Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection to Advance Notice Filing Concerning The Options Clearing Corporation's Escrow Deposit Program, 72138-72141 [2016-25233]
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Federal Register / Vol. 81, No. 202 / Wednesday, October 19, 2016 / Notices
investors, or otherwise in furtherance of
the purposes of the Act.
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:
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.19
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–25237 Filed 10–18–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79096; File No. SR–OCC–
2016–802]
• 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–
BatsEDGX–2016–55 on the subject line.
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of No Objection to Advance Notice
Filing Concerning The Options
Clearing Corporation’s Escrow Deposit
Program
Paper Comments
sradovich on DSK3GMQ082PROD with NOTICES
Electronic Comments:
October 13, 2016.
• 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–BatsEDGX–2016–55. 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–
BatsEDGX–2016–55, and should be
submitted on or before November 9,
2016.
The Options Clearing Corporation
(‘‘OCC’’) filed on August 15, 2016 with
the Securities and Exchange
Commission (‘‘Commission’’) advance
notice SR–OCC–2016–802 (‘‘Advance
Notice’’) pursuant to Section 806(e)(1) of
the Payment, Clearing, and Settlement
Supervision Act of 2010 (‘‘Payment,
Clearing and Settlement Supervision
Act’’) 1 and Rule 19b–4(n)(1)(i) 2 under
the Securities Exchange Act of 1934
(‘‘Exchange Act’’) to implement changes
to its escrow deposit program. The
Advance Notice was published for
comment in the Federal Register on
September 20, 2016.3 The Commission
did not receive any comments on the
Advance Notice. This publication serves
as notice of no objection to the Advance
Notice.
19 17
CFR 200.30–3(a)(12).
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I. Description of the Advance Notice
OCC is the sole clearing agency for the
U.S. listed options markets and a
systemically important financial market
utility. OCC seeks to manage risks that
1 12 U.S.C. 5465(e)(1). The Financial Stability
Oversight Council designated OCC a systemically
important financial market utility on July 18, 2012.
See Financial Stability Oversight Council 2012
Annual Report, Appendix A, https://
www.treasury.gov/initiatives/fsoc/Documents/
2012%20Annual%20Report.pdf. Therefore, OCC is
required to comply with the Payment, Clearing and
Settlement Supervision Act and file advance
notices with the Commission. See 12 U.S.C.
5465(e).
2 17 CFR 240.19b–4(n)(1)(i).
3 See Securities Exchange Act Release No. 78834
(September 14, 2016), 81 FR 64536 (September 20,
2016) (File No. SR–OCC–2016–802). OCC also filed
a proposed rule change with the Commission
pursuant to Section 19(b)(1) of the Exchange Act
and Rule 19b–4 thereunder, seeking approval of
changes to its Rules necessary to implement the
Advance Notice. 15 U.S.C. 78s(b)(1) and 17 CFR
240.19b–4, respectively. This proposed rule change
was published in the Federal Register on August
31, 2016. Securities Exchange Act Release No.
78675 (August 25, 2016), 81 FR 60108 (August 31,
2016) (SR–OCC–2016–009).
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could cause a financial loss or
settlement disruption and, therefore,
threaten the stability of the U.S.
financial system. One way OCC
manages such risks is by collecting
collateral to protect against potential
losses stemming from the default of a
clearing member or its customers. OCC
obtains this collateral by collecting
margin from its clearing members, or
from deposits in lieu of margin of
clearing members’ customers through
OCC’s escrow deposit program. OCC
states that the users of its 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). OCC
states that 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. OCC
believes that 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.
As described by OCC in the Advance
Notice, the purpose of the proposed
change is to improve the resiliency of
OCC’s escrow deposit program (‘‘EDP’’).
