Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Advance Notice of and No Objection to The Options Clearing Corporation's Proposal To Enter Into a New Credit Facility Agreement, 31371-31376 [2017-14187]
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Federal Register / Vol. 82, No. 128 / Thursday, July 6, 2017 / Notices
Filing Date: The application was filed
on June 9, 2017.
Applicant’s Address: c/o Central Park
Advisers, LLC, 805 Third Avenue, New
York, New York 10022.
reorganization were paid by the
applicant’s investment adviser.
Filing Dates: The application was
filed on December 16, 2016, and
amended on June 5, 2017.
Applicant’s Address: 50606
Ameriprise Financial Center,
Minneapolis, Minnesota 55474.
Winton Series Trust [File No. 811–
23004]
RS Investment Trust [File No. 811–
05159]
Summary: Applicant seeks an order
declaring that it has ceased to be an
investment company. Each series of
applicant has transferred its assets to a
corresponding series of Victory
Portfolios and, on July 29, 2016, made
a final distribution to its shareholders
based on net asset value. Expenses of
$6,471,304 incurred in connection with
the reorganization were paid by the
applicant’s investment adviser and the
acquiring fund’s investment adviser.
Filing Date: The application was filed
on June 6, 2017.
Applicant’s Address: 4900 Tiedeman
Road, 4th Floor, Brooklyn, Ohio 44144.
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RS Variable Products Trust [File No.
811–21922]
Summary: Applicant seeks an order
declaring that it has ceased to be an
investment company. Each series of
applicant has transferred its assets to a
corresponding series of Victory Variable
Insurance Funds and, on July 29, 2016,
made a final distribution to its
shareholders based on net asset value.
The RS S&P 500 Index VIP Series, a
series of RS Variable Products Trust, is
a named defendant in the multi-district
class action lawsuit. Any potential
liability for this action was assumed by
the Victory S&P 500 Index VIP Series,
a series of Victory Variable Insurance
Funds. Expenses of $1,517,960 incurred
in connection with the reorganization
were paid by the applicant’s investment
adviser and the acquiring fund’s
investment adviser.
Filing Date: The application was filed
on June 6, 2017.
Applicant’s Address: 4900 Tiedeman
Road, 4th Floor, Brooklyn, Ohio 44144.
CPG Alternative Strategies Fund, LLC
[File No. 811–22446]
Summary: Applicant, a closed-end
investment company, seeks an order
declaring that it has ceased to be an
investment company. On May 23, 2016,
September 1, 2016, December 20, 2016,
and May 15, 2017, applicant made
liquidating distributions to its
shareholders, based on net asset value.
Expenses of $11,000 incurred in
connection with the liquidation were
paid by the applicant’s investment
adviser.
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Summary: Applicant seeks an order
declaring that it has ceased to be an
investment company. On March 27,
2017, applicant made a liquidating
distribution to its shareholders, based
on net asset value. Expenses in
connection with the liquidation were
paid by the applicant’s investment
adviser.
Filing Dates: The application was
filed on May 16, 2017, and amended on
June 9, 2017.
Applicant’s Address: One Freedom
Valley Drive, Oaks, Pennsylvania 19456.
For the Commission, by the Division of
Investment Management, pursuant to
delegated authority.
Brent J. Fields,
Secretary.
[FR Doc. 2017–14195 Filed 7–5–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–81058; File No. SR–OCC–
2017–803]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing of Advance Notice of and No
Objection to The Options Clearing
Corporation’s Proposal To Enter Into a
New Credit Facility Agreement
June 30, 2017.
Pursuant to Section 806(e)(1) of Title
VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act,
entitled the Payment, Clearing and
Settlement Supervision Act of 2010
(‘‘Clearing Supervision Act’’) 1 and Rule
19b–4(n)(1)(i) under the Securities
Exchange Act of 1934 (‘‘Act’’),2 notice is
hereby given that, on May 4, 2017, the
Options Clearing Corporation (‘‘OCC’’)
filed an advance notice (SR–OCC–2017–
803) with the Securities and Exchange
Commission (‘‘Commission’’). The
advance notice is described in Items I
and II below, which have been prepared
by OCC. The Commission is publishing
this notice to solicit comments on the
advance notice from interested persons,
and to provide notice that the
Commission does not object to the
changes set forth in the advance notice.
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1 12
2 17
U.S.C. 5465(e)(1).
CFR 240.19b–4(n)(1)(i).
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31371
I. Clearing Agency’s Statement of the
Terms of Substance of the Advance
Notice
This advance notice is being filed in
connection with a proposed change in
the form of the replacement of a
revolving credit facility that OCC
maintains for a 364-day term for the
purpose of meeting obligations arising
out of the default or suspension of a
Clearing Member, in anticipation of a
potential default by a Clearing Member,
or the failure of a bank or securities or
commodities clearing organization to
perform its obligations due to its
bankruptcy, insolvency, receivership or
suspension of operations.
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 advance notice and none have
been received.
(B) Advance Notice Filed Pursuant to
Section 806(e) of the Payment, Clearing,
and Settlement Supervision Act
Description of Proposed Change
Background
This advance notice is being filed in
connection with a proposed change in
the form of the replacement of a
revolving credit facility that OCC
maintains for a 364-day term for the
purpose of meeting obligations arising
out of the default or suspension of a
Clearing Member, in anticipation of a
potential default by a Clearing Member,
or the failure of a bank or securities or
commodities clearing organization to
perform its obligations due to its
bankruptcy, insolvency, receivership or
suspension of operations. In such
circumstances, OCC has certain
conditional authority under its By-Laws
and Rules to borrow or otherwise obtain
funds from third parties using Clearing
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Member margin deposits and/or
Clearing Fund contributions.3
OCC’s existing credit facility
(‘‘Existing Facility’’) was implemented
as of September 30, 2016, through the
execution of a credit agreement among
OCC, Bank of America, N.A. (‘‘BofA’’),
as administrative agent, and the lenders
that are parties to the agreement from
time to time. The Existing Facility
provides short-term secured borrowings
in an aggregate principal amount of $2
billion but may be increased to $3
billion if OCC so requests and sufficient
commitments from lenders are received
and accepted. To obtain a loan under
the Existing Facility, OCC must pledge
as collateral U.S. dollars or securities
issued or guaranteed by the U.S.
Government or the Government of
Canada. Certain mandatory
prepayments or deposits of additional
collateral are required depending on
changes in the collateral’s market value.
In connection with OCC’s past
implementation of the Existing Facility,
OCC filed an advance notice with the
Commission on August 29, 2016, and
the Commission published a Notice of
No-Objection on September 21, 2016.4
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Proposed Changes
The Existing Facility is not set to
expire until September 29, 2017;
however, OCC is seeking an early
termination of the Existing Facility and
is currently negotiating the terms of a
new credit facility (‘‘New Facility’’) on
substantially similar terms as the
Existing Facility together with certain
additional proposed modifications
described herein. The proposed
modifications would, among other
things: (i) Change the renewal timing to
an approximate June 30 annual cycle;
(ii) expand the types of permitted
collateral under the credit agreement to
include S&P 500 Market Index equities,
Exchange Traded Funds (‘‘ETFs’’), and
American Depositary Receipts (‘‘ADRs’’)
and certain GSE debt securities; (iii)
expand the definition of ‘‘Liquidity
Needs’’ 5 in the credit agreement to
allow OCC to borrow from the New
Facility to satisfy anticipated same-day
settlement obligations as a result of
circumstances where a bank or
securities or commodities clearing
3 See generally Article VIII, Sections 5(a), (b) and
(e) of OCC’s By-Laws; Interpretation and Policy .06
to Article VIII, Section 5; OCC Rules 1102 and
1104(b).
4 See Securities Exchange Act Release No. 78893
(September 21, 2016), 81 FR 66318 (September 27,
2016) (SR–OCC–2016–803).
5 Under the Existing Facility, OCC’s ‘‘Liquidity
Needs’’ are defined as the use of loan proceeds to
obtain funds projected to be required by OCC in
anticipation of a potential default by a Clearing
Member.
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organization has failed to achieve daily
settlement with OCC; and (iv) modify
certain other terms and definitions in
the agreement (including the
replacement of the backup collateral
agent).
