Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection To Advance Notice Filing Concerning the Use of the Society of Worldwide Interbank Financial Telecommunication (“SWIFT”) Messaging Network in OCC's Cash Settlement Process, 58230-58232 [2017-26554]

Download as PDF 58230 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Notices The United States Postal Service® hereby gives notice that, pursuant to 39 U.S.C. 3642 and 3632(b)(3), on December 5, 2017, it filed with the Postal Regulatory Commission a USPS Request to Add Priority Mail Contract 382 to Competitive Product List. Documents are available at www.prc.gov, Docket Nos. MC2018–42, CP2018–72. SUPPLEMENTARY INFORMATION: Elizabeth A. Reed, Attorney, Corporate and Postal Business Law. SECURITIES AND EXCHANGE COMMISSION [Release No. 34–82221; File No. SR–OCC– 2017–805] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection To Advance Notice Filing Concerning the Use of the Society of Worldwide Interbank Financial Telecommunication (‘‘SWIFT’’) Messaging Network in OCC’s Cash Settlement Process [FR Doc. 2017–26586 Filed 12–8–17; 8:45 am] December 5, 2017. BILLING CODE 7710–12–P POSTAL SERVICE Product Change—Parcel Select Negotiated Service Agreement AGENCY: ACTION: Postal ServiceTM. Notice. The Postal Service gives notice of filing a request with the Postal Regulatory Commission to add a domestic shipping services contract to the list of Negotiated Service Agreements in the Mail Classification Schedule’s Competitive Products List. SUMMARY: Date of notice required under 39 U.S.C. 3642(d)(1): December 11, 2017. DATES: FOR FURTHER INFORMATION CONTACT: Elizabeth A. Reed, 202–268–3179. The United States Postal Service® hereby gives notice that, pursuant to 39 U.S.C. 3642 and 3632(b)(3), on December 5, 2017, it filed with the Postal Regulatory Commission a Request of the United States Postal Service to Add Parcel Select Contract 26 to Competitive Product List. Documents are available at www.prc.gov, Docket Nos. MC2018–44, CP2018–74. SUPPLEMENTARY INFORMATION: Elizabeth A. Reed, Attorney, Corporate and Postal Business Law. [FR Doc. 2017–26590 Filed 12–8–17; 8:45 am] daltland on DSKBBV9HB2PROD with NOTICES BILLING CODE 7710–12–P VerDate Sep<11>2014 17:54 Dec 08, 2017 Jkt 244001 The Options Clearing Corporation (‘‘OCC’’) filed on October 10, 2017 with the Securities and Exchange Commission (‘‘Commission’’) advance notice SR–OCC–2017–805 (‘‘Advance Notice’’) pursuant to Section 806(e)(1) of the Payment, Clearing, and Settlement Supervision Act of 2010 (‘‘Payment, Clearing and Settlement Supervision Act’’) 1 and Rule 19b–4(n)(1)(i) under the Securities Exchange Act of 1934 2 (‘‘Exchange Act’’) to propose changes to the current process OCC uses to conduct cash settlement with Clearing Members 3 by requiring Clearing Banks to integrate the use of the Society of Worldwide Interbank Financial Telecommunication (‘‘SWIFT’’) messaging network. The proposed changes are intended to enhance the resiliency, efficiency, and consistency of the cash settlement process and thereby mitigate risks that are associated with the existing cash settlement process. The Advance Notice was published for comment in the Federal Register on November 17, 2017.4 The Commission has not received any comments on the Advance Notice to date. This publication serves as notice of no objection to the Advance Notice. I. Background In connection with OCC’s performance of clearance and settlement 1 12 U.S.C. 5465(e)(1). The Financial Stability Oversight Council designated OCC a systemically important financial market utility (‘‘SIFMU’’) on July 18, 2012. See Financial Stability Oversight Council 2012 Annual Report, Appendix A, https:// www.treasury.gov/initiatives/fsoc/Documents/ 2012%20Annual%20Report.pdf. Therefore, OCC is required to comply with the Payment, Clearing and Settlement Supervision Act and file advance notices with the Commission. 2 17 CFR 240.19b–4(n)(1)(i). 3 Unless specified otherwise, capitalized terms shall have the meaning OCC ascribes in its By-Laws and Rules. 4 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, Exchange Act Release No. 82055 (Nov. 13, 2017), 82 FR 54448 (Nov. 17, 2017) (‘‘Notice of Filing of Advance Notice’’). PO 00000 Frm 00064 Fmt 4703 Sfmt 4703 services, OCC and its Clearing Members are obligated to perform cash settlement functions pursuant to OCC’s By-Laws and Rules. For example, a Clearing Member may be obligated to pay OCC the premium for a cleared contract, or OCC may be obligated to pay a Clearing Member the settlement value of a cleared contract.5 The cash settlement process for these and other clearance and settlement services 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.6 Currently, there are eight Clearing Banks with which OCC effects cash settlements through the ENCORE clearing system (‘‘OCS’’).7 OCC generates settlement instructions associated with Cleared Contracts and Stock Loans of Clearing Members by running specific predefined settlement profiles 8 throughout the day. These settlement instructions are categorized as either start-of-day instructions or intra-day instructions. 