Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Amendment No. 1 and Order Approving Proposed Rule Change, as Modified by Amendment No. 1, Related to The Options Clearing Corporation's Trade Acceptance and Novation Rules, 25087-25093 [2018-11611]
Download as PDF
<![CDATA[
Federal Register / Vol. 83, No. 105 / Thursday, May 31, 2018 / Notices
an applicant using the Company name
box, at https://www.sec.gov/search/
search.htm or by calling (202) 551–
8090. An order granting each
application will be issued unless the
SEC orders a hearing.
Interested persons may request a
hearing on any application by writing to
the SEC’s Secretary at the address below
and serving the relevant applicant with
a copy of the request, personally or by
mail. Hearing requests should be
received by the SEC by 5:30 p.m. on
June 19, 2018, and should be
accompanied by proof of service on
applicants, in the form of an affidavit or,
for lawyers, a certificate of service.
Pursuant to Rule 0–5 under the Act,
hearing requests should state the nature
of the writer’s interest, any facts bearing
upon the desirability of a hearing on the
matter, the reason for the request, and
the issues contested. Persons who wish
to be notified of a hearing may request
notification by writing to the
Commission’s Secretary.
ADDRESSES: The Commission: Secretary,
U.S. Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
FOR FURTHER INFORMATION CONTACT:
Shawn Davis, Branch Chief, at (202)
551–6413 or Chief Counsel’s Office at
(202) 551–6821; SEC, Division of
Investment Management, Chief
Counsel’s Office, 100 F Street NE,
Washington, DC 20549–8010.
Alpine Equity Trust [File No. 811–
05684]
amozie on DSK3GDR082PROD with NOTICES1
Alpine Income Trust [File No. 811–
21210]
Alpine Series Trust [File No. 811–
10405]
Summary: Each applicant seeks an
order declaring that it has ceased to be
an investment company. Applicants
transferred their assets to the Aberdeen
Funds and, on May 7, 2018, made final
distributions to their shareholders based
on net asset value. Aggregate expenses
of $704,589 incurred in connection with
the reorganizations were paid by the
applicants’ investment adviser and the
acquiring funds’ investment adviser.
Filing Dates: The applications were
filed on May 11, 2018, and amended on
May 23, 2018.
Applicants’ Addresses: 2500
Westchester Avenue, Suite 215,
Purchase, New York 10577.
on net asset value. No expenses were
incurred in connection with the
liquidation.
Filing Dates: The application was
filed on May 5, 2017, and amended on
May 1, 2018.
Applicant’s Address: Two
International Place, Boston,
Massachusetts 02110.
Compass Strategic Investments Fund
[File No. 811–09021]
Summary: Applicant, a closed-end
investment company, seeks an order
declaring that it has ceased to be an
investment company. Applicant has
never made a public offering of its
securities and does not propose to make
a public offering. Applicant will
continue to operate in reliance on
Section 3(c)(1) or 3(c)(7) of the Act, or
another applicable exclusion or
exemption.
Filing Dates: The application was
filed on April 5, 2018, and amended on
May 18, 2018.
Applicant’s Address: MIO Partners,
Inc, 245 Park Avenue, 13th Floor, New
York, New York 10167.
Partners Income Fund [File No. 811–
06708]
Summary: Applicant, a closed-end
investment company, seeks an order
declaring that it has ceased to be an
investment company. The applicant has
transferred its assets to Compass Special
Situations Fund LLC, and, on November
1, 2006, made a final distribution to its
shareholders based on net asset value.
Expenses of $42,065 incurred in
connection with the reorganization were
paid by the acquiring fund.
Filing Dates: The application was
filed on April 5, 2018, and amended on
May 18, 2018.
Applicant’s Address: MIO Partners,
Inc, 245 Park Avenue, 13th Floor, New
York, New York 10167.
For the Commission, by the Division of
Investment Management, pursuant to
delegated authority.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–11729 Filed 5–30–18; 8:45 am]
BILLING CODE 8011–01–P
Bond Portfolio II [File No. 811–23008]
Summary: Applicant seeks an order
declaring that it has ceased to be an
investment company. On April 21,
2016, applicant made a liquidating
distribution to its shareholders, based
VerDate Sep<11>2014
17:46 May 30, 2018
Jkt 241001
PO 00000
Frm 00122
Fmt 4703
Sfmt 4703
25087
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83321; File No. SR–OCC–
2018–007]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing of Amendment No. 1 and
Order Approving Proposed Rule
Change, as Modified by Amendment
No. 1, Related to The Options Clearing
Corporation’s Trade Acceptance and
Novation Rules
May 24, 2018.
On March 23, 2018, the Options
Clearing Corporation (‘‘OCC’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’),1 and
Rule 19b–4 thereunder,2 proposed rule
change SR–OCC–2018–007. The
proposed rule change was published for
comment in the Federal Register on
April 9, 2018.3 The Commission did not
receive any comments on the proposed
rule change. On April 19, 2018, OCC
filed Amendment No. 1 to the proposed
rule change.4 The Commission is
publishing this notice to solicit
comment on Amendment No. 1 from
interested persons and is approving the
proposed rule change, as modified by
Amendment No. 1.
I. Description of the Proposed Rule
Change 5
OCC proposed to amend OCC’s ByLaws (‘‘By-Laws’’) and Rules to: (1)
Clarify the time at which OCC accepts
and novates 6 the transactions that it
clears; (2) streamline provisions in the
By-Laws and Rules related to trade
reporting and novation; and (3) delete
provisions that apply only to certain
dormant products that OCC no longer
clears and settles or that are no longer
applicable to OCC’s current clearing
processes.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Securities Exchange Act Release No. 82984
(April 3, 2018), 83 FR 15181 (April 9, 2018) (SR–
OCC–2018–007) (‘‘Notice’’).
4 OCC submitted Amendment No. 1 to correct an
error in Exhibit 5B of the Notice, which did not
accurately reflect the text of existing OCC Rule
2202(c) and erroneously contained proposed
changes to that inaccurate text. Amendment No. 1
clarifies that the rule text for existing Rule 2202(c)
would remain unchanged and would not be affected
by the proposed rule change.
5 The subsequent description of the proposed rule
change is substantially excerpted from OCC’s
description in the Notice. See Notice, 83 FR 15181–
15186.
6 In this context, novation is the process through
which OCC is substituted as the buyer to the seller
and the seller to the buyer for each cleared contact.
2 17
E:\FR\FM\31MYN1.SGM
31MYN1
25088
Federal Register / Vol. 83, No. 105 / Thursday, May 31, 2018 / Notices
Background
Acceptance and Novation Timing
Clearly stating the specific time at
which OCC accepts transactions for
clearance and settlement is important to
Clearing Members because it signifies
the time under the By-Laws and Rules
at which the following events occur: (1)
OCC is substituted through novation as
the central counterparty (‘‘CCP’’) to each
Clearing Member that was an initial
party to the transaction; (2) the rights of
the initial Clearing Member parties to
the transaction become solely as against
OCC; and (3) OCC becomes obligated to
each Clearing Member in accordance
with the By-Laws and Rules,7 including
as a guarantor of the settlement
obligations associated with transactions
that OCC accepts and novates.8
Current Acceptance and Novation of
Confirmed Trades
While most trades are functionally
novated upon proper submission to
OCC for clearing, OCC’s current ByLaws and Rules require a user to parse
through a number of provisions and
definitions in various locations to
identify the time at which acceptance
and novation occur. For example, the
term Confirmed Trade 9 is defined to
include all of the products for which
OCC currently provides clearance and
settlement services, with the exception
of certain Stock Loan 10 transactions. A
Confirmed Trade is novated upon OCC’s
acceptance of the trade, but acceptance
is not deemed to occur until a
designated Commencement Time.
Commencement Time is defined
differently for different products that
meet the definition of a Confirmed
Trade, but one section of the By-Laws
(regarding OCC’s obligations) generally
defines it as the time at which OCC
makes available to Clearing Members a
Daily Position Report reflecting the
Confirmed Trade.11 Another section of
the By-Laws (regarding the reporting of
7 See,
e.g., Article VI, Section 5 of the By-Laws.
generally 15 U.S.C. 78q–1; 17 CFR
240.17Ad–22.
9 Under the By-Laws, a Confirmed Trade is
defined as ‘‘a transaction for the purchase, writing,
or sale of a cleared contract, or for the closing out
of a long or short position in a cleared contract, that
is (i) effected on or through the facilities of an
Exchange and submitted to the Corporation for
clearance or (ii) affirmed through the facilities of an
OTC Trade Source and submitted to the
Corporation for clearance.’’
10 See Article I, Section 1.S.(21) of the By-Laws.
The term Stock Loan may refer to either a Hedge
Loan that is part of OCC’s Stock Loan/Hedge
Program or a Market Loan that is part of OCC’s
Market Loan Program. Matters regarding the
acceptance and novation of these products are
addressed separately below.
11 Article VI, Section 5 of the By-Laws. This
typically occurs at the end of each business day.
amozie on DSK3GDR082PROD with NOTICES1
8 See
VerDate Sep<11>2014
17:46 May 30, 2018
Jkt 241001
Confirmed Trades) specifies that this
acceptance is subject to the condition
that the Exchange or OTC Trade Source
on which the transaction occurred has
reported to OCC, during such times as
OCC has prescribed, certain information
regarding the Confirmed Trade and that
such information passes OCC’s initial
validation checks.12
Under yet another section of the ByLaws, OCC generally has no right (other
than regarding certain types of
Confirmed Trades discussed below) to
reject a Confirmed Trade due to the
failure of the Purchasing Clearing
Member to pay any amount due to OCC
at or before the settlement time.13 This
means that transactions in most
products that are Confirmed Trades will
inevitably be accepted for clearing and
novated at the Commencement Time
simply due to the passage of time.14
OCC proposed the changes herein to
reflect this reality.
Different Commencement Times and
Rejection Rights for Certain Confirmed
Trades
Certain categories of Confirmed
Trades are not subject to the general
Commencement Time described above,
and OCC retains certain rights to reject
such transactions. Specifically, Article
VI, Section 5 of the By-Laws excludes
the products described below from the
general Commencement Time, while
setting forth the following alternate
definitions of Commencement Time:
(1) For futures issued in exchange-forphysical transactions,15 block trades,16
or other trades designated as noncompetitively executed: The time after
the transaction is reported to OCC that
OCC receives the first variation
settlement payment; 17
(2) For cross-rate FX options and FX
index options: The time that is three
12 Article
VI, Section 7 of the By-Laws.
