Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Advance Notice Concerning the Adoption of a New Stock Options and Futures Settlement Agreement Between The Options Clearing Corporation and the National Securities Clearing Corporation, 31109-31117 [2017-14016]
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31109
Federal Register / Vol. 82, No. 127 / Wednesday, July 5, 2017 / Notices
more accurate employee pension
information by asking the employer
whether the employee is currently
eligible for a pension and instructing the
employer to indicate whether the
employee filed for the pension or
instead elected to defer distribution
from the pension account in Items 11a
and 11b (paper) and Items 10a and 10b
(Internet). The RRB also proposes to
make other editorial changes. The RRB
proposes no changes to Form G–88r.
ESTIMATE OF ANNUAL RESPONDENT BURDEN
Annual
responses
Form No.
Time
(minutes)
Burden
(hours)
G–88p ..........................................................................................................................................
G–88p (Internet) ..........................................................................................................................
G–88r ...........................................................................................................................................
100
200
10
8
6
8
13
20
1
Total ......................................................................................................................................
310
........................
34
deceased employee; (2) the amount of
spouse and survivor annuities; and (3)
the Tier II restored amount payable to a
widow(er) whose annuity was reduced
for receipt of an employee annuity, and
who was dependent on the railroad
employee in the year prior to the
employee’s death. One-half support may
also negate the public service pension
offset in Tier I for a spouse or
3. Title and purpose of information
collection: Statement Regarding
Contributions and Support; OMB 3220–
0099.
Under Section 2 of the Railroad
Retirement Act, dependency on an
employee for one-half support at the
time of the employee’s death can affect
(1) entitlement to a survivor annuity
when the survivor is a parent of the
widow(er). The Railroad Retirement
Board (RRB) utilizes Form G–134,
Statement Regarding Contributions and
Support, to secure information needed
to adequately determine if the applicant
meets the one-half support requirement.
One response is completed by each
respondent. Completion is required to
obtain benefits. The RRB proposes no
changes to Form G–134.
ESTIMATE OF ANNUAL RESPONDENT BURDEN
Annual
responses
Form No.
Time
(minutes)
Burden
(hours)
G–134
With Assistance ....................................................................................................................
Without assistance ...............................................................................................................
75
25
147
180
184
75
Total ...............................................................................................................................
100
........................
259
Additional Information or Comments:
To request more information or to
obtain a copy of the information
collection justification, forms, and/or
supporting material, contact Dana
Hickman at (312) 751–4981 or
Dana.Hickman@RRB.GOV. Comments
regarding the information collection
should be addressed to Brian Foster,
Railroad Retirement Board, 844 North
Rush Street, Chicago, Illinois 60611–
1275 or emailed to Brian.Foster@rrb.gov.
Written comments should be received
within 60 days of this notice.
SECURITIES AND EXCHANGE
COMMISSION
Brian D. Foster,
Clearance Officer.
Pursuant to Section 806(e)(1) of Title
VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act,
entitled Payment, Clearing and
Settlement Supervision Act of 2010
(‘‘Clearing Supervision Act’’ or
‘‘Payment, Clearing and Settlement
Supervision Act’’) 1 and Rule 19b–
4(n)(1)(i) of the Securities Exchange Act
of 1934 (‘‘Act’’),2 notice is hereby given
that on June 1, 2017, The Options
[FR Doc. 2017–14067 Filed 7–3–17; 8:45 am]
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BILLING CODE 7905–01–P
[Release No. 34–81040; File No. SR–OCC–
2017–804]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing of Advance Notice
Concerning the Adoption of a New
Stock Options and Futures Settlement
Agreement Between The Options
Clearing Corporation and the National
Securities Clearing Corporation
June 28, 2017.
1 12
2 17
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U.S.C. 5465(e)(1).
CFR 240.19b–4(n)(1)(i).
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Clearing Corporation (‘‘OCC’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) an
advance notice 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 advance notice from
interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Advance
Notice
This advance notice is filed in
connection with proposed changes
relating to a new Stock Options and
Futures Settlement Agreement (‘‘New
Accord’’) between OCC and the National
Securities Clearing Corporation
(‘‘NSCC,’’ collectively NSCC and OCC
may be referred to herein as the
‘‘clearing agencies’’) and amendments to
OCC’s By-Laws and Rules to
accommodate the proposed provisions
of the New Accord.
The proposed changes to OCC’s ByLaws and Rules and the proposed New
Accord were submitted as Exhibits 5A–
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5C of the filing, respectively.3 The
proposed changes are described in
detail in Item 10 below. All terms with
initial capitalization not defined herein
have the same meaning as set forth in
OCC’s By-Laws and Rules.4
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Advance Notice
In its filing with the Commission,
OCC included statements concerning
the purpose of and basis for the advance
notice and discussed any comments it
received on the advance notice. 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 and B below, of the most
significant aspects of these statements.
(A) Clearing Agency’s Statement on
Comments on the Advance Notice
Received From Members, Participants or
Others
Written comments were not and are
not intended to be solicited with respect
to the proposed rule change and none
have been received. OCC will notify the
Commission of any written comments
received by OCC.
(B) Advance Notices Filed Pursuant to
Section 806(e) of the Payment, Clearing,
and Settlement Supervision Act
Description of the Proposed Change
Background
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OCC issues and clears U.S.-listed
options and futures on a number of
underlying financial assets including
common stocks, currencies and stock
indices. OCC’s Rules, however, provide
that delivery of, and payment for,
securities underlying certain physically
settled stock options and single stock
futures cleared by OCC are effected
through the facilities of a correspondent
clearing corporation (i.e., NSCC) and are
not settled through the facilities OCC.
OCC and NSCC are parties to a Third
Amended and Restated Options
Exercise Settlement Agreement, dated
February 16, 1995, as amended
3 OCC has filed a proposed rule change with the
Commission in connection with the New Accord.
See SR–OCC–2017–013. NSCC also has filed
proposed rule change and advance notice filings
with the Commission in connection with the New
Accord. See NSCC filings SR–NSCC–2017–007 and
SR–NSCC–2017–803, respectively.
4 OCC’s By-Laws and Rules can be found on
OCC’s public Web site: https://optionsclearing.com/
about/publications/bylaws.jsp. Other terms not
defined herein or in the OCC By-Laws and Rules
can be found in the Rules & Procedures of NSCC
(‘‘NSCC Rules’’), available at https://www.dtcc.com/
∼/media/Files/Downloads/legal/rules/nscc_
rules.pdf, as the context implies.
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(‘‘Existing Accord’’),5 which governs the
delivery and receipt of stock in the
settlement of put and call options issued
by OCC (‘‘Stock Options’’) that are
eligible for settlement through NSCC’s
Continuous Net Settlement (‘‘CNS’’)
Accounting Operation and are
designated to settle on the third
business day following the date the
related exercise or assignment was
accepted by NSCC (‘‘Options E&A’’). All
OCC Clearing Members that intend to
engage in Stock Options transactions are
required to also be Members of NSCC or
to have appointed or nominated an
NSCC Member to act on its behalf.6
OCC proposes to adopt a New Accord
with NSCC, which would provide for
the settlement of certain Stock Options
and delivery obligations arising from
certain matured physically-settled stock
futures contracts cleared by OCC
(‘‘Stock Futures’’). Specifically, the New
Accord would, among other things: (1)
Expand the category of securities that
are eligible for settlement and guaranty
under the agreement to certain
securities (including stocks, exchangetraded funds and exchange-traded
notes) that (i) are required to be
delivered in the exercise and
assignment of Stock Options and are
eligible to be settled through NSCC’s
Balance Order Accounting Operation (in
addition to its CNS Accounting
Operation) or (ii) are delivery
obligations arising from Stock Futures
that have reached maturity and are
eligible to be settled through NSCC’s
CNS Accounting Operation or Balance
Order Accounting Operation; (2) modify
the time of the transfer of
responsibilities from OCC to NSCC and,
specifically, when OCC’s guarantee
obligations under OCC’s By-Laws and
5 The Existing Accord and the proposed changes
thereunder were previously approved by the
Commission. See Securities Exchange Act Release
No. 37731 (September 26, 1996), 61 FR 51731
(October 3, 1996) (SR–OCC–96–04 and SR–NSCC–
96–11) (Order Approving Proposed Rule Change
Related to an Amended and Restated Options
Exercise Settlement Agreement Between the
Options Clearing Corporation and the National
Securities Clearing Corporation); Securities
Exchange Act Release No. 43837 (January 12, 2001),
66 FR 6726 (January 22, 2001) (SR–OCC–00–12)
(Order Granting Accelerated Approval of a
Proposed Rule Change Relating to the Creation of
a Program to Relieve Strains on Clearing Members’
Liquidity in Connection With Exercise Settlements);
and Securities Exchange Act Release No. 58988
(November 20, 2008), 73 FR 72098 (November 26,
2008) (SR–OCC–2008–18 and SR–NSCC–2008–09)
(Notice of Filing and Order Granting Accelerated
Approval of Proposed Rule Changes Relating to
Amendment No. 2 to the Third Amended and
Restated Options Exercise Settlement Agreement).
6 A firm that is both an OCC Clearing Member and
an NSCC Member, or is an OCC Clearing Member
that has designated an NSCC Member to act on its
behalf is referred to herein as a ‘‘Common
Member.’’
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Rules with respect to such transactions
(‘‘OCC’s Guaranty’’) end and NSCC’s
obligations under Addendum K of the
NSCC Rules with respect to such
transactions (‘‘NSCC’s Guaranty’’) begin
(such transfer being the ‘‘Guaranty
Substitution’’); and (3) put additional
arrangements into place concerning the
procedures, information sharing, and
overall governance processes under the
agreement. Furthermore, OCC proposes
to make certain clarifying and
conforming changes to the OCC ByLaws and Rules as necessary to
implement the New Accord.
The primary purpose of the proposed
changes is to (1) provide consistent
treatment across all expiries for
products with ‘‘regular way’’ 7
settlement cycle specifications; (2)
reduce the operational complexities of
the Existing Accord by eliminating the
cross-guaranty between OCC and NSCC
and the bifurcated risk management of
exercised and assigned transactions
between the two clearing agencies by
delineating a single point in time at
which OCC’s Guaranty ceases and
NSCC’s Guaranty begins; (3) further
solidify the roles and responsibilities of
OCC and NSCC in the event of a default
of a Common Member at either or both
clearing agencies; and (4) improve
procedures, information sharing, and
overall governance under the agreement.
The New Accord would become
effective, and wholly replace the
Existing Accord, at a date specified in
a service level agreement to be entered
into between NSCC and OCC.8
The Existing Accord
Key Terms of the Existing Accord
Under the Existing Accord, the
settlement of Options E&A generally
proceeds according to the following
7 Under the New Accord, ‘‘regular way
settlement’’ shall have a meaning agreed to by the
clearing agencies. Generally, regular way settlement
is understood to be the financial services industry’s
standard settlement cycle. Currently, regular way
settlement of Stock Options or Stock Futures
transactions are those transactions designated to
settle on the third business day following the date
the related exercise, assignment or delivery
obligation was accepted by NSCC. NSCC has
proposed to change the NSCC Rules with respect to
the meaning of regular way settlement in order to
be consistent with the anticipated industry-wide
move to a shorter standard settlement cycle of two
business days after trade date. See Securities
Exchange Act Release No. 79734 (January 4, 2017),
82 FR 3030 (January 10, 2017) (SR–NSCC–2016–
007). See also Securities Exchange Act Release No.
78962 (September 28, 2016), 81 FR 69240 (October
5, 2016) (S7–22–16) (Amendment to Securities
Transaction Settlement Cycle).
8 Such effective date would be a date following
approval of all required regulatory submissions to
be filed by OCC and NSCC with the appropriate
regulatory authorities, including this advance
notice filing. See supra note 3.
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sequence of events. NSCC maintains
and delivers to OCC a list (‘‘CNS
Eligibility Master File’’) that enumerates
all CNS Securities, which are defined in
NSCC’s Rule 1 and generally include
securities that have been designated by
NSCC as eligible for processing through
NSCC’s CNS Accounting Operation and
eligible for book entry delivery at
NSCC’s affiliate, The Depository Trust
Company (for purposes of this advance
notice filing, such securities are referred
to as ‘‘CNS Eligible Securities’’).9 OCC,
in turn, uses this file to make a final
determination of which securities NSCC
would not accept and therefore would
need to be settled on a broker-to-broker
basis. OCC then sends to NSCC a
transactions file,10 listing the specific
securities that are to be delivered and
received in settlement of an Options
E&A that have not previously been
reported to NSCC and for which
settlement is to be made through NSCC
(‘‘OCC Transactions File’’).11 With
respect to each Options E&A, the OCC
Transactions File includes the CUSIP
number of the security to be delivered,
the identities of the delivering and
receiving Common Members, the
quantity to be delivered, the total value
of the quantity to be delivered based on
the exercise price of the option for
which such security is the underlying
security, and the exercise settlement
date. After receiving the OCC
Transactions File, NSCC then has until
11:00 a.m. Central Time on the
following business day to reject any
transaction listed in the OCC
Transactions File. NSCC can reject a
transaction if the security to be
delivered has not been listed as a CNS
Eligible Security in the CNS Eligible
Master File or if information provided
in the OCC Transactions File is
incomplete. Otherwise, if NSCC does
not so notify OCC of its rejection of an
Options E&A by the time required under
the Existing Accord, NSCC will become
unconditionally obligated to effect
settlement of the Options E&A.