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.9 Clearing Bank staff review the settlement instructions by logging into OCS and opening the settlement batch.10 5 See Article VI, Section 4 of OCC’s By-Laws (Obligations of Purchasing Clearing Members); see also Chapter V of OCC’s Rules (Daily Cash Settlement); Article VI, Section 6.01 of OCC’s ByLaws (requiring, among other things, that OCC be substituted through novation as the buyer of every seller and seller to every buyer with respect to obligations owing to persons having positions in cleared contract); Article I, Section 1.S.(16) of OCC’s By-Laws (defining the term ‘‘settlement time’’). 6 See OCC Rule 101.C.(1) (defining 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.’’). 7 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. 8 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. 9 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. 10 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 E:\FR\FM\11DEN1.SGM 11DEN1 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Notices Each Clearing Bank has entered into a Cash Settlement Procedures Agreement (‘‘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 process includes prescribed communication methods and settlement procedures, including a requirement that the Clearing Bank act upon the settlement instructions before a defined settlement time. If a Clearing Bank does not expressly accept or reject a settlement instruction by the specified settlement time, the Clearing Bank is deemed to have accepted the instruction. The processes agreed to in the CSPAs currently are conducted via OCS because the SWIFT messaging network is available for cash settlement processes in narrow circumstances only. For example, OCC states that SWIFT is available to Clearing Members to deposit letters of credit for margining purposes provided: (i) They are denominated in U.S. dollars, (ii) they are issued by banks or trust companies, (iii) they are approved by OCC as margin assets, and (iv) the issuer of any such letter of credit submits amendments to OCC using the SWIFT network. OCC states that it manages this process through a SWIFT system that interfaces with OCC’s OCS so that OCC is able to track and process the amendment messages.11 The proposals set forth in OCC’s Advance Notice would change its current cash settlement process with Clearing Members by: (i) Requiring Clearing Banks to expand the use of the SWIFT messaging network, and (ii) creating a new standardized CSPA template. Collectively, OCC believes these changes would improve OCC’s resiliency, efficiency, and consistency, thereby mitigating risks.12 The specifics of the proposals are described in detail below. II. Description of the Advance Notice daltland on DSKBBV9HB2PROD with NOTICES A. Proposed Change To Increase SWIFT Utilization OCC’s Advance Notice states that the changes to its cash settlement process are intended to improve OCC’s current facsimile confirmation to OCC. After receipt of the confirmation, OCC staff manually enters the approvals or rejections into OCS. This Clearing Bank will transfer to the SWIFT messaging network after implementation of the proposals described herein. 11 See Notice of Filing of Advance Notice. 12 See Notice of Filing of Advance Notice for a more detailed description of the specific rule changes OCC is proposing. VerDate Sep<11>2014 17:54 Dec 08, 2017 Jkt 244001 cash settlement process by implementing the SWIFT messaging network as the primary means of transmitting daily cash settlement between OCC and the Clearing Banks. Currently, OCS requires Clearing Banks to process aspects of the cash settlement process manually, including logging into OCS to reject settlement instructions or to accept in instances where Clearing Banks opt to actively accept settlement instructions prior to the specified settlement time. These requirements result in inconsistent operational practices across Clearing Banks since OCS is a proprietary online cash settlement system and not all Clearing Banks use OCS consistently.13 Furthermore, the manual processing steps introduce risks for error and can result in elongated times for processing, response, and approval. Requiring all of the Clearing Banks to integrate the use of SWIFT into their operations facilitating OCC’s cash settlement with Clearing Members would eliminate the facsimile, telephone, and email communications as primary communication methods for settlement processing while harmonizing the cash settlement process across all Clearing Banks. Due to the automated nature of the SWIFT messaging network, OCC believes that implementing SWIFT would reduce manual processing and approval steps. For instance, settlement instructions would be automatically transmitted to Clearing Banks over the SWIFT network so that Clearing Bank staff would not need to log into OCS to accept or reject them. Similarly, OCC automatically would receive