Article VI, Section 8 of the By-Laws.
14 An Exchange or OTC Trade Source, however,
may instruct OCC to disregard a transaction that it
previously reported as a Confirmed Trade ‘‘because
of a subsequent determination that (i) the trade
information submitted by the Purchasing Clearing
Member and Selling Clearing Member did not agree,
(ii) the trade information did not contain all the
information required by the Corporation as set forth
in the By-Laws and Rules, or (iii) new or revised
trade information was required to properly clear the
transaction.’’ See Article VI, Section 7 of the ByLaws. This authority would be preserved and
relocated into OCC’s Rules in connection with the
proposed changes described herein.
15 An exchange-for-physical transaction (or
‘‘EFP’’) is a transaction between two parties in
which a futures contract on a commodity or
security is exchanged for the actual physical good.
16 A block trade is a trade involving a large
number of shares being traded at an arranged price
between parties, outside of the open markets, in
order to lessen the impact of such a large trade
being made public.
17 See Article XII, Section 7 of the By-Laws.
13 See
PO 00000
Frm 00123
Fmt 4703
Sfmt 4703
hours following the settlement time of
the Confirmed Trade in which such
contract was purchased; 18 and
(3) For OTC Options (other than
Backloaded OTC Options): The time
when a report of OCC’s acceptance is
made available to Clearing Members
through OCC’s clearing system.19
That same section of the By-Laws
specifies that, for Backloaded OTC
Options, the transaction is not accepted
for clearing until the Selling Clearing
Member has met its regular morning
settlement obligation on the business
day following the reporting of the trade
to OCC.20
In addition to the separate
Commencement Times for these types of
Confirmed Trades, OCC also currently
has certain authority to reject such
trades due to the failure of the
Purchasing Clearing Member to pay an
amount due to OCC at or before the
applicable settlement time.21 In contrast
to most other types of Confirmed
Trades, this means that OCC continues
to have authority to reject these
transactions even after they are properly
submitted for clearing. OCC’s authority
to reject these types of Confirmed
Trades arises under the following
circumstances:
(1) For futures issued in exchange-forphysical transactions, block trades, or
other trades designated as noncompetitively executed: In the event
OCC fails to receive any variation
payment due in the accounts of the
Clearing Members; 22
(2) For cross-rate FX options and FX
index options: In the event OCC fails to
receive from the Purchasing Clearing
Member premiums denominated in the
proper trading currency in the account
in which the transaction is effected; 23
and
(3) For Backloaded OTC Options: In
the event the Selling Clearing Member
does not meet its regular morning
settlement obligation on the business
day following the reporting of the trade
to OCC.24
18 See Articles XX, Section 1 and XXIII, Section
1 of the By-Laws.
19 See Article VI, Section 5 of the By-Laws.
20 Id.
21 See generally Article VI, Section 8 of the ByLaws identifying these exceptions.
22 See Article XII, Section 7 of the By-Laws.
23 See Article XX, Section 5, Article XXIII,
Section 7 of the By-Laws.
24 See Article VI, Section 8 of the By-Laws. In
addition, OCC will not accept a Backloaded OTC
Option for clearing if OCC receives it from the OTC
Trade Source after 4 p.m. Central on the business
day that is four business days prior to its expiration.
E:\FR\FM\31MYN1.SGM
31MYN1
Federal Register / Vol. 83, No. 105 / Thursday, May 31, 2018 / Notices
Proposed Changes to Acceptance and
Novation Rules
amozie on DSK3GDR082PROD with NOTICES1
Proposed Uniform Acceptance and
Novation Timing for Nearly All
Confirmed Trades
To provide greater certainty and
clarity to Clearing Members and other
interested parties regarding the
acceptance and novation timing for
transactions that OCC clears and settles,
OCC proposed to amend the substance
of Article VI, Section 5 of the By-Laws 25
to set forth a uniform acceptance and
novation time for nearly all Confirmed
Trades. As described in more detail
below, OCC would retain exceptions
from the uniform acceptance and
novation time for Confirmed Trades in
Backloaded OTC Options and
Confirmed Trades in futures issued in
exchange-for-physical transactions,
block trades, or other trades designated
as non-competitively executed.
To accomplish this, OCC proposed to
eliminate the concept of
Commencement Time and instead deem
nearly all Confirmed Trades to be
accepted and simultaneously novated
when they are reported to OCC and the
related position information has been
recorded in OCC’s clearing system
(which occurs on a real-time basis).26
This would, however, be subject to the
condition that the required transaction
information reported to OCC by the
Exchange or OTC Trade Source first
passes OCC’s validation procedures 27
and is provided to OCC at such time as
OCC prescribes. This change is intended
to provide a more definitive indication
of the point after which OCC no longer
has authority to reject such transactions
for clearing.28 Eliminating the concept
of Commencement Time also
necessitates deleting the term from the
defined terms in Article I, Section 1 of
the By-Laws and replacing all references
to Commencement Time with references
to the time at which OCC accepts a
transaction for clearing. To do this, OCC
25 As described below under the heading
Reorganization, OCC also proposes to relocate the
provisions currently in Article VI, Section 5 of the
By-Laws to Rules 401 and 404.
26 OCC notes that upon acceptance and recording
of position information in OCC’s ENCORE clearing
system, Clearing Members have the ability to see
the trades they are responsible for via position
information screens in the ENCORE system and
through real-time messaging.
27 All inbound trades to OCC are subject to coded
validation of the required fields for trades. These
fields contain the critical details of the trade,
including but not limited to the trade source,
symbol, expiration, strike, call or put, quantity,
price, and Clearing Member details of both sides of
the trade.
28 As described above, an Exchange or OTC Trade
Source would continue to have the authority to
instruct OCC to disregard a Confirmed Trade. See
supra 10.
VerDate Sep<11>2014
17:46 May 30, 2018
Jkt 241001
proposed to amend the following
provisions of its By-Laws: Article I
(definition of ‘‘American; Americanstyle’’); Sections 5, 6, and 12 of Article
VI; 29 and Section 7 of Article XII.
OCC also proposed to amend Rule 401
to clarify the trade information required
to be submitted by the participant
Exchange to OCC as a condition to
acceptance and novation. For options
transactions, amended Rule 401(a)(1)(i)
would provide that these terms include:
(a) The identity of the Purchasing
Clearing Member and Writing Clearing
Member to the transaction; (b) the
clearing date; (c) the transaction time;
(d) the trade source; (e) the trade
quantity; (f) the trade price; (g) the
security type; (h) the ticker symbol; (i)
the series/contract date; (j) whether the
trade is a put or a call; (k) the strike
price; (l) whether the trade is a purchase
or a sale; (m) the account type; (n) the
allocation indicator, if applicable; (o)
the CMTA indicator, if applicable; (p)
the Give-Up Clearing Member, if
applicable; (q) the trade type, including,
in the case of futures options, whether
the transaction is a block trade,
exchange-for-physical, or any other
trade designated by the futures market
or security futures market reporting the
trade as a non-competitively executed
trade; (r) in the case of OTC options
transactions in a securities customers’
account, a unique customer ID for the
customer for whom the trade was
executed; and (s) in the case of OTC
options, such other variable terms as
provided in Section 6 of Article XVII of
the By-Laws. In addition, new Rule
401(a)(1)(ii) would provide that OCC
may also request certain optional trade
information that is not required as a
condition for acceptance.30
For futures transactions, Rule
401(a)(2)(i) would be amended to
provide that the required terms for
acceptance and novation include: (a)
The identity of the Purchasing Clearing
Member and the Selling Clearing
Member to the transaction; (b) the
clearing date; (c) the transaction time;
(d) the trade source; (e) the trade
quantity; (f) the trade price; (g) the
security type; (h) the ticker symbol; (i)
the series/contract date; (j) whether the
trade is a purchase or a sale; (k) the
account type; (l) the allocation
indicator, if applicable; (m) the CMTA
29 As described in more detail below, OCC
proposes to relocate Article VI, Sections 5 and 6 to
Rules 401, 404, and 405 to help streamline and
reorganize provisions addressing trade reporting
and novation.
30 OCC makes available to its participant
Exchanges and Clearing Members the complete list
of required and optional trade information in an
inbound reference guide for Exchange trades.
PO 00000
Frm 00124
Fmt 4703
Sfmt 4703
25089
indicator, if applicable; (n) the Give-Up
Clearing Member, if applicable; and (o)
whether the trade is an exchange-forphysical or block trade or any other
trade designated by the futures market
or security futures market reporting the
trade as a non-competitively executed
trade. In addition, new Rule 401(a)(2)(ii)
would provide that OCC may also
request certain optional trade
information that is not required as a
condition for acceptance.
Taken together, these changes are
designed to provide a uniform approach
for nearly all Confirmed Trades
regarding acceptance and novation. OCC
believes the changes will reduce the
complexity of its Rules and By-Laws,
while at the same time providing
significantly greater clarity and
transparency in OCC’s legal framework
for Clearing Members and other
interested parties concerning the point
at which OCC does not have authority
to reject a transaction after it has been
properly submitted to and validated by
OCC. OCC believes that adopting this
uniform approach regarding acceptance
and novation will neither functionally
change the time at which OCC becomes
obligated regarding Confirmed Trades
nor otherwise alter the credit risk OCC
faces with respect to such Confirmed
Trades.
First, providing that nearly all
Confirmed Trades are accepted and
novated upon proper submission
functionally would not change the time
at which OCC becomes obligated
regarding such Confirmed Trades
because OCC currently has no right to
reject Confirmed Trades, upon proper
submission, due to the failure of a
Purchasing Clearing Member to pay any
amount due to OCC at or before the
settlement time. Second, OCC generally
does not collect margin with respect to
such Confirmed Trades until 9:00 a.m.
Central the following business day.31
OCC, therefore, already faces this same
credit risk between the acceptance of
the Confirmed Trades and the time that
it collects margin from Clearing
Members. Accordingly, OCC does not
anticipate that moving the novation
time from the general Commencement
Time to earlier in the day as described
above—at the point of acceptance—
would alter the credit risk OCC faces
with respect to such Confirmed Trades.
