Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection To Advance Notice Concerning The Options Clearing Corporation's Proposal To Enter Into a New Credit Facility Agreement, 31128-31131 [2019-13776]
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Federal Register / Vol. 84, No. 125 / Friday, June 28, 2019 / Notices
Rule 520(b) 19 and (c) 20 would not be
satisfied just because the member
utilized the PRIME.21 A similar
provision currently exists for interest in
the Book that is subject to the Managed
Interest Process pursuant to Exchange
Rule 515(c), and the proposed rule
change extends this functionality to
interest that is subject to the POP
Process.
D. cPRIME Auction
Currently, a cPRIME Agency Order
will be rejected at the time of receipt if
any component of the strategy involves
an option that is subject to the Managed
Interest Process described in Rule
515(c)(1)(ii).22 The Exchange now
proposes to also reject a cPRIME Agency
Order at the time of receipt if any
component of the strategy involves an
option that is subject to Exchange Rule
515(d) (which describes the
management process for Market Maker
order and quotes) or the POP Process.
III. Discussion and Commission
Findings
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After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of the
Act,23 and the rules and regulations
thereunder applicable to a national
securities exchange.24 In particular, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act,25 which requires,
among other things, that the rules of a
national securities exchange be
designed to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest and
that the rules are not designed to permit
19 Exchange Rule 520(b) provides that members
may not execute as principal orders they represent
as agent unless (i) agency orders are first exposed
on the Exchange for at least one second, (ii) the
member has been bidding or offering on the
Exchange for at least one second prior to receiving
an agency order that is executable against such bid
or offer, or (iii) the member utilizes the PRIME.
20 Exchange Rule 520(c) provides that members
may not execute orders they represent as agent on
the Exchange against order solicited from members
and non-member broker-dealers to transact with
such orders unless the unsolicited Order is first
exposed on the Exchange for at least one second,
or the member utilizes the PRIME or PRIME
Solicitation Mechanism.
21 See Notice, supra note 3, at 20666 (for
examples illustrating how Post-Only interest resting
on the Book is handled).
22 See Exchange Rule 515A Interpretation and
Policy .12(b)(iii).
23 15 U.S.C. 78f.
24 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).
25 15 U.S.C. 78f(b)(5).
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unfair discrimination between
customers, issuers, brokers, or dealers.
Regarding PRIME Auction eligibility
and the stop price when considering
existing interest resting on the Book, the
proposal provides that Post-Only Quotes
will now also be considered (in addition
to considering resting limit orders) in
determining the Auction’s Agency
Order stop price, which must be at least
$0.01 better than the Book price if the
EBBO represents a limit order on the
Book or a Post-Only Quote subject to the
POP Process on the same side as the
Agency Order. The Commission finds
that, as revised, these PRIME eligibility
requirements are consistent with the Act
in that they protect the priority of
resting limit orders on the Book when
members seek to initiate a PRIME
Auction and thus they are consistent
with the protection of investors and the
public interest.
The Commission finds that the
proposal to permit participation in a
PRIME Auction by incoming Post-Only
OQs received during a PRIME Auction
may increase the potential liquidity
available to trade with an Agency Order
during a PRIME Auction and thus
provide additional opportunities for
price improvement to the Agency Order,
thereby removing impediments to and
perfecting the mechanism of a free and
open market in a manner consistent
with the protection of investors. The
Commission notes that the participation
of Post-Only interest in the PRIME
Auction is limited. Specifically, PostOnly OQs may participate in a PRIME
Auction if they are received during the
RFR period, though they may not be
submitted as responses to an RFR.26
Further, Post-Only OQ may not
participate in PRIME as an Agency
Order, principal interest, or solicited
interest.27 The proposal to permit
resting trading interest on the Book
subject to the POP Process on the
opposite side as the Agency Order to
execute automatically against the
Agency Order (before the System
initiates a PRIME Auction) at a price
$0.01 inside the EBBO is designed to
accommodate within the PRIME process
the presence of a preexisting, resting
Post-Only OQ on the opposite side of
the Agency Order, while allowing
members to submit customer interest to
the PRIME mechanism for potential
price improvement.28 As such, this
provision is designed to provide a
further opportunity for a liquidity26 See Exchange Rule 515A(a)(2)(i)(D) (stating
RFR responses shall be an Auction-or-Cancel
(‘‘AOC’’) order or an AOC eQuote).
27 See Exchange Rule 515A(a)(1)(iv).
28 See also supra notes 19 and 20 (concerning the
applicability of exposure requirements).
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taking Agency Order to receive both a
timely execution and meaningful price
improvement. As such, it is designed in
a manner that is consistent with the
protection of investors.
Finally, the Commission finds that the
proposal to reject a cPRIME Agency
Order, and thus not commence a PRIME
Auction, if any component of the
complex order on the Book is subject to
the POP Process is substantially similar
to the current rule that provides that a
cPRIME Agency Order will be rejected
at the time of receipt if any component
is subject to the Managed Interest
Process. The Exchange intends for this
provision to protect the integrity of the
Book. The Commission finds that
extending this protection to include
interest subject to the POP Process is
designed to support efficient trading in
both the simple market and the complex
market and remove impediments to and
perfect the mechanism of a free and
open market.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,29 that the
proposed rule change (SR–EMERALD–
2019–19) be, and hereby is, approved.
