Self-Regulatory Organizations; the Options Clearing Corporation; Notice of No Objection to Advance Notice Concerning Liquidity for Same-Day Settlement, 59685-59687 [2017-27112]
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Federal Register / Vol. 82, No. 240 / Friday, December 15, 2017 / Notices
to change the parenthetical regarding
the OTC Equity Securities discount in
paragraph (b)(2) of the proposed fee
schedule from ‘‘with a discount for
Equity ATSs exclusively trading OTC
Equity Securities based on the average
shares per trade ratio between NMS
Stocks and OTC Equity Securities’’ to
‘‘with a discount for OTC Equity
Securities market share of Equity ATSs
trading OTC Equity Securities based on
the average shares per trade ratio
between NMS Stocks and OTC Equity
Securities.’’
III. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposal, as
amended by Amendment No. 1 and
Amendment No. 2, is consistent with
the Act. Comments may be submitted by
any of the following methods:
sradovich on DSK3GMQ082PROD with NOTICES
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–
CBOE–2017–040 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–CBOE–2017–040. 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 website (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 website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
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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–CBOE–2017–040, and
should be submitted on or before
January 5, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.26
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017–26995 Filed 12–14–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82296; File No. SR–OCC–
2017–806]
Self-Regulatory Organizations; the
Options Clearing Corporation; Notice
of No Objection to Advance Notice
Concerning Liquidity for Same-Day
Settlement
December 12, 2017.
The Options Clearing Corporation
(‘‘OCC’’) filed on October 13, 2017 with
the Securities and Exchange
Commission (‘‘Commission’’) advance
notice SR–OCC–2017–806 (‘‘Advance
Notice’’) pursuant to Section 806(e)(1) of
Title VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act,
entitled the Payment, Clearing and
Settlement Supervision Act of 2010
(‘‘Clearing Supervision Act’’) 1 and Rule
19b–4(n)(1)(i) under the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 2 to modify the tools it has
available to address the risks of liquidity
shortfalls when OCC faces a liquidity
need to meet its same-day settlement
obligations resulting from the failure of
a bank or securities or commodities
clearing organization (‘‘Settlement
Entity’’) to achieve daily settlement. The
Advance Notice was published for
comment in the Federal Register on
November 13, 2017.3 The Commission
has not received any comments on the
Advance Notice to date. This
26 17
CFR 200.30–3(a)(12).
U.S.C. 5465(e)(1).
2 17 CFR 240.19b–4(n)(1)(i).
3 SR–OCC–2017–806. Securities Exchange Act
Release No. 82056 (Nov. 13, 2017) 82 FR 54430
(Nov. 17, 2017). OCC also filed a proposed rule
change with the Commission in connection with
the proposed change. See Securities Exchange Act
Release No. 81956 (Oct. 26, 2017), 82 FR 50705
(Nov. 1, 2017) (SR–OCC–2017–017).
1 12
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59685
publication serves as notice of no
objection to the Advance Notice.
I. Background
OCC filed this Advance Notice in
connection with its proposed change to
modify the tools available to OCC to
provide a mechanism for addressing the
risks of liquidity shortfalls, specifically,
in the extraordinary situation where
OCC faces a liquidity need to meet its
same-day settlement obligations
resulting from a Settlement Entity’s
failure to achieve daily settlement.
OCC’s By-Laws currently grant OCC
the authority to borrow against its
Clearing Fund where a Settlement
Entity fails to make timely settlement
with OCC due to the bankruptcy,
insolvency, resolution, suspension of
operations or similar event of such
Settlement Entity.4 The Advance Notice
seeks to expand this borrowing
authority to circumstances relatively
less severe than bankruptcy, insolvency,
or a similar event to include a
temporary failure of a Settlement Entity
to achieve daily settlement.
Specifically, Article VIII, Section 5(e)
of OCC’s By-Laws provides OCC with
the authority to borrow against the
Clearing Fund in two circumstances.