In addition, OCC would continue to
have the same authority that it does
today to address any credit risk as
31 See Article I, Section 1.S.(16) of the By-Laws
(defining the term ‘‘settlement time’’ in respect of
a Clearing Member’s obligation to pay amounts
owed to OCC).
E:\FR\FM\31MYN1.SGM
31MYN1
25090
Federal Register / Vol. 83, No. 105 / Thursday, May 31, 2018 / Notices
necessary through intra-day margin
collection.32
Further, OCC believes that it would be
appropriate to also apply the uniform
acceptance and novation time to OTC
Options that are not Backloaded OTC
Options. OTC Options currently are
subject to an alternative Commencement
Time, designated for OTC Options that
are not Backloaded OTC Options as the
time when a report of OCC’s acceptance
is made available to Clearing Members
through OCC’s clearing system.33 In
practice, OCC automatically makes a
report of its acceptance of such OTC
Options available to Clearing Members
in its clearing system, provided the OTC
Option is properly reported to OCC, the
contract passes OCC’s validation
process, and the contract is not rejected,
all of which generally is completed
immediately upon submission of the
contract to OCC.34 This is consistent
with the new uniform approach OCC
proposed, which would deem nearly all
Confirmed Trades to be accepted and
simultaneously novated when they are
reported to OCC and the related position
information has been recorded in OCC’s
clearing system, which occurs on a realtime basis. Accordingly, OCC believes
there is no operational, risk
management, or other reason to exclude
OTC Options that are not Backloaded
OTC Options from the proposed
uniform acceptance and novation
timing.
amozie on DSK3GDR082PROD with NOTICES1
Proposed Exceptions to the Uniform
Acceptance and Novation Timing
For other categories of Confirmed
Trades that currently are not subject to
the general definition of
Commencement Time (i.e., Confirmed
Trades in futures issued in exchangefor-physical transactions, block trades,
or other trades designated as noncompetitively executed), OCC proposed
to preserve the existing structure under
which OCC has authority to reject the
transactions even after they are properly
submitted for clearing by creating an
exception to the uniform acceptance
and novation timing for such trades.
OCC believes that delayed novation
continues to be appropriate for such
non-competitively executed transactions
because there is a heightened risk that
non-competitive execution may cause
them to be effected at off-market prices,
which could lead to significant losses if
32 See OCC Rule 609 (addressing OCC’s authority
to require intra-day margin).
33 Article VI, Section 5 of the By-Laws.
34 See Securities Exchange Act Release No. 68434
(December 14, 2012), 77 FR 75243 (December 19,
2012) (SR–OCC–2012–14 and AN–OCC–2012–01)
(discussing the trade submission mechanics for
OTC Options).
VerDate Sep<11>2014
17:46 May 30, 2018
Jkt 241001
a Clearing Member defaults on the
related settlement obligations.35
As proposed, an exception to the
uniform acceptance and novation timing
also would be made for Confirmed
Trades that are Backloaded OTC
Options, which are defined as OTC
Options for which the premium
payment date is prior to the business
day on which the transaction is
submitted to OCC for clearing.36 OCC
believes that an exception for
Backloaded OTC Options remains
necessary because their ‘‘backloaded’’
nature means that the premium
payment has already been made.
Backloaded OTC Options also are
subject to being non-competitively
executed and therefore present the same
heightened settlement default risk
regarding other non-competitively
executed transactions discussed above.
In addition, because OCC is not able to
immediately validate a Backloaded OTC
Options transaction or check its price
reasonability upon submission, OCC
believes that it remains appropriate to
continue its existing practice of delaying
acceptance and novation for these
contracts until the selling Clearing
Member has met its regular morning
settlement obligations on the business
day following trade reporting.
Provisional Information Regarding
Confirmed Trades
OCC proposed that its acceptance and
novation time would no longer be tied
to publication of a Daily Position
Report, given that OCC’s acceptance of
a Confirmed Trade would instead be
reflected in the position information
that OCC makes available to Clearing
Members throughout the business day.
Accordingly, OCC proposed to amend
Interpretation and Policy .01 to Rule 501
to: (1) Clarify that OCC makes updated
position data reflecting accepted and
novated trades available to its Clearing
Members throughout the day; and (2)
remove from that provision a statement
that Clearing Members must rely on the
Daily Position Report for definitive
information regarding their positions.
35 OCC also proposes to add new Interpretation
and Policy .05 to provide that OCC will not treat
an EFP or block trade as a noncompetitively
executed trade subject to Article XII, Section 7 of
the By-Laws if the Exchange on which such trade
is executed has made representations satisfactory to
OCC that the Exchange has rules, policies or
procedures that require each EFP and block trade
that is submitted to OCC to be executed at a
reasonable price and that such price is validated by
the Exchange. This new Interpretation and Policy
to Rule 401 would reiterate current Interpretation
and Policy .04 to Article XII, Section 7 of the ByLaws to provide additional clarity in the Rules
around the acceptance and novation time for
competitively executed EFPs and block trades.
36 See Article I, Section 1.B.(1) of the By-Laws.
PO 00000
Frm 00125
Fmt 4703
Sfmt 4703
Hedge Loans and Market Loans
In addition to its clearance and
settlement of Confirmed Trades, OCC
also acts as a CCP for certain stock
lending transactions that are part of its
Stock Loan/Hedge Program and Market
Loan Program. OCC proposed to amend
its rules for both programs to better
describe its process for accepting Hedge
Loans and Market Loans and to
appropriately harmonize certain
provisions governing each type of Stock
Loan.37
Stock Loan/Hedge Loan Program.
Hedge Loans are initiated as stock
lending transactions that are negotiated
and settled between Clearing Members
at The Depository Trust Company
(‘‘DTC’’) before they are reported to
OCC. Rule 2202(b) provides that OCC
must generally accept these stock
lending transactions upon receipt of a
report from DTC that shows a completed
transaction.38 However, OCC may reject
a transaction if it determines that it is:
(1) Not in accordance with OCC’s ByLaws or Rules; (2) one or both account
numbers specified are invalid for Hedge
Loans; or (3) the information provided
by DTC contains errors or omissions.
Moreover, Rule 2202(b) provides that if
OCC does not affirmatively reject a
reported transaction by such a time as
OCC is authorized to specify from time
to time then the transaction is deemed
accepted as a Hedge Loan. Upon
acceptance, OCC becomes the lender to
the Borrowing Clearing Member and the
borrower to the Lending Clearing
Member. Although OCC has discretion
during each business day to make
provisional information available to
Clearing Members regarding their
lending and borrowing activity, only the
Stock Loan Mark to Market Activity
Report is recognized as providing
definitive Hedge Loan positions.39
OCC proposed to amend Rule 2202(b)
to clarify that OCC receives and accepts
completed transaction information from
DTC throughout the day, and it would
delete the statement that a transaction is
deemed accepted by a particular cut off
time if OCC does not affirmatively
notify Clearing Members of a rejection.
Rule 2202(b) would instead state that
OCC generally accepts completed
transactions reported to it unless: (1)
OCC is otherwise required to reject a
transaction because it is not in
accordance with the By-Laws or Rules;
37 See
OCC Rules 2202(b); 2202A(b), (c).
is not obligated to accept the stock lending
transactions of a Clearing Member that has been
suspended by DTC. See OCC Rule 2210(a). The
same condition applies regarding Market Loans. See
OCC Rule 2210A(a).
39 See Rule 2202, Interpretation and Policy .01.
38 OCC
E:\FR\FM\31MYN1.SGM
31MYN1
Federal Register / Vol. 83, No. 105 / Thursday, May 31, 2018 / Notices
amozie on DSK3GDR082PROD with NOTICES1
(2) one or both account numbers
specified are invalid; or (3) the
information provided contains
unresolved errors or omissions. OCC
believes that these changes will help
clarify the time at which Hedge Loans
are accepted and the specific
circumstances in which Hedge Loans
will be rejected. As discussed more fully
below, the change also would ensure
consistency between parallel provisions
in the Stock Loan/Hedge Program and
Market Loan Program regarding the
initiation process, which OCC believes
should apply equally across both
programs. Finally, a reference to the
Stock Loan Mark to Market Activity
Report being the only definitive
statement of positions would be deleted
because Hedge Loan positions would be
definitive upon acceptance in OCC’s
clearing system.
Market Loan Program. In connection
with the Market Loan Program initiation
process, DTC also sends information to
OCC regarding completed stock lending
transactions. Rule 2202A(b) provides
that, upon OCC’s receipt of an end of
day stock loan activity file from DTC,
OCC must accept the transactions as
Market Loans unless it is required to
reject them for the same reasons
described above concerning Hedge
Loans. The Rule further provides that,
upon OCC’s affirmative acceptance,
OCC becomes the lender to the
Borrowing Clearing Member and the
borrower to the Lending Clearing
Member.
As with the proposed changes to the
Stock Loan Hedge Program, OCC
proposed to clarify that OCC receives
and accepts completed transaction
information from DTC throughout the
day. OCC also proposed to delete a
reference to affirmative acceptance in
Rule 2202A(b) because the other
proposed changes would clarify that
acceptance will generally take place
automatically unless OCC is specifically
required to reject transactions due to the
deficiencies described above. A
conforming change also would be made
in this regard in Rule 2202A(c).
References to the definitive nature of the
Stock Loan Mark to Market Activity
Report would be deleted for the same
reasons described above regarding
Hedge Loans.
Streamlining and Reorganization
As part of its continued effort to
streamline its By-Laws and Rules, OCC
proposed to relocate certain provisions
from Article VI, Sections 4 through 8 of
the By-Laws to Chapter IV of the Rules.
This change would promote a
centralized location for provisions that
address trade reporting and novation.
VerDate Sep<11>2014
17:46 May 30, 2018
Jkt 241001
OCC also proposed to consolidate
certain provisions in Chapter IV of the
Rules to eliminate redundancy. These
proposed organizational changes are
summarized below.