The proposed terms and conditions
that are expected to be applicable to the
New Facility, subject to agreement by
the lenders, are set forth in the
Summary of Terms and Conditions,
which is not a public document.6 OCC
has separately submitted a request for
confidential treatment to the
Commission regarding the Summary of
Terms and Conditions, which is
included in this filing as Exhibit 3. The
conditions regarding the availability of
the New Facility, which OCC
anticipates will be satisfied on or about
July 5, 2017, include the execution and
delivery of (i) a credit agreement
between OCC and the administrative
agent, collateral agent and various
lenders under the New Facility, (ii) a
pledge agreement between OCC and the
administrative agent or collateral agent,
and (iii) such other documents as may
be required by the parties. The
definitive documentation concerning
the New Facility is expected to be
consistent with the Summary of Terms
and Conditions and substantially
similar to the definitive documentation
concerning the Existing Facility,
although it may include certain changes
to business terms as may be necessary
to obtain the agreement of lenders with
sufficient funding commitments and
certain changes as may be necessary
regarding administrative and
operational terms being finalized
between the parties.
The proposed changes to terms and
conditions that are expected to be
applicable to the New Facility are
described in detail below.
Change in Renewal Timing
OCC is seeking an early termination of
the Existing Facility, which is not set to
expire until September 29, 2017, and
proposes to change the renewal timing
of the New Facility. OCC’s purpose in
early termination is to change to a
different renewal cycle so that the credit
facility will be renewed on or around
June 30 every year. OCC believes that
this renewal cycle is preferable because
August and September, on account of
traditional vacation times and the Labor
Day holiday, have historically been a
challenging period during which to
schedule negotiations and for
6 The Summary of Terms and Conditions for the
New Facility clarifies certain terms regarding
mandatory prepayments or deposits of additional
collateral, which, as described above, are also
features of the Existing Facility.
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participating banks to schedule credit
committee meetings.
Expansion of Permitted Collateral
OCC also proposes to expand the
types of permitted collateral under the
New Facility. As proposed, OCC would
be permitted to pledge a wider range of
collateral under the New Facility that
Clearing Members are permitted to use
in making margin deposits and Clearing
Fund contributions. As discussed above,
to obtain a loan under the Existing
Facility, OCC must pledge as collateral
certain cash or securities that Clearing
Members have contributed to the
Clearing Fund or deposited as margin.
The Summary of Terms and Conditions
for the New Facility contemplates that
it will expand the scope of such
collateral that OCC may pledge to
include other categories of securities
that OCC accepts as margin deposits or
that it may accept upon prior approval
by the Risk Committee (i.e., certain GSE
debt securities).7
Specifically, the new collateral in
respect of Clearing Member margin
deposits that OCC would be permitted
to pledge would include: (i) Common
equities included in the S&P 500 Index,
but not including securities of any type
issued by or on behalf of any lender or
lender’s affiliate (‘‘Pledged S&P
Equities’’); (ii) U.S. dollar exchange
traded funds for equity, fixed income or
commodity asset classes with a market
capitalization of $300 million or more,
subject to certain additional restrictions
with respect to volume and bid/asks,
among other things, as agreed upon by
OCC and the administrative agent
(‘‘Pledged ETFs’’); (iii) U.S. dollar
denominated shares of foreign based
companies traded on a U.S. national
exchange with a market price of $5.00
or more per share or unit (‘‘Pledged
ADRs,’’ and together with Pledge S&P
Equities and Pledged ETFs, ‘‘Pledged
Equities’’); 8 (iv) U.S. Government
Sponsored Enterprise mortgage backed
securities, excluding collateralized
mortgage obligations and real estate
mortgage investment conduits, rated at
least AA by two out of three of S&P,
Moody’s and Fitch (‘‘Pledged GSE
MBS’’); and (v) non-callable debt
securities issued by Freddie Mac within
the reference debt program, securities
issued by Fannie Mae within its
7 See
infra note 9.
would be applied so that Pledged S&P
Equities and Pledged ADRs of a single issuer would
not, at any time, exceed 5% of the cash or securities
that OCC pledges, and total Pledged Equities would
not, at any time, exceed 37.5% of the total cash or
securities pledged. These limits, and the other
limits that are part of the terms of the Existing
Facility, would not apply to borrowings in an
amount of $50 million or less.
8 Limits
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benchmark debt program, or noncallable short-term discount notes from
either Freddie Mac or Fannie Mae
(‘‘Other Pledged GSE Securities,’’ and
together with Pledged GSE MBS,
‘‘Pledged GSE Securities’’).9 OCC would
be able to pledge these securities to
support the New Facility using pledge
infrastructure that is already
contemplated under the terms of the
Existing Facility.
Adding these additional categories of
permitted collateral to the New Facility
serves the purpose of aligning the scope
of permitted collateral for the New
Facility with the scope of Clearing
Member collateral that may become
available to OCC for borrowing
purposes. Specifically, in the event of a
Clearing Member default, the cash and
securities deposited as margin by the
Clearing Member may be used by OCC
for borrowing. Should OCC draw upon
the New Facility in connection with
such a default, OCC believes that it
would be appropriate for it to have the
increased flexibility to pledge a greater
range of securities, which are permitted
to be included in the defaulted Clearing
Member’s margin deposit.
The Summary of Terms and
Conditions contemplates that the New
Facility would also modify the ratings
standards for securities that are issued
or guaranteed by the Government of
Canada. Such securities would be
acceptable as permitted collateral
provided that they have minimum
ratings of AA (S&P) or Aa2 (Moody’s)—
rather than AAA or Aaa as under the
Existing Facility.
The terms and conditions of the New
Facility would also differ from the
Existing Facility in connection with
how the amount of funds available to
OCC is calculated. As under the Existing
Facility, the amount would be
determined in part by applying haircuts
to the market value of the different
categories of collateral pledged by OCC.
However, to accommodate the new
categories of collateral it is expected
that Pledged S&P Equities and Pledged
ETFs would be valued at 70% of their
market value, and Pledged ADRs will be
valued at 50% of their market value.
Depending on their tenor, Pledged GSE
Securities would also be subject to
9 Article I, Section 1.G.(6) of OCC’s By-Laws
provides that the term ‘‘GSE debt securities’’ means
‘‘such debt securities issued by Congressionally
chartered corporations as the Risk Committee may
from time to time approve for deposit as margin.’’
OCC currently does not accept Pledged GSE MBS
for deposit as margin. As a result, the specific
expansion of permitted collateral to include
Pledged GSE MBS under the New Facility would
not become available to OCC until such time, if at
all, as OCC’s Risk Committee approves such
securities for deposit as margin.
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haircuts on their market value as
follows: (i) Under one year, 95%; (ii)
one year or greater but less than five
years, 94%; (iii) five years or greater but
less than 10 years, 92%; and (iv) ten
years or greater, 88%. For the purpose
of determining the fund availability, and
also for determining the amount of
mandatory prepayments under the
terms of the New Facility, the assets in
OCC’s Clearing Fund would continue to
be valued at 90% of their market value,
except under the New Facility, U.S.
cash would be valued at 100%. These
haircuts would represent commercial
terms negotiated at arms-length by the
parties.
Expansion of Use of Proceeds
Under the Existing Facility, OCC is
permitted to finance Liquidity Needs in
anticipation of a potential default by or
suspension of a Clearing Member to the
extent permitted under OCC’s By-Laws
and Rules. OCC has requested that the
New Facility also provide it with
flexibility to be able to borrow to
address reasonably anticipated sameday settlement obligations under certain
conditions, such as the failure of any
bank or securities or commodities
clearing organization to make daily
settlement, to the extent such borrowing
is permitted under the By-Laws and
Rules.10 OCC believes that this
expanded use of proceeds under the
New Facility would enhance OCC’s
ability to effectively address and
manage its liquidity risks as they related
to its daily settlement obligations,
specifically when any bank or securities
or commodities clearing organization
has failed to make daily settlement with
OCC.
