Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change Related to The Options Clearing Corporation's Default Management Policy, 50707-50711 [2017-23735]
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Federal Register / Vol. 82, No. 210 / Wednesday, November 1, 2017 / Notices
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
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Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act and Rule 19b–
4(f)(6) thereunder.10
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 11 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii) 12
permits the Commission to designate a
shorter time if such action is consistent
with the protection of investors and the
public interest. The Exchange has asked
the Commission to waive the 30-day
operative delay so that the proposal may
become operative immediately upon
filing. The Commission notes that the
proposed rule change is based on EDGX
Rule 21.1(f)(6) and is identical to such
rule. Thus, the Commission believes
that waiver of the operative delay is
consistent with the protection of
investors and the public because the
proposal does not present any new or
novel issues that have not been
previously considered by the
Commission. Therefore, the
Commission hereby waives the 30-day
operative delay and designates the
proposal operative upon filing.13
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
10 17 CFR 240.19b–4(f)(6). As required under Rule
19b–4(f)(6)(iii), the Exchange provided the
Commission with written notice of its intent to file
the proposed rule change, along with a brief
description and the text of the proposed rule
change, at least five business days prior to the date
of filing of the proposed rule change, or such
shorter time as designated by the Commission.
11 17 CFR 240.19b–4(f)(6).
12 17 CFR 240.19b–4(f)(6)(iii).
13 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
• 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–
BatsBZX–2017–71 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–BatsBZX–2017–71. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–BatsBZX–2017–71 and
should be submitted on or before
November 22, 2017.
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–23732 Filed 10–31–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
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[Release No. 34–81955; File No. SR–OCC–
2017–010]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing of Proposed Rule Change
Related to The Options Clearing
Corporation’s Default Management
Policy
October 26, 2017.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on October
12, 2017, The Options Clearing
Corporation (‘‘OCC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared primarily by OCC. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
This proposed rule change by The
Options Clearing Corporation (‘‘OCC’’)
would formalize and update OCC’s
Default Management Policy, which
would promote compliance with
multiple requirements applicable to
OCC under Rule 17Ad–22, including
Rules 17Ad–22(e)(4)(ix) (Replenishment
of Resources) and (e)(13) (Default
Management).3 The Default
Management Policy is included as
confidential Exhibit 5.4
The proposed rule change does not
require any changes to the text of OCC’s
By-Laws or Rules. All terms with initial
capitalization that are not otherwise
defined herein have the same meaning
as set forth in the OCC By-Laws and
Rules.5
14 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 17 CFR 240.17Ad–22(e)(4)(ix) and (e)(13).
4 The Commission notes that Exhibit 5 is
included in the filing, not in this Notice.
5 OCC’s By-Laws and Rules can be found on
OCC’s public Web site: https://optionsclearing.com/
about/publications/bylaws.jsp.
1 15
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Federal Register / Vol. 82, No. 210 / Wednesday, November 1, 2017 / Notices
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission,
OCC included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. OCC has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of these statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
(1) Purpose
Background
On September 28, 2016, the
Commission adopted amendments to
Rule 17Ad–22 6 and added new Rule
17Ab2–2 7 pursuant to Section 17A of
the Securities Exchange Act of 1934, as
amended, (‘‘Act’’) 8 and the Payment,
Clearing, and Settlement Supervision
Act of 2010 (‘‘Payment, Clearing and
Settlement Supervision Act’’) 9 to
establish enhanced standards for the
operation and governance of those
clearing agencies registered with the
Commission that meet the definition of
a ‘‘covered clearing agency,’’ as defined
by Rule 17Ad–22(a)(5) 10 (collectively,
the new and amended rules are herein
referred to as the ‘‘CCA’’ rules). OCC
meets the definition of a covered
clearing agency and is therefore subject
to the requirements of the CCA rules.11
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Relevance of OCC’s Default
Management Policy to Rules 17Ad–
22(e)(4)(ix) and (e)(13)
Certain of the CCA rules relate to
matters that, as described below, are
addressed by OCC’s Default
Management Policy (‘‘DM Policy’’).
Specifically, Rules 17Ad–22(e)(4)(ix)
and (e)(13) respectively require OCC to,
among other things, establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to: (i) Effectively
identify, measure, and manage its credit
exposures to participants and those
arising from its payment, clearing and
settlement processes, including by
‘‘describing [OCC’s] process to replenish
6 Securities Exchange Act Release No. 78961
(September 28, 2016), 81 FR 70786 (October 13,
2016) (‘‘CCA Adopting Release’’); see also 17 CFR
240.17Ad–22.
7 17 CFR 240.17Ab2–2.
8 15 U.S.C. 78q–1.
9 12 U.S.C. 5461 et. seq.
10 17 CFR 240.17Ad–22(a)(5).
11 Id.
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any financial resources it may use
following a default or other event in
which use of such resources is
contemplated’’ 12 and (ii) ensure that
OCC ‘‘has the authority and operational
capacity to take timely action to contain
losses and liquidity demands and
continue to meet its obligations by, at a
minimum, requiring [OCC’s]
participants and, when practicable,
other stakeholders to participate in the
testing and review of its default
procedures, including any close-out
procedure, at least annually and
following material changes thereto.’’ 13
OCC believes that the DM Policy
promotes compliance with these
requirements under Rules 17Ad–
22(e)(4)(ix) and (e)(13), and an overview
of the DM Policy is provided below.
Default Management Policy
OCC proposes to formalize its DM
Policy, which would apply in the event
of a default by a Clearing Member,
settlement bank or a financial market
utility with which OCC has a
relationship (‘‘FMU’’).14 The purpose of
the policy is to outline OCC’s default
management framework and describe
the default management steps that OCC
has authority to take depending upon
the facts and circumstances of a default.