For the Commission, by the Division
of Trading and Markets, pursuant to
delegated authority.30
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 2019–13763 Filed 6–27–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86182; File No. SR–OCC–
2019–803]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of No Objection To Advance Notice
Concerning The Options Clearing
Corporation’s Proposal To Enter Into a
New Credit Facility Agreement
June 24, 2019.
I. Introduction
On April 26, 2019, The Options
Clearing Corporation (‘‘OCC’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) advance
notice SR–OCC–2019–803 (‘‘Advance
Notice’’) pursuant to Section 806(e)(1) of
Title VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act,
entitled Payment, Clearing and
Settlement Supervision Act of 2010
29 15
30 17
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U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
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Federal Register / Vol. 84, No. 125 / Friday, June 28, 2019 / Notices
(‘‘Clearing Supervision Act’’) 1 and Rule
19b–4(n)(1)(i) 2 under the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 3 to propose to replace the 364-day
term revolving credit facility that OCC
currently maintains, which is due to
expire on June 27, 2019.4 The Advance
Notice was published for public
comment in the Federal Register on
May 30, 2019,5 and the Commission
received no comments regarding the
proposal contained in the Advance
Notice. This publication serves as notice
of no objection to the Advance Notice.
II. Background
OCC maintains a $2 billion revolving
credit facility to provide access to liquid
resources in certain circumstances,
including the default of a Clearing
Member.6 The current revolving credit
facility (‘‘Existing Facility’’) was
implemented on June 28, 2018 for a 364day term, and will terminate on June 27,
2019. To maintain access to the liquid
resources provided by the Existing
Facility, OCC proposes to implement a
replacement credit facility (‘‘New
Facility’’) on substantially similar terms
as the Existing Facility with one
exception: OCC proposes to expand the
types of collateral that OCC would be
permitted to pledge under the New
Facility.
OCC currently has conditional
authority to borrow from the Existing
Facility, using Clearing Member margin
deposits or Clearing Fund contributions
as collateral, (i) in anticipation of a
potential default by or suspension of a
Clearing Member; (ii) to meet
obligations arising out of the default or
suspension of a Clearing Member; (iii) to
meet reasonably anticipated 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;
or (iv) to meet obligations arising out of
the failure of a bank or securities or
commodities clearing organization to
perform its obligations due to its
bankruptcy, insolvency, receivership or
suspension of operations (‘‘Permitted
Use Circumstances’’). The exact same
Permitted Use Circumstances will be
present in the New Facility as are
present in the Existing Facility.
1 12
U.S.C. 5465(e)(1).
CFR 240.19b–4(n)(1)(i).
U.S.C. 78a et seq.
4 See Notice of Filing infra note 5, at 83 FR 25089.
5 Securities Exchange Act Release No. 85924 (May
23, 2019), 83 FR 25089 (May 30, 2019) (SR–OCC–
2019–803) (‘‘Notice of Filing’’).
6 See Securities Exchange Act Release No. 83529
(Jun. 27, 2018), 83 FR 31237 (Jul. 3, 2018) (Notice
of Filing of Advance Notice of and No Objection to
OCC’s Proposal To Enter Into a New Credit Facility
Agreement) (SR–OCC–2018–802).
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2 17
3 15
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To obtain a loan under the Existing
Facility, OCC must pledge collateral.
The collateral permitted under the
Existing Facility includes U.S. dollars,
securities issued or guaranteed by the
U.S. Government or the Government of
Canada,7 S&P 500 Market Index
equities, Exchange-Traded Funds,
American Depositary Receipts, or
certain government-sponsored
enterprise debt securities. As noted
above, the New Facility would permit
OCC to pledge a wider range of
collateral than what is contemplated by
the Existing Facility. Under the New
Facility, OCC would be permitted to
pledge the same collateral permissible
under the Existing Facility as well as
debt securities issued by the Federal
Republic of Germany, the Republic of
France, Japan, or the United Kingdom
(‘‘Additional G7 Governments’’), but
only to the extent that Clearing
Members are permitted to pledge such
collateral as margin deposits or Clearing
Fund contributions at the time that OCC
obtains a loan under the New Facility.8
In that event, under the proposed terms
of the New Facility, debt securities of
Additional G7 Governments would be
subject to haircuts and would be
permissible collateral for a loan from the
New Facility only if they have
minimum credit ratings of A (by
Standard & Poor’s) and A2 (by
Moody’s).
III. Discussion and Commission
Findings
Although the Clearing Supervision
Act does not specify a standard of
review for an advance notice, the stated
purpose of the Clearing Supervision Act
is instructive: To mitigate systemic risk
in the financial system and promote
financial stability by, among other
things, promoting uniform risk
management standards for systemically
important financial market utilities
7 In 2013, OCC expanded the permissible
collateral in an earlier iteration of the current
revolving credit facility (‘‘2013 Facility’’). See
Securities Exchange Release No. 70596 (Oct. 2,
2013), 78 FR 62719 (Oct. 22, 2013). In assessing the
anticipated effects on and management of risk
related to the 2013 Facility, OCC noted that the
inclusion of Canadian Government securities as
eligible collateral would increase the amount of
OCC collateral that can be pledged to support
borrowings under the 2013 Facility, resulting in
increased availability of loans. Id. at 62721.