First, the By-Laws provide OCC the
authority to borrow where OCC ‘‘deems
it necessary or advisable to borrow or
otherwise obtain funds from third
parties in order to meet obligations
arising out of the default or suspension
of a Clearing Member or any action
taken by the Corporation in connection
therewith pursuant to Chapter XI of the
Rules or otherwise.’’ Second, the ByLaws provide OCC the authority to
borrow against the Clearing Fund where
OCC ‘‘sustains a loss reimbursable out
of the Clearing Fund pursuant to
[Article VIII, Section 5(b) of OCC’s ByLaws] but [OCC] elects to borrow or
otherwise obtain funds from third
parties in lieu of immediately charging
such loss to the Clearing Fund.’’ In
order for a loss to be reimbursable out
of the Clearing Fund under Article VIII,
Section 5(b) of OCC’s By-Laws, the loss
must arise from a situation in which any
Settlement Entity has failed ‘‘to perform
any obligation to [OCC] when due
because of its bankruptcy, insolvency,
receivership, suspension of operations,
or because of any similar event.’’ 5
Under either of the circumstances
above, OCC is authorized to borrow
4 OCC
By-Laws, Article VIII, Section 5.
the extent that a loss resulting from any of
the events referred to in Article VIII, Section 5(b)
is recoverable out of the Clearing Fund pursuant to
Article VIII, Section 5(a), the provisions of Article
VIII, Section 5(a) control and render the provisions
of Article VIII, Section 5(b) inapplicable.
5 To
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Federal Register / Vol. 82, No. 240 / Friday, December 15, 2017 / Notices
against the Clearing Fund for a period
not to exceed 30 days, and during this
time, the borrowing would not affect the
amount or timing of any charges
otherwise required to be made against
the Clearing Fund pursuant to Article
VIII, Section 5 of the By-Laws. However,
if any part of the borrowing remains
outstanding after 30 days, then at the
close of business on the 30th day (or the
first Business Day thereafter) the
amount must be considered an actual
loss to the Clearing Fund, and OCC
must immediately allocate such loss
among its Clearing Members in
accordance with Article VIII, Section 5.
II. Description of the Advance Notice
sradovich on DSK3GMQ082PROD with NOTICES
A. Proposed Change To Expand
Borrowing Authority
The Advance Notice seeks to expand
OCC’s authority to borrow against its
Clearing Fund to instances where a
Settlement Entity suffers an event
relatively less extreme than a
bankruptcy, insolvency, or similar
event, but is still temporarily unable to
timely make daily settlement with OCC.
Such an event might include a scenario
where the ordinary operations of a
settlement bank are disrupted in a
manner that temporarily prohibits the
bank from timely effecting settlement
payments in accordance with OCC’s
daily settlement cycle. OCC believes
that such authority would only be used
in extraordinary circumstances, and any
funds obtained from any such
transaction could only be used for the
stated purpose of satisfying a need for
liquidity for same-day settlement.
Pursuant to the proposed change, any
ability to borrow under this expanded
authority would not exceed thirty (30)
days. During this period, the funds
obtained would not be deemed to be
charges against the Clearing Fund and
would not affect the amount or timing
of any charges otherwise required to be
made against the clearing fund under
Article VIII of OCC’s By-Laws.6 Should
the borrowing unexpectedly remain
outstanding after thirty (30) days, at the
close of business on the 30th day (or the
first Business Day thereafter), the
amount outstanding would be
considered an actual loss to the Clearing
Fund. However, OCC would also have
discretionary authority to declare a
borrowing outstanding for less than
thirty (30) days as an actual loss
chargeable against the Clearing Fund to
6 Assets contained in the Clearing Fund,
including those assets pledged by OCC pursuant to
its authority under this proposed expansion of
borrowing authority, would remain in OCC’s
possession.
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Jkt 244001
be collected from Clearing Members.7 If
the amount outstanding becomes an
actual loss to the Clearing Fund, OCC,
in accordance with its By-Laws, would
then charge all of its Clearing Members
to make pro rata contributions to the
Clearing Fund to cover the deficit
arising from the loss.
