Self-Regulatory Organizations; the Options Clearing Corporation; Notice of Filing of Proposed Rule Change Concerning the Options Clearing Corporation's Escrow Deposit Program, 60099-60108 [2016-20882]
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Federal Register / Vol. 81, No. 169 / Wednesday, August 31, 2016 / Notices
A proposed rule change filed under
Rule 19b–4(f)(6) normally does not
become operative for 30 days from the
date of filing. However, Rule 19b–
4(f)(6)(iii) 17 permits the Commission to
designate a shorter time if such action
is consistent with the protection of
investors and the public interest. The
Exchange has asked the Commission to
waive the 30-day operative delay so that
the proposal may become operative
immediately upon filing. The
Commission notes that it recently
approved BOX’s substantially similar
proposal to list and trade Wednesday
SPY Expirations.18 The Exchange has
stated that waiver of the operative delay
will allow the Exchange to list and trade
Wednesday SPY Expirations as soon as
possible, and therefore, promote
competition among the option
exchanges. For these reasons, the
Commission believes that the proposed
rule change presents no novel issues
and that waiver of the 30-day operative
delay is consistent with the protection
of investors and the public interest, and
will allow the Exchange to remain
competitive with other exchanges.
Therefore, the Commission hereby
waives the 30-day operative delay and
designates the proposal effective upon
filing.19 At any time within 60 days of
the filing of the proposed rule change,
the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
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Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
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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–BatsBZX–2016–53. 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 the Exchange. 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–
BatsBZX–2016–53 and should be
submitted on or before September 21,
2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Brent J. Fields,
Secretary.
[FR Doc. 2016–20964 Filed 8–30–16; 8:45 am]
days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
17 17 CFR 240.19b–4(f)(6)(iii).
18 See supra note 5.
19 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
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• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BatsBZX–2016–53 on the subject line.
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78675; File No. SR–OCC–
2016–009]
Self-Regulatory Organizations; the
Options Clearing Corporation; Notice
of Filing of Proposed Rule Change
Concerning the Options Clearing
Corporation’s Escrow Deposit
Program
August 25, 2016.
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 August
15, 2016, The Options Clearing
Corporation (‘‘OCC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II and III
below, which Items have been prepared
by OCC. The Commission is publishing
this notice to solicit comments on the
proposed rule change from interested
persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
The purpose of this proposed rule
change by OCC is to improve the
resiliency of OCC’s escrow deposit
program. OCC is proposing changes that
are designed to: (1) Increase OCC’s
visibility into and control over collateral
deposits made under the escrow deposit
program; (2) strengthen clearing
members’ rights to collateral in the
escrow deposit program in the event of
a customer default to the clearing
member; (3) provide more specificity
concerning the manner in which OCC or
clearing members would take
possession of collateral in OCC’s escrow
deposit program; and (4) improve the
readability of the rules governing OCC’s
escrow deposit program by
consolidating all such rules into a single
location in OCC’s Rulebook.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission,
OCC included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. OCC has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of these statements.
1 15
20 17
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CFR 200.30–3(a)(12).
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60099
2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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Federal Register / Vol. 81, No. 169 / Wednesday, August 31, 2016 / Notices
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(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
1. Purpose
The purpose of this proposed rule
change is to improve the resiliency of
OCC’s escrow deposit program. The
changes would: (1) Increase OCC’s
visibility into and control over collateral
deposits made under the escrow deposit
program; (2) provide more specificity
concerning the manner in which OCC
would take possession of collateral in
OCC’s escrow deposit program in the
event of a clearing member or custodian
bank default; (3) clarify clearing
members’ rights to collateral in the
escrow deposit program in the event of
a customer default to the clearing
member; and (4) improve the readability
of the rules governing OCC’s escrow
deposit program by consolidating all
such rules into a single location in
OCC’s Rulebook. Upon implementation
of the proposed rule change, all
securities collateral in OCC’s escrow
deposit program would be held at the
Depository Trust Company (‘‘DTC’’),
and custodian banks would only be
allowed to hold cash collateral.
The narrative below is comprised of
four sections. The first section provides
a background of OCC’s current escrow
deposit program as well as an overview
of the proposed changes to the rules and
agreements that govern the escrow
deposit program. The second section
discusses the changes associated with:
(1) Increasing OCC’s visibility into and
control over collateral deposits made
under the escrow deposit program; (2)
providing more specificity concerning
the manner in which OCC would take
possession of collateral in OCC’s escrow
deposit program in the event of a
clearing member or custodian bank
default; and, (3) clarifying clearing
members’ rights to collateral in the
escrow deposit program in the event of
a customer default to the clearing
member as well as providing additional
detail concerning the manner in which
clearing members may take possession
of such collateral. The third section
discusses proposed technical and
conforming changes to the rules and
agreements governing the current
escrow deposit program that would
allow OCC to consolidate all such terms
into a single location in OCC’s
Rulebook. The second and third
sections also discuss changes that
improve the readability of the rules
governing OCC’s escrow deposit
program, which is primarily achieved
by consolidating all such rules into a
single location in OCC’s Rulebook. The
fourth section discusses the manner in
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which OCC proposes to transition from
the current escrow deposit program to
the new escrow deposit program,
including the removal of certain rules
and contractual provisions that would
no longer be applicable to the new
escrow deposit program.
program, the relevant positions are
excluded from the clearing member’s
margin requirement at OCC. The escrow
deposit program therefore provides
users of OCC’s services with a means to
more efficiently use cash or securities
they may have available.
Section 1: Background and Overview of
Proposed Rule Changes
Overview of Rule Changes (Including
Terminology Changes) and New
Agreements
Background/Current Escrow Deposit
Program
Each day OCC collects collateral from
its clearing members in order to protect
OCC and the markets it serves from
potential losses stemming from a
clearing member default. Approximately
half of the collateral deposited by
clearing members at OCC is deposited
through OCC’s escrow deposit program.
Users of OCC’s escrow deposit program
are customers of clearing members who,
through the escrow deposit program, are
permitted to collateralize eligible
positions directly with OCC (instead of
with the relevant clearing member who
would, in turn, deposit margin at OCC).
Currently, collateral deposits made
through OCC’s escrow deposit program
are characterized as either ‘‘specific
deposits’’ or ‘‘escrow deposits.’’ Specific
deposits are deposits of the security
underlying a given options position and
are made through DTC by a clearing
member on behalf of its customer (at the
direction of the customer).3 Escrow
deposits are deposits of cash or
securities made by a custodian bank on
behalf of a customer of an OCC clearing
member in support of an eligible
options position. OCC’s Rules currently
contemplate two forms of escrow
deposits: ‘‘third-party escrow deposits’’
and ‘‘escrow program deposits.’’ Thirdparty escrow deposits are substantially
similar to specific deposits except for
the fact that third-party escrow deposits
are made by a custodian bank, and not
a clearing member. Third-party escrow
deposits consist entirely of securities
and, like specific deposits, are made
through DTC. In order to effect thirdparty specific deposits, custodian banks
must be DTC members. Escrow program
deposits are bank deposits of eligible
securities or cash, which are held at the
custodian bank (versus third-party
escrow deposits and specific deposits,
which are held at DTC).
When a customer of a clearing
member makes a deposit in lieu of
margin through OCC’s escrow deposit
3 For example, if customer XYZ holds a short
position of options on AAPL, customer XYZ could,
through its clearing member’s DTC account, pledge
shares of AAPL to OCC in order to collateralize
such options position and not be charged margin by
OCC.
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Rule Consolidation and Terminology
Changes
Currently, the rules concerning OCC’s
escrow deposit program are located in
OCC Rules 503, 610, 613 and 1801.
Additionally, OCC and custodian banks
participating in OCC’s escrow deposit
program enter into an Escrow Deposit
Agreement (‘‘EDA’’), which also
contains substantive provisions
governing the program. OCC is
proposing to consolidate all of the rules
concerning the escrow deposit program,
including the provisions of the EDA
relevant to the revised escrow deposit
program, into proposed Rules 610,
610A, 610B and 610C.4 OCC believes
that consolidating the many rules
governing the escrow deposit program
into a single location would
significantly enhance the
understandability and transparency of
the rules concerning the escrow deposit
program for current users of the program
as well as any persons that may be
interested in using the program in the
future.
In connection with the above
described rule consolidation, OCC is
also proposing to rename the types of
escrow deposits available within the
escrow deposit program, as well as
rename the term ‘‘approved depository’’
to ‘‘approved custodian.’’ Specific
deposits would now be called ‘‘member
specific deposits,’’ which are equity
securities deposited by clearing
members at DTC at the direction of their
customers; third-party escrow deposits
would now be called ‘‘third-party
specific deposits,’’ which are equity
securities deposited by custodian banks
at DTC at the direction of their
customers; and, escrow program
deposits would now be called, ‘‘escrow
deposits,’’ which are either cash
deposits held at a custodian bank for the
benefit of OCC, or Government
securities deposited at DTC by
custodian banks at the direction of their
4 As described herein, OCC is proposing to
eliminate the EDA based on such consolidation.
When appropriate, and as described in more detail
below, conforming changes were made to certain
Rules as a result of OCC proposing to require that
all non-cash deposits in the escrow deposit program
be made through DTC (and not held at custodian
banks).
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customers. The term ‘‘approved
depository’’ would also be changed to
‘‘approved custodian’’ to eliminate any
potential confusion with the term
‘‘Depository,’’ which is defined in the
Rules, to mean DTC.
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New Rule Organization
With respect to the rules governing
the escrow deposit program, proposed
Rule 610 would set forth general terms
and conditions common to all types of
deposits permitted under the escrow
deposit program. Specifically, proposed
Rule 610: (1) Sets forth the different
types of eligible positions for which a
deposit in lieu of margin may be used,
(2) sets forth operational aspects of the
escrow deposit program such as the
days and the times during which a
deposit in lieu of margin may be made
and where the different types of
deposits in lieu of margin must be
maintained (either DTC or a custodian
bank), (3) provides the conditions under
which OCC may take possession of a
deposit in lieu of margin (from DTC or
a custodian bank), and (4) describes
OCC’s security interest in deposits in
lieu of margin.5 Proposed Rule 610 is
supplemented by: (1) Proposed Rule
610A for member specific deposits, (2)
proposed Rule 610B for third-party
specific deposits, and (3) proposed Rule
610C for escrow deposits. Proposed
Rules 610A, 610B and 610C provide
further guidance and specificity on the
topics initially addressed in proposed
Rule 610 (and delineated above) as they
relate to member specific deposits,
third-party specific deposits and escrow
deposits, respectively.
The new rule structure differs from
the existing rule structure in that
existing Rules 503, 610, 613 and 1801
discuss topics concerning deposits in
lieu of margin (such as withdrawal, rollover 6 and release) in general terms and
without regard to the type of deposit in
lieu of margin. The existing rule
structure also does not provide
operational details of the escrow deposit
5 OCC would continue to maintain a perfected
security interest in deposits in the escrow deposit
program under the proposed Rules notwithstanding
changes to the location of the rules that perfect such
security interest. OCC’s security interest in
securities deposits in the escrow deposit program,
which are held at DTC, is perfected by operation of
DTC’s rules. OCC’s security interest in cash
deposits in the escrow deposit program is perfected
under proposed Rules 610C(i), 610C(j) and 610C(k),
which replace Sections 3.3, 3.4, 4.3, 4.4, 5.3, 5.4
and 21 of the EDA. Proposed Rule 610(g) also
concerns OCC’s security interest in deposits in
escrow deposit program.
6 A ‘‘roll-over’’ occurs when a customer chooses
to maintain an existing escrow deposit after the
options supported by the escrow deposit expires, or
are closed-out, and the customer re-allocates the
escrow deposit to a new options position.
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21:59 Aug 30, 2016
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program. The new rule structure
discusses each aspect of OCC’s escrow
deposit program by type of deposit in
lieu of margin (member specific
deposits, third-party specific deposit or
escrow deposits) as well as provides
operational details concerning the
program. OCC believes that the more
detailed presentation of the new rules
concerning the escrow deposit program
enhances the understandability of the
program to all users, and potential
users, of the program because all such
persons will be able to better
understand how topics apply by type of
deposit in lieu of margin and with
regard to the operational differences
between each type of deposit in lieu of
margin.
Agreements Concerning the Escrow
Deposit Program
In addition to the above-described
Rule changes, many provisions of the
EDA would be moved into the Rules.
Accordingly, OCC is proposing to
eliminate the EDA and replace it with
a simplified agreement entitled the
‘‘Participating Escrow Bank
Agreement.’’ 7 The Participating Escrow
Bank Agreement would provide that
custodian banks are subject to all terms
of the Rules governing the revised
escrow deposit program,8 as they may
be amended from time to time.9 The
Participating Escrow Bank Agreement
would contain eligibility requirements
for custodian banks, including
representations regarding the custodian
bank’s Tier 1 Capital,10 and provide
7 The Participating Escrow Bank Agreement is
attached to this filing as Exhibit 5A, with changes
from the EDA marked. Custodian banks
participating in the revised escrow deposit program
are defined as ‘‘Participating Escrow Banks’’ in the
Participating Escrow Bank Agreement, and such
banks must also be an Approved Custodian
pursuant to proposed Section 1.A(13) of OCC’s ByLaws. In addition, and as described above, certain
provisions of the EDA are proposed to be
incorporated into OCC’s Rules; however, no rights
or obligations of either OCC or a custodian bank
would change solely as a result of such an
incorporation.
8 The Rules governing the revised escrow deposit
program are proposed Rules 610, 610A, 610B and
610C.