OCC would relocate Article VI,
Section 4 of OCC’s By-Laws regarding a
Purchasing Clearing Member’s
obligations with respect to a Confirmed
Trade, without amendment, to a new
Rule 403. As described above, OCC
would amend Article VI, Section 5 of
the By-Laws regarding OCC’s
obligations with respect to a Confirmed
Trade, and it would be incorporated
into existing Rule 401 and new Rule
404. As described above, OCC would
amend Article VI, Section 6 of the ByLaws regarding the issuance of cleared
contracts, and it would be relocated to
a new Rule 405. OCC would relocate
Article VI, Section 7 of the By-Laws
regarding the reporting of confirmed
trades incorporate it into Rule 401. More
specifically, Article VI, Section 7(b) of
the By-Laws would become Rule 401(e),
Section 7(c) would become Rule 401(f),
and Interpretation and Policy .01 to
Section 7 would become Interpretation
and Policy .03 to Rule 401. As described
above, OCC would amend Article VI,
Section 8 of the By-Laws regarding
payments made to OCC and relocate it
to new Rule 406. To accommodate these
new rules in Chapter IV, current Rule
403 would be renumbered as 407, and
current Rule 405 would be renumbered
as Rule 408. Cross-references also would
be updated to reflect this renumbering
throughout Chapter IV of the Rules, as
well as in Article I, Section 1.G.(3) and
(4), Article VI, Section 2, and Article
XVII, Sections 2(a) and 2(c)(1) of the ByLaws, and Rules 504(e), 504(g), and
611(a).
Additionally, to create a more
centralized trade reporting rule, OCC
proposed to delete existing Rule 404
regarding the reporting of confirmed
trades in OTC Options and to
incorporate its substance into Rule 401.
This would require the addition of
references to OTC Trade Sources in Rule
401(a) and (b), and the merger of
language from Rule 404(b) into Rule
401(b) and from Rule 404(c) into Rule
401(d).
Elimination of Dormant Products and
Rules
OCC no longer clears and settles
cross-rate foreign currency options and
flexibly-structured index options
denominated in a foreign currency.
Accordingly, OCC proposed to delete
certain provisions from its By-Laws and
Rules that only apply to such products.
When OCC still actively cleared and
settled these products they were subject
PO 00000
Frm 00126
Fmt 4703
Sfmt 4703
25091
to delayed novation. OCC therefore
believes that eliminating the rules
governing these products at this time
would avoid confusion and enhance
clarity regarding OCC’s proposed
uniform approach to trade acceptance
and novation timing. Consequently,
OCC proposed to delete Articles XX and
XXIII of its By-Laws, which governs
cross-rate foreign currency options, and
Chapters XXI and XXIV of its Rules,
which govern flexibly-structured index
options denominated in a foreign
currency. Additionally, OCC proposed
to eliminate all other references to such
products throughout its By-Laws and
Rules, including in Section 1(d) of
Article V, and Interpretation and Policy
.03 to Section 1 of Article V of the ByLaws and Rules 607, 1107(a)(3) and
1107(a)(4), as well as in the definitions
of Option Contract, Trading Currency,
and Underlying Currency in Article I of
the By-Laws.
OCC also proposed to delete Rule 402
concerning the supplementary reporting
of Confirmed Trades. Rule 402 grants
OCC the discretion to, in certain
extraordinary circumstances, accept
from an Exchange after the cut-off time
for receiving Confirmed Trade
information for a particular business
day (‘‘trade date’’), supplementary
Confirmed Trade information reflecting
the comparison of additional trades
executed on or before the trade date that
remained unconfirmed at the cut-off
time. Rule 402 was adopted at a time
when OCC received matched trade
information from Exchanges for a given
trade date in a single batch submission
after the close of the trading day.40
Under this old process, trades that
remained unmatched when an Exchange
prepared its nightly trade tape to OCC
were omitted from the tape and, if a
trade was subsequently matched, the
Exchange reported the trade to OCC the
following night to be processed as if it
had not been executed until the date
when it was reported. OCC adopted
Rule 402 to accommodate the late
submission of trades that had not been
matched in time to be submitted on the
Exchange’s original trade tape, thereby
allowing those trades to be processed as
if they were submitted on their original
trade date. OCC proposed to delete Rule
402 because it is no longer applicable to
OCC’s current clearing processes,
whereby OCC continuously receives
matched trade information from
Exchanges on a real-time basis.
40 See Filing and Order Granting Accelerated
Approval of Proposed Rule Change of Options
Clearing Corporation, Securities Exchange Act
Release No. 21233 (August 10, 1984) (SR–OCC–84–
12).
E:\FR\FM\31MYN1.SGM
31MYN1
25092
Federal Register / Vol. 83, No. 105 / Thursday, May 31, 2018 / Notices
amozie on DSK3GDR082PROD with NOTICES1
II. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Act directs
the Commission to approve a proposed
rule change of a self-regulatory
organization if it finds that such
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to such organization.41 After
carefully considering the proposed rule
change, the Commission believes that
the proposed rule change is consistent
with the requirements of the Act and the
rules and regulations thereunder
applicable to OCC. More specifically,
the Commission believes that the
proposal is consistent with Section
17A(b)(3)(F) of the Act 42 and Rule
17Ad–22(e)(1) under the Act.43
A. Consistency With Section
17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act 44
requires, among other things, that the
rules of a clearing agency be designed to
foster cooperation and coordination
with persons engaged in the clearance
and settlement of securities
transactions, promote the prompt and
accurate clearance and settlement of
securities and derivatives transactions,
and, in general, protect investors and
the public interest. As described above,
the proposed rule change is intended to
provide a clear and uniform acceptance
and novation time for nearly all
Confirmed Trades and to clarify the
acceptance and novation timing
regarding Stock Loans by specifying the
time at which novation occurs and
when Confirmed Trades and Stock
Loans may no longer be rejected by
OCC. Under the proposed uniform
acceptance time, OCC would deem
nearly all Confirmed Trades to be
accepted and simultaneously novated
when they are reported to OCC,
provided that the transaction
information reported to OCC passes
OCC’s validation procedures and is
provided to OCC at such time as OCC’s
rules prescribe. In addition, the
proposed rule change would eliminate
certain dormant rules no longer
applicable to OCC’s clearance and
settlement services and processes.
The Commission believes that these
changes would provide greater clarity
and transparency to Clearing Members,
other users of OCC, and the general
public regarding OCC’s processes for the
reporting of transactions, acceptance,
and novation. Instead of parsing through
41 15
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–1(b)(3)(F).
43 17 CFR 240.17Ad–22(e)(1).
44 15 U.S.C. 78q–1(b)(3)(F).
multiple different definitions and
provisions in various locations
throughout OCC’s By-Laws and Rules to
identify the different times at which
acceptance and novation occurs for
different transactions, users and other
interested parties will be able to refer to
more uniform approach set forth in a
single chapter of OCC’s Rules. This, in
turn, will help avoid potential
confusion and ambiguity. Accordingly,
the Commission believes that, taken
together, these changes will help foster
cooperation and coordination with
persons engaged in the clearance and
settlement of securities transactions,
promote the prompt and accurate
clearance and settlement of securities
and derivatives transactions, and, in
general, protect investors and the public
interest consistent with Section
17A(b)(3)(F) of the Act.45
B. Consistency with Rule 17Ad–22(e)(1)
Rule 17Ad–22(e)(1) 46 requires a
covered clearing agency to establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to provide for a
well-founded, clear, transparent and
enforceable legal basis for each aspect of
its activities in all relevant jurisdictions.
The Commission believes the proposed
changes are consistent with Rule 17Ad–
22(e)(1) for the reasons set forth below.
First, by modifying the current
process so that all Confirmed Trades,
subject to limited exceptions, would be
deemed accepted and simultaneously
novated when they are reported to OCC
and the related position information has
been recorded in OCC’s clearing system,
the proposed rule change would provide
a clear and uniform time regarding
OCC’s acceptance and novation for
nearly all Confirmed Trades and clarify
OCC’s acceptance and novation process
regarding Stock Loans. The Commission
believes this would bring clarity and
transparency to OCC’s By-Laws and
Rulebook and help simplify the process
of reporting transactions, acceptance,
and novation, which in turn will help
ensure that OCC has a well-founded,
clear, transparent, and enforceable legal
basis regarding the rights and
obligations of OCC and Clearing
Members regarding Confirmed Trades,
consistent with Rule 17Ad–22(e)(1).
Second, the Commission believes that
the streamlining and reorganizing all of
the provisions concerning transaction
reporting, acceptance, and novation and
consolidating them in Chapter IV of the
Rules would promote consistency and
readability and help avoid potential
42 15
VerDate Sep<11>2014
17:46 May 30, 2018
confusion and ambiguity, and therefore
allow the provisions to be more easily
understood. For example, enumerating
the trade information required to be
submitted by participant Exchanges to
OCC for options and futures
transactions would allow for greater
clarity of the information required and
that may be requested by OCC.
Similarly, by better describing the
process by which Hedge Loans and
Market Loans are accepted, OCC would
harmonize the relevant provisions of its
Rulebook governing each type of Stock
Loan. In addition, the Commission
believes eliminating provisions related
to processes no longer supported by
OCC and dormant products that are no
longer cleared and settled by OCC
would improve the clarity and
transparency of its By-Laws and Rules.
Accordingly, the Commission believes
that the changes proposed in the
proposed rule change are consistent
with Rule 17Ad–22(e)(1) under the
Act.47
III. Solicitation of Comments on
Amendment No. 1
Interested persons are invited to
submit written data, views and
arguments concerning whether
Amendment No. 1, is consistent with
the Act. Comments may be submitted by
any of the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
OCC–2018–007 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–OCC–2018–007. 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
45 Id.
46 17
Jkt 241001
PO 00000
CFR 240.17Ad–22(e)(1).
Frm 00127
Fmt 4703
Sfmt 4703
47 Id.
E:\FR\FM\31MYN1.SGM
31MYN1
Federal Register / Vol. 83, No. 105 / Thursday, May 31, 2018 / Notices
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 such
filing also will be available for
inspection and copying at the principal
office of OCC and on OCC’s website at
https://www.theocc.com/about/
publications/bylaws.jsp.
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–2018–007 and should
be submitted on or before June 15, 2018.
IV. Approval of Proposed Rule Change,
as Modified by Amendment No. 1
As discussed above, OCC submitted
Amendment No. 1 to accurately reflect
existing Rule 2202(c), which would not
be affected by the proposed rule change.
