Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change, as Modified by Partial Amendment No. 2, Concerning Updates to and Formalization of OCC's Recovery and Orderly Wind-Down Plan, 44091-44096 [2018-18673]
Download as PDF
<![CDATA[
Federal Register / Vol. 83, No. 168 / Wednesday, August 29, 2018 / Notices
Commission believes that the 200
percent cap in the proposed changes is
consistent with Rule 17Ad–22(e)(4)(ix).
sradovich on DSK3GMQ082PROD with NOTICES
5. Authority To Take Timely Action To
Contain Losses and Liquidity Demands
and Continue To Meet Obligations
Rule 17Ad–22(e)(13) requires, in
relevant part, that OCC establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to ensure that it has
the authority and operational capacity
to take timely action to contain losses
and liquidity demands and continue to
meet its obligations.49 As described
above, OCC’s proposal would provide
OCC with modified assessment powers
and new tools of Voluntary Payments,
Voluntary Tear-Ups, and Partial TearUps.
As discussed above, the Commission
recognizes that a tear-up would result in
termination of positions of nondefaulting Clearing Members. However,
because OCC would only be able to use
its tear-up authority after it has
conducted an auction pursuant to its
Rules and when OCC has determined
that it may not have sufficient financial
resources to meet its obligations, a tearup would only arise in an extreme stress
scenario. Further, use of tear-up in such
circumstances could potentially return
OCC to a matched book quickly, thereby
containing its losses.
The Commission believes that these
tools are designed to provide greater
certainty to Clearing Members seeking
to estimate the potential risks and losses
arising from their use of OCC, while
enabling OCC to promptly return to a
matched book. The Commission
believes that returning to a matched
book pursuant to these provisions in the
context of OCC’s default management
and recovery facilitates OCC’s
operational capacity to timely contain
losses and liquidity demands while
continuing to meet its obligations. Thus,
the Commission believes that the
proposed changes are consistent with
Rule 17Ad–22(e)(13).50
6. Public Disclosure of Key Aspects of
Default Rules
Rules 17Ad–22(e)(23)(i) and (ii)
require, in relevant part, that OCC
establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to provide for the
public disclosure of all relevant rules
and material procedures, including key
aspects of default rules and procedures,
proposed rule change including, among other
things, a 300 percent cap on non-defaulting
participants’ liability during a cooling-off period).
49 17 CFR 240.17Ad–22(e)(13).
50 Id.
VerDate Sep<11>2014
17:04 Aug 28, 2018
Jkt 244001
as well as sufficient information to
enable participants to identify and
evaluate the risks, fees and other
material costs they incur by
participating in OCC.51 The
Commission believes that the proposed
changes address key aspects of OCC’s
default rules and procedures, thereby
providing Clearing Members with a
better understanding of the potential
risks and costs they might face in an
extreme event where OCC may use its
proposed recovery tools, including the
potential use of the Special Charge.
Accordingly, the Commission believes
that OCC has disclosed these key
aspects of its default rules and
procedures, consistent with Rule 17Ad–
22(e)(23)(i) and (ii).52
IV. Conclusion
It is therefore noticed, pursuant to
Section 806(e)(1)(I) of the Clearing
Supervision Act,53 that the Commission
does not object to Advance Notice (SR–
OCC–2017–809), as modified by
Amendment No. 2, and that OCC is
authorized to implement the proposed
change as of the date of this notice or
the date of an order by the Commission
approving proposed rule change SR–
OCC–2017–020, as modified by
Amendment No. 2, whichever is later.
By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–18655 Filed 8–28–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83918; File No. SR–OCC–
2017–021]
Self-Regulatory Organizations; The
Options Clearing Corporation; Order
Approving Proposed Rule Change, as
Modified by Partial Amendment No. 2,
Concerning Updates to and
Formalization of OCC’s Recovery and
Orderly Wind-Down Plan
August 23, 2018.
I. Introduction
On December 8, 2017, The Options
Clearing Corporation (‘‘OCC’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change SR–OCC–2017–
021 (‘‘Proposed Rule Change’’) pursuant
to Section 19(b) of the Securities
Exchange Act of 1934 (‘‘Exchange
51 17
CFR 240.17Ad–22(e)(23)(i) and (ii).
CFR 240.17Ad–22(e)(23)(i) and (ii).
53 12 U.S.C. 5465(e)(1)(I).
52 17
PO 00000
Frm 00077
Fmt 4703
Sfmt 4703
44091
Act’’),1 and Rule 19b–4 2 thereunder to
propose to formalize and update its
Recovery and Orderly Wind-Down Plan
(‘‘RWD Plan’’).3 The Proposed Rule
Change was published for comment in
the Federal Register on December 26,
2017.4 On January 25, 2018, the
Commission designated a longer period
of time for Commission action on the
Proposed Rule Change.5 On March 22,
2018, the Commission published an
order to institute proceedings to
determine whether to approve or
disapprove the Proposed Rule Change.6
On July 11, 2018, OCC filed Partial
Amendment No. 1 to the Proposed Rule
Change.7 On July 13, 2018, OCC filed
Partial Amendment No. 2 to the
Proposed Rule Change.8 Notice of
Partial Amendments No. 1 and 2 to the
Proposed Rule Change was published
for public comment in the Federal
Register on August 2, 2018,9 and the
Commission has received no comments
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Notice infra note 4, 82 FR 61072.
4 Securities Exchange Act Release No. 82352 (Dec.
19, 2017), 82 FR 61072 (Dec. 26, 2017) (File No. SR–
OCC–2017–021) (‘‘Notice’’). On December 8, 2017,
OCC also filed a related advance notice (SR–OCC–
2017–810) (‘‘Advance Notice’’) with the
Commission pursuant to Section 806(e)(1) of Title
VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, entitled the Payment,
Clearing, and Settlement Supervision Act of 2010
and Rule 19b–4(n)(1)(i) under the Exchange Act. 12
U.S.C. 5465(e)(1) and 17 CFR 240.19b–4(n)(1)(i),
respectively. The Advance Notice was published in
the Federal Register on January 23, 2018. Securities
Exchange Act Release No. 82514 (Jan. 17, 2017), 83
FR 3224 (Jan. 23, 2018) (SR–OCC–2017–810).
The Financial Stability Oversight Council
designated OCC a systemically important financial
market utility on July 18, 2012. See Financial
Stability Oversight Council 2012 Annual Report,
Appendix A, available at https://www.treasury.gov/
initiatives/fsoc/Documents/2012%20Annual
%20Report.pdf. Therefore, OCC is required to
comply with the Payment, Clearing and Settlement
Supervision Act and file advance notices with the
Commission. See 12 U.S.C. 5465(e).
5 Securities Exchange Act Release No. 82586 (Jan.
25, 2018), 83 FR 4527 (Jan. 31, 2018) (File No. SR–
OCC–2017–021).
6 Securities Exchange Act Release No. 82927
(Mar. 22, 2018), 83 FR 13176 (Mar. 27, 2018) (File
No. SR–OCC–2017–021).
7 In Partial Amendment No. 1, OCC made three
modifications to the Notice: (1) Removal of sections
of the RWD Plan concerning OCC’s proposed
authority to require cash settlement of certain
physically delivered options and single stock
futures; (2) updating the list of OCC’s Critical
Support Functions; and (3) making three changes to
the RWD Plan to conform to a change
contemporaneously proposed in Partial
Amendment No. 2 to OCC filing SR–OCC–2017–020
concerning enhanced and new tools for recovery
scenarios.
8 Partial Amendment No. 2 superseded and
replaced Partial Amendment No. 1 in its entirety,
due to technical defects in Partial Amendment No.
1.
9 See Securities Exchange Act Release No. 83732
(Jul. 27, 2018), 83 FR 37864 (Aug. 2, 2018) (‘‘Notice
of Amendment’’).
2 17
E:\FR\FM\29AUN1.SGM
29AUN1
44092
Federal Register / Vol. 83, No. 168 / Wednesday, August 29, 2018 / Notices
in response. This order approves the
Proposed Rule Change as modified by
Partial Amendment No. 2 (‘‘Amended
Proposed Rule Change’’).
sradovich on DSK3GMQ082PROD with NOTICES
II. Description of the Amended
Proposed Rule Change 10
OCC’s proposal would formalize and
update its RWD Plan. The purpose of
the RWD Plan is to: (i) Demonstrate that
OCC has considered the scenarios
which may potentially prevent it from
being able to provide the services OCC
determined to be critical as a goingconcern; (ii) provide appropriate plans
for OCC’s recovery or orderly winddown based on the results of such
consideration; and (iii) impart to
relevant authorities the information
reasonably anticipated to be necessary
for purposes of recovery and orderly
wind-down planning.
The RWD Plan would identify the
services provided by OCC that OCC has
determined to be critical, and it would
set forth five qualitative events that
could trigger a recovery scenario and six
qualitative events that could trigger an
orderly wind-down. It would also
address six scenarios that describe
OCC’s possible responses to series of
stresses. The RWD Plan would also
include an overview designed to
provide information that OCC believes
would be essential to relevant
authorities for purposes of recovery and
orderly wind-down planning, as well as
to provide readers of the Plan with
necessary context for subsequent
discussion and analysis. The overview
would also include a detailed
description of OCC’s business,
summarizing the role OCC has in the
options market as well as the services
and products it provides to its clearing
members and market participants. The
RWD Plan would identify fourteen
internal support functions at OCC and
provide a brief description of the
activities performed by each support
function. Similar to the information
regarding OCC’s business, this
information is designed to inform the
relevant authorities for orderly winddown planning and as necessary context
for understanding other elements of the
RWD Plan.