B. Proposed Change to OCC’s By-Laws
To implement the proposed change,
OCC proposed to amend Sections 1(a),
5(b) and 5(e) of Article VIII of its ByLaws to give effect to the expanded
borrowing authority. First, Article VIII,
Section 5(e) of the By-Laws would be
amended to permit OCC to borrow
against the Clearing Fund if it
reasonably believes such borrowing is
necessary to meet its liquidity needs for
same-day settlement as a result of the
failure of any Settlement Entity to
achieve daily settlement. Second,
Article VIII, Section 1(a) of the By-Laws
would be amended to include
conforming changes stating that the
purpose of the Clearing Fund includes
borrowing against the Clearing Fund as
permitted under Article VIII Section
5(e).
Next, Article VIII, Section 5(b) of the
By-Laws would be amended to include
conforming changes that would declare
that any borrowing remaining
outstanding for less than 30 days may be
considered, in OCC’s discretion, an
actual loss to the Clearing Fund to be
charged proportionately against all
Clearing Members’ computed
contributions. Any borrowing remaining
outstanding on the 30th day shall be
considered an actual loss to the Clearing
Fund and the amount of any such loss
shall be charged proportionately against
all Clearing Members’ computed
contributions to the Clearing Fund as
fixed at the time.
7 OCC states that such discretionary authority
could be exercised in a circumstance where,
depending on the size of the borrowing, OCC must
ensure that it maintains financial resources
necessary to meet a ‘‘Cover 1’’ liquidity resource
standard. OCC must establish, implement, maintain
and enforce written policies and procedures
reasonably designed to, as applicable, effectively
identify, measure, monitor, and manage its credit
exposures to participants and those arising from its
payment, clearing, and settlement processes,
including by maintaining sufficient financial
resources to cover its credit exposure to each
participant fully with a high degree of confidence,
and, to the extent not already maintained pursuant
to the foregoing, maintaining additional financial
resources at the minimum to enable it to cover a
wide range of foreseeable stress scenarios that
include, but are not limited to, the ‘‘default of the
participant family that would potentially cause the
largest aggregate credit exposure for the [CCA] in
extreme but plausible market conditions.’’ 17 CFR
240.17Ad–22(e)(4)(iii).
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III. Discussion and Commission
Findings
Although the Clearing Supervision
Act does not specify a standard of
review for an advance notice, its stated
purpose is instructive.8 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 (‘‘SIFMUs’’)
and strengthening the liquidity of
SIFMUs.9
Section 805(a)(2) of the Clearing
Supervision Act 10 authorizes the
Commission to prescribe regulations
containing risk-management 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 Clearing Supervision Act 11
provides the following objectives and
principles for the Commission’s riskmanagement 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.12
The Commission has adopted riskmanagement standards under Section
805(a)(2) of the Clearing Supervision
Act and the Exchange Act (the ‘‘Clearing
Agency Rules’’).13 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
8 See
12 U.S.C. 5461(b).
9 Id.
10 12
U.S.C. 5464(a)(2).
U.S.C. 5464(b).
12 12 U.S.C. 5464(c).
13 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).
11 12
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Federal Register / Vol. 82, No. 240 / Friday, December 15, 2017 / Notices
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 riskmanagement standards described in
Section 805(b) of the Clearing
Supervision Act and the Clearing
Agency Rules.
A. Consistency With Section 805(b) of
the Clearing Supervision Act
The Commission believes the
Advance Notice proposal is consistent
with the stated objectives and principles
of Section 805(b) of the Clearing
Supervision Act.14 Specifically, the
Commission believes that the changes
proposed in the Advance Notice are
consistent with promoting robust risk
management in the area of liquidity risk,
as well as enhancing safety and
soundness across the broader financial
system.