The Commission believes that
Amendment No. 1 does not raise any
novel issues or alter the proposed
changes in any way. In addition, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 1, is consistent with Act and
applicable rules thereunder for the
reasons discussed above. Accordingly,
the Commission finds good cause to
approve the proposed rule change, as
modified by Amendment No. 1 pursuant
to Section 19(b)(2) of the Act.48
amozie on DSK3GDR082PROD with NOTICES1
V. Conclusion
On the basis of the foregoing, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 1, is consistent with the
requirements of the Act, in particular
with the requirements of Section 17A of
the Act 49 and Rule 17Ad–22(e)(1)
thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) 50 of the Act, that the
proposed rule change (SR–OCC–2018–
007) be, and it hereby is, approved.
48 15
U.S.C. 78s(b)(2).
approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
50 15 U.S.C. 78s(b)(2).
51 17 CFR 200.30–3(a)(12).
49 In
VerDate Sep<11>2014
17:46 May 30, 2018
Jkt 241001
25093
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.51
Eduardo A. Aleman,
Assistant Secretary.
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
[FR Doc. 2018–11611 Filed 5–30–18; 8:45 am]
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83320; File No. SR–
NYSEArca–2018–35]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Relating to the Peritus
High Yield ETF
May 24, 2018
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934
(‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on May 14,
2018, NYSE Arca, Inc. (‘‘Exchange’’ or
‘‘NYSE Arca’’) 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 self-regulatory organization. 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 proposes to change
certain representations made in the
respective proposed rule changes
previously filed with the Commission
pursuant to Rule 19b-4 relating to the
Peritus High Yield ETF (the ‘‘Fund’’).
Shares of the Fund are currently listed
and traded on the Exchange under
NYSE Arca Rule 8.600–E. The proposed
rule change is available on the
Exchange’s website at www.nyse.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
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
1 15
U.S.C.78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
2 15
PO 00000
Frm 00128
Fmt 4703
1. Purpose
The Commission has approved the
listing and trading on the Exchange of
shares (‘‘Shares’’) of the Fund, under
NYSE Arca Rule 8.600–E(j)(3) (formerly
NYSE Arca Equities Rule 8.600), which
governs the listing and trading of
Managed Fund Shares.4 The Fund’s
Shares are currently listed and traded
on the Exchange under NYSE Arca Rule
8.600–E.5 The Shares are offered by
AdvisorShares Trust (‘‘Trust’’).6
4 A Managed Fund Share is a security that
represents an interest in an investment company
registered under the Investment Company Act of
1940 (15 U.S.C. 80a-1) (the ‘‘1940 Act’’) organized
as an open-end investment company or similar
entity that invests in a portfolio of securities
selected by its investment adviser consistent with
its investment objectives and policies. In contrast,
an open-end investment company that issues
Investment Company Units, listed and traded on
the Exchange under NYSE Arca Rule 5.2–E(j)(3),
seeks to provide investment results that correspond
generally to the price and yield performance of a
specific foreign or domestic stock index, fixed
income securities index or combination thereof.
5 The Commission previously approved the
listing and trading of the Shares of the Fund. See
Securities Exchange Act Release Nos. 63329
(November 17, 2010), 75 FR 71260 (November 24,
2010) (SR–NYSEArca–2010–86) (Order Granting
Approval of Proposed Rule Change Relating to the
Listing and Trading of Shares of the Peritus High
Yield ETF) (‘‘Approval Order’’); 63041 (October 5,
2010), 75 FR 62905 (October 13, 2010) (SR–
NYSEArca-2010–86) (Notice of Filing of Proposed
Rule Change Relating to the Listing and Trading of
Shares of the Peritus High Yield ETF) (‘‘Notice’’).
The Exchange subsequently filed with the
Commission several proposed rule changes relating
to changes in the Fund’s holdings. See Securities
Exchange Act Release Nos. 66818 (April 17, 2012),
77 FR 24233 (April 23, 2012) (SR–NYSEArca–2012–
33) (Notice of Filing and Immediate Effectiveness of
Proposed Rule Change relating to the Peritus High
Yield ETF); 70284 (August 29, 2013), 78 FR 54715
(September 5, 2013) (SR–NYSEArca–2013–83)
(Notice of Filing and Immediate Effectiveness of
Proposed Rule Change Relating to Investments in
Leveraged Loans by the Peritus High Yield ETF);
72433 (June 19, 2014), 79 FR 36114 (June 25, 2014)
(SR–NYSEArca–2014–69) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change
Relating to Holdings in Equity Securities by the
Peritus High Yield ETF); 73181 (September 23,
2014), 79 FR 58001 (September 26, 2014) (SR–
NYSEArca–2014–103) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change
Relating to an Increase in the Number of Securities
Held by the Peritus High Yield ETF). (The Approval
Order, Notice and other proposed rule changes
referenced above are referred to collectively herein
as the ‘‘Releases’’).
6 The Trust is registered under the 1940 Act. On
November 1, 2017, the Trust filed with the
Commission an amendment to its registration
Continued
Sfmt 4703
E:\FR\FM\31MYN1.SGM
31MYN1
]]>Agencies
[Federal Register Volume 83, Number 105 (Thursday, May 31, 2018)]
[Notices]
[Pages 25087-25093]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-11611]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83321; File No. SR-OCC-2018-007]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Amendment No. 1 and Order Approving Proposed Rule
Change, as Modified by Amendment No. 1, Related to The Options Clearing
Corporation's Trade Acceptance and Novation Rules
May 24, 2018.
On March 23, 2018, the Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission''), pursuant
to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ proposed rule change SR-
OCC-2018-007. The proposed rule change was published for comment in the
Federal Register on April 9, 2018.\3\ The Commission did not receive
any comments on the proposed rule change. On April 19, 2018, OCC filed
Amendment No. 1 to the proposed rule change.\4\ The Commission is
publishing this notice to solicit comment on Amendment No. 1 from
interested persons and is approving the proposed rule change, as
modified by Amendment No. 1.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 82984 (April 3, 2018),
83 FR 15181 (April 9, 2018) (SR-OCC-2018-007) (``Notice'').
\4\ OCC submitted Amendment No. 1 to correct an error in Exhibit
5B of the Notice, which did not accurately reflect the text of
existing OCC Rule 2202(c) and erroneously contained proposed changes
to that inaccurate text. Amendment No. 1 clarifies that the rule
text for existing Rule 2202(c) would remain unchanged and would not
be affected by the proposed rule change.
---------------------------------------------------------------------------
I. Description of the Proposed Rule Change 5
---------------------------------------------------------------------------
\5\ The subsequent description of the proposed rule change is
substantially excerpted from OCC's description in the Notice. See
Notice, 83 FR 15181-15186.
---------------------------------------------------------------------------
OCC proposed to amend OCC's By-Laws (``By-Laws'') and Rules to: (1)
Clarify the time at which OCC accepts and novates \6\ the transactions
that it clears; (2) streamline provisions in the By-Laws and Rules
related to trade reporting and novation; and (3) delete provisions that
apply only to certain dormant products that OCC no longer clears and
settles or that are no longer applicable to OCC's current clearing
processes.
---------------------------------------------------------------------------
\6\ In this context, novation is the process through which OCC
is substituted as the buyer to the seller and the seller to the
buyer for each cleared contact.
---------------------------------------------------------------------------
[[Page 25088]]
Background
Acceptance and Novation Timing
Clearly stating the specific time at which OCC accepts transactions
for clearance and settlement is important to Clearing Members because
it signifies the time under the By-Laws and Rules at which the
following events occur: (1) OCC is substituted through novation as the
central counterparty (``CCP'') to each Clearing Member that was an
initial party to the transaction; (2) the rights of the initial
Clearing Member parties to the transaction become solely as against
OCC; and (3) OCC becomes obligated to each Clearing Member in
accordance with the By-Laws and Rules,\7\ including as a guarantor of
the settlement obligations associated with transactions that OCC
accepts and novates.\8\
---------------------------------------------------------------------------
\7\ See, e.g., Article VI, Section 5 of the By-Laws.
\8\ See generally 15 U.S.C. 78q-1; 17 CFR 240.17Ad-22.
---------------------------------------------------------------------------
Current Acceptance and Novation of Confirmed Trades
While most trades are functionally novated upon proper submission
to OCC for clearing, OCC's current By-Laws and Rules require a user to
parse through a number of provisions and definitions in various
locations to identify the time at which acceptance and novation occur.
For example, the term Confirmed Trade \9\ is defined to include all of
the products for which OCC currently provides clearance and settlement
services, with the exception of certain Stock Loan \10\ transactions. A
Confirmed Trade is novated upon OCC's acceptance of the trade, but
acceptance is not deemed to occur until a designated Commencement Time.
Commencement Time is defined differently for different products that
meet the definition of a Confirmed Trade, but one section of the By-
Laws (regarding OCC's obligations) generally defines it as the time at
which OCC makes available to Clearing Members a Daily Position Report
reflecting the Confirmed Trade.\11\ Another section of the By-Laws
(regarding the reporting of Confirmed Trades) specifies that this
acceptance is subject to the condition that the Exchange or OTC Trade
Source on which the transaction occurred has reported to OCC, during
such times as OCC has prescribed, certain information regarding the
Confirmed Trade and that such information passes OCC's initial
validation checks.\12\
---------------------------------------------------------------------------
\9\ Under the By-Laws, a Confirmed Trade is defined as ``a
transaction for the purchase, writing, or sale of a cleared
contract, or for the closing out of a long or short position in a
cleared contract, that is (i) effected on or through the facilities
of an Exchange and submitted to the Corporation for clearance or
(ii) affirmed through the facilities of an OTC Trade Source and
submitted to the Corporation for clearance.''
\10\ See Article I, Section 1.S.(21) of the By-Laws. The term
Stock Loan may refer to either a Hedge Loan that is part of OCC's
Stock Loan/Hedge Program or a Market Loan that is part of OCC's
Market Loan Program. Matters regarding the acceptance and novation
of these products are addressed separately below.
\11\ Article VI, Section 5 of the By-Laws. This typically occurs
at the end of each business day.
\12\ Article VI, Section 7 of the By-Laws.
---------------------------------------------------------------------------
Under yet another section of the By-Laws, OCC generally has no
right (other than regarding certain types of Confirmed Trades discussed
below) to reject a Confirmed Trade due to the failure of the Purchasing
Clearing Member to pay any amount due to OCC at or before the
settlement time.\13\ This means that transactions in most products that
are Confirmed Trades will inevitably be accepted for clearing and
novated at the Commencement Time simply due to the passage of time.\14\
OCC proposed the changes herein to reflect this reality.