9 Under the Participating Escrow Bank
Agreement, however, OCC will agree to provide
custodian banks with advance notice of material
amendments to the Rules relating to deposits in lieu
of margin and custodian banks will have the
opportunity to withdraw from the escrow deposit
program if they object to the amendments. As a
general matter, the Participating Escrow Bank
Agreement will not be negotiable, although OCC
may determine to vary certain non-material terms
in limited circumstances.
10 OCC recently enhanced the measurement it
uses—Tier 1 Capital instead of shareholders’
equity—to establish minimum capital requirements
for banks approved to issue letters of credit that
may be deposited by clearing members as a form
of margin asset. See Securities Exchange Act
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60101
OCC with express representations
concerning the bank’s authority to enter
into the Participating Escrow Bank
Agreement.11 Moreover, standard
contractual provisions concerning
topics such as assignment, governing
law and limitation of liability have been
enhanced in the Participating Escrow
Bank Agreement when compared to the
EDA.12 OCC is also proposing to move
notification requirements into proposed
Rule 610C(l), which is an enhancement
of Section 7 of the EDA that requires
custodian banks to provide notice to
OCC only when there are changes to the
‘‘authorized persons’’ and changes to
the address of the bank. Proposed Rule
610C(l) would require escrow banks to
provide OCC with notices of material
changes to the bank (in additional to
items such as changes of authorized
persons and the address of bank, as
currently required under Section 7 of
the EDA).
OCC, under Proposed Rule 610C(b),
would also require customers wishing to
deposit cash collateral and custodian
banks holding escrow deposits
comprised of cash to enter into a triparty agreement involving OCC, the
customer and the applicable custodian
bank (‘‘Tri-Party Agreement,’’ attached
hereto as Exhibit 5B). The Tri-Party
Agreement governs the customer’s use
of cash in the program, confirms the
grant of a security interest in the
customer’s account to OCC and the
relevant clearing member, as set forth in
proposed Rule 610C(f), and causes
customers of clearing members to be
subject to all terms of the Rules
governing the revised escrow deposit
program.13 Each custodian bank
entering into the Tri-Party Agreement
(‘‘Tri-Party Custodian Bank’’), would
agree to follow the directions of OCC
Release No. 74894 (May 7, 2015), 80 FR 27431 (May
13, 2015) (SR–OCC–2015–007). For the reasons set
forth in SR–OCC–2015–007, OCC is proposing to
adopt the same standard with respect to custodian
bank escrow deposits.
11 These provisions include, but are not limited
to, Sections 1.1 and 1.2 of the EDA.
12 Sections 2.1, 2.2, 3.5, 3.6, 3.8, 4.7, and 5.6, 6
and 7 of the EDA would be removed entirely since
they are no longer needed under OCC’s revised
escrow deposit program. These provisions concern
a custodian bank’s movement of securities escrow
collateral; such collateral would be deposited at
DTC under the revised escrow deposit program (as
described below). Section 2.3 of the EDA would
also be removed in its entirety because escrow
deposits would not be permitted for equity calls in
the revised escrow deposit program. Additionally,
the concept of cash settlements concerning escrow
deposits would not be included in the revised
escrow deposit program and, as a result, Sections
15, 16, 17 and 18(b) to 18(d) would be removed in
their entirety.
13 The Rules governing the revised escrow deposit
program are proposed Rules 610, 610A, 610B and
610C.
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with respect to cash escrow deposits
without further consent by the
customer.14 As discussed in greater
detail below, use of the Tri-Party
Agreement significantly enhances OCC’s
rights concerning cash escrow deposits,
and provides OCC with greater certainty
regarding its rights to cash escrow
deposits in the event of a customer or
clearing member default.
Section 2: Transparency and Controls,
Taking Possession of Collateral, and
Clearing Member Rights to Collateral
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Transparency and Control Over
Collateral Included in Escrow Deposits
Currently, securities deposits in the
escrow deposit program are held at
either DTC or a custodian bank, and
cash deposits in the escrow deposit
program are held at a custodian bank. In
the case of either cash or securities held
at a custodian bank, OCC relies on the
custodian bank to verify the value and
control of collateral since OCC does not
have any visibility into relevant
accounts. OCC is proposing to require
that all securities deposited within the
escrow deposit program, regardless of
the type of deposit, be held at DTC.15
Additionally, OCC is proposing to
require Tri-Party Custodian Banks to
provide OCC with view access into the
account in which the deposit is held.
Holding securities escrow deposit
program collateral at DTC would
provide OCC with increased visibility
into the collateral within the escrow
deposit program because OCC would be
able to use its existing interfaces with
DTC to view, validate and value
collateral within the escrow deposit
program in real time, allowing OCC to
perform the controls for which it
currently relies on the custodian banks.
It would also provide OCC with the
ability to obtain possession of deposited
securities upon a clearing member
default by issuing a demand of collateral
instruction through DTC’s systems,
without the need for custodian bank
14 OCC has determined to use this cash account
structure as a result of a series of discussions with
certain custodian banks involved in the cash
portion of the escrow deposit program, as described
in Item 5 below. The intended structure would
permit a greater number of customers to participate
in the escrow deposit program than, for example,
a commingled ‘‘omnibus’’ account structure at each
custodian bank, which would preclude the
participation of customers subject to restrictions
under the Investment Company Act of 1940
requiring segregation of a registered investment
company’s funds.
15 OCC has discussed the proposed rule changes
to the escrow deposit program with DTC and, based
on feedback from DTC, no concerns were
communicated to OCC by DTC regarding the
proposed rule changes. DTC has also indicated that
the proposed rule changes to the escrow deposit
program are consistent with DTC’s operations.
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21:59 Aug 30, 2016
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involvement. Furthermore, a clearing
member would have the ability to obtain
possession of deposited securities upon
a customer default in a similar manner
by notifying OCC of such customer
default and submitting a request for
delivery of such deposited securities
(OCC’s and clearing members’ ability to
take possession of a deposit within the
escrow deposit program is discussed in
greater detail below). OCC does not
believe that requiring use of DTC to
deposit securities escrow collateral
presents a material change for users of
OCC’s escrow deposit program because
such users currently use DTC to effect
certain types of deposits in lieu of
margin under the current escrow
deposit program.16
Cash collateral pledged to support an
escrow deposit would continue to be
facilitated through the existing program
interfaces; however, for increased
security, any pledges of cash would be
required to be made in a customer’s
account at the Tri-Party Custodian Bank
that is used solely for the purpose of
making escrow deposits. As described
above, under the proposed changes OCC
would require Tri-Party Custodian
Banks and customers to enter into a TriParty Agreement in order to provide
legal certainty concerning this
arrangement. Further, and as set forth in
the Tri-Party Agreement, each Tri-Party
Custodian Bank would agree to disburse
funds from the pledged account only at
OCC’s direction. From an operational
perspective, each Tri-Party Custodian
Bank would provide OCC with online
view access to each customer’s cash
account designated for the escrow
deposit program, allowing visibility into
transactional activity and account
balances. OCC would not process a cash
escrow deposit in its systems until it
sees the appropriate amount of cash
deposited in the designated bank
account at the Tri-Party Custodian Bank.
This process ensures that OCC does not
rely on a third party to value, or warrant
the existence of, collateral within the
escrow deposit program. The Tri-Party
Agreement, in connection with the new
cash collateral structure, would provide
OCC with additional transparency and
control over cash collateral under the
revised escrow deposit program.
In order to effect the foregoing, OCC
is proposing to adopt proposed Rules
610A(a), 610B(a), 610C(b) and 610C(c).
Proposed Rules 610A(a) and 610B(a),
Effecting a Member Specific Deposit and
Effecting a Third-Party Specific Deposit,
16 Specifically, users of OCC’s escrow deposit
program would use DTC’s Collateral Loan Services,
which is described at: https://www.dtcc.com/
products/training/helpfiles/settlement/settlement_
help/help/collateral_loans.htm.
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respectively, require that member
specific deposits and third-party
specific deposits must be made through
DTC, and are largely based upon
existing Rule 610(e), which discusses
effecting deposits in lieu or margin
generally. Language has been added to
each proposed rule to more accurately
articulate that member specific deposits
and third-party specific deposits must
be made through DTC and the party that
is required to effect each type of deposit
(i.e., a clearing member or a third-party
depository). In the case of member
specific deposits and third-party
specific deposits, which are already
made through DTC, OCC believes that
proposed Rules 610A(a) and Rule
610B(a) are rules that clarify existing
practices and provide additional
operational detail to users of the escrow
deposit program (i.e., member specific
deposits and third-party specific
deposits must be made through DTC’s
EDP Pledge System and clearing
members are required to maintain
records of such deposits). Proposed
Rules 610C(b) and 610C(c), Manner of
Holding and Method of Effecting Escrow
Deposits, respectively, are largely based
upon existing Rules 610(d), 610(g),
1801(d) and 1801(g), as well as Section
8 of the EDA with language added to
more accurately articulate that securities
escrow deposits must be made through
DTC and cash must be deposited
through a Tri-Party Custodian Bank, and
provide operational detail concerning
effecting escrow deposits. Moreover,
OCC is proposing to adopt new Rule
610(e) in order to specify that all types
of deposits in the escrow deposit
program may be made only during the
time specified by OCC. The purpose of
specifying the time frames in which
participants are allowed to effect
deposits in the escrow deposit program
is to facilitate OCC daily margin
processing and ensure that all of the
positions it guarantees are timely
collateralized.17
In addition to the above, and with
respect to escrow deposits only, OCC is
proposing enhancements to its process
of ensuring that customers meet initial
and maintenance minimums.18
Specifically, under the revised escrow
deposit program, in the event a
customer falls below the maintenance
minimum, the custodian bank, pursuant
17 In the event a deposit in the escrow deposit
program is not timely made, OCC would collect
margin from the relevant clearing member.
18 Initial and maintenance minimums do not
apply to member specific deposits and third-party
specific deposits since the clearing member or
custodian bank, as applicable, is pledging the
security that is deliverable upon exercise of the
germane options position.
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to the Participating Escrow Bank
Agreement, would be required to ensure
that the customer deposits additional
collateral or escalate the matter to OCC.
In addition to such notification
requirement, OCC would also
implement automated processes to
ensure that escrow deposits meet
required initial and maintenance
minimums. In the event the matter is
escalated to OCC or OCC’s systems
identify a shortfall, OCC would: (1)
Demand that the relevant clearing
member post additional margin to cover
the margin requirement on the
applicable position, and (2) if the
relevant clearing member fails to satisfy
such a demand for additional margin,
OCC would close-out the applicable
position and demand the escrow deposit
from DTC or the Tri-Party Custodian
Bank, as applicable, under its existing
authority pursuant to Rule 1106. This
process is much more robust than the
current process concerning maintenance
minimums in that OCC currently relies
entirely on custodian banks holding
escrow deposits to ensure the customer
deposits additional collateral, as
necessary, to meet initial and
maintenance minimums. OCC believes
that the proposed new process is more
streamlined and efficient because OCC
would not have to rely entirely on a
custodian bank to ensure customers
comply with initial and maintenance
minimums.
In order to implement the foregoing
within the new rules concerning the
escrow deposit program, OCC is
proposing to adopt Rules 610C(g) and
610C(h) that concern the initial and
maintenance minimum escrow deposit
values required by OCC as well as
actions OCC is permitted to take in the
event an escrow deposit falls below a
required amount. These proposed rules
are based on existing Rules 1801(c) and
1801(e) as well as Sections 3.2, 4.2, 5.2,
3.7, 4.8 and 5.7 of the EDA.19 With
respect to the computation of initial and
maintenance minimums, proposed
Rules 610C(g) and 610C(h) would
explain the formula through which OCC
computes the initial and maintenance
minimum for a given options position,
with the specific percentage applicable
to such calculation provided to
participants in the escrow deposit
program in a schedule posted on OCC’s
Web site. With respect to the effects of
a failure to meet maintenance
19 OCC is proposing to eliminate the concept of
‘‘substitutions’’ of escrow deposit collateral (located
in Sections 4.7 and 5.6 of the EDA)—instead a given
escrow deposit must at all times must meet the
minimum amount (as set forth in proposed Rules
610(g)(1) and (2)) and OCC would permit any excess
amount to be withdrawn.
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minimums, proposed Rule 610C(h) sets
forth the conditions under which OCC
would close out a given escrow deposit
should it fall below the requisite
maintenance minimum. Proposed Rule
610C(h) would also provide OCC with
the authority to use the cash and
securities included within the escrow
deposit to reimburse itself for costs
incurred in connection with the closeout. OCC believes that by virtue of their
proposed new location in the rules, as
well as the additional detail provided in
the proposed rules, all participants, and
potential participants, in OCC’s escrow
deposit program would better
understand the rules concerning initial
and maintenance minimums, as they
relate to escrow deposits, under the
enhanced escrow deposit program
(versus under the current escrow
deposit program).
OCC’s Rights to Collateral in the Escrow
Deposit Program in the Event of a
Clearing Member or Bank Default
The proposed Rules would enhance
OCC’s default management regime as it
relates to the escrow deposit program by
more specifically delineating the
conditions under, and the process
through which, OCC would take
possession of collateral within the
escrow deposit program should a
clearing member or custodian bank
default. Specifically, proposed Rules
610A(b), 610B(f), 610C(q) and 610C(r)
provide that in the event of a clearing
member or custodian bank default OCC
would have the right to direct DTC to
deliver the securities included in a
member specific deposit, third-party
specific deposit or escrow deposit to
OCC’s DTC participant account for the
purpose of satisfying the obligations of
the clearing member or reimbursing
itself for losses incurred as a result of
the failure, as applicable. Similarly,
pursuant to proposed Rules 610C(q) and
610C(r) OCC would have the right in the
event of a Tri-Party Custodian Bank
default to take possession of cash
included within an escrow deposit for
the same purposes. In the event of a
custodian bank default, pursuant to
proposed Rule 610C(r) OCC would have
the right to remove the custodian bank
from the escrow deposit program,
prohibit the custodian bank from
making new escrow deposits, disallow
withdrawals with respect to existing
deposits, close out short positions
covered by escrow deposits at the
defaulted custodian bank and use such
escrow deposits to reimburse itself for
the costs of the close-out, or disregard
or require the withdrawal of existing
escrow deposits.