A. Designating Critical Services and
Critical Support Functions
The RWD Plan would define the
terms ‘‘Critical Services’’ and ‘‘Critical
Support Functions.’’ Specifically, a
Critical Service would be a service
provided by OCC that, if interrupted,
10 Capitalized terms used but not defined herein
have the meanings specified in OCC’s Rules and ByLaws, available at https://www.theocc.com/about/
publications/bylaws.jsp.
VerDate Sep<11>2014
17:04 Aug 28, 2018
Jkt 244001
would likely have a material negative
impact on participants or significant
third parties, give rise to contagion, or
undermine the general confidence of
markets that OCC serves. A Critical
Support Function would be a function
within OCC that must continue in some
capacity for OCC to be able to continue
providing its Critical Services.
The RWD Plan would describe the
framework that OCC uses to determine
whether a service is critical. This
framework includes four criteria to
determine if failure or discontinuation
of a particular service would impact
financial and operational capabilities of
OCC’s clearing members, other FMUs,
or the broader financial system: (1)
Market dominance, (2) substitutability,
(3) interconnectedness, and (4) barriers
to entry. The current set of services
designated as Critical Services under the
RWD Plan is based on the analysis of
these measureable indicators and
subsequent internal discussion at OCC.
The Critical Services currently include,
but are not limited to, clearance services
for listed options and clearance services
for futures.
implementation with an estimated time
frame for use of the tool, key risks
associated with use of the tool, and the
expected impact and incentives of using
the tool.
B. Recovery Plan
The RWD Plan would include plans
for recovery from scenarios that could
prevent OCC from providing Critical
Services.11 After discussing particular
scenarios, the RWD Plan identifies the
tools that OCC could use as warranted
in such scenarios. These tools fall into
two categories: (1) Enhanced Risk
Management Tools, and (2) Recovery
Tools. An Enhanced Risk Management
Tool is a tool that is designed to
supplement OCC’s existing processes
and other existing tools in scenarios
where OCC faces heightened stresses,
while a Recovery Tool is a tool that is
generally limited to a scenario in which
a specific trigger has occurred. In its
RWD Plan, OCC would define a set of
five such qualitative trigger events
(‘‘Recovery Trigger Events’’).
The sequence and timing of the
deployment of each Recovery Tool is
more structured and lacks the flexibility
inherent in the sequence and timing for
use of the Enhanced Risk Management
Tools. For each tool, the RWD Plan
provides an overview of the tool, and,
as appropriate, a discussion of its
1. Enhanced Risk Management Tools
OCC stated that the Enhanced Risk
Management Tools would be used
prophylactically in an effort to prevent
the occurrence of a Recovery Trigger
Event and would not be limited to
recovery. OCC would not anticipate
applying a rigid order or timing for the
deployment of the Enhanced Risk
Management Tools. The RWD Plan
would include five Enhanced Risk
Management Tools: (1) Use of Current/
Retained Earnings; (2) Minimum
Clearing Fund Cash Contribution; (3)
Borrowing Against Clearing Fund; (4)
Credit Facility; and (5) Non-Bank
Facility.
Use of Current/Retained Earnings.
Under its By-Laws, OCC may use
current and/or retained earnings to
discharge a loss that would be
chargeable against the Clearing Fund,
but would require unanimous consent
from the holders of OCC’s Class A and
Class B common stock. The RWD Plan
acknowledges that the utility of this tool
is limited by the requirement for
shareholder consent and that OCC’s
retained earnings presently amount to a
small fraction of OCC’s existing
prefunded Clearing Fund resources.
OCC stated that, given this amount, the
maximum utility of this tool may be
realized in specific circumstances at
either the beginning of OCC’s loss
waterfall or toward the end of OCC’s
loss waterfall, where it would be
sufficient to fully extinguish liabilities
without triggering the use of another
tool.
Minimum Clearing Fund Cash
Contribution. Under its current rules,
OCC Clearing Members collectively
contribute $3 billion in cash to OCC’s
Clearing Fund.12 In addition, OCC may,
in certain limited circumstances,
increase the minimum cash requirement
up to the then-minimum size of the
Clearing Fund.13 The RWD Plan would
acknowledge that increasing the
minimum cash requirement would
require preparation of OCC
documentation that considers the
11 For the purposes of the RWD Plan, OCC defines
‘‘recovery’’ as ‘‘the actions of [a financial market
utility], consistent with its rules, procedures, and
other ex-ante contractual arrangements, to address
any uncovered credit loss, liquidity shortfall,
capital inadequacy, or business, operational or
other structural weakness, including the
replenishment of any depleted pre-funded financial
resources and liquidity arrangements, as necessary
to maintain the [financial market utility’s] viability
as a going concern.’’
12 See OCC By-Laws, Art. VIII, Section 3(a)(i). The
Commission recently approved a proposal by OCC
that, after implementation, would move this section
of the OCC By-Laws to OCC Rule 1002(a)(i). See
Securities Exchange Act Release No. 83735 (Jul. 27,
2018), 83 FR 37855, 37859 (Aug. 2, 2018) (SR–OCC–
2018–008) (‘‘Order Approving Proposed Rule
Change, as Modified by Amendments No. 1 and 2,
Related to OCC’s Stress Testing and Clearing Fund
Methodology’’).
13 See OCC By-Laws, Art. VIII, Section 3(a)(i).
PO 00000
Frm 00078
Fmt 4703
Sfmt 4703
E:\FR\FM\29AUN1.SGM
29AUN1
Federal Register / Vol. 83, No. 168 / Wednesday, August 29, 2018 / Notices
sradovich on DSK3GMQ082PROD with NOTICES
projected liquidity demands for
successful management of a defaulted
Clearing Member.
Borrowing Against Clearing Fund.
OCC has the authority to borrow against
the Clearing Fund in three
circumstances: (1) To meet obligations
arising out of the default or suspension
of a Clearing Member or any action
taken by OCC under Chapter XI of its
rules pertaining to the suspension of a
clearing member; (2) to borrow or
otherwise obtain funds from third
parties in lieu of immediately charging
the Clearing Fund for a loss that is
reimbursable out of the Clearing Fund;
and (3) to meet liquidity needs for sameday settlement as a result of the failure
of any bank or securities or commodities
clearing organization to achieve daily
settlement.14 The RWD Plan would
acknowledge that any borrowing would
require preparation of OCC
documentation in accordance with OCC
procedures. Further, the RWD Plan
would recognize that the availability of
this tool in advance of a heightened
stress scenario would be unknown
because OCC’s primary liquidity
facilities could already be fully or
partially utilized.
Credit Facility and Non-Bank
Liquidity Facility. OCC maintains a $2
billion dollar senior secured 364-day
revolving credit facility with a syndicate
of lenders for the purpose of providing
OCC with liquidity to meet settlement
obligations as a central counterparty.
The RWD Plan would recognize that an
inherent risk of the credit facility is that
a portion of the syndicate may not
provide funds in timely response to
OCC’s request. OCC also maintains a $1
billion dollar secured non-bank
liquidity facility for the purpose of
providing OCC with a non-bank
liquidity resource to meet settlement
obligations as a central counterparty.
Similar to the risk associated with the
credit facility, the RWD Plan would
recognize the risk that OCC’s
counterparty may not timely execute the
transaction under the non-bank
liquidity facility.
2. Recovery Tools
Under the RWD Plan, Recovery Tools
would be different from Enhanced Risk
Management Tools because OCC’s use
of a Recovery Tool is generally limited
to a scenario in which a Recovery
Trigger has occurred. The RWD Plan
14 See OCC By-Laws, Art. VIII, Section 5(e). The
Commission recently approved a proposal by OCC
that, after implementation, would move this section
of the OCC By-Laws to OCC Rule 1006(f). See Order
Approving Proposed Rule Change Related to OCC
Stress Testing and Clearing Fund Methodology,
supra note 12, 83 FR at 37859.
VerDate Sep<11>2014
17:04 Aug 28, 2018
Jkt 244001
would identify five Recovery Tools, the
last four of which would generally be
deployed in the order they are described
here: (1) Replenishment Capital; (2)
Assessment Powers; (3) Voluntary
Payments; (4) Voluntary Tear-Up; and
(5) Partial Tear-Up.15 As noted above,
the sequence and timing of deployment
of the Recovery Tools would be more
structured than the sequence and timing
of the use of Enhanced Risk
Management Tools.
Replenishment Capital. OCC holds
capital contributed by its stockholder
exchanges who have committed to
replenish OCC’s capital if it falls below
a certain threshold.16 The RWD Plan
would include the replenishment of
capital by OCC’s stockholder exchanges
as a recovery tool.
Assessment Powers. Under OCC’s
rules, OCC has authority to assess a nondefaulting Clearing Member during any
cooling-off period for an amount equal
to 200 percent of the Clearing Member’s
then-required contribution to the
Clearing Fund.17 Following the end of
the cooling-off period, each remaining
Clearing Member must replenish the
Clearing Fund in the amount necessary
to meet its then-required contribution.18
The RWD Plan would recognize the risk
that the use of assessment powers may
incentivize Clearing Members to
withdraw from membership in OCC to
avoid replenishment, and that such
withdrawals would limit the resources
available to OCC for future assessments.