First, OCC states that the changes would
increase OCC’s visibility into and
control over collateral deposits made
under the escrow deposit program. As
described in the Advance Notice,
currently, securities deposits in the EDP
(‘‘specific deposits’’) are held at either
the Depository Trust Company (‘‘DTC’’)
or custodian banks, and cash deposits in
the EDP (‘‘escrow deposits’’) are held at
custodian banks. While OCC currently
can verify the value of the securities
deposited at DTC through DTC’s
systems, it lacks similar visibility into
cash and securities held in custodian
bank accounts, relying instead on the
custodian banks to verify the value of
such collateral. The proposed changes
would require securities in the EDP to
be held at DTC, providing OCC with
increased visibility into the collateral, as
OCC will be able to view, validate, and
value the collateral in real time and
perform the controls currently
performed by custodian banks. As stated
in the Advance Notice, a bank
participating in the escrow deposit
program (‘‘Tri-Party Custodian Bank’’)
would also provide OCC with online
view access to each customer’s cash
account designated for the escrow
deposit program, allowing visibility into
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transactional activity and account
balances without having to rely upon a
third party to value or warrant the
existence of the collateral.
Second, OCC states that the proposed
changes 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. As described in the
Advance Notice, proposed Rules
610A(b), 610B(f), 610C(q), and 610C(r)
would 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. 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. Further, 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.
Third, OCC states the proposed
changes would clarify clearing
members’ rights to collateral in the EDP
in the event of a customer default to the
clearing member. According to the
Advance Notice, 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, with the clearing member’s
right subordinate to OCC’s interest.
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, which 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. OCC states that
placing the ‘‘hold’’ instruction gives a
clearing member the right to request that
OCC direct delivery of the deposit to the
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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. OCC believes
that providing clearing members with
transparent instructions regarding how
to place a hold instruction on and direct
delivery of a deposit in the escrow
deposit program would be a significant
enhancement to the current escrow
deposit program.
Fourth, OCC states the changes would
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 change, all securities
collateral in OCC’s escrow deposit
program would be held at DTC, and
custodian banks would only be allowed
to hold cash collateral.
Rule Consolidation and Terminology
Changes
OCC’s current rules concerning its
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 proposes 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. OCC states 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.
OCC proposes 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, which are equity securities
deposited by clearing members at DTC
at the direction of their customers,
would now be called ‘‘member specific
deposits’’; third-party escrow deposits,
which are equity securities deposited by
custodian banks at DTC at the direction
of their customers, would now be called
‘‘third-party specific deposits’’; and
escrow program 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 customers, would now be called
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72139
‘‘escrow deposits’’. 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, OCC states
that 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.4 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.
Agreements Concerning the Escrow
Deposit Program
In addition to the above-described
Rule changes, many provisions of the
EDA would be moved in to the Rules.
OCC proposes to eliminate the EDA and
replace it with a streamlined agreement
entitled the ‘‘Participating Escrow Bank
Agreement.’’ OCC states that the
Participating Escrow Bank Agreement
would provide that custodian banks are
subject to all terms of the Rules
governing the revised escrow deposit
program, as they may be amended from
time to time.5 OCC states that the
4 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.
5 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
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Participating Escrow Bank Agreement
would contain eligibility requirements
for custodian banks, including
representations regarding the custodian
bank’s Tier 1 Capital, and provide OCC
with express representations concerning
the bank’s authority to enter into the
Participating Escrow Bank Agreement.
OCC is also proposing, under
Proposed Rule 610C(b), to 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. While cash
collateral pledged in the escrow deposit
program will continue to be facilitated
through existing interfaces, OCC states
that pledges would be required to be
made in the customer’s account at the
Tri-Party Custodian Bank. OCC states
that the Tri-Party Agreement would
govern the customer’s use of cash in the
program, confirm 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 cause customers of clearing
members to be subject to all terms of the
Rules governing the revised escrow
deposit program. Each custodian bank
entering into the Tri-Party Agreement
would also agree to follow the
directions of OCC with respect to cash
escrow deposits without further consent
by the customer.