any acceptances provided.14 In addition, OCC could monitor all cash-settlement related SWIFT messages it sends or receives. Accordingly, OCC believes that the proposed changes would increase the efficiency, accuracy, and resiliency of OCC’s cash settlement process while eliminating certain risks inherent in both having Clearing Banks using different systems that employ manual processes. In addition, OCC states that the changes would adopt communication procedures and standards that are internationally accepted and therefore are consistent with the requirements in Rule 17Ad22(e)(22) under the Exchange Act.15 13 See supra note 10. a Clearing Bank fails to accept the settlement instructions, OCC would follow up with the Clearing Bank to determine the reason no acceptance was provided and to coordinate with the Clearing Bank that appropriate action is taken with respect to the instructions. 15 17 CFR 240.17Ad–22(e)(22). 14 If PO 00000 Frm 00065 Fmt 4703 Sfmt 4703 58231 B. Proposed Changes to CSPA The CSPA is the principal form of agreement that: (i) Governs the rights and responsibilities of OCC and each Clearing Bank, (ii) details operational procedures (including backup procedures) and security protocols, and (iii) 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. According to OCC, the CSPAs currently in effect between OCC and its Clearing Banks were implemented over many years as OCC’s operations expanded and it became appropriate to maintain service agreements with a range of Clearing Banks. In addition, many of OCC’s CSPAs have not been renegotiated in a long time. Accordingly, OCC states that there are substantial deviations among some of the terms and conditions of the respective CSPAs and the corresponding Clearing Bank practices. As a part of the transition to SWIFT, Clearing Banks would enter into new CSPAs with OCC. Each CSPA would be based on a standardized template developed by OCC in collaboration with its Clearing Banks. Each CSPA would establish various deadlines for OCC and the Clearing Bank as well as backup procedures.16 OCC believes that the renegotiation of the CSPAs with the Clearing Banks to accommodate the adoption of the SWIFT messaging network as the primary process to support daily cash settlement also would allow the agreements to be updated to ensure their uniform compliance with the requirements in Rule 17Ad–22(e)(22).17 III. Discussion and Commission Findings Although the Payment, Clearing and Settlement Supervision Act of 2010 (‘‘Act’’) does not specify a standard of review for an advance notice, the stated purpose of the Act is instructive.18 The stated purpose of the Act is to mitigate systemic risk in the financial system and promote financial stability by, among other things, promoting uniform risk management standards for SIFMUs and strengthening the liquidity of SIFMUs.19 Section 805(a)(2) of the Act 20 authorizes the Commission to prescribe regulations containing risk-management 16 A key change is that Clearing Banks would not be deemed to have accepted settlement instructions in the absence of a communication. 17 17 CFR 240.17Ad–22(e)(22). 18 See 12 U.S.C. 5461(b). 19 Id. 20 12 U.S.C. 5464(a)(2). E:\FR\FM\11DEN1.SGM 11DEN1 58232 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Notices standards for the payment, clearing, and settlement activities of designated clearing entities engaged in designated activities for which the Commission is the supervisory agency. Section 805(b) of the Act 21 provides the following objectives and principles for the Commission’s risk-management standards prescribed under Section 805(a): • To promote robust risk management; • To promote safety and soundness; • To reduce systemic risks; and • To support the stability of the broader financial system. Section 805(c) provides, in addition, that the Commission’s risk-management standards may address such areas as risk-management and default policies and procedures, among others areas.22 The Commission has adopted riskmanagement standards under Section 805(a)(2) of the Act and the Exchange Act (the ‘‘Clearing Agency Rules’’).23 The Clearing Agency Rules require each covered clearing agency, among other things, to establish, implement, maintain, and enforce written policies and procedures that are reasonably designed to meet certain minimum requirements for operations and riskmanagement practices on an ongoing basis. As such, it is appropriate for the Commission to review advance notices for consistency with the objectives and principles for risk-management standards described in Section 805(b) of the Act and the Clearing Agency Rules. A. Consistency With Section 805(b) of the Payment, Clearing and Settlement Supervision Act The Commission believes each proposal in OCC’s Advance Notice is consistent with promoting robust risk management, promoting safety and soundness, reducing systemic risks, and supporting the stability of the broader financial system, the stated objectives and principles of Section 805(b) of the Act.24 21 12 U.S.C. 5464(b). U.S.C. 5464(c). 