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Proposed Rules 610A(b), 610B(f) and
610C(q) concern OCC’s rights to member
specific deposits, third-party specific
deposits and escrow deposits,
respectively, in the event of a clearing
member default. They would provide a
more specific description of OCC’s
rights to a third-party specific deposit
during a default than existing Rule
610(k) and Section 18 of the EDA.
However, the additional specificity that
would be provided in proposed Rules
610A(b), 610B(f) and 610C(q) would not
change OCC’s nor clearing members’
rights or obligations regarding member
specific, third-party specific or escrow
deposits in the event of a clearing
member default. Proposed Rule 610C(r)
addresses OCC’s rights in the event of a
custodian bank default and is based on
existing Rules 613(h) and 1801(k).
Proposed Rule 610C(r) would clarify
OCC’s existing operational practices
when a custodian defaults (i.e., demand
monies, not allow new deposits, etc., as
described immediately above), but does
not change any of the rights of OCC,
clearing members or custodian banks set
forth in existing Rules 613(h) and
1801(k).
In addition to the above-described
proposed rule changes, OCC is
proposing to amend Rule 1106 to set
forth the treatment of deposits in the
escrow deposit program in the event of
a suspension of a clearing member. Rule
1106(b)(2) would be amended to
provide that OCC may close out a short
position of a suspended clearing
member covered by a member specific,
third-party specific or escrow deposit,
subject to the ability of the suspended
clearing member or its representative to
transfer the short position to another
clearing member under certain
circumstances. Further, current Rule
1106(b)(3) would be combined with
Rule 1106(b)(2) and amended to set
forth OCC’s right to take possession of
the cash and/or securities included
within an escrow, member specific or
third-party specific deposit for the
purpose of reimbursing itself for costs
incurred in connection with the closeout of a short position covered by the
deposit. These proposed amendments to
Rule 1106 are consistent with proposed
Rules 610B(f), 610C(q) and 610C(r).
Clearing Members’ Rights to Collateral
in the Escrow Deposit Program
Clearing members’ rights to escrow
deposits and third-party specific
deposits would be clarified under the
proposed rules. While clearing members
have secondary lien rights to the escrow
deposits of their customers under the
current escrow deposit program, OCC is
proposing to add several rules that
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would clarify these rights and provide
additional guidance to clearing
members regarding operational steps
that would need to be taken in order to
exercise their secondary lien rights.
Specifically, OCC is proposing to add
Rules 610B(c) and 610C(f) to delineate
the rights of a clearing member as they
relate to third-party specific deposits
and escrow deposits. Proposed Rules
610B(c) and 610C(f) would provide for
the grant of a security interest by the
customer to the clearing member with
respect to any given third-party specific
deposit and escrow deposit, as
applicable. The Rules would further
provide that any such security interest
of a clearing member in an escrow
deposit would be subordinated to OCC’s
interest. For purposes of perfecting a
clearing member’s security interest
under the Uniform Commercial Code
(‘‘UCC’’), OCC would obtain control
over the security both on its own behalf
and on behalf of the relevant clearing
member, with clear subordination of the
clearing member’s interest to OCC’s
interest. In the event OCC had to direct
delivery of the security to the clearing
member, OCC would do so on the
clearing member’s behalf. Proposed
Rules 610B(c) and 610C(f) would better
codify clearing members’ secondary lien
rights to third-party specific deposits
and escrow deposit than they are
currently codified in Section 21 of the
EDA, without changing any clearing
member rights or obligations. OCC
believes that such a codification would
provide more transparency regarding
clearing members’ secondary lien rights
under the enhanced escrow deposit
program because all users and potential
users of OCC’s escrow deposit program
would be able to easily identify and
understand the rules concerning
clearing members’ secondary lien rights
in a single location within OCC’s
publicly available Rulebook.
Additionally, OCC is proposing to add
several procedural rules that would set
forth the process by which clearing
members could exercise their secondary
lien rights in a given deposit in the
escrow deposit program. Proposed Rules
610C(d), 610C(o), 610C(p) and 610C(s),
relating to escrow deposits, and
proposed Rules 610B(d) and 610B(e),
relating to third-party specific deposits,
would provide that, in the event of a
customer default to a clearing member,
the clearing member would have the
right to request a ‘‘hold’’ on a deposit.
The hold would prevent the withdrawal
of deposited securities or cash by a
custodian bank or the release of a
deposit that would otherwise occur in
the ordinary course. Subsequent to
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placing a hold instruction on a deposit,
a clearing member would have the right
to request that OCC direct delivery of
the deposit to the clearing member
through DTC’s systems in the case of
securities, or an instruction to the TriParty Custodian Bank in the case of
cash. Providing clearing members with
transparent instructions regarding how
to place a hold instruction on, and
direct delivery of a deposit within the
escrow deposit program, would
significantly enhance the current escrow
deposit program.
OCC is also proposing to adopt Rules
610B(e) and 610C(s), which would
protect OCC in the event that it delivers
a third-party specific deposit or escrow
deposit to a clearing member. Under
proposed Rules 610B(e) and 610C(s), a
clearing member making a request for
delivery would be deemed to have made
the appropriate representations to OCC
that the clearing member has a right to
take possession of the deposited
securities or cash and would agree to
indemnify OCC against losses resulting
from a breach of these representations or
the delivery of the deposit. A clearing
member would also be required to
provide documentation regarding its
right to possession of the securities or
cash as OCC may reasonably request.
Section 3: Techincal[sic] and
Conforming Changes to OCC’S Rules
OCC also proposes a number of
technical, conforming and structural
changes in order to move the majority
of the terms governing the escrow
deposit program into one section in its
Rulebook. OCC believes that changes to
proposed Rules 610, 610A, 610B and
610C, described in greater detail below,
are either non-substantive or
conforming changes that do not alter the
current rights or obligations of OCC,
clearing members or participants in the
escrow deposit program.
Proposed Rule 610—Deposits in Lieu of
Margin (General Provisions)
Proposed Rule 610 contains general
provisions applicable to the escrow
deposit program. Specifically, proposed
Rule 610(a) replaces existing Rule 610(a)
and sets forth general provisions of the
escrow deposit program including: (1)
Who may participate in the escrow
deposit program, (2) the types of
positions included in the escrow
deposit program, (3) the types of
deposits in the escrow deposit program,
and (4) the collateral that is eligible for
the escrow deposit program. Proposed
Rule 610(b) replaces existing Rule
610(b) and provides further specificity
with respect to the types of options
positions included within OCC’s escrow
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deposit program.20 This additional
specificity clarifies OCC’s existing rules
and provides more transparency to users
and potential users of OCC’s escrow
deposit program. Proposed Rule 610(c),
which is not derived from an existing
rule, clarifies OCC’s existing practice
that OCC will disregard a member
specific deposit or a third-party specific
deposit if such deposit is no longer
eligible to be delivered upon the
exercise of the associated stock option
contract. Proposed Rule 610(d), which
replaces existing Rules 610(c) and
1801(l), requires that deposits within
the escrow deposit program be made in
accordance with applicable laws and
regulations, and be appropriately
authorized. Proposed Rule 610(f), which
replaces existing Rule 610(l), would
clarify OCC’s right to use deposits
within the escrow deposit program until
such deposits are withdrawn. Proposed
Rule 610(f) is supplemented by
proposed Rules 610A, 610B and 610C
with respect to member specific, thirdparty specific and escrow deposits.
Proposed Rule 610(g) codifies OCC’s
security interest in deposits within the
escrow deposit program.
Proposed Rule 610A—Member Specific
Deposits
Proposed Rule 610A clarifies many of
the current rules concerning the escrow
deposit program as they relate to
member specific deposits. For example,
proposed 610A(c) describes the process
by which a clearing member may
withdraw a member specific deposit
(i.e., effecting a withdrawal or release
through DTC’s EDP Pledge System and
ensuring that its margin requirement at
OCC is met). While this issue is
addressed in existing Rule 610(j) in
general terms, OCC believes that the
additional operational details regarding
its existing processes in proposed Rule
610A(c), along with its inclusion in
proposed Rule 610A, further clarify how
those existing processes apply to
member specific deposits as opposed to
other types of deposits in lieu of margin
in existing Rule 610.21 Proposed Rule
610A(d) also establishes that member
specific deposits may be ‘‘rolled-over,’’
a concept that is not specifically set
forth in existing Rule 610 but has
historically applied in connection with
member specific deposits (formerly
specific deposits).
20 As described in greater detail below, proposed
Rules 610(a) and 610(b) are supplemented by
proposed Rules 610A, 610B and 610C.
21 Proposed Rule 610A(c) supplements proposed
Rule 610(f).
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Proposed Rule 610B—Third-Party
Specific Deposits
Proposed Rule 610B clarifies many of
the current rules concerning third-party
specific deposits. For example,
Proposed Rule 610B(b) addresses
rollovers of a third-party specific
deposit and replaces existing Rules
613(a) and Section 9 of the EDA, and
articulates how to rollover third-party
specific deposits by its inclusion within
Rule 610B. Withdrawals and releases of
third-party specific deposits are
addressed in proposed Rule 610B(d),
which is based on existing Rules 613(b)
and 613(f). Specifically, releases and
withdrawals of third-party specific
deposits would be effected through
DTC’s EDP Pledge System, subject to the
clearing member’s margin requirement
being met, the clearing member’s
approval of the release or withdrawal,
and the absence of a ‘‘hold’’ instruction.
In addition, proposed Rule 610B(g)
seeks to provide a more detailed
description of the effect of a release of
a third-party specific deposit than the
applicable portions of existing Rule
613(i).
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Proposed Rule 610C—Escrow Deposits
Proposed Rule 610C, which is based
on existing Rule 1801(a), would clarify
the current rules concerning escrow
deposits. For example, the introductory
paragraph of proposed Rule 610C would
provide a more detailed overview of a
custodian bank’s role in the escrow
deposit program, specifying such a
bank’s role in effecting escrow deposits,
and would describe eligible positions as
they relate to escrow deposits. Proposed
Rules 610C(a) through 610C(e) and
proposed Rule 610C(t) concern eligible
collateral, the manner in which escrow
deposits are to be held, and
withdrawing an escrow deposit and
rolling over an escrow deposit. These
operational rules are based on: (1)
Existing Rules 610(g) and 1801(b) and
Sections 3.1, 4.1 and 5.1 of the EDA
with respect to eligible collateral
(proposed Rule 610C(a)); (2) existing
Rules 610(j) and 1801(i), and Sections
10 and 20 of the EDA with respect to
withdrawing an escrow deposit
(proposed Rule 610C(d)); (3) existing
Rule 613(i) with respect to the effect of
a release or withdrawal of an escrow
deposit (proposed Rule 610C(t)); and (4)
existing Rule 613(a) and Section 9 of the
EDA with respect to rollovers of an
escrow deposit (Proposed Rule 610C(e)).
In order to provide additional
transparency concerning representations
that custodian banks are deemed to
make when effecting an escrow deposit,
OCC is proposing to move several
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contractual provisions of the EDA into
proposed Rules 610C(i), 610C(j) and
610C(k). Specifically: (1) Proposed Rule
610C(i), which concerns agreements and
representations a custodian bank is
deemed to have made when effecting an
escrow deposit, is based upon Sections
1.6 and 4.6 of the EDA; (2) proposed
Rule 610C(j), which concerns
representations and warranties a
custodian bank is deemed to make when
giving an instruction to OCC and is
based upon Sections 1.3, 1.4, 1.5, 1.6,
1.7 and 1.8 of the EDA; and (3) proposed
Rule 610C(k), which concerns
agreements a custodian bank is deemed
to make when giving an instruction to
OCC and is based upon Sections 4, 5
and 21 of the EDA. Moreover, and in
addition to locating deemed
representations of custodian banks in
the Rules, proposed Rules 610C(i),
610C(j) and 610C(k) contain language
that perfects OCC’s security interest in
escrow deposits under Section 9 of the
UCC, and replace Sections 3.3, 3.4, 4.3,
4.4, 5.3 and 5.4 of the EDA.22 OCC
believes that by locating the abovedescribed provisions in the Rules, all
users and potential users of OCC’s
escrow deposit program would better
understand the relationship between
OCC and custodian banks.
Proposed Rules 610C(m), 610C(n),
610C(o) and 610C(p) concern the
exercise of options positions
collateralized by escrow deposits and
the release of escrow deposits upon
expiration. As with other parts of
proposed Rule 610C, OCC believes that
the location of proposed Rules 610C(m),
610C(n), 610C(o) and 610C(p) provides
all users and potential users of OCC’s
escrow deposit program with a more
transparent understanding of how
exercises of options positions affect
escrow deposits as well as the manner
in which OCC would release an escrow
deposit upon the expiration of an
options position. Similar to other parts
of Rule 610C, proposed Rules 610C(m),
610C(n), 610C(o) and 610C(p) are based
on existing Rules of OCC as well as the
EDA.23 Proposed Rule 610C(m)
22 The primary UCC-related provisions in the
proposed Rules include Rules 610C(j)(1), 610C(j)(9)
and 610C(k)(1), which provide for the perfection of
OCC’s security interest in deposits consisting of
securities under UCC Sections 9–106 and 9–314;
Rules 610C(j)(1), 610C(j)(10), and 610C(k)(2), which
provide for the perfection of OCC’s security interest
in deposits consisting of cash under UCC Sections
9–104, 9–312 and 9–314; and Rules 610C(i)(1),
610C(i)(2) and 610C(j)(3), which support the first
priority of OCC’s security interest by preventing
competing liens or claims.
