Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Advance Notice Concerning the Use of the Society of Worldwide Interbank Financial Telecommunication Messaging Network in OCC's Cash Settlement Process, 54448-54453 [2017-24919]
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Federal Register / Vol. 82, No. 221 / Friday, November 17, 2017 / Notices
this is appropriate because the fees and
rebates should incentivize Members to
direct additional order flow to the
Exchange and thus provide additional
liquidity that enhances the quality of its
markets and increases the volume of
contracts traded on the Exchange. To
the extent that this purpose is achieved,
all the Exchange’s market participants
should benefit from the improved
market liquidity. Enhanced market
quality and increased transaction
volume that results from the anticipated
increase in order flow directed to the
Exchange will benefit all market
participants and improve competition
on the Exchange. The Exchange notes
that it operates in a highly competitive
market in which market participants can
readily favor competing venues if they
deem fee levels at a particular venue to
be excessive.
As noted above, while the Exchange
has proposed to establish different fee
codes for Market Maker complex orders
that interact with Customer orders on
the COB and other non-Customer
complex orders that interact with
Customer orders on the COB, the
Exchange has not proposed to
differentiate the pricing applicable to
these fee codes at this time.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has not solicited, and
does not intend to solicit, comments on
this proposed rule change. The
Exchange has not received any written
comments from members or other
interested parties.
sradovich on DSK3GMQ082PROD with NOTICES
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 30 and paragraph (f) of Rule
19b–4 thereunder.31 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.
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:
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
[Release No. 34–82055; File No. SR–OCC–
2017–805]
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BatsEDGX–2017–48 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–BatsEDGX–2017–48. 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 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–BatsEDGX–2017–48, and
should be submitted on or before
December 8, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.32
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–24929 Filed 11–16–17; 8:45 am]
BILLING CODE 8011–01–P
30 15
U.S.C. 78s(b)(3)(A).
31 17 CFR 240.19b–4(f).
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Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing of Advance Notice
Concerning the Use of the Society of
Worldwide Interbank Financial
Telecommunication Messaging
Network in OCC’s Cash Settlement
Process
November 13, 2017.
Pursuant to Section 806(e)(1) of Title
VIII of the Dodd–Frank Wall Street
Reform and Consumer Protection Act,
entitled Payment, Clearing and
Settlement Supervision Act of 2010
(‘‘Clearing Supervision Act’’) 1 and Rule
19b–4(n)(1)(i) of the Securities Exchange
Act of 1934 (‘‘Act’’),2 notice is hereby
given that on October 10, 2017, The
Options Clearing Corporation (‘‘OCC’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) an
advance notice as well as a proposed
cash settlement agreement procedures
agreement (‘‘CSPA’’) template as
described in Items I and II below, which
Items have been prepared by OCC. The
Commission is publishing this notice to
solicit comments on the advance notice
from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Advance
Notice
In accordance with Section 806(e)(1)
of the Clearing Supervision Act 3 and
Rule 19b–4(n)(1)(i) 4 of the Act,5 this
advance notice is filed by OCC in
connection with proposed changes to
improve OCC’s cash settlement process
by implementing Society of Worldwide
Interbank Financial Telecommunication
(‘‘SWIFT’’) messaging as the primary
means of transmitting daily cash
settlement instructions between OCC
and its Clearing Banks.6 The proposed
change is designed to: (1) Increase the
efficiency, accuracy, and resiliency of
OCC’s cash settlement process, (2)
eliminate certain risks associated with
the current use of OCC’s proprietary
online cash settlement system within
the ENCORE clearing system (‘‘OCS’’),
and (3) adopt communication
procedures and standards that are
internationally accepted and therefore
1 12
U.S.C. 5465(e)(1).
CFR 240.19b–4(n)(1)(i).
3 12 U.S.C. 5465(e)(1).
4 17 CFR 240.19b–4(n)(1)(i).
5 15 U.S.C. 78a et seq.
6 See OCC Rule 101.C.(1) (defining the term
‘‘Clearing Bank’’).
2 17
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are consistent with the requirements in
Rule 17Ad–22(e)(22).7
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.8
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
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Communications With Clearing Banks
There are currently eight banks or
trust companies that act as OCC
Clearing Banks.9 The Clearing Banks
were first informed in early 2016 via
phone communications regarding OCC’s
initiative to utilize SWIFT messaging
and the SWIFT network for cash
settlement processing. This initiative
was positively received by existing
Clearing Banks since they utilize
SWIFT-based messaging in other areas
of their businesses. Moreover, several
Clearing Banks have informally
expressed their desire to OCC in the
past for OCC to integrate use of the
SWIFT messaging network in the cash
settlement process.
Beginning in October 2016, OCC
distributed a draft template cash
settlement procedures agreement to all
Clearing Banks that would implement
SWIFT messaging as the primary means
of transmitting daily cash settlement
instructions between OCC and the
Clearing Banks along with a request for
feedback. In response, all of the existing
Clearing Banks have expressed support
for the transition to SWIFT. This is in
part because the existing use of OCC’s
online cash settlement system is not
integrated with the internal systems
used by Clearing Banks for processing
settlement instructions. Processing the
settlement instructions therefore
requires manual intervention by the
Clearing Banks to enter the instructions
into their own systems. According to
comments from all Clearing Banks, this
lack of integration elongates the
timeframe to process and approve
settlement instructions, which causes
delays and increases the risk of errors in
preparing, posting, transmitting,
receiving, and executing timely
settlement instructions.
Following the receipt of questions and
comments, OCC began negotiating the
cash settlement procedures agreement
with each Clearing Bank based on the
standardized template. The definitive
documentation between OCC and each
Clearing Bank is expected to be
consistent with the template agreement,
however, areas of negotiation to date
have generally included such matters as
acceptable backup communication
methods for transmitting settlement
instructions (e.g., facsimile, email, or
other means), standards of care
associated with duties and potential
liabilities under the agreement (e.g.,
negligence, gross negligence, or willful
misconduct), certain defined terms (e.g.,
the meaning of a ‘‘business day’’), and
allocations of responsibility regarding
the detection of errors associated with
settlement instructions.
(B) Advance Notices Filed Pursuant to
Section 806(e) of the Payment, Clearing,
and Settlement Supervision Act
Description of the Proposed Change
Background
The Existing Online Cash Settlement
System
In connection with OCC’s
performance of clearance and settlement
services for cleared contracts 10 and
Stock Loans, OCC and Clearing
Members are obligated under OCC’s ByLaws and Rules to perform cash
settlement of related obligations.11 This
cash settlement process is facilitated by
Clearing Banks, which are banks or trust
companies that have entered agreements
with OCC to settle on behalf of Clearing
Members and at which OCC and
Clearing Members each maintain
accounts.12 Currently, there are eight
Clearing Banks with which OCC effects
cash settlements through OCS, which is
a proprietary web-based system OCC
10 See
7 17
CFR 240.17Ad–22(e)(22).
8 OCC’s By-Laws and Rules can be found on
OCC’s public Web site: https://optionsclearing.com/
about/publications/bylaws.jsp.
9 OCC Rule 101.C.(1) defines the term ‘‘Clearing
Bank’’ to mean ‘‘a bank or trust company which has
entered into an agreement with [OCC] in respect of
settlement of confirmed trades on behalf of Clearing
Members.’’
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Article I., Section 1.C.(11).
e.g., Article I, Section 1.S.(16) of OCC’s ByLaws (defining the term ‘‘settlement time’’); Article
VI, Sections 4 and 6 of OCC’s By-Laws (addressing
obligations of Purchasing Clearing Members and
obligations of OCC as a central counterparty); and
Chapter V of OCC’s Rules (regarding daily cash
settlement).