Under the Existing Accord, even after
NSCC’s trade guarantee has come into
9 See
supra note 4.
of the OCC Transactions File with
respect to an Options E&A typically happens on the
date of the option’s exercise or expiration, though
this is not expressly stated in the Existing Accord.
In theory, however, an Options E&A could, due to
an error or delay, be reported later than the date of
the option’s exercise or expiration.
11 This process would be substantially the same
under the New Accord with the exception that the
CNS Eligibility Master File and OCC Transactions
File would be renamed and would be expanded in
scope to include additional securities that would be
eligible for guaranty and settlement under the New
Accord, as discussed in further detail below.
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10 Delivery
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effect,12 OCC is not released from its
guarantee with respect to the Options
E&A until certain deadlines 13 have
passed on the first business day
following the scheduled settlement date
without NSCC notifying OCC that the
relevant Common Member has failed to
meet an obligation to NSCC or NSCC
has ceased to act for such Common
Member pursuant to the NSCC Rules.14
As a result, there is a period of time
when NSCC’s trade guarantee overlaps
with OCC’s guarantee and where both
clearing agencies are holding margin
against the same Options E&A position.
In the event that NSCC or OCC ceases
to act on behalf of or suspends a
Common Member, that Common
Member becomes a ‘‘defaulting
member.’’ Once a Common Member
becomes a defaulting member, the
Existing Accord provides that NSCC
will make a payment to OCC equal to
the lesser of OCC’s loss or the positive
mark-to-market amount relating to the
defaulting member’s Options E&A and
that OCC will make a payment to NSCC
equal to the lesser of NSCC’s loss or the
negative mark-to-market amount
relating to the defaulting member’s
Options E&A to compensate for
potential losses incurred in connection
with the default. A clearing agency must
request the transfer of any such
payments by the close of business on
the tenth business day following the day
of default and, after a request is made,
the other clearing agency is required to
make payment within five business days
of the request.
The New Accord
Overview
As noted above, NSCC proposes to
adopt a New Accord with OCC, which
would provide for the settlement of
certain Stock Options and Stock Futures
transactions. The New Accord is
primarily designed to, among other
things, expand the category of securities
that are eligible for settlement and
12 Pursuant to Addendum K of the NSCC Rules,
NSCC guarantees the completion of CNS
transactions and balance order transactions that
have reached the point at which, for bi-lateral
submissions by Members, such trades have been
validated and compared by NSCC, and for lockedin submission, such trades have been validated by
NSCC, as described in the NSCC Rules.
Transactions that are covered by the Existing
Accord, and that would be covered by the New
Accord, are expressly excluded from the timeframes
described in Addendum K. See supra note 4.
13 The deadline is 6:00 a.m. Central Time for
NSCC notifying OCC of a Common Member failure
and, if NSCC does not immediately cease to act for
such defaulting Common Member, 4:00 p.m.
Central Time for notifying OCC that it has ceased
to act.
14 See NSCC Rule 46 (Rule 46 (Restrictions on
Access to Services)). See supra note 4.
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31111
guaranty under the agreement; simplify
the time of the transfer of
responsibilities from OCC to NSCC
(specifically, the transfer of guarantee
obligations); and put additional
arrangements into place concerning the
procedures, information sharing, and
overall governance processes under the
agreement. The material provisions of
the New Accord are described in detail
below.
Key Elements of the New Accord
Expanded Scope of Eligible Securities
Pursuant to the proposed New
Accord, on each day that both OCC and
NSCC are open for accepting trades for
clearing (‘‘Activity Date’’), NSCC would
deliver to OCC an ‘‘Eligibility Master
File,’’ which would identify the
securities, including stocks, exchangetraded funds and exchange-traded notes,
that are (1) eligible to settle through
NSCC’s CNS Accounting Operation (as
is currently the case under the Existing
Accord) or NSCC’s Balance Order
Accounting Operation (which is a
feature of the New Accord) and (2) to be
delivered in settlement of (i) exercises
and assignments of Stock Options (as is
currently the case under the Existing
Accord) or (ii) delivery obligations
arising from maturing physically settled
Stock Futures (which is a feature of the
New Accord) (all such securities
collectively being ‘‘Eligible Securities’’).
OCC, in turn, would deliver to NSCC its
file of E&A/Delivery Transactions 15 that
list the Eligible Securities to be
delivered, or received, and for which
settlement is proposed to be made
through NSCC on that Activity Date.
Guaranty Substitution (discussed
further below) would not occur with
respect to an E&A/Delivery Transaction
that is not submitted in the proper
format or that involves a security that is
not identified as an Eligible Security on
the then-current Eligibility Master File.
This process is similar to the current
process under the Existing Accord with
the exception of the expanded scope of
Eligible Securities (and additional fields
necessary to accommodate such
securities) that would be listed on the
15 ‘‘E&A/Delivery Transactions’’ are transactions
involving the settlement of Stock Options and Stock
Futures under the New Accord. The delivery of
E&A/Delivery Transactions to NSCC would replace
the delivery of the ‘‘OCC Transactions File’’ from
the Existing Accord. The actual information
delivered by OCC to NSCC would be the same as
is currently provided on the OCC Transactions File,
but certain additional terms would be included to
accommodate the inclusion of Stock Futures, along
with information regarding the date that the
instruction to NSCC was originally created and the
E&A/Delivery Transaction’s designated settlement
date.
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Eligibility Master File and the E&A/
Delivery Transactions file.
Like the Existing Accord, the
proposed New Accord would continue
to facilitate the processes by which
Common Members deliver and receive
stock in the settlement of Stock Options
that are eligible to settle through NSCC’s
CNS Accounting Operation and are
designated to settle regular way. The
New Accord would also expand the
category of securities eligible for
settlement under the agreement. In
particular, the New Accord would
facilitate the processes by which
Common Members deliver and receive
stock in settlement of Stock Futures that
are eligible to settle through NSCC’s
CNS Accounting Operation and are
designated to settle regular way. It
would also provide for the settlement of
both Stock Options and Stock Futures
that are eligible to settle through NSCC’s
Balance Order Accounting Operation on
a regular way basis. The primary
purpose of expanding the category of
securities that are eligible for settlement
and guaranty under the agreement is to
provide consistent treatment across all
expiries for products with regular way
settlement cycle specifications and
simplify the settlement process for these
additional securities transactions.
The New Accord would not apply to
Stock Options or Stock Futures that are
designated to settle on a shorter
timeframe than the regular way
settlement timeframe. These Stock
Options would continue to be processed
and settled as they would be today,
outside of the New Accord. The New
Accord also would not apply to any
Stock Options or Stock Futures that are
neither CNS Securities nor Balance
Order Securities.16 Transactions in
these securities are, and would continue
to be, processed on a trade-for-trade
basis away from NSCC’s facilities. Such
transactions may utilize other NSCC
services for which they are eligible, but
would not be subject to the New
Accord.17
Proposed Changes Related to Guaranty
Substitution
The New Accord would adopt a
fundamentally different approach to the
delineation of the rights and
responsibilities of OCC and NSCC with
respect to E&A/Delivery Transactions.
The purpose of the proposed changes
16 Balance Order Securities are defined in NSCC
Rule 1, and are generally securities, other than
foreign securities, that are eligible to be cleared at
NSCC but are not eligible for processing through the
CNS Accounting Operation. See supra note 4.
17 OCC will continue to guarantee settlement until
settlement actually occurs with respect to these
Stock Options and Stock Futures.
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related to the Guaranty Substitution,
defined below, is to reduce the
operational complexities of the Existing
Accord by eliminating the crossguaranty between OCC and NSCC and
the bifurcated risk management of
exercised and assigned transactions
between the two clearing agencies and
delineating a single point in time at
which OCC’s Guaranty ceases and
NSCC’s Guaranty begins. Moreover, the
proposed changes would solidify the
roles and responsibilities of OCC and
NSCC in the event of a default of a
Common Member at either or both
clearing agencies.
As described above, the Existing
Accord provides that NSCC will make a
payment to OCC following the default of
a Common Member in an amount equal
to the lesser of OCC’s loss or the
positive mark-to-market amount relating
to the Common Member’s Options E&A,
and provides that OCC will make a
payment to NSCC following the default
of a Common Member equal to the
lesser of NSCC’s loss or the negative
mark-to-market amount relating to the
Common Member’s Options E&A to
compensate for potential losses incurred
in connection with the Common
Member’s default. The proposed New
Accord, in contrast, would focus on the
transfer of responsibilities from OCC to
NSCC and, specifically, the point at
which OCC’s Guaranty ends and NSCC’s
Guaranty begins (i.e., the Guaranty
Substitution) with respect to E&A/
Delivery Transactions. By focusing on
the timing of the Guaranty Substitution,
rather than payment from one clearing
agency to the other, the New Accord
would simplify the agreement and the
procedures for situations involving the
default of a Common Member. The New
Accord additionally would minimize
‘‘double-margining’’ situations when a
Common Member may simultaneously
owe margin to both NSCC and OCC with
respect to the same E&A/Delivery
Transaction.
After NSCC has received an E&A/
Delivery Transaction, the Guaranty
Substitution would normally occur
when NSCC has received all Required
Deposits to its Clearing Fund, calculated
taking into account such E&A/Delivery
Transaction, of Common Members
(‘‘Guaranty Substitution Time’’).18 At
the Guaranty Substitution Time, NSCC’s
Guaranty takes effect, and OCC does not
retain any settlement obligations with
respect to such E&A/Delivery
Transactions. The Guaranty Substitution
18 Procedure XV of the NSCC Rules provides that
all Clearing Fund requirements and other deposits
must be made within one hour of demand, unless
NSCC determines otherwise. See supra note 4.
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would not occur, however, with respect
to any E&A/Delivery Transaction if
NSCC has rejected such E&A/Delivery
Transaction due to an improper
submission, as described above, or if,
during the time after NSCC’s receipt of
the E&A/Delivery Transaction but prior
to the Guaranty Substitution Time, a
Common Member involved in the E&A/
Delivery Transaction has defaulted on
its obligations to NSCC by failing to
meet its Clearing Fund obligations, or
NSCC has otherwise ceased to act for
such Common Member pursuant to the
NSCC Rules (in either case, such
Common Member becomes a
‘‘Defaulting NSCC Member’’).
NSCC would be required to promptly
notify OCC if a Common Member
becomes a Defaulting NSCC Member, as
described above. Upon receiving such a
notice, OCC would not submit to NSCC
any further E&A/Delivery Transactions
involving the Defaulting NSCC Member
for settlement, unless authorized
representatives of both OCC and NSCC
otherwise consent. OCC would,
however, deliver to NSCC a list of all
E&A/Delivery Transactions that have
already been submitted to NSCC and
that involve the Defaulting NSCC
Member (‘‘Defaulted NSCC Member
Transactions’’). The Guaranty
Substitution ordinarily would not occur
with respect to any Defaulted NSCC
Member Transactions, unless both
clearing agencies agree otherwise. As
such, NSCC would have no obligation to
guaranty such Defaulted NSCC Member
Transactions, and OCC would continue
to be responsible for effecting the
settlement of such Defaulted NSCC
Member Transactions pursuant to OCC’s
By-Laws and Rules. Once NSCC has
confirmed the list of Defaulted NSCC
Member Transactions, Guaranty
Substitution would occur for all E&A/
Delivery Transactions for that Activity
Date that are not included on such list.
NSCC would be required to promptly
notify OCC upon the occurrence of the
Guaranty Substitution Time on each
Activity Date.
If OCC suspends a Common Member
after NSCC has received the E&A/
Delivery Transactions but before the
Guaranty Substitution has occurred, and
that Common Member has not become
a Defaulting NSCC Member, the
Guaranty Substitution would proceed at
the Guaranty Substitution Time. In such
a scenario, OCC would continue to be
responsible for guaranteeing the
settlement of the E&A/Delivery
Transactions in question until the
Guaranty Substitution Time, at which
time the responsibility would transfer to
NSCC. If, however, the suspended
Common Member also becomes a
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Defaulting NSCC Member after NSCC
has received the E&A/Delivery
Transactions but before the Guaranty
Substitution has occurred, Guaranty
Substitution would not occur, and OCC
would continue to be responsible for
effecting the settlement of such
Defaulted NSCC Member Transactions
pursuant to OCC’s By-Laws and Rules
(unless both clearing agencies agree
otherwise).