8 OCC currently does not permit Clearing
Members to pledge as margin deposits or clearing
fund contributions debt securities issued by the
Additional G7 Governments. As OCC clarified in its
proposal, permitting Clearing Members to pledge
such securities to OCC would require OCC to
address certain governance requirements, including
making any necessary filings with the Commission.
See Notice of Filing, 84 FR at 25090.
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31129
(‘‘SIFMUs’’) and strengthening the
liquidity of SIFMUs.9
Section 805(a)(2) of the Clearing
Supervision Act 10 authorizes the
Commission to prescribe regulations
containing risk-management standards
for the payment, clearing, and
settlement activities of designated
clearing entities engaged in designated
activities for which the Commission is
the supervisory agency. Section 805(b)
of the Clearing Supervision Act 11
provides the following objectives and
principles for the Commission’s riskmanagement standards prescribed under
Section 805(a):
• To promote robust risk
management;
• to promote safety and soundness;
• to reduce systemic risks; and
• to support the stability of the
broader financial system.
Section 805(c) provides, in addition,
that the Commission’s risk-management
standards may address such areas as
risk-management and default policies
and procedures, among other areas.12
The Commission has adopted riskmanagement standards under Section
805(a)(2) of the Clearing Supervision
Act and Section 17A of the Exchange
Act (the ‘‘Clearing Agency Rules’’).13
The Clearing Agency Rules require,
among other things, each covered
clearing agency to establish, implement,
maintain, and enforce written policies
and procedures that are reasonably
designed to meet certain minimum
requirements for its operations and risk
management practices on an ongoing
basis.14 As such, it is appropriate for the
Commission to review advance notices
against the Clearing Agency Rules and
the objectives and principles of the risk
management standards as described in
Section 805(b) of the Clearing
Supervision Act. As discussed below,
the Commission believes the proposal in
the Advance Notice is consistent with
the objectives and principles described
in Section 805(b) of the Clearing
Supervision Act,15 and in the Clearing
9 See
12 U.S.C. 5461(b).
U.S.C. 5464(a)(2).
11 12 U.S.C. 5464(b).
12 12 U.S.C. 5464(c).
13 17 CFR 240.17Ad–22. See Securities Exchange
Act Release No. 68080 (October 22, 2012), 77 FR
66220 (November 2, 2012) (S7–08–11). See also
Securities Exchange Act Release No. 78961
(September 28, 2016), 81 FR 70786 (October 13,
2016) (S7–03–14) (‘‘Covered Clearing Agency
Standards’’). The Commission established an
effective date of December 12, 2016 and a
compliance date of April 11, 2017 for the Covered
Clearing Agency Standards. OCC is a ‘‘covered
clearing agency’’ as defined in Rule 17Ad–22(a)(5).
14 17 CFR 240.17Ad–22.
15 12 U.S.C. 5464(b).
10 12
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Federal Register / Vol. 84, No. 125 / Friday, June 28, 2019 / Notices
Agency Rules, in particular Rule 17Ad–
22(e)(7)(ii).16
A. Consistency With Section 805(b) of
the Clearing Supervision Act
The Commission believes that the
Advance Notice is consistent with the
stated objectives and principles of
Section 805(b) of the Clearing
Supervision Act. The Commission
believes that the changes proposed in
the Advance Notice are consistent with
promoting robust risk management, in
particular management of liquidity risk
presented to OCC. Renewing and
maintaining a credit facility for this
purpose and in the manner proposed by
OCC would diversify the liquidity
resources that OCC may use to resolve
a Member default.17 Additionally, the
Commission believes that the terms of
the New Facility providing for an
expanded range of eligible collateral
would promote robust risk management
by giving OCC more flexibility to use
assets it may already hold as a means of
accessing liquidity under the New
Facility. At the same time, the
expansion of collateral would be limited
to only those assets that Clearing
Members are permitted to pledge as
collateral to OCC (as margin or clearing
fund contributions) at the time of the
loan, which the Commission believes
would further promote robust risk
management by aligning the collateral
necessary to access the New Facility
with the actual collateral that OCC has
available at that time.18 As such, the
Commission believes that the proposal
would promote robust risk management
practices at OCC, consistent with
16 17
CFR 240.17Ad–22(e)(7)(ii).
also maintains a minimum amount of cash
in its Clearing Fund as well as a non-bank liquidity
facility. See Securities Exchange Act Release No.
82501 (Jan. 12, 2018), 83 FR 2843 (Jan. 19, 2018)
(Notice of No Objection to Advance Notice, as
Modified by Amendment No. 1, Concerning the
Adoption of a New Minimum Cash Requirement for
the Clearing Fund) (SR–OCC–2017–808) and
Securities Exchange Act Release No. 76821 (Jan. 4,
2016), 81 FR 3208 (Jan. 20, 2016) (Notice of No
Objection to Advance Notice Filing, as Modified by
Amendment Nos. 1, 2 and 3, Concerning The
Options Clearing Corporation’s Non-Bank Liquidity
Facility) (SR–OCC–2015–805), respectively.