Voluntary Payments. OCC’s rules
provide a framework by which OCC can
receive voluntary payments in response
to a Clearing Member default. Use of
this tool is permissible only where OCC
has determined that it may not have
sufficient resources to satisfy its
obligations and liabilities arising out of
15 For a more detailed description of the Recovery
Tools numbered (2) through (5) here, please see
Securities Exchange Act Release No. 83916 (Aug.
23, 2018) (SR–OCC–2017–020).
16 The requirement to replenish OCC’s capital was
adopted as part of OCC’s plan to raise and maintain
capital at a specified level (‘‘Capital Plan’’). See
Securities Exchange Act Release No. 77112 (Feb. 11,
2016), 81 FR 8294 (Feb. 18, 2016) (SR–OCC–2015–
02). The Capital Plan was later subject to judicial
review by the U.S. Court of Appeals for the District
of Columbia Circuit, which remanded for the
Commission to further analyze whether the Capital
Plan is consistent with the Exchange Act.
Susquehanna Int’l Grp., LLP v . SEC, 866 F.3d 442
(D.C. Cir. 2017). The Commission’s review of the
Capital Plan on remand is ongoing, and the Capital
Plan remains in effect during this ongoing review.
17 The cooling-off period is the period following
a proportionate charge assessed by OCC against the
Clearing Members’ Clearing Fund contributions. It
is a minimum of fifteen days, but could extend to
as much as twenty days from the date of the
proportionate charge based on intervening events.
18 A Clearing Member may avoid liability for
replenishment by terminating its membership in
OCC prior to the end of the cooling-off period.
PO 00000
Frm 00079
Fmt 4703
Sfmt 4703
44093
the default. The RWD Plan would
describe the processes involved in
calling for and receiving voluntary
payments, including the issuance of a
notice to Clearing Members. The RWD
Plan would recognize the risk that
Clearing Members would be unwilling
or unable to make voluntary payments.
As an incentive for Clearing Members to
provide voluntary payments, a nondefaulting Clearing Member who made
a voluntary payment would receive
priority in reimbursement from amounts
recovered by OCC from the estate of a
defaulting Clearing Member.
Voluntary Tear-up. OCC’s rules
provide a framework by which nondefaulting Clearing Members and
customers could be permitted to
voluntarily extinguish (i.e., voluntarily
tear-up) open positions in response to a
Clearing Member default. Voluntary
Tear-up is permissible only where OCC
has determined that it may not have
sufficient resources to satisfy its
obligations and liabilities arising out of
the default. The RWD Plan would
contemplate that OCC would initiate
any tear-up process after the market
close on the day that OCC determines it
may have insufficient resources. The
RWD Plan would further anticipate that
OCC would publish notice of tear-up no
later than the following morning (prior
to the market open), and that positions
would be extinguished following the
market close. The RWD Plan would also
recognize the risk that Clearing
Members would be unwilling or unable
to participate in the voluntary tear-up
process. A non-defaulting Clearing
Member that faced losses, costs, or
expenses in reestablishing voluntarily
torn-up positions could receive
compensation from amounts recovered
by OCC from the estate of a defaulting
Clearing Member ahead of other
Clearing Members that faced such
losses, costs, or expenses after
reestablishing torn up positions.
Partial Tear-up. OCC’s rules provide a
framework by which OCC could
extinguish the remaining open positions
of a defaulted Clearing Member or its
customers (i.e., Partial Tear-up) in
response to a Clearing Member default.
The RWD Plan would anticipate that the
Partial Tear-up process would be
intertwined with the Voluntary Tear-up
process described above. The RWD Plan
also would contemplate the
compensation of Clearing Members
facing losses, costs, or expenses after
reestablishing torn up positions from
Clearing Fund contributions.
The RWD Plan also would provide a
mapping of Enhanced Risk Management
Tools and Recovery Tools to different
types of risk exposures. Such risk
E:\FR\FM\29AUN1.SGM
29AUN1
44094
Federal Register / Vol. 83, No. 168 / Wednesday, August 29, 2018 / Notices
sradovich on DSK3GMQ082PROD with NOTICES
exposures include: (1) Uncovered credit
losses; (2) liquidity shortfalls; (3)
replenishment of financial resource; (4)
losses related to business, operational,
or other structural weaknesses; and (5)
re-establishment of a matched book. The
RWD Plan discusses how each tool
would apply to these risk categories and
would reference the stress scenarios
contemplated by the RWD Plan.
The RWD Plan would outline an
escalation process for the occurrence of
each Recovery Trigger.19 Under the
RWD Plan, OCC’s Enterprise Risk
Management and Financial Risk
Management groups would be
responsible for recommending which, if
any, of the tools described above should
be used in a given situation. Further,
OCC’s Chief Executive Officer and
Executive Chairman would be
responsible for approval of such
recommendations, and OCC’s Chief Risk
Officer and Management Committee
would be responsible for overseeing
deployment of such tools. Finally,
OCC’s Board and the Risk Committee of
the Board would be responsible for
generally overseeing OCC’s recovery
efforts.
C. Orderly Wind-Down Plan
The RWD Plan would also include
OCC’s wind-down plan and include
scenarios that could prevent OCC from
being able to provide Critical Services as
a going-concern. OCC would identify its
wind-down objective as the pursuit of
financial stability and ensuring the
continuity of critical functions. The
RWD Plan would provide OCC’s
assumptions concerning the wind-down
process regarding: (1) Duration of winddown; (2) cost of wind-down; (3) OCC’s
capitalization; and (4) the maintenance
of Critical Services and Critical Support
Functions. It also would identify six
wind-down triggers (‘‘WDP Trigger
Events’’), the occurrence of which could
jeopardize the viability of OCC’s
recovery. Under the RWD Plan, the
occurrence of a WDP Trigger Event
would necessitate notification of
regulators, including the Commission,
the U.S. Commodity Futures Trading
Commission, and the Federal Deposit
Insurance Corporation, as well as
internal notifications to OCC senior
management.
The RWD Plan would reference
critical interconnections and key
agreements for consideration in the
context of wind-down. The RWD Plan
also would discuss OCC’s key actions in
19 The RWD Plan also would discuss notification
of regulators, including the Commission, the U.S.
Commodity Futures Trading Commission, and the
Federal Deposit Insurance Corporation, in response
to the occurrence of a Recovery Trigger.
VerDate Sep<11>2014
17:04 Aug 28, 2018
Jkt 244001
wind-down including the: (1) Decision
by OCC’s Board to initiate wind-down;
(2) institution of heightened clearing
member requirements; (3) imposition of
heightened capital requirements for
clearing members; (4) imposition of
increased margin requirements; (5)
cessation of investment by OCC; (6)
institution of new operational practices;
and (7) targeted reductions in force.
The RWD Plan also would identify
transactions that could be entered into
to accomplish OCC’s wind-down
objectives: (1) Stock transactions; (2)
merger transactions; and (3) asset
transactions. The RWD Plan focuses
discussion of wind-down transactions
on issues including, but not limited to,
governance and regulatory issues. The
goal of any such transaction would be
to transfer ownership of OCC in a
manner that ensures the continuation of
OCC’s critical services; however, the
RWD Plan also would contemplate the
cessation of Critical Services through
OCC’s existing close-out netting rules.20
D. Governance
The RWD Plan would also
memorialize the governance processes
for maintenance, review, and approval
of the RWD Plan. Under the RWD Plan,
all changes would originate in a
recommendation from OCC’s RWD
Working Group. Changes would go
through a series of consecutive rounds
of review and approval by OCC’s
Management Committee, the Risk
Committee of OCC’s Board of Directors,
and the full Board of Directors, which
would have final approval authority.
III. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Exchange
Act directs the Commission to approve
a proposed rule change of a selfregulatory organization if it finds that
such proposed rule change is consistent
with the requirements of the Exchange
Act and the rules and regulations
thereunder applicable to such
organization.21 After carefully
considering the Amended Proposed
Rule Change, the Commission believes
the proposal is consistent with the
requirements of the Exchange Act and
the rules and regulations thereunder
applicable to OCC. More specifically,
the Commission finds that the Amended
Proposed Rule Change is consistent
with Section 17A(b)(3)(F) of the
Exchange Act 22 and Rules 17Ad–
22(e)(2)(i), (iii), and (v), 17Ad–
20 See
also OCC By-Laws, Art. VI, Section 27.
U.S.C. 78s(b)(2)(C).
22 15 U.S.C. 78q–1(b)(3)(F).