Finally, the New Accord also would
provide for the consistent treatment of
all exercise and assignment activity
under the agreement. Under the Existing
Accord, ‘‘standard’’ 19 option contracts
become guaranteed by NSCC when the
Common Member meets its morning
Clearing Fund Required Deposit at
NSCC while ‘‘non-standard’’ exercise
and assignment activity becomes
guaranteed by NSCC at midnight of the
day after trade date (T+1). Under the
New Accord, all exercise and
assignment activity for Eligible
Securities would be guaranteed by
NSCC as of the Guaranty Substitution
Time, under the circumstances
described above, further simplifying the
framework for the settlement of such
contracts.
sradovich on DSK3GMQ082PROD with NOTICES
Other Terms of the New Accord
The New Accord also would include
a number of other provisions intended
to either generally maintain certain
terms of the Existing Accord or improve
the procedures, information sharing,
and overall governance process under
the new agreement. Many of these terms
are additions to or improvements upon
the terms of the Existing Accord.
Under the proposed New Accord,
OCC and NSCC would agree to address
the specifics regarding the time, form
and manner of various required
notifications and actions in a separate
service level agreement which the
parties would be able to revisit as their
operational needs evolve. The service
level agreement would also specify an
effective date for the New Accord,
which, as mentioned above, would
occur on a date following approval and
effectiveness of all required regulatory
submissions to be filed by OCC and
NSCC with the appropriate regulatory
authorities. Similar to the Existing
Accord, the proposed New Accord
would remain in effect (a) until it is
terminated by the mutual written
agreement of OCC and NSCC, (b) until
it is unilaterally terminated by either
clearing agency upon one year’s written
19 Option contracts with ‘‘standard’’ expirations
expire on the third Friday of the specified
expiration month, while ‘‘non-standard’’ contracts
expire on other days of the expiration month.
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notice (as opposed to six months under
the Existing Accord), or (c) until it is
terminated by either NSCC or OCC upon
the bankruptcy or insolvency of the
other, provided that the election to
terminate is communicated to the other
party within three business days by
written notice.
Under the proposed New Accord,
NSCC would agree to notify OCC if
NSCC ceases to act for a Common
Member pursuant to the NSCC Rules no
later than the earlier of NSCC’s
provision of notice of such action to the
governmental authorities or notice to
other NSCC Members. Furthermore, if
an NSCC Member for which NSCC has
not yet ceased to act fails to satisfy its
Clearing Fund obligations to NSCC,
NSCC would be required to notify OCC
promptly after discovery of the failure.
Likewise, OCC would be required to
notify NSCC of the suspension of a
Common Member no later than the
earlier of OCC’s provision of notice to
the governmental authorities or other
OCC Clearing Members.
Under the Existing Accord, NSCC and
OCC agree to share certain reports and
information regarding settlement
activity and obligations under the
agreement. The New Accord would
enhance this information sharing
between the clearing agencies.
Specifically, NSCC and OCC would
agree to share certain information,
including general risk management due
diligence regarding Common Members,
lists of Common Members, and
information regarding the amounts of
Common Members’ margin and
settlement obligations at OCC or
Clearing Fund Required Deposits at
NSCC. NSCC and OCC would also be
required to provide the other clearing
agency with any other information that
the other reasonably requests in
connection with the performance of its
obligations under the New Accord. All
such information would be required to
be kept confidential, using the same
care and discretion that each clearing
agency uses for the safekeeping of its
own members’ confidential information.
NSCC and OCC would each be required
to act in good faith to resolve and notify
the other of any errors, discrepancies or
delays in the information it provides.
The New Accord also would include
new terms to provide that, to the extent
one party is unable to perform any
obligation as a result of the failure of the
other party to perform its
responsibilities on a timely basis, the
time for the non-failing party’s
performance would be extended, its
performance would be reduced to the
extent of any such impairment, and it
would not be liable for any failure to
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31113
perform its obligations. Further, NSCC
and OCC would agree that neither party
would be liable to the other party in
connection with its performance of its
obligations under the proposed New
Accord to the extent it has acted, or
omitted or ceased to act, with the
permission or at the direction of a
governmental authority. Moreover, the
proposed New Accord would provide
that in no case would either clearing
agency be liable to the other for
punitive, incidental or consequential
damages. The purpose of these new
provisions is to provide clear and
specific terms regarding each clearing
agency’s liability for non-performance
under the agreement.
The proposed New Accord would also
contain the usual and customary
representations and warranties for an
agreement of this type, including
representations as to the parties’ good
standing, corporate power and authority
and operational capability, that the
agreement complies with laws and all
government documents and does not
violate any agreements, and that all of
the required regulatory notifications and
filings would be obtained prior to the
New Accord’s effective date. It would
also include representations that the
proposed New Accord constitutes a
legal, valid and binding obligation on
each of OCC and NSCC and is
enforceable against each, subject to
standard exceptions. Furthermore, the
proposed New Accord would contain a
force majeure provision, under which
NSCC and OCC would agree to notify
the other no later than two hours upon
learning that a force majeure event has
occurred and both parties would be
required to cooperate in good faith to
mitigate the effects of any resulting
inability to perform or delay in
performing.
Proposed Amendments to OCC’s ByLaws and Rules
Given the key differences between the
Existing Accord and the New Accord, as
described above, OCC proposes certain
changes to its By-Laws and Rules in
order to accommodate the terms of the
New Accord. The primary purpose of
the proposed changes is to: (1) Reflect
the expanded scope of the New Accord,
(2) reflect changes related to the new
Guaranty Substitution mechanics of the
New Accord; and (3) make other
changes necessary to conform to the
terms of the New Accord or to otherwise
provide additional clarity around the
settlement and margining 20 treatment
20 OCC notes that, while it is proposing changes
to its Rules concerning margin requirements (e.g.,
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of: (i) Eligible Securities under the New
Accord, (ii) non-regular way securities
settling through the facilities of NSCC
but outside of the New Accord, and (iii)
those securities settling outside of the
New Accord and away from NSCC on a
broker-to-broker basis. These proposed
changes are discussed in greater detail
below.
sradovich on DSK3GMQ082PROD with NOTICES
Changes Related to the Expanded Scope
of the New Accord
First, OCC proposes to amend and
replace the defined term ‘‘CNSeligible’’ 21 in order to reflect the
expanded definition of Eligible
Securities under the New Accord. The
term ‘‘CNS-eligible’’ currently describes
the securities underlying the physicallysettled stock options that are eligible
under the Existing Accord to be settled
through NSCC’s CNS Accounting
Operation. Under the New Accord,
however, the term Eligible Securities is
more broadly defined to include
securities (both Stock Options and Stock
Futures) eligible for settlement via
NSCC’s CNS Accounting Operation and
NSCC’s Balance Order Accounting
Operation. Accordingly, OCC proposes
to use ‘‘CCC,’’ for ‘‘correspondent
clearing corporation’’ 22 to describe the
Eligible Securities. Thus, the term
‘‘CCC-eligible’’ would replace ‘‘CNSeligible’’ throughout OCC’s By-Laws and
Rules.
Next, because the New Accord would
include the settlement of Stock Futures,
OCC proposes to make several changes
to its rules regarding Stock Futures to
accommodate this expansion. More
specifically, OCC proposes a conforming
amendment to Rule 901 Interpretation
and Policy (.02) to clarify that, under the
New Accord, OCC will, subject to its
discretion, cause the settlement of all
matured Stock Futures to be made
through the facilities of NSCC to the
extent that the underlying securities are
CCC-eligible as the term is currently
proposed.
OCC also proposes clarifying and
conforming revisions to newly
renumbered Rule 901(e) (currently Rule
901(d)) to specify that settlements made
which transactions would be included as part of
OCC’s margin calculation at a given point in time),
OCC is not proposing any changes to its margin
model (with the exception that OCC would no
longer collect and hold margin for positions after
NSCC’s Guaranty has taken effect under the New
Accord).
21 See Article I, Section (C)(23) of OCC’s By-Laws.
22 Under Article I of OCC’s By-Laws, the term
‘‘correspondent clearing corporation’’ means the
National Securities Clearing Corporation or any
successor thereto which, by agreement with the
Corporation, provides facilities for settlements in
respect of exercised option contracts or BOUNDs or
in respect of delivery obligations arising from
physically-settled stock futures.
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through the facilities of the
correspondent clearing corporation are
governed by Rule 901 and to clarify that,
under the New Accord, specifications
made in any Delivery Advice may be
revoked up until the point at which
NSCC’s Guaranty has taken effect (the
‘‘obligation time’’ as discussed below)
and not the opening of business on the
delivery date.
Changes Related to Guaranty
Substitution
OCC also proposes a series of
amendments to its Rules to accurately
reflect the process under which the
Guaranty Substitution occurs under the
New Accord. First, OCC proposes to
amend Rule 901(c) so that the term
‘‘obligation time’’—the time that the
correspondent clearing corporation
becomes unconditionally obligated, in
accordance with its rules, to effect
settlement in respect thereof or to close
out the securities contract arising
therefrom—is synonymous with the
Guaranty Substitution Time under the
New Accord and (i.e., (i) settlement
obligations are reported to and are not
rejected by NSCC; (ii) NSCC has not
notified OCC that it has ceased to act for
the relevant Clearing Member; and (iii)
the Clearing Fund requirements of the
relevant Clearing Member are received
by NSCC). Under the New Accord, if a
default occurs prior to the Guaranty
Substitution Time, the Guaranty
Substitution will not occur for any E&A/
Delivery Transactions involving the
Defaulting NSCC Member, and OCC will
continue to guarantee settlement for
those Defaulted NSCC Member
Transactions.
Next, OCC proposes to amend
language in newly renumbered Rule
901(i) (currently Rule 901(h)) regarding
the timing of the end of a Clearing
Member’s obligations to OCC with
respect to securities to be settled
through NSCC. Under the Existing
Accord and OCC’s existing Rules, a
Clearing Member’s obligations to OCC
end only once settlement is completed.
Under the New Accord, however, a
Clearing Member’s obligations to OCC
will end when OCC’s obligations with
respect to guaranteeing settlement of the
security would end (i.e., the Guaranty
Substitution Time or ‘‘obligation time’’).
OCC therefore proposes to amend newly
renumbered Rule 901(i) to specify that
a Clearing Member’s obligations to OCC
will be deemed completed and
performed once the ‘‘obligation time’’
has occurred.
As discussed above, the New Accord
eliminates the provisions of the Existing
Accord whereby OCC and NSCC
guaranteed each other the performance
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Fmt 4703
Sfmt 4703
of Common Members and made certain
payments to the other upon the default
of a Common Member. As such, OCC
proposes to delete discussions of such
guarantees and payments from newly
renumbered Rule 901(i) and Rule 1107.
OCC also proposes amendments to
Rules 910 and 911, which set forth
procedures for handling failures to make
or take delivery of securities in
settlement of exercised or assigned
Stock Options and matured physicallysettled Stock Futures, to add language to
both rules to clarify that the failure
procedures set forth therein would not
apply with respect to any delivery to be
made through NSCC pursuant to Rule
901. Under the New Accord, once the
Guaranty Substitution Time with
respect to a specific E&A/Delivery
Transaction occurs, OCC’s Guaranty
ends and NSCC’s Guaranty begins,
leaving OCC with no involvement with
or responsibility for the settlement of
the securities underlying that
transaction. Therefore, if there is a
failure to make or take delivery with
respect to that transaction after
Guaranty Substitution has occurred, the
NSCC Rules will govern that failure.
With respect to deliveries made on a
broker-to-broker basis under OCC Rules
903 through 912 (including those that
may utilize NSCC’s Obligation
Warehouse services), and which are not
governed by Rule 901, Guaranty
Substitution does not occur and OCC’s
failure procedures would apply.
Changes to OCC’s Margin Rules
Under the New Accord, OCC will no
longer collect margin on a transaction
once it is no longer guaranteeing
settlement for that transaction. As such,
OCC proposes to add language to Rule
601(f) to clarify that OCC’s margin
calculations will not include delivery
obligations arising from any Stock
Options or Stock Futures that are
eligible for settlement through NSCC
and for which OCC has no further
settlement obligations because either (i)
Guaranty Substitution has occurred for
E&A/Delivery Transactions under the
New Accord (as described in revised
Rule 901(c)) or (ii) NSCC has otherwise
accepted transactions for non-regular
way settlement under the NSCC Rules
(as describe in newly proposed Rule
901(d)).23 By not including these
transactions as part of OCC’s margin
calculation, OCC is hoping to alleviate
instances of ‘‘double-margining’’ for
Common Members that may otherwise
simultaneously owe margin to NSCC
23 Related revisions to Rule 901(c) and newly
proposed Rule 901(d) are discussed in more detail
below.
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and OCC with respect to the same
position.
OCC also proposes to delete Rule
608A in its entirety. The New Accord
seeks to eliminate the situation under
the Existing Accord where Common
Members are effectively ‘‘doublemargined’’ or required to
simultaneously post margin with OCC
and NSCC with respect to the same
position. As the New Accord eliminates
this double-margining scenario, Rule
608A, which provides procedures
pursuant to which a Clearing Member
could use the securities deposited as
margin with OCC as collateral to secure
a loan to pay its margin obligations to
NSCC, is now unnecessary.