23 17 CFR 240.17Ad–22. See Securities Exchange Act Release No. 68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7–08–11). See also Securities Exchange Act Release No. 78961 (September 28, 2016), 81 FR 70786 (October 13, 2016) (S7–03–14) (‘‘Covered Clearing Agency Standards’’). The Commission established an effective date of December 12, 2016, and a compliance date of April 11, 2017, for the Covered Clearing Agency Standards. On March 4, 2017, the Commission granted covered clearing agencies a temporary exemption from compliance with Rule 17Ad–22(e)(3)(ii) and certain requirements in Rules 17Ad–22(e)(15)(i) and (ii) until December 31, 2017, subject to certain conditions. OCC is a ‘‘covered clearing agency’’ as defined in Rule 17Ad–22(a)(5). 24 12 U.S.C. 5464(b). daltland on DSKBBV9HB2PROD with NOTICES 22 12 VerDate Sep<11>2014 17:54 Dec 08, 2017 Jkt 244001 First, the Commission believes that OCC’s proposal to implement the SWIFT messaging network as the primary means of transmitting cash settlement instructions between OCC and each Clearing Bank is consistent with promoting safety and soundness. The Commission agrees with OCC’s analysis that usage of the SWIFT messaging network would mitigate risks that arise in the existing cash settlement process due to manual processing steps and inconsistent practices across OCC’s Clearing Banks. By having an automated and standardized process that sends automatic messages without requiring Clearing Bank staff members to log into OCS to manually accept or reject settlement instructions, the Commission further believes the proposal would enhance the resiliency, efficiency, and consistency of OCC’s cash settlement process. The Commission therefore believes this specific proposal is consistent with promoting safety and soundness. Second, the Commission believes that OCC’s proposal to update, enhance and standardize a uniform set of CSPAs between OCC and each Clearing Bank would promote robust risk management. Specifically, the Commission believes that this proposal will reduce the risk of settlement delay or error that may arise due to each Clearing Bank operating according to disparate CSPA terms and requirements. The Commission therefore believes this specific proposal is consistent with promoting robust risk management. Consistent with the conclusions discussed above, the Commission also believes that OCC’s proposal is consistent with supporting the broader stability of the financial system. Specifically, the Commission believes that promoting the prompt and accurate messaging between OCC and the Clearing Banks would promote safety and soundness of both OCC and Clearing Banks. The reduction in errors and delays arising from the proposed implementation of SWIFT and more harmonized CSPAs would also enhance the reliability and resilience of OCC’s cash settlement process for Clearing Members, thereby decreasing systemic risks. Accordingly, the proposed changes would support the stability of the broader financial system. Thus, the Commission believes that the proposals contained in the Advance Notice are consistent with the stated objectives and principles of Section 805(b) of the Act. B. Consistency With Rule 17Ad– 22(e)(22) Under the Exchange Act The Commission further believes that OCC’s proposals in the Advance Notice PO 00000 Frm 00066 Fmt 4703 Sfmt 4703 are consistent with the Covered Clearing Agency Standards, specifically Rule 17Ad–22(e)(22) under the Exchange Act.25 Rule 17Ad–22(e)(22) requires each 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.’’ 26 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.’’ 27 Accordingly, the Commission believes that the proposals to expand the usage of the SWIFT messaging network and standardize the CSPAs with each Clearing Bank pursuant to the SWIFT messaging network implementation are consistent with Rule 17Ad–22(e)(22) under the Exchange Act. IV. Conclusion It is therefore noticed, pursuant to Section 806(e)(1)(G) of the Payment, Clearing and Settlement Supervision Act,28 that the Commission does not object to Advance Notice (SR–OCC– 2017–805) and that OCC is authorized to implement the proposed change. By the Commission. Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–26554 Filed 12–8–17; 8:45 am] BILLING CODE P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–82219; File No. SR–Phlx– 2017–95] Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 3304 December 5, 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 November 28, 2017, Nasdaq PHLX LLC (‘‘Phlx’’ or ‘‘Exchange’’) filed with the Securities 25 17 CFR 240.17Ad–22(e)(22). 26 Id. 27 Securities Exchange Act Release No. 78961 (September 28, 2016), 81 FR 70786, 70842 at n. 510 (October 13, 2016). 28 12 U.S.C. 5465(e)(1)(G). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. E:\FR\FM\11DEN1.SGM 11DEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 82, Number 236 (Monday, December 11, 2017)]
[Notices]
[Pages 58230-58232]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-26554]