21 15
PO 00000
Frm 00080
Fmt 4703
Sfmt 4703
22(e)(3)(ii), and 17Ad–22(e)(15)(i)
thereunder.23
A. Consistency With Section
17A(b)(3)(F) of the Exchange Act
Section 17A(b)(3)(F) of the Exchange
Act requires that the rules of a clearing
agency be designed to, among other
things, promote the prompt and
accurate clearance and settlement of
securities transactions, assure the
safeguarding of securities and funds
which are in the custody or control of
the clearing agency or for which it is
responsible, and, in general, to protect
investors and the public interest.24
As described above, the RWD Plan
would specify the Enhanced Risk
Management Tools and Recovery Tools
available to OCC in recovery and in an
orderly wind-down, as well as the
governance framework applicable to the
use of such tools. The RWD Plan would
analyze the use of the Enhanced Risk
Management Tools and Recovery Tools,
the incentives created by such tools, and
the risks associated with using such
tools. The Commission believes that by
specifying the tools that OCC would
take in either a recovery or a winddown, the RWD Plan would enhance
OCC’s ability to address circumstances
specific to an extreme stress event,
thereby increasing the likelihood that
OCC could execute a successful
recovery or orderly wind-down in such
an event. In increasing the likelihood
that OCC could execute a successful
recovery or orderly wind-down, the
RWD Plan would enhance OCC’s ability
to maintain continuity of its critical
services (including clearance and
settlement services) during, through,
and following periods of extreme stress
giving rise to the need for recovery,
thereby promoting the prompt and
accurate clearance and settlement of
securities transactions. The Commission
also believes that the rules proposed in
the RWD Plan are designed to assure the
safeguarding of securities or funds in
the custody or control of OCC by
reducing the likelihood of a disorderly
or unsuccessful recovery or wind-down,
which could otherwise disrupt access to
such securities or funds.
Further, the Commission believes that
the RWD Plan is designed, in general, to
protect investors and the public interest
by establishing a plan to effectuate an
orderly wind-down. The RWD Plan’s
governance processes and regulatory
notice provisions could facilitate either
the orderly transfer of OCC’s Critical
Services to another entity or the orderly
23 17 CFR 240.17Ad–22(e)(2)(i), (iii), and (v);
(e)(3)(ii); (e)(15)(i).
24 15 U.S.C. 78q–1(b)(3)(F).
E:\FR\FM\29AUN1.SGM
29AUN1
Federal Register / Vol. 83, No. 168 / Wednesday, August 29, 2018 / Notices
sradovich on DSK3GMQ082PROD with NOTICES
close-out of positions. Providing
additional information regarding the
potential orderly transfer of services or
close-out of positions would benefit
Clearing Members and their customers
by providing greater transparency and
certainty regarding the potential
disposition or treatment of their
positions and assets at OCC, thereby
benefiting market participants more
broadly.
Therefore, the Commission believes
that the Amended Proposed Rule
Change would promote the prompt and
accurate clearance and settlement of
securities transactions, assure the
safeguarding of securities and funds in
OCC’s custody and control, and, in
general, protect investors and the public
interest, consistent with the Section
17A(b)(3)(F) of the Act.25
B. Consistency With Rules 17Ad–
22(e)(2)(i), (iii), and (v) Under the
Exchange Act
Rules 17Ad–22(e)(2)(i), (iii), and (v)
require that OCC establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
provide for governance arrangements
that are clear and transparent, that
support the public interest requirements
in Section 17A of the Exchange Act
applicable to clearing agencies, and the
objectives of owners and participants,
and that specify clear and direct lines of
responsibility.26
The RWD Plan would outline an
escalation process for the occurrence of
a Recovery Trigger Event, which would
provide a governance framework for the
use and functioning of the Enhanced
Risk Management Tools and Recovery
Tools in addition to those specified
elsewhere in OCC’s rules. It would also
identify the internal notification
requirements that would apply to WDP
Trigger Events and establish the role of
the Board in determining whether to
enter into a wind-down or take other
key actions, consistent with the
governance specified elsewhere in
OCC’s rules.
Moreover, the RWD Plan would
identify the internal governance process
for the approval of subsequent changes
to OCC’s RWD Plan. The RWD Plan
would also specify the process OCC
would take to receive input from
various parties at OCC, including
management and the Board.
Taken together, the Commission
believes that these lines of control could
contribute to establishing,
implementing, maintain and enforcing
clear and transparent governance
arrangements that support the public
interest requirements in Section 17A of
the Exchange Act applicable to clearing
agencies, and the objectives of owners
and participants.
Therefore, the Commission believes
that the proposed changes are consistent
with Rules 17Ad–22(e)(2)(i), (iii), and
(v).27
C. Consistency With Rule 17Ad–
22(e)(3)(ii) Under the Exchange Act
Rule 17Ad–22(e)(3)(ii) requires that
OCC establish, implement, maintain and
enforce written policies and procedures
reasonably designed to maintain a
sound risk management framework for
comprehensively managing legal, credit,
liquidity, operational, general business,
investment, custody, and other risks
that arise in or are borne by OCC, which
includes plans for the recovery and
orderly wind-down of OCC necessitated
by credit losses, liquidity shortfalls,
losses from general business risk, or any
other losses.28
The Commission believes that the
information the RWD Plan would
provide about the OCC’s recovery tools
would enhance OCC’s ability to recover
from credit losses, liquidity shortfalls,
general business risk losses, or other
losses, consistent with Rule 17Ad–
22(e)(3)(ii).29 Specifically, the
information from the RWD Plan would
enable OCC to prepare in advance for
the use of such tools, which would in
turn enhance OCC’s ability to use such
tools effectively to carry out a successful
recovery. In addition, by establishing a
single source of information about, and
steps needed to effectuate, a recovery of
OCC, the RWD Plan would allow OCC
personnel to effectuate a recovery in a
consistent and coordinated fashion, and
would thereby increase the likelihood of
a successful recovery. Moreover, by
identifying and assessing available
Enhanced Risk Management Tools and
Recovery Tools, the Commission
believes that the RWD Plan would
enhance OCC’s ability to use such tools
effectively to bring about a recovery by
identifying in advance which tools may
be most effective for different situations
or needs, consistent with Rule 17Ad–
22(e)(3)(ii).30
Similarly, in providing detailed
information about the assumptions,
actions, and objectives related to
triggering and implementing the winddown portion of the RWD Plan,
discussed in more detail above, the
Commission believes that the RWD Plan
27 Id.
28 17
25 15
U.S.C. 78q–1(b)(3)(F).
26 17 CFR 240.17Ad–22(e)(2)(i), (iii), and (v).
VerDate Sep<11>2014
17:04 Aug 28, 2018
Jkt 244001
would enhance OCC’s ability to
effectuate an orderly wind-down,
consistent with Rule 17Ad–
22(e)(3)(ii).31 Specifically, by setting out
in advance the potential events that
could cause OCC to trigger, and
transactions by which OCC would
effectuate, a wind-down, the RWD Plan
would enable OCC to prepare in
advance for a wind-down, which the
Commission believes would enhance
OCC’s ability to use the RWD Plan
effectively to carry-out an orderly winddown. In addition, by establishing a
single source of information about, and
steps needed to effectuate, a wind-down
of OCC, the Commission believes the
RWD Plan would allow OCC personnel
to effectuate a wind-down in a
consistent and coordinated fashion, and
would thereby increase the likelihood of
an orderly wind-down. Finally, the
RWD Plan would identify the legal basis
for OCC’s actions with respect to a
potential wind-down, including
relevant citations to provisions of the
rule books of its various clearing
services and contractual agreements,
which the Commission believes would
further facilitate an orderly wind-down
process by providing OCC with a single
source of information and steps needed
for a wind-down, consistent with Rule
17Ad–22(e)(3)(ii).32
Therefore, the Commission believes
that the proposed changes to adopt
plans for the recovery and orderly winddown of OCC are consistent with Rule
17Ad–22(e)(3)(ii).33
D. Consistency With Rules 17Ad–
22(e)(15)(i) Under the Exchange Act
Rule 17Ad–22(e)(15)(i) requires OCC
to establish, implement, maintain and
enforce written policies and procedures
reasonably designed to identify,
monitor, and manage its general
business risk and hold sufficient liquid
net assets funded by equity to cover
potential general business losses so that
OCC can continue operations and
services as a going concern if those
losses materialize, including by
determining the amount of liquid net
assets funded by equity based upon its
general business risk profile and the
length of time required to achieve a
recovery or orderly wind-down, as
appropriate, of its critical operations
and services if such action is taken.34
OCC’s RWD Plan would estimate
costs related to a wind-down based on
a series of assumptions laid out in the
RWD Plan. These assumptions include
31 Id.
CFR 240.17Ad–22(e)(3)(ii).
32 Id.
29 Id.
33 Id.
30 Id.
34 17
PO 00000
Frm 00081
Fmt 4703
Sfmt 4703
44095
E:\FR\FM\29AUN1.SGM
CFR 240.17Ad–22(e)(15)(i).
29AUN1
44096
Federal Register / Vol. 83, No. 168 / Wednesday, August 29, 2018 / Notices
duration of the wind-down process,
OCC’s capitalization through the winddown process, the maintenance of
Critical Services and Critical Support
Functions, and the retention of
personnel and contractual relationships.