Other Clarifying Changes Not Related to
the New Accord
OCC also proposes to amend its Rules
to make clarifying changes that are not
directly required by the New Accord but
would provide additional clarity in its
Rules in light of other changes being
made to accommodate the New Accord.
Specifically, OCC proposes to revise
Rule 901 Interpretation and Policy (.02)
to provide that transactions that involve
the delivery of non-CCC eligible
securities made on a broker-to-broker
basis (and away from NSCC) may
nevertheless involve the use of certain
services of NSCC (e.g., NSCC’s
Obligation Warehouse). For such
transactions, because they are not
covered by the New Accord and NSCC
at no point guarantees settlement, OCC
Rule 901 would not apply and delivery
is governed by the broker-to-broker
settlement procedures set forth in OCC
Rules 903 through 912, as is the case
currently today. Additionally, while
OCC’s existing Rules do not prohibit
broker-to-broker settlements from being
facilitated through the services of a
correspondent clearing corporation,
they do not explicitly contemplate the
possibility. OCC also proposes to make
clarifying amendments to Rule 904(b)
and 910A(a) to more clearly distinguish
between settlements effected through
NSCC’s CNS Accounting Operation or
Balance Order Accounting Operations
in accordance with OCC Rule 901 and
deliveries effected on a broker-to-broker
basis utilizing services of NSCC under
OCC Rules 903 through 912 and to
clearly state which OCC Rules apply in
each context.
Further, OCC proposes to add a new
paragraph (d) to Rule 901 to clarify that
OCC still intends, at its discretion, to
effect settlement of Stock Options and
Stock Futures that are scheduled to be
settled on the first business day after
exercise or maturity through NSCC
pursuant to Rule 901 and the relevant
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provisions of the NSCC Rules, even
though such contracts are outside the
scope of the New Accord. These
contracts would continue to be settled
as they are currently today.
OCC also proposes clarifying and
conforming changes to the introductory
language of Chapter IX of the Rules.
Specifically, OCC proposes conforming
changes to the Rule to reflect the
replacement of the defined term ‘‘CNSeligible’’ with ‘‘CCC-eligible’’ as
described above. The proposed changes
would also clarify that OCC’s broker-tobroker settlement rules are contained in
Rules 903–912, as Rule 902 concerns
Delivery Advices, which also may be
applicable to settlements made through
the correspondent clearing corporation
pursuant to Rule 901. In addition, the
proposed changes to the introductory
language of Chapter IX of the Rules
would provide additional clarity around
OCC’s existing authority to alter a
previous designation of a settlement
method at any time prior to the
designated delivery date by specifying
that this authority would apply to both
settlements to be made through the
facilities of the correspondent clearing
corporation pursuant to Rule 901 or
settlements to be made on a broker-tobroker basis pursuant to Rules 903
through 912. Finally, OCC proposes a
number of conforming changes to Rules
901 and 912 to reflect the renumbering
of various Rule provisions due to the
proposed amendments described above.
Expected Effect on and Management of
Risk
OCC believes that the proposed
change, which would adopt the New
Accord and make conforming changes
to the OCC By-Laws and Rules to
accommodate the New Accord, would
reduce the overall level of risk to OCC,
its Clearing Members, and the markets
served by OCC.
In connection with the proposal to
enhance the timing of the Guaranty
Substitution, the New Accord would
provide a clearer, simpler framework for
the settlement of Stock Options and
Stock Futures. By pinpointing a specific
moment in time, the Guaranty
Substitution Time, at which guarantee
obligations transfer from OCC to NSCC
with respect to each cleared securities
transaction, the New Accord would
eliminate any ambiguity regarding
which clearing agency is responsible for
guaranteeing settlement at any given
moment. Establishing a precise
Guaranty Substitution Time also
provides greater certainty that, in the
event of the default of a Common
Member, the default would be handled
pursuant to the rules and procedures of
PO 00000
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Fmt 4703
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31115
the clearing agency whose guarantee is
then in effect and the system for the
settlement and clearance of Stock
Options and Stock Futures would
continue with minimal interruption.
This greater certainty strengthens OCC’s
and NSCC’s ability to plan for and
manage, and therefore mitigate, the risk
presented by Common Member defaults
to OCC, other Clearing Members and the
market as a whole.
The proposal to expand the category
of securities eligible for settlement and
guaranty under the New Accord would
provide consistent treatment across all
expiries for products with regular way
settlement cycle specifications, and
would provide a clearer, simpler
framework for the settlement of these
securities. Finally, the proposal to put
additional arrangements into place
concerning the procedures, information
sharing, and overall governance
processes under the New Accord, would
assist the clearing agencies to more
effectively identify, monitor, and
manage risks that may be presented by
certain Common Members, and would
create new efficiencies in their general
surveillance efforts with respect to these
firms.
Consistency With the Clearing
Supervision Act
The stated purpose of the Clearing
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.24 Section 805(a)(2) of the
Clearing Supervision Act 25 also
authorizes the Commission to prescribe
risk management standards for the
payment, clearing and settlement
activities of designated clearing entities,
like OCC, for which the Commission is
the supervisory agency. Section 805(b)
of the Clearing Supervision Act 26 states
that the objectives and principles for
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 Clearing Supervision
Act and the Act in furtherance of these
objectives and principles, including
24 12
U.S.C. 5461(b).
U.S.C. 5464(a)(2).
26 12 U.S.C. 5464(b).
25 12
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those standards adopted pursuant to the
Commission rules cited below.27 For the
reasons set forth below, OCC believes
that the proposed change is consistent
with the risk management standards
promulgated under Section 805(a) of the
Clearing Supervision Act.28
Rule 17Ad–22(e)(1) requires that a
covered clearing agency establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to provide for a
well-founded, clear, transparent, and
enforceable legal basis for each aspect of
its activities in all relevant
jurisdictions.29 The New Accord would
constitute a legal, valid and binding
obligation on each of OCC and NSCC,
which is enforceable against each
clearing agency. In connection with the
proposal to enhance the timing of the
Guaranty Substitution, the New Accord
would establish clear, transparent, and
enforceable terms for the settlement of
OCC’s cleared Stock Options and Stock
Futures through the facilities of NSCC
and would simplify the settlement
process for those Stock Options
currently settled under the Existing
Accord. By clarifying the timing and
mechanisms by which OCC’s Guaranty
ends and NSCC’s Guaranty begins by
focusing on the timing of the Guaranty
Substitution, the new Accord,
specifically the proposal to enhance the
timing of the Guaranty Substitution,
would provide a clear, transparent and
enforceable legal basis for OCC’s and
NSCC’s obligations during the event of
a Common Member default. As a result,
OCC believes that the proposal is
consistent with the requirements of Rule
17Ad–22(e)(1).30
Rule 17Ad–22(e)(20) requires, in part,
that a covered clearing agency establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to identify,
monitor, and manage risks related to
any link the covered clearing agency
establishes with one or more other
clearing agencies or financial market
utilities.31
OCC is proposing to adopt the New
Accord in order to address the risks it
27 17 CFR 240.17Ad–22. See Securities Exchange
Act Release Nos. 68080 (October 22, 2012), 77 FR
66220 (November 2, 2012) (S7–08–11) (‘‘Clearing
Agency Standards’’); 78961 (September 28, 2016),
81 FR 70786 (October 13, 2016) (S7–03–14)
(‘‘Standards for Covered Clearing Agencies’’). The
Standards for Covered Clearing Agencies became
effective on December 12, 2016. OCC is a ‘‘covered
clearing agency’’ as defined in Rule 17Ad–22(a)(5)
and therefore is subject to section (e) of Rule 17Ad22.
28 12 U.S.C. 5464(a).
29 17 CFR 240.17Ad–22(e)(1).
30 Id.
31 17 CFR 240.17Ad–22(e)(20).
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has identified related to its existing link
with the NSCC within the Existing
Accord. Specifically, under the terms of
the Existing Accord, even after NSCC’s
guarantee has come into effect, OCC is
not released from its guarantee with
respect to the Options E&A until certain
deadlines have passed on the first
business day following the scheduled
settlement date without NSCC notifying
OCC that the relevant Common Member
has failed to meet an obligation to NSCC
and/or NSCC has ceased to act for such
firm. This current process results in a
period of time where NSCC’s trade
guarantee and OCC’s guarantee both
apply to the same positions, and,
therefore, both clearing agencies are
holding margin against the same
Options E&A position. As a result, the
Existing Accord provides for a more
complicated framework for the
settlement of certain Stock Options.
These complications could give rise to
inconsistencies with regard to the
development and application of
interdependent policies and procedures
between OCC and NSCC, which could
lead to unanticipated disruptions in
OCC’s or NSCC’s clearing operations.
In connection with the proposal to
enhance the timing of the Guaranty
Substitution, the New Accord would
provide for a clearer, simpler framework
for the settlement of certain Stock
Options and Stock Futures by
pinpointing a specific moment in time,
the Guaranty Substitution Time, at
which guarantee obligations would
transfer from OCC to NSCC. The New
Accord would eliminate any ambiguity
regarding which clearing agency is
responsible for guaranteeing settlement
at any given moment. Establishing a
precise Guaranty Substitution Time
would also provide greater certainty that
in the event of a Common Member
default, the default would be handled
pursuant to the rules and procedures of
the clearing agency whose guarantee is
then in effect and the system for the
clearance and settlement of Stock
Options and Stock Futures would
continue with minimal interruption.
This greater certainty would strengthen
OCC’s and NSCC’s ability to plan for
and manage, and therefore would
mitigate, the risk presented by Common
Member defaults to OCC and NSCC,
other members, and the markets the
clearing agencies serve. Therefore,
through the adoption of the proposal to
enhance the timing of the Guaranty
Substitution, OCC would more
effectively manage its risks related to
the operation of the New Accord.
Moreover, in connection with the
proposal to put additional arrangements
into place concerning the procedures,
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information sharing, and overall
governance processes under the New
Accord, NSCC and OCC would agree to
share certain information, including
general surveillance information
regarding their members, so that each
clearing agency would be able to
effectively identify, monitor, and
manage risks that may be presented by
certain Common Members. Accordingly,
OCC believes the proposed changes are
reasonably designed to identify,
monitor, and manage risks related to the
link established between OCC and
NSCC for the settlement of certain Stock
Options and Stock Futures in a manner
consistent with Rule 17Ad–22(e)(20).32
Finally, Rule 17Ad–22(e)(21) requires
that a covered clearing agency establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to, among other
things, be efficient and effective in
meeting the requirements of its
participants and the markets it serves.33
As noted above, under the Existing
Accord, even after NSCC’s guarantee has
come into effect, OCC is not released
from its guarantee with respect to the
Options E&A until certain deadlines
have passed on the first business day
following the scheduled settlement date
without NSCC notifying OCC that the
relevant Common Member has failed to
meet an obligation to NSCC and/or
NSCC has ceased to act for such firm.
This results in a period of time where
NSCC’s guarantee overlaps with OCC’s
guarantee and where both clearing
agencies are holding margin against the
same Options E&A positions. In
connection with the proposal to
enhance the timing of the Guaranty
Substitution, the New Accord would
minimize this ‘‘double margining’’ issue
by introducing a new Guaranty
Substitution Time, which would
normally occur as soon as NSCC has
received all Required Deposits to the
Clearing Fund from Common Members,
which have been calculated taking into
account the relevant E&A/Delivery
Transactions, rather than require
reimbursement payments from one
clearing agency to the other. As a result,
Common Members would no longer be
required to post margin at both clearing
agencies to cover the same E&A/
Delivery Transactions. OCC believes
that, by simplifying the terms of the
existing agreement in this way, the New
Accord is designed to be efficient and
effective in meeting the requirements of
OCC’s and NSCC’s participants and the
markets they serve.
32 Id.
33 17
E:\FR\FM\05JYN1.SGM
CFR 240.17Ad–22(e)(21).
05JYN1
Federal Register / Vol. 82, No. 127 / Wednesday, July 5, 2017 / Notices
Additionally, the proposal to put
additional arrangements into place
concerning the procedures, information
sharing, and overall governance
processes under the New Accord would
create new efficiencies in the
management of this important link
between OCC and NSCC. The proposal
to enhance information sharing between
OCC and NSCC would allow the
clearing agencies to more effectively
identify, monitor, and manage risks that
may be presented by certain Common
Members, and would create new
efficiencies in their general surveillance
efforts with respect to these firms.
In these ways, OCC believes the
proposed New Accord is consistent with
the requirements of Rule 17Ad–
22(e)(21).34
sradovich on DSK3GMQ082PROD with NOTICES
III. Date of Effectiveness of the Advance
Notice and Timing for Commission
Action
The proposed change may be
implemented if the Commission does
not object to the proposed change
within 60 days of the later of (i) the date
the proposed change was filed with the
Commission or (ii) the date any
additional information requested by the
Commission is received. OCC shall not
implement the proposed change if the
Commission has any objection to the
proposed change.