=======================================================================
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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82221; File No. SR-OCC-2017-805]

Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of No Objection To Advance Notice Filing Concerning the Use of
the Society of Worldwide Interbank Financial Telecommunication
(``SWIFT'') Messaging Network in OCC's Cash Settlement Process

December 5, 2017.
The Options Clearing Corporation (``OCC'') filed on October 10,
2017 with the Securities and Exchange Commission (``Commission'')
advance notice SR-OCC-2017-805 (``Advance Notice'') pursuant to Section
806(e)(1) of the Payment, Clearing, and Settlement Supervision Act of
2010 (``Payment, Clearing and Settlement Supervision Act'') \1\ and
Rule 19b-4(n)(1)(i) under the Securities Exchange Act of 1934 \2\
(``Exchange Act'') to propose changes to the current process OCC uses
to conduct cash settlement with Clearing Members \3\ by requiring
Clearing Banks to integrate the use of the Society of Worldwide
Interbank Financial Telecommunication (``SWIFT'') messaging network.
The proposed changes are intended to enhance the resiliency,
efficiency, and consistency of the cash settlement process and thereby
mitigate risks that are associated with the existing cash settlement
process. The Advance Notice was published for comment in the Federal
Register on November 17, 2017.\4\ The Commission has not received any
comments on the Advance Notice to date. This publication serves as
notice of no objection to the Advance Notice.
---------------------------------------------------------------------------

\1\ 12 U.S.C. 5465(e)(1). The Financial Stability Oversight
Council designated OCC a systemically important financial market
utility (``SIFMU'') on July 18, 2012. See Financial Stability
Oversight Council 2012 Annual Report, Appendix A, https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, OCC is required to comply
with the Payment, Clearing and Settlement Supervision Act and file
advance notices with the Commission.
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ Unless specified otherwise, capitalized terms shall have the
meaning OCC ascribes in its By-Laws and Rules.
\4\ 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, Exchange Act Release No.
82055 (Nov. 13, 2017), 82 FR 54448 (Nov. 17, 2017) (``Notice of
Filing of Advance Notice'').
---------------------------------------------------------------------------

I. Background

In connection with OCC's performance of clearance and settlement
services, OCC and its Clearing Members are obligated to perform cash
settlement functions pursuant to OCC's By-Laws and Rules. For example,
a Clearing Member may be obligated to pay OCC the premium for a cleared
contract, or OCC may be obligated to pay a Clearing Member the
settlement value of a cleared contract.\5\ The cash settlement process
for these and other clearance and settlement services 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.\6\ Currently,
there are eight Clearing Banks with which OCC effects cash settlements
through the ENCORE clearing system (``OCS'').\7\
---------------------------------------------------------------------------