10 Article VIII, Section 5(e) of OCC’s By-Laws
authorizes OCC to take possession of Clearing Fund
assets and to use such assets for purposes of
securing a borrowing in circumstances concerning
the default or suspension of a Clearing Member or
where OCC has otherwise sustained a loss
reimbursable out of the Clearing Fund (but OCC has
elected to borrow to meet such obligations instead
of immediately charging the Clearing Fund). OCC
has requested that the definition of ‘‘Liquidity
Needs’’ under the New Facility would include the
ability to borrow to address reasonably anticipated
same-day obligations as a result of the failure of any
bank or securities or commodities clearing
organization to achieve daily settlement, but would
continue to be limited to the extent that such
borrowing is permitted under the By-Laws and
Rules. By limiting the ability to borrow for purposes
of financing Liquidity Needs always to the extent
permitted under the By-Laws and Rules, this
borrowing authority in the agreement would not
become operative until OCC receives all necessary
regulatory approvals for any amendments to ByLaws and Rules necessary to effect such a
borrowing, which would be the subject of a separate
regulatory filing.
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31373
Other Proposed Changes
The New Facility may also limit the
scope of those eligible to act as lenders
in the New Facility to: (i) Banks within
the meaning of Section 3(a)(6) of the
Act; 11 (ii) any subsidiary of such a bank;
(iii) any corporation organized under
Section 25A of the Federal Reserve
Act; 12 and (iv) any agency or branch of
a foreign bank located within the United
States.13 As discussed above, the
Summary of Terms and Conditions
contemplates that the New Facility
would permit the pledge of certain
equity securities as collateral. Lending
secured by such securities is required to
be conducted in compliance with
Federal Reserve regulations regarding
securities lending, including Regulation
U,14 and this change would be designed
to promote general consistency with
such requirements.
Finally, under the New Facility, OCC
also expects that a new backup
collateral agent will be named.
Anticipated Effect on and Management
of Risk
Completing timely settlement is a key
aspect of OCC’s role as a clearing agency
performing central counterparty
services. Overall, the New Facility
would continue to promote the
reduction of risks to OCC, its Clearing
Members and the options market in
general because it would allow OCC to
obtain short-term funds to address
liquidity demands arising out of the
default or suspension of a Clearing
Member, in anticipation of a potential
default or suspension of Clearing
Members or the insolvency of a bank or
another securities or commodities
clearing organization. The existence of
the New Facility would therefore help
OCC minimize losses in the event of
such a default, suspension or
insolvency, by allowing it to obtain
funds on extremely short notice to
ensure clearance and settlement of
transactions in options and other
contracts without interruption. OCC
believes that the reduced settlement risk
presented by OCC resulting from the
New Facility would correspondingly
reduce systemic risk and promote the
safety and soundness of the clearing
system. By drawing on the New Facility,
OCC would also be able to avoid
liquidating margin deposits or Clearing
Fund contributions in what would
11 15
U.S.C. 78c(a)(6).
U.S.C. 611.
13 This explicitly does not include any savings
and loan association, any credit union, any lending
institution that is an instrumentality of the United
States, or any member of a national securities
exchange.
14 12 CFR 221.6.
12 12
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likely be volatile market conditions,
which would preserve funds available
to cover any losses resulting from the
failure of a Clearing Member, bank or
other clearing organization. Expanding
the scope of collateral that OCC is
permitted to pledge to the New Facility
to include the Pledged Equities and
Pledged GSE Securities that OCC
permits its Clearing Members to deposit
as margin would further this purpose by
giving OCC greater flexibility to pledge
a broader range of collateral to the New
Facility that it determines is appropriate
under the circumstances. Expanding the
uses of proceeds under the New Facility
to support Liquidity Needs in respect of
OCC’s settlement obligations would also
further this purpose to the extent such
borrowing is authorized under OCC’s
By-Laws and Rules. OCC believes that
the change would not otherwise affect
or alter the management of risk at OCC
because the New Facility generally
preserves the same terms and conditions
as the Existing Facility.
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Consistency With the Payment, Clearing
and Settlement 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.15 Section 805(a)(2) of the
Clearing Supervision Act 16 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 17 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.18 In
15 12
U.S.C. 5461(b).
16 12 U.S.C. 5464(a)(2).
17 12 U.S.C. 5464(b).
18 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
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particular, Rule 17Ad–22(e)(7) 19
requires that a covered clearing agency
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to effectively
measure, monitor, and manage the
liquidity risk that arises in or is borne
by it, including measuring, monitoring
and managing its settlement and
funding flows on an ongoing and timely
basis and its use of intraday liquidity.
OCC believes that the New Facility is
consistent with Section 805(b)(1) of the
Clearing Supervision Act 20 and Rule
17Ad–22(e)(7) 21 because it promotes
robust risk management by OCC of its
liquidity risks to ensure that OCC can
continue meeting its settlement
obligations. The New Facility would
provide OCC with timely access to a
stable and reliable liquidity funding
source to help it complete timely
clearing and settlement. Expanding the
purposes for which borrowing proceeds
may be used and the scope of permitted
collateral under the New Facility would
further the timeliness and reliability of
OCC’s access to liquidity funding, by
providing greater flexibility regarding (i)
the use of proceeds under the New
Facility to address and manage
settlement obligations and (ii) the
collateral that OCC may determine is
appropriate to pledge to support
borrowing in the event of a Clearing
Member default. The expansion of
permitted collateral would better enable
OCC to manage liquidity risk associated
with its settlement obligations by having
access to a broader range of collateral to
pledge to the New Facility in the form
margin collateral that a defaulting
Clearing Member may have on deposit.
Expanding the uses of proceeds under
the New Facility to support Liquidity
Needs in respect of OCC’s settlement
obligations would also promote
management of settlement and funding
flows (to the extent such borrowing is
authorized under OCC’s By-Laws and
Rules). In these ways, the proposed
changes are consistent with Section
805(b)(1) of the Clearing Supervision
Act 22 and Rule 17Ad–22(e)(7).23
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 OCC must comply with new section
(e) of Rule 17Ad–22 as of April 11, 2017.
19 17 CFR 240.17Ad–22(e)(7).
20 12 U.S.C. 5464(b)(1).
21 17 CFR 240.17Ad–22(e)(7).
22 12 U.S.C. 5464(b)(1).
23 17 CFR 240.17Ad–22(e)(7).
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Accelerated Commission Action
Requested
Pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act,24 OCC
requests that the Commission notify
OCC that it has no objection to the New
Facility not later than Friday, June 30,
2017, which shall be fifty-seven
calendar days from the date of OCC’s
submission of this proposed change and
two business days prior to the expected
July 5, 2017 availability of the New
Facility. OCC requests Commission
action by this date to ensure that the
New Facility is able to become effective
and will launch according to the new
renewal cycle. For the reasons described
above, OCC believes that the new
renewal cycle will help it manage
certain commercial structuring and
administrative coordination risks
associated with the renewal process.
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.
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:
24 12
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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–2017–803 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–2017–803. 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_
803.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–2017–803 and should
be submitted on or before July 27, 2017.
sradovich on DSK3GMQ082PROD with NOTICES
V. Commission Findings and Notice of
No Objection
Although the Clearing Supervision
Act does not specify a standard of
review for an advance notice, its stated
purpose is instructive: 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
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market utilities.25 Section 805(a)(2) of
the Clearing Supervision Act authorizes
the Commission to prescribe risk
management standards for the payment,
clearing, and settlement activities of
designated clearing entities and
financial institutions engaged in
designated activities for which it is the
supervisory agency or the appropriate
financial regulator.26 Section 805(b) of
the Clearing Supervision Act 27 states
that the objectives and principles for the
risk management standards prescribed
under Section 805(a) shall be to:
• Promote robust risk management;
• promote safety and soundness;
• reduce systemic risks; and
• support the stability of the broader
financial system.28
The Commission has adopted risk
management standards under Section
805(a)(2) of the Clearing Supervision
Act 29 and Section 17A of the Exchange
Act (‘‘Rule 17Ad–22’’).30 Rule 17Ad–22
requires registered clearing agencies to
establish, implement, maintain, and
enforce written policies and procedures
that are reasonably designed to meet
certain minimum requirements for their
operations and risk management
practices on an ongoing basis.31
Therefore, it is appropriate for the
Commission to review changes
proposed in advance notices against
Rule 17Ad–22 and the objectives and
principles of the risk management
standards described in Section 805(b) of
the Clearing Supervision Act.32 The
Commission believes that the proposal
in the Advance Notice is consistent with
the objectives and principles described
in Section 805(b) of the Clearing
Supervision Act,33 and in Rule 17Ad–22
under the Exchange Act, particularly
Rule 17Ad–22(e)(7).34
A. Consistency With Section 805(b) of
the Clearing Supervision Act
As discussed below, the Commission
believes that the changes proposed in
the Advance Notice are consistent with
Section 805(b) of the Clearing
Supervision Act because they: (i)
Promote robust risk management; (ii) are
consistent with promoting safety and
soundness; and (iii) are consistent with
reducing systemic risks and promoting
the stability of the broader financial
system.