The DM Policy focuses on Clearing
Member default, which OCC believes is
appropriate because Clearing Member
default represents a substantial part of
the overall default risk that is posed to
OCC in connection with its central
counterparty clearing services.15
OCC notes that the DM Policy is part
of a broader framework used by OCC to
manage the default of a Clearing
Member, settlement bank or FMU,
including OCC’s By-Laws, Rules, and
other policies and procedures. The
broader framework is designed to
collectively ensure that OCC would
appropriately manage any such default
consistent with OCC’s obligations as a
12 17
CFR 240.17Ad–22(e)(4)(ix).
13 17 CFR 240.17Ad–22(e)(13).
14 Examples of such FMUs contemplated by the
DM Policy are the following securities or
commodities clearing organizations: The Depository
Trust Company, National Securities Clearing
Corporation, and the Chicago Mercantile Exchange.
In an event of default by one of these securities or
commodities clearing organizations, or by a
settlement bank, OCC has authority under certain
conditions pursuant to Article VIII, Section
1.(a)(vii) and 5.(b) of the By-Laws to manage the
default using Clearing Member contributions to the
Clearing Fund.
15 For purposes of the DM Policy, references to a
Clearing Member suspension or default contemplate
the circumstances specified in OCC Rule 1102,
which constitute events of ‘‘default’’ under
Interpretation and Policy .01 to the Rule.
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covered clearing agency, including
under Rule 17Ad–22.16
The DM Policy describes the authority
of OCC’s Board of Directors (‘‘Board’’) or
a Designated Officer 17 to summarily
suspend a Clearing Member pursuant to
OCC Rule 1102(a) in the event the
Clearing Member defaults. The DM
Policy further provides that, pursuant to
OCC Rule 707, OCC may suspend a
Clearing Member that participates in a
cross-margining program in the event of
a default regarding its cross-margining
accounts. Upon any suspension of a
Clearing Member, the DM Policy states
that OCC would immediately notify a
number of parties, including the
suspended Clearing Member, regulatory
authorities, participant and other
exchanges (as applicable) in which the
suspended Clearing Member is a
common member, other Clearing
Members,18 and OCC’s Board.19
In the event of a Clearing Member
suspension, the DM Policy provides that
OCC’s Financial Risk Management
department (‘‘FRM’’) shall prepare an
exposure summary report to be
provided to OCC’s Management
Committee detailing, among other
things, the open obligations of the
suspended Clearing Member, collateral
deposited by the Clearing Member,
obligations to other FMUs and a
summary of related entity exposure. The
report summarizes the net settlement
obligation of the suspended Clearing
Member at the time of default. The DM
Policy further provides that a
recommendation as to any liquidity
needs requiring a draw on OCC’s credit
facilities would be provided to OCC’s
Management Committee and
subsequently be authorized, as
applicable, by the Executive Chairman,
CAO, or COO, as provided for in Article
VIII, Section 5 of the By-Laws. These
practices ensure that OCC’s
Management Committee remains
properly informed and can make
16 In this regard, the DM Policy provides that OCC
publishes key aspects of its default management
Rules and procedures on its Web site. The summary
is available at https://www.theocc.com/riskmanagement/default-rules/.
17 For this purpose, the term Designated Officer
includes the Executive Chairman, Chief
Administrative Officer (‘‘CAO’’), Chief Operating
Officer (‘‘COO’’), Chief Risk Officer (‘‘CRO’’) and
Executive Vice President—Financial Risk
Management (‘‘EVP–FRM’’).
18 OCC Rule 1103 requires OCC to notify all
Clearing Members of the suspension as soon as
possible.
19 With respect to pending transactions of a
suspended Clearing Member, the DM Policy
provides that these will be handled pursuant to
OCC Rule 1105, provided that OCC has no
obligation to accept the trades effected by a
suspended Clearing Member post-suspension.
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appropriate decisions in the default
management process.
The DM Policy describes OCC’s
existing authority under OCC Rule 505
to extend the time for OCC’s settlement
obligations (i.e., payment obligations
owed by OCC to Clearing Members).
The DM Policy notes that any such
determination to extend the settlement
time and the reasons thereof will be
promptly reported by OCC to the
Commission and the Commodity
Futures Trading Commission (‘‘CFTC’’),
however, the effectiveness of the
extension is not be conditioned upon
such reporting. The DM Policy notes
that such an extension may be necessary
as a result of a Clearing Member default
or a failure of a Clearing Member’s
settlement bank.
To address situations in which a
Clearing Member’s settlement bank fails
or experiences an operational outage
that prevents the Clearing Member from
meeting its settlement obligations to
OCC, the DM Policy provides that OCC
requires each Clearing Member to
maintain procedures detailing how it
would meet its settlement obligations in
such an event. The DM Policy further
provides that a Designated Officer
would determine whether to enact these
alternate settlement procedures in the
event that a Clearing Member’s
settlement bank is unable to perform.
The DM Policy sets forth the sequence
or ‘‘waterfall’’ of financial resources that
OCC may use to meet its obligations in
the event of a Clearing Member
suspension to provide certainty
regarding the order in which these
resources would be applied.
Specifically, the DM Policy describes
that OCC is able to use the following
financial resources: (i) Margin deposits
of the suspended Clearing Member; (ii)
deposits in lieu of margin of the
suspended Clearing Member; 20 (iii)
Clearing Fund deposits of the
suspended Clearing Member; (iv)
Clearing Fund deposits of nondefaulting Clearing Members; (v)
Clearing Fund assessments against
Clearing Members; and (vi) the current
or retained earnings of OCC, subject to
the unanimous approval of certain OCC
shareholders.21
In the case of a suspended Clearing
Member, the DM Policy outlines the
20 See
Rule 610(f) and (g).
OCC By-Law Article VIII, Section 5(d). In
lieu of charging a loss or deficiency proportionately
to the computed Clearing Fund contributions of
non-defaulting Clearing Members, OCC may charge
the loss or deficiency to current or retained
earnings. This same discretion applies in
connection with any loss by reason of the failure
of a bank or securities or commodities clearing
organization to perform an obligation to OCC.