\5\ See Article VI, Section 4 of OCC's By-Laws (Obligations of
Purchasing Clearing Members); see also Chapter V of OCC's Rules
(Daily Cash Settlement); Article VI, Section 6.01 of OCC's By-Laws
(requiring, among other things, that OCC be substituted through
novation as the buyer of every seller and seller to every buyer with
respect to obligations owing to persons having positions in cleared
contract); Article I, Section 1.S.(16) of OCC's By-Laws (defining
the term ``settlement time'').
\6\ See OCC Rule 101.C.(1) (defining 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.'').
\7\ See generally OCC Completes Second Major Installation of
Encore^TM Clearing System (November 25, 2002) available at
https://www.theocc.com/about/newsroom/releases/2002/11_25.jsp.
---------------------------------------------------------------------------

OCC generates settlement instructions associated with Cleared
Contracts and Stock Loans of Clearing Members by running specific
predefined settlement profiles \8\ throughout the day. These settlement
instructions are categorized as either start-of-day instructions or
intra-day instructions. 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.\9\ Clearing Bank staff review the settlement
instructions by logging into OCS and opening the settlement batch.\10\
---------------------------------------------------------------------------

\8\ 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.
\9\ 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.
\10\ 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. This Clearing
Bank will transfer to the SWIFT messaging network after
implementation of the proposals described herein.

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[[Page 58231]]

Each Clearing Bank has entered into a Cash Settlement Procedures
Agreement (``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 process includes prescribed communication
methods and settlement procedures, including a requirement that the
Clearing Bank act upon the settlement instructions before a defined
settlement time. If a Clearing Bank does not expressly accept or reject
a settlement instruction by the specified settlement time, the Clearing
Bank is deemed to have accepted the instruction.
The processes agreed to in the CSPAs currently are conducted via
OCS because the SWIFT messaging network is available for cash
settlement processes in narrow circumstances only. For example, OCC
states that SWIFT is available to Clearing Members to deposit letters
of credit for margining purposes provided: (i) They are denominated in
U.S. dollars, (ii) they are issued by banks or trust companies, (iii)
they are approved by OCC as margin assets, and (iv) the issuer of any
such letter of credit submits amendments to OCC using the SWIFT
network. OCC states that it manages this process through a SWIFT system
that interfaces with OCC's OCS so that OCC is able to track and process
the amendment messages.\11\
---------------------------------------------------------------------------

\11\ See Notice of Filing of Advance Notice.
---------------------------------------------------------------------------

The proposals set forth in OCC's Advance Notice would change its
current cash settlement process with Clearing Members by: (i) Requiring
Clearing Banks to expand the use of the SWIFT messaging network, and
(ii) creating a new standardized CSPA template. Collectively, OCC
believes these changes would improve OCC's resiliency, efficiency, and
consistency, thereby mitigating risks.\12\ The specifics of the
proposals are described in detail below.
---------------------------------------------------------------------------

\12\ See Notice of Filing of Advance Notice for a more detailed
description of the specific rule changes OCC is proposing.
---------------------------------------------------------------------------

II. Description of the Advance Notice

A. Proposed Change To Increase SWIFT Utilization

OCC's Advance Notice states that the changes to its cash settlement
process are intended to improve OCC's current cash settlement process
by implementing the SWIFT messaging network as the primary means of
transmitting daily cash settlement between OCC and the Clearing Banks.
Currently, OCS requires Clearing Banks to process aspects of the cash
settlement process manually, including logging into OCS to reject
settlement instructions or to accept in instances where Clearing Banks
opt to actively accept settlement instructions prior to the specified
settlement time. These requirements result in inconsistent operational
practices across Clearing Banks since OCS is a proprietary online cash
settlement system and not all Clearing Banks use OCS consistently.\13\
Furthermore, the manual processing steps introduce risks for error and
can result in elongated times for processing, response, and approval.
Requiring all of the Clearing Banks to integrate the use of SWIFT into
their operations facilitating OCC's cash settlement with Clearing
Members would eliminate the facsimile, telephone, and email
communications as primary communication methods for settlement
processing while harmonizing the cash settlement process across all
Clearing Banks.
---------------------------------------------------------------------------

\13\ See supra note 10.
---------------------------------------------------------------------------

Due to the automated nature of the SWIFT messaging network, OCC
believes that implementing SWIFT would reduce manual processing and
approval steps. For instance, settlement instructions would be
automatically transmitted to Clearing Banks over the SWIFT network so
that Clearing Bank staff would not need to log into OCS to accept or
reject them. Similarly, OCC automatically would receive any acceptances
provided.\14\ In addition, OCC could monitor all cash-settlement
related SWIFT messages it sends or receives.
---------------------------------------------------------------------------