The Commission believes that the
expanded authority proposed by OCC
under the Advance Notice would
enhance OCC’s ability to access liquid
resources that, in turn, would allow
OCC to continue to meet its settlement
obligations to its Clearing Members in a
timely fashion, thereby promoting
robust liquidity risk management at
OCC. The Commission notes that OCC’s
By-Laws already grant OCC the
authority to borrow against the Clearing
Fund to manage the bankruptcy,
insolvency, receivership, suspension of
operations or similar event of a
Settlement Entity.15 The proposed
change would therefore constitute a
limited expansion of that authority to
relatively less extreme scenarios that
nevertheless temporarily prevent a
Settlement Entity from achieving daily
settlement. While the Commission notes
that this expansion of OCC’s authority
to use the Clearing Fund potentially
expands that range of scenarios where
OCC might have to use Clearing Fund
resources, the Commission believes that
the ability of OCC management to
exercise its discretion to either borrow
against the Clearing Fund or utilize
some other tool would permit OCC to
14 12
U.S.C. 5464(b).
Commission previously issued a Notice of
No Objection to OCC’s Advance Notice Proposal to
Enter Into a New Credit Facility Agreement, which
involved a replacement of a revolving credit
facility. See Securities Exchange Act Release No.
81058 (June 30, 2017), 82 FR 31371 (July 6, 2017)
(SR–OCC–2017–803). The Commission believes that
the present Advance Notice is consistent with the
new credit facility agreement, which provides OCC
with the ability to borrow to address reasonably
anticipated same-day settlement obligations,
including but not limited to, the failure of any
Settlement Entity to achieve daily settlement.
sradovich on DSK3GMQ082PROD with NOTICES
15 The
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consider and effectively manage such
scenarios based on the facts and
circumstances present.16
Further, the Commission believes that
the Advance Notice is consistent with
reducing systemic risks and promoting
the stability of the broader financial
system. The Commission believes that
expanding OCC’s authority to use the
Clearing Fund in the manner proposed
by the Advance Notice increases the
probability of OCC being able to meet its
settlement obligations to its Clearing
Members. The ability to use the Clearing
Fund to obtain liquid resources to cover
a liquidity gap that arises where a
Settlement Entity is unable to perform
enhances OCC’s ability to contain losses
and liquidity pressures that otherwise
might cause financial distress to OCC or
its Clearing Members, thereby
enhancing safety and soundness across
the broader financial system. The
Commission believes that the Advance
Notice is designed to bolster OCC’s
ability to meet its settlement obligations
even if a Settlement Entity temporarily
fails to achieve daily settlement with
OCC, thereby reducing the risk of loss
contagion and enhancing the ability of
OCC and its Clearing Members to
provide reliability, stability, and safety
to the financial markets that they serve.
Accordingly, the Commission believes
that the proposal could help to reduce
systemic risk and support the stability
of the broader financial system,
consistent with Section 805(b) of the
Clearing Supervision Act.
B. Consistency With Rule 17Ad–
22(e)(7)(viii) Under the Exchange Act
The Commission further believes that
the proposed change is consistent with
Rule 17 Ad–22(e)(7)(viii), which
requires that a covered clearing agency
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to, as applicable,
effectively measure, monitor, and
manage liquidity risk that arises in or is
borne by the covered clearing agency,
including measuring, monitoring, and
managing its settlement and funding
flows on an ongoing and timely basis,
and its use of intraday liquidity by, at
a minimum, addressing foreseeable
liquidity shortfalls that would not be
covered by its liquid resources and seek
to avoid unwinding, revoking, or
delaying the same-day settlement of
payment obligations.17
The Commission believes that the
Advance Notice is designed to improve
OCC’s ability to address a temporary
liquidity need resulting from the failure
of a Settlement Entity to achieve timely
settlement. The Commission believes
that the proposed change is designed to
provide OCC with additional tools to
address a foreseeable, temporary
liquidity shortfall to prevent the
unwinding, revoking, or delaying of
same-day settlement should that
scenario materialize, and is therefore
consistent with Rule 17Ad–22(e)(7)(viii)
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,18 that the Commission does not
object to Advance Notice (SR–OCC–
2017–806) and that OCC is authorized
to implement the proposed change.19
By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2017–27112 Filed 12–14–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82290; File No. SR–
NASDAQ–2017–123]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing of Proposed Rule Change To
List and Trade the Shares of the
Causeway International Value
NextSharesTM and the Causeway
Global Value NextSharesTM
December 11, 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, The Nasdaq Stock Market LLC
(‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
18 12
U.S.C. 5465(e)(1)(G).