The Commission may extend the
period for review by an additional 60
days if the proposed change raises novel
or complex issues, subject to the
Commission providing the clearing
agency with prompt written notice of
the extension. A proposed change may
be implemented in less than 60 days
from the date the advance notice is
filed, or the date further information
requested by the Commission is
received, if the Commission notifies the
clearing agency in writing that it does
not object to the proposed change and
authorizes the clearing agency to
implement the proposed change on an
earlier date, subject to any conditions
imposed by the Commission.
OCC shall post notice on its Web site
of proposed changes that are
implemented.
The proposal shall not take effect
until all regulatory actions required
with respect to the proposal are
completed.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing.
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–2017–804 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549.
All submissions should refer to File
Number SR–OCC–2017–804. 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 advance notice that
are filed with the Commission, and all
written communications relating to the
advance notice between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of OCC and on OCC’s Web site at
https://www.theocc.com/components/
docs/legal/rules_and_bylaws/sr_occ_17_
804.pdf.
All comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly.
All submissions should refer to File
Number SR–OCC–2017–804 and should
be submitted on or before July 20, 2017.
By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017–14016 Filed 7–3–17; 8:45 am]
BILLING CODE 8011–01–P
34 Id.
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31117
SECURITIES AND EXCHANGE
COMMISSION
Proposed Collection; Comment
Request
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE., Washington, DC
20549–2736
Extension:
Rule 38a–1; SEC File No. 270–522, OMB
Control No. 3235–0586
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
and Exchange Commission (the
‘‘Commission’’) is soliciting comments
on the collection of information
summarized below. The Commission
plans to submit this existing collection
of information to the Office of
Management and Budget for extension
and approval.
Rule 38a–1 (17 CFR 270.38a–1) under
the Investment Company Act of 1940
(15 U.S.C. 80a) (‘‘Investment Company
Act’’) is intended to protect investors by
fostering better fund compliance with
securities laws. The rule requires every
registered investment company and
business development company
(‘‘fund’’) to: (i) Adopt and implement
written policies and procedures
reasonably designed to prevent
violations of the federal securities laws
by the fund, including procedures for
oversight of compliance by each
investment adviser, principal
underwriter, administrator, and transfer
agent of the fund; (ii) obtain the fund
board of directors’ approval of those
policies and procedures; (iii) annually
review the adequacy of those policies
and procedures and the policies and
procedures of each investment adviser,
principal underwriter, administrator,
and transfer agent of the fund, and the
effectiveness of their implementation;
(iv) designate a chief compliance officer
to administer the fund’s policies and
procedures and prepare an annual
report to the board that addresses
certain specified items relating to the
policies and procedures; and (v)
maintain for five years the compliance
policies and procedures and the chief
compliance officer’s annual report to the
board.
The rule contains certain information
collection requirements that are
designed to ensure that funds establish
and maintain comprehensive, written
internal compliance programs. The
information collections also assist the
Commission’s examination staff in
assessing the adequacy of funds’
compliance programs.
E:\FR\FM\05JYN1.SGM
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]]>Agencies
[Federal Register Volume 82, Number 127 (Wednesday, July 5, 2017)]
[Notices]
[Pages 31109-31117]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-14016]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-81040; File No. SR-OCC-2017-804]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Advance Notice Concerning the Adoption of a New
Stock Options and Futures Settlement Agreement Between The Options
Clearing Corporation and the National Securities Clearing Corporation
June 28, 2017.
Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, entitled Payment, Clearing
and Settlement Supervision Act of 2010 (``Clearing Supervision Act'' or
``Payment, Clearing and Settlement Supervision Act'') \1\ and Rule 19b-
4(n)(1)(i) of the Securities Exchange Act of 1934 (``Act''),\2\ notice
is hereby given that on June 1, 2017, The Options Clearing Corporation
(``OCC'') filed with the Securities and Exchange Commission
(``Commission'') an advance notice 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 advance notice from
interested persons.
---------------------------------------------------------------------------
\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice
This advance notice is filed in connection with proposed changes
relating to a new Stock Options and Futures Settlement Agreement (``New
Accord'') between OCC and the National Securities Clearing Corporation
(``NSCC,'' collectively NSCC and OCC may be referred to herein as the
``clearing agencies'') and amendments to OCC's By-Laws and Rules to
accommodate the proposed provisions of the New Accord.
The proposed changes to OCC's By-Laws and Rules and the proposed
New Accord were submitted as Exhibits 5A-
[[Page 31110]]
5C of the filing, respectively.\3\ The proposed changes are described
in detail in Item 10 below. All terms with initial capitalization not
defined herein have the same meaning as set forth in OCC's By-Laws and
Rules.\4\
---------------------------------------------------------------------------
\3\ OCC has filed a proposed rule change with the Commission in
connection with the New Accord. See SR-OCC-2017-013. NSCC also has
filed proposed rule change and advance notice filings with the
Commission in connection with the New Accord. See NSCC filings SR-
NSCC-2017-007 and SR-NSCC-2017-803, respectively.
\4\ OCC's By-Laws and Rules can be found on OCC's public Web
site: https://optionsclearing.com/about/publications/bylaws.jsp.
Other terms not defined herein or in the OCC By-Laws and Rules can
be found in the Rules & Procedures of NSCC (``NSCC Rules''),
available at https://www.dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf, as the context implies.
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Advance Notice
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the advance notice and
discussed any comments it received on the advance notice. 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 and B below,
of the most significant aspects of these statements.
(A) Clearing Agency's Statement on Comments on the Advance Notice
Received From Members, Participants or Others
Written comments were not and are not intended to be solicited with
respect to the proposed rule change and none have been received. OCC
will notify the Commission of any written comments received by OCC.
(B) Advance Notices Filed Pursuant to Section 806(e) of the Payment,
Clearing, and Settlement Supervision Act
Description of the Proposed Change
Background
OCC issues and clears U.S.-listed options and futures on a number
of underlying financial assets including common stocks, currencies and
stock indices. OCC's Rules, however, provide that delivery of, and
payment for, securities underlying certain physically settled stock
options and single stock futures cleared by OCC are effected through
the facilities of a correspondent clearing corporation (i.e., NSCC) and
are not settled through the facilities OCC. OCC and NSCC are parties to
a Third Amended and Restated Options Exercise Settlement Agreement,
dated February 16, 1995, as amended (``Existing Accord''),\5\ which
governs the delivery and receipt of stock in the settlement of put and
call options issued by OCC (``Stock Options'') that are eligible for
settlement through NSCC's Continuous Net Settlement (``CNS'')
Accounting Operation and are designated to settle on the third business
day following the date the related exercise or assignment was accepted
by NSCC (``Options E&A''). All OCC Clearing Members that intend to
engage in Stock Options transactions are required to also be Members of
NSCC or to have appointed or nominated an NSCC Member to act on its
behalf.\6\
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\5\ The Existing Accord and the proposed changes thereunder were
previously approved by the Commission. See Securities Exchange Act
Release No. 37731 (September 26, 1996), 61 FR 51731 (October 3,
1996) (SR-OCC-96-04 and SR-NSCC-96-11) (Order Approving Proposed
Rule Change Related to an Amended and Restated Options Exercise
Settlement Agreement Between the Options Clearing Corporation and
the National Securities Clearing Corporation); Securities Exchange
Act Release No. 43837 (January 12, 2001), 66 FR 6726 (January 22,
2001) (SR-OCC-00-12) (Order Granting Accelerated Approval of a
Proposed Rule Change Relating to the Creation of a Program to
Relieve Strains on Clearing Members' Liquidity in Connection With
Exercise Settlements); and Securities Exchange Act Release No. 58988
(November 20, 2008), 73 FR 72098 (November 26, 2008) (SR-OCC-2008-18
and SR-NSCC-2008-09) (Notice of Filing and Order Granting
Accelerated Approval of Proposed Rule Changes Relating to Amendment
No. 2 to the Third Amended and Restated Options Exercise Settlement
Agreement).
\6\ A firm that is both an OCC Clearing Member and an NSCC
Member, or is an OCC Clearing Member that has designated an NSCC
Member to act on its behalf is referred to herein as a ``Common
Member.''
---------------------------------------------------------------------------
OCC proposes to adopt a New Accord with NSCC, which would provide
for the settlement of certain Stock Options and delivery obligations
arising from certain matured physically-settled stock futures contracts
cleared by OCC (``Stock Futures''). Specifically, the New Accord would,
among other things: (1) Expand the category of securities that are
eligible for settlement and guaranty under the agreement to certain
securities (including stocks, exchange-traded funds and exchange-traded
notes) that (i) are required to be delivered in the exercise and
assignment of Stock Options and are eligible to be settled through
NSCC's Balance Order Accounting Operation (in addition to its CNS
Accounting Operation) or (ii) are delivery obligations arising from
Stock Futures that have reached maturity and are eligible to be settled
through NSCC's CNS Accounting Operation or Balance Order Accounting
Operation; (2) modify the time of the transfer of responsibilities from
OCC to NSCC and, specifically, when OCC's guarantee obligations under
OCC's By-Laws and Rules with respect to such transactions (``OCC's
Guaranty'') end and NSCC's obligations under Addendum K of the NSCC
Rules with respect to such transactions (``NSCC's Guaranty'') begin
(such transfer being the ``Guaranty Substitution''); and (3) put
additional arrangements into place concerning the procedures,
information sharing, and overall governance processes under the
agreement. Furthermore, OCC proposes to make certain clarifying and
conforming changes to the OCC By-Laws and Rules as necessary to
implement the New Accord.
The primary purpose of the proposed changes is to (1) provide
consistent treatment across all expiries for products with ``regular
way'' \7\ settlement cycle specifications; (2) reduce the operational
complexities of the Existing Accord by eliminating the cross-guaranty
between OCC and NSCC and the bifurcated risk management of exercised
and assigned transactions between the two clearing agencies by
delineating a single point in time at which OCC's Guaranty ceases and
NSCC's Guaranty begins; (3) further solidify the roles and
responsibilities of OCC and NSCC in the event of a default of a Common
Member at either or both clearing agencies; and (4) improve procedures,
information sharing, and overall governance under the agreement.
---------------------------------------------------------------------------
\7\ Under the New Accord, ``regular way settlement'' shall have
a meaning agreed to by the clearing agencies. Generally, regular way
settlement is understood to be the financial services industry's
standard settlement cycle. Currently, regular way settlement of
Stock Options or Stock Futures transactions are those transactions
designated to settle on the third business day following the date
the related exercise, assignment or delivery obligation was accepted
by NSCC. NSCC has proposed to change the NSCC Rules with respect to
the meaning of regular way settlement in order to be consistent with
the anticipated industry-wide move to a shorter standard settlement
cycle of two business days after trade date. See Securities Exchange
Act Release No. 79734 (January 4, 2017), 82 FR 3030 (January 10,
2017) (SR-NSCC-2016-007). See also Securities Exchange Act Release
No. 78962 (September 28, 2016), 81 FR 69240 (October 5, 2016) (S7-
22-16) (Amendment to Securities Transaction Settlement Cycle).
---------------------------------------------------------------------------
The New Accord would become effective, and wholly replace the
Existing Accord, at a date specified in a service level agreement to be
entered into between NSCC and OCC.\8\
---------------------------------------------------------------------------
\8\ Such effective date would be a date following approval of
all required regulatory submissions to be filed by OCC and NSCC with
the appropriate regulatory authorities, including this advance
notice filing. See supra note 3.
---------------------------------------------------------------------------
The Existing Accord
Key Terms of the Existing Accord
Under the Existing Accord, the settlement of Options E&A generally
proceeds according to the following
[[Page 31111]]
sequence of events. NSCC maintains and delivers to OCC a list (``CNS
Eligibility Master File'') that enumerates all CNS Securities, which
are defined in NSCC's Rule 1 and generally include securities that have
been designated by NSCC as eligible for processing through NSCC's CNS
Accounting Operation and eligible for book entry delivery at NSCC's
affiliate, The Depository Trust Company (for purposes of this advance
notice filing, such securities are referred to as ``CNS Eligible
Securities'').\9\ OCC, in turn, uses this file to make a final
determination of which securities NSCC would not accept and therefore
would need to be settled on a broker-to-broker basis. OCC then sends to
NSCC a transactions file,\10\ listing the specific securities that are
to be delivered and received in settlement of an Options E&A that have
not previously been reported to NSCC and for which settlement is to be
made through NSCC (``OCC Transactions File'').\11\ With respect to each
Options E&A, the OCC Transactions File includes the CUSIP number of the
security to be delivered, the identities of the delivering and
receiving Common Members, the quantity to be delivered, the total value
of the quantity to be delivered based on the exercise price of the
option for which such security is the underlying security, and the
exercise settlement date. After receiving the OCC Transactions File,
NSCC then has until 11:00 a.m. Central Time on the following business
day to reject any transaction listed in the OCC Transactions File. NSCC
can reject a transaction if the security to be delivered has not been
listed as a CNS Eligible Security in the CNS Eligible Master File or if
information provided in the OCC Transactions File is incomplete.