23 As discussed in Section 3 above, Rules 610C(n)
and 610C(p) contain language that prevents the
release of an escrow deposit in the event such
deposit is subject to a hold instruction, which is a
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concerns reports OCC provides
regarding escrow deposits and is based
upon existing Rules 613(d) and 613(e) as
well as Sections 11, 12 and 13 of the
EDA. Proposed Rules 610C(n), 610C(o)
and 610C(p), which concern
assignments of exercises and releases of
escrow deposits upon expiration is
based upon existing Rules 613(f) and
1801(j) and Section 14 of the EDA.
Section 4: Transition Period
For the administrative convenience of
clearing members, custodian banks and
customers, the existing Rules governing
deposits in lieu of margin would remain
in effect, in parallel with the proposed
Rules, for a transition ending November
30, 2017. During this transition period,
deposits in lieu of margin could be
made under either the existing Rules or
the proposed Rules. This will eliminate
the need of all clearing members to
provide new collateral on a single date
in the absence of a transition period.
After the transition period, proposed
Rules 610, 610A, 610B and 610C would
provide the sole means of making
deposits in lieu of margin and existing
Rules 613 and 1801 would be removed
from the Rulebook. In connection with
the transition, existing Rule 610 would
be re-designated as 610T to indicate that
it is a temporary rule, and would
become ineffective and removed after
the transition period. Furthermore,
following the transition period, existing
Rule 503, which addresses instructions
that call for the payment of a premium
by or to the clearing member for whose
account the deposit is made, would be
removed from the Rules because these
instructions would no longer be
permitted under the revised escrow
deposit program since this aspect of the
program has not been used for a number
of years.24 In addition, Government
securities would be given full market
value under the revised escrow deposit
program and therefore existing Rule
610(h) would be removed from the
Rules after the transition period.
2. Statutory Basis
OCC believes that the proposed rule
change is consistent with Section
17A(b)(3)(F) of the Act 25 because it
would ensure the safeguarding of
securities and funds which are in the
custody and control of OCC. As
described above, the proposed rule
proposed enhancement to the escrow deposit
program.
24 For the purposes of clarity, existing Rules
613(c), 613(g), 613(h), 613(j) address the same topic
and would be removed from OCC’s Rulebook
following the transition period without being
migrated into a proposed Rule.
25 15 U.S.C. 78q–1(b)(3)(F).
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change would increase OCC’s visibility
into and control over cash and securities
deposits made in OCC’s escrow deposit
program. Deposits in OCC’s escrow
deposit program collateralize open
securities positions guaranteed by OCC
and protect OCC and market
participants from the risk associated
with a default of a clearing member. The
proposed rule change would better
ensure that OCC could verify that
deposits of both cash and securities
within OCC’s escrow deposit program
sufficiently collateralize germane short
options position(s). In addition, OCC
would: (1) Be able to use its existing
functionality with DTC to more quickly
take possession of such deposits
without involving custodian banks in
the event of a clearing member default,
and (2) obtain a contractual
commitment from [sic] Tri-Party
Custodian Bank that they would
disperse cash within the escrow deposit
program to OCC at OCC’s direction.
OCC believes that these features of the
revised escrow deposit program would
reduce potential losses that may occur
as a result of a clearing member default.
As a result of the foregoing, the
proposed rule change would better
ensure the safeguarding of securities
and funds that are in the custody and
control of OCC.
OCC also believes that the proposed
rule change is consistent with Rule
17Ad–22(d)(3), which requires OCC to
hold assets in a manner that minimizes
risk of loss or delay or in access to
them.26 Specifically, and with respect to
non-cash collateral, all non-cash
collateral in the escrow deposit program
would be held at DTC thereby allowing
OCC to validate and value collateral in
real time and quickly obtain possession
of deposited securities by issuing a
transfer instruction through DTC’s
systems in an event of default without
involving custodian banks. With respect
to cash collateral, all such collateral
would be held in an escrow deposit
program specific account at a Tri-Party
Custodian Bank, OCC would have view
access into such account, and OCC
would obtain a contractual commitment
from the Tri-Party Custodian Banks that
they would disperse cash within the
escrow deposit program to OCC at
OCC’s direction. By more widely
utilizing its existing infrastructure for
non-cash collateral in the escrow
deposit program, as well as by obtaining
specific agreements regarding its right to
take possession of cash collateral, OCC
will be able to more quickly take
possession of collateral in the escrow
deposit program in the event of a
clearing member default that would, in
turn, reduce potential losses to OCC,
other clearing members and market
participants. Moreover, OCC believes
that the proposed rule change is
consistent with the requirement in Rule
17Ad–22(d)(11) 27 that clearing agencies
establish, implement, maintain and
enforce policies and procedures
reasonably designed to make key
aspects of their default procedures
publicly available, because the
substantive terms of the escrow deposit
program, and specifically the rules
concerning default management, would
be incorporated into OCC’s Rules,
which are publicly available on OCC’s
Web site, rather than in private
agreements.
(B) Clearing Agency’s Statement on
Burden on Competition
The proposed rule change would
reflect changes to the Rules governing
OCC’s escrow deposit program and,
more generally, amend the Rules to
more clearly identify the three forms of
deposits in lieu of margin: (1) Escrow
deposits, (2) third-party specific
deposits and (3) member specific
deposits. The proposed rule change
would impose a burden on competition
that is necessary and appropriate in
furtherance of the Act.28 In particular, a
burden would be imposed on Tri-Party
Custodian Bank[sic] in light of the
requirement that cash included within
an escrow deposit be held in an account
of the relevant customer at the Tri-Party
Custodian Bank pursuant to a Tri-Party
Agreement. This requirement may limit
certain custodian banks’ participation in
the escrow deposit program because the
escrow deposit program would now
require a Tri-Party Custodian Bank to
have the technological capability to
allow both OCC and customers of
clearing members to have view access
into bank accounts within the escrow
deposit program. However, OCC
believes that the resulting burden on
competition is both necessary and
appropriate in furtherance of the Act
because OCC’s view access into bank
accounts within the escrow deposit
program provides OCC additional
transparency over cash collateral. As
described in Item 3 above, by obtaining
view access into bank accounts within
the escrow deposit program OCC would
not have to rely on Tri-Party Custodian
Bank[sic] to value, or warrant the
existence of, cash collateral within the
escrow deposit program. OCC believes
that obtaining such additional
transparency over cash collateral is
27 17
26 17
CFR 240.17Ad–22(d)(3)
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21:59 Aug 30, 2016
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CFR 240.17Ad–22(d)(11).
U.S.C. 78q–1(b)(3)(I).
Frm 00131
Fmt 4703
Sfmt 4703
necessary and appropriate in
furtherance of the Act.
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants or Others
Communications With Custodian Banks
In light of the substantial changes
proposed to the escrow deposit
program, OCC has sought to keep
custodian banks informed regarding the
proposed rule changes. These
communications began in January and
February 2012, when OCC notified each
custodian bank of the proposal to
restructure the escrow deposit program.
As part of this notification, OCC
informed each custodian bank of (1)
OCC’s intention to require that security
pledges be made through DTC, (2) the
percentage of cash used in the escrow
deposit program and (3) the potential
elimination of cash deposits.29
In June through August 2012, OCC
provided a PowerPoint presentation to
each custodian bank summarizing
proposed rule changes to the escrow
deposit program. This presentation
included an explanation of the reasons
for the proposed rule changes, including
the desire to enhance and strengthen the
escrow deposit program and increase
collateral transparency. The
presentation also included a discussion
of changes to the validation and
valuation of collateral, and the
calculation of contract quantities based
on the collateral that has been pledged.
In April and May 2013, OCC provided
each custodian bank with an operational
overview of the restructured escrow
deposit program in the form of a
PowerPoint presentation. This
presentation covered: Eligible option
types, types of eligible supporting
collateral, required collateral value
calculations for option contact coverage,
valuation of supporting collateral, asset
management locations/processing of
supporting collateral, and validation
and valuation of supporting collateral
29 While it was ultimately determined in April
2014 that cash collateral would remain in the
escrow deposit program, prior discussions with
participating escrow banks reflected the evolution
of OCC’s decision on this point. For example, the
PowerPoint presentation given to banks during
June–August 2012 indicated that cash collateral
would not be permitted in the escrow deposit
program, while the PowerPoint presentation given
during April–May 2013, as well as the draft rules
distributed to participating escrow banks for
comment in July–August 2013, indicated that it
would be included. A number of current
participants in the escrow deposit program use
cash, some to a substantial degree, and OCC
determined that the use of cash collateral should
remain an essential aspect of the escrow deposit
program.
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Federal Register / Vol. 81, No. 169 / Wednesday, August 31, 2016 / Notices
and calculation of option contract
coverage.
In July and August 2013, OCC
distributed a draft Participating Escrow
Bank Agreement (as described below)
and the related proposed OCC Rules to
custodian banks along with a request for
feedback. Following the receipt of
questions and comments, OCC
distributed ‘‘FAQ’’ responses to
custodian banks.
During September 2013, OCC
provided a walkthrough of the functions
of its ENCORE 30 system applicable to
the enhanced escrow deposit program
for custodian banks in order to provide
an orientation of such functionality. In
connection with the restructured escrow
deposit program, clearing members will
continue to use ENCORE to view
member specific deposits, and
custodian banks will use ENCORE to
view third-party specific deposits and
make escrow deposits consisting of
cash. Moreover, OCC sent requests to
custodian banks for validation of the
DTC pledgor accounts to be used for the
restructured escrow deposit program. In
October 2013, OCC distributed escrow
deposit program eligible securities file
details to custodian banks.
In February and March 2014, OCC
arranged a series of calls with custodian
banks to solicit feedback on a term sheet
detailing cash account structures.
Following the receipt of questions and
comments, OCC distributed ‘‘FAQ’’
responses to custodian banks.
mstockstill on DSK3G9T082PROD with NOTICES
Comments Received From Custodian
Banks
As described above, OCC discussed
the proposed rule changes to its escrow
deposit program with custodian banks
several times since 2012. While these
discussions were generally
informational in nature, custodian
banks provided OCC with comments
and questions in two instances: The
July/August 2013 discussions and the
February/March 2014 discussion. The
primary focus of the comments in both
sets of discussions was the manner in
which custodian banks would be
required to hold cash under the new
escrow rules: In an omnibus structure or
in a tri-party structure. The omnibus
structure would provide OCC with an
account in OCC’s name and thereby
perfect OCC’s right under the UCC to
take possession of cash escrow deposits
in the event of a clearing member
default. This would also eliminate the
need for a separate tri-party agreement.
30 ENCORE is OCC’s real-time clearing and
settlement system that allows clearing members to,
among other things, post and view margin collateral
as well as deposits in lieu of margin.
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However, the omnibus structure was
less desirable to custodian banks since
all of a custodian bank’s OCC escrow
deposit program clients’ assets would be
comingled in a single account. From an
operational perspective, a single
omnibus account at a custodian bank is
easier for OCC to manage since OCC
would only need to have ‘‘view access’’
into one account at a custodian bank.
On the other hand, custodian banks
expressed privacy concerns with respect
to several clients having view access
into a single account.
Eventually, OCC decided to use a triparty account structure for cash escrow
deposits, with certain controls to
alleviate the concerns on both sides.
Specifically, custodian banks agreed to
facilitate the execution of a form triparty agreement with each of its clients
that participates in OCC’s escrow
deposit program, which perfects OCC’s
security interest in cash escrow
deposits. Additionally, custodian banks
agreed to establish an escrow specific
cash account for each client so that OCC
does not need to differentiate a client’s
OCC escrow cash from the client’s nonescrow cash. OCC believes that the
proposed structure for cash accounts
strikes the appropriate balance between
OCC’s desire for legal certainty as to its
right to take possession of cash escrow
deposits in the event of a clearing
member default, and the operational
desire to only have view access to a
client’s OCC escrow deposit program
cash account balance at a custodian
bank.
Additional comments OCC received
from the July/August 2013 discussions
with custodian banks centered on
administrative items such as the escrow
deposit program documentation
structure and the manner in which
custodian banks would post escrow
deposits in OCC’s clearing system,
ENCORE. As discussed above, OCC
moved the substantial majority of its
Amended and Restated On-Line Escrow
Deposit Agreement into proposed Rule
610C in order to have the majority of
escrow rules in one place. Custodian
banks did not express any concerns
regarding the operational steps
necessary to post an escrow deposit in
ENCORE once OCC provided custodian
banks with a ‘‘walkthrough’’ of the
operational process.
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
PO 00000
Frm 00132
Fmt 4703
Sfmt 4703
60107
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
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
OCC–2016–009 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–2016–009. 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 such
filings 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_16_
009.pdf.
All comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
E:\FR\FM\31AUN1.SGM
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Federal Register / Vol. 81, No. 169 / Wednesday, August 31, 2016 / Notices
should submit only information that
you wish to make available publicly.