is authorized to implement the proposed
change as of the date of this Notice of No Objection
or the date of an Order by the Commission
approving the proposed rule change filed in
connection with this Advance Notice, SR–OCC–
2017–017, whichever is later.
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
19 OCC
16 For example, OCC could use existing authority
to expand the settlement window under OCC Rule
505, rather than borrowing against the Clearing
Fund, should it determine that this tool would be
more appropriate in light of other demands on
Clearing Fund resources.
17 17 CFR 240.17Ad–22(e)(7)(viii).
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]]>Agencies
[Federal Register Volume 82, Number 240 (Friday, December 15, 2017)]
[Notices]
[Pages 59685-59687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27112]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82296; File No. SR-OCC-2017-806]
Self-Regulatory Organizations; the Options Clearing Corporation;
Notice of No Objection to Advance Notice Concerning Liquidity for Same-
Day Settlement
December 12, 2017.
The Options Clearing Corporation (``OCC'') filed on October 13,
2017 with the Securities and Exchange Commission (``Commission'')
advance notice SR-OCC-2017-806 (``Advance Notice'') pursuant to Section
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, entitled the Payment, Clearing and Settlement
Supervision Act of 2010 (``Clearing Supervision Act'') \1\ and Rule
19b-4(n)(1)(i) under the Securities Exchange Act of 1934 (``Exchange
Act'') \2\ to modify the tools it has available to address the risks of
liquidity shortfalls when OCC faces a liquidity need to meet its same-
day settlement obligations resulting from the failure of a bank or
securities or commodities clearing organization (``Settlement Entity'')
to achieve daily settlement. The Advance Notice was published for
comment in the Federal Register on November 13, 2017.\3\ 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).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ SR-OCC-2017-806. Securities Exchange Act Release No. 82056
(Nov. 13, 2017) 82 FR 54430 (Nov. 17, 2017). OCC also filed a
proposed rule change with the Commission in connection with the
proposed change. See Securities Exchange Act Release No. 81956 (Oct.
26, 2017), 82 FR 50705 (Nov. 1, 2017) (SR-OCC-2017-017).
---------------------------------------------------------------------------
I. Background
OCC filed this Advance Notice in connection with its proposed
change to modify the tools available to OCC to provide a mechanism for
addressing the risks of liquidity shortfalls, specifically, in the
extraordinary situation where OCC faces a liquidity need to meet its
same-day settlement obligations resulting from a Settlement Entity's
failure to achieve daily settlement.
OCC's By-Laws currently grant OCC the authority to borrow against
its Clearing Fund where a Settlement Entity fails to make timely
settlement with OCC due to the bankruptcy, insolvency, resolution,
suspension of operations or similar event of such Settlement Entity.\4\
The Advance Notice seeks to expand this borrowing authority to
circumstances relatively less severe than bankruptcy, insolvency, or a
similar event to include a temporary failure of a Settlement Entity to
achieve daily settlement.
---------------------------------------------------------------------------
\4\ OCC By-Laws, Article VIII, Section 5.