II. Discussion and Commission
Findings
Although the Payment, Clearing and
Settlement Supervision Act does not
specify a standard of review for an
advance notice, the Commission
believes that the stated purpose of the
Payment, Clearing and Settlement
Supervision Act is instructive.6 The
stated purpose of the Payment, Clearing
and Settlement Supervision Act is to
mitigate systemic risk in the financial
system and promote financial stability
by, among other things, promoting
uniform risk management standards for
systemically important financial market
utilities and strengthening the liquidity
of systemically important financial
market utilities.7
Section 805(a)(2) of the Payment,
Clearing and Settlement Supervision
Act 8 authorizes the Commission to
prescribe risk management standards for
the payment, clearing, and settlement
activities of designated clearing entities
and financial institutions engaged in
designated activities for which it is the
supervisory agency or the appropriate
financial regulator. Section 805(b) of the
Payment, Clearing and Settlement
Supervision Act 9 states that the
objectives and principles for the risk
management standards prescribed under
Section 805(a) shall be to:
• promote robust risk management;
• promote safety and soundness;
• reduce systemic risks; and
• support the stability of the broader
financial system.
The Commission has adopted risk
management standards under Section
805(a)(2) of the Payment, Clearing and
Settlement Supervision Act (‘‘Clearing
Agency Standards’’) and the Exchange
Act.10 The Clearing Agency Standards
became effective on January 2, 2013,
and require registered clearing agencies
to establish, implement, maintain, and
enforce written policies and procedures
that are reasonably designed to meet
certain minimum requirements for their
operations and risk management
practices on an ongoing basis. As such,
it is appropriate for the Commission to
review advance notices against these
Clearing Agency Standards, and the
objectives and principles of these risk
management standards as described in
Section 805(b) of the Payment, Clearing
and Settlement Supervision Act.11
The Commission believes the
proposed change is consistent with the
objectives and principles described in
Section 805(b) of the Payment, Clearing
and Settlement Supervision Act,12 and
the Clearing Agency Standards, in
particular, Rule 17Ad–22(d)(1),13 Rule
17Ad–22(d)(3),14 and Rule 17Ad–
22(d)(11) 15 under the Exchange Act, as
described in detail below.
A. Consistency With Section 805(b)(1) of
the Act
The objectives and principles of
Section 805(b) of the Payment, Clearing
and Settlement Supervision Act are to
promote robust risk management,
promote safety and soundness, reduce
systemic risks, and support the stability
sradovich on DSK3GMQ082PROD with NOTICES
8 12
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.
6 See 12 U.S.C. 5461(b).
7 Id.
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17:39 Oct 18, 2016
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U.S.C. 5464(a)(2).
U.S.C. 5464(b).
10 17 CFR 240.17Ad–22. See Securities Exchange
Act Release No. 68080 (October 22, 2012), 77 FR
66220 (November 2, 2012) (S7–08–11).
11 12 U.S.C. 5464(b).
12 Id.
13 17 CFR 240.17Ad–22(d)(1).
14 17 CFR 240.17Ad–22(d)(3).
15 17 CFR 240.17Ad–22(d)(11).
9 12
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of the broader financial system.16 The
proposed change is consistent with the
objectives and principles described in
Section 805(b)(1) of the Act, including
consistency with promoting robust risk
management.17 OCC collects margin and
deposits in lieu of margin to protect
OCC and market participants from risks
resulting from the default of a clearing
member. The proposed change will
enhance OCC’s ability to validate and
value EDP deposits in real time and
enhance its ability to expeditiously take
possession of such deposits in the event
of a default. These enhancements will
enable OCC to better ensure that it
monitors and maintains adequate
financial resources in the event of a
clearing member default and thereby
promote robust risk management. As
such, the Commission believes that the
proposed change is consistent with the
promotion of robust risk management.
B. Consistency With Exchange Act Rule
17Ad–22(d)
Rule 17Ad–22(d)(1) under the
Exchange Act requires OCC to establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to provide a wellfounded, transparent, and enforceable
legal framework for each aspect of its
activities in all relevant jurisdictions.18
Through the proposed change, OCC will
provide clarity to clearing members,
their customers, and potential users of
OCC’s escrow deposit program
regarding the operations of the escrow
deposit program and the manner in
which OCC would risk manage a
clearing member or customer default
using the escrow deposit program. For
example, the proposed change would
better codify OCC’s and clearing
members’ rights to EDP collateral in the
event of a clearing member or customer
default and provide greater transparency
regarding the operational steps involved
in taking possession of such collateral.
