Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of a Proposed Rule Change Concerning a Proposed Capital Plan for Raising Additional Capital That Would Support the Options Clearing Corporation's Function as a Systemically Important Financial Market Utility, 5171-5179 [2015-01755]
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Federal Register / Vol. 80, No. 20 / Friday, January 30, 2015 / Notices
Act 12 and the rules and regulations
thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,13 that the
proposed rule change (SR–ICEEU–2015–
003) be, and hereby is, approved on an
accelerated basis.14
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015–01752 Filed 1–29–15; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–74136; File No. SR–OCC–
2015–02]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing of a Proposed Rule Change
Concerning a Proposed Capital Plan
for Raising Additional Capital That
Would Support the Options Clearing
Corporation’s Function as a
Systemically Important Financial
Market Utility
January 26, 2015.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on January
14, 2015, The Options Clearing
Corporation (‘‘OCC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
OCC.3 The Commission is publishing
this notice to solicit comments on the
proposed rule change from interested
persons.
12 15
U.S.C. 78q–1.
U.S.C. 78s(b)(2).
14 In approving the proposed rule change, the
Commission considered the proposal’s impact on
efficiency, competition and capital formation. 15
U.S.C. 78c(f).
15 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 OCC also filed proposals in this proposed rule
change as an advance notice under Section
806(e)(1) of the Payment, Clearing, and Settlement
Supervision Act of 2010. 12 U.S.C. 5465(e)(1). See
File No. SR–OCC–2014–813. In Items I and II
below, OCC states that the purpose of this proposal
is in part to facilitate compliance with the SEC
Proposed Rules (as defined below) and address
Principle 15 of the Principles for Financial Market
Infrastructures. The Commission notes that the SEC
Proposed Rules are pending. The Commission will
evaluate the proposed rule change under the Act
and the rules currently in force thereunder.
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I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
This proposed rule change is filed by
OCC in order to set forth a proposed
Capital Plan for raising additional
capital that would support OCC’s
function as a systemically important
financial market utility and facilitate
OCC’s compliance with new regulatory
requirements applicable to systemically
important financial market utilities that
have been proposed by the Commission
but have not yet been adopted.
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 such statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
1. Purpose
OCC is proposing to amend its ByLaws and other governing documents,
and to adopt certain policies, for the
purpose of implementing a plan for
raising additional capital (‘‘Capital
Plan’’) under which the options
exchanges that own equity in OCC
(‘‘Stockholder Exchanges’’ or
‘‘Stockholders’’) would make an
additional capital contribution and
commit to replenishment capital
(‘‘Replenishment Capital’’) in
circumstances discussed below, and
would receive, among other things, the
right to receive dividends from OCC.4 In
addition to the additional capital
contribution and Replenishment
Capital, the main features of the Capital
Plan are: (i) A policy establishing OCC’s
fees at a level that would be sufficient
to cover OCC’s estimated operating
expenses plus a ‘‘Business Risk Buffer’’
as described below (‘‘Fee Policy’’), (ii) a
policy establishing the amount of the
annual refund to clearing members of
OCC’s fees (‘‘Refund Policy’’), and (iii)
a policy for calculating the amount of
dividends to be paid to the Stockholder
Exchanges (‘‘Dividend Policy’’). The
Capital Plan is proposed to be
4 The Capital Plan has also been filed with the
Commission as an advance notice (SR–OCC–2014–
813), which was amended and restated on January
14, 2015.
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5171
implemented on or about February 27,
2015, subject to all necessary regulatory
approvals.5
The Capital Plan would significantly
increase OCC’s capital in connection
with its increased responsibilities as a
systemically important financial market
utility, and OCC believes that it would
facilitate OCC’s compliance with new
regulatory requirements applicable to
such systemically important financial
market utilities that have been proposed
by the Commission but have not yet
been adopted.6 For purposes of its
capital planning, OCC has used the
working assumption that the new
requirements contained in the
Commission’s proposed amendments to
Rule 17Ad–22 of the SEC Proposed
Rules will be adopted substantially as
proposed, and the Capital Plan is
intended to ensure OCC’s ability to
comply with Rule 17Ad–22, specifically
paragraph (e)(15) thereof, when the SEC
Proposed Rules become effective. In
addition, it is intended to address
Principle 15 of the Principles for
Financial Market Infrastructures
published by the Bank for International
Settlements and the International
Organization of Securities Commissions,
which provides, among other things,
that a financial market utility should
identify, monitor and manage its general
business risk and hold sufficient liquid
net assets funded by equity to cover
potential general business losses so that
it can continue to operate as a going
concern. The Capital Plan calls for an
infusion of substantial additional equity
capital by the Stockholder Exchanges to
be made prior to February 27, 2015,
subject to regulatory approval, that
when added to retained earnings
accumulated by OCC in 2014 will
significantly increase OCC’s capital
levels as compared to historical levels.
Additionally, the Capital Plan includes
the Replenishment Capital commitment,
which would provide OCC access to
additional equity contributed by the
Stockholder Exchanges should OCC’s
equity fall close to or below the amount
that OCC determines to be appropriate
to support its business and manage
business risk in compliance with Rule
17Ad–22, as discussed more fully
below.
5 The material features of the Capital Plan are
summarized in the Term Sheet that is included as
Exhibit 3 to this filing. Certain details of the Term
Sheet may change as a result of negotiations
between OCC and the Stockholder Exchanges or
changes in financial figures, but OCC does not
anticipate any material changes to the Capital Plan.
6 See Securities Exchange Act Release No. 71699
(March 12, 2014), 79 FR 29507 (May 22, 2014)
(‘‘SEC Proposed Rules’’).
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Background
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OCC is a clearing agency registered
with the Commission and is also a
derivatives clearing organization
(‘‘DCO’’) regulated in its capacity as
such by the Commodity Futures Trading
Commission (‘‘CFTC’’). OCC is a
Delaware business corporation and is
owned equally by the Stockholder
Exchanges, five national securities
exchanges for which OCC provides
clearing services.7 In addition, OCC
provides clearing services for seven
other national securities exchanges that
trade options (‘‘Non-Stockholder
Exchanges’’). In its capacity as a DCO,
OCC also provides clearing services to
four futures exchanges.
OCC has been designated systemically
important by the Financial Stability
Oversight Council pursuant to the
Payment, Clearing and Settlement
Supervision Act, and the Commission is
OCC’s ‘‘Supervisory Agency’’ under
Section 803(8) of the Payment, Clearing
and Settlement Supervision Act. OCC is
therefore a ‘‘covered clearing agency’’
(‘‘CCA’’) as defined in proposed
amendments to the Commission’s Rule
17Ad–22(a)(7) and would be required to
comply with the provisions of proposed
Rule 17Ad–22 applicable to CCA’s,
including paragraph (e)(15) thereof.8
Proposed Rule 17Ad–22(e)(15)
provides:
Each covered clearing agency shall
establish, implement, maintain and enforce
written policies and procedures reasonably
designed to, as applicable: . . . Identify,
monitor, and manage the covered clearing
agency’s general business risk and hold
sufficient liquid net assets funded by equity
to cover potential general business losses so
that the covered clearing agency can continue
operations and services as a going concern if
those losses materialize, including by:
(i) Determining the amount of liquid net
assets funded by equity based upon its
general business risk profile and the length
of time required to achieve recovery or
orderly wind-down, as appropriate, of its
critical operations and services if such action
is taken;
(ii) Holding liquid net assets funded by
equity equal to the greater of either (x) six
months of the covered clearing agency’s
current operating expenses, or (y) the amount
determined by the board of directors to be
sufficient to ensure a recovery or orderly
wind-down of critical operations and
services of the covered clearing agency, as
contemplated by the plans established under
paragraph (e)(3)(ii) of this section, and
which:
7 The Stockholder Exchanges are: Chicago Board
Options Exchange, Incorporated; International
Securities Exchange, LLC; NASDAQ OMX PHLX
LLC; NYSE MKT LLC; and NYSE Arca, Inc.
8 SEC Proposed Rules at 32–33, FR 29507, 29515
(May 22, 2014).
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(A) shall be in addition to resources held
to cover participant defaults or other risks
covered under the credit risk standard in
paragraph (b)(3) or paragraph (e)(4)(i)–(iii) of
this section, as applicable, and the liquidity
risk standard in paragraph (e)(7)(i) and (ii) of
this section; and
(B) Shall be of high quality and sufficiently
liquid to allow the covered clearing agency
to meet its current and projected operating
expenses under a range of scenarios,
including adverse market conditions; and
(iii) Maintaining a viable plan, approved by
the board of directors and updated at least
annually, for raising additional equity should
its equity fall close to or below the amount
required under paragraph (e)(15)(ii) of this
section.9
Over the last nine months, OCC has
devoted substantial efforts to: (1)
Develop a 5-year forward looking model
of expenses; (2) quantify maximum
recovery and wind-down costs under
OCC’s Recovery and Wind-Down Plan;
(3) assess and quantify OCC’s
operational and business risks; (4)
model projected capital accumulation
taking into account varying assumptions
concerning business conditions, fee
levels, buffer margin levels and refunds;
and (5) develop an effective mechanism
that provides OCC access to
replenishment capital in the event of
losses that could cause OCC to be noncompliant with the SEC Proposed Rules.
Incorporating the results of those efforts,
the proposed amendments are intended
to allow OCC to implement the Capital
Plan and thereby provide OCC with the
means to increase its shareholders’
equity and, in particular, to obtain
timely compliance with Rule 17Ad–
22(e)(15) 10 as proposed by the
Commission. A more detailed
discussion of the manner in which the
Capital Plan would allow OCC to
comply with Rule 17Ad–22(e)(15)
appears below.
OCC’s Projected Capital Requirement
Using the methods described in detail
below, OCC will annually determine a
‘‘Target Capital Requirement’’ consisting
of (i) a ‘‘Baseline Capital Requirement’’
equal to the greatest of (x) six months
operating expenses for the following
year, (y) the maximum cost of the
recovery scenario from OCC’s Recovery
and Wind-Down Plan, and (z) the cost
to OCC of winding down operations as
set forth in the Recovery and WindDown Plan, plus (ii) a ‘‘Target Capital
Buffer’’ linked to plausible loss
scenarios from operational risk,
business risk and pension risk. OCC has
determined that its currently
9 SEC Proposed Rules at 417–418, FR 29507,
29616 (May 22, 2014).
10 SEC Proposed Rules at 222–223, FR 29507,
29547–29548 (May 22, 2014).
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appropriate ‘‘Target Capital
Requirement’’ is $247 million, reflecting
a Baseline Capital Requirement of $117
million, which is equal to six months of
projected operating expenses, plus a
Target Capital Buffer of $130 million.
This Target Capital Buffer would
provide a significant capital cushion to
offset potential business losses.
As of December 31, 2013, OCC had
total shareholders’ equity of
approximately $25 million,11 meaning
that OCC proposes to add additional
capital of $222 million to meet its 2015
Target Capital Requirement. In addition,
OCC would be obligated under
paragraph (e)(15)(iii) 12 of proposed Rule
17Ad–22 to maintain ‘‘a viable plan’’ for
raising additional equity should its
equity fall close to or below the amount
required under paragraph (e)(15)(ii) of
the Rule; 13 i.e., the Baseline Capital
Requirement. OCC has determined that
its viable plan for Replenishment
Capital should provide for a
‘‘Replenishment Capital Amount’’
which would give OCC access to
additional capital as needed up to a
maximum of the Baseline Capital
Requirement, which is currently $117
million.14 Therefore, OCC’s proposed
Capital Plan would provide OCC in
2015 with ready access to
approximately $364 million in equity
capital as follows:
Baseline Capital Requirement ..................................
Target Capital Buffer ............
Target Capital Requirement
Replenishment Capital
Amount ..............................
Total OCC Capital Resources ......................
$117,000,000
130,000,000
247,000,000
117,000,000
364,000,000
Procedures Followed in Order to
Determine Capital Requirement
Various measures were used in
determining the appropriate level of
capital necessary to comply with the
SEC Proposed Rules. An outside
consultant conducted a ‘‘bottom-up’’
analysis of OCC’s risks and quantified
the appropriate amount of capital to be
held against each risk. The analysis was
11 See OCC 2013 Annual Report, Financial
Statements, Statements of Financial Condition,
available on OCC’s Web site, https://
optionsclearing.com/components/docs/about/
annual-reports/occ_2013_annual_report.pdf.
12 SEC Proposed Rules at 418, FR 29507, 29616
(May 22, 2014).
13 SEC Proposed Rules at 417, FR 29507, 29616
(May 22, 2014).
14 The obligation to provide Replenishment
Capital will be capped at $200 million, which OCC
projects will sufficiently account for increases in its
capital requirements for the foreseeable future.