12 See OCC Rule 101.C.(1) (defining the term
‘‘Clearing Bank’’).
11 See,
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developed in conjunction with the
gradual phase-in of its ENCORE clearing
system in the early- to-mid 2000’s.13
OCS replaced OCC’s previous cash
settlement system, the Options
Automated Settlement Instructions
System, which required the use of
dedicated terminals at each Clearing
Bank. Because OCS is a web-based
system, it provides greater flexibility to
OCC and Clearing Banks because users
are not limited to only using dedicated
terminals to access the system.
On a daily basis, OCC generates
settlement instructions associated with
Cleared Contracts and Stock Loans of
Clearing Members by running specific
predefined settlement profiles 14
throughout the day. The resulting
settlement instructions are generally
transmitted by OCC to Clearing Banks
by way of OCS, at which point the
Clearing Banks are able to view batches
of settlement instructions within OCS.15
Clearing Bank staff review the
settlement instructions by logging into
OCS and opening the settlement batch.
Thereafter, the Clearing Bank either
approves or rejects the settlement
instructions in OCS. One of the Clearing
Banks, however, currently does not
utilize OCS as its primary means of
effecting cash settlement. Instead, the
Clearing Bank primarily receives
settlement instructions from OCC via
facsimile, reviews the settlement
instructions, approves or rejects them,
and then returns a facsimile
confirmation to OCC. After receipt of
the confirmation, OCC staff manually
enters the approvals or rejections into
OCS.
Cash settlement instructions that OCC
transmits to Clearing Banks are
generally categorized in two groups:
Start-of-day and intra-day. Start-of-day
settlement instructions are generated
through OCC’s nightly processing cycle
and relate to cash settlement obligations
that arise from Cleared Contracts and
Stock Loans of Clearing Members,
including, but not limited to, premium
payments, margin requirements, markto-market activity, and cash settlement
amounts for exercised options that are
cash settled. Intra-day settlement
13 See generally OCC Completes Second Major
Installation of EncoreTM Clearing System(November
25, 2002), available at https://www.theocc.com/
about/newsroom/releases/2002/11_25.jsp.
14 Predefined settlement profiles are programmed
to track various types of obligations to pay or collect
cash in connection with Cleared Contracts and
Stock Loans that are in turn used to generate
settlement instructions.
15 A settlement batch is a set of individual debit
or credit settlement instructions that may either
instruct a Clearing Bank to move funds to or from
an OCC settlement account or to or from a Clearing
Member’s account at the same Clearing Bank.
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instructions represent any settlement
instruction other than a start-of-day
instruction and may be transmitted by
OCC to a Clearing Bank throughout the
day. For example, intra-day settlement
instructions may be generated to credit
excess cash to a Clearing Member in
connection with its margin
requirement,16 to complete a cash
substitution regarding a Clearing
Member’s margin deposit or to effect an
intra-day margin call that OCC may
issue to a Clearing Member pursuant to
its authority under Rule 609.17 The
settlement timeline for processing intraday settlement instructions depends on
the time at which the Clearing Bank
receives the instructions, as discussed
below.
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Existing Cash Settlement Procedures
Agreements
Each Clearing Bank entered into a
CSPA with OCC that details the
substantive rights and responsibilities of
the parties and specifies operational
procedures for which they are
responsible regarding start-of-day and
intra-day settlement instructions. This
includes prescribed communication
methods and settlement procedures and
generally contemplates the use of OCS
as the primary means to facilitate the
cash settlement process, with the
exception of the one instance described
above in which the primary means of
communication between OCC and the
Clearing Bank is facsimile.
For start-of-day settlement
instructions, the CSPA requires the
Clearing Bank on the morning of each
business day and by a standard time to
access OCS and act upon the settlement
instructions transmitted by OCC. Once
the Clearing Bank reviews the
settlement instructions, it either accepts
or rejects each instruction through
OCS.18 If an instruction is to be rejected,
the Clearing Bank must immediately
notify OCC in advance by telephone that
it intends to reject the instruction and
provide the reason. OCC then has an
opportunity to submit a revised
settlement instruction by telephone or
other mutually agreed upon means. All
settlement instructions must be acted
upon by the Clearing Bank before a
defined settlement time, which differs
for credit instructions (i.e., transfers of
funds from an OCC account to a
Clearing Member account) and debit
instructions (i.e., transfers of funds from
a Clearing Member account to an OCC
16 See
OCC Rule 608 (Withdrawals of Margin).
OCC Rule 609 (Intra-Day Margin).
18 In the event OCS is unavailable, the CSPA
specifies backup procedures, which may include
transmission by telephone or facsimile.
17 See
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account). If a Clearing Bank does not
expressly accept or reject a settlement
instruction by the specified settlement
time, the bank is deemed to have
accepted the instruction.
For intra-day settlement instructions,
OCC transmits the instructions through
OCS for the Clearing Bank to review and
then notifies the Clearing Bank by
telephone or other agreed upon means.
With respect to Clearing Banks with
access to OCS, the Clearing Bank must
then use commercially reasonable
efforts to access OCS immediately and
act upon the settlement instruction by
the earlier of either: (a) Thirty (30)
minutes following the time the bank
first views the settlement instruction in
OCS or (b) sixty (60) minutes after OCC
notifies the Clearing Bank that is has
submitted settlement instructions via
OCS. The same provisions related to
backup procedures, acceptance,
rejection, and implied acceptance for
morning settlement also apply to such
intra-day settlement instructions.
Proposed Changes
Under the Proposed CSPA, OCC and
all Clearing Banks would use the SWIFT
network as the primary means of
transmitting settlement instructions to
each other, and Clearing Bank staff
would no longer log in to OCS and
accept or reject settlement instructions.
OCC would, however, continue using
OCS for more limited purposes to
manage its settlement instruction
processing, including with respect to
the initiation, processing, and tracking
of settlement instructions. Under the
new process in which SWIFT would be
the primary means of transmitting
settlement instructions, OCC would
integrate OCS with the SWIFT network,
and SWIFT would be used to
communicate settlement instructions to
Clearing Banks and allow Clearing
Banks to approve settlement
instructions. OCC would also
implement a new monitoring screen to
complement OCS that would allow OCC
to track the lifecycle of all SWIFT
messages sent or received by OCC in
connection with its cash settlement
activities.
SWIFT would not be a new
communication channel for OCC even
though the proposed change would
increase the extent to which OCC
utilizes the SWIFT messaging network
in connection with its clearance and
settlement activities. This is because
Clearing Members may currently
deposit letters of credit denominated in
U.S. dollars issued by banks or trust
companies approved by OCC as margin
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assets 19 and the issuer of any such letter
of credit submits amendments to OCC
using the SWIFT network. OCC manages
this process through a SWIFT system
that interfaces with OCC’s ENCORE
clearing system so that OCC is able to
track and process the amendment
messages. Under the proposed change,
OCC would also use the same SWIFT
system to support cash settlement
processing. Based upon settlement
profiles created by OCC, settlement
instructions in the form of SWIFT
messages would be automatically
transmitted to Clearing Banks over the
SWIFT network. In response, OCC
would then receive acceptances from
Clearing Banks via the SWIFT network.
If an acceptance is not provided, OCC
would have discretion to treat a
settlement instruction as rejected, and
in any case would promptly contact the
Clearing Bank to determine the reason
and coordinate with the Clearing Bank
to ensure that appropriate action is
taken with respect to the instruction.