PO 00000
25 12
U.S.C. 5461(b).
U.S.C. 5464(a)(2).
27 12 U.S.C. 5464(b).
28 Id.
29 12 U.S.C. 5464(a)(2).
30 See 17 CFR 240.17Ad–22.
31 Id.
32 12 U.S.C. 5464(b).
33 Id.
34 See 17 CFR 240.17Ad–22(e)(7).
26 12
Frm 00093
Fmt 4703
Sfmt 4703
31375
The Commission believes that the
changes proposed in the Advance
Notice are consistent with promoting
robust risk management, in particular
management of liquidity risk. In
particular, the terms of the proposed
New Facility give OCC expanded
flexibility to manage liquidity stresses
arising from a Clearing Member default
by broadening the range of collateral
that OCC can pledge to the facility. The
expanded range of collateral that may be
pledged therefore affords OCC a new
option of pledging margin assets other
than cash, U.S. Government Securities,
and Canadian Government Securities as
an alternative to its existing choices of
either liquidating other margin
collateral or pledging primarily Clearing
Fund collateral in order to access the
Existing Facility.35 The broader
collateral eligibility reflected in the
proposed New Facility also would bring
OCC’s liquidity risk management
resources in line with those of other
CCPs that already have the ability to
pledge equities to their revolving credit
facility liquidity lines.36 In addition,
broadening the definition of ‘‘Liquidity
Needs’’ in the New Facility to address
losses that may arise when a bank or
securities or commodities clearing
organization has failed to make daily
settlement with OCC (as opposed to the
narrower instance under the Existing
Facility of losses from a bankruptcy or
insolvency of a bank or securities or
commodities clearing organization)—
subject to necessary amendments of
OCC’s By-Laws and Rules and
concomitant regulatory approvals 37—
would further enhance OCC’s ability to
continue to meet its settlement
obligations. As such, the Commission
believes that the proposal would
promote robust risk management
35 The Commission notes that OCC does not
currently accept Pledged GSE MBS for deposit as
margin, and that OCC has represented that it will
not do so unless and until OCC’s Risk Committee
approves such securities for deposit as margin, in
accordance with OCC’s By-laws. See supra note 9.
36 The Commission notes that the National
Securities Clearing Corporation has the right to post
equity securities as part of its revolving credit
facility. See Securities Exchange Act Release No.
69557 (May 10, 2013), 78 FR 28936, 28936 & n.5
(May 16, 2013) (SR–NSCC–2013–803); see also
NSCC Rules and Procedures, Rule 4 (https://
dtcc.com/legal/rules_proc/nscc_rules.pdf).
37 The Commission notes that OCC has
represented that the expanded borrowing authority
in this agreement would not become operative
unless and until OCC receives all necessary
regulatory approvals for any amendments to its ByLaws and Rules necessary to effect such a
borrowing, which would be subject to a separate
regulatory filing with the Commission. See supra
note 10. For the purposes of the findings herein, the
Commission relies on this representation and
expects that OCC will make a separate regulatory
filing in connection with effecting consistent
changes of this sort to its By-Laws and Rules.
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practices at OCC, consistent with
Section 805(b) of the Clearing
Supervision Act.38
The Commission also believes that the
changes proposed in the Advance
Notice are consistent with promoting
safety and soundness. The New Facility
would continue to provide OCC with a
liquidity resource in the event of a
participant default or of losses due to
the bankruptcy or insolvency of a bank
or securities or commodities clearing
organization. Subject to amendment of
OCC’s By-Laws and Rules and related
regulatory approvals, the New Facility
also would provide liquidity to OCC in
the event of a failure by a bank or
securities or commodities clearing
organization to perform same-day
settlement obligations outside the
context of such bank or clearing
organization’s bankruptcy or
insolvency. This expanded set of
circumstances in which OCC could
access liquidity would promote safety
and soundness for OCC and its Clearing
Members because it would provide OCC
with a readily available liquidity
resource that would enable it to
continue to meet its settlement
obligations in a timely fashion, thereby
helping OCC to contain losses and
liquidity pressures that otherwise might
cause financial distress to OCC or its
Clearing Members. As such, the
Commission believes the proposed
change is consistent with promoting
safety and soundness, as contemplated
in Section 805(b) of the Clearing
Supervision Act.
Finally, the Commission believes that
the Advance Notice is consistent with
reducing systemic risks and promoting
the stability of the broader financial
system. The New Facility would
provide OCC, which has been
designated a systemically important
financial market utility, with a more
flexible and thus improved, liquidity
resource. The Commission believes that
the New Facility should bolster the
likelihood that OCC will meet its
settlement obligations, thereby reducing
the risk of loss contagion and enhancing
the ability of OCC and its Clearing
Members to provide reliability, stability,
and safety to the financial markets that
they serve. Accordingly, the
Commission believes that the proposal
could help to reduce systemic risk and
support the stability of the broader
financial system, consistent with
Section 805(b) of the Clearing
Supervision Act.
B. Consistency With Rule 17Ad–22(e)(7)
The Commission believes that the
proposed changes associated with the
New Facility are consistent with the
requirements of Rule 17Ad–22(e)(7)
under the Exchange Act.39 This rule
requires that a covered clearing agency
establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to ‘‘effectively
measure, monitor, and manage the
liquidity risk that arises in or is borne
by [it], including measuring,
monitoring, and managing its settlement
and funding flows on an ongoing and
timely basis, and its use of intraday
liquidity.’’ 40
In particular, Rule 17Ad–22(e)(7)(i)
directs that a covered clearing agency
meet this obligation by, among other
things, ‘‘[m]aintaining sufficient liquid
resources at the minimum in all relevant
currencies to effect same-day . . .
settlement of payment obligations with
a high degree of confidence under a
wide range of foreseeable stress
scenarios that includes, but is not
limited to, the default of the participant
family that would generate the largest
aggregate payment obligation for the
covered clearing agency in extreme but
plausible conditions.’’ 41
The Commission believes that the
proposal is consistent with Exchange
Act Rule 17Ad–22(e)(7)(i). The
proposed New Facility would permit
OCC to pledge a broader range of
collateral to the facility, and therefore
would allow OCC to utilize a greater
range of margin collateral to obtain
liquidity from the facility, as an
alternative to selling such collateral
under what may be stressed and volatile
market conditions and as an alternative
to pledging collateral deposited to the
Clearing Fund. The proposal thus
increases OCC’s flexibility to respond to
a clearing member default by providing
OCC with greater opportunity,
depending on prevailing market
conditions, to select among different
types of collateral assets and make
efficient use of margin collateral and to
preserve Clearing Fund assets in
managing a Clearing Member default.
The New Facility also would permit
OCC to cover any losses resulting from
the failure of a bank or other clearing
organization to achieve same-day
settlement, subject to further internal
governance and concomitant regulatory
approvals that OCC must obtain.42 This
39 17
CFR 240.17Ad–22(e)(7).
40 Id.
41 17
CFR 240.17Ad–22(e)(7)(i).
stated above, OCC’s ability to utilize
borrowings for these purposes would be subject to
42 As
38 12
U.S.C. 5464(b).