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Federal Register / Vol. 80, No. 20 / Friday, January 30, 2015 / Notices
comprehensive across risk types,
including credit, market, pension,
operational, and business risk. Based on
internal operational risk scenarios and
loss modeling at or above the 99%
confidence level, OCC’s operational risk
was quantified at $226 million and
pension risk at $21 million, resulting in
the total Target Capital Requirement of
$247 million. Business risk was
addressed by taking into consideration
that OCC has the ability to fully offset
potential revenue volatility and manage
business risk to zero by adjusting the
levels at which fees and refunds are set
and by adopting a ‘‘Business Risk
Buffer’’ of 25% when setting fees. Other
risks, such as counterparty risk and onbalance sheet credit and market risk,
were considered to be immaterial for
purposes of requiring additional capital
based on means available to OCC to
address those risks that did not require
use of OCC’s capital. As discussed in
more detail below in the context of
OCC’s Fee Policy, the Business Risk
Buffer of 25% is achieved by setting
OCC’s fees at a level intended to achieve
target annual revenue that will result in
a 25% buffer for the year after paying all
operating expenses.
An analysis was also performed to
identify OCC’s risk in terms of the
regulatory requirements set forth in
proposed Rule 17Ad-22(e)(15)(ii).15 This
analysis estimated that, currently, OCC’s
maximum recovery costs would be $100
million and projected wind-down costs
would be $73 million. OCC’s projected
expenses for 2015 are $234 million, so
that six months projected expenses are
$234 million/2 = $117 million. The
greater of recovery or wind-down costs
and six months of operating expenses is
therefore $117 million, and OCC’s
Baseline Capital Requirement
5173
(minimum regulatory requirement) is
therefore $117 million. OCC then
computed the appropriate amount of a
Target Capital Buffer from operational
risk, business risk, and pension risk.
This resulted in a determination that the
current Target Capital Buffer should be
$130 million. Thus, the Target Capital
Requirement is $117 million + $130
million = $247 million.
Overview of, and Basis for, OCC’s
Proposal to Acquire Additional Equity
Capital
In order to meet its Target Capital
Requirement, and after consideration of
available alternatives, OCC’s Board
approved a proposal from OCC’s
Stockholder Exchanges under which
OCC would meet its Target Capital
Requirement of $247 million in early
2015 as follows:
$25,000,000
72,000,000
150,000,000
Target Capital Requirement .................................................................................................................................................
Replenishment Capital Amount ............................................................................................................................................
247,000,000
117,000,000
Total OCC Capital Resources .......................................................................................................................................
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Shareholders’ Equity as of 1/1/2014 ...........................................................................................................................................
Shareholders Equity Accumulated Through Retained Earnings 16 .............................................................................................
Additional Contribution from Stockholder Exchanges .................................................................................................................
364,000,000
The additional contribution of the
Stockholder Exchanges would be made
in respect of their Class B Common
Stock on a pro rata basis. The
Stockholder Exchanges will also commit
to provide additional equity capital up
to the Replenishment Capital Amount,
which is currently $117 million, in the
event Replenishment Capital is needed.
While the Replenishment Capital
Amount will increase as the Baseline
Capital Requirement increases, it would
be capped at a total of $200 million that
could be outstanding at any point in
time. OCC has estimated that the
Baseline Capital Requirement would not
exceed this amount before 2022. When
the limit is being approached, OCC
would revise the Capital Plan as needed
to address future needs. In
consideration for their capital
contributions and replenishment
commitments, the Stockholder
Exchanges will receive dividends as
described in the Dividend Policy
discussed below for so long as they
remain stockholders and maintain their
15 SEC Proposed Rules at 417, FR 29507, 29616
(May 22, 2014).
16 See Proposed Rule Change by The Options
Clearing Corporation to Reflect the Elimination of
a Discount to the Clearing Fee Schedule, Securities
Exchange Act Release No. 71769 (March 21, 2014),
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Upon reaching the Target Capital
Requirement, the Capital Plan and the
proposed Fee Policy require OCC to set
its fees at a level that utilizes a Business
Risk Buffer of 25%. The purpose of this
Business Risk Buffer is to ensure that
OCC accumulates sufficient capital to
cover unexpected fluctuations in
operating expenses, business capital
needs, and regulatory capital
requirements. Furthermore, the Capital
Plan requires OCC to maintain Fee,
Refund, and Dividend Policies,
described in more detail below, which
are designed to ensure that OCC’s
shareholders’ equity remains well above
the Baseline Capital Requirement. The
proposed Fee, Refund, and Dividend
Policies are attached to this filing as
Exhibits 5A, 5B, and 5C respectively.
The required Business Risk Buffer of
25% is below OCC’s 10-year historical
pre-refund average buffer of 31%. The
target will remain 25% so long as OCC’s
shareholders’ equity remains above the
Target Capital Requirement amount.
The reduction in buffer margin from
OCC’s 10-year average of 31% to 25%
reflects OCC’s commitment to continue
to operate as an industry utility and
ensuring that market participants
benefit as much as possible from OCC’s
operational efficiencies in the future.
This reduction will permit OCC to
charge lower fees to market participants
rather than maximizing refunds to
clearing members and dividend
distributions to Stockholder Exchanges.
OCC will review its fee schedule on a
quarterly basis to manage revenue as
closely to this target as possible.17 For
example, if the Business Risk Buffer is
materially above 25% after the first
quarter of a particular year, OCC may
decrease fees for the remainder of the
year, and conversely if the Business
Risk Buffer is materially below 25%
after the first quarter, OCC may increase
fees for the remainder of the year.
79 FR 17214 (March 27, 2014) (SR–OCC–2014–05)
(Filing for immediate effectiveness of a proposed
rule change with the Commission to reinstate OCC’s
permanent clearing fee schedule for securities
options and securities futures that became effective
May 1, 2007 (‘‘Permanent Schedule Reinstatement
Filing’’)). The $72 million is after giving effect to
the approximately $40 million refund referred to
below.
17 If OCC’s fee schedule needs to be changed in
order to achieve the 25% Business Risk Buffer, OCC
would file a proposed rule change seeking approval
of the revised fee schedule.
contributed capital and commitment to
replenish capital up to the
Replenishment Capital Amount, subject
to the $200 million cap.
Fee, Refund, and Dividend Policies
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The Capital Plan would allow OCC to
refund approximately $40 million from
2014 fees to clearing members in 2015
and to reduce fees in an amount to be
determined by the Board, effective in
the second quarter 2015. OCC will
announce new fee levels early in 2015
and will make them effective following
notification to clearing members and
any necessary approval by the
Commission. OCC will endeavor to
provide clearing members with no less
than 60-day advance notice of the
effectiveness of changes to fee levels,
particularly those that result in
increases to fee levels. No dividends
will be declared until December 2015
and no dividends will be paid until
2016.
Changes to the Fee, Refund, or
Dividend Policies will require the
affirmative vote of two-thirds of the
directors then in office and approval of
the holders of all of OCC’s outstanding
Class B Common Stock. The formulas
for determining the amount of refunds
and dividends under the Refund and
Dividend Policies, respectively, which
are described in more detail below,
assume that refunds are tax-deductible
but that dividends are not. The Refund
and Dividend Policies would each
provide that in the event that refunds
payable under the Refund Policy are not
tax deductible, the policies would be
amended to restore the relative
economic benefits between the
recipients of the refunds and the
Stockholder Exchanges.
Fee Policy
Under the Fee Policy, in setting fees
each year, OCC would calculate an
annual revenue target based on a
forward twelve months expense forecast
divided by the difference between one
and the Business Risk Buffer of 25%,
i.e., OCC will divide the expense
forecast by .75. Establishing a Business
Risk Buffer at 25% would allow OCC to
manage the risk that fees would generate
less revenue than expected due to
lower-than-expected trading volume or
other factors, or that expenses would be
higher than projected. The Fee Policy
also will include provisions from
existing Article IX, Section 9 of the ByLaws to the effect that the fee schedule
may also include additional amounts
necessary to (i) maintain such reserves
as are deemed reasonably necessary by
the Board to provide facilities for the
conduct of OCC’s business and to
conduct development and capital
planning activities in connection with
OCC’s services to the options exchanges,
Clearing Members and the general
public, and (ii) accumulate such
additional surplus as the Board may
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deem advisable to permit OCC to meet
its obligations to Clearing Members and
the general public; however, these
provisions will be invoked only in
extraordinary circumstances and to the
extent that the Board has determined
that the required amount of such
additional reserves or additional surplus
will exceed the full amount that is
expected to be accumulated through the
Business Risk Buffer (prior to payment
of refunds or dividends) so OCC’s fees
will ordinarily be based on its projected
operating expenses and the Business
Risk Buffer of 25%.
Under the Capital Plan, OCC would
calculate its annual revenue target as
follows:
Annual Revenue Target = Forward 12
Months Expense Forecast/(1–.25).
Because OCC’s clearing fee schedules
typically reflect different rates for
different categories of transactions, fee
projections would include projections
as to relative volume in each such
category. The clearing fee schedule
would therefore be set to achieve a
blended or average rate per contract
sufficient, when multiplied by total
projected contract volume, to achieve
the Annual Revenue Target. Under
extraordinary circumstances, OCC
would then add any amount determined
to be necessary for additional reserves
or surplus and divide the resulting
number by the projected contract
volume to determine the applicable
average fee per cleared contract needed
to achieve the additional amounts
required. Consistent with past practice,
OCC would notify clearing members of
the fees that would be applicable for any
particular period by describing the
change in an information memorandum
distributed to all clearing members.
Consistent with past practice, OCC
would also notify regulators of the fees
that would be applicable for any
particular period by filing an
amendment to its Schedule of Fees as a
proposed rule change for immediate
effectiveness under Section 19(b)(3)(A)
of the Act and Rule 19b–4(f)(2)
thereunder.18
Refund Policy
Under the Refund Policy, except at a
time when Replenishment Capital is
outstanding as described below, OCC
would declare a refund to Clearing
18 See, e.g., the Permanent Schedule
Reinstatement Filing, supra n. 13; Proposed Rule
Change by The Options Clearing Corporation to
Reduce the Per Contract Clearing Fee for Routing
Trades Executed in Accordance with the Options
Order Protection and Locked/Crossed Market Plan
to $.01 per Contract, Securities Exchange Act
Release No. 68025 (October 12, 2012), 77 FR 63398
(October 16, 2012) (SR–OCC–2012–18).
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Members in December of each year,
beginning in 2015, in an amount equal
to 50% of the excess, if any, of (i) pretax income for the year in which the
refund is declared over (ii) the sum of
(x) the amount of pre-tax income after
the refund necessary to produce aftertax income for such year sufficient to
maintain shareholders’ equity at the
Target Capital Requirement for the
following year plus (y) the amount of
pre-tax income after the refund
necessary to fund any additional
reserves or additional surplus not
already included in the Target Capital
Requirement. Such refund will be paid
in the year following the declaration
after the issuance of OCC’s audited
financial statements, provided that (i)
the payment does not result in total
shareholders’ equity falling below the
Target Capital Requirement, and (ii)
such payment is otherwise permitted by
applicable Delaware law and applicable
federal laws and regulations. OCC
would not be able to pay a refund on a
particular date unless dividends were
paid on the same date. If Replenishment
Capital has been contributed and
remains outstanding, OCC would not
pay refunds until such time as the
Target Capital Requirement is restored
through the accumulation of retained
earnings. Refunds in accordance with
the Refund Policy would resume once
the Target Capital Requirement is
restored and all Replenishment Capital
is repaid in full, provided that the
restoration of the Target Capital
Requirement and the repayment of
Replenishment Capital occurred within
24 months of the issuance date of the
Replenishment Capital. If, within 24
months of the issuance date of any
Replenishment Capital, such
Replenishment Capital has not been
repaid in full or shareholders’ equity
has not been restored to the Target
Capital Requirement, OCC would no
longer pay refunds to clearing members,
even if the Target Capital Requirement
is restored and all Replenishment
Capital is repaid at a later date.
Dividend Policy
The Dividend Policy would provide
that, except at a time when
Replenishment Capital is outstanding as
described below, OCC would declare a
dividend on its Class B Common Stock
in December of each year in an aggregate
amount equal to the excess, if any, of (i)
after-tax income for the year, after
application of the Refund Policy (unless
the Refund Policy has been eliminated,
in which case the refunds shall be
deemed to be $0) over (ii) the sum of (A)
the amount required to be retained in
order to maintain total shareholders’
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equity at the Target Capital Requirement
for the following year, plus (B) the
amount of any additional reserves or
additional surplus not already included
in the Target Capital Requirement. Such
dividend will be paid in the year
following the declaration after the
issuance of OCC’s audited financial
statements, provided that (i) the
payment does not result in total
shareholders’ equity falling below the
Target Capital Requirement, and (ii)
such payment is otherwise permitted by
applicable Delaware law and applicable
federal laws and regulations. If
Replenishment Capital has been
contributed and remains outstanding,
OCC would not pay dividends until
such time as the Target Capital
Requirement is restored.