Otherwise, if NSCC does not so notify OCC of its rejection of an
Options E&A by the time required under the Existing Accord, NSCC will
become unconditionally obligated to effect settlement of the Options
E&A.
---------------------------------------------------------------------------
\9\ See supra note 4.
\10\ Delivery of the OCC Transactions File with respect to an
Options E&A typically happens on the date of the option's exercise
or expiration, though this is not expressly stated in the Existing
Accord. In theory, however, an Options E&A could, due to an error or
delay, be reported later than the date of the option's exercise or
expiration.
\11\ This process would be substantially the same under the New
Accord with the exception that the CNS Eligibility Master File and
OCC Transactions File would be renamed and would be expanded in
scope to include additional securities that would be eligible for
guaranty and settlement under the New Accord, as discussed in
further detail below.
---------------------------------------------------------------------------
Under the Existing Accord, even after NSCC's trade guarantee has
come into effect,\12\ OCC is not released from its guarantee with
respect to the Options E&A until certain deadlines \13\ have passed on
the first business day following the scheduled settlement date without
NSCC notifying OCC that the relevant Common Member has failed to meet
an obligation to NSCC or NSCC has ceased to act for such Common Member
pursuant to the NSCC Rules.\14\ As a result, there is a period of time
when NSCC's trade guarantee overlaps with OCC's guarantee and where
both clearing agencies are holding margin against the same Options E&A
position.
---------------------------------------------------------------------------
\12\ Pursuant to Addendum K of the NSCC Rules, NSCC guarantees
the completion of CNS transactions and balance order transactions
that have reached the point at which, for bi-lateral submissions by
Members, such trades have been validated and compared by NSCC, and
for locked-in submission, such trades have been validated by NSCC,
as described in the NSCC Rules. Transactions that are covered by the
Existing Accord, and that would be covered by the New Accord, are
expressly excluded from the timeframes described in Addendum K. See
supra note 4.
\13\ The deadline is 6:00 a.m. Central Time for NSCC notifying
OCC of a Common Member failure and, if NSCC does not immediately
cease to act for such defaulting Common Member, 4:00 p.m. Central
Time for notifying OCC that it has ceased to act.
\14\ See NSCC Rule 46 (Rule 46 (Restrictions on Access to
Services)). See supra note 4.
---------------------------------------------------------------------------
In the event that NSCC or OCC ceases to act on behalf of or
suspends a Common Member, that Common Member becomes a ``defaulting
member.'' Once a Common Member becomes a defaulting member, the
Existing Accord provides that NSCC will make a payment to OCC equal to
the lesser of OCC's loss or the positive mark-to-market amount relating
to the defaulting member's Options E&A and that OCC will make a payment
to NSCC equal to the lesser of NSCC's loss or the negative mark-to-
market amount relating to the defaulting member's Options E&A to
compensate for potential losses incurred in connection with the
default. A clearing agency must request the transfer of any such
payments by the close of business on the tenth business day following
the day of default and, after a request is made, the other clearing
agency is required to make payment within five business days of the
request.
The New Accord
Overview
As noted above, NSCC proposes to adopt a New Accord with OCC, which
would provide for the settlement of certain Stock Options and Stock
Futures transactions. The New Accord is primarily designed to, among
other things, expand the category of securities that are eligible for
settlement and guaranty under the agreement; simplify the time of the
transfer of responsibilities from OCC to NSCC (specifically, the
transfer of guarantee obligations); and put additional arrangements
into place concerning the procedures, information sharing, and overall
governance processes under the agreement. The material provisions of
the New Accord are described in detail below.
Key Elements of the New Accord
Expanded Scope of Eligible Securities
Pursuant to the proposed New Accord, on each day that both OCC and
NSCC are open for accepting trades for clearing (``Activity Date''),
NSCC would deliver to OCC an ``Eligibility Master File,'' which would
identify the securities, including stocks, exchange-traded funds and
exchange-traded notes, that are (1) eligible to settle through NSCC's
CNS Accounting Operation (as is currently the case under the Existing
Accord) or NSCC's Balance Order Accounting Operation (which is a
feature of the New Accord) and (2) to be delivered in settlement of (i)
exercises and assignments of Stock Options (as is currently the case
under the Existing Accord) or (ii) delivery obligations arising from
maturing physically settled Stock Futures (which is a feature of the
New Accord) (all such securities collectively being ``Eligible
Securities''). OCC, in turn, would deliver to NSCC its file of E&A/
Delivery Transactions \15\ that list the Eligible Securities to be
delivered, or received, and for which settlement is proposed to be made
through NSCC on that Activity Date. Guaranty Substitution (discussed
further below) would not occur with respect to an E&A/Delivery
Transaction that is not submitted in the proper format or that involves
a security that is not identified as an Eligible Security on the then-
current Eligibility Master File. This process is similar to the current
process under the Existing Accord with the exception of the expanded
scope of Eligible Securities (and additional fields necessary to
accommodate such securities) that would be listed on the
[[Page 31112]]
Eligibility Master File and the E&A/Delivery Transactions file.
---------------------------------------------------------------------------
\15\ ``E&A/Delivery Transactions'' are transactions involving
the settlement of Stock Options and Stock Futures under the New
Accord. The delivery of E&A/Delivery Transactions to NSCC would
replace the delivery of the ``OCC Transactions File'' from the
Existing Accord. The actual information delivered by OCC to NSCC
would be the same as is currently provided on the OCC Transactions
File, but certain additional terms would be included to accommodate
the inclusion of Stock Futures, along with information regarding the
date that the instruction to NSCC was originally created and the
E&A/Delivery Transaction's designated settlement date.
---------------------------------------------------------------------------
Like the Existing Accord, the proposed New Accord would continue to
facilitate the processes by which Common Members deliver and receive
stock in the settlement of Stock Options that are eligible to settle
through NSCC's CNS Accounting Operation and are designated to settle
regular way. The New Accord would also expand the category of
securities eligible for settlement under the agreement. In particular,
the New Accord would facilitate the processes by which Common Members
deliver and receive stock in settlement of Stock Futures that are
eligible to settle through NSCC's CNS Accounting Operation and are
designated to settle regular way. It would also provide for the
settlement of both Stock Options and Stock Futures that are eligible to
settle through NSCC's Balance Order Accounting Operation on a regular
way basis. The primary purpose of expanding the category of securities
that are eligible for settlement and guaranty under the agreement is to
provide consistent treatment across all expiries for products with
regular way settlement cycle specifications and simplify the settlement
process for these additional securities transactions.
The New Accord would not apply to Stock Options or Stock Futures
that are designated to settle on a shorter timeframe than the regular
way settlement timeframe. These Stock Options would continue to be
processed and settled as they would be today, outside of the New
Accord. The New Accord also would not apply to any Stock Options or
Stock Futures that are neither CNS Securities nor Balance Order
Securities.\16\ Transactions in these securities are, and would
continue to be, processed on a trade-for-trade basis away from NSCC's
facilities. Such transactions may utilize other NSCC services for which
they are eligible, but would not be subject to the New Accord.\17\
---------------------------------------------------------------------------
\16\ Balance Order Securities are defined in NSCC Rule 1, and
are generally securities, other than foreign securities, that are
eligible to be cleared at NSCC but are not eligible for processing
through the CNS Accounting Operation. See supra note 4.
\17\ OCC will continue to guarantee settlement until settlement
actually occurs with respect to these Stock Options and Stock
Futures.
---------------------------------------------------------------------------
Proposed Changes Related to Guaranty Substitution
The New Accord would adopt a fundamentally different approach to
the delineation of the rights and responsibilities of OCC and NSCC with
respect to E&A/Delivery Transactions. The purpose of the proposed
changes related to the Guaranty Substitution, defined below, is to
reduce the operational complexities of the Existing Accord by
eliminating the cross-guaranty between OCC and NSCC and the bifurcated
risk management of exercised and assigned transactions between the two
clearing agencies and delineating a single point in time at which OCC's
Guaranty ceases and NSCC's Guaranty begins. Moreover, the proposed
changes would solidify the roles and responsibilities of OCC and NSCC
in the event of a default of a Common Member at either or both clearing
agencies.
As described above, the Existing Accord provides that NSCC will
make a payment to OCC following the default of a Common Member in an
amount equal to the lesser of OCC's loss or the positive mark-to-market
amount relating to the Common Member's Options E&A, and provides that
OCC will make a payment to NSCC following the default of a Common
Member equal to the lesser of NSCC's loss or the negative mark-to-
market amount relating to the Common Member's Options E&A to compensate
for potential losses incurred in connection with the Common Member's
default. The proposed New Accord, in contrast, would focus on the
transfer of responsibilities from OCC to NSCC and, specifically, the
point at which OCC's Guaranty ends and NSCC's Guaranty begins (i.e.,
the Guaranty Substitution) with respect to E&A/Delivery Transactions.
By focusing on the timing of the Guaranty Substitution, rather than
payment from one clearing agency to the other, the New Accord would
simplify the agreement and the procedures for situations involving the
default of a Common Member. The New Accord additionally would minimize
``double-margining'' situations when a Common Member may simultaneously
owe margin to both NSCC and OCC with respect to the same E&A/Delivery
Transaction.
After NSCC has received an E&A/Delivery Transaction, the Guaranty
Substitution would normally occur when NSCC has received all Required
Deposits to its Clearing Fund, calculated taking into account such E&A/
Delivery Transaction, of Common Members (``Guaranty Substitution
Time'').\18\ At the Guaranty Substitution Time, NSCC's Guaranty takes
effect, and OCC does not retain any settlement obligations with respect
to such E&A/Delivery Transactions. The Guaranty Substitution would not
occur, however, with respect to any E&A/Delivery Transaction if NSCC
has rejected such E&A/Delivery Transaction due to an improper
submission, as described above, or if, during the time after NSCC's
receipt of the E&A/Delivery Transaction but prior to the Guaranty
Substitution Time, a Common Member involved in the E&A/Delivery
Transaction has defaulted on its obligations to NSCC by failing to meet
its Clearing Fund obligations, or NSCC has otherwise ceased to act for
such Common Member pursuant to the NSCC Rules (in either case, such
Common Member becomes a ``Defaulting NSCC Member'').
---------------------------------------------------------------------------
\18\ Procedure XV of the NSCC Rules provides that all Clearing
Fund requirements and other deposits must be made within one hour of
demand, unless NSCC determines otherwise. See supra note 4.
---------------------------------------------------------------------------
NSCC would be required to promptly notify OCC if a Common Member
becomes a Defaulting NSCC Member, as described above. Upon receiving
such a notice, OCC would not submit to NSCC any further E&A/Delivery
Transactions involving the Defaulting NSCC Member for settlement,
unless authorized representatives of both OCC and NSCC otherwise
consent. OCC would, however, deliver to NSCC a list of all E&A/Delivery
Transactions that have already been submitted to NSCC and that involve
the Defaulting NSCC Member (``Defaulted NSCC Member Transactions'').
The Guaranty Substitution ordinarily would not occur with respect to
any Defaulted NSCC Member Transactions, unless both clearing agencies
agree otherwise. As such, NSCC would have no obligation to guaranty
such Defaulted NSCC Member Transactions, and OCC would continue to be
responsible for effecting the settlement of such Defaulted NSCC Member
Transactions pursuant to OCC's By-Laws and Rules. Once NSCC has
confirmed the list of Defaulted NSCC Member Transactions, Guaranty
Substitution would occur for all E&A/Delivery Transactions for that
Activity Date that are not included on such list. NSCC would be
required to promptly notify OCC upon the occurrence of the Guaranty
Substitution Time on each Activity Date.
If OCC suspends a Common Member after NSCC has received the E&A/
Delivery Transactions but before the Guaranty Substitution has
occurred, and that Common Member has not become a Defaulting NSCC
Member, the Guaranty Substitution would proceed at the Guaranty
Substitution Time. In such a scenario, OCC would continue to be
responsible for guaranteeing the settlement of the E&A/Delivery
Transactions in question until the Guaranty Substitution Time, at which
time the responsibility would transfer to NSCC. If, however, the
suspended Common Member also becomes a
[[Page 31113]]
Defaulting NSCC Member after NSCC has received the E&A/Delivery
Transactions but before the Guaranty Substitution has occurred,
Guaranty Substitution would not occur, and OCC would continue to be
responsible for effecting the settlement of such Defaulted NSCC Member
Transactions pursuant to OCC's By-Laws and Rules (unless both clearing
agencies agree otherwise).
Finally, the New Accord also would provide for the consistent
treatment of all exercise and assignment activity under the agreement.
Under the Existing Accord, ``standard'' \19\ option contracts become
guaranteed by NSCC when the Common Member meets its morning Clearing
Fund Required Deposit at NSCC while ``non-standard'' exercise and
assignment activity becomes guaranteed by NSCC at midnight of the day
after trade date (T+1). Under the New Accord, all exercise and
assignment activity for Eligible Securities would be guaranteed by NSCC
as of the Guaranty Substitution Time, under the circumstances described
above, further simplifying the framework for the settlement of such
contracts.