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would provide OCC with additional
liquidity to manage scenarios outside of
a Clearing Member default, thereby
mitigating the likelihood of liquidity
stress to OCC. The additional features of
the New Facility described above would
support OCC’s ability to meet liquidity
needs and to effect same-day, intraday,
and multiday settlement payment
obligations under a wider range of stress
scenarios than under the Existing
Facility. Therefore, the Commission
believes that the proposal is consistent
with Rule 17Ad–22(e)(7)(i).43
Finally, Rule 17Ad–22(e)(7)(ii) under
the Exchange Act requires that OCC
establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to hold qualifying
liquid resources sufficient to satisfy
payment obligations owed to clearing
members.44 Rule 17Ad–22(a)(14) of the
Exchange Act defines ‘‘qualifying liquid
resources’’ to include, among other
things, lines of credit without material
adverse change provisions, that are
readily available and convertible into
cash.45 Based upon review of the
relevant provisions of the Summary of
Terms and Conditions, the Commission
believes that the New Facility would not
be subject to any material adverse
change provision, and is thus consistent
with Rule 17Ad–22(a)(14).46 Further,
and as described above, the New
Facility is designed to help ensure that
OCC has sufficient, readily-available
qualifying liquid resources to meet the
cash settlement obligations of OCC’s
largest family of affiliated Clearing
Members. Therefore, the Commission
believes that the proposal is consistent
with Rule 17Ad–22(e)(7)(ii).47
VI. Conclusion
It is therefore noticed, pursuant to
Section 806(e)(1)(I) of the Clearing
Supervision Act, that the Commission
does not object to the Advance Notice
SR–OCC–2017–803 and OCC can and
hereby is authorized to implement the
change as of the date of this notice.
By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2017–14187 Filed 7–5–17; 8:45 am]
BILLING CODE 8011–01–P
a further OCC regulatory filing to make the changes
to its By-Laws and Rules. See note 10, supra.
43 Id.
44 17 CFR 240.17Ad–22(e)(7)(ii).
45 17 CFR 240.17Ad–22(a)(14).
46 Id.
47 17 CFR 240.17Ad–22(e)(7)(ii).
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]]>Agencies
[Federal Register Volume 82, Number 128 (Thursday, July 6, 2017)]
[Notices]
[Pages 31371-31376]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-14187]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-81058; File No. SR-OCC-2017-803]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Advance Notice of and No Objection to The Options
Clearing Corporation's Proposal To Enter Into a New Credit Facility
Agreement
June 30, 2017.
Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, entitled the Payment,
Clearing and Settlement Supervision Act of 2010 (``Clearing Supervision
Act'') \1\ and Rule 19b-4(n)(1)(i) under the Securities Exchange Act of
1934 (``Act''),\2\ notice is hereby given that, on May 4, 2017, the
Options Clearing Corporation (``OCC'') filed an advance notice (SR-OCC-
2017-803) with the Securities and Exchange Commission (``Commission'').
The advance notice is described in Items I and II below, which have
been prepared by OCC. The Commission is publishing this notice to
solicit comments on the advance notice from interested persons, and to
provide notice that the Commission does not object to the changes set
forth in the advance notice.
---------------------------------------------------------------------------
\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 being filed in connection with a proposed
change in the form of the replacement of a revolving credit facility
that OCC maintains for a 364-day term for the purpose of meeting
obligations arising out of the default or suspension of a Clearing
Member, in anticipation of a potential default by a Clearing Member, or
the failure of a bank or securities or commodities clearing
organization to perform its obligations due to its bankruptcy,
insolvency, receivership or suspension of operations.
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 advance notice and none have been received.
(B) Advance Notice Filed Pursuant to Section 806(e) of the Payment,
Clearing, and Settlement Supervision Act
Description of Proposed Change
Background
This advance notice is being filed in connection with a proposed
change in the form of the replacement of a revolving credit facility
that OCC maintains for a 364-day term for the purpose of meeting
obligations arising out of the default or suspension of a Clearing
Member, in anticipation of a potential default by a Clearing Member, or
the failure of a bank or securities or commodities clearing
organization to perform its obligations due to its bankruptcy,
insolvency, receivership or suspension of operations. In such
circumstances, OCC has certain conditional authority under its By-Laws
and Rules to borrow or otherwise obtain funds from third parties using
Clearing
[[Page 31372]]
Member margin deposits and/or Clearing Fund contributions.\3\
---------------------------------------------------------------------------
\3\ See generally Article VIII, Sections 5(a), (b) and (e) of
OCC's By-Laws; Interpretation and Policy .06 to Article VIII,
Section 5; OCC Rules 1102 and 1104(b).
---------------------------------------------------------------------------
OCC's existing credit facility (``Existing Facility'') was
implemented as of September 30, 2016, through the execution of a credit
agreement among OCC, Bank of America, N.A. (``BofA''), as
administrative agent, and the lenders that are parties to the agreement
from time to time. The Existing Facility provides short-term secured
borrowings in an aggregate principal amount of $2 billion but may be
increased to $3 billion if OCC so requests and sufficient commitments
from lenders are received and accepted. To obtain a loan under the
Existing Facility, OCC must pledge as collateral U.S. dollars or
securities issued or guaranteed by the U.S. Government or the
Government of Canada. Certain mandatory prepayments or deposits of
additional collateral are required depending on changes in the
collateral's market value. In connection with OCC's past implementation
of the Existing Facility, OCC filed an advance notice with the
Commission on August 29, 2016, and the Commission published a Notice of
No-Objection on September 21, 2016.\4\
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 78893 (September 21,
2016), 81 FR 66318 (September 27, 2016) (SR-OCC-2016-803).
---------------------------------------------------------------------------
Proposed Changes
The Existing Facility is not set to expire until September 29,
2017; however, OCC is seeking an early termination of the Existing
Facility and is currently negotiating the terms of a new credit
facility (``New Facility'') on substantially similar terms as the
Existing Facility together with certain additional proposed
modifications described herein. The proposed modifications would, among
other things: (i) Change the renewal timing to an approximate June 30
annual cycle; (ii) expand the types of permitted collateral under the
credit agreement to include S&P 500 Market Index equities, Exchange
Traded Funds (``ETFs''), and American Depositary Receipts (``ADRs'')
and certain GSE debt securities; (iii) expand the definition of
``Liquidity Needs'' \5\ in the credit agreement to allow OCC to borrow
from the New Facility to satisfy anticipated same-day settlement
obligations as a result of circumstances where a bank or securities or
commodities clearing organization has failed to achieve daily
settlement with OCC; and (iv) modify certain other terms and
definitions in the agreement (including the replacement of the backup
collateral agent).
---------------------------------------------------------------------------
\5\ Under the Existing Facility, OCC's ``Liquidity Needs'' are
defined as the use of loan proceeds to obtain funds projected to be
required by OCC in anticipation of a potential default by a Clearing
Member.
---------------------------------------------------------------------------
The proposed terms and conditions that are expected to be
applicable to the New Facility, subject to agreement by the lenders,
are set forth in the Summary of Terms and Conditions, which is not a
public document.\6\ OCC has separately submitted a request for
confidential treatment to the Commission regarding the Summary of Terms
and Conditions, which is included in this filing as Exhibit 3. The
conditions regarding the availability of the New Facility, which OCC
anticipates will be satisfied on or about July 5, 2017, include the
execution and delivery of (i) a credit agreement between OCC and the
administrative agent, collateral agent and various lenders under the
New Facility, (ii) a pledge agreement between OCC and the
administrative agent or collateral agent, and (iii) such other
documents as may be required by the parties. The definitive
documentation concerning the New Facility is expected to be consistent
with the Summary of Terms and Conditions and substantially similar to
the definitive documentation concerning the Existing Facility, although
it may include certain changes to business terms as may be necessary to
obtain the agreement of lenders with sufficient funding commitments and
certain changes as may be necessary regarding administrative and
operational terms being finalized between the parties.
---------------------------------------------------------------------------
\6\ The Summary of Terms and Conditions for the New Facility
clarifies certain terms regarding mandatory prepayments or deposits
of additional collateral, which, as described above, are also
features of the Existing Facility.
---------------------------------------------------------------------------
The proposed changes to terms and conditions that are expected to
be applicable to the New Facility are described in detail below.