OCC believes the proposed change
would significantly increase the
resiliency of OCC’s cash settlement
process by reducing manual processing
steps that are more prone to error. For
example, upon a Clearing Bank’s
acceptance of a settlement instruction
sent by OCC using SWIFT, debits or
credits, as appropriate, would be
automatically made as between OCC’s
account at the Clearing Bank and the
Clearing Member’s account at the
Clearing Bank. This means that Clearing
Banks would no longer need to view
settlement instructions in OCS and
manually enter them into their systems
to effect them as they do today.
Moreover, use of the SWIFT network
would eliminate facsimile, telephone,
and email communications as primary
communication methods for settlement
processing. If SWIFT is unavailable,
OCC and Clearing Banks would
communicate by using contingency
methods as specified in the applicable
CSPA.
The Proposed CSPA would also
introduce significant efficiencies to
OCC’s cash settlement process by
reducing manual processing steps that
elongate the time frame for processing
and approving settlement instructions.
Notably, OCC expects significantly
faster response times from Clearing
Banks because the banks would be able
to communicate with OCC using the
same SWIFT transmission method that
they already typically use to process
funds transfer instructions. OCC
believes that efficiencies and time
savings would also be experienced by
19 See
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OCC Rule 604(c).
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significantly reducing manual steps
associated with the processing of
settlement instructions, such as manual
data entry by Clearing Banks to enter
settlement instruction information into
their own systems based on computer
printouts of instructions contained in
OCS or instructions that are received by
facsimile. In addition, the proposed
change would allow Clearing Banks to
forward SWIFT messages from OCC to
internal staff at the Clearing Bank who
have responsibility for the cash
settlement process.
The Proposed CSPA would also
harmonize the primary process by
which OCC performs cash settlement
with Clearing Banks by having all
Clearing Banks use the SWIFT
messaging system. In addition to the
efficiency and risk mitigation benefits
described above, the Proposed CSPA
would directly respond to the Clearing
Bank requests for OCC to implement an
enhanced process to mitigate the
manual processing challenges that are
associated with the existing cash
settlement process.
Finally, OCC believes that the
Proposed CSPA would also promote
compliance with Rule 17Ad–22(e)(22),20
which requires OCC as a covered
clearing agency to establish, implement,
maintain, and enforce written policies
and procedures reasonably designed to
‘‘use, or at a minimum accommodate,
relevant internationally accepted
communication procedures and
standards in order to facilitate efficient
payment, clearing, and settlement.’’ In
adopting this requirement, the
Commission stated that ‘‘[r]elevant
internationally accepted communication
procedures and standards could include
messaging standards such as SWIFT,
FIX and FpML.’’ [emphasis added].21
Accordingly, use of the SWIFT
messaging network as the primary
process to support daily cash settlement
is consistent with Rule 17Ad–22(e)(22).
New Cash Settlement Procedures
Agreement
As part of the transition to SWIFT,
Clearing Banks would enter into the
Proposed CSPA with OCC. The
Proposed CSPA is based on a
standardized template developed by
OCC in collaboration with its Clearing
Banks. The Proposed CSPA template
agreement is not a public document,
and OCC has separately submitted a
request for confidential treatment
regarding the Proposed CSPA template
20 17
CFR 240.17Ad–22(e)(22).
Exchange Act Release No. 78961
(September 28, 2016), 81 FR 70786, 70842 (October
13, 2016).
21 Securities
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agreement, which is included in this
filing as Exhibit 3. The definitive
Proposed CSPA between OCC and each
Clearing Bank is expected to be
consistent with the template agreement,
however, OCC and each Clearing Bank
may negotiate certain modifications.
As is the case today, the Proposed
CSPA would continue to be the
principal form of agreement that
governs the rights and responsibilities of
OCC and each Clearing Bank, details
operational procedures (including
backup procedures) and security
protocols, and identifies individuals at
OCC and at the Clearing Bank who are
authorized to act on behalf of each party
with respect to cash settlement
instructions.
Under the Proposed CSPA, the
timelines for OCC and Clearing Banks to
perform the actions needed to effect
settlement would be bifurcated as they
are under the current agreement into
start-of-day settlement instructions and
intra-day settlement instructions. Also
as with the current CSPA, there would
be defined deadlines by which OCC
must submit settlement instructions and
by which the Clearing Bank must accept
and execute the settlement instructions.
In the event the SWIFT network is
unavailable during a time at which
settlement instructions are to be
communicated, each Proposed CSPA
would detail backup procedures with
corresponding security protocols by
which OCC and the Clearing Bank could
effect settlement. For example, such
alternative communication methods
may include secure email messages,
telephone instructions with the use of
personal identification codes, facsimile
instructions, the Clearing Bank’s
proprietary online account system, or
other methods agreed upon by OCC and
the Clearing Bank.
Under the Proposed CSPA, however,
Clearing Banks would not be deemed to
have accepted settlement instructions in
the event the Clearing bank does not
explicitly communicate acceptance or
rejection to OCC. Instead, any
acceptance would be required to be
made by affirmative SWIFT
confirmation message, and if a Clearing
Bank did not respond OCC would have
discretion to treat the failure to respond
as a rejection and OCC would
communicate with the Clearing Bank to
understand the reason(s) why no
response to the settlement instruction
was provided and appropriate action is
taken. These measures are intended to
ensure that potentially erroneous
instructions are identified and acted
upon in a timely manner and to
evidence settlement finality.
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54451
The CSPAs currently in effect
between OCC and its Clearing Banks
were implemented incrementally over a
number of years as OCC’s operations
expanded and it became appropriate to
maintain service agreements with a
range of Clearing Banks, and in many
cases they have not been renegotiated in
a significant amount of time. For these
reasons, there is variation between the
terms and conditions of the relevant
CSPA and the corresponding practices
with the Clearing Banks. In some cases
the differences are relatively substantial,
such as in the one case described above
where the primary means of
communication between the Clearing
Bank and OCC to support the cash
settlement process is facsimile. The
Proposed CSPA would address these
issues by increasing consistency in the
respective rights and responsibilities of
OCC and the Clearing Banks and in turn
promoting harmonization across OCC’s
daily cash settlement process.
Negotiation of the Proposed CSPA to
adopt the SWIFT messaging network as
the primary process to support daily
cash settlement would also update the
agreements to rely on current industry
communication procedures and
standards that the Commission has
recognized as consistent with the
requirements of Rule 17Ad–22(e)(22).22
Testing and Implementation
Prior to implementation of the
Proposed CSPA, the existing CSPA and
current processes regarding daily cash
settlement would continue in effect
while OCC completes the development
of the new SWIFT interface. OCC would
also complete roundtrip certification
testing of the proposed SWIFT network
messaging operations. Upon execution
of the Proposed CSPA by a Clearing
Bank, an implementation date would be
coordinated between OCC and the
Clearing Bank and OCC would provide
advance notice of the implementation to
Clearing Members through an
Information Memo. OCC generally
expects a total timeframe of
approximately 90 days would be
necessary to migrate a Clearing Bank to
SWIFT messaging-based cash
settlement. Though OCC would be able
to begin migration to SWIFT messaged–
based cash settlement with each
Clearing Bank on an individual basis, it
would expect to complete the migration
with all of its Clearing Banks by the end
of Q1 2018.
22 17
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CFR 240.17Ad–22(e)(22).