21 See
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means by which OCC may determine
close out positions and collateral of the
suspended Clearing Member pursuant to
OCC’s Rules, including certain
provisions under Chapter XI of the
Rules. Based upon recommendations
from OCC’s risk staff, the EVP–FRM
may take any one, or any combination,
of the following actions pursuant to the
terms of OCC’s By-Laws and Rules: (i)
Net the suspended Clearing Member’s
positions by offset; (ii) effect market
transactions to close out open short
positions, long positions, and collateral;
(iii) transfer the positions and related
collateral to a non-suspended Clearing
Member; (iv) effect hedging transactions
to reduce the risk to OCC of open
positions; (v) conduct a private auction
of the positions and collateral of the
suspended Clearing Member; (vi)
exercise unsegregated and segregated
long options; (vii) set cash settlement
values or perform buy-in or sell-out
processes; and (viii) defer close-out, as
may be authorized by certain officers of
OCC.22
In addition, the DM Policy specifies
that OCC risk staff will develop a Closeout Action Plan (‘‘CAP’’) and present it
to the EVP–FRM for approval. The DM
Policy provides that upon approval of
the CAP by the EVP–FRM, FRM and
other designated business OCC business
units and personnel will be responsible
for its execution. The DM Policy also
provides that OCC’s legal department
would advise OCC’s Management
Committee on OCC’s authority to
execute the proposed CAP and describe
the responsibilities for the execution,
monitoring and reporting of the CAP
and escalation of issues to OCC’s
Management Committee. The CAP
process is designed to ensure that OCC
has an appropriate process in place to
analyze its exposures, take into
consideration current and expected
market conditions, and evaluate the
tools and resources available to deal
with those exposures under the
circumstances so that OCC can
appropriately manage any default in a
manner that would protect Clearing
Members, investors, the public interest,
and the markets that OCC serves.
The DM Policy provides that OCC
would generally liquidate all positions
and collateral of a suspended Clearing
Member, and the proceeds would be
attributed to the account type from
which they originated. It also specifies
that as a registered clearing agency with
the Commission and a registered
22 The DM Policy also provides that any
determination to defer close-out or hedging
transactions under the CAP would be reported to
the Board and/or the Risk Committee, as required
under OCC Rules 1106.
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50709
derivatives clearing organization with
the CFTC, OCC is required to comply
with regulatory requirements to
safeguard customer assets.
In the event of a default, OCC would
immediately demand any pledged
collateral of the suspended Clearing
Member from custodian(s) to ensure
those resources are available for default
management purposes. For example, the
DM Policy provides that, among other
things, cash and proceeds from any
liquidated collateral or demand of
payment on a letter of credit would be
placed in the appropriate liquidating
settlement account, pursuant to OCC
Rule 1104. The DM Policy further
provides that all pledged valued margin
collateral will be moved by the
Collateral Services Department into an
OCC account and may be transferred to
an auction recipient, delivered to a
liquidating agent or delivered to a
liquidating settlement account. In the
case of deposits in lieu of margin,
however, the DM Policy states that OCC
would only demand such collateral to
meet obligations arising from the
assignment of a related contract.
After the close-out of the suspended
Clearing Member is completed, the DM
Policy describes that the Executive
Chairman, CAO, or COO would
determine whether, consistent with
Article VIII, Section 5(a) of OCC’s ByLaws, an assessment must be made
against the Clearing Fund in connection
with the liquidation. In the event of a
shortfall whereby the close-out of the
suspended Clearing Member does not
result in enough resources to cover its
obligations, the DM Policy states that
each Clearing Member, consistent with
Article VIII, Section 6 of OCC’s ByLaws, may be assessed an additional
amount equal to the amount of its initial
Clearing Fund deposit, as determined by
the Executive Chairman, CAO, or COO.
The DM Policy notes that any such
assessment decision would be
communicated via email in accordance
with the procedure covering the
assessment process. The DM Policy also
specifies that a Clearing Member is
liable for further assessments until the
balance of OCC’s losses are covered or
the Clearing Member has withdrawn
from membership as set forth in Article
VIII, Sections 6 and 7 of OCC’s By-Laws.
The DM Policy provides that, on at
least an annual basis, OCC’s default
management working group will
provide OCC’s Management Committee
with recommended areas for testing,
including close-out procedures, and that
the Management Committee is
responsible for reviewing and ultimately
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approving the overall test plan.23 In
addition, the DM Policy specifies that
the default management working group
maintains the authority to approve
individual test plans and overall plan
changes, but that any changes to the
overall plan would be reported to and
reviewed by OCC’s Management
Committee. The DM Policy further
provides that testing is recommended
and performed more frequently than
annually if a material change is made to
OCC’s default management procedures
or if it is deemed necessary by OCC’s
default management working group.
These provisions are designed to ensure
that OCC maintains policies and
procedures reasonably designed to
satisfy the requirements of Rule 17Ad–
22(e)(13) 24 relating to the testing and
review of its default procedures.
In addition, the DM Policy outlines
the execution of the testing plan and the
review of the results of the testing plan,
including the production of annual
reports to OCC’s Management
Committee and Risk Committee
regarding the results of OCC’s default
tests to provide appropriate oversight
over the default testing process.
(2) Statutory Basis
Section 17A(b)(3)(F) of the Act 25
requires, among other things, that the
rules of a clearing agency be designed to
promote the prompt and accurate
clearance and settlement of securities
transactions, and, in general, protect
investors and the public interest. The
DM Policy focuses on the processes that
OCC would use to take timely action to
contain losses and liquidity demands in
an event of default by a Clearing
Member, such as closing out open
positions and collateral of a defaulted
Clearing Member, using alternate
settlement bank procedures or relying
on Clearing Fund contributions of
Clearing Members under certain
conditions. In this regard, the DM Policy
is designed to ensure that OCC can
maintain its resilience in the event of a
default, thereby enabling OCC to
continue to provide its clearance and
settlement services to the public in such
circumstances. Accordingly, OCC
believes that the DM Policy is designed
to (i) protect investors and the public
interest, and (ii) promote the prompt
and accurate clearance and settlement of
securities transactions in a manner
23 The DM Policy also provides that Clearing
Members are required to participate in default
management testing pursuant to OCC Rules 218(c)
and (d). See Securities Exchange Act Release No.