Moreover, consolidating the rules
governing the EDP and terms previously
located in the EDA into a single location
will enhance the transparency of the
applicable EDP rules. As such, the
Commission believes the proposed
change is consistent with Exchange Act
Rule 17Ad–22(d)(1).19
In addition, the Commission believes
that the proposed change is consistent
with Exchange Act Rule 17Ad–
22(d)(3).20 Rule 17Ad–22(d)(3) requires
OCC to, among other things, establish,
16 12
U.S.C. 5464(b).
U.S.C. 5464(b)(1).
18 17 CFR 240.17Ad–22(d)(1).
19 Id.
20 17 CFR 240.17Ad–22(d)(3).
17 12
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implement, maintain and enforce
written policies and procedures
reasonably designed to hold assets in a
manner that minimizes risk of loss or
delay or in its access to them.21 Under
the proposed change, all non-cash
collateral in the EDP would be held at
DTC, which will allow OCC to validate
and value collateral in real time and
quickly obtain possession of deposited
securities in an event of default without
involving custodian banks by issuing a
transfer instruction through DTC’s
systems. With respect to cash collateral,
the proposed change would codify
OCC’s right to take possession of cash
within an escrow account upon a
clearing member or custodian bank
default and provide OCC with online
view access to each customer’s cash
account at the custodian bank. Together,
these changes would allow OCC
monitor the adequacy of collateral in the
EDP and be able to more quickly take
possession of collateral in the EDP in
the event of a clearing member default,
which would, thereby, reduce potential
losses to OCC, other clearing members
and market participants.
Finally, the Commission believes that
the proposed change is consistent with
Exchange Act Rule 17Ad–22(d)(11),
which requires OCC to, among other
things, establish, implement, maintain
and enforce written policies and
procedures reasonably designed to make
key aspects of their default procedures
publicly available.22 The Commission
believes that the proposed change is
consistent with Rule 17Ad–22(d)(11)
because it would incorporate the
substantive terms of the EDP, and
specifically the rules concerning default
management, into OCC’s Rules, which
are publicly available on OCC’s Web
site, rather than in private agreements.
III. Conclusion
sradovich on DSK3GMQ082PROD with NOTICES
It is therefore noticed, pursuant to
Section 806(e)(1)(I) of the Payment,
Clearing and Settlement Supervision
Act,23 that the Commission does not
object to Advance Notice (SR–OCC–
2016–802) and that OCC is authorized
to implement the proposed change.
By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–25233 Filed 10–18–16; 8:45 am]
BILLING CODE 8011–01–P
21 Id.
22 17
23 12
CFR 240.17Ad–22(d)(11).
U.S.C. 5465(e)(1)(I).
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79092; File No. SR–
BATSBZX–2016–48]
Self-Regulatory Organizations; Bats
BZX Exchange, Inc.; Notice of
Designation of a Longer Period for
Commission Action on Proposed Rule
Change, as Modified by Amendment
No. 1 Thereto, to List and Trade Shares
of the iShares iBonds Dec 2023 Term
Muni Bond ETF and iShares iBonds
Dec 2024 Term Muni Bond ETF of the
iShares U.S. ETF Trust
October 13, 2016.
On August 9, 2016, Bats BZX
Exchange, Inc. (‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to list and trade Shares of the
iShares iBonds Dec 2023 Term Muni
Bond ETF and iShares iBonds Dec 2024
Term Muni Bond ETF (collectively,
‘‘Funds’’) pursuant to Exchange Rule
14.11(c)(4). The proposed rule change
was published for comment in the
Federal Register on August 30, 2016.3
On October 6, 2016, the Exchange filed
Amendment No. 1 to the proposed rule
change, which amended and replaced in
its entirety the proposal as originally
submitted.4 The Commission has not
received any comments on the proposal.
