Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Concerning an Agreement for Clearing and Settlement Services Between The Options Clearing Corporation and Small Exchange, Inc., 70602-70605 [2019-27589]
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Federal Register / Vol. 84, No. 246 / Monday, December 23, 2019 / Notices
competition either among or between
classes of market participants.
Finally, the Exchange believes that
the technical changes to the rule text
(i.e., clarifying ‘‘FAANG contract sides’’
and including concept of a specified
minimum number of ‘‘eligible contract
sides’’) do not impose an undue burden
on competition. Instead, the proposed
changes would add clarity and
transparency making the Fee Schedule
easier for market participants to
navigate.17
Intermarket Competition. While there
is limited intermarket competition with
respect to FAANG, as it lists and trades
only on the Exchange and NYSE Arca,
this index product competes with
market participants that choose to create
their own synthetic index product by
trading in the basket of securities that
comprise the FAANG index on other
exchanges. This proposed fee change
would therefore promote intermarket
competition because it is designed to
increase liquidity for market
participants that would like to trade
FAANG by encouraging Market Maker
organizations to open more positions in
FAANG on the Exchange. The Exchange
believes that the proposed change could
promote competition between the
Exchange and other execution venues,
by encouraging additional orders to be
sent to the Exchange for execution. The
Exchange does not believe that the
proposed change will impair the ability
of any market participants or competing
order execution venues to maintain
their competitive standing in the
financial markets.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective
upon filing pursuant to Section
19(b)(3)(A) 18 of the Act and
subparagraph (f)(2) of Rule 19b–4 19
thereunder, because it establishes a due,
fee, or other charge imposed by the
Exchange.
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
17 See
supra notes 8, 9.
U.S.C. 78s(b)(3)(A).
19 17 CFR 240.19b–4(f)(2).
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 20 of the Act to
determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSEAMER–2019–57 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSEAMER–2019–57. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
18 15
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U.S.C. 78s(b)(2)(B).
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personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NYSEAMER–2019–57, and
should be submitted on or before
January 13, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.21
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019–27594 Filed 12–20–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87774; File No. SR–OCC–
2019–011]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing and Immediate Effectiveness
of Proposed Rule Change Concerning
an Agreement for Clearing and
Settlement Services Between The
Options Clearing Corporation and
Small Exchange, Inc.
December 17, 2019.
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 December
6, 2019, the Options Clearing
Corporation (‘‘OCC’’) 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 OCC. OCC filed the
proposed rule change pursuant to
Section 19(b)(3)(A) 3 of the Act and Rule
19b–4(f)(4)(ii) 4 thereunder so that the
proposal was effective upon filing with
the Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
OCC is proposing to execute an
Agreement for Clearing and Settlement
Services (‘‘Clearing Agreement’’)
between OCC and Small Exchange, Inc.
(‘‘Small’’) in connection with Small’s
intention to operate as a designated
contract market (‘‘DCM’’) regulated by
the Commodity Futures Trading
21 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(4)(ii).
1 15
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Commission (‘‘CFTC’’). There are no
proposed changes to OCC’s By-Laws or
Rules.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission,
OCC 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. OCC has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of these statements.
A. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
(1) Purpose
OCC is proposing to provide clearance
and settlement services to Small
pursuant to the terms set forth in the
Clearing Agreement. Small has applied
for designation as a DCM by the CFTC.5
The purpose of this proposed rule
change is to adopt a new Clearing
Agreement so that OCC may begin
providing clearing and settlement
services for Small after Small has
received the requisite regulatory
approvals.
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Clearing Agreement Proposal
On December 4, 2018, Small applied
for designation as a DCM by the CFTC.6
Contingent on the CFTC approving
Small’s application, OCC is now
proposing to provide the clearance and
settlement services as described in the
Clearing Agreement.
The terms of the Clearing Agreement
are based on the terms of the Agreement
for Clearing and Settlement Services
entered into with Nasdaq Futures, Inc.
(‘‘NFX Clearing Agreement’’), which has
been approved by the Commission.7 The
Clearing Agreement is substantially
similar to the NFX Clearing Agreement
with several differences discussed in
more detail below.