OCC also provided information
regarding its assumption about the cost
of the wind-down process. Further, the
RWD Plan identifies potential
transactions that could be effected to
accomplish the objectives of wind-down
with the ultimate goal of transferring
ownership of OCC itself by the
consummation or a consensual sale or
similar transaction, in a manner that
ensures the continuation of OCC’s
Critical Services. The Commission
considered the assumptions that the
RWD Plan makes regarding wind-down
as well as the potential transactions in
which OCC might engage in the event of
a wind-down. The Commission also
considered the estimated cost of winddown noted in the RWD Plan in light of
OCC’s rules regarding the maintenance
of certain capital levels and qualifying
liquid resources. The Commission
believes that the RWD Plan, which
indicates the cost at which OCC could
effectuate an orderly wind-down, i.e., at
a lower cost than the amount of its
liquid resources is consistent with Rule
17Ad–22(e)(15)(i).35
Therefore, the Commission believes
that the proposed changes that would
determine costs associated with an
orderly wind-down and that would
further ensure that OCC holds liquid net
assets greater than these costs, are
consistent with Rule 17Ad–
22(e)(15)(i).36
IV. Conclusion
sradovich on DSK3GMQ082PROD with NOTICES
On the basis of the foregoing, the
Commission finds that the Amended
Proposed Rule Change is consistent
with the requirements of the Exchange
Act, and in particular, with the
requirements of Section 17A of the
Exchange Act 37 and the rules and
regulations thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,38
that the Proposed Rule Change (SR–
OCC–2017–021), as modified by Partial
Amendment No. 2, be, and it hereby is,
approved.
35 Id.
36 Id.
37 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).
38 15 U.S.C. 78s(b)(2).
39 17 CFR 200.30–3(a)(12).
VerDate Sep<11>2014
17:04 Aug 28, 2018
Jkt 244001
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.39
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–18673 Filed 8–28–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83925; File No. SR–
CboeBYX–2018–017]
Self-Regulatory Organizations; Cboe
BYX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change Related to Fees
for Use on Cboe BYX Exchange, Inc.
August 23, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on August 9,
2018, Cboe BYX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BYX’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II and III
below, which Items have been prepared
by the Exchange. The Exchange has
designated the proposed rule change as
one establishing or changing a member
due, fee, or other charge imposed by the
Exchange under Section 19(b)(3)(A)(ii)
of the Act 3 and Rule 19b–4(f)(2)
thereunder,4 which renders the
proposed rule change effective upon
filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange filed a proposal to
amend the Exchange’s fee schedule
applicable to its equities trading
platform to: (1) Increase the ADV
requirements to qualify for Add/Remove
Volume Tier 6 associated with fee codes
W, BB, and N, and (2) increase the
routing fee charged to orders routed to
Investors Exchange LLC using the
Destination Specific routing strategy
under fee code IX, and eliminate an
outdated reference to the TRIM and
TRIM2 routing strategies in this fee
code.
The text of the proposed rule change
is available at the Exchange’s website at
www.markets.cboe.com, at the principal
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
4 17 CFR 240.19b–4(f)(2).
2 17
PO 00000
Frm 00082
Fmt 4703
Sfmt 4703
office of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at 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.
(A) Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to amend the Exchange’s fee
schedule applicable to its equities
trading platform (‘‘BYX Equities’’) to: (1)
Increase the ADV 5 requirements to
qualify for Add/Remove Volume Tier 6
associated with fee codes W,6 BB,7 and
N,8 and (2) increase the routing fee
charged to orders routed to Investors
Exchange LLC (‘‘IEX’’) using the
Destination Specific 9 routing strategy
under fee code IX,10 and eliminate an
outdated reference to the TRIM and
5 ‘‘ADAV’’ means average daily added volume
calculated as the number of shares added per day
and ‘‘ADV’’ means average daily volume calculated
as the number of shares added or removed,
combined, per day. See BYX Fee Schedule,
Definitions. ADAV and ADV are calculated on a
monthly basis. The Exchange excludes from its
calculation of ADAV and ADV shares added or
removed on any day that the Exchange’s system
experiences a disruption that lasts for more than 60
minutes during regular trading hours (‘‘Exchange
System Disruption’’), on any day with a scheduled
early market close and on the last Friday in June
(the ‘‘Russell Reconstitution Day’’). Routed shares
are not included in ADAV or ADV calculation. With
prior notice to the Exchange, a Member may
aggregate ADAV or ADV with other Members that
control, are controlled by, or are under common
control with such Member (as evidenced on such
Member’s Form BD).
6 W is associated with orders that remove
liquidity from BYX in Tape A securities.
7 BB is associated with orders that remove
liquidity from BYX in Tape B securities.
8 N is associated with orders that remove liquidity
from BYX in Tape C securities.
9 Destination Specific is a routing option under
which an order checks the System for available
shares and then is sent to an away trading center
or centers specified by the User. See Rule
11.13(b)(3)(E).
10 IX is associated with orders routed to IEX using
the Destination Specific, TRIM or TRIM2 routing
strategies.
E:\FR\FM\29AUN1.SGM
29AUN1
]]>Agencies
[Federal Register Volume 83, Number 168 (Wednesday, August 29, 2018)]
[Notices]
[Pages 44091-44096]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18673]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83918; File No. SR-OCC-2017-021]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving Proposed Rule Change, as Modified by Partial Amendment
No. 2, Concerning Updates to and Formalization of OCC's Recovery and
Orderly Wind-Down Plan
August 23, 2018.
I. Introduction
On December 8, 2017, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2017-021 (``Proposed Rule Change'')
pursuant to Section 19(b) of the Securities Exchange Act of 1934
(``Exchange Act''),\1\ and Rule 19b-4 \2\ thereunder to propose to
formalize and update its Recovery and Orderly Wind-Down Plan (``RWD
Plan'').\3\ The Proposed Rule Change was published for comment in the
Federal Register on December 26, 2017.\4\ On January 25, 2018, the
Commission designated a longer period of time for Commission action on
the Proposed Rule Change.\5\ On March 22, 2018, the Commission
published an order to institute proceedings to determine whether to
approve or disapprove the Proposed Rule Change.\6\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Notice infra note 4, 82 FR 61072.
\4\ Securities Exchange Act Release No. 82352 (Dec. 19, 2017),
82 FR 61072 (Dec. 26, 2017) (File No. SR-OCC-2017-021) (``Notice'').
On December 8, 2017, OCC also filed a related advance notice (SR-
OCC-2017-810) (``Advance Notice'') with the Commission pursuant to
Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, entitled the Payment, Clearing, and
Settlement Supervision Act of 2010 and Rule 19b-4(n)(1)(i) under the
Exchange Act. 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b-4(n)(1)(i),
respectively. The Advance Notice was published in the Federal
Register on January 23, 2018. Securities Exchange Act Release No.
82514 (Jan. 17, 2017), 83 FR 3224 (Jan. 23, 2018) (SR-OCC-2017-810).
The Financial Stability Oversight Council designated OCC a
systemically important financial market utility on July 18, 2012.
See Financial Stability Oversight Council 2012 Annual Report,
Appendix A, available at https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, OCC is required to
comply with the Payment, Clearing and Settlement Supervision Act and
file advance notices with the Commission. See 12 U.S.C. 5465(e).
\5\ Securities Exchange Act Release No. 82586 (Jan. 25, 2018),
83 FR 4527 (Jan. 31, 2018) (File No. SR-OCC-2017-021).
\6\ Securities Exchange Act Release No. 82927 (Mar. 22, 2018),
83 FR 13176 (Mar. 27, 2018) (File No. SR-OCC-2017-021).
---------------------------------------------------------------------------
On July 11, 2018, OCC filed Partial Amendment No. 1 to the Proposed
Rule Change.\7\ On July 13, 2018, OCC filed Partial Amendment No. 2 to
the Proposed Rule Change.\8\ Notice of Partial Amendments No. 1 and 2
to the Proposed Rule Change was published for public comment in the
Federal Register on August 2, 2018,\9\ and the Commission has received
no comments
[[Page 44092]]
in response. This order approves the Proposed Rule Change as modified
by Partial Amendment No. 2 (``Amended Proposed Rule Change'').
---------------------------------------------------------------------------
\7\ In Partial Amendment No. 1, OCC made three modifications to
the Notice: (1) Removal of sections of the RWD Plan concerning OCC's
proposed authority to require cash settlement of certain physically
delivered options and single stock futures; (2) updating the list of
OCC's Critical Support Functions; and (3) making three changes to
the RWD Plan to conform to a change contemporaneously proposed in
Partial Amendment No. 2 to OCC filing SR-OCC-2017-020 concerning
enhanced and new tools for recovery scenarios.
\8\ Partial Amendment No. 2 superseded and replaced Partial
Amendment No. 1 in its entirety, due to technical defects in Partial
Amendment No. 1.
\9\ See Securities Exchange Act Release No. 83732 (Jul. 27,
2018), 83 FR 37864 (Aug. 2, 2018) (``Notice of Amendment'').
---------------------------------------------------------------------------
II. Description of the Amended Proposed Rule Change [bds1][bds0]
---------------------------------------------------------------------------
\10\ Capitalized terms used but not defined herein have the
meanings specified in OCC's Rules and By-Laws, available at https://www.theocc.com/about/publications/bylaws.jsp.
---------------------------------------------------------------------------
OCC's proposal would formalize and update its RWD Plan. The purpose
of the RWD Plan is to: (i) Demonstrate that OCC has considered the
scenarios which may potentially prevent it from being able to provide
the services OCC determined to be critical as a going-concern; (ii)
provide appropriate plans for OCC's recovery or orderly wind-down based
on the results of such consideration; and (iii) impart to relevant
authorities the information reasonably anticipated to be necessary for
purposes of recovery and orderly wind-down planning.