Section 19(b)(2) of the Act 5 provides
that within 45 days of the publication of
notice of the filing of a proposed rule
change, or within such longer period up
to 90 days as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding, or as to which the
self-regulatory organization consents,
the Commission shall either approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether the
proposed rule change should be
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 78666
(Aug. 24, 2016), 81 FR 59700.
4 In Amendment No. 1, the Exchange: (1) Clarified
the amounts of certain municipal securities that the
Funds would hold; (2) represented that at least 90%
of the Funds’ net assets that are invested in listed
derivatives would be invested in instruments that
trade in markets that are members or affiliates of
members of the Intermarket Surveillance Group or
are parties to a comprehensive surveillance sharing
agreement with the Exchange; (3) provided greater
detail regarding the types of short-term instruments
in which the Funds may invest; and (4)
supplemented the information provided regarding
the availability of price information for the Funds’
permitted investments.
5 15 U.S.C. 78s(b)(2).
2 17
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72141
disapproved. The 45th day after
publication of the notice for this
proposed rule change is October 14,
2016. The Commission is extending this
45-day time period.
The Commission finds it appropriate
to designate a longer period within
which to take action on the proposed
rule change so that it has sufficient time
to consider this proposed rule change,
as modified by Amendment No. 1.
Accordingly, the Commission, pursuant
to Section 19(b)(2) of the Act,6
designates November 28, 2016, as the
date by which the Commission shall
either approve or disapprove, or
institute proceedings to determine
whether to disapprove, the proposed
rule change (File No. SR–BATSBZX–
2016–48) as modified by Amendment
No. 1.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.7
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–25235 Filed 10–18–16; 8:45 am]
BILLING CODE 8011–01–P
DEPARTMENT OF STATE
[Public Notice: 9764]
Overseas Security Advisory Council
(OSAC) Renewal
The Department of State has renewed
the Charter of the Overseas Security
Advisory Council. This federal advisory
committee will continue to interact on
overseas security matters of mutual
interest between the U.S. Government
and the American private sector. The
Council’s initiatives and security
publications provide a unique
contribution to protecting American
private sector interests abroad. The
Under Secretary for Management
determined that renewal of the Charter
is necessary and in the public interest.
The Council consists of
representatives from three (3) U.S.
Government agencies and thirty-one
(31) American private sector companies
and organizations. The Council follows
the procedures prescribed by the
Federal Advisory Committee Act
(FACA) (Pub. L. 92–463). Meetings will
be open to the public unless a
determination is made in accordance
with Section 10(d) of the FACA and 5
U.S.C. 552b(c)(4), that a meeting or a
portion of the meeting should be closed
to the public. Notice of each meeting
6 Id.
7 17
E:\FR\FM\19OCN1.SGM
CFR 200.30–3(a)(31).
19OCN1
]]>Agencies
[Federal Register Volume 81, Number 202 (Wednesday, October 19, 2016)]
[Notices]
[Pages 72138-72141]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-25233]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-79096; File No. SR-OCC-2016-802]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of No Objection to Advance Notice Filing Concerning The Options
Clearing Corporation's Escrow Deposit Program
October 13, 2016.
The Options Clearing Corporation (``OCC'') filed on August 15, 2016
with the Securities and Exchange Commission (``Commission'') advance
notice SR-OCC-2016-802 (``Advance Notice'') pursuant to Section
806(e)(1) of the Payment, Clearing, and Settlement Supervision Act of
2010 (``Payment, Clearing and Settlement Supervision Act'') \1\ and
Rule 19b-4(n)(1)(i) \2\ under the Securities Exchange Act of 1934
(``Exchange Act'') to implement changes to its escrow deposit program.
The Advance Notice was published for comment in the Federal Register on
September 20, 2016.\3\ The Commission did not receive any comments on
the Advance Notice. This publication serves as notice of no objection
to the Advance Notice.
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\1\ 12 U.S.C. 5465(e)(1). The Financial Stability Oversight
Council designated OCC a systemically important financial market
utility on July 18, 2012. See Financial Stability Oversight Council
2012 Annual Report, Appendix A, https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, OCC is
required to comply with the Payment, Clearing and Settlement
Supervision Act and file advance notices with the Commission. See 12
U.S.C. 5465(e).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ See Securities Exchange Act Release No. 78834 (September 14,
2016), 81 FR 64536 (September 20, 2016) (File No. SR-OCC-2016-802).