---------------------------------------------------------------------------
\13\ See Article VI, Section 8 of the By-Laws.
\14\ An Exchange or OTC Trade Source, however, may instruct OCC
to disregard a transaction that it previously reported as a
Confirmed Trade ``because of a subsequent determination that (i) the
trade information submitted by the Purchasing Clearing Member and
Selling Clearing Member did not agree, (ii) the trade information
did not contain all the information required by the Corporation as
set forth in the By-Laws and Rules, or (iii) new or revised trade
information was required to properly clear the transaction.'' See
Article VI, Section 7 of the By-Laws. This authority would be
preserved and relocated into OCC's Rules in connection with the
proposed changes described herein.
---------------------------------------------------------------------------
Different Commencement Times and Rejection Rights for Certain Confirmed
Trades
Certain categories of Confirmed Trades are not subject to the
general Commencement Time described above, and OCC retains certain
rights to reject such transactions. Specifically, Article VI, Section 5
of the By-Laws excludes the products described below from the general
Commencement Time, while setting forth the following alternate
definitions of Commencement Time:
(1) For futures issued in exchange-for-physical transactions,\15\
block trades,\16\ or other trades designated as non-competitively
executed: The time after the transaction is reported to OCC that OCC
receives the first variation settlement payment; \17\
---------------------------------------------------------------------------
\15\ An exchange-for-physical transaction (or ``EFP'') is a
transaction between two parties in which a futures contract on a
commodity or security is exchanged for the actual physical good.
\16\ A block trade is a trade involving a large number of shares
being traded at an arranged price between parties, outside of the
open markets, in order to lessen the impact of such a large trade
being made public.
\17\ See Article XII, Section 7 of the By-Laws.
---------------------------------------------------------------------------
(2) For cross-rate FX options and FX index options: The time that
is three hours following the settlement time of the Confirmed Trade in
which such contract was purchased; \18\ and
---------------------------------------------------------------------------
\18\ See Articles XX, Section 1 and XXIII, Section 1 of the By-
Laws.
---------------------------------------------------------------------------
(3) For OTC Options (other than Backloaded OTC Options): The time
when a report of OCC's acceptance is made available to Clearing Members
through OCC's clearing system.\19\
---------------------------------------------------------------------------
\19\ See Article VI, Section 5 of the By-Laws.
---------------------------------------------------------------------------
That same section of the By-Laws specifies that, for Backloaded OTC
Options, the transaction is not accepted for clearing until the Selling
Clearing Member has met its regular morning settlement obligation on
the business day following the reporting of the trade to OCC.\20\
---------------------------------------------------------------------------
\20\ Id.
---------------------------------------------------------------------------
In addition to the separate Commencement Times for these types of
Confirmed Trades, OCC also currently has certain authority to reject
such trades due to the failure of the Purchasing Clearing Member to pay
an amount due to OCC at or before the applicable settlement time.\21\
In contrast to most other types of Confirmed Trades, this means that
OCC continues to have authority to reject these transactions even after
they are properly submitted for clearing. OCC's authority to reject
these types of Confirmed Trades arises under the following
circumstances:
---------------------------------------------------------------------------
\21\ See generally Article VI, Section 8 of the By-Laws
identifying these exceptions.
---------------------------------------------------------------------------
(1) For futures issued in exchange-for-physical transactions, block
trades, or other trades designated as non-competitively executed: In
the event OCC fails to receive any variation payment due in the
accounts of the Clearing Members; \22\
---------------------------------------------------------------------------
\22\ See Article XII, Section 7 of the By-Laws.
---------------------------------------------------------------------------
(2) For cross-rate FX options and FX index options: In the event
OCC fails to receive from the Purchasing Clearing Member premiums
denominated in the proper trading currency in the account in which the
transaction is effected; \23\ and
---------------------------------------------------------------------------
\23\ See Article XX, Section 5, Article XXIII, Section 7 of the
By-Laws.
---------------------------------------------------------------------------
(3) For Backloaded OTC Options: In the event the Selling Clearing
Member does not meet its regular morning settlement obligation on the
business day following the reporting of the trade to OCC.\24\
---------------------------------------------------------------------------
\24\ See Article VI, Section 8 of the By-Laws. In addition, OCC
will not accept a Backloaded OTC Option for clearing if OCC receives
it from the OTC Trade Source after 4 p.m. Central on the business
day that is four business days prior to its expiration.
---------------------------------------------------------------------------
[[Page 25089]]
Proposed Changes to Acceptance and Novation Rules
Proposed Uniform Acceptance and Novation Timing for Nearly All
Confirmed Trades
To provide greater certainty and clarity to Clearing Members and
other interested parties regarding the acceptance and novation timing
for transactions that OCC clears and settles, OCC proposed to amend the
substance of Article VI, Section 5 of the By-Laws \25\ to set forth a
uniform acceptance and novation time for nearly all Confirmed Trades.
As described in more detail below, OCC would retain exceptions from the
uniform acceptance and novation time for Confirmed Trades in Backloaded
OTC Options and Confirmed Trades in futures issued in exchange-for-
physical transactions, block trades, or other trades designated as non-
competitively executed.
---------------------------------------------------------------------------
\25\ As described below under the heading Reorganization, OCC
also proposes to relocate the provisions currently in Article VI,
Section 5 of the By-Laws to Rules 401 and 404.
---------------------------------------------------------------------------
To accomplish this, OCC proposed to eliminate the concept of
Commencement Time and instead deem nearly all Confirmed Trades to be
accepted and simultaneously novated when they are reported to OCC and
the related position information has been recorded in OCC's clearing
system (which occurs on a real-time basis).\26\ This would, however, be
subject to the condition that the required transaction information
reported to OCC by the Exchange or OTC Trade Source first passes OCC's
validation procedures \27\ and is provided to OCC at such time as OCC
prescribes. This change is intended to provide a more definitive
indication of the point after which OCC no longer has authority to
reject such transactions for clearing.\28\ Eliminating the concept of
Commencement Time also necessitates deleting the term from the defined
terms in Article I, Section 1 of the By-Laws and replacing all
references to Commencement Time with references to the time at which
OCC accepts a transaction for clearing. To do this, OCC proposed to
amend the following provisions of its By-Laws: Article I (definition of
``American; American-style''); Sections 5, 6, and 12 of Article VI;
\29\ and Section 7 of Article XII.
---------------------------------------------------------------------------
\26\ OCC notes that upon acceptance and recording of position
information in OCC's ENCORE clearing system, Clearing Members have
the ability to see the trades they are responsible for via position
information screens in the ENCORE system and through real-time
messaging.
\27\ All inbound trades to OCC are subject to coded validation
of the required fields for trades. These fields contain the critical
details of the trade, including but not limited to the trade source,
symbol, expiration, strike, call or put, quantity, price, and
Clearing Member details of both sides of the trade.
\28\ As described above, an Exchange or OTC Trade Source would
continue to have the authority to instruct OCC to disregard a
Confirmed Trade. See supra 10.
\29\ As described in more detail below, OCC proposes to relocate
Article VI, Sections 5 and 6 to Rules 401, 404, and 405 to help
streamline and reorganize provisions addressing trade reporting and
novation.
---------------------------------------------------------------------------
OCC also proposed to amend Rule 401 to clarify the trade
information required to be submitted by the participant Exchange to OCC
as a condition to acceptance and novation. For options transactions,
amended Rule 401(a)(1)(i) would provide that these terms include: (a)
The identity of the Purchasing Clearing Member and Writing Clearing
Member to the transaction; (b) the clearing date; (c) the transaction
time; (d) the trade source; (e) the trade quantity; (f) the trade
price; (g) the security type; (h) the ticker symbol; (i) the series/
contract date; (j) whether the trade is a put or a call; (k) the strike
price; (l) whether the trade is a purchase or a sale; (m) the account
type; (n) the allocation indicator, if applicable; (o) the CMTA
indicator, if applicable; (p) the Give-Up Clearing Member, if
applicable; (q) the trade type, including, in the case of futures
options, whether the transaction is a block trade, exchange-for-
physical, or any other trade designated by the futures market or
security futures market reporting the trade as a non-competitively
executed trade; (r) in the case of OTC options transactions in a
securities customers' account, a unique customer ID for the customer
for whom the trade was executed; and (s) in the case of OTC options,
such other variable terms as provided in Section 6 of Article XVII of
the By-Laws. In addition, new Rule 401(a)(1)(ii) would provide that OCC
may also request certain optional trade information that is not
required as a condition for acceptance.\30\
---------------------------------------------------------------------------
\30\ OCC makes available to its participant Exchanges and
Clearing Members the complete list of required and optional trade
information in an inbound reference guide for Exchange trades.
---------------------------------------------------------------------------
For futures transactions, Rule 401(a)(2)(i) would be amended to
provide that the required terms for acceptance and novation include:
(a) The identity of the Purchasing Clearing Member and the Selling
Clearing Member to the transaction; (b) the clearing date; (c) the
transaction time; (d) the trade source; (e) the trade quantity; (f) the
trade price; (g) the security type; (h) the ticker symbol; (i) the
series/contract date; (j) whether the trade is a purchase or a sale;
(k) the account type; (l) the allocation indicator, if applicable; (m)
the CMTA indicator, if applicable; (n) the Give-Up Clearing Member, if
applicable; and (o) whether the trade is an exchange-for-physical or
block trade or any other trade designated by the futures market or
security futures market reporting the trade as a non-competitively
executed trade. In addition, new Rule 401(a)(2)(ii) would provide that
OCC may also request certain optional trade information that is not
required as a condition for acceptance.
Taken together, these changes are designed to provide a uniform
approach for nearly all Confirmed Trades regarding acceptance and
novation. OCC believes the changes will reduce the complexity of its
Rules and By-Laws, while at the same time providing significantly
greater clarity and transparency in OCC's legal framework for Clearing
Members and other interested parties concerning the point at which OCC
does not have authority to reject a transaction after it has been
properly submitted to and validated by OCC. OCC believes that adopting
this uniform approach regarding acceptance and novation will neither
functionally change the time at which OCC becomes obligated regarding
Confirmed Trades nor otherwise alter the credit risk OCC faces with
respect to such Confirmed Trades.