---------------------------------------------------------------------------
Specifically, Article VIII, Section 5(e) of OCC's By-Laws provides
OCC with the authority to borrow against the Clearing Fund in two
circumstances. First, the By-Laws provide OCC the authority to borrow
where OCC ``deems it necessary or advisable to borrow or otherwise
obtain funds from third parties in order to meet obligations arising
out of the default or suspension of a Clearing Member or any action
taken by the Corporation in connection therewith pursuant to Chapter XI
of the Rules or otherwise.'' Second, the By-Laws provide OCC the
authority to borrow against the Clearing Fund where OCC ``sustains a
loss reimbursable out of the Clearing Fund pursuant to [Article VIII,
Section 5(b) of OCC's By-Laws] but [OCC] elects to borrow or otherwise
obtain funds from third parties in lieu of immediately charging such
loss to the Clearing Fund.'' In order for a loss to be reimbursable out
of the Clearing Fund under Article VIII, Section 5(b) of OCC's By-Laws,
the loss must arise from a situation in which any Settlement Entity has
failed ``to perform any obligation to [OCC] when due because of its
bankruptcy, insolvency, receivership, suspension of operations, or
because of any similar event.'' \5\
---------------------------------------------------------------------------
\5\ To the extent that a loss resulting from any of the events
referred to in Article VIII, Section 5(b) is recoverable out of the
Clearing Fund pursuant to Article VIII, Section 5(a), the provisions
of Article VIII, Section 5(a) control and render the provisions of
Article VIII, Section 5(b) inapplicable.
---------------------------------------------------------------------------
Under either of the circumstances above, OCC is authorized to
borrow
[[Page 59686]]
against the Clearing Fund for a period not to exceed 30 days, and
during this time, the borrowing would not affect the amount or timing
of any charges otherwise required to be made against the Clearing Fund
pursuant to Article VIII, Section 5 of the By-Laws. However, if any
part of the borrowing remains outstanding after 30 days, then at the
close of business on the 30th day (or the first Business Day
thereafter) the amount must be considered an actual loss to the
Clearing Fund, and OCC must immediately allocate such loss among its
Clearing Members in accordance with Article VIII, Section 5.
II. Description of the Advance Notice
A. Proposed Change To Expand Borrowing Authority
The Advance Notice seeks to expand OCC's authority to borrow
against its Clearing Fund to instances where a Settlement Entity
suffers an event relatively less extreme than a bankruptcy, insolvency,
or similar event, but is still temporarily unable to timely make daily
settlement with OCC. Such an event might include a scenario where the
ordinary operations of a settlement bank are disrupted in a manner that
temporarily prohibits the bank from timely effecting settlement
payments in accordance with OCC's daily settlement cycle. OCC believes
that such authority would only be used in extraordinary circumstances,
and any funds obtained from any such transaction could only be used for
the stated purpose of satisfying a need for liquidity for same-day
settlement.
Pursuant to the proposed change, any ability to borrow under this
expanded authority would not exceed thirty (30) days. During this
period, the funds obtained would not be deemed to be charges against
the Clearing Fund and would not affect the amount or timing of any
charges otherwise required to be made against the clearing fund under
Article VIII of OCC's By-Laws.\6\ Should the borrowing unexpectedly
remain outstanding after thirty (30) days, at the close of business on
the 30th day (or the first Business Day thereafter), the amount
outstanding would be considered an actual loss to the Clearing Fund.
However, OCC would also have discretionary authority to declare a
borrowing outstanding for less than thirty (30) days as an actual loss
chargeable against the Clearing Fund to be collected from Clearing
Members.\7\ If the amount outstanding becomes an actual loss to the
Clearing Fund, OCC, in accordance with its By-Laws, would then charge
all of its Clearing Members to make pro rata contributions to the
Clearing Fund to cover the deficit arising from the loss.
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\6\ Assets contained in the Clearing Fund, including those
assets pledged by OCC pursuant to its authority under this proposed
expansion of borrowing authority, would remain in OCC's possession.
