Information solely for purposes of fulfilling their
obligations under the New RPEA and are only permitted to disclose
Confidential Information to employees and agents who need to know the
information.
Section 32 makes clear that a disclosing party retains all
intellectual property rights in its Confidential Information. Section
32 also contains a provision prohibiting OCC's disclosure of Exchange
Data that identifies an Exchange member except as required by law or
regulation, or as part of post-trade processing. A receiving party may
disclose Confidential Information to a government entity with
jurisdiction over a party, as part of a party's responsibilities to
share information with other regulatory bodies, or in response to a
valid subpoena.
Section 32 highlights that the parties are required to acknowledge
that a disclosing party could suffer harm in the event of a breach of
the confidentiality provisions, and that a disclosing party is entitled
to seek an injunction, specific performance, and other equitable relief
in court against a threatened or continuation of a material breach of
the confidentiality provisions in the New RPEA.
Lastly, new Section 32 provides that the receipt of Confidential
Information does not restrict a receiving party from providing services
to other parties as long as it does not use a disclosing party's
Confidential Information to provide services to third parties.
Final Paragraph
OCC removed ``The 1975 Agreement is hereby terminated, effective as
of the date of this Agreement'' because it no longer is necessary
because the 1975 agreement was terminated by the 1983 agreement. OCC
also removed language allowing the agreement to be executed in several
counterparts because the language is out of date.
2. Statutory Basis
OCC believes the proposed changes are consistent with the
requirements of the Exchange Act and the rules and
[[Page 22816]]
regulations thereunder applicable to a registered clearing agency. In
particular, OCC believes the proposed changes are consistent with
Section 17A(b)(3)(F) of the Exchange Act, which requires, among other
things, that the rules of a clearing agency be designed to promote the
prompt and accurate clearance and settlement of securities transactions
and, in general, to protect investors and the public interest.\31\
OCC's relationship with the Exchanges is largely governed by the
Existing RPEA, which sets out the terms and conditions under which OCC
will provide clearing services to the Exchanges for the options listed
on the Exchanges. The agreement was last amended 17 years ago, and the
proposed changes would bring up to date the agreement and would serve
to ensure that the relationship between OCC and the Exchanges is
accurately documented to reflect current practices between the parties.
Updating the Existing RPEA to reflect current practices will add
clarity and eliminate confusion about the roles and responsibilities of
the parties to the agreement by integrating amendments into the New
RPEA to make one cohesive, more readable document and incorporating
existing and modernized practices into the document as well, thereby
promoting the prompt and accurate clearance and settlement of
securities transactions and, in general, protecting investors and the
public interest.
---------------------------------------------------------------------------
\31\ 15 U.S.C. 78q-1(B)(3)(F).
---------------------------------------------------------------------------
By adopting the New RPEA, the proposed changes would identify,
monitor, and manage in an up-to-date manner the risks related to links
OCC established with the Exchanges in accordance with 17A(b)(3)(F) \32\
of the Exchange Act and Rule 17Ad-22(e)(20) thereunder.\33\
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\32\ Id.
\33\ 17 CFR 240.17Ad-22(e)(20).
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The proposed changes would (i) eliminate provisions that are out of
date or update provisions to reflect current industry terminology and/
or (ii) reflect current, enhanced, or implied but not specifically
stated operational and business practices between OCC and the
Exchanges, which may address technology or industry changes or
developments that necessitate new or updated agreement terms or
incorporate adopted best practices for contract terms. The proposed
changes serving these purposes would: state that national securities
exchanges would not become parties to the New RPEA; update the
permitted Underlying Interests on which options could be listed;
provide OCC with the authority to disapprove for clearing options that
materially impact OCC's risk profile; remove a specified time by which
Exchanges may add new series; state that each Exchange is responsible
for determining units of trading and communicating this information to
OCC and that deviation from the standard unit of trading may not be
permitted; remove the requirement that Exchanges make product lists
available; establish conditions for Exchanges to delist options;
establish requirements for Exchanges in the listing of and the
determination of the settlement process for singly listed options;
memorialize the manner in which Exchanges make Exchange Data available
to OCC and how OCC may use and redistribute Exchange Data, address
intellectual property rights, address changes to Exchange Data, and
grant a license to OCC to use the Exchange Data; remove provisions
related to OCC performing comparison services; create the defined terms
``Matched Trade'' and ``Trading Day''; require OCC to provide notice
for any change to the time by which Exchanges must submit comparisons;
and remove the perquisite that payment of premiums be made prior to
OCC's acceptance of trades.