Change in Renewal Timing
OCC is seeking an early termination of the Existing Facility, which
is not set to expire until September 29, 2017, and proposes to change
the renewal timing of the New Facility. OCC's purpose in early
termination is to change to a different renewal cycle so that the
credit facility will be renewed on or around June 30 every year. OCC
believes that this renewal cycle is preferable because August and
September, on account of traditional vacation times and the Labor Day
holiday, have historically been a challenging period during which to
schedule negotiations and for participating banks to schedule credit
committee meetings.
Expansion of Permitted Collateral
OCC also proposes to expand the types of permitted collateral under
the New Facility. As proposed, OCC would be permitted to pledge a wider
range of collateral under the New Facility that Clearing Members are
permitted to use in making margin deposits and Clearing Fund
contributions. As discussed above, to obtain a loan under the Existing
Facility, OCC must pledge as collateral certain cash or securities that
Clearing Members have contributed to the Clearing Fund or deposited as
margin. The Summary of Terms and Conditions for the New Facility
contemplates that it will expand the scope of such collateral that OCC
may pledge to include other categories of securities that OCC accepts
as margin deposits or that it may accept upon prior approval by the
Risk Committee (i.e., certain GSE debt securities).\7\
---------------------------------------------------------------------------
\7\ See infra note 9.
---------------------------------------------------------------------------
Specifically, the new collateral in respect of Clearing Member
margin deposits that OCC would be permitted to pledge would include:
(i) Common equities included in the S&P 500 Index, but not including
securities of any type issued by or on behalf of any lender or lender's
affiliate (``Pledged S&P Equities''); (ii) U.S. dollar exchange traded
funds for equity, fixed income or commodity asset classes with a market
capitalization of $300 million or more, subject to certain additional
restrictions with respect to volume and bid/asks, among other things,
as agreed upon by OCC and the administrative agent (``Pledged ETFs'');
(iii) U.S. dollar denominated shares of foreign based companies traded
on a U.S. national exchange with a market price of $5.00 or more per
share or unit (``Pledged ADRs,'' and together with Pledge S&P Equities
and Pledged ETFs, ``Pledged Equities''); \8\ (iv) U.S. Government
Sponsored Enterprise mortgage backed securities, excluding
collateralized mortgage obligations and real estate mortgage investment
conduits, rated at least AA by two out of three of S&P, Moody's and
Fitch (``Pledged GSE MBS''); and (v) non-callable debt securities
issued by Freddie Mac within the reference debt program, securities
issued by Fannie Mae within its
[[Page 31373]]
benchmark debt program, or non-callable short-term discount notes from
either Freddie Mac or Fannie Mae (``Other Pledged GSE Securities,'' and
together with Pledged GSE MBS, ``Pledged GSE Securities'').\9\ OCC
would be able to pledge these securities to support the New Facility
using pledge infrastructure that is already contemplated under the
terms of the Existing Facility.
---------------------------------------------------------------------------
\8\ Limits would be applied so that Pledged S&P Equities and
Pledged ADRs of a single issuer would not, at any time, exceed 5% of
the cash or securities that OCC pledges, and total Pledged Equities
would not, at any time, exceed 37.5% of the total cash or securities
pledged. These limits, and the other limits that are part of the
terms of the Existing Facility, would not apply to borrowings in an
amount of $50 million or less.
\9\ Article I, Section 1.G.(6) of OCC's By-Laws provides that
the term ``GSE debt securities'' means ``such debt securities issued
by Congressionally chartered corporations as the Risk Committee may
from time to time approve for deposit as margin.'' OCC currently
does not accept Pledged GSE MBS for deposit as margin. As a result,
the specific expansion of permitted collateral to include Pledged
GSE MBS under the New Facility would not become available to OCC
until such time, if at all, as OCC's Risk Committee approves such
securities for deposit as margin.
---------------------------------------------------------------------------
Adding these additional categories of permitted collateral to the
New Facility serves the purpose of aligning the scope of permitted
collateral for the New Facility with the scope of Clearing Member
collateral that may become available to OCC for borrowing purposes.
Specifically, in the event of a Clearing Member default, the cash and
securities deposited as margin by the Clearing Member may be used by
OCC for borrowing. Should OCC draw upon the New Facility in connection
with such a default, OCC believes that it would be appropriate for it
to have the increased flexibility to pledge a greater range of
securities, which are permitted to be included in the defaulted
Clearing Member's margin deposit.
The Summary of Terms and Conditions contemplates that the New
Facility would also modify the ratings standards for securities that
are issued or guaranteed by the Government of Canada. Such securities
would be acceptable as permitted collateral provided that they have
minimum ratings of AA (S&P) or Aa2 (Moody's)--rather than AAA or Aaa as
under the Existing Facility.
The terms and conditions of the New Facility would also differ from
the Existing Facility in connection with how the amount of funds
available to OCC is calculated. As under the Existing Facility, the
amount would be determined in part by applying haircuts to the market
value of the different categories of collateral pledged by OCC.
However, to accommodate the new categories of collateral it is expected
that Pledged S&P Equities and Pledged ETFs would be valued at 70% of
their market value, and Pledged ADRs will be valued at 50% of their
market value. Depending on their tenor, Pledged GSE Securities would
also be subject to haircuts on their market value as follows: (i) Under
one year, 95%; (ii) one year or greater but less than five years, 94%;
(iii) five years or greater but less than 10 years, 92%; and (iv) ten
years or greater, 88%. For the purpose of determining the fund
availability, and also for determining the amount of mandatory
prepayments under the terms of the New Facility, the assets in OCC's
Clearing Fund would continue to be valued at 90% of their market value,
except under the New Facility, U.S. cash would be valued at 100%. These
haircuts would represent commercial terms negotiated at arms-length by
the parties.
Expansion of Use of Proceeds
Under the Existing Facility, OCC is permitted to finance Liquidity
Needs in anticipation of a potential default by or suspension of a
Clearing Member to the extent permitted under OCC's By-Laws and Rules.
OCC has requested that the New Facility also provide it with
flexibility to be able to borrow to address reasonably anticipated
same-day settlement obligations under certain conditions, such as the
failure of any bank or securities or commodities clearing organization
to make daily settlement, to the extent such borrowing is permitted
under the By-Laws and Rules.\10\ OCC believes that this expanded use of
proceeds under the New Facility would enhance OCC's ability to
effectively address and manage its liquidity risks as they related to
its daily settlement obligations, specifically when any bank or
securities or commodities clearing organization has failed to make
daily settlement with OCC.
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\10\ Article VIII, Section 5(e) of OCC's By-Laws authorizes OCC
to take possession of Clearing Fund assets and to use such assets
for purposes of securing a borrowing in circumstances concerning the
default or suspension of a Clearing Member or where OCC has
otherwise sustained a loss reimbursable out of the Clearing Fund
(but OCC has elected to borrow to meet such obligations instead of
immediately charging the Clearing Fund). OCC has requested that the
definition of ``Liquidity Needs'' under the New Facility would
include the ability to borrow to address reasonably anticipated
same-day obligations as a result of the failure of any bank or
securities or commodities clearing organization to achieve daily
settlement, but would continue to be limited to the extent that such
borrowing is permitted under the By-Laws and Rules. By limiting the
ability to borrow for purposes of financing Liquidity Needs always
to the extent permitted under the By-Laws and Rules, this borrowing
authority in the agreement would not become operative until OCC
receives all necessary regulatory approvals for any amendments to
By-Laws and Rules necessary to effect such a borrowing, which would
be the subject of a separate regulatory filing.
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Other Proposed Changes
The New Facility may also limit the scope of those eligible to act
as lenders in the New Facility to: (i) Banks within the meaning of
Section 3(a)(6) of the Act; \11\ (ii) any subsidiary of such a bank;
(iii) any corporation organized under Section 25A of the Federal
Reserve Act; \12\ and (iv) any agency or branch of a foreign bank
located within the United States.\13\ As discussed above, the Summary
of Terms and Conditions contemplates that the New Facility would permit
the pledge of certain equity securities as collateral. Lending secured
by such securities is required to be conducted in compliance with
Federal Reserve regulations regarding securities lending, including
Regulation U,\14\ and this change would be designed to promote general
consistency with such requirements.
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\11\ 15 U.S.C. 78c(a)(6).
\12\ 12 U.S.C. 611.