\14\ If a Clearing Bank fails to accept the settlement
instructions, OCC would follow up with the Clearing Bank to
determine the reason no acceptance was provided and to coordinate
with the Clearing Bank that appropriate action is taken with respect
to the instructions.
---------------------------------------------------------------------------

Accordingly, OCC believes that the proposed changes would increase
the efficiency, accuracy, and resiliency of OCC's cash settlement
process while eliminating certain risks inherent in both having
Clearing Banks using different systems that employ manual processes. In
addition, OCC states that the changes would adopt communication
procedures and standards that are internationally accepted and
therefore are consistent with the requirements in Rule 17Ad-22(e)(22)
under the Exchange Act.\15\
---------------------------------------------------------------------------

\15\ 17 CFR 240.17Ad-22(e)(22).
---------------------------------------------------------------------------

B. Proposed Changes to CSPA

The CSPA is the principal form of agreement that: (i) Governs the
rights and responsibilities of OCC and each Clearing Bank, (ii) details
operational procedures (including backup procedures) and security
protocols, and (iii) 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. According to OCC, the CSPAs currently in
effect between OCC and its Clearing Banks were implemented over many
years as OCC's operations expanded and it became appropriate to
maintain service agreements with a range of Clearing Banks. In
addition, many of OCC's CSPAs have not been renegotiated in a long
time. Accordingly, OCC states that there are substantial deviations
among some of the terms and conditions of the respective CSPAs and the
corresponding Clearing Bank practices.
As a part of the transition to SWIFT, Clearing Banks would enter
into new CSPAs with OCC. Each CSPA would be based on a standardized
template developed by OCC in collaboration with its Clearing Banks.
Each CSPA would establish various deadlines for OCC and the Clearing
Bank as well as backup procedures.\16\ OCC believes that the
renegotiation of the CSPAs with the Clearing Banks to accommodate the
adoption of the SWIFT messaging network as the primary process to
support daily cash settlement also would allow the agreements to be
updated to ensure their uniform compliance with the requirements in
Rule 17Ad-22(e)(22).\17\
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\16\ A key change is that Clearing Banks would not be deemed to
have accepted settlement instructions in the absence of a
communication.
\17\ 17 CFR 240.17Ad-22(e)(22).
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III. Discussion and Commission Findings

Although the Payment, Clearing and Settlement Supervision Act of
2010 (``Act'') does not specify a standard of review for an advance
notice, the stated purpose of the Act is instructive.\18\ The stated
purpose of the Act is to mitigate systemic risk in the financial system
and promote financial stability by, among other things, promoting
uniform risk management standards for SIFMUs and strengthening the
liquidity of SIFMUs.\19\
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\18\ See 12 U.S.C. 5461(b).
\19\ Id.
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Section 805(a)(2) of the Act \20\ authorizes the Commission to
prescribe regulations containing risk-management

[[Page 58232]]

standards for the payment, clearing, and settlement activities of
designated clearing entities engaged in designated activities for which
the Commission is the supervisory agency. Section 805(b) of the Act
\21\ provides the following objectives and principles for the
Commission's risk-management standards prescribed under Section 805(a):
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\20\ 12 U.S.C. 5464(a)(2).
\21\ 12 U.S.C. 5464(b).
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To promote robust risk management;
To promote safety and soundness;
To reduce systemic risks; and
To support the stability of the broader financial system.
Section 805(c) provides, in addition, that the Commission's risk-
management standards may address such areas as risk-management and
default policies and procedures, among others areas.\22\
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\22\ 12 U.S.C. 5464(c).
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The Commission has adopted risk-management standards under Section
805(a)(2) of the Act and the Exchange Act (the ``Clearing Agency
Rules'').\23\ The Clearing Agency Rules require each covered clearing
agency, among other things, to establish, implement, maintain, and
enforce written policies and procedures that are reasonably designed to
meet certain minimum requirements for operations and risk-management
practices on an ongoing basis. As such, it is appropriate for the
Commission to review advance notices for consistency with the
objectives and principles for risk-management standards described in
Section 805(b) of the Act and the Clearing Agency Rules.
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\23\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No.
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11).
See also Securities Exchange Act Release No. 78961 (September 28,
2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing
Agency Standards''). The Commission established an effective date of
December 12, 2016, and a compliance date of April 11, 2017, for the
Covered Clearing Agency Standards. On March 4, 2017, the Commission
granted covered clearing agencies a temporary exemption from
compliance with Rule 17Ad-22(e)(3)(ii) and certain requirements in
Rules 17Ad-22(e)(15)(i) and (ii) until December 31, 2017, subject to
certain conditions. OCC is a ``covered clearing agency'' as defined
in Rule 17Ad-22(a)(5).
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A. Consistency With Section 805(b) of the Payment, Clearing and
Settlement Supervision Act