OCC also filed a proposed rule change with the Commission pursuant
to Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder,
seeking approval of changes to its Rules necessary to implement the
Advance Notice. 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4,
respectively. This proposed rule change was published in the Federal
Register on August 31, 2016. Securities Exchange Act Release No.
78675 (August 25, 2016), 81 FR 60108 (August 31, 2016) (SR-OCC-2016-
009).
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I. Description of the Advance Notice
OCC is the sole clearing agency for the U.S. listed options markets
and a systemically important financial market utility. OCC seeks to
manage risks that could cause a financial loss or settlement disruption
and, therefore, threaten the stability of the U.S. financial system.
One way OCC manages such risks is by collecting collateral to protect
against potential losses stemming from the default of a clearing member
or its customers. OCC obtains this collateral by collecting margin from
its clearing members, or from deposits in lieu of margin of clearing
members' customers through OCC's escrow deposit program. OCC states
that the users of its 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).
OCC states that 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. OCC believes that 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.
As described by OCC in the Advance Notice, the purpose of the
proposed change is to improve the resiliency of OCC's escrow deposit
program (``EDP''). First, OCC states that the changes would increase
OCC's visibility into and control over collateral deposits made under
the escrow deposit program. As described in the Advance Notice,
currently, securities deposits in the EDP (``specific deposits'') are
held at either the Depository Trust Company (``DTC'') or custodian
banks, and cash deposits in the EDP (``escrow deposits'') are held at
custodian banks. While OCC currently can verify the value of the
securities deposited at DTC through DTC's systems, it lacks similar
visibility into cash and securities held in custodian bank accounts,
relying instead on the custodian banks to verify the value of such
collateral. The proposed changes would require securities in the EDP to
be held at DTC, providing OCC with increased visibility into the
collateral, as OCC will be able to view, validate, and value the
collateral in real time and perform the controls currently performed by
custodian banks. As stated in the Advance Notice, a bank participating
in the escrow deposit program (``Tri-Party Custodian Bank'') would also
provide OCC with online view access to each customer's cash account
designated for the escrow deposit program, allowing visibility into
[[Page 72139]]
transactional activity and account balances without having to rely upon
a third party to value or warrant the existence of the collateral.
Second, OCC states that the proposed changes 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. As described in the Advance Notice,
proposed Rules 610A(b), 610B(f), 610C(q), and 610C(r) would 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. 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. Further, 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.
Third, OCC states the proposed changes would clarify clearing
members' rights to collateral in the EDP in the event of a customer
default to the clearing member. According to the Advance Notice,
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, with the clearing member's right subordinate to OCC's
interest. 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, which 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. OCC states that placing the ``hold'' instruction gives
a clearing member 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. OCC believes that providing clearing members with
transparent instructions regarding how to place a hold instruction on
and direct delivery of a deposit in the escrow deposit program would be
a significant enhancement to the current escrow deposit program.
Fourth, OCC states the changes would 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 change, all securities collateral in OCC's escrow deposit
program would be held at DTC, and custodian banks would only be allowed
to hold cash collateral.
Rule Consolidation and Terminology Changes
OCC's current rules concerning its 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 proposes 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. OCC
states 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.
OCC proposes 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,
which are equity securities deposited by clearing members at DTC at the
direction of their customers, would now be called ``member specific
deposits''; third-party escrow deposits, which are equity securities
deposited by custodian banks at DTC at the direction of their
customers, would now be called ``third-party specific deposits''; and
escrow program 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
customers, would now be called ``escrow deposits''. 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, OCC
states that 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.\4\
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.