Additional changes serving these two purposes would: state that OCC
can calculate position limits at the request of the Exchanges; note
that the general limitation on OCC from opening or restricting trading
would not limit OCC's other rights under the agreement; include
references to ``Regulatory Services Agreement'' for Exchanges that
outsource surveillance; remove the obligation for Exchanges to notify
OCC when a Clearing Member is not in compliance with OCC's financial
standards; add that Exchanges will notify OCC when a Clearing Member
must be reported to SIPC or ``any other resolution authority''; remove
in person document delivery requirements; remove the requirement that
OCC maintain an office in every city where Exchanges are located;
remove outdated systems scalability reporting and response protocols;
require the Exchanges to provide supporting materials, data, and
reports needed to support clearing and to make Exchange representatives
available to discuss data and information needs; instead of best
efforts, require OCC to use commercially reasonable efforts to maintain
capacity and expand operations to clear new options; require the
Exchanges to comply with OCC's operational specifications for options
and require advance notice to change the specifications; establish
financial reporting requirements for exchanges and related
confidentiality provisions; strengthen information security; require
the parties to take commercially reasonable steps to comply with
cybersecurity regulations; allow OCC to suspend its obligations to an
Exchange if an Exchange disruption materially impacts OCC; require
Exchanges to accommodate OCC's connectivity requirements and provide
advance notice of any changes; use industry terminology to describe
options as cash settled or physically settled; remove requirements
related to providing local banking information; allow notices to be
delivered via email; clarify the assignment provisions; grant OCC a
license to use the Exchanges' trademarks and grant the Exchanges a
license to use OCC trademarks; give OCC the right to suspend its
obligations to an Exchange to comply with OCC's Rules or By-Laws, or
the Securities Act or Exchange Act; provide that both OCC and the
Exchanges are responsible for preparing the ODD and would provide for
mutual indemnification for the contents of the ODD; clarify and
describe the administration of the LOD Committee; and add
confidentiality provisions with respect to both OCC's and the
Exchanges' information.
The proposed changes also would align the agreement with current
law and/or OCC's By-Laws and Rules by: changing ``expiration months''
to ``expiration dates'' to reflect the increased number of expiration
cycles; requiring Exchanges to provide values for underlying options
and to determine Exercise Settlement Values in alignment with OCC By-
Laws; changing the use of ``Non-Discrimination'' to ``No Unfair
Discrimination,'' along with By-Laws references; requiring Exchanges to
provide materials for Clearing Members that also are members of the
Exchange and change the time requirement for Exchange submissions of
materials and reporting materials; and change OCC's designated official
for financial purposes to the Financial Risk Management officer.
Lastly, the proposed changes would acknowledge the legal and
regulatory landscape of the options industry that affect the
interactions between OCC and the Exchanges by recognizing such factors
within the agreement. As part of the New RPEA, OCC and the Exchanges
would: agree to remain in compliance with the Exchange Act and each
party's own rules; the Exchanges would agree to list options in
accordance with their rules and agree that listings must be addressed
in the ODD; agree to submit new products to the OCC in accordance with
the OLPP; and allow for exercises
[[Page 22817]]
to be restricted in the case of a government mandated restrictions.
OCC believes amending the Existing RPEA to reflect current,
enhanced, or implied but not specifically stated operational and
business practices between OCC and the Exchanges, align the agreement
with current law and/or OCC's By-Laws and Rules, eliminate provisions
that are out of date or update provisions to reflect current industry
terminology, and acknowledge the legal and regulatory landscape of the
options industry that affect the interactions between OCC and the
Exchanges by recognizing such factors within the agreement will ensure
the parties rights and obligations are clear and well documented. This,
in turn, will serve the public interest by continuing to promote the
prompt and accurate clearance and settlement of transactions because
both OCC and the Exchanges will have a clear understanding of their
rights and obligations in the agreement.