---------------------------------------------------------------------------
\19\ Option contracts with ``standard'' expirations expire on
the third Friday of the specified expiration month, while ``non-
standard'' contracts expire on other days of the expiration month.
---------------------------------------------------------------------------
Other Terms of the New Accord
The New Accord also would include a number of other provisions
intended to either generally maintain certain terms of the Existing
Accord or improve the procedures, information sharing, and overall
governance process under the new agreement. Many of these terms are
additions to or improvements upon the terms of the Existing Accord.
Under the proposed New Accord, OCC and NSCC would agree to address
the specifics regarding the time, form and manner of various required
notifications and actions in a separate service level agreement which
the parties would be able to revisit as their operational needs evolve.
The service level agreement would also specify an effective date for
the New Accord, which, as mentioned above, would occur on a date
following approval and effectiveness of all required regulatory
submissions to be filed by OCC and NSCC with the appropriate regulatory
authorities. Similar to the Existing Accord, the proposed New Accord
would remain in effect (a) until it is terminated by the mutual written
agreement of OCC and NSCC, (b) until it is unilaterally terminated by
either clearing agency upon one year's written notice (as opposed to
six months under the Existing Accord), or (c) until it is terminated by
either NSCC or OCC upon the bankruptcy or insolvency of the other,
provided that the election to terminate is communicated to the other
party within three business days by written notice.
Under the proposed New Accord, NSCC would agree to notify OCC if
NSCC ceases to act for a Common Member pursuant to the NSCC Rules no
later than the earlier of NSCC's provision of notice of such action to
the governmental authorities or notice to other NSCC Members.
Furthermore, if an NSCC Member for which NSCC has not yet ceased to act
fails to satisfy its Clearing Fund obligations to NSCC, NSCC would be
required to notify OCC promptly after discovery of the failure.
Likewise, OCC would be required to notify NSCC of the suspension of a
Common Member no later than the earlier of OCC's provision of notice to
the governmental authorities or other OCC Clearing Members.
Under the Existing Accord, NSCC and OCC agree to share certain
reports and information regarding settlement activity and obligations
under the agreement. The New Accord would enhance this information
sharing between the clearing agencies. Specifically, NSCC and OCC would
agree to share certain information, including general risk management
due diligence regarding Common Members, lists of Common Members, and
information regarding the amounts of Common Members' margin and
settlement obligations at OCC or Clearing Fund Required Deposits at
NSCC. NSCC and OCC would also be required to provide the other clearing
agency with any other information that the other reasonably requests in
connection with the performance of its obligations under the New
Accord. All such information would be required to be kept confidential,
using the same care and discretion that each clearing agency uses for
the safekeeping of its own members' confidential information. NSCC and
OCC would each be required to act in good faith to resolve and notify
the other of any errors, discrepancies or delays in the information it
provides.
The New Accord also would include new terms to provide that, to the
extent one party is unable to perform any obligation as a result of the
failure of the other party to perform its responsibilities on a timely
basis, the time for the non-failing party's performance would be
extended, its performance would be reduced to the extent of any such
impairment, and it would not be liable for any failure to perform its
obligations. Further, NSCC and OCC would agree that neither party would
be liable to the other party in connection with its performance of its
obligations under the proposed New Accord to the extent it has acted,
or omitted or ceased to act, with the permission or at the direction of
a governmental authority. Moreover, the proposed New Accord would
provide that in no case would either clearing agency be liable to the
other for punitive, incidental or consequential damages. The purpose of
these new provisions is to provide clear and specific terms regarding
each clearing agency's liability for non-performance under the
agreement.
The proposed New Accord would also contain the usual and customary
representations and warranties for an agreement of this type, including
representations as to the parties' good standing, corporate power and
authority and operational capability, that the agreement complies with
laws and all government documents and does not violate any agreements,
and that all of the required regulatory notifications and filings would
be obtained prior to the New Accord's effective date. It would also
include representations that the proposed New Accord constitutes a
legal, valid and binding obligation on each of OCC and NSCC and is
enforceable against each, subject to standard exceptions. Furthermore,
the proposed New Accord would contain a force majeure provision, under
which NSCC and OCC would agree to notify the other no later than two
hours upon learning that a force majeure event has occurred and both
parties would be required to cooperate in good faith to mitigate the
effects of any resulting inability to perform or delay in performing.
Proposed Amendments to OCC's By-Laws and Rules
Given the key differences between the Existing Accord and the New
Accord, as described above, OCC proposes certain changes to its By-Laws
and Rules in order to accommodate the terms of the New Accord. The
primary purpose of the proposed changes is to: (1) Reflect the expanded
scope of the New Accord, (2) reflect changes related to the new
Guaranty Substitution mechanics of the New Accord; and (3) make other
changes necessary to conform to the terms of the New Accord or to
otherwise provide additional clarity around the settlement and
margining \20\ treatment
[[Page 31114]]
of: (i) Eligible Securities under the New Accord, (ii) non-regular way
securities settling through the facilities of NSCC but outside of the
New Accord, and (iii) those securities settling outside of the New
Accord and away from NSCC on a broker-to-broker basis. These proposed
changes are discussed in greater detail below.
---------------------------------------------------------------------------
\20\ OCC notes that, while it is proposing changes to its Rules
concerning margin requirements (e.g., which transactions would be
included as part of OCC's margin calculation at a given point in
time), OCC is not proposing any changes to its margin model (with
the exception that OCC would no longer collect and hold margin for
positions after NSCC's Guaranty has taken effect under the New
Accord).
---------------------------------------------------------------------------
Changes Related to the Expanded Scope of the New Accord
First, OCC proposes to amend and replace the defined term ``CNS-
eligible'' \21\ in order to reflect the expanded definition of Eligible
Securities under the New Accord. The term ``CNS-eligible'' currently
describes the securities underlying the physically-settled stock
options that are eligible under the Existing Accord to be settled
through NSCC's CNS Accounting Operation. Under the New Accord, however,
the term Eligible Securities is more broadly defined to include
securities (both Stock Options and Stock Futures) eligible for
settlement via NSCC's CNS Accounting Operation and NSCC's Balance Order
Accounting Operation. Accordingly, OCC proposes to use ``CCC,'' for
``correspondent clearing corporation'' \22\ to describe the Eligible
Securities. Thus, the term ``CCC-eligible'' would replace ``CNS-
eligible'' throughout OCC's By-Laws and Rules.
---------------------------------------------------------------------------
\21\ See Article I, Section (C)(23) of OCC's By-Laws.
\22\ Under Article I of OCC's By-Laws, the term ``correspondent
clearing corporation'' means the National Securities Clearing
Corporation or any successor thereto which, by agreement with the
Corporation, provides facilities for settlements in respect of
exercised option contracts or BOUNDs or in respect of delivery
obligations arising from physically-settled stock futures.
---------------------------------------------------------------------------
Next, because the New Accord would include the settlement of Stock
Futures, OCC proposes to make several changes to its rules regarding
Stock Futures to accommodate this expansion. More specifically, OCC
proposes a conforming amendment to Rule 901 Interpretation and Policy
(.02) to clarify that, under the New Accord, OCC will, subject to its
discretion, cause the settlement of all matured Stock Futures to be
made through the facilities of NSCC to the extent that the underlying
securities are CCC-eligible as the term is currently proposed.
OCC also proposes clarifying and conforming revisions to newly
renumbered Rule 901(e) (currently Rule 901(d)) to specify that
settlements made through the facilities of the correspondent clearing
corporation are governed by Rule 901 and to clarify that, under the New
Accord, specifications made in any Delivery Advice may be revoked up
until the point at which NSCC's Guaranty has taken effect (the
``obligation time'' as discussed below) and not the opening of business
on the delivery date.
Changes Related to Guaranty Substitution
OCC also proposes a series of amendments to its Rules to accurately
reflect the process under which the Guaranty Substitution occurs under
the New Accord. First, OCC proposes to amend Rule 901(c) so that the
term ``obligation time''--the time that the correspondent clearing
corporation becomes unconditionally obligated, in accordance with its
rules, to effect settlement in respect thereof or to close out the
securities contract arising therefrom--is synonymous with the Guaranty
Substitution Time under the New Accord and (i.e., (i) settlement
obligations are reported to and are not rejected by NSCC; (ii) NSCC has
not notified OCC that it has ceased to act for the relevant Clearing
Member; and (iii) the Clearing Fund requirements of the relevant
Clearing Member are received by NSCC). Under the New Accord, if a
default occurs prior to the Guaranty Substitution Time, the Guaranty
Substitution will not occur for any E&A/Delivery Transactions involving
the Defaulting NSCC Member, and OCC will continue to guarantee
settlement for those Defaulted NSCC Member Transactions.
Next, OCC proposes to amend language in newly renumbered Rule
901(i) (currently Rule 901(h)) regarding the timing of the end of a
Clearing Member's obligations to OCC with respect to securities to be
settled through NSCC. Under the Existing Accord and OCC's existing
Rules, a Clearing Member's obligations to OCC end only once settlement
is completed. Under the New Accord, however, a Clearing Member's
obligations to OCC will end when OCC's obligations with respect to
guaranteeing settlement of the security would end (i.e., the Guaranty
Substitution Time or ``obligation time''). OCC therefore proposes to
amend newly renumbered Rule 901(i) to specify that a Clearing Member's
obligations to OCC will be deemed completed and performed once the
``obligation time'' has occurred.
As discussed above, the New Accord eliminates the provisions of the
Existing Accord whereby OCC and NSCC guaranteed each other the
performance of Common Members and made certain payments to the other
upon the default of a Common Member. As such, OCC proposes to delete
discussions of such guarantees and payments from newly renumbered Rule
901(i) and Rule 1107.
OCC also proposes amendments to Rules 910 and 911, which set forth
procedures for handling failures to make or take delivery of securities
in settlement of exercised or assigned Stock Options and matured
physically-settled Stock Futures, to add language to both rules to
clarify that the failure procedures set forth therein would not apply
with respect to any delivery to be made through NSCC pursuant to Rule
901. Under the New Accord, once the Guaranty Substitution Time with
respect to a specific E&A/Delivery Transaction occurs, OCC's Guaranty
ends and NSCC's Guaranty begins, leaving OCC with no involvement with
or responsibility for the settlement of the securities underlying that
transaction. Therefore, if there is a failure to make or take delivery
with respect to that transaction after Guaranty Substitution has
occurred, the NSCC Rules will govern that failure. With respect to
deliveries made on a broker-to-broker basis under OCC Rules 903 through
912 (including those that may utilize NSCC's Obligation Warehouse
services), and which are not governed by Rule 901, Guaranty
Substitution does not occur and OCC's failure procedures would apply.
Changes to OCC's Margin Rules
Under the New Accord, OCC will no longer collect margin on a
transaction once it is no longer guaranteeing settlement for that
transaction. As such, OCC proposes to add language to Rule 601(f) to
clarify that OCC's margin calculations will not include delivery
obligations arising from any Stock Options or Stock Futures that are
eligible for settlement through NSCC and for which OCC has no further
settlement obligations because either (i) Guaranty Substitution has
occurred for E&A/Delivery Transactions under the New Accord (as
described in revised Rule 901(c)) or (ii) NSCC has otherwise accepted
transactions for non-regular way settlement under the NSCC Rules (as
describe in newly proposed Rule 901(d)).\23\ By not including these
transactions as part of OCC's margin calculation, OCC is hoping to
alleviate instances of ``double-margining'' for Common Members that may
otherwise simultaneously owe margin to NSCC
[[Page 31115]]
and OCC with respect to the same position.
---------------------------------------------------------------------------
\23\ Related revisions to Rule 901(c) and newly proposed Rule
901(d) are discussed in more detail below.
---------------------------------------------------------------------------
OCC also proposes to delete Rule 608A in its entirety. The New
Accord seeks to eliminate the situation under the Existing Accord where
Common Members are effectively ``double-margined'' or required to
simultaneously post margin with OCC and NSCC with respect to the same
position. As the New Accord eliminates this double-margining scenario,
Rule 608A, which provides procedures pursuant to which a Clearing
Member could use the securities deposited as margin with OCC as
collateral to secure a loan to pay its margin obligations to NSCC, is
now unnecessary.
Other Clarifying Changes Not Related to the New Accord
OCC also proposes to amend its Rules to make clarifying changes
that are not directly required by the New Accord but would provide
additional clarity in its Rules in light of other changes being made to
accommodate the New Accord. Specifically, OCC proposes to revise Rule
901 Interpretation and Policy (.02) to provide that transactions that
involve the delivery of non-CCC eligible securities made on a broker-
to-broker basis (and away from NSCC) may nevertheless involve the use
of certain services of NSCC (e.g., NSCC's Obligation Warehouse). For
such transactions, because they are not covered by the New Accord and
NSCC at no point guarantees settlement, OCC Rule 901 would not apply
and delivery is governed by the broker-to-broker settlement procedures
set forth in OCC Rules 903 through 912, as is the case currently today.