The RWD Plan would identify the services provided by OCC that OCC
has determined to be critical, and it would set forth five qualitative
events that could trigger a recovery scenario and six qualitative
events that could trigger an orderly wind-down. It would also address
six scenarios that describe OCC's possible responses to series of
stresses. The RWD Plan would also include an overview designed to
provide information that OCC believes would be essential to relevant
authorities for purposes of recovery and orderly wind-down planning, as
well as to provide readers of the Plan with necessary context for
subsequent discussion and analysis. The overview would also include a
detailed description of OCC's business, summarizing the role OCC has in
the options market as well as the services and products it provides to
its clearing members and market participants. The RWD Plan would
identify fourteen internal support functions at OCC and provide a brief
description of the activities performed by each support function.
Similar to the information regarding OCC's business, this information
is designed to inform the relevant authorities for orderly wind-down
planning and as necessary context for understanding other elements of
the RWD Plan.
A. Designating Critical Services and Critical Support Functions
The RWD Plan would define the terms ``Critical Services'' and
``Critical Support Functions.'' Specifically, a Critical Service would
be a service provided by OCC that, if interrupted, would likely have a
material negative impact on participants or significant third parties,
give rise to contagion, or undermine the general confidence of markets
that OCC serves. A Critical Support Function would be a function within
OCC that must continue in some capacity for OCC to be able to continue
providing its Critical Services.
The RWD Plan would describe the framework that OCC uses to
determine whether a service is critical. This framework includes four
criteria to determine if failure or discontinuation of a particular
service would impact financial and operational capabilities of OCC's
clearing members, other FMUs, or the broader financial system: (1)
Market dominance, (2) substitutability, (3) interconnectedness, and (4)
barriers to entry. The current set of services designated as Critical
Services under the RWD Plan is based on the analysis of these
measureable indicators and subsequent internal discussion at OCC. The
Critical Services currently include, but are not limited to, clearance
services for listed options and clearance services for futures.
B. Recovery Plan
The RWD Plan would include plans for recovery from scenarios that
could prevent OCC from providing Critical Services.\11\ After
discussing particular scenarios, the RWD Plan identifies the tools that
OCC could use as warranted in such scenarios. These tools fall into two
categories: (1) Enhanced Risk Management Tools, and (2) Recovery Tools.
An Enhanced Risk Management Tool is a tool that is designed to
supplement OCC's existing processes and other existing tools in
scenarios where OCC faces heightened stresses, while a Recovery Tool is
a tool that is generally limited to a scenario in which a specific
trigger has occurred. In its RWD Plan, OCC would define a set of five
such qualitative trigger events (``Recovery Trigger Events'').
---------------------------------------------------------------------------
\11\ For the purposes of the RWD Plan, OCC defines ``recovery''
as ``the actions of [a financial market utility], consistent with
its rules, procedures, and other ex-ante contractual arrangements,
to address any uncovered credit loss, liquidity shortfall, capital
inadequacy, or business, operational or other structural weakness,
including the replenishment of any depleted pre-funded financial
resources and liquidity arrangements, as necessary to maintain the
[financial market utility's] viability as a going concern.''
---------------------------------------------------------------------------
The sequence and timing of the deployment of each Recovery Tool is
more structured and lacks the flexibility inherent in the sequence and
timing for use of the Enhanced Risk Management Tools. For each tool,
the RWD Plan provides an overview of the tool, and, as appropriate, a
discussion of its implementation with an estimated time frame for use
of the tool, key risks associated with use of the tool, and the
expected impact and incentives of using the tool.
1. Enhanced Risk Management Tools
OCC stated that the Enhanced Risk Management Tools would be used
prophylactically in an effort to prevent the occurrence of a Recovery
Trigger Event and would not be limited to recovery. OCC would not
anticipate applying a rigid order or timing for the deployment of the
Enhanced Risk Management Tools. The RWD Plan would include five
Enhanced Risk Management Tools: (1) Use of Current/Retained Earnings;
(2) Minimum Clearing Fund Cash Contribution; (3) Borrowing Against
Clearing Fund; (4) Credit Facility; and (5) Non-Bank Facility.
Use of Current/Retained Earnings. Under its By-Laws, OCC may use
current and/or retained earnings to discharge a loss that would be
chargeable against the Clearing Fund, but would require unanimous
consent from the holders of OCC's Class A and Class B common stock. The
RWD Plan acknowledges that the utility of this tool is limited by the
requirement for shareholder consent and that OCC's retained earnings
presently amount to a small fraction of OCC's existing prefunded
Clearing Fund resources. OCC stated that, given this amount, the
maximum utility of this tool may be realized in specific circumstances
at either the beginning of OCC's loss waterfall or toward the end of
OCC's loss waterfall, where it would be sufficient to fully extinguish
liabilities without triggering the use of another tool.
Minimum Clearing Fund Cash Contribution. Under its current rules,
OCC Clearing Members collectively contribute $3 billion in cash to
OCC's Clearing Fund.\12\ In addition, OCC may, in certain limited
circumstances, increase the minimum cash requirement up to the then-
minimum size of the Clearing Fund.\13\ The RWD Plan would acknowledge
that increasing the minimum cash requirement would require preparation
of OCC documentation that considers the
[[Page 44093]]
projected liquidity demands for successful management of a defaulted
Clearing Member.
---------------------------------------------------------------------------
\12\ See OCC By-Laws, Art. VIII, Section 3(a)(i). The Commission
recently approved a proposal by OCC that, after implementation,
would move this section of the OCC By-Laws to OCC Rule 1002(a)(i).
See Securities Exchange Act Release No. 83735 (Jul. 27, 2018), 83 FR
37855, 37859 (Aug. 2, 2018) (SR-OCC-2018-008) (``Order Approving
Proposed Rule Change, as Modified by Amendments No. 1 and 2, Related
to OCC's Stress Testing and Clearing Fund Methodology'').
\13\ See OCC By-Laws, Art. VIII, Section 3(a)(i).
---------------------------------------------------------------------------
Borrowing Against Clearing Fund. OCC has the authority to borrow
against the Clearing Fund in three circumstances: (1) To meet
obligations arising out of the default or suspension of a Clearing
Member or any action taken by OCC under Chapter XI of its rules
pertaining to the suspension of a clearing member; (2) to borrow or
otherwise obtain funds from third parties in lieu of immediately
charging the Clearing Fund for a loss that is reimbursable out of the
Clearing Fund; and (3) to meet liquidity needs for same-day settlement
as a result of the failure of any bank or securities or commodities
clearing organization to achieve daily settlement.\14\ The RWD Plan
would acknowledge that any borrowing would require preparation of OCC
documentation in accordance with OCC procedures. Further, the RWD Plan
would recognize that the availability of this tool in advance of a
heightened stress scenario would be unknown because OCC's primary
liquidity facilities could already be fully or partially utilized.
---------------------------------------------------------------------------
\14\ See OCC By-Laws, Art. VIII, Section 5(e). The Commission
recently approved a proposal by OCC that, after implementation,
would move this section of the OCC By-Laws to OCC Rule 1006(f). See
Order Approving Proposed Rule Change Related to OCC Stress Testing
and Clearing Fund Methodology, supra note 12, 83 FR at 37859.
---------------------------------------------------------------------------
Credit Facility and Non-Bank Liquidity Facility. OCC maintains a $2
billion dollar senior secured 364-day revolving credit facility with a
syndicate of lenders for the purpose of providing OCC with liquidity to
meet settlement obligations as a central counterparty. The RWD Plan
would recognize that an inherent risk of the credit facility is that a
portion of the syndicate may not provide funds in timely response to
OCC's request. OCC also maintains a $1 billion dollar secured non-bank
liquidity facility for the purpose of providing OCC with a non-bank
liquidity resource to meet settlement obligations as a central
counterparty. Similar to the risk associated with the credit facility,
the RWD Plan would recognize the risk that OCC's counterparty may not
timely execute the transaction under the non-bank liquidity facility.
2. Recovery Tools
Under the RWD Plan, Recovery Tools would be different from Enhanced
Risk Management Tools because OCC's use of a Recovery Tool is generally
limited to a scenario in which a Recovery Trigger has occurred. The RWD
Plan would identify five Recovery Tools, the last four of which would
generally be deployed in the order they are described here: (1)
Replenishment Capital; (2) Assessment Powers; (3) Voluntary Payments;
(4) Voluntary Tear-Up; and (5) Partial Tear-Up.\15\ As noted above, the
sequence and timing of deployment of the Recovery Tools would be more
structured than the sequence and timing of the use of Enhanced Risk
Management Tools.
---------------------------------------------------------------------------
\15\ For a more detailed description of the Recovery Tools
numbered (2) through (5) here, please see Securities Exchange Act
Release No. 83916 (Aug. 23, 2018) (SR-OCC-2017-020).
---------------------------------------------------------------------------
Replenishment Capital. OCC holds capital contributed by its
stockholder exchanges who have committed to replenish OCC's capital if
it falls below a certain threshold.\16\ The RWD Plan would include the
replenishment of capital by OCC's stockholder exchanges as a recovery
tool.
---------------------------------------------------------------------------
\16\ The requirement to replenish OCC's capital was adopted as
part of OCC's plan to raise and maintain capital at a specified
level (``Capital Plan''). See Securities Exchange Act Release No.
77112 (Feb. 11, 2016), 81 FR 8294 (Feb. 18, 2016) (SR-OCC-2015-02).