18 The Commission is not, at this time, expressing
a view regarding the specific collateral or the
haircuts applicable under the New Facility as they
would apply to Clearing Member margin deposits
or Clearing Fund contributions. As noted, OCC
currently does not permit Clearing Members to
pledge as margin deposits or clearing fund
contributions debt securities of Additional G7
Governments, and OCC would not be able to do so
without first making any necessary filings with the
Commission. See supra note 8. The Commission
believes that an analysis of the specific collateral or
haircuts that would apply to clearing member
margin deposits or clearing fund contributions
would be more appropriate at the time and in the
context of any such future filings.
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17 OCC
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Section 805(b) of the Clearing
Supervision Act.19
The Commission also believes that the
changes proposed in the Advance
Notice are consistent with promoting
safety and soundness. As described
above, the New Facility would provide
OCC with an additional liquidity
resource in the event of a Clearing
Member default. This would promote
safety and soundness for Clearing
Members because it would provide OCC
with a readily available liquidity
resource that could enable OCC to
continue to meet its obligations in a
timely fashion in the event of a Clearing
Member default, thereby helping to
contain losses and liquidity pressures
from that default. As discussed above,
the expansion of the range of eligible
collateral under the New Facility would
further promote safety and soundness
because it increases OCC’s ability to
access such a liquidity resource. As
such, the Commission believes it is
consistent with promoting safety and
soundness as contemplated in Section
805(b) of the Act.20
In addition, the Commission believes
that the proposed changes set forth in
the Advance Notice are consistent with
reducing systemic risks and promoting
the stability of the broader financial
system. As mentioned above, allowing
OCC to enter into the New Facility
would enable OCC to maintain an
additional liquidity resource that OCC
may access to help manage a Clearing
Member default. Further, aligning the
collateral that OCC would be permitted
to pledge under the New Facility with
the collateral that Clearing Members are
permitted to pledge to OCC at the time
that OCC accesses credit under the New
Facility would give OCC flexibility to
access credit under the New Facility,
thereby reducing the risk that OCC
would lack sufficient collateral to access
the New Facility. his flexibility would,
in turn, enable OCC to access additional
liquidity to help manage a Clearing
Member default.
Accordingly, and for the reasons
stated, the Commission believes the
changes proposed in the Advance
Notice are consistent with Section
805(b) of the Clearing Supervision
Act.21
B. Consistency With Rule 17Ad–
22(e)(7)(ii) of the Exchange Act
Rule 17Ad–22(e)(7)(ii) requires, in
part, OCC to establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
19 12
U.S.C. 5464(b).
20 Id.
21 12
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U.S.C. 5464(b).
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effectively measure, monitor, and
manage liquidity risk that arises in or is
borne by OCC, including measuring,
monitoring, and managing its settlement
and funding flows on an ongoing and
timely basis, and its use of intraday
liquidity by, at a minimum, holding
qualifying liquid resources sufficient to
meet the minimum liquidity resource
requirement under Rule 17Ad–
22(e)(7)(i) 22 in each relevant currency
for which the covered clearing agency
has payment obligations owed to
Clearing Members.23 Rule 17Ad–
22(a)(14) of the Exchange Act defines
‘‘qualifying liquid resources’’ to include,
among other things, lines of credit
without material adverse change
provisions, that are readily available
and convertible into cash.24
As described above, the
implementation of the New Facility
would provide OCC with continued
access to a $2 billion revolving credit
facility on substantially similar terms to
the Existing Facility. As the
Commission noted previously, the
Existing Facility provides OCC with
access to a single credit facility designed
to help ensure that OCC has sufficient,
readily-available qualifying liquid
resources to meet the cash settlement
obligations of its largest family of
affiliated members.25 Implementation of
the New Facility on substantially
similar terms to the Existing Facility
would ensure that OCC maintains
continued access to such a credit
facility. Further, as noted above, by
aligning the collateral that OCC would
be permitted to pledge under the New
Facility with the collateral that Clearing
Members are permitted pledge to OCC at
the time that OCC needs to access the
New Facility, the proposed expansion of
permissible collateral that OCC could
pledge under the New Facility would
give OCC increased flexibility to access
credit under the New Facility.
22 Rule 17Ad–22(e)(7)(i) requires OCC to
establish, implement, maintain and enforce written
policies and procedures reasonably designed to
effectively measure, monitor, and manage liquidity
risk that arises in or is borne by OCC, including
measuring, monitoring, and managing its settlement
and funding flows on an ongoing and timely basis,
and its use of intraday liquidity by, at a minimum,
maintaining sufficient liquid resources at the
minimum in all relevant currencies to effect sameday settlement of payment obligations with a high
degree of confidence under a wide range of
foreseeable stress scenarios that includes, but is not
limited to, the default of the participant family that
would generate the largest aggregate payment of
obligation for the covered clearing agency in
extreme but plausible conditions. 17 CFR
240.17Ad–22(e)(7)(i).