All submissions should refer to File
Number SR–OCC–2016–009 and should
be submitted on or before September 21,
2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.31
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–20882 Filed 8–30–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78685; File No. SR–
NYSEMKT–2016–77]
Self-Regulatory Organizations; NYSE
MKT LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Amending Rule
900.2NY(18A)
August 25, 2016.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on August
12, 2016, NYSE MKT LLC (the
‘‘Exchange’’ or ‘‘NYSE MKT’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rule 900.2NY(18A). The proposed rule
change is available on the Exchange’s
Web site at www.nyse.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
mstockstill on DSK3G9T082PROD with NOTICES
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
31 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
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21:59 Aug 30, 2016
Jkt 238001
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 those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the filing is to amend
Rule 900.2NY(18A), regarding the
definition of a ‘‘Professional Customer,’’
to align the Exchange’s definition with
that of competing options exchanges, as
discussed below.
The Exchange adopted the definition
of a Professional Customer in 2010, after
several other options exchanges added
this definition.4 In doing so, the
Exchange provided that a Professional
Customer would ‘‘be treated in the same
manner as a Broker/Dealer (or nonCustomer) in securities for the
purposes’’ of various Exchange rules
‘‘and the Exchange’s schedule of fees.’’ 5
Recently, the Exchange amended its
Professional Customer definition to
align with rules of other markets.6
However, as part of the harmonization
effort for a uniform definition of
Professional Customer, the Exchange
has determined that other options
exchanges do not similarly include
reference to their fee schedules in the
definition of Professional Customer.7
Thus, to conform with the rules of other
options exchanges, the Exchange
proposes to modify Rule 900.2NY(18A)
to delete the reference to the Exchange’s
fee schedule. This change would allow
the Exchange, like its competitors, to
4 See Securities Exchange Act Release No. 61818
(March 31, 2010), 75 FR 17457 (April 6, 2010) (SR–
NYSEAmex–2010–18). See also id., at note 14
(citing the approval orders of other options
exchanges).
5 See Rule 900.2NY(18A).
6 See Securities Exchange Act Release No. 77836
(May 16, 2016), 81 FR 31994 (May 20, 2016) (SR–
NYSEMKT–2016–53).
7 See, e.g., NYSE Arca Rule 6.1A.(4A) (no
reference to fee schedule in definition of
Professional Customer); Nasdaq OMX PHLX
(‘‘PHLX’’) Rule 1000 (b)(14) (same); Nasdaq Options
Market (‘‘NOM’’) Chapter 1, Sec. 1(a)(48) (same);
Bats BZX Exchange, Inc.’s (‘‘BZX’’) Rule 16.1(a)(46)
(same); BOX Options Exchange LLC (‘‘BOX’’) Rule
100 (a)(50) (same); International Securities
Exchange (‘‘ISE’’) Rule 100(a)(37A) (same); MIAX
Options Exchange (‘‘MIAX’’) Rule 100 (same).
PO 00000
Frm 00133
Fmt 4703
Sfmt 4703
attract Professional Customer order flow
with fees that differentiate Professional
Customers from Broker/Dealers.
The Exchange also proposes to make
a non-substantive change to clarify the
list of rules to which the Professional
Customer definition applies, which
would add clarity and transparency to
Exchange rules.
2. Statutory Basis
The proposed rule change is
consistent with Section 6(b) 8 of the
Securities Exchange Act of 1934 (the
‘‘Act’’), in general, and furthers the
objectives of Section 6(b)(5),9 in
particular, in that it is designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in facilitating
transactions in securities, and to remove
impediments to and perfect the
mechanisms of a free and open market
and a national market system.
The proposed change would foster
cooperation and coordination with
persons engaged in facilitating
transactions in securities as it would
align Exchange rules with that of its
competitors, which benefits investors
and the public interest. By removing
reference to the Exchange’s fee schedule
from the definition of Professional
Customer, the Exchange would, like its
competitors, have the ability to attract
Professional Customer order flow with
fees that differentiate Professional
Customers from Broker/Dealers. The
proposed rule change would therefore
remove impediments to and perfect the
mechanism of a free and open market
and a national market system by
enabling the Exchange to structure its
fees for Professional Customers
competitively with the fees of other
options exchanges.
Further, the proposed changes are not
unfairly discriminatory as the modified
definition would apply to all similarlysituated ATP Holders that submit orders
on behalf of Professional Customers.
Finally, the non-substantive change to
the Professional Customer definition
would remove impediments to and
perfect the mechanisms of a free and
open market and a national market
system, as it would add clarity and
transparency to Exchange rules.
8 15
9 15
E:\FR\FM\31AUN1.SGM
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
31AUN1
]]>Agencies
[Federal Register Volume 81, Number 169 (Wednesday, August 31, 2016)]
[Notices]
[Pages 60099-60108]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-20882]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78675; File No. SR-OCC-2016-009]
Self-Regulatory Organizations; the Options Clearing Corporation;
Notice of Filing of Proposed Rule Change Concerning the Options
Clearing Corporation's Escrow Deposit Program
August 25, 2016.
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 August 15, 2016, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by OCC. 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.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The purpose of this proposed rule change by OCC is to improve the
resiliency of OCC's escrow deposit program. OCC is proposing changes
that are designed to: (1) Increase OCC's visibility into and control
over collateral deposits made under the escrow deposit program; (2)
strengthen clearing members' rights to collateral in the escrow deposit
program in the event of a customer default to the clearing member; (3)
provide more specificity concerning the manner in which OCC or clearing
members would take possession of collateral in OCC's escrow deposit
program; and (4) improve the readability of the rules governing OCC's
escrow deposit program by consolidating all such rules into a single
location in OCC's Rulebook.
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. OCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.
[[Page 60100]]
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
The purpose of this proposed rule change is to improve the
resiliency of OCC's escrow deposit program. The changes would: (1)
Increase OCC's visibility into and control over collateral deposits
made under the escrow deposit program; (2) provide more specificity
concerning the manner in which OCC would take possession of collateral
in OCC's escrow deposit program in the event of a clearing member or
custodian bank default; (3) clarify clearing members' rights to
collateral in the escrow deposit program in the event of a customer
default to the clearing member; and (4) improve the readability of the
rules governing OCC's escrow deposit program by consolidating all such
rules into a single location in OCC's Rulebook. Upon implementation of
the proposed rule change, all securities collateral in OCC's escrow
deposit program would be held at the Depository Trust Company
(``DTC''), and custodian banks would only be allowed to hold cash
collateral.
The narrative below is comprised of four sections. The first
section provides a background of OCC's current escrow deposit program
as well as an overview of the proposed changes to the rules and
agreements that govern the escrow deposit program. The second section
discusses the changes associated with: (1) Increasing OCC's visibility
into and control over collateral deposits made under the escrow deposit
program; (2) providing more specificity concerning the manner in which
OCC would take possession of collateral in OCC's escrow deposit program
in the event of a clearing member or custodian bank default; and, (3)
clarifying clearing members' rights to collateral in the escrow deposit
program in the event of a customer default to the clearing member as
well as providing additional detail concerning the manner in which
clearing members may take possession of such collateral. The third
section discusses proposed technical and conforming changes to the
rules and agreements governing the current escrow deposit program that
would allow OCC to consolidate all such terms into a single location in
OCC's Rulebook. The second and third sections also discuss changes that
improve the readability of the rules governing OCC's escrow deposit
program, which is primarily achieved by consolidating all such rules
into a single location in OCC's Rulebook. The fourth section discusses
the manner in which OCC proposes to transition from the current escrow
deposit program to the new escrow deposit program, including the
removal of certain rules and contractual provisions that would no
longer be applicable to the new escrow deposit program.
Section 1: Background and Overview of Proposed Rule Changes
Background/Current Escrow Deposit Program
Each day OCC collects collateral from its clearing members in order
to protect OCC and the markets it serves from potential losses stemming
from a clearing member default. Approximately half of the collateral
deposited by clearing members at OCC is deposited through OCC's escrow
deposit program. Users of OCC's escrow deposit program are customers of
clearing members who, through the escrow deposit program, are permitted
to collateralize eligible positions directly with OCC (instead of with
the relevant clearing member who would, in turn, deposit margin at
OCC). Currently, collateral deposits made through OCC's escrow deposit
program are characterized as either ``specific deposits'' or ``escrow
deposits.'' Specific deposits are deposits of the security underlying a
given options position and are made through DTC by a clearing member on
behalf of its customer (at the direction of the customer).\3\ Escrow
deposits are deposits of cash or securities made by a custodian bank on
behalf of a customer of an OCC clearing member in support of an
eligible options position. OCC's Rules currently contemplate two forms
of escrow deposits: ``third-party escrow deposits'' and ``escrow
program deposits.'' Third-party escrow deposits are substantially
similar to specific deposits except for the fact that third-party
escrow deposits are made by a custodian bank, and not a clearing
member. Third-party escrow deposits consist entirely of securities and,
like specific deposits, are made through DTC. In order to effect third-
party specific deposits, custodian banks must be DTC members. Escrow
program deposits are bank deposits of eligible securities or cash,
which are held at the custodian bank (versus third-party escrow
deposits and specific deposits, which are held at DTC).
---------------------------------------------------------------------------
\3\ For example, if customer XYZ holds a short position of
options on AAPL, customer XYZ could, through its clearing member's
DTC account, pledge shares of AAPL to OCC in order to collateralize
such options position and not be charged margin by OCC.
---------------------------------------------------------------------------
When a customer of a clearing member makes a deposit in lieu of
margin through OCC's escrow deposit program, the relevant positions are
excluded from the clearing member's margin requirement at OCC. The
escrow deposit program therefore provides users of OCC's services with
a means to more efficiently use cash or securities they may have
available.
Overview of Rule Changes (Including Terminology Changes) and New
Agreements
Rule Consolidation and Terminology Changes
Currently, the rules concerning OCC's escrow deposit program are
located in OCC Rules 503, 610, 613 and 1801. Additionally, OCC and
custodian banks participating in OCC's escrow deposit program enter
into an Escrow Deposit Agreement (``EDA''), which also contains
substantive provisions governing the program. OCC is proposing to
consolidate all of the rules concerning the escrow deposit program,
including the provisions of the EDA relevant to the revised escrow
deposit program, into proposed Rules 610, 610A, 610B and 610C.\4\ OCC
believes that consolidating the many rules governing the escrow deposit
program into a single location would significantly enhance the
understandability and transparency of the rules concerning the escrow
deposit program for current users of the program as well as any persons
that may be interested in using the program in the future.
---------------------------------------------------------------------------
\4\ As described herein, OCC is proposing to eliminate the EDA
based on such consolidation. When appropriate, and as described in
more detail below, conforming changes were made to certain Rules as
a result of OCC proposing to require that all non-cash deposits in
the escrow deposit program be made through DTC (and not held at
custodian banks).
---------------------------------------------------------------------------
In connection with the above described rule consolidation, OCC is
also proposing to rename the types of escrow deposits available within
the escrow deposit program, as well as rename the term ``approved
depository'' to ``approved custodian.'' Specific deposits would now be
called ``member specific deposits,'' which are equity securities
deposited by clearing members at DTC at the direction of their
customers; third-party escrow deposits would now be called ``third-
party specific deposits,'' which are equity securities deposited by
custodian banks at DTC at the direction of their customers; and, escrow
program deposits would now be called, ``escrow deposits,'' which are
either cash deposits held at a custodian bank for the benefit of OCC,
or Government securities deposited at DTC by custodian banks at the
direction of their
[[Page 60101]]
customers. The term ``approved depository'' would also be changed to
``approved custodian'' to eliminate any potential confusion with the
term ``Depository,'' which is defined in the Rules, to mean DTC.
New Rule Organization
With respect to the rules governing the escrow deposit program,
proposed Rule 610 would set forth general terms and conditions common
to all types of deposits permitted under the escrow deposit program.
Specifically, proposed Rule 610: (1) Sets forth the different types of
eligible positions for which a deposit in lieu of margin may be used,
(2) sets forth operational aspects of the escrow deposit program such
as the days and the times during which a deposit in lieu of margin may
be made and where the different types of deposits in lieu of margin
must be maintained (either DTC or a custodian bank), (3) provides the
conditions under which OCC may take possession of a deposit in lieu of
margin (from DTC or a custodian bank), and (4) describes OCC's security
interest in deposits in lieu of margin.\5\ Proposed Rule 610 is
supplemented by: (1) Proposed Rule 610A for member specific deposits,
(2) proposed Rule 610B for third-party specific deposits, and (3)
proposed Rule 610C for escrow deposits. Proposed Rules 610A, 610B and
610C provide further guidance and specificity on the topics initially
addressed in proposed Rule 610 (and delineated above) as they relate to
member specific deposits, third-party specific deposits and escrow
deposits, respectively.
---------------------------------------------------------------------------
\5\ OCC would continue to maintain a perfected security interest
in deposits in the escrow deposit program under the proposed Rules
notwithstanding changes to the location of the rules that perfect
such security interest. OCC's security interest in securities
deposits in the escrow deposit program, which are held at DTC, is
perfected by operation of DTC's rules. OCC's security interest in
cash deposits in the escrow deposit program is perfected under
proposed Rules 610C(i), 610C(j) and 610C(k), which replace Sections
3.3, 3.4, 4.3, 4.4, 5.3, 5.4 and 21 of the EDA. Proposed Rule 610(g)
also concerns OCC's security interest in deposits in escrow deposit
program.
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The new rule structure differs from the existing rule structure in
that existing Rules 503, 610, 613 and 1801 discuss topics concerning
deposits in lieu of margin (such as withdrawal, roll-over \6\ and
release) in general terms and without regard to the type of deposit in
lieu of margin. The existing rule structure also does not provide
operational details of the escrow deposit program. The new rule
structure discusses each aspect of OCC's escrow deposit program by type
of deposit in lieu of margin (member specific deposits, third-party
specific deposit or escrow deposits) as well as provides operational
details concerning the program. OCC believes that the more detailed
presentation of the new rules concerning the escrow deposit program
enhances the understandability of the program to all users, and
potential users, of the program because all such persons will be able
to better understand how topics apply by type of deposit in lieu of
margin and with regard to the operational differences between each type
of deposit in lieu of margin.