80372 (April 4, 2017), 82 FR 17311 (April 10, 2017)
(SR–OCC–2017–003).
24 17 CFR 240.17Ad–22(e)(13).
25 15 U.S.C. 78q–1(b)(3)(F).
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consistent with Section 17A(b)(3)(F) of
the Act.26
Rules 17Ad–22(e)(4)(ix) and (e)(13)
respectively require a covered clearing
agency to, among other things, establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to: (i) Effectively
identify, measure, and manage its credit
exposures to participants and those
arising from its payment, clearing and
settlement processes, including by
describing its process to replenish any
financial resources it may use following
a default or other event in which use of
such resources is contemplated 27 and
(ii) ensure that it has the authority and
operational capacity to take timely
action to contain losses and liquidity
demands and continue to meet its
obligations by, at a minimum, requiring
its participants and, when practicable,
other stakeholders to participate in the
testing and review of its default
procedures, including any close-out
procedure, at least annually and
following material changes thereto.28
OCC believes that the proposed rule
change is consistent with Rule 17Ad–
22(e)(13) 29 because the DM Policy,
among other things, sets forth OCC’s
authority and operational capabilities to
take timely action to contain losses and
liquidity demands and continue to meet
its obligations. For example, the DM
Policy sets forth the procedures by
which OCC would suspend a Clearing
Member as well as the waterfall of
financial resources that OCC would use
to contain losses arising from the
Clearing Member’s default. The DM
Policy also sets forth, among other
things, the various means by which OCC
may close-out the positions of a
suspended Clearing Member and the
process it uses to make such
determinations, which OCC believes
helps ensure that OCC has sufficient
operational capacity take timely action
to contain losses and liquidity demands
and continue to meet its obligations
consistent with Rule 17Ad–22(e)(13).30
In addition, OCC believes that the DM
Policy is consistent with the testing
requirement in Rule 17Ad–22(e)(13) 31
because the DM Policy sets forth OCC’s
processes for managing annual testing,
or more frequent testing following a
change to OCC’s default management
procedures.
OCC also believes that the DM Policy
is consistent with Rule 17Ad–
26 Id.
27 17
28 17
CFR 240.17Ad–22(e)(4)(ix).
CFR 240.17Ad–22(e)(13).
22(e)(4)(ix) 32 because the DM Policy
describes the process by which OCC
may initiate a Clearing Fund assessment
to replenish financial resources that
may be used following a default and
attendant suspension of a Clearing
Member. Specifically, the DM Policy
provides that where the liquidation of a
suspended Clearing Member results in a
shortfall, certain officers of OCC may
require that all Clearing Members be
assessed an additional amount equal to
the amount of their respective Clearing
Fund deposits, consistent with OCC’s
By-Laws, and that a Clearing Member is
liable for further assessments until the
balance of OCC’s losses are covered or
the Clearing Member has withdrawn
from membership as set forth in OCC’s
By-Laws. In addition, the DM Policy
also provides that, pursuant to the
waterfall of financial resources used in
the event of a Clearing Member
suspension, OCC could use current or
retained earnings, consistent with OCC’s
By-Laws, to continue meeting its
financial obligations.
The proposed rule change is not
inconsistent with the existing rules of
OCC, including any other rules
proposed to be amended.
(B) Clearing Agency’s Statement on
Burden on Competition
Section 17A(b)(3)(I) of the Act 33
requires that the rules of a clearing
agency not impose any burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act. OCC does not
believe that the proposed rule change
would impact or impose any burden on
competition. As a general matter, the
DM Policy describes the processes OCC
would follow in a default that are
already set forth in OCC’s approved ByLaws and Rules. More specifically, the
proposed rule change sets forth in a
single document the framework OCC
would use to manage the default
primarily of a Clearing Member, as well
as the default of a settlement bank or
FMU. Because any individual Clearing
Member, settlement bank, or FMU
under the DM Policy is equally subject
to the aspects of OCC’s default
management framework that apply to it,
the proposed rule change would not
provide any such entity with a
competitive advantage over any other
similar entity. OCC notes that, in
managing any potential default, OCC
focuses on the risk posed to OCC by
such default. Accordingly, to the extent,
for example, that OCC were to close-out
the open positions of one suspended
29 Id.
30 Id.
32 17
31 Id.
33 15
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U.S.C. 78q–1(b)(3)(I).
01NON1
Federal Register / Vol. 82, No. 210 / Wednesday, November 1, 2017 / Notices
Clearing Member in a different manner
than it were to close-out the open
positions of another Clearing Member,
such differences result from the risks
posed to OCC by each Clearing
Member’s respective positions.
Moreover, the treatment of customer
versus proprietary positions in a default
scenario are not specifically addressed
in the DM Policy, which as noted sets
forth a general framework for managing
defaults, but rather in OCC’s existing
By-Laws and Rules. Further, the
proposed rule change would not affect
Clearing Members’ access to OCC’s
services or impose any direct burdens
on Clearing Members.
For the foregoing reasons, OCC
believes that the proposed rule change
is in the public interest, would be
consistent with the requirements of the
Act applicable to clearing agencies, and
would not impact or impose a burden
on competition.
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants or Others
Written comments on the proposed
rule change were not and are not
intended to be solicited with respect to
the proposed rule change and none have
been received.
sradovich on DSK3GMQ082PROD with NOTICES
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
OCC–2017–010 on the subject line.
VerDate Sep<11>2014
18:16 Oct 31, 2017
Jkt 244001
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–OCC–2017–010. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
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_
010.pdf.
All comments received will be posted
without change. Persons submitting
comments are cautioned that the
Commission does not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly.