17NON1
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Anticipated Effect on and Management
of Risk
OCC anticipates that the Proposed
CSPA would reduce the nature and
level of risk presented by OCC because,
as described above, it would enhance
the resiliency, efficiency and
consistency of the cash settlement
process and thereby reduce risks that
are associated with the existing cash
settlement process. Specifically, the
Proposed CSPA would increase the
resiliency of the cash settlement process
by reducing manual processing steps
that are more prone to risk of delay or
error. Due to implementation of the
SWIFT messaging network as the
primary means of transmitting
settlement instructions, a Clearing
Bank’s acceptance of settlement
instructions would automatically result
in debits or credits, as appropriate, and
Clearing Banks would no longer
manually enter settlement instructions
in their own systems.
OCC also anticipates the Proposed
CSPA would enhance the efficiency of
the cash settlement process by reducing
manual processing steps that elongate
the timeframe for processing and
approving settlement instructions. In
this regard, using SWIFT as the primary
means of transmitting settlement
instructions would reduce the risk of
uncertainty in the cash settlement
process by allowing OCC and the
Clearing Banks to communicate using
the same transmission method that is
already typically used by the Clearing
Banks to process funds transfer
instructions with other institutions.
OCC expects that this would lead to
significantly faster response times from
Clearing Banks to accept or reject
instructions, which, in turn, would
better manage the risk of untimely
settlement by providing greater certainty
concerning prompt settlement.
In addition, the Proposed CSPA
would enhance consistency in the
agreements between OCC and the
Clearing Banks and harmonize the use
of SWIFT as the primary process used
to conduct cash settlement. OCC
anticipates that this greater consistency
would reduce the risk of delay or error
in the settlement process that might
result from OCC’s management of the
greater inconsistency across practices
with the Clearing Banks that exists
today.
Finally, OCC anticipates the Proposed
CSPA would reduce regulatory risk to
OCC by helping to ensure that the
primary means of communicating
settlement instructions uses relevant
internationally accepted
communications procedures and
VerDate Sep<11>2014
18:32 Nov 16, 2017
Jkt 244001
standards to facilitate efficient payment,
clearing and settlement in a manner that
is consistent with the requirements of
Rule 17Ad–22(e)(22).23
For all of these reasons, OCC
anticipates that the Proposed CSPA
would reduce the nature and level of
risk presented by OCC.
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.24 Section 805(a)(2) of the
Clearing Supervision Act 25 also
authorizes the Commission to prescribe
risk management standards for the
payment, clearing and settlement
activities of designated clearing entities,
like OCC, for which the Commission is
the supervisory agency. Section 805(b)
of the Clearing Supervision Act 26 states
that the objectives and principles for
risk management standards prescribed
under Section 805(a) shall be to:
• Promote robust risk management;
• promote safety and soundness;
• reduce systemic risks; and
• support the stability of the broader
financial system.
The Commission has adopted risk
management standards under Section
805(a)(2) of the Clearing Supervision
Act and the Act in furtherance of these
objectives and principles.27 In
particular, Rule 17Ad–22(e)(22) 28
requires that a covered clearing agency
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to ‘‘use, or at a
minimum accommodate, relevant
internationally accepted communication
procedures and standards in order to
facilitate efficient payment, clearing,
and settlement.’’
OCC believes that the proposed
change concerning cash settlement
23 17
CFR 240.17Ad–22(e)(22).
U.S.C. 5461(b).
25 12 U.S.C. 5464(a)(2).
26 12 U.S.C. 5464(b).
27 17 CFR 240. 17Ad–22. See Securities Exchange
Act Release Nos. 68080 (October 22, 2012), 77 FR
66220 (November 2, 2012) (S7–08–11) (‘‘Clearing
Agency Standards’’); 78961 (September 28, 2016),
81 FR 70786 (October 13, 2016) (S7–03–14)
(‘‘Standards for Covered Clearing Agencies’’). The
Standards for Covered Clearing Agencies became
effective on December 12, 2016. As a ‘‘covered
clearing agency’’ under Rule 17Ad–22(a)(5), OCC
became obligated to comply with new section (e) of
Rule 17Ad–22 as of the Commission’s compliance
date of April 11, 2017.
28 17 CFR 240.17Ad–22(e)(22).
24 12
PO 00000
Frm 00137
Fmt 4703
Sfmt 4703
described above is consistent with
Section 805(b)(2) of the Clearing
Supervision Act 29 because it would
promote safety and soundness in OCC’s
daily cash settlement process by
mitigating risks that arise in the existing
process due to manual processing steps
and inconsistent practices across OCC’s
Clearing Banks and thereby enhancing
the resiliency, efficiency and
consistency of the process. As described
in detail above, the proposed change
would promote safety and soundness by
implementing the SWIFT messaging
network as the primary means of
transmitting daily cash settlement
instructions between OCC and each
Clearing Bank that performs cash
settlement on behalf of Clearing
Members. This represents the use of a
primary communication procedure that
would be integrated with the systems
that are already typically used by the
Clearing Banks to process funds transfer
instructions with other institutions and
that would cause the acceptance of
settlement instructions by Clearing
Banks to automatically result in debits
or credits, as appropriate, in the
accounts of OCC and Clearing Members
at the Clearing Banks. OCC believes that
these changes promote the safety and
soundness of the cash settlement
process by, among other things,
reducing manual processing steps that
are more prone to risk of delay or error
and by facilitating faster response times
regarding the acceptance or rejection of
settlement instructions by Clearing
Banks, which, in turn, would provide
greater certainty regarding prompt
settlement.
OCC also believes that the proposed
change to enhance the consistency of
the CSPA between OCC and each
Clearing Bank would promote safety
and soundness by reducing the risk of
settlement delay or error that may arise
due to the existing degree of variability
in the practices between Clearing Banks,
including but not limited to the current
use by one Clearing Bank of facsimile as
a primary method for transmitting
settlement instructions.
OCC further believes that the
proposed change would promote
compliance with Rule 17Ad–22(e)(22),30
which requires OCC as a covered
clearing agency to establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
‘‘use, or at a minimum accommodate,
relevant internationally accepted
communication procedures and
standards in order to facilitate efficient
payment, clearing, and settlement.’’ In
29 12
30 17
E:\FR\FM\17NON1.SGM
U.S.C. 5464(b)(2).
CFR 240.17Ad–22(e)(22).
17NON1
Federal Register / Vol. 82, No. 221 / Friday, November 17, 2017 / Notices
adopting this requirement, the
Commission stated that ‘‘[r]elevant
internationally accepted communication
procedures and standards could include
messaging standards such as SWIFT,
FIX and FpML.’’ [emphasis added].31
Accordingly, use of the SWIFT
messaging network as the primary
process to support daily cash settlement
is consistent with Rule 17Ad–22(e)(22).
In these ways, OCC believes the
proposed changes are consistent with
Section 805(b)(2) of the Clearing
Supervision Act 32 and Rule 17Ad–
22(e)(22).33
III. Date of Effectiveness of the Advance
Notice and Timing for Commission
Action
The proposed change may be
implemented if the Commission does
not object to the proposed change
within 60 days of the later of: (i) The
date the proposed change was filed with
the Commission or (ii) the date any
additional information requested by the
Commission is received. OCC shall not
implement the proposed change if the
Commission has any objection to the
proposed change.
The Commission may extend the
period for review by an additional 60
days if the proposed change raises novel
or complex issues, subject to the
Commission providing the clearing
agency with prompt written notice of
the extension. A proposed change may
be implemented in less than 60 days
from the date the advance notice is
filed, or the date further information
requested by the Commission is
received, if the Commission notifies the
clearing agency in writing that it does
not object to the proposed change and
authorizes the clearing agency to
implement the proposed change on an
earlier date, subject to any conditions
imposed by the Commission.
OCC shall post notice on its Web site
of proposed changes that are
implemented.