First, providing that nearly all Confirmed Trades are accepted and
novated upon proper submission functionally would not change the time
at which OCC becomes obligated regarding such Confirmed Trades because
OCC currently has no right to reject Confirmed Trades, upon proper
submission, due to the failure of a Purchasing Clearing Member to pay
any amount due to OCC at or before the settlement time. Second, OCC
generally does not collect margin with respect to such Confirmed Trades
until 9:00 a.m. Central the following business day.\31\ OCC, therefore,
already faces this same credit risk between the acceptance of the
Confirmed Trades and the time that it collects margin from Clearing
Members. Accordingly, OCC does not anticipate that moving the novation
time from the general Commencement Time to earlier in the day as
described above--at the point of acceptance--would alter the credit
risk OCC faces with respect to such Confirmed Trades. In addition, OCC
would continue to have the same authority that it does today to address
any credit risk as
[[Page 25090]]
necessary through intra-day margin collection.\32\
---------------------------------------------------------------------------
\31\ See Article I, Section 1.S.(16) of the By-Laws (defining
the term ``settlement time'' in respect of a Clearing Member's
obligation to pay amounts owed to OCC).
\32\ See OCC Rule 609 (addressing OCC's authority to require
intra-day margin).
---------------------------------------------------------------------------
Further, OCC believes that it would be appropriate to also apply
the uniform acceptance and novation time to OTC Options that are not
Backloaded OTC Options. OTC Options currently are subject to an
alternative Commencement Time, designated for OTC Options that are not
Backloaded OTC Options as the time when a report of OCC's acceptance is
made available to Clearing Members through OCC's clearing system.\33\
In practice, OCC automatically makes a report of its acceptance of such
OTC Options available to Clearing Members in its clearing system,
provided the OTC Option is properly reported to OCC, the contract
passes OCC's validation process, and the contract is not rejected, all
of which generally is completed immediately upon submission of the
contract to OCC.\34\ This is consistent with the new uniform approach
OCC proposed, which would deem nearly all Confirmed Trades to be
accepted and simultaneously novated when they are reported to OCC and
the related position information has been recorded in OCC's clearing
system, which occurs on a real-time basis. Accordingly, OCC believes
there is no operational, risk management, or other reason to exclude
OTC Options that are not Backloaded OTC Options from the proposed
uniform acceptance and novation timing.
---------------------------------------------------------------------------
\33\ Article VI, Section 5 of the By-Laws.
\34\ See Securities Exchange Act Release No. 68434 (December 14,
2012), 77 FR 75243 (December 19, 2012) (SR-OCC-2012-14 and AN-OCC-
2012-01) (discussing the trade submission mechanics for OTC
Options).
---------------------------------------------------------------------------
Proposed Exceptions to the Uniform Acceptance and Novation Timing
For other categories of Confirmed Trades that currently are not
subject to the general definition of Commencement Time (i.e., Confirmed
Trades in futures issued in exchange-for-physical transactions, block
trades, or other trades designated as non-competitively executed), OCC
proposed to preserve the existing structure under which OCC has
authority to reject the transactions even after they are properly
submitted for clearing by creating an exception to the uniform
acceptance and novation timing for such trades. OCC believes that
delayed novation continues to be appropriate for such non-competitively
executed transactions because there is a heightened risk that non-
competitive execution may cause them to be effected at off-market
prices, which could lead to significant losses if a Clearing Member
defaults on the related settlement obligations.\35\
---------------------------------------------------------------------------
\35\ OCC also proposes to add new Interpretation and Policy .05
to provide that OCC will not treat an EFP or block trade as a
noncompetitively executed trade subject to Article XII, Section 7 of
the By-Laws if the Exchange on which such trade is executed has made
representations satisfactory to OCC that the Exchange has rules,
policies or procedures that require each EFP and block trade that is
submitted to OCC to be executed at a reasonable price and that such
price is validated by the Exchange. This new Interpretation and
Policy to Rule 401 would reiterate current Interpretation and Policy
.04 to Article XII, Section 7 of the By-Laws to provide additional
clarity in the Rules around the acceptance and novation time for
competitively executed EFPs and block trades.
---------------------------------------------------------------------------
As proposed, an exception to the uniform acceptance and novation
timing also would be made for Confirmed Trades that are Backloaded OTC
Options, which are defined as OTC Options for which the premium payment
date is prior to the business day on which the transaction is submitted
to OCC for clearing.\36\ OCC believes that an exception for Backloaded
OTC Options remains necessary because their ``backloaded'' nature means
that the premium payment has already been made. Backloaded OTC Options
also are subject to being non-competitively executed and therefore
present the same heightened settlement default risk regarding other
non-competitively executed transactions discussed above. In addition,
because OCC is not able to immediately validate a Backloaded OTC
Options transaction or check its price reasonability upon submission,
OCC believes that it remains appropriate to continue its existing
practice of delaying acceptance and novation for these contracts until
the selling Clearing Member has met its regular morning settlement
obligations on the business day following trade reporting.
---------------------------------------------------------------------------
\36\ See Article I, Section 1.B.(1) of the By-Laws.
---------------------------------------------------------------------------
Provisional Information Regarding Confirmed Trades
OCC proposed that its acceptance and novation time would no longer
be tied to publication of a Daily Position Report, given that OCC's
acceptance of a Confirmed Trade would instead be reflected in the
position information that OCC makes available to Clearing Members
throughout the business day. Accordingly, OCC proposed to amend
Interpretation and Policy .01 to Rule 501 to: (1) Clarify that OCC
makes updated position data reflecting accepted and novated trades
available to its Clearing Members throughout the day; and (2) remove
from that provision a statement that Clearing Members must rely on the
Daily Position Report for definitive information regarding their
positions.
Hedge Loans and Market Loans
In addition to its clearance and settlement of Confirmed Trades,
OCC also acts as a CCP for certain stock lending transactions that are
part of its Stock Loan/Hedge Program and Market Loan Program. OCC
proposed to amend its rules for both programs to better describe its
process for accepting Hedge Loans and Market Loans and to appropriately
harmonize certain provisions governing each type of Stock Loan.\37\
---------------------------------------------------------------------------
\37\ See OCC Rules 2202(b); 2202A(b), (c).
---------------------------------------------------------------------------
Stock Loan/Hedge Loan Program. Hedge Loans are initiated as stock
lending transactions that are negotiated and settled between Clearing
Members at The Depository Trust Company (``DTC'') before they are
reported to OCC. Rule 2202(b) provides that OCC must generally accept
these stock lending transactions upon receipt of a report from DTC that
shows a completed transaction.\38\ However, OCC may reject a
transaction if it determines that it is: (1) Not in accordance with
OCC's By-Laws or Rules; (2) one or both account numbers specified are
invalid for Hedge Loans; or (3) the information provided by DTC
contains errors or omissions. Moreover, Rule 2202(b) provides that if
OCC does not affirmatively reject a reported transaction by such a time
as OCC is authorized to specify from time to time then the transaction
is deemed accepted as a Hedge Loan. Upon acceptance, OCC becomes the
lender to the Borrowing Clearing Member and the borrower to the Lending
Clearing Member. Although OCC has discretion during each business day
to make provisional information available to Clearing Members regarding
their lending and borrowing activity, only the Stock Loan Mark to
Market Activity Report is recognized as providing definitive Hedge Loan
positions.\39\
---------------------------------------------------------------------------
\38\ OCC is not obligated to accept the stock lending
transactions of a Clearing Member that has been suspended by DTC.
See OCC Rule 2210(a). The same condition applies regarding Market
Loans. See OCC Rule 2210A(a).
\39\ See Rule 2202, Interpretation and Policy .01.
---------------------------------------------------------------------------
OCC proposed to amend Rule 2202(b) to clarify that OCC receives and
accepts completed transaction information from DTC throughout the day,
and it would delete the statement that a transaction is deemed accepted
by a particular cut off time if OCC does not affirmatively notify
Clearing Members of a rejection. Rule 2202(b) would instead state that
OCC generally accepts completed transactions reported to it unless: (1)
OCC is otherwise required to reject a transaction because it is not in
accordance with the By-Laws or Rules;
[[Page 25091]]
(2) one or both account numbers specified are invalid; or (3) the
information provided contains unresolved errors or omissions. OCC
believes that these changes will help clarify the time at which Hedge
Loans are accepted and the specific circumstances in which Hedge Loans
will be rejected. As discussed more fully below, the change also would
ensure consistency between parallel provisions in the Stock Loan/Hedge
Program and Market Loan Program regarding the initiation process, which
OCC believes should apply equally across both programs. Finally, a
reference to the Stock Loan Mark to Market Activity Report being the
only definitive statement of positions would be deleted because Hedge
Loan positions would be definitive upon acceptance in OCC's clearing
system.
Market Loan Program. In connection with the Market Loan Program
initiation process, DTC also sends information to OCC regarding
completed stock lending transactions. Rule 2202A(b) provides that, upon
OCC's receipt of an end of day stock loan activity file from DTC, OCC
must accept the transactions as Market Loans unless it is required to
reject them for the same reasons described above concerning Hedge
Loans. The Rule further provides that, upon OCC's affirmative
acceptance, OCC becomes the lender to the Borrowing Clearing Member and
the borrower to the Lending Clearing Member.
As with the proposed changes to the Stock Loan Hedge Program, OCC
proposed to clarify that OCC receives and accepts completed transaction
information from DTC throughout the day. OCC also proposed to delete a
reference to affirmative acceptance in Rule 2202A(b) because the other
proposed changes would clarify that acceptance will generally take
place automatically unless OCC is specifically required to reject
transactions due to the deficiencies described above. A conforming
change also would be made in this regard in Rule 2202A(c). References
to the definitive nature of the Stock Loan Mark to Market Activity
Report would be deleted for the same reasons described above regarding
Hedge Loans.
Streamlining and Reorganization
As part of its continued effort to streamline its By-Laws and
Rules, OCC proposed to relocate certain provisions from Article VI,
Sections 4 through 8 of the By-Laws to Chapter IV of the Rules. This
change would promote a centralized location for provisions that address
trade reporting and novation. OCC also proposed to consolidate certain
provisions in Chapter IV of the Rules to eliminate redundancy. These
proposed organizational changes are summarized below.