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\6\ A ``roll-over'' occurs when a customer chooses to maintain
an existing escrow deposit after the options supported by the escrow
deposit expires, or are closed-out, and the customer re-allocates
the escrow deposit to a new options position.
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Agreements Concerning the Escrow Deposit Program
In addition to the above-described Rule changes, many provisions of
the EDA would be moved into the Rules. Accordingly, OCC is proposing to
eliminate the EDA and replace it with a simplified agreement entitled
the ``Participating Escrow Bank Agreement.'' \7\ The Participating
Escrow Bank Agreement would provide that custodian banks are subject to
all terms of the Rules governing the revised escrow deposit program,\8\
as they may be amended from time to time.\9\ The Participating Escrow
Bank Agreement would contain eligibility requirements for custodian
banks, including representations regarding the custodian bank's Tier 1
Capital,\10\ and provide OCC with express representations concerning
the bank's authority to enter into the Participating Escrow Bank
Agreement.\11\ Moreover, standard contractual provisions concerning
topics such as assignment, governing law and limitation of liability
have been enhanced in the Participating Escrow Bank Agreement when
compared to the EDA.\12\ OCC is also proposing to move notification
requirements into proposed Rule 610C(l), which is an enhancement of
Section 7 of the EDA that requires custodian banks to provide notice to
OCC only when there are changes to the ``authorized persons'' and
changes to the address of the bank. Proposed Rule 610C(l) would require
escrow banks to provide OCC with notices of material changes to the
bank (in additional to items such as changes of authorized persons and
the address of bank, as currently required under Section 7 of the EDA).
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\7\ The Participating Escrow Bank Agreement is attached to this
filing as Exhibit 5A, with changes from the EDA marked. Custodian
banks participating in the revised escrow deposit program are
defined as ``Participating Escrow Banks'' in the Participating
Escrow Bank Agreement, and such banks must also be an Approved
Custodian pursuant to proposed Section 1.A(13) of OCC's By-Laws. In
addition, and as described above, certain provisions of the EDA are
proposed to be incorporated into OCC's Rules; however, no rights or
obligations of either OCC or a custodian bank would change solely as
a result of such an incorporation.
\8\ The Rules governing the revised escrow deposit program are
proposed Rules 610, 610A, 610B and 610C.
\9\ Under the Participating Escrow Bank Agreement, however, OCC
will agree to provide custodian banks with advance notice of
material amendments to the Rules relating to deposits in lieu of
margin and custodian banks will have the opportunity to withdraw
from the escrow deposit program if they object to the amendments. As
a general matter, the Participating Escrow Bank Agreement will not
be negotiable, although OCC may determine to vary certain non-
material terms in limited circumstances.
\10\ OCC recently enhanced the measurement it uses--Tier 1
Capital instead of shareholders' equity--to establish minimum
capital requirements for banks approved to issue letters of credit
that may be deposited by clearing members as a form of margin asset.
See Securities Exchange Act Release No. 74894 (May 7, 2015), 80 FR
27431 (May 13, 2015) (SR-OCC-2015-007). For the reasons set forth in
SR-OCC-2015-007, OCC is proposing to adopt the same standard with
respect to custodian bank escrow deposits.
\11\ These provisions include, but are not limited to, Sections
1.1 and 1.2 of the EDA.
\12\ Sections 2.1, 2.2, 3.5, 3.6, 3.8, 4.7, and 5.6, 6 and 7 of
the EDA would be removed entirely since they are no longer needed
under OCC's revised escrow deposit program. These provisions concern
a custodian bank's movement of securities escrow collateral; such
collateral would be deposited at DTC under the revised escrow
deposit program (as described below). Section 2.3 of the EDA would
also be removed in its entirety because escrow deposits would not be
permitted for equity calls in the revised escrow deposit program.
Additionally, the concept of cash settlements concerning escrow
deposits would not be included in the revised escrow deposit program
and, as a result, Sections 15, 16, 17 and 18(b) to 18(d) would be
removed in their entirety.
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OCC, under Proposed Rule 610C(b), would also require customers
wishing to deposit cash collateral and custodian banks holding escrow
deposits comprised of cash to enter into a tri-party agreement
involving OCC, the customer and the applicable custodian bank (``Tri-
Party Agreement,'' attached hereto as Exhibit 5B). The Tri-Party
Agreement governs the customer's use of cash in the program, confirms
the grant of a security interest in the customer's account to OCC and
the relevant clearing member, as set forth in proposed Rule 610C(f),
and causes customers of clearing members to be subject to all terms of
the Rules governing the revised escrow deposit program.\13\ Each
custodian bank entering into the Tri-Party Agreement (``Tri-Party
Custodian Bank''), would agree to follow the directions of OCC
[[Page 60102]]
with respect to cash escrow deposits without further consent by the
customer.\14\ As discussed in greater detail below, use of the Tri-
Party Agreement significantly enhances OCC's rights concerning cash
escrow deposits, and provides OCC with greater certainty regarding its
rights to cash escrow deposits in the event of a customer or clearing
member default.
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\13\ The Rules governing the revised escrow deposit program are
proposed Rules 610, 610A, 610B and 610C.
\14\ OCC has determined to use this cash account structure as a
result of a series of discussions with certain custodian banks
involved in the cash portion of the escrow deposit program, as
described in Item 5 below. The intended structure would permit a
greater number of customers to participate in the escrow deposit
program than, for example, a commingled ``omnibus'' account
structure at each custodian bank, which would preclude the
participation of customers subject to restrictions under the
Investment Company Act of 1940 requiring segregation of a registered
investment company's funds.
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Section 2: Transparency and Controls, Taking Possession of Collateral,
and Clearing Member Rights to Collateral
Transparency and Control Over Collateral Included in Escrow Deposits
Currently, securities deposits in the escrow deposit program are
held at either DTC or a custodian bank, and cash deposits in the escrow
deposit program are held at a custodian bank. In the case of either
cash or securities held at a custodian bank, OCC relies on the
custodian bank to verify the value and control of collateral since OCC
does not have any visibility into relevant accounts. OCC is proposing
to require that all securities deposited within the escrow deposit
program, regardless of the type of deposit, be held at DTC.\15\
Additionally, OCC is proposing to require Tri-Party Custodian Banks to
provide OCC with view access into the account in which the deposit is
held.
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\15\ OCC has discussed the proposed rule changes to the escrow
deposit program with DTC and, based on feedback from DTC, no
concerns were communicated to OCC by DTC regarding the proposed rule
changes. DTC has also indicated that the proposed rule changes to
the escrow deposit program are consistent with DTC's operations.
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Holding securities escrow deposit program collateral at DTC would
provide OCC with increased visibility into the collateral within the
escrow deposit program because OCC would be able to use its existing
interfaces with DTC to view, validate and value collateral within the
escrow deposit program in real time, allowing OCC to perform the
controls for which it currently relies on the custodian banks. It would
also provide OCC with the ability to obtain possession of deposited
securities upon a clearing member default by issuing a demand of
collateral instruction through DTC's systems, without the need for
custodian bank involvement. Furthermore, a clearing member would have
the ability to obtain possession of deposited securities upon a
customer default in a similar manner by notifying OCC of such customer
default and submitting a request for delivery of such deposited
securities (OCC's and clearing members' ability to take possession of a
deposit within the escrow deposit program is discussed in greater
detail below). OCC does not believe that requiring use of DTC to
deposit securities escrow collateral presents a material change for
users of OCC's escrow deposit program because such users currently use
DTC to effect certain types of deposits in lieu of margin under the
current escrow deposit program.\16\
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\16\ Specifically, users of OCC's escrow deposit program would
use DTC's Collateral Loan Services, which is described at: https://www.dtcc.com/products/training/helpfiles/settlement/settlement_help/help/collateral_loans.htm.
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Cash collateral pledged to support an escrow deposit would continue
to be facilitated through the existing program interfaces; however, for
increased security, any pledges of cash would be required to be made in
a customer's account at the Tri-Party Custodian Bank that is used
solely for the purpose of making escrow deposits. As described above,
under the proposed changes OCC would require Tri-Party Custodian Banks
and customers to enter into a Tri-Party Agreement in order to provide
legal certainty concerning this arrangement. Further, and as set forth
in the Tri-Party Agreement, each Tri-Party Custodian Bank would agree
to disburse funds from the pledged account only at OCC's direction.
From an operational perspective, each Tri-Party Custodian Bank would
provide OCC with online view access to each customer's cash account
designated for the escrow deposit program, allowing visibility into
transactional activity and account balances. OCC would not process a
cash escrow deposit in its systems until it sees the appropriate amount
of cash deposited in the designated bank account at the Tri-Party
Custodian Bank. This process ensures that OCC does not rely on a third
party to value, or warrant the existence of, collateral within the
escrow deposit program. The Tri-Party Agreement, in connection with the
new cash collateral structure, would provide OCC with additional
transparency and control over cash collateral under the revised escrow
deposit program.
In order to effect the foregoing, OCC is proposing to adopt
proposed Rules 610A(a), 610B(a), 610C(b) and 610C(c). Proposed Rules
610A(a) and 610B(a), Effecting a Member Specific Deposit and Effecting
a Third-Party Specific Deposit, respectively, require that member
specific deposits and third-party specific deposits must be made
through DTC, and are largely based upon existing Rule 610(e), which
discusses effecting deposits in lieu or margin generally. Language has
been added to each proposed rule to more accurately articulate that
member specific deposits and third-party specific deposits must be made
through DTC and the party that is required to effect each type of
deposit (i.e., a clearing member or a third-party depository). In the
case of member specific deposits and third-party specific deposits,
which are already made through DTC, OCC believes that proposed Rules
610A(a) and Rule 610B(a) are rules that clarify existing practices and
provide additional operational detail to users of the escrow deposit
program (i.e., member specific deposits and third-party specific
deposits must be made through DTC's EDP Pledge System and clearing
members are required to maintain records of such deposits). Proposed
Rules 610C(b) and 610C(c), Manner of Holding and Method of Effecting
Escrow Deposits, respectively, are largely based upon existing Rules
610(d), 610(g), 1801(d) and 1801(g), as well as Section 8 of the EDA
with language added to more accurately articulate that securities
escrow deposits must be made through DTC and cash must be deposited
through a Tri-Party Custodian Bank, and provide operational detail
concerning effecting escrow deposits. Moreover, OCC is proposing to
adopt new Rule 610(e) in order to specify that all types of deposits in
the escrow deposit program may be made only during the time specified
by OCC. The purpose of specifying the time frames in which participants
are allowed to effect deposits in the escrow deposit program is to
facilitate OCC daily margin processing and ensure that all of the
positions it guarantees are timely collateralized.\17\
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\17\ In the event a deposit in the escrow deposit program is not
timely made, OCC would collect margin from the relevant clearing
member.
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In addition to the above, and with respect to escrow deposits only,
OCC is proposing enhancements to its process of ensuring that customers
meet initial and maintenance minimums.\18\ Specifically, under the
revised escrow deposit program, in the event a customer falls below the
maintenance minimum, the custodian bank, pursuant
[[Page 60103]]
to the Participating Escrow Bank Agreement, would be required to ensure
that the customer deposits additional collateral or escalate the matter
to OCC. In addition to such notification requirement, OCC would also
implement automated processes to ensure that escrow deposits meet
required initial and maintenance minimums. In the event the matter is
escalated to OCC or OCC's systems identify a shortfall, OCC would: (1)
Demand that the relevant clearing member post additional margin to
cover the margin requirement on the applicable position, and (2) if the
relevant clearing member fails to satisfy such a demand for additional
margin, OCC would close-out the applicable position and demand the
escrow deposit from DTC or the Tri-Party Custodian Bank, as applicable,
under its existing authority pursuant to Rule 1106. This process is
much more robust than the current process concerning maintenance
minimums in that OCC currently relies entirely on custodian banks
holding escrow deposits to ensure the customer deposits additional
collateral, as necessary, to meet initial and maintenance minimums. OCC
believes that the proposed new process is more streamlined and
efficient because OCC would not have to rely entirely on a custodian
bank to ensure customers comply with initial and maintenance minimums.
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\18\ Initial and maintenance minimums do not apply to member
specific deposits and third-party specific deposits since the
clearing member or custodian bank, as applicable, is pledging the
security that is deliverable upon exercise of the germane options
position.
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In order to implement the foregoing within the new rules concerning
the escrow deposit program, OCC is proposing to adopt Rules 610C(g) and
610C(h) that concern the initial and maintenance minimum escrow deposit
values required by OCC as well as actions OCC is permitted to take in
the event an escrow deposit falls below a required amount. These
proposed rules are based on existing Rules 1801(c) and 1801(e) as well
as Sections 3.2, 4.2, 5.2, 3.7, 4.8 and 5.7 of the EDA.\19\ With
respect to the computation of initial and maintenance minimums,
proposed Rules 610C(g) and 610C(h) would explain the formula through
which OCC computes the initial and maintenance minimum for a given
options position, with the specific percentage applicable to such
calculation provided to participants in the escrow deposit program in a
schedule posted on OCC's Web site. With respect to the effects of a
failure to meet maintenance minimums, proposed Rule 610C(h) sets forth
the conditions under which OCC would close out a given escrow deposit
should it fall below the requisite maintenance minimum. Proposed Rule
610C(h) would also provide OCC with the authority to use the cash and
securities included within the escrow deposit to reimburse itself for
costs incurred in connection with the close-out. OCC believes that by
virtue of their proposed new location in the rules, as well as the
additional detail provided in the proposed rules, all participants, and
potential participants, in OCC's escrow deposit program would better
understand the rules concerning initial and maintenance minimums, as
they relate to escrow deposits, under the enhanced escrow deposit
program (versus under the current escrow deposit program).