The proposal shall not take effect
until all regulatory actions required
with respect to the proposal are
completed.
sradovich on DSK3GMQ082PROD with NOTICES
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the advance notice is
consistent with the Clearing
Supervision Act and the Act. Comments
31 Securities
Exchange Act Release No. 78961
(September 28, 2016), 81 FR 70786, 70842 (October
13, 2016).
32 12 U.S.C. 5464(b)(2).
33 17 CFR 240.17Ad–22(e)(22).
VerDate Sep<11>2014
18:32 Nov 16, 2017
Jkt 244001
may be submitted by any of the
following methods:
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
54453
[Release No. 34–82060; File No. SR–
BatsEDGX–2017–47]
• 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 SROCC–2017–805 on the subject line.
November 13, 2017.
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–2017–805. 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_
805.pdf.
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–OCC–2017–805 and
should be submitted on or before
December 8, 2017.
[FR Doc. 2017–24919 Filed 11–16–17; 8:45 am]
BILLING CODE 8011–01–P
Frm 00138
Fmt 4703
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 November
2, 2017, Cboe EDGX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGX’’) (formerly
known as Bats EDGX Exchange, Inc.)
filed with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II and III below, which Items
have been prepared by the Exchange.
The Exchange has designated the
proposed rule change as one
establishing or changing a member due,
fee, or other charge imposed by the
Exchange under Section 19(b)(3)(A)(ii)
of the Act 3 and Rule 19b–4(f)(2)
thereunder,4 which renders the
proposed rule change effective upon
filing with the Commission. 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 proposal to
amend the fee schedule applicable to
Members 5 and non-Members of the
Exchange pursuant to EDGX Rules
15.1(a) and (c).
The text of the proposed rule change
is available at the Exchange’s Web site
at www.markets.cboe.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
4 17 CFR 240.19b–4(f)(2).
5 The term ‘‘Member’’ is defined as ‘‘any
registered broker or dealer that has been admitted
to membership in the Exchange.’’ See Exchange
Rule 1.5(n).
2 17
By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
PO 00000
Self-Regulatory Organizations; Cboe
EDGX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Modify Its
Fees for Physical Ports
Sfmt 4703
E:\FR\FM\17NON1.SGM
17NON1
]]>Agencies
[Federal Register Volume 82, Number 221 (Friday, November 17, 2017)]
[Notices]
[Pages 54448-54453]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-24919]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82055; File No. SR-OCC-2017-805]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Advance Notice Concerning the Use of the Society of
Worldwide Interbank Financial Telecommunication Messaging Network in
OCC's Cash Settlement Process
November 13, 2017.
Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, entitled Payment, Clearing
and Settlement Supervision Act of 2010 (``Clearing Supervision Act'')
\1\ and Rule 19b-4(n)(1)(i) of the Securities Exchange Act of 1934
(``Act''),\2\ notice is hereby given that on October 10, 2017, The
Options Clearing Corporation (``OCC'') filed with the Securities and
Exchange Commission (``Commission'') an advance notice as well as a
proposed cash settlement agreement procedures agreement (``CSPA'')
template as described in Items I and II below, which Items have been
prepared by OCC. The Commission is publishing this notice to solicit
comments on the advance notice from interested persons.
---------------------------------------------------------------------------
\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice
In accordance with Section 806(e)(1) of the Clearing Supervision
Act \3\ and Rule 19b-4(n)(1)(i) \4\ of the Act,\5\ this advance notice
is filed by OCC in connection with proposed changes to improve OCC's
cash settlement process by implementing Society of Worldwide Interbank
Financial Telecommunication (``SWIFT'') messaging as the primary means
of transmitting daily cash settlement instructions between OCC and its
Clearing Banks.\6\ The proposed change is designed to: (1) Increase the
efficiency, accuracy, and resiliency of OCC's cash settlement process,
(2) eliminate certain risks associated with the current use of OCC's
proprietary online cash settlement system within the ENCORE clearing
system (``OCS''), and (3) adopt communication procedures and standards
that are internationally accepted and therefore
[[Page 54449]]
are consistent with the requirements in Rule 17Ad-22(e)(22).\7\
---------------------------------------------------------------------------
\3\ 12 U.S.C. 5465(e)(1).
\4\ 17 CFR 240.19b-4(n)(1)(i).
\5\ 15 U.S.C. 78a et seq.
\6\ See OCC Rule 101.C.(1) (defining the term ``Clearing
Bank'').
\7\ 17 CFR 240.17Ad-22(e)(22).
---------------------------------------------------------------------------
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.\8\
---------------------------------------------------------------------------
\8\ OCC's By-Laws and Rules can be found on OCC's public Web
site: https://optionsclearing.com/about/publications/bylaws.jsp.
---------------------------------------------------------------------------
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
Communications With Clearing Banks
There are currently eight banks or trust companies that act as OCC
Clearing Banks.\9\ The Clearing Banks were first informed in early 2016
via phone communications regarding OCC's initiative to utilize SWIFT
messaging and the SWIFT network for cash settlement processing. This
initiative was positively received by existing Clearing Banks since
they utilize SWIFT-based messaging in other areas of their businesses.
Moreover, several Clearing Banks have informally expressed their desire
to OCC in the past for OCC to integrate use of the SWIFT messaging
network in the cash settlement process.
---------------------------------------------------------------------------
\9\ OCC Rule 101.C.(1) defines the term ``Clearing Bank'' to
mean ``a bank or trust company which has entered into an agreement
with [OCC] in respect of settlement of confirmed trades on behalf of
Clearing Members.''
---------------------------------------------------------------------------
Beginning in October 2016, OCC distributed a draft template cash
settlement procedures agreement to all Clearing Banks that would
implement SWIFT messaging as the primary means of transmitting daily
cash settlement instructions between OCC and the Clearing Banks along
with a request for feedback. In response, all of the existing Clearing
Banks have expressed support for the transition to SWIFT. This is in
part because the existing use of OCC's online cash settlement system is
not integrated with the internal systems used by Clearing Banks for
processing settlement instructions. Processing the settlement
instructions therefore requires manual intervention by the Clearing
Banks to enter the instructions into their own systems. According to
comments from all Clearing Banks, this lack of integration elongates
the timeframe to process and approve settlement instructions, which
causes delays and increases the risk of errors in preparing, posting,
transmitting, receiving, and executing timely settlement instructions.
Following the receipt of questions and comments, OCC began
negotiating the cash settlement procedures agreement with each Clearing
Bank based on the standardized template. The definitive documentation
between OCC and each Clearing Bank is expected to be consistent with
the template agreement, however, areas of negotiation to date have
generally included such matters as acceptable backup communication
methods for transmitting settlement instructions (e.g., facsimile,
email, or other means), standards of care associated with duties and
potential liabilities under the agreement (e.g., negligence, gross
negligence, or willful misconduct), certain defined terms (e.g., the
meaning of a ``business day''), and allocations of responsibility
regarding the detection of errors associated with settlement
instructions.
(B) Advance Notices Filed Pursuant to Section 806(e) of the Payment,
Clearing, and Settlement Supervision Act
Description of the Proposed Change
Background
The Existing Online Cash Settlement System
In connection with OCC's performance of clearance and settlement
services for cleared contracts \10\ and Stock Loans, OCC and Clearing
Members are obligated under OCC's By-Laws and Rules to perform cash
settlement of related obligations.\11\ This cash settlement process is
facilitated by Clearing Banks, which are banks or trust companies that
have entered agreements with OCC to settle on behalf of Clearing
Members and at which OCC and Clearing Members each maintain
accounts.\12\ Currently, there are eight Clearing Banks with which OCC
effects cash settlements through OCS, which is a proprietary web-based
system OCC developed in conjunction with the gradual phase-in of its
ENCORE clearing system in the early- to-mid 2000's.\13\ OCS replaced
OCC's previous cash settlement system, the Options Automated Settlement
Instructions System, which required the use of dedicated terminals at
each Clearing Bank. Because OCS is a web-based system, it provides
greater flexibility to OCC and Clearing Banks because users are not
limited to only using dedicated terminals to access the system.