23 17 CFR 240.17Ad–22(e)(7)(ii).
24 17 CFR 240.17Ad–22(a)(14).
25 Securities Exchange Act Release No. 83529
(Jun. 27, 2018), 83 FR 31237, 31241 (Jul. 3, 2018)
(SR–OCC–2018–802).
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Therefore, the Commission believes that
the proposal is consistent with Rule
17Ad–22(e)(7)(ii).
IV. Conclusion
It is therefore noticed, pursuant to
Section 806(e)(1)(I) of the Clearing
Supervision Act, that the Commission
does not object to Advance Notice (SR–
OCC–2019–803) and that OCC is
authorized to implement the proposed
change as of the date of this notice.
By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–13776 Filed 6–27–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86191; File No. SR–Phlx–
2019–20]
Self-Regulatory Organizations; Nasdaq
PHLX LLC; Order Granting Approval of
Proposed Rule Change Relating to the
Allocation and Prioritization of
Automatically Executed Trades
June 24, 2019.
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I. Introduction
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on May 15,
2019, Nasdaq PHLX LLC (‘‘Phlx’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change relating to the allocation and
prioritization of automatically executed
trades. The proposed rule change was
published for comment in the Federal
Register on May 22, 2019.3 The
Commission received no comments on
the proposed rule change. This order
approves the proposed rule change.
II. Description of the Proposal
The Exchange proposes to adopt new
Rule 1089 to describe in greater detail
the manner in which Phlx will process,
prioritize and allocate transactions. The
current Phlx rule, Rule 1014(g)(vii) and
(viii), describes the allocation process
generally and relies on a calculation to
describe how different market
participants may be allocated. The
Exchange now proposes to sequentially
describe the manner in which an order
would be allocated, including the
allocation method, rounding and all
1 15
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 85876
(May 16, 2019), 84 FR 23595 (‘‘Notice’’).
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III. Discussion and Commission
Findings
After careful review of the proposed
rule change, the Commission finds that
the proposal is consistent with the
requirements of the Act and the rules
and regulations thereunder that are
applicable to a national securities
exchange.5 Specifically, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act,6 which requires,
among other things, that the rules of a
national securities exchange be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and to
protect investors and the public interest.
The Commission notes that the
Exchange proposes to revise its rules
governing how it processes, prioritizes,
and allocates transactions, including by
codifying practices that were not set
forth in the Exchange’s rules, by
deleting its existing rules and adopting
a new rule. The Commission believes
that the Exchange’s proposal protects
investors and the public interest
because it enhances the transparency of
its transaction allocation process for
market participants using its facilities.
Therefore, the Commission finds that
this enhanced transparency is consistent
with the Act.
With respect to the Exchange’s
proposal to modify the specialist
allocation to provide the Directed
Specialist with the entire allocation of a
Directed Order where the order is for 5
contracts or fewer, the Commission
notes that the Directed Specialist will
not be entitled to this allocation when
there is a Public Customer present at the
same price or when the Specialist is not
quoting at the inside when the order is
received. The Commission further notes
that the modified specialist entitlement
is identical to the existing specialist
allocation of orders of 5 contracts or
fewer where the order is not a Directed
Order, which is provided to specialists
in recognition of the specialists’
affirmative market making obligations.
The Commission finds that the
proposed specialist allocation for
Directed Orders of 5 contracts or fewer
is consistent with the Act in that the
proposal should promote just and
equitable principles of trade.
4 After the DROT Priority is applied, the System
excludes the Specialist/DROT from the total
number of contracts that is utilized (denominator)
in calculating the ROT Priority in proposed Rule
1089(a)(1)(E).
5 In approving this rule change, the Commission
has considered the rule’s impact on efficiency,
competition, and capital formation. See 15 U.S.C.
78c(f).
6 15 U.S.C. 78f(b)(5).
potential allocation scenarios. The
proposal generally codifies the
Exchange’s current practices while
adding more explicit language to the
rule text. In addition, the Exchange
proposes to codify its round robin
allocation of odd lots that is not set forth
in its current rules.
The Exchange proposes to retain its
existing allocation methodology and
priorities in the new rule. For example,
Public Customer orders will continue to
have priority over non-Public Customer
interest at the same price, provided the
Public Customer order is an executable
order. Generally, the Specialist and/or
Directed Registered Option Trader
(‘‘DROT’’) priority is then applied,
before the ROT priority 4 and remaining
interest. The proposed rule also codifies
the manner in which rounding will be
handled and makes conforming changes
to the Exchange’s rules.
In its proposal, the Exchange proposes
one change to its existing allocation
scheme. Specifically, the Exchange
proposes to amend the current
allocation a Specialist is entitled to
receive when a Specialist is also the
DROT, and the order is directed to a
particular market maker (a ‘‘Directed
Order’’) for 5 contracts or fewer. Today,
a Specialist is entitled to the allocation
of orders of 5 contracts or fewer only
when such order is either not a Directed
Order or is a Directed order for 5
contracts or fewer, but the DROT is not
quoting at the inside price. If the order
for 5 contracts or fewer is a Directed
Order and the DROT is also the
Specialist, then the Specialist currently
is entitled to receive only the DROT
allocation of 40% of the order, rather
than the full size of the allocation of the
order for 5 contracts or fewer.