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\19\ OCC is proposing to eliminate the concept of
``substitutions'' of escrow deposit collateral (located in Sections
4.7 and 5.6 of the EDA)--instead a given escrow deposit must at all
times must meet the minimum amount (as set forth in proposed Rules
610(g)(1) and (2)) and OCC would permit any excess amount to be
withdrawn.
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OCC's Rights to Collateral in the Escrow Deposit Program in the Event
of a Clearing Member or Bank Default
The proposed Rules would enhance OCC's default management regime as
it relates to the escrow deposit program by more specifically
delineating the conditions under, and the process through which, OCC
would take possession of collateral within the escrow deposit program
should a clearing member or custodian bank default. Specifically,
proposed Rules 610A(b), 610B(f), 610C(q) and 610C(r) provide that in
the event of a clearing member or custodian bank default OCC would have
the right to direct DTC to deliver the securities included in a member
specific deposit, third-party specific deposit or escrow deposit to
OCC's DTC participant account for the purpose of satisfying the
obligations of the clearing member or reimbursing itself for losses
incurred as a result of the failure, as applicable. Similarly, pursuant
to proposed Rules 610C(q) and 610C(r) OCC would have the right in the
event of a Tri-Party Custodian Bank default to take possession of cash
included within an escrow deposit for the same purposes. In the event
of a custodian bank default, pursuant to proposed Rule 610C(r) OCC
would have the right to remove the custodian bank from the escrow
deposit program, prohibit the custodian bank from making new escrow
deposits, disallow withdrawals with respect to existing deposits, close
out short positions covered by escrow deposits at the defaulted
custodian bank and use such escrow deposits to reimburse itself for the
costs of the close-out, or disregard or require the withdrawal of
existing escrow deposits.
Proposed Rules 610A(b), 610B(f) and 610C(q) concern OCC's rights to
member specific deposits, third-party specific deposits and escrow
deposits, respectively, in the event of a clearing member default. They
would provide a more specific description of OCC's rights to a third-
party specific deposit during a default than existing Rule 610(k) and
Section 18 of the EDA. However, the additional specificity that would
be provided in proposed Rules 610A(b), 610B(f) and 610C(q) would not
change OCC's nor clearing members' rights or obligations regarding
member specific, third-party specific or escrow deposits in the event
of a clearing member default. Proposed Rule 610C(r) addresses OCC's
rights in the event of a custodian bank default and is based on
existing Rules 613(h) and 1801(k). Proposed Rule 610C(r) would clarify
OCC's existing operational practices when a custodian defaults (i.e.,
demand monies, not allow new deposits, etc., as described immediately
above), but does not change any of the rights of OCC, clearing members
or custodian banks set forth in existing Rules 613(h) and 1801(k).
In addition to the above-described proposed rule changes, OCC is
proposing to amend Rule 1106 to set forth the treatment of deposits in
the escrow deposit program in the event of a suspension of a clearing
member. Rule 1106(b)(2) would be amended to provide that OCC may close
out a short position of a suspended clearing member covered by a member
specific, third-party specific or escrow deposit, subject to the
ability of the suspended clearing member or its representative to
transfer the short position to another clearing member under certain
circumstances. Further, current Rule 1106(b)(3) would be combined with
Rule 1106(b)(2) and amended to set forth OCC's right to take possession
of the cash and/or securities included within an escrow, member
specific or third-party specific deposit for the purpose of reimbursing
itself for costs incurred in connection with the close-out of a short
position covered by the deposit. These proposed amendments to Rule 1106
are consistent with proposed Rules 610B(f), 610C(q) and 610C(r).
Clearing Members' Rights to Collateral in the Escrow Deposit Program
Clearing members' rights to escrow deposits and third-party
specific deposits would be clarified under the proposed rules. While
clearing members have secondary lien rights to the escrow deposits of
their customers under the current escrow deposit program, OCC is
proposing to add several rules that
[[Page 60104]]
would clarify these rights and provide additional guidance to clearing
members regarding operational steps that would need to be taken in
order to exercise their secondary lien rights. Specifically, OCC is
proposing to add Rules 610B(c) and 610C(f) to delineate the rights of a
clearing member as they relate to third-party specific deposits and
escrow deposits. Proposed Rules 610B(c) and 610C(f) would provide for
the grant of a security interest by the customer to the clearing member
with respect to any given third-party specific deposit and escrow
deposit, as applicable. The Rules would further provide that any such
security interest of a clearing member in an escrow deposit would be
subordinated to OCC's interest. For purposes of perfecting a clearing
member's security interest under the Uniform Commercial Code (``UCC''),
OCC would obtain control over the security both on its own behalf and
on behalf of the relevant clearing member, with clear subordination of
the clearing member's interest to OCC's interest. In the event OCC had
to direct delivery of the security to the clearing member, OCC would do
so on the clearing member's behalf. Proposed Rules 610B(c) and 610C(f)
would better codify clearing members' secondary lien rights to third-
party specific deposits and escrow deposit than they are currently
codified in Section 21 of the EDA, without changing any clearing member
rights or obligations. OCC believes that such a codification would
provide more transparency regarding clearing members' secondary lien
rights under the enhanced escrow deposit program because all users and
potential users of OCC's escrow deposit program would be able to easily
identify and understand the rules concerning clearing members'
secondary lien rights in a single location within OCC's publicly
available Rulebook.
Additionally, OCC is proposing to add several procedural rules that
would set forth the process by which clearing members could exercise
their secondary lien rights in a given deposit in the escrow deposit
program. Proposed Rules 610C(d), 610C(o), 610C(p) and 610C(s), relating
to escrow deposits, and proposed Rules 610B(d) and 610B(e), relating to
third-party specific deposits, would provide that, in the event of a
customer default to a clearing member, the clearing member would have
the right to request a ``hold'' on a deposit. The hold would prevent
the withdrawal of deposited securities or cash by a custodian bank or
the release of a deposit that would otherwise occur in the ordinary
course. Subsequent to placing a hold instruction on a deposit, a
clearing member would have the right to request that OCC direct
delivery of the deposit to the clearing member through DTC's systems in
the case of securities, or an instruction to the Tri-Party Custodian
Bank in the case of cash. Providing clearing members with transparent
instructions regarding how to place a hold instruction on, and direct
delivery of a deposit within the escrow deposit program, would
significantly enhance the current escrow deposit program.
OCC is also proposing to adopt Rules 610B(e) and 610C(s), which
would protect OCC in the event that it delivers a third-party specific
deposit or escrow deposit to a clearing member. Under proposed Rules
610B(e) and 610C(s), a clearing member making a request for delivery
would be deemed to have made the appropriate representations to OCC
that the clearing member has a right to take possession of the
deposited securities or cash and would agree to indemnify OCC against
losses resulting from a breach of these representations or the delivery
of the deposit. A clearing member would also be required to provide
documentation regarding its right to possession of the securities or
cash as OCC may reasonably request.
Section 3: Techincal[sic] and Conforming Changes to OCC'S Rules
OCC also proposes a number of technical, conforming and structural
changes in order to move the majority of the terms governing the escrow
deposit program into one section in its Rulebook. OCC believes that
changes to proposed Rules 610, 610A, 610B and 610C, described in
greater detail below, are either non-substantive or conforming changes
that do not alter the current rights or obligations of OCC, clearing
members or participants in the escrow deposit program.
Proposed Rule 610--Deposits in Lieu of Margin (General Provisions)
Proposed Rule 610 contains general provisions applicable to the
escrow deposit program. Specifically, proposed Rule 610(a) replaces
existing Rule 610(a) and sets forth general provisions of the escrow
deposit program including: (1) Who may participate in the escrow
deposit program, (2) the types of positions included in the escrow
deposit program, (3) the types of deposits in the escrow deposit
program, and (4) the collateral that is eligible for the escrow deposit
program. Proposed Rule 610(b) replaces existing Rule 610(b) and
provides further specificity with respect to the types of options
positions included within OCC's escrow deposit program.\20\ This
additional specificity clarifies OCC's existing rules and provides more
transparency to users and potential users of OCC's escrow deposit
program. Proposed Rule 610(c), which is not derived from an existing
rule, clarifies OCC's existing practice that OCC will disregard a
member specific deposit or a third-party specific deposit if such
deposit is no longer eligible to be delivered upon the exercise of the
associated stock option contract. Proposed Rule 610(d), which replaces
existing Rules 610(c) and 1801(l), requires that deposits within the
escrow deposit program be made in accordance with applicable laws and
regulations, and be appropriately authorized. Proposed Rule 610(f),
which replaces existing Rule 610(l), would clarify OCC's right to use
deposits within the escrow deposit program until such deposits are
withdrawn. Proposed Rule 610(f) is supplemented by proposed Rules 610A,
610B and 610C with respect to member specific, third-party specific and
escrow deposits. Proposed Rule 610(g) codifies OCC's security interest
in deposits within the escrow deposit program.
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\20\ As described in greater detail below, proposed Rules 610(a)
and 610(b) are supplemented by proposed Rules 610A, 610B and 610C.
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Proposed Rule 610A--Member Specific Deposits
Proposed Rule 610A clarifies many of the current rules concerning
the escrow deposit program as they relate to member specific deposits.
For example, proposed 610A(c) describes the process by which a clearing
member may withdraw a member specific deposit (i.e., effecting a
withdrawal or release through DTC's EDP Pledge System and ensuring that
its margin requirement at OCC is met). While this issue is addressed in
existing Rule 610(j) in general terms, OCC believes that the additional
operational details regarding its existing processes in proposed Rule
610A(c), along with its inclusion in proposed Rule 610A, further
clarify how those existing processes apply to member specific deposits
as opposed to other types of deposits in lieu of margin in existing
Rule 610.\21\ Proposed Rule 610A(d) also establishes that member
specific deposits may be ``rolled-over,'' a concept that is not
specifically set forth in existing Rule 610 but has historically
applied in connection with member specific deposits (formerly specific
deposits).
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\21\ Proposed Rule 610A(c) supplements proposed Rule 610(f).
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[[Page 60105]]
Proposed Rule 610B--Third-Party Specific Deposits
Proposed Rule 610B clarifies many of the current rules concerning
third-party specific deposits. For example, Proposed Rule 610B(b)
addresses rollovers of a third-party specific deposit and replaces
existing Rules 613(a) and Section 9 of the EDA, and articulates how to
rollover third-party specific deposits by its inclusion within Rule
610B. Withdrawals and releases of third-party specific deposits are
addressed in proposed Rule 610B(d), which is based on existing Rules
613(b) and 613(f). Specifically, releases and withdrawals of third-
party specific deposits would be effected through DTC's EDP Pledge
System, subject to the clearing member's margin requirement being met,
the clearing member's approval of the release or withdrawal, and the
absence of a ``hold'' instruction. In addition, proposed Rule 610B(g)
seeks to provide a more detailed description of the effect of a release
of a third-party specific deposit than the applicable portions of
existing Rule 613(i).
Proposed Rule 610C--Escrow Deposits
Proposed Rule 610C, which is based on existing Rule 1801(a), would
clarify the current rules concerning escrow deposits. For example, the
introductory paragraph of proposed Rule 610C would provide a more
detailed overview of a custodian bank's role in the escrow deposit
program, specifying such a bank's role in effecting escrow deposits,
and would describe eligible positions as they relate to escrow
deposits. Proposed Rules 610C(a) through 610C(e) and proposed Rule
610C(t) concern eligible collateral, the manner in which escrow
deposits are to be held, and withdrawing an escrow deposit and rolling
over an escrow deposit. These operational rules are based on: (1)
Existing Rules 610(g) and 1801(b) and Sections 3.1, 4.1 and 5.1 of the
EDA with respect to eligible collateral (proposed Rule 610C(a)); (2)
existing Rules 610(j) and 1801(i), and Sections 10 and 20 of the EDA
with respect to withdrawing an escrow deposit (proposed Rule 610C(d));
(3) existing Rule 613(i) with respect to the effect of a release or
withdrawal of an escrow deposit (proposed Rule 610C(t)); and (4)
existing Rule 613(a) and Section 9 of the EDA with respect to rollovers
of an escrow deposit (Proposed Rule 610C(e)).
In order to provide additional transparency concerning
representations that custodian banks are deemed to make when effecting
an escrow deposit, OCC is proposing to move several contractual
provisions of the EDA into proposed Rules 610C(i), 610C(j) and 610C(k).
Specifically: (1) Proposed Rule 610C(i), which concerns agreements and
representations a custodian bank is deemed to have made when effecting
an escrow deposit, is based upon Sections 1.6 and 4.6 of the EDA; (2)
proposed Rule 610C(j), which concerns representations and warranties a
custodian bank is deemed to make when giving an instruction to OCC and
is based upon Sections 1.3, 1.4, 1.5, 1.6, 1.7 and 1.8 of the EDA; and
(3) proposed Rule 610C(k), which concerns agreements a custodian bank
is deemed to make when giving an instruction to OCC and is based upon
Sections 4, 5 and 21 of the EDA. Moreover, and in addition to locating
deemed representations of custodian banks in the Rules, proposed Rules
610C(i), 610C(j) and 610C(k) contain language that perfects OCC's
security interest in escrow deposits under Section 9 of the UCC, and
replace Sections 3.3, 3.4, 4.3, 4.4, 5.3 and 5.4 of the EDA.\22\ OCC
believes that by locating the above-described provisions in the Rules,
all users and potential users of OCC's escrow deposit program would
better understand the relationship between OCC and custodian banks.