All submissions should refer to File
Number SR–OCC–2017–010 and should
be submitted on or before November 22,
2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
Authority.34
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–23735 Filed 10–31–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–81962; File No. SR–
BatsBZX–2017–70]
Self-Regulatory Organizations; Bats
BZX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Reflect in
the Exchange’s Governing Documents,
Rulebook and Fees Schedules, a NonSubstantive Corporate Branding
Change, Including Changes to the
Company’s Name, the Intermediate’s
Name, and the Exchange’s Name
October 26, 2017.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on October
16, 2017, Bats BZX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BZX’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange filed a proposed rule
change with respect to amendments of
the Second Amended and Restated
Certificate of Incorporation (the
‘‘Company’s Certificate’’) and Third
Amended and Restated Bylaws (the ’’
Company’s Bylaws’’) of its parent
corporation, CBOE Holdings, Inc.
(‘‘CBOE Holdings’’ or the ‘‘Company’’)
to change the name of the Company to
Cboe Global Markets, Inc. With respect
to CBOE V, LLC, an intermediate
Holding Company of the Exchange (the
‘‘Intermediate’’), the Exchange proposes
to amend the Certificate of Formation
and Limited Liability Company
Operating Agreement of CBOE V, LLC
(the ‘‘Operating Agreement’’), in
connection with a related name change
for the Intermediate. The Exchange also
proposes to amend its Amended and
Restated Certificate of Incorporation (the
‘‘Exchange Certificate’’), Sixth Amended
and Restated Bylaws of Bats BZX
Exchange, Inc. (the ‘‘Exchange
Bylaws’’), rulebook and fees schedules
(collectively ‘‘operative documents’’) in
connection with the name change of its
parent Company, Intermediate, and the
Exchange.
1 15
34 17
PO 00000
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Frm 00104
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Sfmt 4703
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2 17
E:\FR\FM\01NON1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
01NON1
]]>Agencies
[Federal Register Volume 82, Number 210 (Wednesday, November 1, 2017)]
[Notices]
[Pages 50707-50711]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-23735]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-81955; File No. SR-OCC-2017-010]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change Related to The Options
Clearing Corporation's Default Management Policy
October 26, 2017.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on October 12, 2017, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared primarily by OCC. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
This proposed rule change by The Options Clearing Corporation
(``OCC'') would formalize and update OCC's Default Management Policy,
which would promote compliance with multiple requirements applicable to
OCC under Rule 17Ad-22, including Rules 17Ad-22(e)(4)(ix)
(Replenishment of Resources) and (e)(13) (Default Management).\3\ The
Default Management Policy is included as confidential Exhibit 5.\4\
---------------------------------------------------------------------------
\3\ 17 CFR 240.17Ad-22(e)(4)(ix) and (e)(13).
\4\ The Commission notes that Exhibit 5 is included in the
filing, not in this Notice.
---------------------------------------------------------------------------
The proposed rule change does not require any changes to the text
of OCC's By-Laws or Rules. All terms with initial capitalization that
are not otherwise defined herein have the same meaning as set forth in
the OCC By-Laws and Rules.\5\
---------------------------------------------------------------------------
\5\ OCC's By-Laws and Rules can be found on OCC's public Web
site: https://optionsclearing.com/about/publications/bylaws.jsp.
---------------------------------------------------------------------------
[[Page 50708]]
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. OCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
(1) Purpose
Background
On September 28, 2016, the Commission adopted amendments to Rule
17Ad-22 \6\ and added new Rule 17Ab2-2 \7\ pursuant to Section 17A of
the Securities Exchange Act of 1934, as amended, (``Act'') \8\ and the
Payment, Clearing, and Settlement Supervision Act of 2010 (``Payment,
Clearing and Settlement Supervision Act'') \9\ to establish enhanced
standards for the operation and governance of those clearing agencies
registered with the Commission that meet the definition of a ``covered
clearing agency,'' as defined by Rule 17Ad-22(a)(5) \10\ (collectively,
the new and amended rules are herein referred to as the ``CCA'' rules).
OCC meets the definition of a covered clearing agency and is therefore
subject to the requirements of the CCA rules.\11\
---------------------------------------------------------------------------
\6\ Securities Exchange Act Release No. 78961 (September 28,
2016), 81 FR 70786 (October 13, 2016) (``CCA Adopting Release'');
see also 17 CFR 240.17Ad-22.
\7\ 17 CFR 240.17Ab2-2.
\8\ 15 U.S.C. 78q-1.
\9\ 12 U.S.C. 5461 et. seq.
\10\ 17 CFR 240.17Ad-22(a)(5).
\11\ Id.
---------------------------------------------------------------------------
Relevance of OCC's Default Management Policy to Rules 17Ad-22(e)(4)(ix)
and (e)(13)
Certain of the CCA rules relate to matters that, as described
below, are addressed by OCC's Default Management Policy (``DM
Policy''). Specifically, Rules 17Ad-22(e)(4)(ix) and (e)(13)
respectively require OCC to, among other things, establish, implement,
maintain, and enforce written policies and procedures reasonably
designed to: (i) Effectively identify, measure, and manage its credit
exposures to participants and those arising from its payment, clearing
and settlement processes, including by ``describing [OCC's] process to
replenish any financial resources it may use following a default or
other event in which use of such resources is contemplated'' \12\ and
(ii) ensure that OCC ``has the authority and operational capacity to
take timely action to contain losses and liquidity demands and continue
to meet its obligations by, at a minimum, requiring [OCC's]
participants and, when practicable, other stakeholders to participate
in the testing and review of its default procedures, including any
close-out procedure, at least annually and following material changes
thereto.'' \13\ OCC believes that the DM Policy promotes compliance
with these requirements under Rules 17Ad-22(e)(4)(ix) and (e)(13), and
an overview of the DM Policy is provided below.
---------------------------------------------------------------------------
\12\ 17 CFR 240.17Ad-22(e)(4)(ix).