The Exchange proposes that,
assuming there is no Public Customer
interest present at the same price, the
Specialist would be entitled to the
entire allocation of the order of 5
contracts or fewer where the Specialist
is also the DROT and the Specialist
receives the Directed Order and has a
quote at the best price when the
Directed Order is received. This
specialist entitlement for orders of 5
contracts or fewer would apply only
after the Opening Process and would
not apply to auctions.
PO 00000
Frm 00115
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]]>Agencies
[Federal Register Volume 84, Number 125 (Friday, June 28, 2019)]
[Notices]
[Pages 31128-31131]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-13776]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86182; File No. SR-OCC-2019-803]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of No Objection To Advance Notice Concerning The Options
Clearing Corporation's Proposal To Enter Into a New Credit Facility
Agreement
June 24, 2019.
I. Introduction
On April 26, 2019, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') advance
notice SR-OCC-2019-803 (``Advance Notice'') pursuant to Section
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, entitled Payment, Clearing and Settlement
Supervision Act of 2010
[[Page 31129]]
(``Clearing Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) \2\ under
the Securities Exchange Act of 1934 (``Exchange Act'') \3\ to propose
to replace the 364-day term revolving credit facility that OCC
currently maintains, which is due to expire on June 27, 2019.\4\ The
Advance Notice was published for public comment in the Federal Register
on May 30, 2019,\5\ and the Commission received no comments regarding
the proposal contained in the Advance Notice. This publication serves
as notice of no objection to the Advance Notice.
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\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ 15 U.S.C. 78a et seq.
\4\ See Notice of Filing infra note 5, at 83 FR 25089.
\5\ Securities Exchange Act Release No. 85924 (May 23, 2019), 83
FR 25089 (May 30, 2019) (SR-OCC-2019-803) (``Notice of Filing'').
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II. Background
OCC maintains a $2 billion revolving credit facility to provide
access to liquid resources in certain circumstances, including the
default of a Clearing Member.\6\ The current revolving credit facility
(``Existing Facility'') was implemented on June 28, 2018 for a 364-day
term, and will terminate on June 27, 2019. To maintain access to the
liquid resources provided by the Existing Facility, OCC proposes to
implement a replacement credit facility (``New Facility'') on
substantially similar terms as the Existing Facility with one
exception: OCC proposes to expand the types of collateral that OCC
would be permitted to pledge under the New Facility.
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\6\ See Securities Exchange Act Release No. 83529 (Jun. 27,
2018), 83 FR 31237 (Jul. 3, 2018) (Notice of Filing of Advance
Notice of and No Objection to OCC's Proposal To Enter Into a New
Credit Facility Agreement) (SR-OCC-2018-802).
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OCC currently has conditional authority to borrow from the Existing
Facility, using Clearing Member margin deposits or Clearing Fund
contributions as collateral, (i) in anticipation of a potential default
by or suspension of a Clearing Member; (ii) to meet obligations arising
out of the default or suspension of a Clearing Member; (iii) to meet
reasonably anticipated 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; or (iv) to meet obligations
arising out of the failure of a bank or securities or commodities
clearing organization to perform its obligations due to its bankruptcy,
insolvency, receivership or suspension of operations (``Permitted Use
Circumstances''). The exact same Permitted Use Circumstances will be
present in the New Facility as are present in the Existing Facility.
To obtain a loan under the Existing Facility, OCC must pledge
collateral. The collateral permitted under the Existing Facility
includes U.S. dollars, securities issued or guaranteed by the U.S.
Government or the Government of Canada,\7\ S&P 500 Market Index
equities, Exchange-Traded Funds, American Depositary Receipts, or
certain government-sponsored enterprise debt securities. As noted
above, the New Facility would permit OCC to pledge a wider range of
collateral than what is contemplated by the Existing Facility. Under
the New Facility, OCC would be permitted to pledge the same collateral
permissible under the Existing Facility as well as debt securities
issued by the Federal Republic of Germany, the Republic of France,
Japan, or the United Kingdom (``Additional G7 Governments''), but only
to the extent that Clearing Members are permitted to pledge such
collateral as margin deposits or Clearing Fund contributions at the
time that OCC obtains a loan under the New Facility.\8\ In that event,
under the proposed terms of the New Facility, debt securities of
Additional G7 Governments would be subject to haircuts and would be
permissible collateral for a loan from the New Facility only if they
have minimum credit ratings of A (by Standard & Poor's) and A2 (by
Moody's).
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\7\ In 2013, OCC expanded the permissible collateral in an
earlier iteration of the current revolving credit facility (``2013
Facility''). See Securities Exchange Release No. 70596 (Oct. 2,
2013), 78 FR 62719 (Oct. 22, 2013). In assessing the anticipated
effects on and management of risk related to the 2013 Facility, OCC
noted that the inclusion of Canadian Government securities as
eligible collateral would increase the amount of OCC collateral that
can be pledged to support borrowings under the 2013 Facility,
resulting in increased availability of loans. Id. at 62721.