OCC’s Status as an Industry Utility
OCC has always been operated on an
‘‘industry utility’’ model. The
Stockholder Exchanges have heretofore
contributed only minimal capital to
OCC.19 OCC’s By-Laws currently require
that OCC set its clearing fees at a level
that is designed to cover operating
expenses and to maintain such reserves
and accumulate such additional capital
as are deemed reasonably necessary for
OCC to meet its obligations to its
clearing members and the public.
Clearing fees that are collected in excess
of these amounts are refunded annually
on a pro rata basis to the clearing
members who paid them. Under this
model, OCC has never paid dividends to
the Stockholder Exchanges. However,
OCC has paid significant refunds to
clearing members each year. OCC is
aware that a portion—possibly a
significant portion—of those refunds are
not passed through by the clearing
members to their end user customers.
Accordingly, by adopting an approach
that includes paying dividends to the
Stockholder Exchanges that have
invested a significant amount of
additional capital ($150 million) but
that also reduces the historical prerefund average buffer of 31% by
adopting a Business Risk Buffer of 25%,
OCC believes that the proposed
approach maintains, and perhaps better
aligns with, an industry utility model.
Given the very large increase in
capital that OCC has determined to be
appropriate in order to assure
compliance with regulatory
requirements and meet the increased
responsibilities imposed upon it as a
19 OCC’s common stock and paid in capital total
$2,659,999. See OCC 2013 Annual Report, Financial
Statements, Statements of Financial Condition,
available on OCC’s Web site, https://
optionsclearing.com/components/docs/about/
annual-reports/occ_2013_annual_report.pdf.
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systemically important financial market
utility, OCC has determined that the
best alternative available to it is to
obtain a substantial further capital
contribution from the Stockholder
Exchanges. This cannot be
accomplished without modification of
the past practice of not providing
dividends to stockholders. Accordingly,
it is necessary for OCC to establish the
new Fee Policy, Refund Policy, and
Dividend Policy. Because of the
Business Risk Buffer being set at 25%,
the combination of the Fee, Refund, and
Dividend Policies will effectively cap
the dividends to be paid to the
Stockholder Exchanges at a level that
the Board (with the advice of outside
financial experts) has determined
results in a reasonable rate of return on
contributed capital, particularly in
comparison to the implied cost of
capital to the clearing members and
their customers of instead pursuing an
approach which required the
accumulation of retained earnings
through higher fees and no refunds for
several years. OCC will continue to
refund a significant percentage of excess
clearing fees to clearing members,
thereby benefiting both clearing
members and, to the extent that refunds
are passed through by the clearing
members to their end user customers,
their customers. The Capital Plan
therefore effectively preserves OCC’s
industry utility model of providing its
services in an efficient manner, but
enhances the benefits to the end user
customers by charging lower initial fees
as a result of the decrease in the buffer
margin from OCC’s 10-year average of
31% to 25%.
Clearing members and customers will
benefit from the proposed Capital Plan
because it will allow OCC to continue
to provide clearing services at low cost.
As noted, OCC expects that this capital
infusion from stockholders will enable
OCC to provide a significant refund of
2014 fees. OCC further expects that its
current clearing fees will be reduced
significantly based on the Business Risk
Buffer of 25% beginning in 2015 with
refunds restored, and that these lower
fees will continue for the foreseeable
future.
Stockholder Exchanges will benefit
from the dividend return they receive
and, perhaps more importantly, they
will be assured that OCC will be in a
position to provide clearing services for
their markets on an on-going basis
within the same basic structure that has
served these markets well since their
inception and without the need to
radically change the structure to address
potential demands of outside equity
investors. Non-Stockholder Exchanges
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will also benefit by continuing to
receive OCC’s clearing services for their
products on the same basis as they
presently do.20
OCC also believes that the Capital
Plan will better align the interests of
Stockholder Exchanges and clearing
members with respect to expenses, since
changes to the level of operating
expenses directly affect the Target
Capital Requirement. In sum, OCC
believes that the present proposal
represents a fair and reasonable
balancing of the interests of the
Stockholder Exchanges, the other
exchanges for which OCC provides
clearing services, clearing members,
customers, and the general public while
providing an immediate infusion of
capital and a structure within which
OCC can meet its obligations to the
public as a systemically important
financial market utility, as well as the
requirements under the SEC Proposed
Rules.
Replenishment Capital Plan
OCC proposes to put in place a
Replenishment Capital Plan whereby
OCC’s Stockholder Exchanges are
obligated to provide on a pro rata basis
a committed amount of Replenishment
Capital should OCC’s total shareholders’
equity fall below the hard trigger (as
defined below). The aggregate
committed amount for all five
Stockholder Exchanges in the form of
Replenishment Capital that could be
accessed at any time would be capped
at the excess of (i) the lesser of (A) the
Baseline Capital Requirement, which is
currently $117 million, at the time of
the relevant funding or (B) $200 million,
over (ii) amounts of outstanding
Replenishment Capital (‘‘Cap’’). The
$200 million figure in the Cap formula
takes into account projected growth in
the Baseline Capital Requirement for the
foreseeable future. The commitment to
provide Replenishment Capital would
not be limited by time, but only by the
Cap. Replenishment Capital could be
called in whole or in part after the
occurrence of a ‘‘hard trigger’’ event
described below, subject to the Cap. If
the Baseline Capital Requirement
approaches or exceeds $200 million, the
Board can consider, as part of its annual
review of the Replenishment Capital
Plan that is required by the SEC
Proposed Rules, alternative
arrangements to obtain replenishment
capital in excess of the $200 million
20 Non-Stockholder Exchanges contribute capital
by purchasing a promissory note in the principal
amount of $1,000,000. See Section 2 of Article VIIB
of OCC’s By-Laws. The required capital
contribution of Non-Stockholder exchanges will not
change under the Capital Plan.
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committed under the Replenishment
Capital Plan. In addition, the Refund
Policy and the Dividend Policy will
provide that, in the absence of obtaining
any such alternative arrangements, the
amount of the difference will be
subtracted from amounts that would
otherwise be available for the payment
of refunds and dividends.
Replenishment Capital contributed to
OCC under the Replenishment Capital
Plan would take the form of a new class
of common stock (‘‘Class C Common
Stock’’) of OCC to be issued to the
Stockholder Exchanges solely in
exchange for Replenishment Capital
contributions.
The Replenishment Capital Plan
would be part of OCC’s overall Capital
Plan. In implementing the
Replenishment Capital Plan, OCC’s
management would monitor OCC’s
levels of shareholders’ equity to identify
certain triggers, or reduced capital
levels, that might require action. OCC
has identified two key triggers—a soft
trigger and a hard trigger—and proposes
that OCC take certain steps upon the
occurrence of either as described in
more detail below.
The ‘‘soft trigger’’ for re-evaluating
OCC’s capital would occur if OCC’s
shareholders’ equity falls below the sum
of (i) the Baseline Capital Requirement
and (ii) 75% of the Target Capital
Buffer. The soft trigger would be a
warning sign that OCC’s capital had
fallen to a level that required attention
and responsive action to prevent it from
falling to unacceptable levels. Upon a
breach of the soft trigger, OCC’s senior
management and the Board would
review alternatives to increasing capital,
and take appropriate action as
necessary, including increasing fees or
decreasing expenses, to restore
shareholders’ equity to the Target
Capital Requirement.
The ‘‘hard trigger’’ for making a
mandatory Replenishment Capital call
would occur if shareholders’ equity falls
below 125% of the Baseline Capital
Requirement (‘‘Hard Trigger
Threshold’’). The hard trigger would be
a sign that corrective action more
significant and with a more immediate
impact than increasing fees or
decreasing expenses should be taken to
increase OCC’s capital, either as part of
a recovery plan or a wind down plan for
OCC’s business. OCC’s shareholders’
equity would have to fall more than
$100 million below the fully funded
capital amount described above in order
for the Hard Trigger Threshold to be
breached. As a result, OCC views the
breach of the Hard Trigger Threshold as
unlikely and occurring only as a result
of a significant, unexpected event. Upon
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a breach of the Hard Trigger Threshold,
the Board would have to determine
whether to attempt a recovery, a winddown of OCC’s operations or a sale or
similar transaction, subject in each case
to any necessary stockholder consent. If
the Board decides to wind-down OCC’s
operations, OCC would access the
Replenishment Capital in an amount
sufficient to fund the wind-down, as
such amount would be determined by
the Board, and subject to the Cap
described above. If the Board decides to
attempt a recovery of OCC’s capital and
business, OCC would access the
Replenishment Capital in an amount
sufficient to return shareholders’ equity
to an amount equal to $20 million above
the Hard Trigger Threshold, subject to
the Cap described above.
While Replenishment Capital is
outstanding, no refunds or dividends
would be paid and, if any
Replenishment Capital remains
outstanding for more than 24 months or
the Target Capital Requirement is not
restored during that period, changes
would be made to how OCC calculates
refunds and dividends, as described in
more detail above under Refund Policy
and Dividend Policy. In addition, while
Replenishment Capital is outstanding,
OCC would first utilize the entire
amount of Available Funds to
repurchase, on a pro rata basis from
each Stockholder, to the extent
permitted by applicable Delaware and
federal law and regulations, outstanding
shares of Class C Common Stock as soon
as practicable after completion of the
financial statements following the end
of each calendar quarter at a price equal
to the original amount paid for such
shares, plus an additional ‘‘gross up’’
amount to compensate the holders of
the Class C Common Stock for taxes on
dividend income (if any) that they may
have to recognize as a result of such
repurchase.21 For this purpose,
‘‘Available Funds’’ would equal, as of
the end of any calendar quarter, the
excess, if any, of (x) shareholders’ equity
over (y) the Minimum Replenishment
Level. The ‘‘Minimum Replenishment
Level’’ would mean $20 million above
the Hard Trigger Threshold, so that
OCC’s shareholders’ equity would
remain at or above the Minimum
Replenishment Level after giving effect
to the repurchase. Furthermore, under
the Dividend and Refund Policies,
refunds and dividends would be
21 Based on current federal rates, if the full
amount of the payment is classified as a dividend
and the recipient is entitled to a dividends received
deduction, this gross up is estimated to be
approximately 12% of the payment.
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suspended until such time as the Target
Capital Requirement is restored.
Amendments to Governing Documents
In order to implement the Capital
Plan, OCC proposes to make
amendments to its By-Laws and
Restated Certificate of Incorporation and
amend and restate its Stockholders
Agreement.
Amendments to By-Laws
OCC is proposing various
amendments to the By-Laws in order to
implement the Capital Plan.
Specifically, OCC proposes to amend
the definition of Equity Exchange in
Article I, Section 1 to take into account
the potential ownership of Class C
Common Stock by the Stockholder
Exchanges.
Article II, Section 3 would be
amended to change the definition of
quorum such that a majority of
outstanding common stock entitled to
vote at a meeting of Stockholders either
in person or by proxy would constitute
a quorum for any such meeting of the
Stockholders. In addition, OCC
proposes to amend Article II, Section 5
to allow for the potential issuance of
Class C Common Stock, which will not
have voting rights except as required by
applicable law.
Article VIIA, Section 2, would be
amended to (i) provide for the potential
issuance of Class C Common Stock in
consideration for Replenishment Capital
provided by Stockholder Exchanges, (ii)
permit, consistent with the proposed
amendments to the Stockholders
Agreement, the transfer of shares of
common stock to another Stockholder,
and (iii) reflect the right of other
Stockholders, consistent with the
proposed amendments to the
Stockholders Agreement, to purchase
the shares of common stock of another
Stockholder. Article VIIA, Section 3,
would be amended to conform to the
changes to Article VIIA, Section 2.
OCC proposes amendments to Article
VIII, Section 5(d), to require that a Board
decision to utilize OCC’s retained
earnings to compensate for a loss or
deficiency to the Clearing Fund would
require unanimous consent from the
holders of Class A Common Stock and
Class B Common Stock. This proposed
amendment is intended to protect
Stockholders from an action taken
without their consent that could
increase their likelihood of being
required to provide Replenishment
Capital. Similarly, Article XI, Section 1
would also be amended to account for
the possible issuance of the non-voting
Class C Common Stock consistent with
the Restated Certificate of Incorporation
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as discussed below, and to require
unanimous Stockholder approval for
any future amendments to the new
provision of Article VIII, Section 5(d)
described above.
Article IX, Section 9, would be
amended in three ways. First, the
concept of the Business Risk Buffer
would be incorporated into Article IX,
Section 9(a). Second, Article IX, Section
9, would be amended to provide that
OCC would only add amounts for
reserves and surpluses in addition to the
Business Risk Buffer in extraordinary
circumstances and only to the extent
that the Board has determined that the
required amount of additional reserves
and surplus is expected to exceed the
full amount that is anticipated to be
accumulated through the Business Risk
Buffer prior to payment of refunds and
dividends. Third, Article IX, Section 9,
would be amended to expressly
reference the potential payment of
dividends in accordance with the
Dividend Policy.