OCC also believes that the proposed changes are consistent with SEC
rules that apply to OCC as a covered clearing agency. Specifically, SEC
Rule 17Ad-22(e)(20) requires OCC to establish, implement, maintain, and
enforce written policies and procedures reasonably designed to
identify, monitor, and manage risks related to any link that OCC
establishes with one or more other clearing agencies, financial market
utilities, or trading markets.\34\ As described in OCC's publicly
available disclosure framework for financial market infrastructures,
OCC maintains links with the Exchanges that are qualified to
participate at OCC. As described above, the Existing RPEA manages the
risks associated with OCC's dealings with the Exchanges by establishing
the terms and conditions under which OCC will provide clearing services
to the Exchanges. The proposed changes to the Existing RPEA are
intended to strengthen OCC's links to the Exchanges by reflecting
current, enhanced, or implied but not specifically stated operational
and business practices between OCC and the Exchanges, aligning the
agreement with current law and/or OCC's By-Laws and Rules, eliminating
provisions that are out of date or update provisions to reflect current
industry terminology, and acknowledging the legal and regulatory
landscape of the options industry that affect the interactions between
OCC and the Exchanges by recognizing such factors within the agreement.
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\34\ 17 CFR 240.17Ad-22(e)(20).
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For these reasons, OCC believes the proposed rule change is
consistent with applicable provisions of Section 17A of the Exchange
Act and Rule 17Ad-22 thereunder.
(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \35\ requires that the rules of a
clearing agency not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act. OCC
does not believe that the proposal would impose any burden on
competition.\36\ The New RPEA applies to Equity and Non-Equity
Exchanges alike in satisfaction of the requirements in OCC's By-Laws.
Accordingly, OCC does not believe that the New RPEA imposes any added
burdens on competition on any one Exchange over another.
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\35\ 15 U.S.C. 78q-1(b)(3)(I).
\36\ Id.
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The primary purpose of the proposed rule change is to (a) reflect
current, enhanced, or implied but not specifically stated operational
and business practices between OCC and the Exchanges, (b) align the
agreement with current law and/or OCC's By-Laws and Rules, (c)
eliminate provisions that are out of date or update provisions to
reflect current industry terminology, (d) acknowledge the legal and
regulatory landscape of the options industry that affect the
interactions between OCC and the Exchanges by recognizing such factors
within the agreement, and (e) improve overall readability of the
document through the incorporation of intervening amendments and
changes into the agreement. Because the proposed rule change is
intended to reflect current, enhanced, or implied but not specifically
stated operational and business practices between OCC and the
Exchanges, OCC anticipates that most, if not all, of the proposed
changes related to operational and business practices between OCC and
the Exchanges already are in effect, and therefore, will not be overly
burdensome on the Exchanges.
The proposed rule change also is intended to align the New RPEA
with current law and/or OCC's By-Laws and Rules. OCC anticipates that
the Exchanges also are operating in alignment with current law and/or
OCC's By-Laws and Rules, and therefore, changes related to this purpose
also should not be overly burdensome on the Exchanges.
The proposed rule change would eliminate provisions that are out of
date or update provisions to reflect current industry terminology.
Changes related to this purpose are intended to ensure that the parties
have engaged in good practices regarding principles related to
contracting and that the agreement between OCC and the Exchanges is
clear and eliminates confusion around the parties' rights and
responsibilities.
Finally, the proposed rule change acknowledges the legal and
regulatory landscape of the options industry that affects the
interactions between OCC and the Exchanges by recognizing such factors
within the agreement. As with the changes related to the other purposes
described above, OCC anticipates that changes intended to acknowledge
the legal and regulatory landscape of the options industry that affect
the interactions between OCC and the Exchanges serve to memorialize
existing industry conditions and practices between the parties.
The proposed rule change would not affect any individual
participant Exchange's current rights beyond the description provided
above or ability to access OCC services or disadvantage or favor any
particular Exchange in relationship to another. As such, OCC believes
that the proposed changes would not have any impact or impose any
burden on competition.
For the foregoing reasons, OCC believes that the proposed rule
change is in the public interest, would be consistent with the
requirements of the Exchange Act applicable to clearing agencies, and
would not have any 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
[[Page 22818]]
with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking);
or
Send an email to [email protected]. Please include
file number SR-OCC-2025-006 on the subject line.
Paper Comments
Send paper comments in triplicate to Vanessa Countryman,
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090.
All submissions should refer to file number SR-OCC-2025-006. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of OCC and on OCC's
website at https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
Do not include personal identifiable information in submissions;
you should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to file number SR-OCC-2025-006 and should
be submitted on or before June 20, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\37\
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\37\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-09624 Filed 5-28-25; 8:45 am]
BILLING CODE 8011-01-P