The Clearing Agreement includes new
provisions that are designed to protect
OCC and the holders of outstanding
contracts listed on Small. These new
provisions would enable OCC to better
manage the risks associated with a
clearing relationship with a DCM such
as the one OCC proposes to enter into
5 See
https://www.cftc.gov/filings/documents/
2018/orgsmfecoverletter181212.pdf.
6 Id.
7 See Securities Exchange Act Release No. 74747
(April 16, 2015), 80 FR 22591 (April 22, 2015) (SR–
OCC–2015–03).
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with Small. More specifically, the
following provisions would be added:
• Section 12 of the Clearing
Agreement, ‘‘Information Sharing by
Market,’’ would be revised to require
Small to provide OCC with audited
financial statements (i) on an annual
basis and (ii) upon request by OCC. OCC
believes this reporting will enable OCC
to better monitor the financial resources
of Small.8
• Section 18(d) of the Clearing
Agreement, ‘‘Financial Resources or
Agreement with Another Exchange,’’
would be added to require that Small
either (i) maintain at all times at least
one year of projected operating
expenses, as updated on an annual
basis 9 or (ii) maintain an arrangement
with another DCM to provide a listing
and trading venue for contracts that
would be listed by Small and cleared by
OCC in the event Small becomes
unavailable to provide a trading venue
for its contracts.10 OCC believes this
will better enable it to manage the
potential risk of Small not being
available to provide a trading venue for
contracts listed on the exchange.
In addition to the above, the Clearing
Agreement would include several other
differences from the NFX Clearing
Agreement, which include:
• Section 3 ‘‘Selection of Underlying
Interests; Classes and Series of
Commodity Contracts’’ would be
revised to clearly reflect that security
futures would not be cleared by OCC
pursuant to the Clearing Agreement, as
Small is not planning to list such
contracts.
• Section 3 would also be revised to:
(i) Add the condition that OCC be
satisfied that it is able to appropriately
process contracts proposed for clearing
by Small using commercially reasonable
efforts, (ii) describe the manner in
which Small initially would notify OCC
of proposed new products, (iii) require
Small to submit a certificate to OCC
detailing certain information on a new
product as specified in Section 3(c) no
later than ten trading days before Small
8 Section 12 of the NFX Clearing Agreement
provided that the rights and obligations of
purchasers and sellers of contracts subject to that
agreement are as set forth in the By-Laws and Rules
of OCC. This is a reiteration of provisions that
already exist in OCC’s By-Laws and OCC therefore
determined to replace it with the provision noted
above in the proposed Clearing Agreement. See,
e.g., Article XII, Section 2(a).
9 OCC notes that 17 CFR 38.1101(a) requires a
DCM to maintain minimum financial resources
‘‘equal to a total amount that would enable the
designated contract market, or applicant for
designation as such, to cover its operating costs for
a period of at least one year, calculated on a rolling
basis.’’
10 It is anticipated that any such DCM would be
cleared by OCC.
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70603
plans to commence trading the product,
and (iv) specify expectations around the
clearance and settlement of a contract
with a new maturity or expiration date
not set forth in the certificate described
in Section 3(c).
• Section 5(a) of the Clearing
Agreement, ‘‘Confirmed Trade Reports,’’
would be amended to eliminate the
reference to exchange-for-physical
transactions, as the exchange is not
planning to provide for such
transactions in its rules. Section 26 from
NFX Clearing Agreement also would be
deleted for this reason as well as the fact
that Article XII, Section VII of OCC’s ByLaws already contains provisions
regarding block trades that mirror what
was in Section 26.
• Section 10 of the Clearing
Agreement, ‘‘Margin Requirements of
Corporation,’’ would be revised to
clarify that OCC maintains the exclusive
right to enforce its margin requirements
with respect to its Clearing Members,
but will maintain good faith
communications with Small concerning
OCC’s establishment and
communication of margin requirements.
Section 10 also would be revised to
remove a provision that would have
required the exchange’s consent prior to
a listed product being made fungible
with other products.