Amendments to Restated Certificate of
Incorporation
OCC is proposing to amend its
Restated Certificate of Incorporation in
order to implement the Capital Plan.
The proposed amendment to the
restated Certificate of Incorporation is
attached to this filing as Exhibit 5D.
Article IV would be amended in
multiple locations to (i) reduce the
number of authorized shares of Class A
Common Stock and Class B Common
Stock to the number of shares currently
outstanding, and the number of series of
Class B Common Stock, to reflect the
fact that there are only five Stockholder
Exchanges, (ii) to eliminate a provision
under which additional shares of Class
A Common Stock and Class B Common
Stock could be authorized in certain
circumstances without a separate vote of
each series of Class B Common Stock,
(iii) create Class C Common Stock as
non-voting stock, (iv) set a par value for
Class C Common Stock of $1,000 per
share, (v) provide for distribution upon
a liquidation or dissolution of OCC to
holders of Class A, Class B, and Class C
Common Stock, pro rata on a pari passu
basis, the amount of the par value of
their shares, and (vi) remove restrictions
on the transfer of shares of Class B
Common Stock to more than one entity
in order to address the possible exercise
by another Stockholder of its right of
first refusal under the Amended and
Restated Stockholders Agreement.
Additionally, Article IV would be
amended to make clear that the
prohibition on OCC’s creating or issuing
rights or options to purchase OCC stock
set forth in Article IV would not restrict
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the ability of OCC to enter into the
Replenishment Capital Plan. Finally,
technical changes would be made to
Article VI in connection with the
creation of Class C Common Stock as
non-voting stock.
Amendments to Stockholders
Agreement
OCC is proposing various
amendments to the Stockholders
Agreement to make technical changes
relating to the additional contributions
of capital to be made by the Stockholder
Exchanges under the Capital Plan and
the potential issuance of Class C
Common Shares. The proposed
Amended and Restated Stockholders
Agreement is attached to this filing as
Exhibit 5E. In part, the amendments to
the Stockholders Agreement would
provide Stockholders with a secondary
right of refusal to be exercised if a
Stockholder wished to sell its shares
and OCC chose not to exercise its
existing right of first refusal to purchase
those shares. This change was
considered necessary because after the
additional contributions of capital by
the Stockholder Exchanges under the
Capital Plan, shares of Class B Common
Stock will be significantly more
valuable, making it less likely that OCC
would be able to exercise its right of
first refusal. Providing the non-selling
Stockholder Exchanges with a
secondary right of first refusal would
increase the chances that a selling
Stockholder Exchange would find a
purchaser for its shares from among
OCC’s existing owners. Because OCC’s
Stockholders Agreement has already
been amended several other times, for
convenience OCC is also proposing to
amend and restate the Stockholders
Agreement to incorporate all previous
amendments and the new amendments
into a single comprehensive agreement.
Each of the proposed new
amendments to the Stockholders
Agreement is described below, in the
order they appear in the agreement.
OCC proposes a technical amendment to
Section 1 of the Stockholders
Agreement to refer to the definitions of
Class A Common Stock, Class B
Common Stock, and Class C Common
Stock in the Restated Certificate of
Incorporation and By-Laws. OCC
proposes an amendment to Section 3
which would delete an obsolete
reference to a plan relating to OCC’s
original reorganization into a common
clearing facility for all options
exchanges. OCC proposes a technical
amendment to Section 5(a) to add a
reference to the procedures for
Stockholder Exchanges to acquire shares
pursuant to their secondary rights of
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first refusal in certain situations that
will be set out in amended Section
10(e). OCC is proposing an amendment
to Section 5(b) providing that the
Stockholder Exchanges may not sell or
transfer less than all of their shares
without the consent of OCC. OCC seeks
to prevent a partial sale by a
Stockholder Exchange of a portion of its
shares of Class A Common Stock, Class
B Common Stock, or Class C Common
Stock to avoid difficulties that could
arise for OCC if, as a result of a partial
sale, voting rights, dividend rights, and
replenishment capital were spread
across Stockholder Exchanges on a non
pro rata basis. Section 5(b) would
further clarify that if OCC consented to
a partial sale the Stockholder
Exchanges’ right of first refusal would
still apply, and that a Stockholder
Exchange could sell shares of Class C
Common Stock to OCC without selling
its shares of Class A Common Stock and
Class B Common Stock. OCC proposes
to amend Section 6(a) to provide
Stockholders, upon the non-exercise of
OCC’s right of first refusal, a secondary
right of first refusal to purchase shares
of other Stockholders in certain
circumstances discussed above, and to
establish procedures governing the
exercise of this right. Section 6(b) would
be amended to explicitly state that OCC
can assign its rights under the
Stockholders Agreement to purchase
shares of a Stockholder Exchange in the
event of such Stockholder Exchange’s
bankruptcy or insolvency, and to create
an exception from the right of first
refusal for transfers to certain affiliates
of a Stockholder that meet the exchange
eligibility requirements set forth in the
By-Laws. Section 6(c) would be
amended to make any transfer or
encumbrance of shares in violation of
the Stockholders Agreement, either
voluntarily or by operation of law, void.
Section 6(d) would be amended to
explicitly state that OCC can assign its
rights under the Stockholders
Agreement to repurchase shares of any
Stockholder that ceases to be qualified
to participate in OCC pursuant to the
By-Laws. The revised Section 6(c)
would take the place of current Section
6(e), which would be deleted. Section
6(e) currently provides that such a
pledge or transfer would automatically
be deemed to create a transfer of the
shares to OCC. OCC proposes
conforming amendments to Section 6(f),
Section 6(g), Section 7, and Section 8 to
provide for the new Stockholder
Exchange right of first refusal. OCC
proposes deleting Section 9 to remove
the right of Stockholders to require OCC
to purchase their shares of stock.
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OCC proposes to amend Section 10(a)
of the Stockholders Agreement to
provide that the purchase price paid
upon exercise of purchase rights by OCC
or the Stockholder Exchanges would be
equal to the lowest of (i) the book value
of the shares to be purchased, (ii) the
total capital contribution of the selling
Stockholder and (iii) in the case of
exercise of a right of first refusal, the
price originally offered for such shares.
OCC proposes other technical
amendments to Sections 10(a), 10(b) and
10)(c) of the Stockholders Agreement
concerning the purchase price formula,
procedures, and timing for OCC’s
repurchase rights of shares (or, if
applicable, the purchase of a
Stockholder’s shares by another
Stockholder) pursuant to the terms of
the Stockholders Agreement. Section
10(d) would be amended such that any
consideration to be paid by OCC upon
the exercise of a right of first refusal
would be subordinated to all other
claims of all other creditors of OCC, and
to prohibit OCC from declaring or
paying any dividends, acquiring for
value any shares of stock or distributing
assets to any Stockholder Exchange,
except with regard to required
purchases or redemptions of shares of
Class C Common Stock or payments of
dividends in accordance with the
Dividend Policy. OCC proposes to
amend current Section 10(e) by moving
its provisions addressing the
subordination of payments by OCC and
non-payment of dividends under certain
circumstances into the proposed Section
10(d) as discussed above. OCC proposes
technical amendments to current
Section 10(g), proposed Section 10(e)
concerning the process under which
OCC would acquire shares upon
exercise of its right of first refusal. OCC
also proposes to move technical
provisions of the current Section 10(f)
concerning the payment of such shares
into Section 10(e). Section 10(f) would
then be amended to address procedures
for Stockholders that exercise their right
of first refusal.
Section 11 of the Stockholders
Agreement would be amended in order
to make a Stockholder’s right to transfer
shares dependent upon the non-exercise
of OCC’s and other Stockholders’ right
of first refusal to the purchase of such
Stockholder’s shares. Additionally,
Section 11 would be amended to
provide that the transfer of a
Stockholder’s shares under that section
would not be effective without the
transferee’s assuming the rights and
obligations under the Stockholders
Agreement, certain joinders to the
Stockholders Agreement and other
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agreements between OCC and
Stockholders. Section 14(a) would be
amended to make reference to the
Stockholders Agreement. Section 14(b)
would be amended to make a technical
change relating to the legend on OCC’s
stock certificates. Section 15 would be
amended to update the mailing
addresses of the Stockholder Exchanges
for written notices and formal
communications. Section 16(c) would
be amended to clarify that a Stockholder
Exchange would be able to assign its
rights under the Stockholders
Agreement only to a party to whom it
would be permitted to transfer its
shares. In addition, Section 16(c) would
be amended to provide that OCC may
only assign its repurchase rights under
Section 6(b) or Section 6(d) of the
Stockholders Agreement. OCC would be
able to assign such rights with respect
to all or a portion of the shares of stock
owned by a Stockholder Exchange, and
would be required to provide the nonselling Stockholder Exchanges with a
right of first refusal in connection with
any such contemplated assignment
comparable to the secondary right of
first refusal applicable with respect to a
voluntary sale by a Stockholder
Exchange and described above. Sections
16(f) and 16(g) would be amended to
effectuate the amendment and
restatement of the existing Stockholders
Agreement.
2. Statutory Basis
OCC believes the proposed rule
change is consistent with Section
17A(b)(3)(F) of the Securities Exchange
Act of 1934, as amended (‘‘Act’’),22 and
the rules and regulations thereunder,
because by implementing the Capital
Plan, OCC would ensure that it could
continue to promptly and accurately
clear and settle securities transactions
even if it suffered significant operational
losses. By ensuring that it maintains
sufficient capital and that it can
replenish the capital in the event it falls
below desirable levels, the Capital Plan
would also enable OCC to maintain safe
and secure obligations, in compliance
with Rule 17Ad–22(d)(6).23 The
proposed Capital Plan would also, as
discussed in more detail above, ensure
OCC’s compliance with new regulatory
requirements proposed by the
Commission seeking to promote the safe
and reliable operation of registered
clearing agencies, and in particular
proposed subsection (e)(15) of Rule
17Ad–22.24 The proposed rule change is
22 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(d)(6).
24 SEC Proposed Rules at 156, FR 29507, 29616
(May 22, 2014).
23 17
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not inconsistent with the existing rules
of OCC, including any other rules
proposed to be amended.
(B) Clearing Agency’s Statement on
Burden on Competition
OCC does not believe that the
proposed rule change would impose any
burden on competition.25 OCC believes
that the proposed rule change would not
unfairly inhibit access to OCC’s services
or disadvantage or favor any particular
user in relationship to another user
because the proposed changes relate to
OCC’s plan for raising and maintaining
adequate capital from its owner
exchanges, and therefore do not affect
clearing members’ or others’ access to
OCC’s services or the nature of these
services.
For the foregoing reasons, OCC
believes that the proposed rule change
is in the public interest, would be
consistent with the requirements of the
Act applicable to clearing agencies and
would not 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 on the proposed
rule change were not and are not
intended to be solicited with respect to
the proposed rule change and none have
been received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
The proposal shall not take effect
until all regulatory actions required
with respect to the proposal are
completed.26
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
25 15
U.S.C. 78q–1(b)(3)(I).
also filed proposals in this proposed rule
change as an advance notice under Section
806(e)(1) of the Payment, Clearing, and Settlement
Supervision Act of 2010. 12 U.S.C. 5465(e)(1). See
supra note 3.
26 OCC
E:\FR\FM\30JAN1.SGM
30JAN1
Federal Register / Vol. 80, No. 20 / Friday, January 30, 2015 / Notices
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:
[FR Doc. 2015–01755 Filed 1–29–15; 8:45 am]
Electronic Comments
BILLING CODE 8011–01–P
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
OCC–2015–02 on the subject line.
Paper Comments
asabaliauskas on DSK5VPTVN1PROD with NOTICES
• 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–2015–02. 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 Web site (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 Web site 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
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of OCC and on OCC’s Web site at
https://www.theocc.com/components/
docs/legal/rules_and_bylaws/sr_occ_15_
02.pdf. All comments received will be
posted without change; the Commission
does not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–OCC–2015–02 and should
be submitted on or before February 20,
2015.
VerDate Sep<11>2014
18:50 Jan 29, 2015
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.27
Jill M. Peterson,
Assistant Secretary.
Jkt 235001
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–74132; File No. SR–FICC–
2014–11]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Order
Approving Proposed Rule Change To
Amend the Government Securities
Division Rulebook and the Mortgage
Backed Securities Clearing Rules In
Order To Move the Time of Novation
With Respect to Certain Trades,
Include Rules To Reflect Existing
Processes, and Clarify Certain Rules
To Reflect Current Practices
January 26, 2015.
I. Introduction
On December 2, 2014, the Fixed
Income Clearing Corporation (‘‘FICC’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) proposed
rule change SR–FICC–2014–11 pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder.2 The proposed
change was published for comment in
the Federal Register on December 16,
2014.3 The Commission received no
comment letters in response to the
proposed rule change. For the reasons
discussed below, the Commission is
approving the proposed rule change.