\7\ OCC states that such discretionary authority could be
exercised in a circumstance where, depending on the size of the
borrowing, OCC must ensure that it maintains financial resources
necessary to meet a ``Cover 1'' liquidity resource standard. OCC
must establish, implement, maintain and enforce written policies and
procedures reasonably designed to, as applicable, effectively
identify, measure, monitor, and manage its credit exposures to
participants and those arising from its payment, clearing, and
settlement processes, including by maintaining sufficient financial
resources to cover its credit exposure to each participant fully
with a high degree of confidence, and, to the extent not already
maintained pursuant to the foregoing, maintaining additional
financial resources at the minimum to enable it to cover a wide
range of foreseeable stress scenarios that include, but are not
limited to, the ``default of the participant family that would
potentially cause the largest aggregate credit exposure for the
[CCA] in extreme but plausible market conditions.'' 17 CFR 240.17Ad-
22(e)(4)(iii).
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B. Proposed Change to OCC's By-Laws
To implement the proposed change, OCC proposed to amend Sections
1(a), 5(b) and 5(e) of Article VIII of its By-Laws to give effect to
the expanded borrowing authority. First, Article VIII, Section 5(e) of
the By-Laws would be amended to permit OCC to borrow against the
Clearing Fund if it reasonably believes such borrowing is necessary to
meet its liquidity needs for same-day settlement as a result of the
failure of any Settlement Entity to achieve daily settlement. Second,
Article VIII, Section 1(a) of the By-Laws would be amended to include
conforming changes stating that the purpose of the Clearing Fund
includes borrowing against the Clearing Fund as permitted under Article
VIII Section 5(e).
Next, Article VIII, Section 5(b) of the By-Laws would be amended to
include conforming changes that would declare that any borrowing
remaining outstanding for less than 30 days may be considered, in OCC's
discretion, an actual loss to the Clearing Fund to be charged
proportionately against all Clearing Members' computed contributions.
Any borrowing remaining outstanding on the 30th day shall be considered
an actual loss to the Clearing Fund and the amount of any such loss
shall be charged proportionately against all Clearing Members' computed
contributions to the Clearing Fund as fixed at the time.
III. Discussion and Commission Findings
Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, its stated purpose is instructive.\8\
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 (``SIFMUs'') and
strengthening the liquidity of SIFMUs.\9\
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\8\ See 12 U.S.C. 5461(b).
\9\ Id.
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Section 805(a)(2) of the Clearing Supervision Act \10\ authorizes
the Commission to prescribe regulations containing risk-management
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
Clearing Supervision Act \11\ provides the following objectives and
principles for the Commission's risk-management standards prescribed
under Section 805(a):
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\10\ 12 U.S.C. 5464(a)(2).
\11\ 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.\12\
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\12\ 12 U.S.C. 5464(c).
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The Commission has adopted risk-management standards under Section
805(a)(2) of the Clearing Supervision Act and the Exchange Act (the
``Clearing Agency Rules'').\13\ 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
[[Page 59687]]
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 Clearing
Supervision Act and the Clearing Agency Rules.
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\13\ 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 Clearing Supervision Act
The Commission believes the Advance Notice proposal is consistent
with the stated objectives and principles of Section 805(b) of the
Clearing Supervision Act.\14\ Specifically, the Commission believes
that the changes proposed in the Advance Notice are consistent with
promoting robust risk management in the area of liquidity risk, as well
as enhancing safety and soundness across the broader financial system.
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\14\ 12 U.S.C. 5464(b).