\13\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------
Default Management Policy
OCC proposes to formalize its DM Policy, which would apply in the
event of a default by a Clearing Member, settlement bank or a financial
market utility with which OCC has a relationship (``FMU'').\14\ The
purpose of the policy is to outline OCC's default management framework
and describe the default management steps that OCC has authority to
take depending upon the facts and circumstances of a default. The DM
Policy focuses on Clearing Member default, which OCC believes is
appropriate because Clearing Member default represents a substantial
part of the overall default risk that is posed to OCC in connection
with its central counterparty clearing services.\15\
---------------------------------------------------------------------------
\14\ Examples of such FMUs contemplated by the DM Policy are the
following securities or commodities clearing organizations: The
Depository Trust Company, National Securities Clearing Corporation,
and the Chicago Mercantile Exchange. In an event of default by one
of these securities or commodities clearing organizations, or by a
settlement bank, OCC has authority under certain conditions pursuant
to Article VIII, Section 1.(a)(vii) and 5.(b) of the By-Laws to
manage the default using Clearing Member contributions to the
Clearing Fund.
\15\ For purposes of the DM Policy, references to a Clearing
Member suspension or default contemplate the circumstances specified
in OCC Rule 1102, which constitute events of ``default'' under
Interpretation and Policy .01 to the Rule.
---------------------------------------------------------------------------
OCC notes that the DM Policy is part of a broader framework used by
OCC to manage the default of a Clearing Member, settlement bank or FMU,
including OCC's By-Laws, Rules, and other policies and procedures. The
broader framework is designed to collectively ensure that OCC would
appropriately manage any such default consistent with OCC's obligations
as a covered clearing agency, including under Rule 17Ad-22.\16\
---------------------------------------------------------------------------
\16\ In this regard, the DM Policy provides that OCC publishes
key aspects of its default management Rules and procedures on its
Web site. The summary is available at https://www.theocc.com/risk-management/default-rules/.
---------------------------------------------------------------------------
The DM Policy describes the authority of OCC's Board of Directors
(``Board'') or a Designated Officer \17\ to summarily suspend a
Clearing Member pursuant to OCC Rule 1102(a) in the event the Clearing
Member defaults. The DM Policy further provides that, pursuant to OCC
Rule 707, OCC may suspend a Clearing Member that participates in a
cross-margining program in the event of a default regarding its cross-
margining accounts. Upon any suspension of a Clearing Member, the DM
Policy states that OCC would immediately notify a number of parties,
including the suspended Clearing Member, regulatory authorities,
participant and other exchanges (as applicable) in which the suspended
Clearing Member is a common member, other Clearing Members,\18\ and
OCC's Board.\19\
---------------------------------------------------------------------------
\17\ For this purpose, the term Designated Officer includes the
Executive Chairman, Chief Administrative Officer (``CAO''), Chief
Operating Officer (``COO''), Chief Risk Officer (``CRO'') and
Executive Vice President--Financial Risk Management (``EVP-FRM'').
\18\ OCC Rule 1103 requires OCC to notify all Clearing Members
of the suspension as soon as possible.
\19\ With respect to pending transactions of a suspended
Clearing Member, the DM Policy provides that these will be handled
pursuant to OCC Rule 1105, provided that OCC has no obligation to
accept the trades effected by a suspended Clearing Member post-
suspension.
---------------------------------------------------------------------------
In the event of a Clearing Member suspension, the DM Policy
provides that OCC's Financial Risk Management department (``FRM'')
shall prepare an exposure summary report to be provided to OCC's
Management Committee detailing, among other things, the open
obligations of the suspended Clearing Member, collateral deposited by
the Clearing Member, obligations to other FMUs and a summary of related
entity exposure. The report summarizes the net settlement obligation of
the suspended Clearing Member at the time of default. The DM Policy
further provides that a recommendation as to any liquidity needs
requiring a draw on OCC's credit facilities would be provided to OCC's
Management Committee and subsequently be authorized, as applicable, by
the Executive Chairman, CAO, or COO, as provided for in Article VIII,
Section 5 of the By-Laws. These practices ensure that OCC's Management
Committee remains properly informed and can make
[[Page 50709]]
appropriate decisions in the default management process.
The DM Policy describes OCC's existing authority under OCC Rule 505
to extend the time for OCC's settlement obligations (i.e., payment
obligations owed by OCC to Clearing Members). The DM Policy notes that
any such determination to extend the settlement time and the reasons
thereof will be promptly reported by OCC to the Commission and the
Commodity Futures Trading Commission (``CFTC''), however, the
effectiveness of the extension is not be conditioned upon such
reporting. The DM Policy notes that such an extension may be necessary
as a result of a Clearing Member default or a failure of a Clearing
Member's settlement bank.
To address situations in which a Clearing Member's settlement bank
fails or experiences an operational outage that prevents the Clearing
Member from meeting its settlement obligations to OCC, the DM Policy
provides that OCC requires each Clearing Member to maintain procedures
detailing how it would meet its settlement obligations in such an
event. The DM Policy further provides that a Designated Officer would
determine whether to enact these alternate settlement procedures in the
event that a Clearing Member's settlement bank is unable to perform.
The DM Policy sets forth the sequence or ``waterfall'' of financial
resources that OCC may use to meet its obligations in the event of a
Clearing Member suspension to provide certainty regarding the order in
which these resources would be applied. Specifically, the DM Policy
describes that OCC is able to use the following financial resources:
(i) Margin deposits of the suspended Clearing Member; (ii) deposits in
lieu of margin of the suspended Clearing Member; \20\ (iii) Clearing
Fund deposits of the suspended Clearing Member; (iv) Clearing Fund
deposits of non-defaulting Clearing Members; (v) Clearing Fund
assessments against Clearing Members; and (vi) the current or retained
earnings of OCC, subject to the unanimous approval of certain OCC
shareholders.\21\
---------------------------------------------------------------------------
\20\ See Rule 610(f) and (g).
\21\ See OCC By-Law Article VIII, Section 5(d). In lieu of
charging a loss or deficiency proportionately to the computed
Clearing Fund contributions of non-defaulting Clearing Members, OCC
may charge the loss or deficiency to current or retained earnings.