II. Description
The rule change, as proposed, moves
the time of novation applicable to
certain transactions submitted to FICC’s
Government Securities Division
(‘‘GSD’’) and FICC’s Mortgage Backed
Securities Division (‘‘MBSD’’) to earlier
in the clearing process in order to
provide members with additional legal
certainty, for purposes of members’
regulatory capital requirements, that
FICC will be the legal counterparty with
respect to their guaranteed trades.
Currently, FICC guarantees the
settlement of a trade upon comparison,
which generally occurs when FICC
issues initial ‘‘output’’ to GSD netting
members or MBSD clearing members, as
27 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Securities Exchange Act Release No. 34–73805
(December 10, 2014), 79 FR 74790 (December 16,
2014) (SR–FICC–2014–11).
1 15
PO 00000
Frm 00100
Fmt 4703
Sfmt 4703
5179
applicable, indicating that their trades
have compared,4 provided that the trade
meets the requirements of the GSD
Rulebook (‘‘GSD Rules’’) or the MBSD
Rulebook (‘‘MBSD Rules’’), as
applicable.5
Novation, which refers to the
termination of delivery, receive and
related payment obligations between the
original parties to the contract and the
replacement of such obligations with
identical obligations between each party
and FICC, currently does not occur until
later in the clearing and settlement
process than comparison. Under the
GSD Rules, novation currently occurs
when subsequent ‘‘netting output’’ is
issued to netting members (usually the
day before settlement). Under the MBSD
Rules, novation currently occurs when
subsequent ‘‘pool netting output’’ is
issued to clearing members (usually the
day before settlement).
FICC stated in its proposed rule
change that it was proposing the rule
change because it understood that, as its
members (or their advisors) analyze
their netting rights with respect to
transactions cleared through FICC for
purposes of regulatory capital
requirements, it is beneficial for
members that FICC become the legal
counterparty at the point its guarantee
attaches.
Time of Novation—Rule Changes
Under the revised GSD Rules and
MBSD Rules, as approved, novation will
occur at comparison for netting eligible
transactions (for GSD) and SBODestined Trades 6 (for MBSD). This
means that, at the point of trade
comparison, FICC will both guarantee
the settlement of the transactions (as it
does today) and novate such
transactions, becoming the legal
counterparty to each submitting member
with respect to such transactions.
Under the revised GSD Rules, as
approved pursuant to this rule change,
all netting eligible transactions that
compare in accordance with the GSD
Rules will novate at the point of
comparison.
As amended by this proposal,
pursuant to the MBSD Rules, only SBODestined Trades, all of which are
4 In the case of GSD locked-in trades, comparison
occurs upon receipt of the trade data submitted to
FICC from the locked-in trade source. GSD Rule 6C.
5 See GSD Rule 11B and MBSD Rule 5.
6 The MBSD Rules define a ‘‘SBO-Destined
Trade’’ as a to-be-announced (‘‘TBA’’) transaction in
the clearing system intended for TBA Netting in
accordance with the provisions of the Rules. MBSD
Rule 1. In a TBA transaction, members agree on a
sale price, quantity, and the characteristics of the
securities being sold, but they do not specify which
particular securities will be delivered on the
settlement date.
E:\FR\FM\30JAN1.SGM
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]]>Agencies
[Federal Register Volume 80, Number 20 (Friday, January 30, 2015)]
[Notices]
[Pages 5171-5179]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-01755]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-74136; File No. SR-OCC-2015-02]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of a Proposed Rule Change Concerning a Proposed
Capital Plan for Raising Additional Capital That Would Support the
Options Clearing Corporation's Function as a Systemically Important
Financial Market Utility
January 26, 2015.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on January 14, 2015, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared OCC.\3\ The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ OCC also filed proposals in this proposed rule change as an
advance notice under Section 806(e)(1) of the Payment, Clearing, and
Settlement Supervision Act of 2010. 12 U.S.C. 5465(e)(1). See File
No. SR-OCC-2014-813. In Items I and II below, OCC states that the
purpose of this proposal is in part to facilitate compliance with
the SEC Proposed Rules (as defined below) and address Principle 15
of the Principles for Financial Market Infrastructures. The
Commission notes that the SEC Proposed Rules are pending. The
Commission will evaluate the proposed rule change under the Act and
the rules currently in force thereunder.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
This proposed rule change is filed by OCC in order to set forth a
proposed Capital Plan for raising additional capital that would support
OCC's function as a systemically important financial market utility and
facilitate OCC's compliance with new regulatory requirements applicable
to systemically important financial market utilities that have been
proposed by the Commission but have not yet been adopted.
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 such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
OCC is proposing to amend its By-Laws and other governing
documents, and to adopt certain policies, for the purpose of
implementing a plan for raising additional capital (``Capital Plan'')
under which the options exchanges that own equity in OCC (``Stockholder
Exchanges'' or ``Stockholders'') would make an additional capital
contribution and commit to replenishment capital (``Replenishment
Capital'') in circumstances discussed below, and would receive, among
other things, the right to receive dividends from OCC.\4\ In addition
to the additional capital contribution and Replenishment Capital, the
main features of the Capital Plan are: (i) A policy establishing OCC's
fees at a level that would be sufficient to cover OCC's estimated
operating expenses plus a ``Business Risk Buffer'' as described below
(``Fee Policy''), (ii) a policy establishing the amount of the annual
refund to clearing members of OCC's fees (``Refund Policy''), and (iii)
a policy for calculating the amount of dividends to be paid to the
Stockholder Exchanges (``Dividend Policy''). The Capital Plan is
proposed to be implemented on or about February 27, 2015, subject to
all necessary regulatory approvals.\5\
---------------------------------------------------------------------------
\4\ The Capital Plan has also been filed with the Commission as
an advance notice (SR-OCC-2014-813), which was amended and restated
on January 14, 2015.
\5\ The material features of the Capital Plan are summarized in
the Term Sheet that is included as Exhibit 3 to this filing. Certain
details of the Term Sheet may change as a result of negotiations
between OCC and the Stockholder Exchanges or changes in financial
figures, but OCC does not anticipate any material changes to the
Capital Plan.
---------------------------------------------------------------------------
The Capital Plan would significantly increase OCC's capital in
connection with its increased responsibilities as a systemically
important financial market utility, and OCC believes that it would
facilitate OCC's compliance with new regulatory requirements applicable
to such systemically important financial market utilities that have
been proposed by the Commission but have not yet been adopted.\6\ For
purposes of its capital planning, OCC has used the working assumption
that the new requirements contained in the Commission's proposed
amendments to Rule 17Ad-22 of the SEC Proposed Rules will be adopted
substantially as proposed, and the Capital Plan is intended to ensure
OCC's ability to comply with Rule 17Ad-22, specifically paragraph
(e)(15) thereof, when the SEC Proposed Rules become effective. In
addition, it is intended to address Principle 15 of the Principles for
Financial Market Infrastructures published by the Bank for
International Settlements and the International Organization of
Securities Commissions, which provides, among other things, that a
financial market utility should identify, monitor and manage its
general business risk and hold sufficient liquid net assets funded by
equity to cover potential general business losses so that it can
continue to operate as a going concern. The Capital Plan calls for an
infusion of substantial additional equity capital by the Stockholder
Exchanges to be made prior to February 27, 2015, subject to regulatory
approval, that when added to retained earnings accumulated by OCC in
2014 will significantly increase OCC's capital levels as compared to
historical levels. Additionally, the Capital Plan includes the
Replenishment Capital commitment, which would provide OCC access to
additional equity contributed by the Stockholder Exchanges should OCC's
equity fall close to or below the amount that OCC determines to be
appropriate to support its business and manage business risk in
compliance with Rule 17Ad-22, as discussed more fully below.
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 71699 (March 12,
2014), 79 FR 29507 (May 22, 2014) (``SEC Proposed Rules'').
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[[Page 5172]]
Background
OCC is a clearing agency registered with the Commission and is also
a derivatives clearing organization (``DCO'') regulated in its capacity
as such by the Commodity Futures Trading Commission (``CFTC''). OCC is
a Delaware business corporation and is owned equally by the Stockholder
Exchanges, five national securities exchanges for which OCC provides
clearing services.\7\ In addition, OCC provides clearing services for
seven other national securities exchanges that trade options (``Non-
Stockholder Exchanges''). In its capacity as a DCO, OCC also provides
clearing services to four futures exchanges.
---------------------------------------------------------------------------
\7\ The Stockholder Exchanges are: Chicago Board Options
Exchange, Incorporated; International Securities Exchange, LLC;
NASDAQ OMX PHLX LLC; NYSE MKT LLC; and NYSE Arca, Inc.
---------------------------------------------------------------------------
OCC has been designated systemically important by the Financial
Stability Oversight Council pursuant to the Payment, Clearing and
Settlement Supervision Act, and the Commission is OCC's ``Supervisory
Agency'' under Section 803(8) of the Payment, Clearing and Settlement
Supervision Act. OCC is therefore a ``covered clearing agency''
(``CCA'') as defined in proposed amendments to the Commission's Rule
17Ad-22(a)(7) and would be required to comply with the provisions of
proposed Rule 17Ad-22 applicable to CCA's, including paragraph (e)(15)
thereof.\8\
---------------------------------------------------------------------------
\8\ SEC Proposed Rules at 32-33, FR 29507, 29515 (May 22, 2014).
---------------------------------------------------------------------------
Proposed Rule 17Ad-22(e)(15) provides:
Each covered clearing agency shall establish, implement,
maintain and enforce written policies and procedures reasonably
designed to, as applicable: . . . Identify, monitor, and manage the
covered clearing agency's general business risk and hold sufficient
liquid net assets funded by equity to cover potential general
business losses so that the covered clearing agency can continue
operations and services as a going concern if those losses
materialize, including by:
(i) Determining the amount of liquid net assets funded by equity
based upon its general business risk profile and the length of time
required to achieve recovery or orderly wind-down, as appropriate,
of its critical operations and services if such action is taken;
(ii) Holding liquid net assets funded by equity equal to the
greater of either (x) six months of the covered clearing agency's
current operating expenses, or (y) the amount determined by the
board of directors to be sufficient to ensure a recovery or orderly
wind-down of critical operations and services of the covered
clearing agency, as contemplated by the plans established under
paragraph (e)(3)(ii) of this section, and which:
(A) shall be in addition to resources held to cover participant
defaults or other risks covered under the credit risk standard in
paragraph (b)(3) or paragraph (e)(4)(i)-(iii) of this section, as
applicable, and the liquidity risk standard in paragraph (e)(7)(i)
and (ii) of this section; and
(B) Shall be of high quality and sufficiently liquid to allow
the covered clearing agency to meet its current and projected
operating expenses under a range of scenarios, including adverse
market conditions; and
(iii) Maintaining a viable plan, approved by the board of
directors and updated at least annually, for raising additional
equity should its equity fall close to or below the amount required
under paragraph (e)(15)(ii) of this section.\9\
---------------------------------------------------------------------------
\9\ SEC Proposed Rules at 417-418, FR 29507, 29616 (May 22,
2014).
Over the last nine months, OCC has devoted substantial efforts to:
(1) Develop a 5-year forward looking model of expenses; (2) quantify
maximum recovery and wind-down costs under OCC's Recovery and Wind-Down
Plan; (3) assess and quantify OCC's operational and business risks; (4)
model projected capital accumulation taking into account varying
assumptions concerning business conditions, fee levels, buffer margin
levels and refunds; and (5) develop an effective mechanism that
provides OCC access to replenishment capital in the event of losses
that could cause OCC to be non-compliant with the SEC Proposed Rules.
Incorporating the results of those efforts, the proposed amendments are
intended to allow OCC to implement the Capital Plan and thereby provide
OCC with the means to increase its shareholders' equity and, in
particular, to obtain timely compliance with Rule 17Ad-22(e)(15) \10\
as proposed by the Commission. A more detailed discussion of the manner
in which the Capital Plan would allow OCC to comply with Rule 17Ad-
22(e)(15) appears below.
---------------------------------------------------------------------------
\10\ SEC Proposed Rules at 222-223, FR 29507, 29547-29548 (May
22, 2014).
---------------------------------------------------------------------------
OCC's Projected Capital Requirement
Using the methods described in detail below, OCC will annually
determine a ``Target Capital Requirement'' consisting of (i) a
``Baseline Capital Requirement'' equal to the greatest of (x) six
months operating expenses for the following year, (y) the maximum cost
of the recovery scenario from OCC's Recovery and Wind-Down Plan, and
(z) the cost to OCC of winding down operations as set forth in the
Recovery and Wind-Down Plan, plus (ii) a ``Target Capital Buffer''
linked to plausible loss scenarios from operational risk, business risk
and pension risk. OCC has determined that its currently appropriate
``Target Capital Requirement'' is $247 million, reflecting a Baseline
Capital Requirement of $117 million, which is equal to six months of
projected operating expenses, plus a Target Capital Buffer of $130
million. This Target Capital Buffer would provide a significant capital
cushion to offset potential business losses.