\8\ OCC currently does not permit Clearing Members to pledge as
margin deposits or clearing fund contributions debt securities
issued by the Additional G7 Governments. As OCC clarified in its
proposal, permitting Clearing Members to pledge such securities to
OCC would require OCC to address certain governance requirements,
including making any necessary filings with the Commission. See
Notice of Filing, 84 FR at 25090.
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III. Discussion and Commission Findings
Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, the stated purpose of the Clearing
Supervision Act is instructive: To mitigate systemic risk in the
financial system and promote financial stability by, among other
things, promoting uniform risk management standards for systemically
important financial market utilities (``SIFMUs'') and strengthening the
liquidity of SIFMUs.\9\
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\9\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------
Section 805(a)(2) of the Clearing Supervision Act \10\ authorizes
the Commission to prescribe regulations containing risk-management
standards for the payment, clearing, and settlement activities of
designated clearing entities engaged in designated activities for which
the Commission is the supervisory agency. Section 805(b) of the
Clearing Supervision Act \11\ provides the following objectives and
principles for the Commission's risk-management standards prescribed
under Section 805(a):
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\10\ 12 U.S.C. 5464(a)(2).
\11\ 12 U.S.C. 5464(b).
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To promote robust risk management;
to promote safety and soundness;
to reduce systemic risks; and
to support the stability of the broader financial system.
Section 805(c) provides, in addition, that the Commission's risk-
management standards may address such areas as risk-management and
default policies and procedures, among other areas.\12\
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\12\ 12 U.S.C. 5464(c).
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The Commission has adopted risk-management standards under Section
805(a)(2) of the Clearing Supervision Act and Section 17A of the
Exchange Act (the ``Clearing Agency Rules'').\13\ The Clearing Agency
Rules require, among other things, each covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures that are reasonably designed to meet certain minimum
requirements for its operations and risk management practices on an
ongoing basis.\14\ As such, it is appropriate for the Commission to
review advance notices against the Clearing Agency Rules and the
objectives and principles of the risk management standards as described
in Section 805(b) of the Clearing Supervision Act. As discussed below,
the Commission believes the proposal in the Advance Notice is
consistent with the objectives and principles described in Section
805(b) of the Clearing Supervision Act,\15\ and in the Clearing
[[Page 31130]]
Agency Rules, in particular Rule 17Ad-22(e)(7)(ii).\16\
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\13\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No.
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11).
See also Securities Exchange Act Release No. 78961 (September 28,
2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing
Agency Standards''). The Commission established an effective date of
December 12, 2016 and a compliance date of April 11, 2017 for the
Covered Clearing Agency Standards. OCC is a ``covered clearing
agency'' as defined in Rule 17Ad-22(a)(5).
\14\ 17 CFR 240.17Ad-22.
\15\ 12 U.S.C. 5464(b).
\16\ 17 CFR 240.17Ad-22(e)(7)(ii).
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A. Consistency With Section 805(b) of the Clearing Supervision Act
The Commission believes that the Advance Notice is consistent with
the stated objectives and principles of Section 805(b) of the Clearing
Supervision Act. The Commission believes that the changes proposed in
the Advance Notice are consistent with promoting robust risk
management, in particular management of liquidity risk presented to
OCC. Renewing and maintaining a credit facility for this purpose and in
the manner proposed by OCC would diversify the liquidity resources that
OCC may use to resolve a Member default.\17\ Additionally, the
Commission believes that the terms of the New Facility providing for an
expanded range of eligible collateral would promote robust risk
management by giving OCC more flexibility to use assets it may already
hold as a means of accessing liquidity under the New Facility. At the
same time, the expansion of collateral would be limited to only those
assets that Clearing Members are permitted to pledge as collateral to
OCC (as margin or clearing fund contributions) at the time of the loan,
which the Commission believes would further promote robust risk
management by aligning the collateral necessary to access the New
Facility with the actual collateral that OCC has available at that
time.\18\ As such, the Commission believes that the proposal would
promote robust risk management practices at OCC, consistent with
Section 805(b) of the Clearing Supervision Act.\19\
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\17\ OCC also maintains a minimum amount of cash in its Clearing
Fund as well as a non-bank liquidity facility. See Securities
Exchange Act Release No. 82501 (Jan. 12, 2018), 83 FR 2843 (Jan. 19,
2018) (Notice of No Objection to Advance Notice, as Modified by
Amendment No. 1, Concerning the Adoption of a New Minimum Cash
Requirement for the Clearing Fund) (SR-OCC-2017-808) and Securities
Exchange Act Release No. 76821 (Jan. 4, 2016), 81 FR 3208 (Jan. 20,
2016) (Notice of No Objection to Advance Notice Filing, as Modified
by Amendment Nos. 1, 2 and 3, Concerning The Options Clearing
Corporation's Non-Bank Liquidity Facility) (SR-OCC-2015-805),
respectively.