OCC would relocate Article VI, Section 4 of OCC's By-Laws regarding
a Purchasing Clearing Member's obligations with respect to a Confirmed
Trade, without amendment, to a new Rule 403. As described above, OCC
would amend Article VI, Section 5 of the By-Laws regarding OCC's
obligations with respect to a Confirmed Trade, and it would be
incorporated into existing Rule 401 and new Rule 404. As described
above, OCC would amend Article VI, Section 6 of the By-Laws regarding
the issuance of cleared contracts, and it would be relocated to a new
Rule 405. OCC would relocate Article VI, Section 7 of the By-Laws
regarding the reporting of confirmed trades incorporate it into Rule
401. More specifically, Article VI, Section 7(b) of the By-Laws would
become Rule 401(e), Section 7(c) would become Rule 401(f), and
Interpretation and Policy .01 to Section 7 would become Interpretation
and Policy .03 to Rule 401. As described above, OCC would amend Article
VI, Section 8 of the By-Laws regarding payments made to OCC and
relocate it to new Rule 406. To accommodate these new rules in Chapter
IV, current Rule 403 would be renumbered as 407, and current Rule 405
would be renumbered as Rule 408. Cross-references also would be updated
to reflect this renumbering throughout Chapter IV of the Rules, as well
as in Article I, Section 1.G.(3) and (4), Article VI, Section 2, and
Article XVII, Sections 2(a) and 2(c)(1) of the By-Laws, and Rules
504(e), 504(g), and 611(a).
Additionally, to create a more centralized trade reporting rule,
OCC proposed to delete existing Rule 404 regarding the reporting of
confirmed trades in OTC Options and to incorporate its substance into
Rule 401. This would require the addition of references to OTC Trade
Sources in Rule 401(a) and (b), and the merger of language from Rule
404(b) into Rule 401(b) and from Rule 404(c) into Rule 401(d).
Elimination of Dormant Products and Rules
OCC no longer clears and settles cross-rate foreign currency
options and flexibly-structured index options denominated in a foreign
currency. Accordingly, OCC proposed to delete certain provisions from
its By-Laws and Rules that only apply to such products. When OCC still
actively cleared and settled these products they were subject to
delayed novation. OCC therefore believes that eliminating the rules
governing these products at this time would avoid confusion and enhance
clarity regarding OCC's proposed uniform approach to trade acceptance
and novation timing. Consequently, OCC proposed to delete Articles XX
and XXIII of its By-Laws, which governs cross-rate foreign currency
options, and Chapters XXI and XXIV of its Rules, which govern flexibly-
structured index options denominated in a foreign currency.
Additionally, OCC proposed to eliminate all other references to such
products throughout its By-Laws and Rules, including in Section 1(d) of
Article V, and Interpretation and Policy .03 to Section 1 of Article V
of the By-Laws and Rules 607, 1107(a)(3) and 1107(a)(4), as well as in
the definitions of Option Contract, Trading Currency, and Underlying
Currency in Article I of the By-Laws.
OCC also proposed to delete Rule 402 concerning the supplementary
reporting of Confirmed Trades. Rule 402 grants OCC the discretion to,
in certain extraordinary circumstances, accept from an Exchange after
the cut-off time for receiving Confirmed Trade information for a
particular business day (``trade date''), supplementary Confirmed Trade
information reflecting the comparison of additional trades executed on
or before the trade date that remained unconfirmed at the cut-off time.
Rule 402 was adopted at a time when OCC received matched trade
information from Exchanges for a given trade date in a single batch
submission after the close of the trading day.\40\ Under this old
process, trades that remained unmatched when an Exchange prepared its
nightly trade tape to OCC were omitted from the tape and, if a trade
was subsequently matched, the Exchange reported the trade to OCC the
following night to be processed as if it had not been executed until
the date when it was reported. OCC adopted Rule 402 to accommodate the
late submission of trades that had not been matched in time to be
submitted on the Exchange's original trade tape, thereby allowing those
trades to be processed as if they were submitted on their original
trade date. OCC proposed to delete Rule 402 because it is no longer
applicable to OCC's current clearing processes, whereby OCC
continuously receives matched trade information from Exchanges on a
real-time basis.
---------------------------------------------------------------------------
\40\ See Filing and Order Granting Accelerated Approval of
Proposed Rule Change of Options Clearing Corporation, Securities
Exchange Act Release No. 21233 (August 10, 1984) (SR-OCC-84-12).
---------------------------------------------------------------------------
[[Page 25092]]
II. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization.\41\ After carefully considering the proposed rule change,
the Commission believes that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to OCC. More specifically, the Commission
believes that the proposal is consistent with Section 17A(b)(3)(F) of
the Act \42\ and Rule 17Ad-22(e)(1) under the Act.\43\
---------------------------------------------------------------------------
\41\ 15 U.S.C. 78s(b)(2)(C).
\42\ 15 U.S.C. 78q-1(b)(3)(F).
\43\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act \44\ requires, among other things,
that the rules of a clearing agency be designed to foster cooperation
and coordination with persons engaged in the clearance and settlement
of securities transactions, promote the prompt and accurate clearance
and settlement of securities and derivatives transactions, and, in
general, protect investors and the public interest. As described above,
the proposed rule change is intended to provide a clear and uniform
acceptance and novation time for nearly all Confirmed Trades and to
clarify the acceptance and novation timing regarding Stock Loans by
specifying the time at which novation occurs and when Confirmed Trades
and Stock Loans may no longer be rejected by OCC. Under the proposed
uniform acceptance time, OCC would deem nearly all Confirmed Trades to
be accepted and simultaneously novated when they are reported to OCC,
provided that the transaction information reported to OCC passes OCC's
validation procedures and is provided to OCC at such time as OCC's
rules prescribe. In addition, the proposed rule change would eliminate
certain dormant rules no longer applicable to OCC's clearance and
settlement services and processes.
---------------------------------------------------------------------------
\44\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The Commission believes that these changes would provide greater
clarity and transparency to Clearing Members, other users of OCC, and
the general public regarding OCC's processes for the reporting of
transactions, acceptance, and novation. Instead of parsing through
multiple different definitions and provisions in various locations
throughout OCC's By-Laws and Rules to identify the different times at
which acceptance and novation occurs for different transactions, users
and other interested parties will be able to refer to more uniform
approach set forth in a single chapter of OCC's Rules. This, in turn,
will help avoid potential confusion and ambiguity. Accordingly, the
Commission believes that, taken together, these changes will help
foster cooperation and coordination with persons engaged in the
clearance and settlement of securities transactions, promote the prompt
and accurate clearance and settlement of securities and derivatives
transactions, and, in general, protect investors and the public
interest consistent with Section 17A(b)(3)(F) of the Act.\45\
---------------------------------------------------------------------------
\45\ Id.
---------------------------------------------------------------------------
B. Consistency with Rule 17Ad-22(e)(1)
Rule 17Ad-22(e)(1) \46\ requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide for a well-founded, clear,
transparent and enforceable legal basis for each aspect of its
activities in all relevant jurisdictions. The Commission believes the
proposed changes are consistent with Rule 17Ad-22(e)(1) for the reasons
set forth below.
---------------------------------------------------------------------------
\46\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------
First, by modifying the current process so that all Confirmed
Trades, subject to limited exceptions, would be deemed accepted and
simultaneously novated when they are reported to OCC and the related
position information has been recorded in OCC's clearing system, the
proposed rule change would provide a clear and uniform time regarding
OCC's acceptance and novation for nearly all Confirmed Trades and
clarify OCC's acceptance and novation process regarding Stock Loans.
The Commission believes this would bring clarity and transparency to
OCC's By-Laws and Rulebook and help simplify the process of reporting
transactions, acceptance, and novation, which in turn will help ensure
that OCC has a well-founded, clear, transparent, and enforceable legal
basis regarding the rights and obligations of OCC and Clearing Members
regarding Confirmed Trades, consistent with Rule 17Ad-22(e)(1).
Second, the Commission believes that the streamlining and
reorganizing all of the provisions concerning transaction reporting,
acceptance, and novation and consolidating them in Chapter IV of the
Rules would promote consistency and readability and help avoid
potential confusion and ambiguity, and therefore allow the provisions
to be more easily understood. For example, enumerating the trade
information required to be submitted by participant Exchanges to OCC
for options and futures transactions would allow for greater clarity of
the information required and that may be requested by OCC. Similarly,
by better describing the process by which Hedge Loans and Market Loans
are accepted, OCC would harmonize the relevant provisions of its
Rulebook governing each type of Stock Loan. In addition, the Commission
believes eliminating provisions related to processes no longer
supported by OCC and dormant products that are no longer cleared and
settled by OCC would improve the clarity and transparency of its By-
Laws and Rules. Accordingly, the Commission believes that the changes
proposed in the proposed rule change are consistent with Rule 17Ad-
22(e)(1) under the Act.\47\
---------------------------------------------------------------------------
\47\ Id.
---------------------------------------------------------------------------
III. Solicitation of Comments on Amendment No. 1
Interested persons are invited to submit written data, views and
arguments concerning whether Amendment No. 1, is consistent with the
Act. Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-OCC-2018-007 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2018-007. 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
[[Page 25093]]
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 such filing also will be available
for inspection and copying at the principal office of OCC and on OCC's
website at https://www.theocc.com/about/publications/bylaws.jsp.
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-2018-007 and
should be submitted on or before June 15, 2018.
IV. Approval of Proposed Rule Change, as Modified by Amendment No. 1
As discussed above, OCC submitted Amendment No. 1 to accurately
reflect existing Rule 2202(c), which would not be affected by the
proposed rule change. The Commission believes that Amendment No. 1 does
not raise any novel issues or alter the proposed changes in any way. In
addition, the Commission finds that the proposed rule change, as
modified by Amendment No. 1, is consistent with Act and applicable
rules thereunder for the reasons discussed above. Accordingly, the
Commission finds good cause to approve the proposed rule change, as
modified by Amendment No. 1 pursuant to Section 19(b)(2) of the
Act.\48\
---------------------------------------------------------------------------
\48\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
V. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change, as modified by Amendment No. 1, is consistent
with the requirements of the Act, in particular with the requirements
of Section 17A of the Act \49\ and Rule 17Ad-22(e)(1) thereunder.
---------------------------------------------------------------------------
\49\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) \50\ of the
Act, that the proposed rule change (SR-OCC-2018-007) be, and it hereby
is, approved.
---------------------------------------------------------------------------
\50\ 15 U.S.C. 78s(b)(2).
\51\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\51\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-11611 Filed 5-30-18; 8:45 am]
BILLING CODE 8011-01-P