As of December 31, 2013, OCC had total shareholders' equity of
approximately $25 million,\11\ meaning that OCC proposes to add
additional capital of $222 million to meet its 2015 Target Capital
Requirement. In addition, OCC would be obligated under paragraph
(e)(15)(iii) \12\ of proposed Rule 17Ad-22 to maintain ``a viable
plan'' for raising additional equity should its equity fall close to or
below the amount required under paragraph (e)(15)(ii) of the Rule; \13\
i.e., the Baseline Capital Requirement. OCC has determined that its
viable plan for Replenishment Capital should provide for a
``Replenishment Capital Amount'' which would give OCC access to
additional capital as needed up to a maximum of the Baseline Capital
Requirement, which is currently $117 million.\14\ Therefore, OCC's
proposed Capital Plan would provide OCC in 2015 with ready access to
approximately $364 million in equity capital as follows:
---------------------------------------------------------------------------
\11\ See OCC 2013 Annual Report, Financial Statements,
Statements of Financial Condition, available on OCC's Web site,
https://optionsclearing.com/components/docs/about/annual-reports/occ_2013_annual_report.pdf.
\12\ SEC Proposed Rules at 418, FR 29507, 29616 (May 22, 2014).
\13\ SEC Proposed Rules at 417, FR 29507, 29616 (May 22, 2014).
\14\ The obligation to provide Replenishment Capital will be
capped at $200 million, which OCC projects will sufficiently account
for increases in its capital requirements for the foreseeable
future.
------------------------------------------------------------------------
------------------------------------------------------------------------
Baseline Capital Requirement............................ $117,000,000
Target Capital Buffer................................... 130,000,000
------------------------------------------------------------------------
Target Capital Requirement.............................. 247,000,000
Replenishment Capital Amount............................ 117,000,000
------------------------------------------------------------------------
Total OCC Capital Resources......................... 364,000,000
------------------------------------------------------------------------
Procedures Followed in Order to Determine Capital Requirement
Various measures were used in determining the appropriate level of
capital necessary to comply with the SEC Proposed Rules. An outside
consultant conducted a ``bottom-up'' analysis of OCC's risks and
quantified the appropriate amount of capital to be held against each
risk. The analysis was
[[Page 5173]]
comprehensive across risk types, including credit, market, pension,
operational, and business risk. Based on internal operational risk
scenarios and loss modeling at or above the 99% confidence level, OCC's
operational risk was quantified at $226 million and pension risk at $21
million, resulting in the total Target Capital Requirement of $247
million. Business risk was addressed by taking into consideration that
OCC has the ability to fully offset potential revenue volatility and
manage business risk to zero by adjusting the levels at which fees and
refunds are set and by adopting a ``Business Risk Buffer'' of 25% when
setting fees. Other risks, such as counterparty risk and on-balance
sheet credit and market risk, were considered to be immaterial for
purposes of requiring additional capital based on means available to
OCC to address those risks that did not require use of OCC's capital.
As discussed in more detail below in the context of OCC's Fee Policy,
the Business Risk Buffer of 25% is achieved by setting OCC's fees at a
level intended to achieve target annual revenue that will result in a
25% buffer for the year after paying all operating expenses.
An analysis was also performed to identify OCC's risk in terms of
the regulatory requirements set forth in proposed Rule 17Ad-
22(e)(15)(ii).\15\ This analysis estimated that, currently, OCC's
maximum recovery costs would be $100 million and projected wind-down
costs would be $73 million. OCC's projected expenses for 2015 are $234
million, so that six months projected expenses are $234 million/2 =
$117 million. The greater of recovery or wind-down costs and six months
of operating expenses is therefore $117 million, and OCC's Baseline
Capital Requirement (minimum regulatory requirement) is therefore $117
million. OCC then computed the appropriate amount of a Target Capital
Buffer from operational risk, business risk, and pension risk. This
resulted in a determination that the current Target Capital Buffer
should be $130 million. Thus, the Target Capital Requirement is $117
million + $130 million = $247 million.
---------------------------------------------------------------------------
\15\ SEC Proposed Rules at 417, FR 29507, 29616 (May 22, 2014).
---------------------------------------------------------------------------
Overview of, and Basis for, OCC's Proposal to Acquire Additional Equity
Capital
In order to meet its Target Capital Requirement, and after
consideration of available alternatives, OCC's Board approved a
proposal from OCC's Stockholder Exchanges under which OCC would meet
its Target Capital Requirement of $247 million in early 2015 as
follows:
------------------------------------------------------------------------
------------------------------------------------------------------------
Shareholders' Equity as of 1/1/2014................. $25,000,000
Shareholders Equity Accumulated Through Retained 72,000,000
Earnings \16\......................................
Additional Contribution from Stockholder Exchanges.. 150,000,000
-------------------
Target Capital Requirement...................... 247,000,000
Replenishment Capital Amount.................... 117,000,000
-------------------
Total OCC Capital Resources................. 364,000,000
------------------------------------------------------------------------
---------------------------------------------------------------------------
\16\ See Proposed Rule Change by The Options Clearing
Corporation to Reflect the Elimination of a Discount to the Clearing
Fee Schedule, Securities Exchange Act Release No. 71769 (March 21,
2014), 79 FR 17214 (March 27, 2014) (SR-OCC-2014-05) (Filing for
immediate effectiveness of a proposed rule change with the
Commission to reinstate OCC's permanent clearing fee schedule for
securities options and securities futures that became effective May
1, 2007 (``Permanent Schedule Reinstatement Filing'')). The $72
million is after giving effect to the approximately $40 million
refund referred to below.
---------------------------------------------------------------------------
The additional contribution of the Stockholder Exchanges would be
made in respect of their Class B Common Stock on a pro rata basis. The
Stockholder Exchanges will also commit to provide additional equity
capital up to the Replenishment Capital Amount, which is currently $117
million, in the event Replenishment Capital is needed. While the
Replenishment Capital Amount will increase as the Baseline Capital
Requirement increases, it would be capped at a total of $200 million
that could be outstanding at any point in time. OCC has estimated that
the Baseline Capital Requirement would not exceed this amount before
2022. When the limit is being approached, OCC would revise the Capital
Plan as needed to address future needs. In consideration for their
capital contributions and replenishment commitments, the Stockholder
Exchanges will receive dividends as described in the Dividend Policy
discussed below for so long as they remain stockholders and maintain
their contributed capital and commitment to replenish capital up to the
Replenishment Capital Amount, subject to the $200 million cap.
Fee, Refund, and Dividend Policies
Upon reaching the Target Capital Requirement, the Capital Plan and
the proposed Fee Policy require OCC to set its fees at a level that
utilizes a Business Risk Buffer of 25%. The purpose of this Business
Risk Buffer is to ensure that OCC accumulates sufficient capital to
cover unexpected fluctuations in operating expenses, business capital
needs, and regulatory capital requirements. Furthermore, the Capital
Plan requires OCC to maintain Fee, Refund, and Dividend Policies,
described in more detail below, which are designed to ensure that OCC's
shareholders' equity remains well above the Baseline Capital
Requirement. The proposed Fee, Refund, and Dividend Policies are
attached to this filing as Exhibits 5A, 5B, and 5C respectively. The
required Business Risk Buffer of 25% is below OCC's 10-year historical
pre-refund average buffer of 31%. The target will remain 25% so long as
OCC's shareholders' equity remains above the Target Capital Requirement
amount. The reduction in buffer margin from OCC's 10-year average of
31% to 25% reflects OCC's commitment to continue to operate as an
industry utility and ensuring that market participants benefit as much
as possible from OCC's operational efficiencies in the future. This
reduction will permit OCC to charge lower fees to market participants
rather than maximizing refunds to clearing members and dividend
distributions to Stockholder Exchanges. OCC will review its fee
schedule on a quarterly basis to manage revenue as closely to this
target as possible.\17\ For example, if the Business Risk Buffer is
materially above 25% after the first quarter of a particular year, OCC
may decrease fees for the remainder of the year, and conversely if the
Business Risk Buffer is materially below 25% after the first quarter,
OCC may increase fees for the remainder of the year.
---------------------------------------------------------------------------
\17\ If OCC's fee schedule needs to be changed in order to
achieve the 25% Business Risk Buffer, OCC would file a proposed rule
change seeking approval of the revised fee schedule.
---------------------------------------------------------------------------
[[Page 5174]]
The Capital Plan would allow OCC to refund approximately $40
million from 2014 fees to clearing members in 2015 and to reduce fees
in an amount to be determined by the Board, effective in the second
quarter 2015. OCC will announce new fee levels early in 2015 and will
make them effective following notification to clearing members and any
necessary approval by the Commission. OCC will endeavor to provide
clearing members with no less than 60-day advance notice of the
effectiveness of changes to fee levels, particularly those that result
in increases to fee levels. No dividends will be declared until
December 2015 and no dividends will be paid until 2016.
Changes to the Fee, Refund, or Dividend Policies will require the
affirmative vote of two-thirds of the directors then in office and
approval of the holders of all of OCC's outstanding Class B Common
Stock. The formulas for determining the amount of refunds and dividends
under the Refund and Dividend Policies, respectively, which are
described in more detail below, assume that refunds are tax-deductible
but that dividends are not. The Refund and Dividend Policies would each
provide that in the event that refunds payable under the Refund Policy
are not tax deductible, the policies would be amended to restore the
relative economic benefits between the recipients of the refunds and
the Stockholder Exchanges.
Fee Policy
Under the Fee Policy, in setting fees each year, OCC would
calculate an annual revenue target based on a forward twelve months
expense forecast divided by the difference between one and the Business
Risk Buffer of 25%, i.e., OCC will divide the expense forecast by .75.
Establishing a Business Risk Buffer at 25% would allow OCC to manage
the risk that fees would generate less revenue than expected due to
lower-than-expected trading volume or other factors, or that expenses
would be higher than projected. The Fee Policy also will include
provisions from existing Article IX, Section 9 of the By-Laws to the
effect that the fee schedule may also include additional amounts
necessary to (i) maintain such reserves as are deemed reasonably
necessary by the Board to provide facilities for the conduct of OCC's
business and to conduct development and capital planning activities in
connection with OCC's services to the options exchanges, Clearing
Members and the general public, and (ii) accumulate such additional
surplus as the Board may deem advisable to permit OCC to meet its
obligations to Clearing Members and the general public; however, these
provisions will be invoked only in extraordinary circumstances and to
the extent that the Board has determined that the required amount of
such additional reserves or additional surplus will exceed the full
amount that is expected to be accumulated through the Business Risk
Buffer (prior to payment of refunds or dividends) so OCC's fees will
ordinarily be based on its projected operating expenses and the
Business Risk Buffer of 25%.
Under the Capital Plan, OCC would calculate its annual revenue
target as follows:
Annual Revenue Target = Forward 12 Months Expense Forecast/(1-.25).
Because OCC's clearing fee schedules typically reflect different
rates for different categories of transactions, fee projections would
include projections as to relative volume in each such category. The
clearing fee schedule would therefore be set to achieve a blended or
average rate per contract sufficient, when multiplied by total
projected contract volume, to achieve the Annual Revenue Target. Under
extraordinary circumstances, OCC would then add any amount determined
to be necessary for additional reserves or surplus and divide the
resulting number by the projected contract volume to determine the
applicable average fee per cleared contract needed to achieve the
additional amounts required. Consistent with past practice, OCC would
notify clearing members of the fees that would be applicable for any
particular period by describing the change in an information memorandum
distributed to all clearing members. Consistent with past practice, OCC
would also notify regulators of the fees that would be applicable for
any particular period by filing an amendment to its Schedule of Fees as
a proposed rule change for immediate effectiveness under Section
19(b)(3)(A) of the Act and Rule 19b-4(f)(2) thereunder.\18\
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\18\ See, e.g., the Permanent Schedule Reinstatement Filing,
supra n. 13; Proposed Rule Change by The Options Clearing
Corporation to Reduce the Per Contract Clearing Fee for Routing
Trades Executed in Accordance with the Options Order Protection and
Locked/Crossed Market Plan to $.01 per Contract, Securities Exchange
Act Release No. 68025 (October 12, 2012), 77 FR 63398 (October 16,
2012) (SR-OCC-2012-18).