\13\ This explicitly does not include any savings and loan
association, any credit union, any lending institution that is an
instrumentality of the United States, or any member of a national
securities exchange.
\14\ 12 CFR 221.6.
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Finally, under the New Facility, OCC also expects that a new backup
collateral agent will be named.
Anticipated Effect on and Management of Risk
Completing timely settlement is a key aspect of OCC's role as a
clearing agency performing central counterparty services. Overall, the
New Facility would continue to promote the reduction of risks to OCC,
its Clearing Members and the options market in general because it would
allow OCC to obtain short-term funds to address liquidity demands
arising out of the default or suspension of a Clearing Member, in
anticipation of a potential default or suspension of Clearing Members
or the insolvency of a bank or another securities or commodities
clearing organization. The existence of the New Facility would
therefore help OCC minimize losses in the event of such a default,
suspension or insolvency, by allowing it to obtain funds on extremely
short notice to ensure clearance and settlement of transactions in
options and other contracts without interruption. OCC believes that the
reduced settlement risk presented by OCC resulting from the New
Facility would correspondingly reduce systemic risk and promote the
safety and soundness of the clearing system. By drawing on the New
Facility, OCC would also be able to avoid liquidating margin deposits
or Clearing Fund contributions in what would
[[Page 31374]]
likely be volatile market conditions, which would preserve funds
available to cover any losses resulting from the failure of a Clearing
Member, bank or other clearing organization. Expanding the scope of
collateral that OCC is permitted to pledge to the New Facility to
include the Pledged Equities and Pledged GSE Securities that OCC
permits its Clearing Members to deposit as margin would further this
purpose by giving OCC greater flexibility to pledge a broader range of
collateral to the New Facility that it determines is appropriate under
the circumstances. Expanding the uses of proceeds under the New
Facility to support Liquidity Needs in respect of OCC's settlement
obligations would also further this purpose to the extent such
borrowing is authorized under OCC's By-Laws and Rules. OCC believes
that the change would not otherwise affect or alter the management of
risk at OCC because the New Facility generally preserves the same terms
and conditions as the Existing Facility.
Consistency With the Payment, Clearing and Settlement 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.\15\
Section 805(a)(2) of the Clearing Supervision Act \16\ 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 \17\ states that the objectives
and principles for risk management standards prescribed under Section
805(a) shall be to:
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\15\ 12 U.S.C. 5461(b).
\16\ 12 U.S.C. 5464(a)(2).
\17\ 12 U.S.C. 5464(b).
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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.\18\ In particular, Rule 17Ad-22(e)(7)
\19\ requires that a covered clearing agency establish, implement,
maintain and enforce written policies and procedures reasonably
designed to effectively measure, monitor, and manage the liquidity risk
that arises in or is borne by it, including measuring, monitoring and
managing its settlement and funding flows on an ongoing and timely
basis and its use of intraday liquidity.
---------------------------------------------------------------------------
\18\ 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 OCC must
comply with new section (e) of Rule 17Ad-22 as of April 11, 2017.
\19\ 17 CFR 240.17Ad-22(e)(7).
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OCC believes that the New Facility is consistent with Section
805(b)(1) of the Clearing Supervision Act \20\ and Rule 17Ad-22(e)(7)
\21\ because it promotes robust risk management by OCC of its liquidity
risks to ensure that OCC can continue meeting its settlement
obligations. The New Facility would provide OCC with timely access to a
stable and reliable liquidity funding source to help it complete timely
clearing and settlement. Expanding the purposes for which borrowing
proceeds may be used and the scope of permitted collateral under the
New Facility would further the timeliness and reliability of OCC's
access to liquidity funding, by providing greater flexibility regarding
(i) the use of proceeds under the New Facility to address and manage
settlement obligations and (ii) the collateral that OCC may determine
is appropriate to pledge to support borrowing in the event of a
Clearing Member default. The expansion of permitted collateral would
better enable OCC to manage liquidity risk associated with its
settlement obligations by having access to a broader range of
collateral to pledge to the New Facility in the form margin collateral
that a defaulting Clearing Member may have on deposit. Expanding the
uses of proceeds under the New Facility to support Liquidity Needs in
respect of OCC's settlement obligations would also promote management
of settlement and funding flows (to the extent such borrowing is
authorized under OCC's By-Laws and Rules). In these ways, the proposed
changes are consistent with Section 805(b)(1) of the Clearing
Supervision Act \22\ and Rule 17Ad-22(e)(7).\23\
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\20\ 12 U.S.C. 5464(b)(1).
\21\ 17 CFR 240.17Ad-22(e)(7).
\22\ 12 U.S.C. 5464(b)(1).
\23\ 17 CFR 240.17Ad-22(e)(7).
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Accelerated Commission Action Requested
Pursuant to Section 806(e)(1)(I) of the Clearing Supervision
Act,\24\ OCC requests that the Commission notify OCC that it has no
objection to the New Facility not later than Friday, June 30, 2017,
which shall be fifty-seven calendar days from the date of OCC's
submission of this proposed change and two business days prior to the
expected July 5, 2017 availability of the New Facility. OCC requests
Commission action by this date to ensure that the New Facility is able
to become effective and will launch according to the new renewal cycle.
For the reasons described above, OCC believes that the new renewal
cycle will help it manage certain commercial structuring and
administrative coordination risks associated with the renewal process.
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\24\ 12 U.S.C. 5465(e)(1)(I).
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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.
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:
[[Page 31375]]
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-2017-803 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-2017-803. 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_803.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-2017-803 and
should be submitted on or before July 27, 2017.
V. Commission Findings and Notice of No Objection
Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, its stated purpose is instructive: 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.\25\ Section 805(a)(2) of the Clearing Supervision Act
authorizes the Commission to prescribe risk management standards for
the payment, clearing, and settlement activities of designated clearing
entities and financial institutions engaged in designated activities
for which it is the supervisory agency or the appropriate financial
regulator.\26\ Section 805(b) of the Clearing Supervision Act \27\
states that the objectives and principles for the risk management
standards prescribed under Section 805(a) shall be to:
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\25\ 12 U.S.C. 5461(b).
\26\ 12 U.S.C. 5464(a)(2).
\27\ 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.\28\
---------------------------------------------------------------------------
\28\ Id.
---------------------------------------------------------------------------
The Commission has adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act \29\ and Section 17A of the
Exchange Act (``Rule 17Ad-22'').\30\ Rule 17Ad-22 requires registered
clearing agencies to establish, implement, maintain, and enforce
written policies and procedures that are reasonably designed to meet
certain minimum requirements for their operations and risk management
practices on an ongoing basis.\31\ Therefore, it is appropriate for the
Commission to review changes proposed in advance notices against Rule
17Ad-22 and the objectives and principles of the risk management
standards described in Section 805(b) of the Clearing Supervision
Act.\32\ The Commission believes that the proposal in the Advance
Notice is consistent with the objectives and principles described in
Section 805(b) of the Clearing Supervision Act,\33\ and in Rule 17Ad-22
under the Exchange Act, particularly Rule 17Ad-22(e)(7).\34\
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\29\ 12 U.S.C. 5464(a)(2).
\30\ See 17 CFR 240.17Ad-22.
\31\ Id.
\32\ 12 U.S.C. 5464(b).
\33\ Id.
\34\ See 17 CFR 240.17Ad-22(e)(7).
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A. Consistency With Section 805(b) of the Clearing Supervision Act
As discussed below, the Commission believes that the changes
proposed in the Advance Notice are consistent with Section 805(b) of
the Clearing Supervision Act because they: (i) Promote robust risk
management; (ii) are consistent with promoting safety and soundness;
and (iii) are consistent with reducing systemic risks and promoting the
stability of the broader financial system.