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\4\ 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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Agreements Concerning the Escrow Deposit Program
In addition to the above-described Rule changes, many provisions of
the EDA would be moved in to the Rules. OCC proposes to eliminate the
EDA and replace it with a streamlined agreement entitled the
``Participating Escrow Bank Agreement.'' OCC states that the
Participating Escrow Bank Agreement would provide that custodian banks
are subject to all terms of the Rules governing the revised escrow
deposit program, as they may be amended from time to time.\5\ OCC
states that the
[[Page 72140]]
Participating Escrow Bank Agreement would contain eligibility
requirements for custodian banks, including representations regarding
the custodian bank's Tier 1 Capital, and provide OCC with express
representations concerning the bank's authority to enter into the
Participating Escrow Bank Agreement.
---------------------------------------------------------------------------
\5\ 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.
---------------------------------------------------------------------------
OCC is also proposing, under Proposed Rule 610C(b), to 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. While cash collateral pledged in the escrow deposit program will
continue to be facilitated through existing interfaces, OCC states that
pledges would be required to be made in the customer's account at the
Tri-Party Custodian Bank. OCC states that the Tri-Party Agreement would
govern the customer's use of cash in the program, confirm 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 cause
customers of clearing members to be subject to all terms of the Rules
governing the revised escrow deposit program. Each custodian bank
entering into the Tri-Party Agreement would also agree to follow the
directions of OCC with respect to cash escrow deposits without further
consent by the customer.
II. Discussion and Commission Findings
Although the Payment, Clearing and Settlement Supervision Act does
not specify a standard of review for an advance notice, the Commission
believes that the stated purpose of the Payment, Clearing and
Settlement Supervision Act is instructive.\6\ The stated purpose of the
Payment, Clearing and Settlement Supervision Act is to mitigate
systemic risk in the financial system and promote financial stability
by, among other things, promoting uniform risk management standards for
systemically important financial market utilities and strengthening the
liquidity of systemically important financial market utilities.\7\
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\6\ See 12 U.S.C. 5461(b).
\7\ Id.
---------------------------------------------------------------------------
Section 805(a)(2) of the Payment, Clearing and Settlement
Supervision Act \8\ authorizes the Commission to prescribe risk
management standards for the payment, clearing, and settlement
activities of designated clearing entities and financial institutions
engaged in designated activities for which it is the supervisory agency
or the appropriate financial regulator. Section 805(b) of the Payment,
Clearing and Settlement Supervision Act \9\ states that the objectives
and principles for the risk management standards prescribed under
Section 805(a) shall be to:
---------------------------------------------------------------------------
\8\ 12 U.S.C. 5464(a)(2).
\9\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
promote robust risk management;
promote safety and soundness;
reduce systemic risks; and
support the stability of the broader financial system.
The Commission has adopted risk management standards under Section
805(a)(2) of the Payment, Clearing and Settlement Supervision Act
(``Clearing Agency Standards'') and the Exchange Act.\10\ The Clearing
Agency Standards became effective on January 2, 2013, and require
registered clearing agencies to establish, implement, maintain, and
enforce written policies and procedures that are reasonably designed to
meet certain minimum requirements for their operations and risk
management practices on an ongoing basis. As such, it is appropriate
for the Commission to review advance notices against these Clearing
Agency Standards, and the objectives and principles of these risk
management standards as described in Section 805(b) of the Payment,
Clearing and Settlement Supervision Act.\11\
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\10\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No.
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11).
\11\ 12 U.S.C. 5464(b).
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The Commission believes the proposed change is consistent with the
objectives and principles described in Section 805(b) of the Payment,
Clearing and Settlement Supervision Act,\12\ and the Clearing Agency
Standards, in particular, Rule 17Ad-22(d)(1),\13\ Rule 17Ad-
22(d)(3),\14\ and Rule 17Ad-22(d)(11) \15\ under the Exchange Act, as
described in detail below.
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\12\ Id.
\13\ 17 CFR 240.17Ad-22(d)(1).
\14\ 17 CFR 240.17Ad-22(d)(3).
\15\ 17 CFR 240.17Ad-22(d)(11).