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The Commission believes that the expanded authority proposed by OCC
under the Advance Notice would enhance OCC's ability to access liquid
resources that, in turn, would allow OCC to continue to meet its
settlement obligations to its Clearing Members in a timely fashion,
thereby promoting robust liquidity risk management at OCC. The
Commission notes that OCC's By-Laws already grant OCC the authority to
borrow against the Clearing Fund to manage the bankruptcy, insolvency,
receivership, suspension of operations or similar event of a Settlement
Entity.\15\ The proposed change would therefore constitute a limited
expansion of that authority to relatively less extreme scenarios that
nevertheless temporarily prevent a Settlement Entity from achieving
daily settlement. While the Commission notes that this expansion of
OCC's authority to use the Clearing Fund potentially expands that range
of scenarios where OCC might have to use Clearing Fund resources, the
Commission believes that the ability of OCC management to exercise its
discretion to either borrow against the Clearing Fund or utilize some
other tool would permit OCC to consider and effectively manage such
scenarios based on the facts and circumstances present.\16\
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\15\ The Commission previously issued a Notice of No Objection
to OCC's Advance Notice Proposal to Enter Into a New Credit Facility
Agreement, which involved a replacement of a revolving credit
facility. See Securities Exchange Act Release No. 81058 (June 30,
2017), 82 FR 31371 (July 6, 2017) (SR-OCC-2017-803). The Commission
believes that the present Advance Notice is consistent with the new
credit facility agreement, which provides OCC with the ability to
borrow to address reasonably anticipated same-day settlement
obligations, including but not limited to, the failure of any
Settlement Entity to achieve daily settlement.
\16\ For example, OCC could use existing authority to expand the
settlement window under OCC Rule 505, rather than borrowing against
the Clearing Fund, should it determine that this tool would be more
appropriate in light of other demands on Clearing Fund resources.
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Further, the Commission believes that the Advance Notice is
consistent with reducing systemic risks and promoting the stability of
the broader financial system. The Commission believes that expanding
OCC's authority to use the Clearing Fund in the manner proposed by the
Advance Notice increases the probability of OCC being able to meet its
settlement obligations to its Clearing Members. The ability to use the
Clearing Fund to obtain liquid resources to cover a liquidity gap that
arises where a Settlement Entity is unable to perform enhances OCC's
ability to contain losses and liquidity pressures that otherwise might
cause financial distress to OCC or its Clearing Members, thereby
enhancing safety and soundness across the broader financial system. The
Commission believes that the Advance Notice is designed to bolster
OCC's ability to meet its settlement obligations even if a Settlement
Entity temporarily fails to achieve daily settlement with OCC, thereby
reducing the risk of loss contagion and enhancing the ability of OCC
and its Clearing Members to provide reliability, stability, and safety
to the financial markets that they serve. Accordingly, the Commission
believes that the proposal could help to reduce systemic risk and
support the stability of the broader financial system, consistent with
Section 805(b) of the Clearing Supervision Act.
B. Consistency With Rule 17Ad-22(e)(7)(viii) Under the Exchange Act
The Commission further believes that the proposed change is
consistent with Rule 17 Ad-22(e)(7)(viii), which requires that a
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to, as applicable,
effectively measure, monitor, and manage liquidity risk that arises in
or is borne by the covered clearing agency, including measuring,
monitoring, and managing its settlement and funding flows on an ongoing
and timely basis, and its use of intraday liquidity by, at a minimum,
addressing foreseeable liquidity shortfalls that would not be covered
by its liquid resources and seek to avoid unwinding, revoking, or
delaying the same-day settlement of payment obligations.\17\
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\17\ 17 CFR 240.17Ad-22(e)(7)(viii).
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The Commission believes that the Advance Notice is designed to
improve OCC's ability to address a temporary liquidity need resulting
from the failure of a Settlement Entity to achieve timely settlement.
The Commission believes that the proposed change is designed to provide
OCC with additional tools to address a foreseeable, temporary liquidity
shortfall to prevent the unwinding, revoking, or delaying of same-day
settlement should that scenario materialize, and is therefore
consistent with Rule 17Ad-22(e)(7)(viii) 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,\18\ that the
Commission does not object to Advance Notice (SR-OCC-2017-806) and that
OCC is authorized to implement the proposed change.\19\
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\18\ 12 U.S.C. 5465(e)(1)(G).
\19\ OCC is authorized to implement the proposed change as of
the date of this Notice of No Objection or the date of an Order by
the Commission approving the proposed rule change filed in
connection with this Advance Notice, SR-OCC-2017-017, whichever is
later.
By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2017-27112 Filed 12-14-17; 8:45 am]
BILLING CODE 8011-01-P