The Commission believes that the changes proposed in the Advance
Notice are consistent with promoting robust risk management, in
particular management of liquidity risk. In particular, the terms of
the proposed New Facility give OCC expanded flexibility to manage
liquidity stresses arising from a Clearing Member default by broadening
the range of collateral that OCC can pledge to the facility. The
expanded range of collateral that may be pledged therefore affords OCC
a new option of pledging margin assets other than cash, U.S. Government
Securities, and Canadian Government Securities as an alternative to its
existing choices of either liquidating other margin collateral or
pledging primarily Clearing Fund collateral in order to access the
Existing Facility.\35\ The broader collateral eligibility reflected in
the proposed New Facility also would bring OCC's liquidity risk
management resources in line with those of other CCPs that already have
the ability to pledge equities to their revolving credit facility
liquidity lines.\36\ In addition, broadening the definition of
``Liquidity Needs'' in the New Facility to address losses that may
arise when a bank or securities or commodities clearing organization
has failed to make daily settlement with OCC (as opposed to the
narrower instance under the Existing Facility of losses from a
bankruptcy or insolvency of a bank or securities or commodities
clearing organization)--subject to necessary amendments of OCC's By-
Laws and Rules and concomitant regulatory approvals \37\--would further
enhance OCC's ability to continue to meet its settlement obligations.
As such, the Commission believes that the proposal would promote robust
risk management
[[Page 31376]]
practices at OCC, consistent with Section 805(b) of the Clearing
Supervision Act.\38\
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\35\ The Commission notes that OCC does not currently accept
Pledged GSE MBS for deposit as margin, and that OCC has represented
that it will not do so unless and until OCC's Risk Committee
approves such securities for deposit as margin, in accordance with
OCC's By-laws. See supra note 9.
\36\ The Commission notes that the National Securities Clearing
Corporation has the right to post equity securities as part of its
revolving credit facility. See Securities Exchange Act Release No.
69557 (May 10, 2013), 78 FR 28936, 28936 & n.5 (May 16, 2013) (SR-
NSCC-2013-803); see also NSCC Rules and Procedures, Rule 4 (https://dtcc.com/legal/rules_proc/nscc_rules.pdf).
\37\ The Commission notes that OCC has represented that the
expanded borrowing authority in this agreement would not become
operative unless and until OCC receives all necessary regulatory
approvals for any amendments to its By-Laws and Rules necessary to
effect such a borrowing, which would be subject to a separate
regulatory filing with the Commission. See supra note 10. For the
purposes of the findings herein, the Commission relies on this
representation and expects that OCC will make a separate regulatory
filing in connection with effecting consistent changes of this sort
to its By-Laws and Rules.
\38\ 12 U.S.C. 5464(b).
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The Commission also believes that the changes proposed in the
Advance Notice are consistent with promoting safety and soundness. The
New Facility would continue to provide OCC with a liquidity resource in
the event of a participant default or of losses due to the bankruptcy
or insolvency of a bank or securities or commodities clearing
organization. Subject to amendment of OCC's By-Laws and Rules and
related regulatory approvals, the New Facility also would provide
liquidity to OCC in the event of a failure by a bank or securities or
commodities clearing organization to perform same-day settlement
obligations outside the context of such bank or clearing organization's
bankruptcy or insolvency. This expanded set of circumstances in which
OCC could access liquidity would promote safety and soundness for OCC
and its Clearing Members because it would provide OCC with a readily
available liquidity resource that would enable it to continue to meet
its settlement obligations in a timely fashion, thereby helping OCC to
contain losses and liquidity pressures that otherwise might cause
financial distress to OCC or its Clearing Members. As such, the
Commission believes the proposed change is consistent with promoting
safety and soundness, as contemplated in Section 805(b) of the Clearing
Supervision Act.
Finally, the Commission believes that the Advance Notice is
consistent with reducing systemic risks and promoting the stability of
the broader financial system. The New Facility would provide OCC, which
has been designated a systemically important financial market utility,
with a more flexible and thus improved, liquidity resource. The
Commission believes that the New Facility should bolster the likelihood
that OCC will meet its settlement obligations, thereby reducing the
risk of loss contagion and enhancing the ability of OCC and its
Clearing Members to provide reliability, stability, and safety to the
financial markets that they serve. Accordingly, the Commission believes
that the proposal could help to reduce systemic risk and support the
stability of the broader financial system, consistent with Section
805(b) of the Clearing Supervision Act.
B. Consistency With Rule 17Ad-22(e)(7)
The Commission believes that the proposed changes associated with
the New Facility are consistent with the requirements of Rule 17Ad-
22(e)(7) under the Exchange Act.\39\ This rule requires that a covered
clearing agency establish, implement, maintain, and enforce written
policies and procedures reasonably designed to ``effectively measure,
monitor, and manage the liquidity risk that arises in or is borne by
[it], including measuring, monitoring, and managing its settlement and
funding flows on an ongoing and timely basis, and its use of intraday
liquidity.'' \40\
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\39\ 17 CFR 240.17Ad-22(e)(7).
\40\ Id.
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In particular, Rule 17Ad-22(e)(7)(i) directs that a covered
clearing agency meet this obligation by, among other things,
``[m]aintaining sufficient liquid resources at the minimum in all
relevant currencies to effect same-day . . . settlement of payment
obligations with a high degree of confidence under a wide range of
foreseeable stress scenarios that includes, but is not limited to, the
default of the participant family that would generate the largest
aggregate payment obligation for the covered clearing agency in extreme
but plausible conditions.'' \41\
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\41\ 17 CFR 240.17Ad-22(e)(7)(i).
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The Commission believes that the proposal is consistent with
Exchange Act Rule 17Ad-22(e)(7)(i). The proposed New Facility would
permit OCC to pledge a broader range of collateral to the facility, and
therefore would allow OCC to utilize a greater range of margin
collateral to obtain liquidity from the facility, as an alternative to
selling such collateral under what may be stressed and volatile market
conditions and as an alternative to pledging collateral deposited to
the Clearing Fund. The proposal thus increases OCC's flexibility to
respond to a clearing member default by providing OCC with greater
opportunity, depending on prevailing market conditions, to select among
different types of collateral assets and make efficient use of margin
collateral and to preserve Clearing Fund assets in managing a Clearing
Member default. The New Facility also would permit OCC to cover any
losses resulting from the failure of a bank or other clearing
organization to achieve same-day settlement, subject to further
internal governance and concomitant regulatory approvals that OCC must
obtain.\42\ This would provide OCC with additional liquidity to manage
scenarios outside of a Clearing Member default, thereby mitigating the
likelihood of liquidity stress to OCC. The additional features of the
New Facility described above would support OCC's ability to meet
liquidity needs and to effect same-day, intraday, and multiday
settlement payment obligations under a wider range of stress scenarios
than under the Existing Facility. Therefore, the Commission believes
that the proposal is consistent with Rule 17Ad-22(e)(7)(i).\43\
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\42\ As stated above, OCC's ability to utilize borrowings for
these purposes would be subject to a further OCC regulatory filing
to make the changes to its By-Laws and Rules. See note 10, supra.
\43\ Id.
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Finally, Rule 17Ad-22(e)(7)(ii) under the Exchange Act requires
that OCC establish, implement, maintain, and enforce written policies
and procedures reasonably designed to hold qualifying liquid resources
sufficient to satisfy payment obligations owed to clearing members.\44\
Rule 17Ad-22(a)(14) of the Exchange Act defines ``qualifying liquid
resources'' to include, among other things, lines of credit without
material adverse change provisions, that are readily available and
convertible into cash.\45\ Based upon review of the relevant provisions
of the Summary of Terms and Conditions, the Commission believes that
the New Facility would not be subject to any material adverse change
provision, and is thus consistent with Rule 17Ad-22(a)(14).\46\
Further, and as described above, the New Facility is designed to help
ensure that OCC has sufficient, readily-available qualifying liquid
resources to meet the cash settlement obligations of OCC's largest
family of affiliated Clearing Members. Therefore, the Commission
believes that the proposal is consistent with Rule 17Ad-
22(e)(7)(ii).\47\
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\44\ 17 CFR 240.17Ad-22(e)(7)(ii).
\45\ 17 CFR 240.17Ad-22(a)(14).
\46\ Id.
\47\ 17 CFR 240.17Ad-22(e)(7)(ii).
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VI. Conclusion
It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act, that the Commission does not object to the
Advance Notice SR-OCC-2017-803 and OCC can and hereby is authorized to
implement the change as of the date of this notice.
By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2017-14187 Filed 7-5-17; 8:45 am]
BILLING CODE 8011-01-P