Additionally, while OCC's existing Rules do not prohibit broker-to-
broker settlements from being facilitated through the services of a
correspondent clearing corporation, they do not explicitly contemplate
the possibility. OCC also proposes to make clarifying amendments to
Rule 904(b) and 910A(a) to more clearly distinguish between settlements
effected through NSCC's CNS Accounting Operation or Balance Order
Accounting Operations in accordance with OCC Rule 901 and deliveries
effected on a broker-to-broker basis utilizing services of NSCC under
OCC Rules 903 through 912 and to clearly state which OCC Rules apply in
each context.
Further, OCC proposes to add a new paragraph (d) to Rule 901 to
clarify that OCC still intends, at its discretion, to effect settlement
of Stock Options and Stock Futures that are scheduled to be settled on
the first business day after exercise or maturity through NSCC pursuant
to Rule 901 and the relevant provisions of the NSCC Rules, even though
such contracts are outside the scope of the New Accord. These contracts
would continue to be settled as they are currently today.
OCC also proposes clarifying and conforming changes to the
introductory language of Chapter IX of the Rules. Specifically, OCC
proposes conforming changes to the Rule to reflect the replacement of
the defined term ``CNS-eligible'' with ``CCC-eligible'' as described
above. The proposed changes would also clarify that OCC's broker-to-
broker settlement rules are contained in Rules 903-912, as Rule 902
concerns Delivery Advices, which also may be applicable to settlements
made through the correspondent clearing corporation pursuant to Rule
901. In addition, the proposed changes to the introductory language of
Chapter IX of the Rules would provide additional clarity around OCC's
existing authority to alter a previous designation of a settlement
method at any time prior to the designated delivery date by specifying
that this authority would apply to both settlements to be made through
the facilities of the correspondent clearing corporation pursuant to
Rule 901 or settlements to be made on a broker-to-broker basis pursuant
to Rules 903 through 912. Finally, OCC proposes a number of conforming
changes to Rules 901 and 912 to reflect the renumbering of various Rule
provisions due to the proposed amendments described above.
Expected Effect on and Management of Risk
OCC believes that the proposed change, which would adopt the New
Accord and make conforming changes to the OCC By-Laws and Rules to
accommodate the New Accord, would reduce the overall level of risk to
OCC, its Clearing Members, and the markets served by OCC.
In connection with the proposal to enhance the timing of the
Guaranty Substitution, the New Accord would provide a clearer, simpler
framework for the settlement of Stock Options and Stock Futures. By
pinpointing a specific moment in time, the Guaranty Substitution Time,
at which guarantee obligations transfer from OCC to NSCC with respect
to each cleared securities transaction, the New Accord would eliminate
any ambiguity regarding which clearing agency is responsible for
guaranteeing settlement at any given moment. Establishing a precise
Guaranty Substitution Time also provides greater certainty that, in the
event of the default of a Common Member, the default would be handled
pursuant to the rules and procedures of the clearing agency whose
guarantee is then in effect and the system for the settlement and
clearance of Stock Options and Stock Futures would continue with
minimal interruption. This greater certainty strengthens OCC's and
NSCC's ability to plan for and manage, and therefore mitigate, the risk
presented by Common Member defaults to OCC, other Clearing Members and
the market as a whole.
The proposal to expand the category of securities eligible for
settlement and guaranty under the New Accord would provide consistent
treatment across all expiries for products with regular way settlement
cycle specifications, and would provide a clearer, simpler framework
for the settlement of these securities. Finally, the proposal to put
additional arrangements into place concerning the procedures,
information sharing, and overall governance processes under the New
Accord, would assist the clearing agencies to more effectively
identify, monitor, and manage risks that may be presented by certain
Common Members, and would create new efficiencies in their general
surveillance efforts with respect to these firms.
Consistency With the Clearing Supervision Act
The stated purpose of the Clearing 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.\24\
Section 805(a)(2) of the Clearing Supervision Act \25\ also authorizes
the Commission to prescribe risk management standards for the payment,
clearing and settlement activities of designated clearing entities,
like OCC, for which the Commission is the supervisory agency. Section
805(b) of the Clearing Supervision Act \26\ states that the objectives
and principles for risk management standards prescribed under Section
805(a) shall be to:
---------------------------------------------------------------------------
\24\ 12 U.S.C. 5461(b).
\25\ 12 U.S.C. 5464(a)(2).
\26\ 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 Clearing Supervision Act and the Act in furtherance of
these objectives and principles, including
[[Page 31116]]
those standards adopted pursuant to the Commission rules cited
below.\27\ For the reasons set forth below, OCC believes that the
proposed change is consistent with the risk management standards
promulgated under Section 805(a) of the Clearing Supervision Act.\28\
---------------------------------------------------------------------------
\27\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release
Nos. 68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-
08-11) (``Clearing Agency Standards''); 78961 (September 28, 2016),
81 FR 70786 (October 13, 2016) (S7-03-14) (``Standards for Covered
Clearing Agencies''). The Standards for Covered Clearing Agencies
became effective on December 12, 2016. OCC is a ``covered clearing
agency'' as defined in Rule 17Ad-22(a)(5) and therefore is subject
to section (e) of Rule 17Ad-22.
\28\ 12 U.S.C. 5464(a).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(1) requires that a covered clearing agency
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide for a well-founded, clear,
transparent, and enforceable legal basis for each aspect of its
activities in all relevant jurisdictions.\29\ The New Accord would
constitute a legal, valid and binding obligation on each of OCC and
NSCC, which is enforceable against each clearing agency. In connection
with the proposal to enhance the timing of the Guaranty Substitution,
the New Accord would establish clear, transparent, and enforceable
terms for the settlement of OCC's cleared Stock Options and Stock
Futures through the facilities of NSCC and would simplify the
settlement process for those Stock Options currently settled under the
Existing Accord. By clarifying the timing and mechanisms by which OCC's
Guaranty ends and NSCC's Guaranty begins by focusing on the timing of
the Guaranty Substitution, the new Accord, specifically the proposal to
enhance the timing of the Guaranty Substitution, would provide a clear,
transparent and enforceable legal basis for OCC's and NSCC's
obligations during the event of a Common Member default. As a result,
OCC believes that the proposal is consistent with the requirements of
Rule 17Ad-22(e)(1).\30\
---------------------------------------------------------------------------
\29\ 17 CFR 240.17Ad-22(e)(1).
\30\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(20) requires, in part, that a covered clearing
agency establish, implement, maintain and enforce written policies and
procedures reasonably designed to identify, monitor, and manage risks
related to any link the covered clearing agency establishes with one or
more other clearing agencies or financial market utilities.\31\
---------------------------------------------------------------------------
\31\ 17 CFR 240.17Ad-22(e)(20).
---------------------------------------------------------------------------
OCC is proposing to adopt the New Accord in order to address the
risks it has identified related to its existing link with the NSCC
within the Existing Accord. Specifically, under the terms of the
Existing Accord, even after NSCC's guarantee has come into effect, OCC
is not released from its guarantee with respect to the Options E&A
until certain deadlines have passed on the first business day following
the scheduled settlement date without NSCC notifying OCC that the
relevant Common Member has failed to meet an obligation to NSCC and/or
NSCC has ceased to act for such firm. This current process results in a
period of time where NSCC's trade guarantee and OCC's guarantee both
apply to the same positions, and, therefore, both clearing agencies are
holding margin against the same Options E&A position. As a result, the
Existing Accord provides for a more complicated framework for the
settlement of certain Stock Options. These complications could give
rise to inconsistencies with regard to the development and application
of interdependent policies and procedures between OCC and NSCC, which
could lead to unanticipated disruptions in OCC's or NSCC's clearing
operations.
In connection with the proposal to enhance the timing of the
Guaranty Substitution, the New Accord would provide for a clearer,
simpler framework for the settlement of certain Stock Options and Stock
Futures by pinpointing a specific moment in time, the Guaranty
Substitution Time, at which guarantee obligations would transfer from
OCC to NSCC. The New Accord would eliminate any ambiguity regarding
which clearing agency is responsible for guaranteeing settlement at any
given moment. Establishing a precise Guaranty Substitution Time would
also provide greater certainty that in the event of a Common Member
default, the default would be handled pursuant to the rules and
procedures of the clearing agency whose guarantee is then in effect and
the system for the clearance and settlement of Stock Options and Stock
Futures would continue with minimal interruption. This greater
certainty would strengthen OCC's and NSCC's ability to plan for and
manage, and therefore would mitigate, the risk presented by Common
Member defaults to OCC and NSCC, other members, and the markets the
clearing agencies serve. Therefore, through the adoption of the
proposal to enhance the timing of the Guaranty Substitution, OCC would
more effectively manage its risks related to the operation of the New
Accord.
Moreover, in connection with the proposal to put additional
arrangements into place concerning the procedures, information sharing,
and overall governance processes under the New Accord, NSCC and OCC
would agree to share certain information, including general
surveillance information regarding their members, so that each clearing
agency would be able to effectively identify, monitor, and manage risks
that may be presented by certain Common Members. Accordingly, OCC
believes the proposed changes are reasonably designed to identify,
monitor, and manage risks related to the link established between OCC
and NSCC for the settlement of certain Stock Options and Stock Futures
in a manner consistent with Rule 17Ad-22(e)(20).\32\
---------------------------------------------------------------------------
\32\ Id.
---------------------------------------------------------------------------
Finally, Rule 17Ad-22(e)(21) requires that a covered clearing
agency establish, implement, maintain and enforce written policies and
procedures reasonably designed to, among other things, be efficient and
effective in meeting the requirements of its participants and the
markets it serves.\33\ As noted above, under the Existing Accord, even
after NSCC's guarantee has come into effect, OCC is not released from
its guarantee with respect to the Options E&A until certain deadlines
have passed on the first business day following the scheduled
settlement date without NSCC notifying OCC that the relevant Common
Member has failed to meet an obligation to NSCC and/or NSCC has ceased
to act for such firm. This results in a period of time where NSCC's
guarantee overlaps with OCC's guarantee and where both clearing
agencies are holding margin against the same Options E&A positions. In
connection with the proposal to enhance the timing of the Guaranty
Substitution, the New Accord would minimize this ``double margining''
issue by introducing a new Guaranty Substitution Time, which would
normally occur as soon as NSCC has received all Required Deposits to
the Clearing Fund from Common Members, which have been calculated
taking into account the relevant E&A/Delivery Transactions, rather than
require reimbursement payments from one clearing agency to the other.
As a result, Common Members would no longer be required to post margin
at both clearing agencies to cover the same E&A/Delivery Transactions.
OCC believes that, by simplifying the terms of the existing agreement
in this way, the New Accord is designed to be efficient and effective
in meeting the requirements of OCC's and NSCC's participants and the
markets they serve.
---------------------------------------------------------------------------
\33\ 17 CFR 240.17Ad-22(e)(21).
---------------------------------------------------------------------------
[[Page 31117]]
Additionally, the proposal to put additional arrangements into
place concerning the procedures, information sharing, and overall
governance processes under the New Accord would create new efficiencies
in the management of this important link between OCC and NSCC. The
proposal to enhance information sharing between OCC and NSCC would
allow the clearing agencies to more effectively identify, monitor, and
manage risks that may be presented by certain Common Members, and would
create new efficiencies in their general surveillance efforts with
respect to these firms.
In these ways, OCC believes the proposed New Accord is consistent
with the requirements of Rule 17Ad-22(e)(21).\34\
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\34\ Id.
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III. Date of Effectiveness of the Advance Notice and Timing for
Commission Action
The proposed change may be implemented if the Commission does not
object to the proposed change within 60 days of the later of (i) the
date the proposed change was filed with the Commission or (ii) the date
any additional information requested by the Commission is received. OCC
shall not implement the proposed change if the Commission has any
objection to the proposed change.
The Commission may extend the period for review by an additional 60
days if the proposed change raises novel or complex issues, subject to
the Commission providing the clearing agency with prompt written notice
of the extension. A proposed change may be implemented in less than 60
days from the date the advance notice is filed, or the date further
information requested by the Commission is received, if the Commission
notifies the clearing agency in writing that it does not object to the
proposed change and authorizes the clearing agency to implement the
proposed change on an earlier date, subject to any conditions imposed
by the Commission.
OCC shall post notice on its Web site of proposed changes that are
implemented.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. 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-2017-804 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549.
All submissions should refer to File Number SR-OCC-2017-804. 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 advance notice that are filed
with the Commission, and all written communications relating to the
advance notice between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for Web site viewing and printing in
the Commission's Public Reference Room, 100 F Street NE., Washington,
DC 20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of OCC and on OCC's Web site at
https://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_17_804.pdf.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly.
All submissions should refer to File Number SR-OCC-2017-804 and
should be submitted on or before July 20, 2017.
By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-14016 Filed 7-3-17; 8:45 am]
BILLING CODE 8011-01-P