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A. Consistency With Section 805(b)(1) of the Act
The objectives and principles of Section 805(b) of the Payment,
Clearing and Settlement Supervision Act are to promote robust risk
management, promote safety and soundness, reduce systemic risks, and
support the stability of the broader financial system.\16\ The proposed
change is consistent with the objectives and principles described in
Section 805(b)(1) of the Act, including consistency with promoting
robust risk management.\17\ OCC collects margin and deposits in lieu of
margin to protect OCC and market participants from risks resulting from
the default of a clearing member. The proposed change will enhance
OCC's ability to validate and value EDP deposits in real time and
enhance its ability to expeditiously take possession of such deposits
in the event of a default. These enhancements will enable OCC to better
ensure that it monitors and maintains adequate financial resources in
the event of a clearing member default and thereby promote robust risk
management. As such, the Commission believes that the proposed change
is consistent with the promotion of robust risk management.
---------------------------------------------------------------------------
\16\ 12 U.S.C. 5464(b).
\17\ 12 U.S.C. 5464(b)(1).
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B. Consistency With Exchange Act Rule 17Ad-22(d)
Rule 17Ad-22(d)(1) under the Exchange Act requires OCC to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide a well-founded, transparent,
and enforceable legal framework for each aspect of its activities in
all relevant jurisdictions.\18\ Through the proposed change, OCC will
provide clarity to clearing members, their customers, and potential
users of OCC's escrow deposit program regarding the operations of the
escrow deposit program and the manner in which OCC would risk manage a
clearing member or customer default using the escrow deposit program.
For example, the proposed change would better codify OCC's and clearing
members' rights to EDP collateral in the event of a clearing member or
customer default and provide greater transparency regarding the
operational steps involved in taking possession of such collateral.
Moreover, consolidating the rules governing the EDP and terms
previously located in the EDA into a single location will enhance the
transparency of the applicable EDP rules. As such, the Commission
believes the proposed change is consistent with Exchange Act Rule 17Ad-
22(d)(1).\19\
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\18\ 17 CFR 240.17Ad-22(d)(1).
\19\ Id.
---------------------------------------------------------------------------
In addition, the Commission believes that the proposed change is
consistent with Exchange Act Rule 17Ad-22(d)(3).\20\ Rule 17Ad-22(d)(3)
requires OCC to, among other things, establish,
[[Page 72141]]
implement, maintain and enforce written policies and procedures
reasonably designed to hold assets in a manner that minimizes risk of
loss or delay or in its access to them.\21\ Under the proposed change,
all non-cash collateral in the EDP would be held at DTC, which will
allow OCC to validate and value collateral in real time and quickly
obtain possession of deposited securities in an event of default
without involving custodian banks by issuing a transfer instruction
through DTC's systems. With respect to cash collateral, the proposed
change would codify OCC's right to take possession of cash within an
escrow account upon a clearing member or custodian bank default and
provide OCC with online view access to each customer's cash account at
the custodian bank. Together, these changes would allow OCC monitor the
adequacy of collateral in the EDP and be able to more quickly take
possession of collateral in the EDP in the event of a clearing member
default, which would, thereby, reduce potential losses to OCC, other
clearing members and market participants.
---------------------------------------------------------------------------
\20\ 17 CFR 240.17Ad-22(d)(3).
\21\ Id.
---------------------------------------------------------------------------
Finally, the Commission believes that the proposed change is
consistent with Exchange Act Rule 17Ad-22(d)(11), which requires OCC
to, among other things, establish, implement, maintain and enforce
written policies and procedures reasonably designed to make key aspects
of their default procedures publicly available.\22\ The Commission
believes that the proposed change is consistent with Rule 17Ad-
22(d)(11) because it would incorporate the substantive terms of the
EDP, and specifically the rules concerning default management, into
OCC's Rules, which are publicly available on OCC's Web site, rather
than in private agreements.
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\22\ 17 CFR 240.17Ad-22(d)(11).
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III. Conclusion
It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Payment, Clearing and Settlement Supervision Act,\23\ that the
Commission does not object to Advance Notice (SR-OCC-2016-802) and that
OCC is authorized to implement the proposed change.
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\23\ 12 U.S.C. 5465(e)(1)(I).
By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-25233 Filed 10-18-16; 8:45 am]
BILLING CODE 8011-01-P