The Capital Plan was later subject to judicial review by the U.S.
Court of Appeals for the District of Columbia Circuit, which
remanded for the Commission to further analyze whether the Capital
Plan is consistent with the Exchange Act. Susquehanna Int'l Grp.,
LLP v . SEC, 866 F.3d 442 (D.C. Cir. 2017). The Commission's review
of the Capital Plan on remand is ongoing, and the Capital Plan
remains in effect during this ongoing review.
---------------------------------------------------------------------------
Assessment Powers. Under OCC's rules, OCC has authority to assess a
non-defaulting Clearing Member during any cooling-off period for an
amount equal to 200 percent of the Clearing Member's then-required
contribution to the Clearing Fund.\17\ Following the end of the
cooling-off period, each remaining Clearing Member must replenish the
Clearing Fund in the amount necessary to meet its then-required
contribution.\18\ The RWD Plan would recognize the risk that the use of
assessment powers may incentivize Clearing Members to withdraw from
membership in OCC to avoid replenishment, and that such withdrawals
would limit the resources available to OCC for future assessments.
---------------------------------------------------------------------------
\17\ The cooling-off period is the period following a
proportionate charge assessed by OCC against the Clearing Members'
Clearing Fund contributions. It is a minimum of fifteen days, but
could extend to as much as twenty days from the date of the
proportionate charge based on intervening events.
\18\ A Clearing Member may avoid liability for replenishment by
terminating its membership in OCC prior to the end of the cooling-
off period.
---------------------------------------------------------------------------
Voluntary Payments. OCC's rules provide a framework by which OCC
can receive voluntary payments in response to a Clearing Member
default. Use of this tool is permissible only where OCC has determined
that it may not have sufficient resources to satisfy its obligations
and liabilities arising out of the default. The RWD Plan would describe
the processes involved in calling for and receiving voluntary payments,
including the issuance of a notice to Clearing Members. The RWD Plan
would recognize the risk that Clearing Members would be unwilling or
unable to make voluntary payments. As an incentive for Clearing Members
to provide voluntary payments, a non-defaulting Clearing Member who
made a voluntary payment would receive priority in reimbursement from
amounts recovered by OCC from the estate of a defaulting Clearing
Member.
Voluntary Tear-up. OCC's rules provide a framework by which non-
defaulting Clearing Members and customers could be permitted to
voluntarily extinguish (i.e., voluntarily tear-up) open positions in
response to a Clearing Member default. Voluntary Tear-up is permissible
only where OCC has determined that it may not have sufficient resources
to satisfy its obligations and liabilities arising out of the default.
The RWD Plan would contemplate that OCC would initiate any tear-up
process after the market close on the day that OCC determines it may
have insufficient resources. The RWD Plan would further anticipate that
OCC would publish notice of tear-up no later than the following morning
(prior to the market open), and that positions would be extinguished
following the market close. The RWD Plan would also recognize the risk
that Clearing Members would be unwilling or unable to participate in
the voluntary tear-up process. A non-defaulting Clearing Member that
faced losses, costs, or expenses in reestablishing voluntarily torn-up
positions could receive compensation from amounts recovered by OCC from
the estate of a defaulting Clearing Member ahead of other Clearing
Members that faced such losses, costs, or expenses after reestablishing
torn up positions.
Partial Tear-up. OCC's rules provide a framework by which OCC could
extinguish the remaining open positions of a defaulted Clearing Member
or its customers (i.e., Partial Tear-up) in response to a Clearing
Member default. The RWD Plan would anticipate that the Partial Tear-up
process would be intertwined with the Voluntary Tear-up process
described above. The RWD Plan also would contemplate the compensation
of Clearing Members facing losses, costs, or expenses after
reestablishing torn up positions from Clearing Fund contributions.
The RWD Plan also would provide a mapping of Enhanced Risk
Management Tools and Recovery Tools to different types of risk
exposures. Such risk
[[Page 44094]]
exposures include: (1) Uncovered credit losses; (2) liquidity
shortfalls; (3) replenishment of financial resource; (4) losses related
to business, operational, or other structural weaknesses; and (5) re-
establishment of a matched book. The RWD Plan discusses how each tool
would apply to these risk categories and would reference the stress
scenarios contemplated by the RWD Plan.
The RWD Plan would outline an escalation process for the occurrence
of each Recovery Trigger.\19\ Under the RWD Plan, OCC's Enterprise Risk
Management and Financial Risk Management groups would be responsible
for recommending which, if any, of the tools described above should be
used in a given situation. Further, OCC's Chief Executive Officer and
Executive Chairman would be responsible for approval of such
recommendations, and OCC's Chief Risk Officer and Management Committee
would be responsible for overseeing deployment of such tools. Finally,
OCC's Board and the Risk Committee of the Board would be responsible
for generally overseeing OCC's recovery efforts.
---------------------------------------------------------------------------
\19\ The RWD Plan also would discuss notification of regulators,
including the Commission, the U.S. Commodity Futures Trading
Commission, and the Federal Deposit Insurance Corporation, in
response to the occurrence of a Recovery Trigger.
---------------------------------------------------------------------------
C. Orderly Wind-Down Plan
The RWD Plan would also include OCC's wind-down plan and include
scenarios that could prevent OCC from being able to provide Critical
Services as a going-concern. OCC would identify its wind-down objective
as the pursuit of financial stability and ensuring the continuity of
critical functions. The RWD Plan would provide OCC's assumptions
concerning the wind-down process regarding: (1) Duration of wind-down;
(2) cost of wind-down; (3) OCC's capitalization; and (4) the
maintenance of Critical Services and Critical Support Functions. It
also would identify six wind-down triggers (``WDP Trigger Events''),
the occurrence of which could jeopardize the viability of OCC's
recovery. Under the RWD Plan, the occurrence of a WDP Trigger Event
would necessitate notification of regulators, including the Commission,
the U.S. Commodity Futures Trading Commission, and the Federal Deposit
Insurance Corporation, as well as internal notifications to OCC senior
management.
The RWD Plan would reference critical interconnections and key
agreements for consideration in the context of wind-down. The RWD Plan
also would discuss OCC's key actions in wind-down including the: (1)
Decision by OCC's Board to initiate wind-down; (2) institution of
heightened clearing member requirements; (3) imposition of heightened
capital requirements for clearing members; (4) imposition of increased
margin requirements; (5) cessation of investment by OCC; (6)
institution of new operational practices; and (7) targeted reductions
in force.
The RWD Plan also would identify transactions that could be entered
into to accomplish OCC's wind-down objectives: (1) Stock transactions;
(2) merger transactions; and (3) asset transactions. The RWD Plan
focuses discussion of wind-down transactions on issues including, but
not limited to, governance and regulatory issues. The goal of any such
transaction would be to transfer ownership of OCC in a manner that
ensures the continuation of OCC's critical services; however, the RWD
Plan also would contemplate the cessation of Critical Services through
OCC's existing close-out netting rules.\20\
---------------------------------------------------------------------------
\20\ See also OCC By-Laws, Art. VI, Section 27.
---------------------------------------------------------------------------
D. Governance
The RWD Plan would also memorialize the governance processes for
maintenance, review, and approval of the RWD Plan. Under the RWD Plan,
all changes would originate in a recommendation from OCC's RWD Working
Group. Changes would go through a series of consecutive rounds of
review and approval by OCC's Management Committee, the Risk Committee
of OCC's Board of Directors, and the full Board of Directors, which
would have final approval authority.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Exchange 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 Exchange Act and the rules and regulations
thereunder applicable to such organization.\21\ After carefully
considering the Amended Proposed Rule Change, the Commission believes
the proposal is consistent with the requirements of the Exchange Act
and the rules and regulations thereunder applicable to OCC. More
specifically, the Commission finds that the Amended Proposed Rule
Change is consistent with Section 17A(b)(3)(F) of the Exchange Act \22\
and Rules 17Ad-22(e)(2)(i), (iii), and (v), 17Ad-22(e)(3)(ii), and
17Ad-22(e)(15)(i) thereunder.\23\
---------------------------------------------------------------------------
\21\ 15 U.S.C. 78s(b)(2)(C).
\22\ 15 U.S.C. 78q-1(b)(3)(F).
\23\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v); (e)(3)(ii);
(e)(15)(i).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F) of the Exchange Act
Section 17A(b)(3)(F) of the Exchange Act requires that the rules of
a clearing agency be designed to, among other things, promote the
prompt and accurate clearance and settlement of securities
transactions, assure the safeguarding of securities and funds which are
in the custody or control of the clearing agency or for which it is
responsible, and, in general, to protect investors and the public
interest.\24\
---------------------------------------------------------------------------
\24\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As described above, the RWD Plan would specify the Enhanced Risk
Management Tools and Recovery Tools available to OCC in recovery and in
an orderly wind-down, as well as the governance framework applicable to
the use of such tools. The RWD Plan would analyze the use of the
Enhanced Risk Management Tools and Recovery Tools, the incentives
created by such tools, and the risks associated with using such tools.