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Refund Policy
Under the Refund Policy, except at a time when Replenishment
Capital is outstanding as described below, OCC would declare a refund
to Clearing Members in December of each year, beginning in 2015, in an
amount equal to 50% of the excess, if any, of (i) pre-tax income for
the year in which the refund is declared over (ii) the sum of (x) the
amount of pre-tax income after the refund necessary to produce after-
tax income for such year sufficient to maintain shareholders' equity at
the Target Capital Requirement for the following year plus (y) the
amount of pre-tax income after the refund necessary to fund any
additional reserves or additional surplus not already included in the
Target Capital Requirement. Such refund will be paid in the year
following the declaration after the issuance of OCC's audited financial
statements, provided that (i) the payment does not result in total
shareholders' equity falling below the Target Capital Requirement, and
(ii) such payment is otherwise permitted by applicable Delaware law and
applicable federal laws and regulations. OCC would not be able to pay a
refund on a particular date unless dividends were paid on the same
date. If Replenishment Capital has been contributed and remains
outstanding, OCC would not pay refunds until such time as the Target
Capital Requirement is restored through the accumulation of retained
earnings. Refunds in accordance with the Refund Policy would resume
once the Target Capital Requirement is restored and all Replenishment
Capital is repaid in full, provided that the restoration of the Target
Capital Requirement and the repayment of Replenishment Capital occurred
within 24 months of the issuance date of the Replenishment Capital. If,
within 24 months of the issuance date of any Replenishment Capital,
such Replenishment Capital has not been repaid in full or shareholders'
equity has not been restored to the Target Capital Requirement, OCC
would no longer pay refunds to clearing members, even if the Target
Capital Requirement is restored and all Replenishment Capital is repaid
at a later date.
Dividend Policy
The Dividend Policy would provide that, except at a time when
Replenishment Capital is outstanding as described below, OCC would
declare a dividend on its Class B Common Stock in December of each year
in an aggregate amount equal to the excess, if any, of (i) after-tax
income for the year, after application of the Refund Policy (unless the
Refund Policy has been eliminated, in which case the refunds shall be
deemed to be $0) over (ii) the sum of (A) the amount required to be
retained in order to maintain total shareholders'
[[Page 5175]]
equity at the Target Capital Requirement for the following year, plus
(B) the amount of any additional reserves or additional surplus not
already included in the Target Capital Requirement. Such dividend will
be paid in the year following the declaration after the issuance of
OCC's audited financial statements, provided that (i) the payment does
not result in total shareholders' equity falling below the Target
Capital Requirement, and (ii) such payment is otherwise permitted by
applicable Delaware law and applicable federal laws and regulations. If
Replenishment Capital has been contributed and remains outstanding, OCC
would not pay dividends until such time as the Target Capital
Requirement is restored.
OCC's Status as an Industry Utility
OCC has always been operated on an ``industry utility'' model. The
Stockholder Exchanges have heretofore contributed only minimal capital
to OCC.\19\ OCC's By-Laws currently require that OCC set its clearing
fees at a level that is designed to cover operating expenses and to
maintain such reserves and accumulate such additional capital as are
deemed reasonably necessary for OCC to meet its obligations to its
clearing members and the public. Clearing fees that are collected in
excess of these amounts are refunded annually on a pro rata basis to
the clearing members who paid them. Under this model, OCC has never
paid dividends to the Stockholder Exchanges. However, OCC has paid
significant refunds to clearing members each year. OCC is aware that a
portion--possibly a significant portion--of those refunds are not
passed through by the clearing members to their end user customers.
Accordingly, by adopting an approach that includes paying dividends to
the Stockholder Exchanges that have invested a significant amount of
additional capital ($150 million) but that also reduces the historical
pre-refund average buffer of 31% by adopting a Business Risk Buffer of
25%, OCC believes that the proposed approach maintains, and perhaps
better aligns with, an industry utility model.
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\19\ OCC's common stock and paid in capital total $2,659,999.
See OCC 2013 Annual Report, Financial Statements, Statements of
Financial Condition, available on OCC's Web site, https://optionsclearing.com/components/docs/about/annual-reports/occ_2013_annual_report.pdf.
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Given the very large increase in capital that OCC has determined to
be appropriate in order to assure compliance with regulatory
requirements and meet the increased responsibilities imposed upon it as
a systemically important financial market utility, OCC has determined
that the best alternative available to it is to obtain a substantial
further capital contribution from the Stockholder Exchanges. This
cannot be accomplished without modification of the past practice of not
providing dividends to stockholders. Accordingly, it is necessary for
OCC to establish the new Fee Policy, Refund Policy, and Dividend
Policy. Because of the Business Risk Buffer being set at 25%, the
combination of the Fee, Refund, and Dividend Policies will effectively
cap the dividends to be paid to the Stockholder Exchanges at a level
that the Board (with the advice of outside financial experts) has
determined results in a reasonable rate of return on contributed
capital, particularly in comparison to the implied cost of capital to
the clearing members and their customers of instead pursuing an
approach which required the accumulation of retained earnings through
higher fees and no refunds for several years. OCC will continue to
refund a significant percentage of excess clearing fees to clearing
members, thereby benefiting both clearing members and, to the extent
that refunds are passed through by the clearing members to their end
user customers, their customers. The Capital Plan therefore effectively
preserves OCC's industry utility model of providing its services in an
efficient manner, but enhances the benefits to the end user customers
by charging lower initial fees as a result of the decrease in the
buffer margin from OCC's 10-year average of 31% to 25%.
Clearing members and customers will benefit from the proposed
Capital Plan because it will allow OCC to continue to provide clearing
services at low cost. As noted, OCC expects that this capital infusion
from stockholders will enable OCC to provide a significant refund of
2014 fees. OCC further expects that its current clearing fees will be
reduced significantly based on the Business Risk Buffer of 25%
beginning in 2015 with refunds restored, and that these lower fees will
continue for the foreseeable future.
Stockholder Exchanges will benefit from the dividend return they
receive and, perhaps more importantly, they will be assured that OCC
will be in a position to provide clearing services for their markets on
an on-going basis within the same basic structure that has served these
markets well since their inception and without the need to radically
change the structure to address potential demands of outside equity
investors. Non-Stockholder Exchanges will also benefit by continuing to
receive OCC's clearing services for their products on the same basis as
they presently do.\20\
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\20\ Non-Stockholder Exchanges contribute capital by purchasing
a promissory note in the principal amount of $1,000,000. See Section
2 of Article VIIB of OCC's By-Laws. The required capital
contribution of Non-Stockholder exchanges will not change under the
Capital Plan.
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OCC also believes that the Capital Plan will better align the
interests of Stockholder Exchanges and clearing members with respect to
expenses, since changes to the level of operating expenses directly
affect the Target Capital Requirement. In sum, OCC believes that the
present proposal represents a fair and reasonable balancing of the
interests of the Stockholder Exchanges, the other exchanges for which
OCC provides clearing services, clearing members, customers, and the
general public while providing an immediate infusion of capital and a
structure within which OCC can meet its obligations to the public as a
systemically important financial market utility, as well as the
requirements under the SEC Proposed Rules.
Replenishment Capital Plan
OCC proposes to put in place a Replenishment Capital Plan whereby
OCC's Stockholder Exchanges are obligated to provide on a pro rata
basis a committed amount of Replenishment Capital should OCC's total
shareholders' equity fall below the hard trigger (as defined below).
The aggregate committed amount for all five Stockholder Exchanges in
the form of Replenishment Capital that could be accessed at any time
would be capped at the excess of (i) the lesser of (A) the Baseline
Capital Requirement, which is currently $117 million, at the time of
the relevant funding or (B) $200 million, over (ii) amounts of
outstanding Replenishment Capital (``Cap''). The $200 million figure in
the Cap formula takes into account projected growth in the Baseline
Capital Requirement for the foreseeable future. The commitment to
provide Replenishment Capital would not be limited by time, but only by
the Cap. Replenishment Capital could be called in whole or in part
after the occurrence of a ``hard trigger'' event described below,
subject to the Cap. If the Baseline Capital Requirement approaches or
exceeds $200 million, the Board can consider, as part of its annual
review of the Replenishment Capital Plan that is required by the SEC
Proposed Rules, alternative arrangements to obtain replenishment
capital in excess of the $200 million
[[Page 5176]]
committed under the Replenishment Capital Plan. In addition, the Refund
Policy and the Dividend Policy will provide that, in the absence of
obtaining any such alternative arrangements, the amount of the
difference will be subtracted from amounts that would otherwise be
available for the payment of refunds and dividends.
Replenishment Capital contributed to OCC under the Replenishment
Capital Plan would take the form of a new class of common stock
(``Class C Common Stock'') of OCC to be issued to the Stockholder
Exchanges solely in exchange for Replenishment Capital contributions.
The Replenishment Capital Plan would be part of OCC's overall
Capital Plan. In implementing the Replenishment Capital Plan, OCC's
management would monitor OCC's levels of shareholders' equity to
identify certain triggers, or reduced capital levels, that might
require action. OCC has identified two key triggers--a soft trigger and
a hard trigger--and proposes that OCC take certain steps upon the
occurrence of either as described in more detail below.
The ``soft trigger'' for re-evaluating OCC's capital would occur if
OCC's shareholders' equity falls below the sum of (i) the Baseline
Capital Requirement and (ii) 75% of the Target Capital Buffer. The soft
trigger would be a warning sign that OCC's capital had fallen to a
level that required attention and responsive action to prevent it from
falling to unacceptable levels. Upon a breach of the soft trigger,
OCC's senior management and the Board would review alternatives to
increasing capital, and take appropriate action as necessary, including
increasing fees or decreasing expenses, to restore shareholders' equity
to the Target Capital Requirement.
The ``hard trigger'' for making a mandatory Replenishment Capital
call would occur if shareholders' equity falls below 125% of the
Baseline Capital Requirement (``Hard Trigger Threshold''). The hard
trigger would be a sign that corrective action more significant and
with a more immediate impact than increasing fees or decreasing
expenses should be taken to increase OCC's capital, either as part of a
recovery plan or a wind down plan for OCC's business. OCC's
shareholders' equity would have to fall more than $100 million below
the fully funded capital amount described above in order for the Hard
Trigger Threshold to be breached. As a result, OCC views the breach of
the Hard Trigger Threshold as unlikely and occurring only as a result
of a significant, unexpected event. Upon a breach of the Hard Trigger
Threshold, the Board would have to determine whether to attempt a
recovery, a wind-down of OCC's operations or a sale or similar
transaction, subject in each case to any necessary stockholder consent.
If the Board decides to wind-down OCC's operations, OCC would access
the Replenishment Capital in an amount sufficient to fund the wind-
down, as such amount would be determined by the Board, and subject to
the Cap described above. If the Board decides to attempt a recovery of
OCC's capital and business, OCC would access the Replenishment Capital
in an amount sufficient to return shareholders' equity to an amount
equal to $20 million above the Hard Trigger Threshold, subject to the
Cap described above.
While Replenishment Capital is outstanding, no refunds or dividends
would be paid and, if any Replenishment Capital remains outstanding for
more than 24 months or the Target Capital Requirement is not restored
during that period, changes would be made to how OCC calculates refunds
and dividends, as described in more detail above under Refund Policy
and Dividend Policy. In addition, while Replenishment Capital is
outstanding, OCC would first utilize the entire amount of Available
Funds to repurchase, on a pro rata basis from each Stockholder, to the
extent permitted by applicable Delaware and federal law and
regulations, outstanding shares of Class C Common Stock as soon as
practicable after completion of the financial statements following the
end of each calendar quarter at a price equal to the original amount
paid for such shares, plus an additional ``gross up'' amount to
compensate the holders of the Class C Common Stock for taxes on
dividend income (if any) that they may have to recognize as a result of
such repurchase.\21\ For this purpose, ``Available Funds'' would equal,
as of the end of any calendar quarter, the excess, if any, of (x)
shareholders' equity over (y) the Minimum Replenishment Level. The
``Minimum Replenishment Level'' would mean $20 million above the Hard
Trigger Threshold, so that OCC's shareholders' equity would remain at
or above the Minimum Replenishment Level after giving effect to the
repurchase. Furthermore, under the Dividend and Refund Policies,
refunds and dividends would be suspended until such time as the Target
Capital Requirement is restored.
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\21\ Based on current federal rates, if the full amount of the
payment is classified as a dividend and the recipient is entitled to
a dividends received deduction, this gross up is estimated to be
approximately 12% of the payment.
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Amendments to Governing Documents
In order to implement the Capital Plan, OCC proposes to make
amendments to its By-Laws and Restated Certificate of Incorporation and
amend and restate its Stockholders Agreement.
Amendments to By-Laws
OCC is proposing various amendments to the By-Laws in order to
implement the Capital Plan. Specifically, OCC proposes to amend the
definition of Equity Exchange in Article I, Section 1 to take into
account the potential ownership of Class C Common Stock by the
Stockholder Exchanges.
Article II, Section 3 would be amended to change the definition of
quorum such that a majority of outstanding common stock entitled to
vote at a meeting of Stockholders either in person or by proxy would
constitute a quorum for any such meeting of the Stockholders. In
addition, OCC proposes to amend Article II, Section 5 to allow for the
potential issuance of Class C Common Stock, which will not have voting
rights except as required by applicable law.