This same discretion applies in connection with any loss by reason
of the failure of a bank or securities or commodities clearing
organization to perform an obligation to OCC.
---------------------------------------------------------------------------
In the case of a suspended Clearing Member, the DM Policy outlines
the means by which OCC may determine close out positions and collateral
of the suspended Clearing Member pursuant to OCC's Rules, including
certain provisions under Chapter XI of the Rules. Based upon
recommendations from OCC's risk staff, the EVP-FRM may take any one, or
any combination, of the following actions pursuant to the terms of
OCC's By-Laws and Rules: (i) Net the suspended Clearing Member's
positions by offset; (ii) effect market transactions to close out open
short positions, long positions, and collateral; (iii) transfer the
positions and related collateral to a non-suspended Clearing Member;
(iv) effect hedging transactions to reduce the risk to OCC of open
positions; (v) conduct a private auction of the positions and
collateral of the suspended Clearing Member; (vi) exercise unsegregated
and segregated long options; (vii) set cash settlement values or
perform buy-in or sell-out processes; and (viii) defer close-out, as
may be authorized by certain officers of OCC.\22\
---------------------------------------------------------------------------
\22\ The DM Policy also provides that any determination to defer
close-out or hedging transactions under the CAP would be reported to
the Board and/or the Risk Committee, as required under OCC Rules
1106.
---------------------------------------------------------------------------
In addition, the DM Policy specifies that OCC risk staff will
develop a Close-out Action Plan (``CAP'') and present it to the EVP-FRM
for approval. The DM Policy provides that upon approval of the CAP by
the EVP-FRM, FRM and other designated business OCC business units and
personnel will be responsible for its execution. The DM Policy also
provides that OCC's legal department would advise OCC's Management
Committee on OCC's authority to execute the proposed CAP and describe
the responsibilities for the execution, monitoring and reporting of the
CAP and escalation of issues to OCC's Management Committee. The CAP
process is designed to ensure that OCC has an appropriate process in
place to analyze its exposures, take into consideration current and
expected market conditions, and evaluate the tools and resources
available to deal with those exposures under the circumstances so that
OCC can appropriately manage any default in a manner that would protect
Clearing Members, investors, the public interest, and the markets that
OCC serves.
The DM Policy provides that OCC would generally liquidate all
positions and collateral of a suspended Clearing Member, and the
proceeds would be attributed to the account type from which they
originated. It also specifies that as a registered clearing agency with
the Commission and a registered derivatives clearing organization with
the CFTC, OCC is required to comply with regulatory requirements to
safeguard customer assets.
In the event of a default, OCC would immediately demand any pledged
collateral of the suspended Clearing Member from custodian(s) to ensure
those resources are available for default management purposes. For
example, the DM Policy provides that, among other things, cash and
proceeds from any liquidated collateral or demand of payment on a
letter of credit would be placed in the appropriate liquidating
settlement account, pursuant to OCC Rule 1104. The DM Policy further
provides that all pledged valued margin collateral will be moved by the
Collateral Services Department into an OCC account and may be
transferred to an auction recipient, delivered to a liquidating agent
or delivered to a liquidating settlement account. In the case of
deposits in lieu of margin, however, the DM Policy states that OCC
would only demand such collateral to meet obligations arising from the
assignment of a related contract.
After the close-out of the suspended Clearing Member is completed,
the DM Policy describes that the Executive Chairman, CAO, or COO would
determine whether, consistent with Article VIII, Section 5(a) of OCC's
By-Laws, an assessment must be made against the Clearing Fund in
connection with the liquidation. In the event of a shortfall whereby
the close-out of the suspended Clearing Member does not result in
enough resources to cover its obligations, the DM Policy states that
each Clearing Member, consistent with Article VIII, Section 6 of OCC's
By-Laws, may be assessed an additional amount equal to the amount of
its initial Clearing Fund deposit, as determined by the Executive
Chairman, CAO, or COO. The DM Policy notes that any such assessment
decision would be communicated via email in accordance with the
procedure covering the assessment process. The DM Policy also specifies
that a Clearing Member is liable for further assessments until the
balance of OCC's losses are covered or the Clearing Member has
withdrawn from membership as set forth in Article VIII, Sections 6 and
7 of OCC's By-Laws.
The DM Policy provides that, on at least an annual basis, OCC's
default management working group will provide OCC's Management
Committee with recommended areas for testing, including close-out
procedures, and that the Management Committee is responsible for
reviewing and ultimately
[[Page 50710]]
approving the overall test plan.\23\ In addition, the DM Policy
specifies that the default management working group maintains the
authority to approve individual test plans and overall plan changes,
but that any changes to the overall plan would be reported to and
reviewed by OCC's Management Committee. The DM Policy further provides
that testing is recommended and performed more frequently than annually
if a material change is made to OCC's default management procedures or
if it is deemed necessary by OCC's default management working group.
These provisions are designed to ensure that OCC maintains policies and
procedures reasonably designed to satisfy the requirements of Rule
17Ad-22(e)(13) \24\ relating to the testing and review of its default
procedures.
---------------------------------------------------------------------------
\23\ The DM Policy also provides that Clearing Members are
required to participate in default management testing pursuant to
OCC Rules 218(c) and (d). See Securities Exchange Act Release No.
80372 (April 4, 2017), 82 FR 17311 (April 10, 2017) (SR-OCC-2017-
003).
\24\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------
In addition, the DM Policy outlines the execution of the testing
plan and the review of the results of the testing plan, including the
production of annual reports to OCC's Management Committee and Risk
Committee regarding the results of OCC's default tests to provide
appropriate oversight over the default testing process.