The Commission believes that by specifying the tools that OCC would
take in either a recovery or a wind-down, the RWD Plan would enhance
OCC's ability to address circumstances specific to an extreme stress
event, thereby increasing the likelihood that OCC could execute a
successful recovery or orderly wind-down in such an event. In
increasing the likelihood that OCC could execute a successful recovery
or orderly wind-down, the RWD Plan would enhance OCC's ability to
maintain continuity of its critical services (including clearance and
settlement services) during, through, and following periods of extreme
stress giving rise to the need for recovery, thereby promoting the
prompt and accurate clearance and settlement of securities
transactions. The Commission also believes that the rules proposed in
the RWD Plan are designed to assure the safeguarding of securities or
funds in the custody or control of OCC by reducing the likelihood of a
disorderly or unsuccessful recovery or wind-down, which could otherwise
disrupt access to such securities or funds.
Further, the Commission believes that the RWD Plan is designed, in
general, to protect investors and the public interest by establishing a
plan to effectuate an orderly wind-down. The RWD Plan's governance
processes and regulatory notice provisions could facilitate either the
orderly transfer of OCC's Critical Services to another entity or the
orderly
[[Page 44095]]
close-out of positions. Providing additional information regarding the
potential orderly transfer of services or close-out of positions would
benefit Clearing Members and their customers by providing greater
transparency and certainty regarding the potential disposition or
treatment of their positions and assets at OCC, thereby benefiting
market participants more broadly.
Therefore, the Commission believes that the Amended Proposed Rule
Change would promote the prompt and accurate clearance and settlement
of securities transactions, assure the safeguarding of securities and
funds in OCC's custody and control, and, in general, protect investors
and the public interest, consistent with the Section 17A(b)(3)(F) of
the Act.\25\
---------------------------------------------------------------------------
\25\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Rules 17Ad-22(e)(2)(i), (iii), and (v) Under the
Exchange Act
Rules 17Ad-22(e)(2)(i), (iii), and (v) require that OCC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide for governance arrangements that are
clear and transparent, that support the public interest requirements in
Section 17A of the Exchange Act applicable to clearing agencies, and
the objectives of owners and participants, and that specify clear and
direct lines of responsibility.\26\
---------------------------------------------------------------------------
\26\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
---------------------------------------------------------------------------
The RWD Plan would outline an escalation process for the occurrence
of a Recovery Trigger Event, which would provide a governance framework
for the use and functioning of the Enhanced Risk Management Tools and
Recovery Tools in addition to those specified elsewhere in OCC's rules.
It would also identify the internal notification requirements that
would apply to WDP Trigger Events and establish the role of the Board
in determining whether to enter into a wind-down or take other key
actions, consistent with the governance specified elsewhere in OCC's
rules.
Moreover, the RWD Plan would identify the internal governance
process for the approval of subsequent changes to OCC's RWD Plan. The
RWD Plan would also specify the process OCC would take to receive input
from various parties at OCC, including management and the Board.
Taken together, the Commission believes that these lines of control
could contribute to establishing, implementing, maintain and enforcing
clear and transparent governance arrangements that support the public
interest requirements in Section 17A of the Exchange Act applicable to
clearing agencies, and the objectives of owners and participants.
Therefore, the Commission believes that the proposed changes are
consistent with Rules 17Ad-22(e)(2)(i), (iii), and (v).\27\
---------------------------------------------------------------------------
\27\ Id.
---------------------------------------------------------------------------
C. Consistency With Rule 17Ad-22(e)(3)(ii) Under the Exchange Act
Rule 17Ad-22(e)(3)(ii) requires that OCC establish, implement,
maintain and enforce written policies and procedures reasonably
designed to maintain a sound risk management framework for
comprehensively managing legal, credit, liquidity, operational, general
business, investment, custody, and other risks that arise in or are
borne by OCC, which includes plans for the recovery and orderly wind-
down of OCC necessitated by credit losses, liquidity shortfalls, losses
from general business risk, or any other losses.\28\
---------------------------------------------------------------------------
\28\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------
The Commission believes that the information the RWD Plan would
provide about the OCC's recovery tools would enhance OCC's ability to
recover from credit losses, liquidity shortfalls, general business risk
losses, or other losses, consistent with Rule 17Ad-22(e)(3)(ii).\29\
Specifically, the information from the RWD Plan would enable OCC to
prepare in advance for the use of such tools, which would in turn
enhance OCC's ability to use such tools effectively to carry out a
successful recovery. In addition, by establishing a single source of
information about, and steps needed to effectuate, a recovery of OCC,
the RWD Plan would allow OCC personnel to effectuate a recovery in a
consistent and coordinated fashion, and would thereby increase the
likelihood of a successful recovery. Moreover, by identifying and
assessing available Enhanced Risk Management Tools and Recovery Tools,
the Commission believes that the RWD Plan would enhance OCC's ability
to use such tools effectively to bring about a recovery by identifying
in advance which tools may be most effective for different situations
or needs, consistent with Rule 17Ad-22(e)(3)(ii).\30\
---------------------------------------------------------------------------
\29\ Id.
\30\ Id.
---------------------------------------------------------------------------
Similarly, in providing detailed information about the assumptions,
actions, and objectives related to triggering and implementing the
wind-down portion of the RWD Plan, discussed in more detail above, the
Commission believes that the RWD Plan would enhance OCC's ability to
effectuate an orderly wind-down, consistent with Rule 17Ad-
22(e)(3)(ii).\31\ Specifically, by setting out in advance the potential
events that could cause OCC to trigger, and transactions by which OCC
would effectuate, a wind-down, the RWD Plan would enable OCC to prepare
in advance for a wind-down, which the Commission believes would enhance
OCC's ability to use the RWD Plan effectively to carry-out an orderly
wind-down. In addition, by establishing a single source of information
about, and steps needed to effectuate, a wind-down of OCC, the
Commission believes the RWD Plan would allow OCC personnel to
effectuate a wind-down in a consistent and coordinated fashion, and
would thereby increase the likelihood of an orderly wind-down. Finally,
the RWD Plan would identify the legal basis for OCC's actions with
respect to a potential wind-down, including relevant citations to
provisions of the rule books of its various clearing services and
contractual agreements, which the Commission believes would further
facilitate an orderly wind-down process by providing OCC with a single
source of information and steps needed for a wind-down, consistent with
Rule 17Ad-22(e)(3)(ii).\32\
---------------------------------------------------------------------------
\31\ Id.
\32\ Id.
---------------------------------------------------------------------------
Therefore, the Commission believes that the proposed changes to
adopt plans for the recovery and orderly wind-down of OCC are
consistent with Rule 17Ad-22(e)(3)(ii).\33\
---------------------------------------------------------------------------
\33\ Id.
---------------------------------------------------------------------------
D. Consistency With Rules 17Ad-22(e)(15)(i) Under the Exchange Act
Rule 17Ad-22(e)(15)(i) requires OCC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to identify, monitor, and manage its general business risk and
hold sufficient liquid net assets funded by equity to cover potential
general business losses so that OCC can continue operations and
services as a going concern if those losses materialize, including by
determining the amount of liquid net assets funded by equity based upon
its general business risk profile and the length of time required to
achieve a recovery or orderly wind-down, as appropriate, of its
critical operations and services if such action is taken.\34\
---------------------------------------------------------------------------
\34\ 17 CFR 240.17Ad-22(e)(15)(i).
---------------------------------------------------------------------------
OCC's RWD Plan would estimate costs related to a wind-down based on
a series of assumptions laid out in the RWD Plan. These assumptions
include
[[Page 44096]]
duration of the wind-down process, OCC's capitalization through the
wind-down process, the maintenance of Critical Services and Critical
Support Functions, and the retention of personnel and contractual
relationships. OCC also provided information regarding its assumption
about the cost of the wind-down process. Further, the RWD Plan
identifies potential transactions that could be effected to accomplish
the objectives of wind-down with the ultimate goal of transferring
ownership of OCC itself by the consummation or a consensual sale or
similar transaction, in a manner that ensures the continuation of OCC's
Critical Services. The Commission considered the assumptions that the
RWD Plan makes regarding wind-down as well as the potential
transactions in which OCC might engage in the event of a wind-down. The
Commission also considered the estimated cost of wind-down noted in the
RWD Plan in light of OCC's rules regarding the maintenance of certain
capital levels and qualifying liquid resources. The Commission believes
that the RWD Plan, which indicates the cost at which OCC could
effectuate an orderly wind-down, i.e., at a lower cost than the amount
of its liquid resources is consistent with Rule 17Ad-22(e)(15)(i).\35\
---------------------------------------------------------------------------
\35\ Id.
---------------------------------------------------------------------------
Therefore, the Commission believes that the proposed changes that
would determine costs associated with an orderly wind-down and that
would further ensure that OCC holds liquid net assets greater than
these costs, are consistent with Rule 17Ad-22(e)(15)(i).\36\
---------------------------------------------------------------------------
\36\ Id.
---------------------------------------------------------------------------
IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Amended Proposed Rule Change is consistent with the requirements of the
Exchange Act, and in particular, with the requirements of Section 17A
of the Exchange Act \37\ and the rules and regulations thereunder.
---------------------------------------------------------------------------
\37\ 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) of the
Exchange Act,\38\ that the Proposed Rule Change (SR-OCC-2017-021), as
modified by Partial Amendment No. 2, be, and it hereby is, approved.
---------------------------------------------------------------------------
\38\ 15 U.S.C. 78s(b)(2).
\39\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-18673 Filed 8-28-18; 8:45 am]
BILLING CODE 8011-01-P