The Commission believes each proposal in OCC's Advance Notice is
consistent with promoting robust risk management, promoting safety and
soundness, reducing systemic risks, and supporting the stability of the
broader financial system, the stated objectives and principles of
Section 805(b) of the Act.\24\
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\24\ 12 U.S.C. 5464(b).
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First, the Commission believes that OCC's proposal to implement the
SWIFT messaging network as the primary means of transmitting cash
settlement instructions between OCC and each Clearing Bank is
consistent with promoting safety and soundness. The Commission agrees
with OCC's analysis that usage of the SWIFT messaging network would
mitigate risks that arise in the existing cash settlement process due
to manual processing steps and inconsistent practices across OCC's
Clearing Banks. By having an automated and standardized process that
sends automatic messages without requiring Clearing Bank staff members
to log into OCS to manually accept or reject settlement instructions,
the Commission further believes the proposal would enhance the
resiliency, efficiency, and consistency of OCC's cash settlement
process. The Commission therefore believes this specific proposal is
consistent with promoting safety and soundness.
Second, the Commission believes that OCC's proposal to update,
enhance and standardize a uniform set of CSPAs between OCC and each
Clearing Bank would promote robust risk management. Specifically, the
Commission believes that this proposal will reduce the risk of
settlement delay or error that may arise due to each Clearing Bank
operating according to disparate CSPA terms and requirements. The
Commission therefore believes this specific proposal is consistent with
promoting robust risk management.
Consistent with the conclusions discussed above, the Commission
also believes that OCC's proposal is consistent with supporting the
broader stability of the financial system. Specifically, the Commission
believes that promoting the prompt and accurate messaging between OCC
and the Clearing Banks would promote safety and soundness of both OCC
and Clearing Banks. The reduction in errors and delays arising from the
proposed implementation of SWIFT and more harmonized CSPAs would also
enhance the reliability and resilience of OCC's cash settlement process
for Clearing Members, thereby decreasing systemic risks. Accordingly,
the proposed changes would support the stability of the broader
financial system. Thus, the Commission believes that the proposals
contained in the Advance Notice are consistent with the stated
objectives and principles of Section 805(b) of the Act.

B. Consistency With Rule 17Ad-22(e)(22) Under the Exchange Act

The Commission further believes that OCC's proposals in the Advance
Notice are consistent with the Covered Clearing Agency Standards,
specifically Rule 17Ad-22(e)(22) under the Exchange Act.\25\ Rule 17Ad-
22(e)(22) requires each 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.'' \26\
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.'' \27\
Accordingly, the Commission believes that the proposals to expand the
usage of the SWIFT messaging network and standardize the CSPAs with
each Clearing Bank pursuant to the SWIFT messaging network
implementation are consistent with Rule 17Ad-22(e)(22) under the
Exchange Act.
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\25\ 17 CFR 240.17Ad-22(e)(22).
\26\ Id.
\27\ Securities Exchange Act Release No. 78961 (September 28,
2016), 81 FR 70786, 70842 at n. 510 (October 13, 2016).
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IV. Conclusion

It is therefore noticed, pursuant to Section 806(e)(1)(G) of the
Payment, Clearing and Settlement Supervision Act,\28\ that the
Commission does not object to Advance Notice (SR-OCC-2017-805) and that
OCC is authorized to implement the proposed change.
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\28\ 12 U.S.C. 5465(e)(1)(G).

By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-26554 Filed 12-8-17; 8:45 am]
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