\18\ The Commission is not, at this time, expressing a view
regarding the specific collateral or the haircuts applicable under
the New Facility as they would apply to Clearing Member margin
deposits or Clearing Fund contributions. As noted, OCC currently
does not permit Clearing Members to pledge as margin deposits or
clearing fund contributions debt securities of Additional G7
Governments, and OCC would not be able to do so without first making
any necessary filings with the Commission. See supra note 8. The
Commission believes that an analysis of the specific collateral or
haircuts that would apply to clearing member margin deposits or
clearing fund contributions would be more appropriate at the time
and in the context of any such future filings.
\19\ 12 U.S.C. 5464(b).
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The Commission also believes that the changes proposed in the
Advance Notice are consistent with promoting safety and soundness. As
described above, the New Facility would provide OCC with an additional
liquidity resource in the event of a Clearing Member default. This
would promote safety and soundness for Clearing Members because it
would provide OCC with a readily available liquidity resource that
could enable OCC to continue to meet its obligations in a timely
fashion in the event of a Clearing Member default, thereby helping to
contain losses and liquidity pressures from that default. As discussed
above, the expansion of the range of eligible collateral under the New
Facility would further promote safety and soundness because it
increases OCC's ability to access such a liquidity resource. As such,
the Commission believes it is consistent with promoting safety and
soundness as contemplated in Section 805(b) of the Act.\20\
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\20\ Id.
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In addition, the Commission believes that the proposed changes set
forth in the Advance Notice are consistent with reducing systemic risks
and promoting the stability of the broader financial system. As
mentioned above, allowing OCC to enter into the New Facility would
enable OCC to maintain an additional liquidity resource that OCC may
access to help manage a Clearing Member default. Further, aligning the
collateral that OCC would be permitted to pledge under the New Facility
with the collateral that Clearing Members are permitted to pledge to
OCC at the time that OCC accesses credit under the New Facility would
give OCC flexibility to access credit under the New Facility, thereby
reducing the risk that OCC would lack sufficient collateral to access
the New Facility. his flexibility would, in turn, enable OCC to access
additional liquidity to help manage a Clearing Member default.
Accordingly, and for the reasons stated, the Commission believes
the changes proposed in the Advance Notice are consistent with Section
805(b) of the Clearing Supervision Act.\21\
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\21\ 12 U.S.C. 5464(b).
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B. Consistency With Rule 17Ad-22(e)(7)(ii) of the Exchange Act
Rule 17Ad-22(e)(7)(ii) requires, in part, OCC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to effectively measure, monitor, and manage
liquidity risk that arises in or is borne by OCC, including measuring,
monitoring, and managing its settlement and funding flows on an ongoing
and timely basis, and its use of intraday liquidity by, at a minimum,
holding qualifying liquid resources sufficient to meet the minimum
liquidity resource requirement under Rule 17Ad-22(e)(7)(i) \22\ in each
relevant currency for which the covered clearing agency has payment
obligations owed to Clearing Members.\23\ Rule 17Ad-22(a)(14) of the
Exchange Act defines ``qualifying liquid resources'' to include, among
other things, lines of credit without material adverse change
provisions, that are readily available and convertible into cash.\24\
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\22\ Rule 17Ad-22(e)(7)(i) requires OCC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to effectively measure, monitor, and manage liquidity risk
that arises in or is borne by OCC, including measuring, monitoring,
and managing its settlement and funding flows on an ongoing and
timely basis, and its use of intraday liquidity by, at a minimum,
maintaining sufficient liquid resources at the minimum in all
relevant currencies to effect same-day settlement of payment
obligations with a high degree of confidence under a wide range of
foreseeable stress scenarios that includes, but is not limited to,
the default of the participant family that would generate the
largest aggregate payment of obligation for the covered clearing
agency in extreme but plausible conditions. 17 CFR 240.17Ad-
22(e)(7)(i).
\23\ 17 CFR 240.17Ad-22(e)(7)(ii).
\24\ 17 CFR 240.17Ad-22(a)(14).
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As described above, the implementation of the New Facility would
provide OCC with continued access to a $2 billion revolving credit
facility on substantially similar terms to the Existing Facility. As
the Commission noted previously, the Existing Facility provides OCC
with access to a single credit facility designed to help ensure that
OCC has sufficient, readily-available qualifying liquid resources to
meet the cash settlement obligations of its largest family of
affiliated members.\25\ Implementation of the New Facility on
substantially similar terms to the Existing Facility would ensure that
OCC maintains continued access to such a credit facility. Further, as
noted above, by aligning the collateral that OCC would be permitted to
pledge under the New Facility with the collateral that Clearing Members
are permitted pledge to OCC at the time that OCC needs to access the
New Facility, the proposed expansion of permissible collateral that OCC
could pledge under the New Facility would give OCC increased
flexibility to access credit under the New Facility.
[[Page 31131]]
Therefore, the Commission believes that the proposal is consistent with
Rule 17Ad-22(e)(7)(ii).
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\25\ Securities Exchange Act Release No. 83529 (Jun. 27, 2018),
83 FR 31237, 31241 (Jul. 3, 2018) (SR-OCC-2018-802).
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IV. Conclusion
It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act, that the Commission does not object to
Advance Notice (SR-OCC-2019-803) and that OCC is authorized to
implement the proposed change as of the date of this notice.
By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-13776 Filed 6-27-19; 8:45 am]
BILLING CODE 8011-01-P