---------------------------------------------------------------------------
\10\ See Article I., Section 1.C.(11).
\11\ See, e.g., Article I, Section 1.S.(16) of OCC's By-Laws
(defining the term ``settlement time''); Article VI, Sections 4 and
6 of OCC's By-Laws (addressing obligations of Purchasing Clearing
Members and obligations of OCC as a central counterparty); and
Chapter V of OCC's Rules (regarding daily cash settlement).
\12\ See OCC Rule 101.C.(1) (defining the term ``Clearing
Bank'').
\13\ See generally OCC Completes Second Major Installation of
EncoreTM Clearing System(November 25, 2002), available at
https://www.theocc.com/about/newsroom/releases/2002/11_25.jsp.
---------------------------------------------------------------------------
On a daily basis, OCC generates settlement instructions associated
with Cleared Contracts and Stock Loans of Clearing Members by running
specific predefined settlement profiles \14\ throughout the day. The
resulting settlement instructions are generally transmitted by OCC to
Clearing Banks by way of OCS, at which point the Clearing Banks are
able to view batches of settlement instructions within OCS.\15\
Clearing Bank staff review the settlement instructions by logging into
OCS and opening the settlement batch. Thereafter, the Clearing Bank
either approves or rejects the settlement instructions in OCS. One of
the Clearing Banks, however, currently does not utilize OCS as its
primary means of effecting cash settlement. Instead, the Clearing Bank
primarily receives settlement instructions from OCC via facsimile,
reviews the settlement instructions, approves or rejects them, and then
returns a facsimile confirmation to OCC. After receipt of the
confirmation, OCC staff manually enters the approvals or rejections
into OCS.
---------------------------------------------------------------------------
\14\ Predefined settlement profiles are programmed to track
various types of obligations to pay or collect cash in connection
with Cleared Contracts and Stock Loans that are in turn used to
generate settlement instructions.
\15\ A settlement batch is a set of individual debit or credit
settlement instructions that may either instruct a Clearing Bank to
move funds to or from an OCC settlement account or to or from a
Clearing Member's account at the same Clearing Bank.
---------------------------------------------------------------------------
Cash settlement instructions that OCC transmits to Clearing Banks
are generally categorized in two groups: Start-of-day and intra-day.
Start-of-day settlement instructions are generated through OCC's
nightly processing cycle and relate to cash settlement obligations that
arise from Cleared Contracts and Stock Loans of Clearing Members,
including, but not limited to, premium payments, margin requirements,
mark-to-market activity, and cash settlement amounts for exercised
options that are cash settled. Intra-day settlement
[[Page 54450]]
instructions represent any settlement instruction other than a start-
of-day instruction and may be transmitted by OCC to a Clearing Bank
throughout the day. For example, intra-day settlement instructions may
be generated to credit excess cash to a Clearing Member in connection
with its margin requirement,\16\ to complete a cash substitution
regarding a Clearing Member's margin deposit or to effect an intra-day
margin call that OCC may issue to a Clearing Member pursuant to its
authority under Rule 609.\17\ The settlement timeline for processing
intra-day settlement instructions depends on the time at which the
Clearing Bank receives the instructions, as discussed below.
---------------------------------------------------------------------------
\16\ See OCC Rule 608 (Withdrawals of Margin).
\17\ See OCC Rule 609 (Intra-Day Margin).
---------------------------------------------------------------------------
Existing Cash Settlement Procedures Agreements
Each Clearing Bank entered into a CSPA with OCC that details the
substantive rights and responsibilities of the parties and specifies
operational procedures for which they are responsible regarding start-
of-day and intra-day settlement instructions. This includes prescribed
communication methods and settlement procedures and generally
contemplates the use of OCS as the primary means to facilitate the cash
settlement process, with the exception of the one instance described
above in which the primary means of communication between OCC and the
Clearing Bank is facsimile.
For start-of-day settlement instructions, the CSPA requires the
Clearing Bank on the morning of each business day and by a standard
time to access OCS and act upon the settlement instructions transmitted
by OCC. Once the Clearing Bank reviews the settlement instructions, it
either accepts or rejects each instruction through OCS.\18\ If an
instruction is to be rejected, the Clearing Bank must immediately
notify OCC in advance by telephone that it intends to reject the
instruction and provide the reason. OCC then has an opportunity to
submit a revised settlement instruction by telephone or other mutually
agreed upon means. All settlement instructions must be acted upon by
the Clearing Bank before a defined settlement time, which differs for
credit instructions (i.e., transfers of funds from an OCC account to a
Clearing Member account) and debit instructions (i.e., transfers of
funds from a Clearing Member account to an OCC account). If a Clearing
Bank does not expressly accept or reject a settlement instruction by
the specified settlement time, the bank is deemed to have accepted the
instruction.
---------------------------------------------------------------------------
\18\ In the event OCS is unavailable, the CSPA specifies backup
procedures, which may include transmission by telephone or
facsimile.
---------------------------------------------------------------------------
For intra-day settlement instructions, OCC transmits the
instructions through OCS for the Clearing Bank to review and then
notifies the Clearing Bank by telephone or other agreed upon means.
With respect to Clearing Banks with access to OCS, the Clearing Bank
must then use commercially reasonable efforts to access OCS immediately
and act upon the settlement instruction by the earlier of either: (a)
Thirty (30) minutes following the time the bank first views the
settlement instruction in OCS or (b) sixty (60) minutes after OCC
notifies the Clearing Bank that is has submitted settlement
instructions via OCS. The same provisions related to backup procedures,
acceptance, rejection, and implied acceptance for morning settlement
also apply to such intra-day settlement instructions.
Proposed Changes
Under the Proposed CSPA, OCC and all Clearing Banks would use the
SWIFT network as the primary means of transmitting settlement
instructions to each other, and Clearing Bank staff would no longer log
in to OCS and accept or reject settlement instructions. OCC would,
however, continue using OCS for more limited purposes to manage its
settlement instruction processing, including with respect to the
initiation, processing, and tracking of settlement instructions. Under
the new process in which SWIFT would be the primary means of
transmitting settlement instructions, OCC would integrate OCS with the
SWIFT network, and SWIFT would be used to communicate settlement
instructions to Clearing Banks and allow Clearing Banks to approve
settlement instructions. OCC would also implement a new monitoring
screen to complement OCS that would allow OCC to track the lifecycle of
all SWIFT messages sent or received by OCC in connection with its cash
settlement activities.
SWIFT would not be a new communication channel for OCC even though
the proposed change would increase the extent to which OCC utilizes the
SWIFT messaging network in connection with its clearance and settlement
activities. This is because Clearing Members may currently deposit
letters of credit denominated in U.S. dollars issued by banks or trust
companies approved by OCC as margin assets \19\ and the issuer of any
such letter of credit submits amendments to OCC using the SWIFT
network. OCC manages this process through a SWIFT system that
interfaces with OCC's ENCORE clearing system so that OCC is able to
track and process the amendment messages. Under the proposed change,
OCC would also use the same SWIFT system to support cash settlement
processing. Based upon settlement profiles created by OCC, settlement
instructions in the form of SWIFT messages would be automatically
transmitted to Clearing Banks over the SWIFT network. In response, OCC
would then receive acceptances from Clearing Banks via the SWIFT
network. If an acceptance is not provided, OCC would have discretion to
treat a settlement instruction as rejected, and in any case would
promptly contact the Clearing Bank to determine the reason and
coordinate with the Clearing Bank to ensure that appropriate action is
taken with respect to the instruction.