Article VIIA, Section 2, would be amended to (i) provide for the
potential issuance of Class C Common Stock in consideration for
Replenishment Capital provided by Stockholder Exchanges, (ii) permit,
consistent with the proposed amendments to the Stockholders Agreement,
the transfer of shares of common stock to another Stockholder, and
(iii) reflect the right of other Stockholders, consistent with the
proposed amendments to the Stockholders Agreement, to purchase the
shares of common stock of another Stockholder. Article VIIA, Section 3,
would be amended to conform to the changes to Article VIIA, Section 2.
OCC proposes amendments to Article VIII, Section 5(d), to require
that a Board decision to utilize OCC's retained earnings to compensate
for a loss or deficiency to the Clearing Fund would require unanimous
consent from the holders of Class A Common Stock and Class B Common
Stock. This proposed amendment is intended to protect Stockholders from
an action taken without their consent that could increase their
likelihood of being required to provide Replenishment Capital.
Similarly, Article XI, Section 1 would also be amended to account for
the possible issuance of the non-voting Class C Common Stock consistent
with the Restated Certificate of Incorporation
[[Page 5177]]
as discussed below, and to require unanimous Stockholder approval for
any future amendments to the new provision of Article VIII, Section
5(d) described above.
Article IX, Section 9, would be amended in three ways. First, the
concept of the Business Risk Buffer would be incorporated into Article
IX, Section 9(a). Second, Article IX, Section 9, would be amended to
provide that OCC would only add amounts for reserves and surpluses in
addition to the Business Risk Buffer in extraordinary circumstances and
only to the extent that the Board has determined that the required
amount of additional reserves and surplus is expected to exceed the
full amount that is anticipated to be accumulated through the Business
Risk Buffer prior to payment of refunds and dividends. Third, Article
IX, Section 9, would be amended to expressly reference the potential
payment of dividends in accordance with the Dividend Policy.
Amendments to Restated Certificate of Incorporation
OCC is proposing to amend its Restated Certificate of Incorporation
in order to implement the Capital Plan. The proposed amendment to the
restated Certificate of Incorporation is attached to this filing as
Exhibit 5D. Article IV would be amended in multiple locations to (i)
reduce the number of authorized shares of Class A Common Stock and
Class B Common Stock to the number of shares currently outstanding, and
the number of series of Class B Common Stock, to reflect the fact that
there are only five Stockholder Exchanges, (ii) to eliminate a
provision under which additional shares of Class A Common Stock and
Class B Common Stock could be authorized in certain circumstances
without a separate vote of each series of Class B Common Stock, (iii)
create Class C Common Stock as non-voting stock, (iv) set a par value
for Class C Common Stock of $1,000 per share, (v) provide for
distribution upon a liquidation or dissolution of OCC to holders of
Class A, Class B, and Class C Common Stock, pro rata on a pari passu
basis, the amount of the par value of their shares, and (vi) remove
restrictions on the transfer of shares of Class B Common Stock to more
than one entity in order to address the possible exercise by another
Stockholder of its right of first refusal under the Amended and
Restated Stockholders Agreement. Additionally, Article IV would be
amended to make clear that the prohibition on OCC's creating or issuing
rights or options to purchase OCC stock set forth in Article IV would
not restrict the ability of OCC to enter into the Replenishment Capital
Plan. Finally, technical changes would be made to Article VI in
connection with the creation of Class C Common Stock as non-voting
stock.
Amendments to Stockholders Agreement
OCC is proposing various amendments to the Stockholders Agreement
to make technical changes relating to the additional contributions of
capital to be made by the Stockholder Exchanges under the Capital Plan
and the potential issuance of Class C Common Shares. The proposed
Amended and Restated Stockholders Agreement is attached to this filing
as Exhibit 5E. In part, the amendments to the Stockholders Agreement
would provide Stockholders with a secondary right of refusal to be
exercised if a Stockholder wished to sell its shares and OCC chose not
to exercise its existing right of first refusal to purchase those
shares. This change was considered necessary because after the
additional contributions of capital by the Stockholder Exchanges under
the Capital Plan, shares of Class B Common Stock will be significantly
more valuable, making it less likely that OCC would be able to exercise
its right of first refusal. Providing the non-selling Stockholder
Exchanges with a secondary right of first refusal would increase the
chances that a selling Stockholder Exchange would find a purchaser for
its shares from among OCC's existing owners. Because OCC's Stockholders
Agreement has already been amended several other times, for convenience
OCC is also proposing to amend and restate the Stockholders Agreement
to incorporate all previous amendments and the new amendments into a
single comprehensive agreement.
Each of the proposed new amendments to the Stockholders Agreement
is described below, in the order they appear in the agreement. OCC
proposes a technical amendment to Section 1 of the Stockholders
Agreement to refer to the definitions of Class A Common Stock, Class B
Common Stock, and Class C Common Stock in the Restated Certificate of
Incorporation and By-Laws. OCC proposes an amendment to Section 3 which
would delete an obsolete reference to a plan relating to OCC's original
reorganization into a common clearing facility for all options
exchanges. OCC proposes a technical amendment to Section 5(a) to add a
reference to the procedures for Stockholder Exchanges to acquire shares
pursuant to their secondary rights of first refusal in certain
situations that will be set out in amended Section 10(e). OCC is
proposing an amendment to Section 5(b) providing that the Stockholder
Exchanges may not sell or transfer less than all of their shares
without the consent of OCC. OCC seeks to prevent a partial sale by a
Stockholder Exchange of a portion of its shares of Class A Common
Stock, Class B Common Stock, or Class C Common Stock to avoid
difficulties that could arise for OCC if, as a result of a partial
sale, voting rights, dividend rights, and replenishment capital were
spread across Stockholder Exchanges on a non pro rata basis. Section
5(b) would further clarify that if OCC consented to a partial sale the
Stockholder Exchanges' right of first refusal would still apply, and
that a Stockholder Exchange could sell shares of Class C Common Stock
to OCC without selling its shares of Class A Common Stock and Class B
Common Stock. OCC proposes to amend Section 6(a) to provide
Stockholders, upon the non-exercise of OCC's right of first refusal, a
secondary right of first refusal to purchase shares of other
Stockholders in certain circumstances discussed above, and to establish
procedures governing the exercise of this right. Section 6(b) would be
amended to explicitly state that OCC can assign its rights under the
Stockholders Agreement to purchase shares of a Stockholder Exchange in
the event of such Stockholder Exchange's bankruptcy or insolvency, and
to create an exception from the right of first refusal for transfers to
certain affiliates of a Stockholder that meet the exchange eligibility
requirements set forth in the By-Laws. Section 6(c) would be amended to
make any transfer or encumbrance of shares in violation of the
Stockholders Agreement, either voluntarily or by operation of law,
void. Section 6(d) would be amended to explicitly state that OCC can
assign its rights under the Stockholders Agreement to repurchase shares
of any Stockholder that ceases to be qualified to participate in OCC
pursuant to the By-Laws. The revised Section 6(c) would take the place
of current Section 6(e), which would be deleted. Section 6(e) currently
provides that such a pledge or transfer would automatically be deemed
to create a transfer of the shares to OCC. OCC proposes conforming
amendments to Section 6(f), Section 6(g), Section 7, and Section 8 to
provide for the new Stockholder Exchange right of first refusal. OCC
proposes deleting Section 9 to remove the right of Stockholders to
require OCC to purchase their shares of stock.
[[Page 5178]]
OCC proposes to amend Section 10(a) of the Stockholders Agreement
to provide that the purchase price paid upon exercise of purchase
rights by OCC or the Stockholder Exchanges would be equal to the lowest
of (i) the book value of the shares to be purchased, (ii) the total
capital contribution of the selling Stockholder and (iii) in the case
of exercise of a right of first refusal, the price originally offered
for such shares. OCC proposes other technical amendments to Sections
10(a), 10(b) and 10)(c) of the Stockholders Agreement concerning the
purchase price formula, procedures, and timing for OCC's repurchase
rights of shares (or, if applicable, the purchase of a Stockholder's
shares by another Stockholder) pursuant to the terms of the
Stockholders Agreement. Section 10(d) would be amended such that any
consideration to be paid by OCC upon the exercise of a right of first
refusal would be subordinated to all other claims of all other
creditors of OCC, and to prohibit OCC from declaring or paying any
dividends, acquiring for value any shares of stock or distributing
assets to any Stockholder Exchange, except with regard to required
purchases or redemptions of shares of Class C Common Stock or payments
of dividends in accordance with the Dividend Policy. OCC proposes to
amend current Section 10(e) by moving its provisions addressing the
subordination of payments by OCC and non-payment of dividends under
certain circumstances into the proposed Section 10(d) as discussed
above. OCC proposes technical amendments to current Section 10(g),
proposed Section 10(e) concerning the process under which OCC would
acquire shares upon exercise of its right of first refusal. OCC also
proposes to move technical provisions of the current Section 10(f)
concerning the payment of such shares into Section 10(e). Section 10(f)
would then be amended to address procedures for Stockholders that
exercise their right of first refusal.
Section 11 of the Stockholders Agreement would be amended in order
to make a Stockholder's right to transfer shares dependent upon the
non-exercise of OCC's and other Stockholders' right of first refusal to
the purchase of such Stockholder's shares. Additionally, Section 11
would be amended to provide that the transfer of a Stockholder's shares
under that section would not be effective without the transferee's
assuming the rights and obligations under the Stockholders Agreement,
certain joinders to the Stockholders Agreement and other agreements
between OCC and Stockholders. Section 14(a) would be amended to make
reference to the Stockholders Agreement. Section 14(b) would be amended
to make a technical change relating to the legend on OCC's stock
certificates. Section 15 would be amended to update the mailing
addresses of the Stockholder Exchanges for written notices and formal
communications. Section 16(c) would be amended to clarify that a
Stockholder Exchange would be able to assign its rights under the
Stockholders Agreement only to a party to whom it would be permitted to
transfer its shares. In addition, Section 16(c) would be amended to
provide that OCC may only assign its repurchase rights under Section
6(b) or Section 6(d) of the Stockholders Agreement. OCC would be able
to assign such rights with respect to all or a portion of the shares of
stock owned by a Stockholder Exchange, and would be required to provide
the non-selling Stockholder Exchanges with a right of first refusal in
connection with any such contemplated assignment comparable to the
secondary right of first refusal applicable with respect to a voluntary
sale by a Stockholder Exchange and described above. Sections 16(f) and
16(g) would be amended to effectuate the amendment and restatement of
the existing Stockholders Agreement.
2. Statutory Basis
OCC believes the proposed rule change is consistent with Section
17A(b)(3)(F) of the Securities Exchange Act of 1934, as amended
(``Act''),\22\ and the rules and regulations thereunder, because by
implementing the Capital Plan, OCC would ensure that it could continue
to promptly and accurately clear and settle securities transactions
even if it suffered significant operational losses. By ensuring that it
maintains sufficient capital and that it can replenish the capital in
the event it falls below desirable levels, the Capital Plan would also
enable OCC to maintain safe and secure obligations, in compliance with
Rule 17Ad-22(d)(6).\23\ The proposed Capital Plan would also, as
discussed in more detail above, ensure OCC's compliance with new
regulatory requirements proposed by the Commission seeking to promote
the safe and reliable operation of registered clearing agencies, and in
particular proposed subsection (e)(15) of Rule 17Ad-22.\24\ The
proposed rule change is not inconsistent with the existing rules of
OCC, including any other rules proposed to be amended.
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\22\ 15 U.S.C. 78q-1(b)(3)(F).
\23\ 17 CFR 240.17Ad-22(d)(6).
\24\ SEC Proposed Rules at 156, FR 29507, 29616 (May 22, 2014).
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(B) Clearing Agency's Statement on Burden on Competition
OCC does not believe that the proposed rule change would impose any
burden on competition.\25\ OCC believes that the proposed rule change
would not unfairly inhibit access to OCC's services or disadvantage or
favor any particular user in relationship to another user because the
proposed changes relate to OCC's plan for raising and maintaining
adequate capital from its owner exchanges, and therefore do not affect
clearing members' or others' access to OCC's services or the nature of
these services.
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\25\ 15 U.S.C. 78q-1(b)(3)(I).
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For the foregoing reasons, OCC believes that the proposed rule
change is in the public interest, would be consistent with the
requirements of the Act applicable to clearing agencies and would not
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 on the proposed rule change were not and are not
intended to be solicited with respect to the proposed rule change and
none have been received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.\26\
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\26\ OCC also filed proposals in this proposed rule change as an
advance notice under Section 806(e)(1) of the Payment, Clearing, and
Settlement Supervision Act of 2010. 12 U.S.C. 5465(e)(1). See supra
note 3.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
[[Page 5179]]
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/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-OCC-2015-02 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-2015-02. 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 Web site (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 Web site 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
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of OCC and on OCC's
Web site at https://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_15_02.pdf. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-OCC-2015-02 and should be submitted on or before
February 20, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-01755 Filed 1-29-15; 8:45 am]
BILLING CODE 8011-01-P