(2) Statutory Basis
Section 17A(b)(3)(F) of the Act \25\ requires, among other things,
that the rules of a clearing agency be designed to promote the prompt
and accurate clearance and settlement of securities transactions, and,
in general, protect investors and the public interest. The DM Policy
focuses on the processes that OCC would use to take timely action to
contain losses and liquidity demands in an event of default by a
Clearing Member, such as closing out open positions and collateral of a
defaulted Clearing Member, using alternate settlement bank procedures
or relying on Clearing Fund contributions of Clearing Members under
certain conditions. In this regard, the DM Policy is designed to ensure
that OCC can maintain its resilience in the event of a default, thereby
enabling OCC to continue to provide its clearance and settlement
services to the public in such circumstances. Accordingly, OCC believes
that the DM Policy is designed to (i) protect investors and the public
interest, and (ii) promote the prompt and accurate clearance and
settlement of securities transactions in a manner consistent with
Section 17A(b)(3)(F) of the Act.\26\
---------------------------------------------------------------------------
\25\ 15 U.S.C. 78q-1(b)(3)(F).
\26\ Id.
---------------------------------------------------------------------------
Rules 17Ad-22(e)(4)(ix) and (e)(13) respectively require a covered
clearing agency to, among other things, establish, implement, maintain,
and enforce written policies and procedures reasonably designed to: (i)
Effectively identify, measure, and manage its credit exposures to
participants and those arising from its payment, clearing and
settlement processes, including by describing its process to replenish
any financial resources it may use following a default or other event
in which use of such resources is contemplated \27\ and (ii) ensure
that it has the authority and operational capacity to take timely
action to contain losses and liquidity demands and continue to meet its
obligations by, at a minimum, requiring its participants and, when
practicable, other stakeholders to participate in the testing and
review of its default procedures, including any close-out procedure, at
least annually and following material changes thereto.\28\ OCC believes
that the proposed rule change is consistent with Rule 17Ad-22(e)(13)
\29\ because the DM Policy, among other things, sets forth OCC's
authority and operational capabilities to take timely action to contain
losses and liquidity demands and continue to meet its obligations. For
example, the DM Policy sets forth the procedures by which OCC would
suspend a Clearing Member as well as the waterfall of financial
resources that OCC would use to contain losses arising from the
Clearing Member's default. The DM Policy also sets forth, among other
things, the various means by which OCC may close-out the positions of a
suspended Clearing Member and the process it uses to make such
determinations, which OCC believes helps ensure that OCC has sufficient
operational capacity take timely action to contain losses and liquidity
demands and continue to meet its obligations consistent with Rule 17Ad-
22(e)(13).\30\ In addition, OCC believes that the DM Policy is
consistent with the testing requirement in Rule 17Ad-22(e)(13) \31\
because the DM Policy sets forth OCC's processes for managing annual
testing, or more frequent testing following a change to OCC's default
management procedures.
---------------------------------------------------------------------------
\27\ 17 CFR 240.17Ad-22(e)(4)(ix).
\28\ 17 CFR 240.17Ad-22(e)(13).
\29\ Id.
\30\ Id.
\31\ Id.
---------------------------------------------------------------------------
OCC also believes that the DM Policy is consistent with Rule 17Ad-
22(e)(4)(ix) \32\ because the DM Policy describes the process by which
OCC may initiate a Clearing Fund assessment to replenish financial
resources that may be used following a default and attendant suspension
of a Clearing Member. Specifically, the DM Policy provides that where
the liquidation of a suspended Clearing Member results in a shortfall,
certain officers of OCC may require that all Clearing Members be
assessed an additional amount equal to the amount of their respective
Clearing Fund deposits, consistent with OCC's By-Laws, and that a
Clearing Member is liable for further assessments until the balance of
OCC's losses are covered or the Clearing Member has withdrawn from
membership as set forth in OCC's By-Laws. In addition, the DM Policy
also provides that, pursuant to the waterfall of financial resources
used in the event of a Clearing Member suspension, OCC could use
current or retained earnings, consistent with OCC's By-Laws, to
continue meeting its financial obligations.
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\32\ 17 CFR 240.17Ad-22(e)(4)(ix).
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The proposed rule change is not inconsistent with the existing
rules of OCC, including any other rules proposed to be amended.
(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \33\ requires that the rules of a
clearing agency not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act. OCC does not
believe that the proposed rule change would impact or impose any burden
on competition. As a general matter, the DM Policy describes the
processes OCC would follow in a default that are already set forth in
OCC's approved By-Laws and Rules. More specifically, the proposed rule
change sets forth in a single document the framework OCC would use to
manage the default primarily of a Clearing Member, as well as the
default of a settlement bank or FMU. Because any individual Clearing
Member, settlement bank, or FMU under the DM Policy is equally subject
to the aspects of OCC's default management framework that apply to it,
the proposed rule change would not provide any such entity with a
competitive advantage over any other similar entity. OCC notes that, in
managing any potential default, OCC focuses on the risk posed to OCC by
such default. Accordingly, to the extent, for example, that OCC were to
close-out the open positions of one suspended
[[Page 50711]]
Clearing Member in a different manner than it were to close-out the
open positions of another Clearing Member, such differences result from
the risks posed to OCC by each Clearing Member's respective positions.
Moreover, the treatment of customer versus proprietary positions in a
default scenario are not specifically addressed in the DM Policy, which
as noted sets forth a general framework for managing defaults, but
rather in OCC's existing By-Laws and Rules. Further, the proposed rule
change would not affect Clearing Members' access to OCC's services or
impose any direct burdens on Clearing Members.
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\33\ 15 U.S.C. 78q-1(b)(3)(I).
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For the foregoing reasons, OCC believes that the proposed rule
change is in the public interest, would be consistent with the
requirements of the Act applicable to clearing agencies, and would not
impact or impose a burden on competition.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments on the proposed rule change were not and are not
intended to be solicited with respect to the proposed rule change and
none have been received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-OCC-2017-010 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2017-010. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such 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_010.pdf.
All comments received will be posted without change. Persons
submitting comments are cautioned that the Commission does not redact
or edit personal identifying information from comment submissions. You
should submit only information that you wish to make available
publicly.
All submissions should refer to File Number SR-OCC-2017-010 and
should be submitted on or before November 22, 2017.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated Authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-23735 Filed 10-31-17; 8:45 am]
BILLING CODE 8011-01-P