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\22\ The primary UCC-related provisions in the proposed Rules
include Rules 610C(j)(1), 610C(j)(9) and 610C(k)(1), which provide
for the perfection of OCC's security interest in deposits consisting
of securities under UCC Sections 9-106 and 9-314; Rules 610C(j)(1),
610C(j)(10), and 610C(k)(2), which provide for the perfection of
OCC's security interest in deposits consisting of cash under UCC
Sections 9-104, 9-312 and 9-314; and Rules 610C(i)(1), 610C(i)(2)
and 610C(j)(3), which support the first priority of OCC's security
interest by preventing competing liens or claims.
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Proposed Rules 610C(m), 610C(n), 610C(o) and 610C(p) concern the
exercise of options positions collateralized by escrow deposits and the
release of escrow deposits upon expiration. As with other parts of
proposed Rule 610C, OCC believes that the location of proposed Rules
610C(m), 610C(n), 610C(o) and 610C(p) provides all users and potential
users of OCC's escrow deposit program with a more transparent
understanding of how exercises of options positions affect escrow
deposits as well as the manner in which OCC would release an escrow
deposit upon the expiration of an options position. Similar to other
parts of Rule 610C, proposed Rules 610C(m), 610C(n), 610C(o) and
610C(p) are based on existing Rules of OCC as well as the EDA.\23\
Proposed Rule 610C(m) concerns reports OCC provides regarding escrow
deposits and is based upon existing Rules 613(d) and 613(e) as well as
Sections 11, 12 and 13 of the EDA. Proposed Rules 610C(n), 610C(o) and
610C(p), which concern assignments of exercises and releases of escrow
deposits upon expiration is based upon existing Rules 613(f) and
1801(j) and Section 14 of the EDA.
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\23\ As discussed in Section 3 above, Rules 610C(n) and 610C(p)
contain language that prevents the release of an escrow deposit in
the event such deposit is subject to a hold instruction, which is a
proposed enhancement to the escrow deposit program.
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Section 4: Transition Period
For the administrative convenience of clearing members, custodian
banks and customers, the existing Rules governing deposits in lieu of
margin would remain in effect, in parallel with the proposed Rules, for
a transition ending November 30, 2017. During this transition period,
deposits in lieu of margin could be made under either the existing
Rules or the proposed Rules. This will eliminate the need of all
clearing members to provide new collateral on a single date in the
absence of a transition period. After the transition period, proposed
Rules 610, 610A, 610B and 610C would provide the sole means of making
deposits in lieu of margin and existing Rules 613 and 1801 would be
removed from the Rulebook. In connection with the transition, existing
Rule 610 would be re-designated as 610T to indicate that it is a
temporary rule, and would become ineffective and removed after the
transition period. Furthermore, following the transition period,
existing Rule 503, which addresses instructions that call for the
payment of a premium by or to the clearing member for whose account the
deposit is made, would be removed from the Rules because these
instructions would no longer be permitted under the revised escrow
deposit program since this aspect of the program has not been used for
a number of years.\24\ In addition, Government securities would be
given full market value under the revised escrow deposit program and
therefore existing Rule 610(h) would be removed from the Rules after
the transition period.
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\24\ For the purposes of clarity, existing Rules 613(c), 613(g),
613(h), 613(j) address the same topic and would be removed from
OCC's Rulebook following the transition period without being
migrated into a proposed Rule.
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2. Statutory Basis
OCC believes that the proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act \25\ because it would ensure the
safeguarding of securities and funds which are in the custody and
control of OCC. As described above, the proposed rule
[[Page 60106]]
change would increase OCC's visibility into and control over cash and
securities deposits made in OCC's escrow deposit program. Deposits in
OCC's escrow deposit program collateralize open securities positions
guaranteed by OCC and protect OCC and market participants from the risk
associated with a default of a clearing member. The proposed rule
change would better ensure that OCC could verify that deposits of both
cash and securities within OCC's escrow deposit program sufficiently
collateralize germane short options position(s). In addition, OCC
would: (1) Be able to use its existing functionality with DTC to more
quickly take possession of such deposits without involving custodian
banks in the event of a clearing member default, and (2) obtain a
contractual commitment from [sic] Tri-Party Custodian Bank that they
would disperse cash within the escrow deposit program to OCC at OCC's
direction. OCC believes that these features of the revised escrow
deposit program would reduce potential losses that may occur as a
result of a clearing member default. As a result of the foregoing, the
proposed rule change would better ensure the safeguarding of securities
and funds that are in the custody and control of OCC.
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\25\ 15 U.S.C. 78q-1(b)(3)(F).
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OCC also believes that the proposed rule change is consistent with
Rule 17Ad-22(d)(3), which requires OCC to hold assets in a manner that
minimizes risk of loss or delay or in access to them.\26\ Specifically,
and with respect to non-cash collateral, all non-cash collateral in the
escrow deposit program would be held at DTC thereby allowing OCC to
validate and value collateral in real time and quickly obtain
possession of deposited securities by issuing a transfer instruction
through DTC's systems in an event of default without involving
custodian banks. With respect to cash collateral, all such collateral
would be held in an escrow deposit program specific account at a Tri-
Party Custodian Bank, OCC would have view access into such account, and
OCC would obtain a contractual commitment from the Tri-Party Custodian
Banks that they would disperse cash within the escrow deposit program
to OCC at OCC's direction. By more widely utilizing its existing
infrastructure for non-cash collateral in the escrow deposit program,
as well as by obtaining specific agreements regarding its right to take
possession of cash collateral, OCC will be able to more quickly take
possession of collateral in the escrow deposit program in the event of
a clearing member default that would, in turn, reduce potential losses
to OCC, other clearing members and market participants. Moreover, OCC
believes that the proposed rule change is consistent with the
requirement in Rule 17Ad-22(d)(11) \27\ that clearing agencies
establish, implement, maintain and enforce policies and procedures
reasonably designed to make key aspects of their default procedures
publicly available, because the substantive terms of the escrow deposit
program, and specifically the rules concerning default management,
would be incorporated into OCC's Rules, which are publicly available on
OCC's Web site, rather than in private agreements.
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\26\ 17 CFR 240.17Ad-22(d)(3)
\27\ 17 CFR 240.17Ad-22(d)(11).
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(B) Clearing Agency's Statement on Burden on Competition
The proposed rule change would reflect changes to the Rules
governing OCC's escrow deposit program and, more generally, amend the
Rules to more clearly identify the three forms of deposits in lieu of
margin: (1) Escrow deposits, (2) third-party specific deposits and (3)
member specific deposits. The proposed rule change would impose a
burden on competition that is necessary and appropriate in furtherance
of the Act.\28\ In particular, a burden would be imposed on Tri-Party
Custodian Bank[sic] in light of the requirement that cash included
within an escrow deposit be held in an account of the relevant customer
at the Tri-Party Custodian Bank pursuant to a Tri-Party Agreement. This
requirement may limit certain custodian banks' participation in the
escrow deposit program because the escrow deposit program would now
require a Tri-Party Custodian Bank to have the technological capability
to allow both OCC and customers of clearing members to have view access
into bank accounts within the escrow deposit program. However, OCC
believes that the resulting burden on competition is both necessary and
appropriate in furtherance of the Act because OCC's view access into
bank accounts within the escrow deposit program provides OCC additional
transparency over cash collateral. As described in Item 3 above, by
obtaining view access into bank accounts within the escrow deposit
program OCC would not have to rely on Tri-Party Custodian Bank[sic] to
value, or warrant the existence of, cash collateral within the escrow
deposit program. OCC believes that obtaining such additional
transparency over cash collateral is necessary and appropriate in
furtherance of the Act.
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\28\ 15 U.S.C. 78q-1(b)(3)(I).
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Communications With Custodian Banks
In light of the substantial changes proposed to the escrow deposit
program, OCC has sought to keep custodian banks informed regarding the
proposed rule changes. These communications began in January and
February 2012, when OCC notified each custodian bank of the proposal to
restructure the escrow deposit program. As part of this notification,
OCC informed each custodian bank of (1) OCC's intention to require that
security pledges be made through DTC, (2) the percentage of cash used
in the escrow deposit program and (3) the potential elimination of cash
deposits.\29\
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\29\ While it was ultimately determined in April 2014 that cash
collateral would remain in the escrow deposit program, prior
discussions with participating escrow banks reflected the evolution
of OCC's decision on this point. For example, the PowerPoint
presentation given to banks during June-August 2012 indicated that
cash collateral would not be permitted in the escrow deposit
program, while the PowerPoint presentation given during April-May
2013, as well as the draft rules distributed to participating escrow
banks for comment in July-August 2013, indicated that it would be
included. A number of current participants in the escrow deposit
program use cash, some to a substantial degree, and OCC determined
that the use of cash collateral should remain an essential aspect of
the escrow deposit program.
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In June through August 2012, OCC provided a PowerPoint presentation
to each custodian bank summarizing proposed rule changes to the escrow
deposit program. This presentation included an explanation of the
reasons for the proposed rule changes, including the desire to enhance
and strengthen the escrow deposit program and increase collateral
transparency. The presentation also included a discussion of changes to
the validation and valuation of collateral, and the calculation of
contract quantities based on the collateral that has been pledged.
In April and May 2013, OCC provided each custodian bank with an
operational overview of the restructured escrow deposit program in the
form of a PowerPoint presentation. This presentation covered: Eligible
option types, types of eligible supporting collateral, required
collateral value calculations for option contact coverage, valuation of
supporting collateral, asset management locations/processing of
supporting collateral, and validation and valuation of supporting
collateral
[[Page 60107]]
and calculation of option contract coverage.
In July and August 2013, OCC distributed a draft Participating
Escrow Bank Agreement (as described below) and the related proposed OCC
Rules to custodian banks along with a request for feedback. Following
the receipt of questions and comments, OCC distributed ``FAQ''
responses to custodian banks.
During September 2013, OCC provided a walkthrough of the functions
of its ENCORE \30\ system applicable to the enhanced escrow deposit
program for custodian banks in order to provide an orientation of such
functionality. In connection with the restructured escrow deposit
program, clearing members will continue to use ENCORE to view member
specific deposits, and custodian banks will use ENCORE to view third-
party specific deposits and make escrow deposits consisting of cash.
Moreover, OCC sent requests to custodian banks for validation of the
DTC pledgor accounts to be used for the restructured escrow deposit
program. In October 2013, OCC distributed escrow deposit program
eligible securities file details to custodian banks.
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\30\ ENCORE is OCC's real-time clearing and settlement system
that allows clearing members to, among other things, post and view
margin collateral as well as deposits in lieu of margin.
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In February and March 2014, OCC arranged a series of calls with
custodian banks to solicit feedback on a term sheet detailing cash
account structures. Following the receipt of questions and comments,
OCC distributed ``FAQ'' responses to custodian banks.
Comments Received From Custodian Banks
As described above, OCC discussed the proposed rule changes to its
escrow deposit program with custodian banks several times since 2012.
While these discussions were generally informational in nature,
custodian banks provided OCC with comments and questions in two
instances: The July/August 2013 discussions and the February/March 2014
discussion. The primary focus of the comments in both sets of
discussions was the manner in which custodian banks would be required
to hold cash under the new escrow rules: In an omnibus structure or in
a tri-party structure. The omnibus structure would provide OCC with an
account in OCC's name and thereby perfect OCC's right under the UCC to
take possession of cash escrow deposits in the event of a clearing
member default. This would also eliminate the need for a separate tri-
party agreement. However, the omnibus structure was less desirable to
custodian banks since all of a custodian bank's OCC escrow deposit
program clients' assets would be comingled in a single account. From an
operational perspective, a single omnibus account at a custodian bank
is easier for OCC to manage since OCC would only need to have ``view
access'' into one account at a custodian bank. On the other hand,
custodian banks expressed privacy concerns with respect to several
clients having view access into a single account.
Eventually, OCC decided to use a tri-party account structure for
cash escrow deposits, with certain controls to alleviate the concerns
on both sides. Specifically, custodian banks agreed to facilitate the
execution of a form tri-party agreement with each of its clients that
participates in OCC's escrow deposit program, which perfects OCC's
security interest in cash escrow deposits. Additionally, custodian
banks agreed to establish an escrow specific cash account for each
client so that OCC does not need to differentiate a client's OCC escrow
cash from the client's non-escrow cash. OCC believes that the proposed
structure for cash accounts strikes the appropriate balance between
OCC's desire for legal certainty as to its right to take possession of
cash escrow deposits in the event of a clearing member default, and the
operational desire to only have view access to a client's OCC escrow
deposit program cash account balance at a custodian bank.
Additional comments OCC received from the July/August 2013
discussions with custodian banks centered on administrative items such
as the escrow deposit program documentation structure and the manner in
which custodian banks would post escrow deposits in OCC's clearing
system, ENCORE. As discussed above, OCC moved the substantial majority
of its Amended and Restated On-Line Escrow Deposit Agreement into
proposed Rule 610C in order to have the majority of escrow rules in one
place. Custodian banks did not express any concerns regarding the
operational steps necessary to post an escrow deposit in ENCORE once
OCC provided custodian banks with a ``walkthrough'' of the operational
process.
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 the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-OCC-2016-009 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-2016-009. 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 such filings 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_16_009.pdf.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
[[Page 60108]]
should submit only information that you wish to make available
publicly.
All submissions should refer to File Number SR-OCC-2016-009 and
should be submitted on or before September 21, 2016.
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\31\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-20882 Filed 8-30-16; 8:45 am]
BILLING CODE 8011-01-P