---------------------------------------------------------------------------
\19\ See OCC Rule 604(c).
---------------------------------------------------------------------------
OCC believes the proposed change would significantly increase the
resiliency of OCC's cash settlement process by reducing manual
processing steps that are more prone to error. For example, upon a
Clearing Bank's acceptance of a settlement instruction sent by OCC
using SWIFT, debits or credits, as appropriate, would be automatically
made as between OCC's account at the Clearing Bank and the Clearing
Member's account at the Clearing Bank. This means that Clearing Banks
would no longer need to view settlement instructions in OCS and
manually enter them into their systems to effect them as they do today.
Moreover, use of the SWIFT network would eliminate facsimile,
telephone, and email communications as primary communication methods
for settlement processing. If SWIFT is unavailable, OCC and Clearing
Banks would communicate by using contingency methods as specified in
the applicable CSPA.
The Proposed CSPA would also introduce significant efficiencies to
OCC's cash settlement process by reducing manual processing steps that
elongate the time frame for processing and approving settlement
instructions. Notably, OCC expects significantly faster response times
from Clearing Banks because the banks would be able to communicate with
OCC using the same SWIFT transmission method that they already
typically use to process funds transfer instructions. OCC believes that
efficiencies and time savings would also be experienced by
[[Page 54451]]
significantly reducing manual steps associated with the processing of
settlement instructions, such as manual data entry by Clearing Banks to
enter settlement instruction information into their own systems based
on computer printouts of instructions contained in OCS or instructions
that are received by facsimile. In addition, the proposed change would
allow Clearing Banks to forward SWIFT messages from OCC to internal
staff at the Clearing Bank who have responsibility for the cash
settlement process.
The Proposed CSPA would also harmonize the primary process by which
OCC performs cash settlement with Clearing Banks by having all Clearing
Banks use the SWIFT messaging system. In addition to the efficiency and
risk mitigation benefits described above, the Proposed CSPA would
directly respond to the Clearing Bank requests for OCC to implement an
enhanced process to mitigate the manual processing challenges that are
associated with the existing cash settlement process.
Finally, OCC believes that the Proposed CSPA would also promote
compliance with Rule 17Ad-22(e)(22),\20\ which requires OCC as a
covered clearing agency to establish, implement, maintain, and enforce
written policies and procedures reasonably designed to ``use, or at a
minimum accommodate, relevant internationally accepted communication
procedures and standards in order to facilitate efficient payment,
clearing, and settlement.'' In adopting this requirement, the
Commission stated that ``[r]elevant internationally accepted
communication procedures and standards could include messaging
standards such as SWIFT, FIX and FpML.'' [emphasis added].\21\
Accordingly, use of the SWIFT messaging network as the primary process
to support daily cash settlement is consistent with Rule 17Ad-
22(e)(22).
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\20\ 17 CFR 240.17Ad-22(e)(22).
\21\ Securities Exchange Act Release No. 78961 (September 28,
2016), 81 FR 70786, 70842 (October 13, 2016).
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New Cash Settlement Procedures Agreement
As part of the transition to SWIFT, Clearing Banks would enter into
the Proposed CSPA with OCC. The Proposed CSPA is based on a
standardized template developed by OCC in collaboration with its
Clearing Banks. The Proposed CSPA template agreement is not a public
document, and OCC has separately submitted a request for confidential
treatment regarding the Proposed CSPA template agreement, which is
included in this filing as Exhibit 3. The definitive Proposed CSPA
between OCC and each Clearing Bank is expected to be consistent with
the template agreement, however, OCC and each Clearing Bank may
negotiate certain modifications.
As is the case today, the Proposed CSPA would continue to be the
principal form of agreement that governs the rights and
responsibilities of OCC and each Clearing Bank, details operational
procedures (including backup procedures) and security protocols, and
identifies individuals at OCC and at the Clearing Bank who are
authorized to act on behalf of each party with respect to cash
settlement instructions.
Under the Proposed CSPA, the timelines for OCC and Clearing Banks
to perform the actions needed to effect settlement would be bifurcated
as they are under the current agreement into start-of-day settlement
instructions and intra-day settlement instructions. Also as with the
current CSPA, there would be defined deadlines by which OCC must submit
settlement instructions and by which the Clearing Bank must accept and
execute the settlement instructions. In the event the SWIFT network is
unavailable during a time at which settlement instructions are to be
communicated, each Proposed CSPA would detail backup procedures with
corresponding security protocols by which OCC and the Clearing Bank
could effect settlement. For example, such alternative communication
methods may include secure email messages, telephone instructions with
the use of personal identification codes, facsimile instructions, the
Clearing Bank's proprietary online account system, or other methods
agreed upon by OCC and the Clearing Bank.
Under the Proposed CSPA, however, Clearing Banks would not be
deemed to have accepted settlement instructions in the event the
Clearing bank does not explicitly communicate acceptance or rejection
to OCC. Instead, any acceptance would be required to be made by
affirmative SWIFT confirmation message, and if a Clearing Bank did not
respond OCC would have discretion to treat the failure to respond as a
rejection and OCC would communicate with the Clearing Bank to
understand the reason(s) why no response to the settlement instruction
was provided and appropriate action is taken. These measures are
intended to ensure that potentially erroneous instructions are
identified and acted upon in a timely manner and to evidence settlement
finality.
The CSPAs currently in effect between OCC and its Clearing Banks
were implemented incrementally over a number of years as OCC's
operations expanded and it became appropriate to maintain service
agreements with a range of Clearing Banks, and in many cases they have
not been renegotiated in a significant amount of time. For these
reasons, there is variation between the terms and conditions of the
relevant CSPA and the corresponding practices with the Clearing Banks.
In some cases the differences are relatively substantial, such as in
the one case described above where the primary means of communication
between the Clearing Bank and OCC to support the cash settlement
process is facsimile. The Proposed CSPA would address these issues by
increasing consistency in the respective rights and responsibilities of
OCC and the Clearing Banks and in turn promoting harmonization across
OCC's daily cash settlement process. Negotiation of the Proposed CSPA
to adopt the SWIFT messaging network as the primary process to support
daily cash settlement would also update the agreements to rely on
current industry communication procedures and standards that the
Commission has recognized as consistent with the requirements of Rule
17Ad-22(e)(22).\22\
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\22\ 17 CFR 240.17Ad-22(e)(22).
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Testing and Implementation
Prior to implementation of the Proposed CSPA, the existing CSPA and
current processes regarding daily cash settlement would continue in
effect while OCC completes the development of the new SWIFT interface.
OCC would also complete roundtrip certification testing of the proposed
SWIFT network messaging operations. Upon execution of the Proposed CSPA
by a Clearing Bank, an implementation date would be coordinated between
OCC and the Clearing Bank and OCC would provide advance notice of the
implementation to Clearing Members through an Information Memo. OCC
generally expects a total timeframe of approximately 90 days would be
necessary to migrate a Clearing Bank to SWIFT messaging-based cash
settlement. Though OCC would be able to begin migration to SWIFT
messaged-based cash settlement with each Clearing Bank on an individual
basis, it would expect to complete the migration with all of its
Clearing Banks by the end of Q1 2018.
[[Page 54452]]
Anticipated Effect on and Management of Risk
OCC anticipates that the Proposed CSPA would reduce the nature and
level of risk presented by OCC because, as described above, it would
enhance the resiliency, efficiency and consistency of the cash
settlement process and thereby reduce risks that are associated with
the existing cash settlement process. Specifically, the Proposed CSPA
would increase the resiliency of the cash settlement process by
reducing manual processing steps that are more prone to risk of delay
or error. Due to implementation of the SWIFT messaging network as the
primary means of transmitting settlement instructions, a Clearing
Bank's acceptance of settlement instructions would automatically result
in debits or credits, as appropriate, and Clearing Banks would no
longer manually enter settlement instructions in their own systems.
OCC also anticipates the Proposed CSPA would enhance the efficiency
of the cash settlement process by reducing manual processing steps that
elongate the timeframe for processing and approving settlement
instructions. In this regard, using SWIFT as the primary means of
transmitting settlement instructions would reduce the risk of
uncertainty in the cash settlement process by allowing OCC and the
Clearing Banks to communicate using the same transmission method that
is already typically used by the Clearing Banks to process funds
transfer instructions with other institutions. OCC expects that this
would lead to significantly faster response times from Clearing Banks
to accept or reject instructions, which, in turn, would better manage
the risk of untimely settlement by providing greater certainty
concerning prompt settlement.
In addition, the Proposed CSPA would enhance consistency in the
agreements between OCC and the Clearing Banks and harmonize the use of
SWIFT as the primary process used to conduct cash settlement. OCC
anticipates that this greater consistency would reduce the risk of
delay or error in the settlement process that might result from OCC's
management of the greater inconsistency across practices with the
Clearing Banks that exists today.
Finally, OCC anticipates the Proposed CSPA would reduce regulatory
risk to OCC by helping to ensure that the primary means of
communicating settlement instructions uses relevant internationally
accepted communications procedures and standards to facilitate
efficient payment, clearing and settlement in a manner that is
consistent with the requirements of Rule 17Ad-22(e)(22).\23\
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\23\ 17 CFR 240.17Ad-22(e)(22).
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For all of these reasons, OCC anticipates that the Proposed CSPA
would reduce the nature and level of risk presented by OCC.
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.\24\
Section 805(a)(2) of the Clearing Supervision Act \25\ also authorizes
the Commission to prescribe risk management standards for the payment,
clearing and settlement activities of designated clearing entities,
like OCC, for which the Commission is the supervisory agency. Section
805(b) of the Clearing Supervision Act \26\ states that the objectives
and principles for risk management standards prescribed under Section
805(a) shall be to:
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\24\ 12 U.S.C. 5461(b).
\25\ 12 U.S.C. 5464(a)(2).
\26\ 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.\27\ In particular, Rule 17Ad-22(e)(22)
\28\ requires that a covered clearing agency establish, implement,
maintain and enforce written policies and procedures reasonably
designed to ``use, or at a minimum accommodate, relevant
internationally accepted communication procedures and standards in
order to facilitate efficient payment, clearing, and settlement.''
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\27\ 17 CFR 240. 17Ad-22. See Securities Exchange Act Release
Nos. 68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-
08-11) (``Clearing Agency Standards''); 78961 (September 28, 2016),
81 FR 70786 (October 13, 2016) (S7-03-14) (``Standards for Covered
Clearing Agencies''). The Standards for Covered Clearing Agencies
became effective on December 12, 2016. As a ``covered clearing
agency'' under Rule 17Ad-22(a)(5), OCC became obligated to comply
with new section (e) of Rule 17Ad-22 as of the Commission's
compliance date of April 11, 2017.
\28\ 17 CFR 240.17Ad-22(e)(22).
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OCC believes that the proposed change concerning cash settlement
described above is consistent with Section 805(b)(2) of the Clearing
Supervision Act \29\ because it would promote safety and soundness in
OCC's daily cash settlement process by mitigating risks that arise in
the existing process due to manual processing steps and inconsistent
practices across OCC's Clearing Banks and thereby enhancing the
resiliency, efficiency and consistency of the process. As described in
detail above, the proposed change would promote safety and soundness by
implementing the SWIFT messaging network as the primary means of
transmitting daily cash settlement instructions between OCC and each
Clearing Bank that performs cash settlement on behalf of Clearing
Members. This represents the use of a primary communication procedure
that would be integrated with the systems that are already typically
used by the Clearing Banks to process funds transfer instructions with
other institutions and that would cause the acceptance of settlement
instructions by Clearing Banks to automatically result in debits or
credits, as appropriate, in the accounts of OCC and Clearing Members at
the Clearing Banks. OCC believes that these changes promote the safety
and soundness of the cash settlement process by, among other things,
reducing manual processing steps that are more prone to risk of delay
or error and by facilitating faster response times regarding the
acceptance or rejection of settlement instructions by Clearing Banks,
which, in turn, would provide greater certainty regarding prompt
settlement.
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\29\ 12 U.S.C. 5464(b)(2).
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OCC also believes that the proposed change to enhance the
consistency of the CSPA between OCC and each Clearing Bank would
promote safety and soundness by reducing the risk of settlement delay
or error that may arise due to the existing degree of variability in
the practices between Clearing Banks, including but not limited to the
current use by one Clearing Bank of facsimile as a primary method for
transmitting settlement instructions.
OCC further believes that the proposed change would promote
compliance with Rule 17Ad-22(e)(22),\30\ which requires OCC as a
covered clearing agency to establish, implement, maintain and enforce
written policies and procedures reasonably designed to ``use, or at a
minimum accommodate, relevant internationally accepted communication
procedures and standards in order to facilitate efficient payment,
clearing, and settlement.'' In
[[Page 54453]]
adopting this requirement, the Commission stated that ``[r]elevant
internationally accepted communication procedures and standards could
include messaging standards such as SWIFT, FIX and FpML.'' [emphasis
added].\31\ Accordingly, use of the SWIFT messaging network as the
primary process to support daily cash settlement is consistent with
Rule 17Ad-22(e)(22).
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\30\ 17 CFR 240.17Ad-22(e)(22).
\31\ Securities Exchange Act Release No. 78961 (September 28,
2016), 81 FR 70786, 70842 (October 13, 2016).
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In these ways, OCC believes the proposed changes are consistent
with Section 805(b)(2) of the Clearing Supervision Act \32\ and Rule
17Ad-22(e)(22).\33\
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\32\ 12 U.S.C. 5464(b)(2).
\33\ 17 CFR 240.17Ad-22(e)(22).
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III. Date of Effectiveness of the Advance Notice and Timing for
Commission Action
The proposed change may be implemented if the Commission does not
object to the proposed change within 60 days of the later of: (i) The
date the proposed change was filed with the Commission or (ii) the date
any additional information requested by the Commission is received. OCC
shall not implement the proposed change if the Commission has any
objection to the proposed change.
The Commission may extend the period for review by an additional 60
days if the proposed change raises novel or complex issues, subject to
the Commission providing the clearing agency with prompt written notice
of the extension. A proposed change may be implemented in less than 60
days from the date the advance notice is filed, or the date further
information requested by the Commission is received, if the Commission
notifies the clearing agency in writing that it does not object to the
proposed change and authorizes the clearing agency to implement the
proposed change on an earlier date, subject to any conditions imposed
by the Commission.
OCC shall post notice on its Web site of proposed changes that are
implemented.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the advance
notice is consistent with the Clearing Supervision Act and 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-2017-805 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-2017-805. 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_805.pdf.
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-OCC-2017-805 and should be
submitted on or before December 8, 2017.
By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-24919 Filed 11-16-17; 8:45 am]
BILLING CODE 8011-01-P