• Section 11 of the Clearing
Agreement, ‘‘Financial Requirements for
Clearing Members,’’ would be revised to
provide that OCC would have the
exclusive authority to establish in its
By-Laws and Rules financial
responsibility standards with which its
Clearing Members must comply.
• Section 13 of the Clearing
Agreement, ‘‘Fees for Clearing Services
and Changes Related to Commodity
Contracts,’’ would be revised to clarify
that in the future, OCC would have the
ability to charge Small fees reasonably
related to OCC’s costs to make any
change(s) necessary to clear a product
for Small, with the condition that prior
to imposing any such fee, OCC would
provide Small with advance written
notice of the fee.11
• Section 15(c) of the Clearing
Agreement, ‘‘Indemnification in Respect
of Intellectual Property,’’ would be
amended to provide that only Small
would indemnify OCC if Small were
alleged to have violated the patent or
11 If OCC ever made a decision to charge Small
fees reasonably related to OCC’s costs to make any
change(s) necessary to clear a product for Small,
OCC would provide Small ample prior written
notice (e.g., 30 days) of any such fees. It is also
anticipated that OCC would make a determination
as to whether a proposed rule change would be
needed in connection with any such fee.
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other intellectual property rights of
others.
• Section 18(b) of the Clearing
Agreement, ‘‘Other Grounds for
Termination,’’ would be amended to
provide that there would be a 365-day
period in which to transfer contracts to
another DCO if either party to the
Clearing Agreement voluntarily
terminated it. Under this amended
provision, OCC also would have the
right to terminate the agreement earlier
if such a transfer were accomplished
prior to this 365-day period.
In addition to the foregoing, various
minor and administrative changes have
been made throughout the document
including, but not limited to, updated
references to the names of the parties
and clean-up of outdated terms.
(2) Statutory Basis
OCC believes the proposed rule
change is consistent with Section 17A of
the Act 12 and the rules thereunder
applicable to OCC. Section 17A(b)(3)(F)
of the Act 13 requires, among other
things, that the rules of a clearing
agency be designed to promote the
prompt and accurate clearance and
settlement of securities transactions
and, to the extent applicable, derivative
agreements, contracts, and transactions,
to 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. The proposed rule change is
designed to promote the prompt and
accurate clearance and settlement of
derivatives contracts traded on Small by
providing that such contracts will be
cleared through OCC’s existing
clearance and settlement processes for
futures contracts, which have
functioned efficiently for many years
with regard to other futures markets for
which OCC provides clearance and
settlement services. Similarly, OCC
believes that the proposed rule change
is designed to assure the safeguarding of
securities and funds which are in the
custody or control of the clearing agency
by bringing contracts traded on Small
and funds associated with those
contracts within the scope of OCC’s
existing custody and control
arrangements, which have effectively
served OCC’s Clearing Members and
their customers for many years. Finally,
OCC believes the proposed rule change
is designed to the protect investors and
the public interest. By providing that
futures contracts traded on Small and
cleared by OCC are risk managed under
OCC’s risk management framework,
which is designed to provide
protections to customers and other
market participants in the event of a
Clearing Member default, OCC believes
the proposed rule change contributes to
the protection of investors and the
public interest.
Rule 17Ad–22(e)(20) 14 requires that a
covered clearing agency ‘‘establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to . . . [i]dentify,
monitor, and manage risks related to
any link the covered clearing agency
establishes with one or more other
clearing agencies, financial market
utilities, or trading markets.’’ OCC
believes that the proposed rule change
is also consistent with Rule 17Ad–
22(e)(20) 15 because the proposed
Clearing Agreement is designed to help
OCC identify, monitor, and manage the
risks associated with providing
clearance and settlement services for
Small, which is a trading market. For
example, the Clearing Agreement would
require Small to report financial
information to OCC, which would
enable OCC to monitor for changes in
Small’s financial condition. It also
would require Small to maintain
sufficient financial resources or
arrangements with another DCM to
mitigate the impact to the marketplace
should Small become unavailable as a
trading venue for its contracts.
B. Clearing Agency’s Statement on
Burden on Competition
Section 17A(b)(3)(I) of the Act 16
requires that the rules of a clearing
agency not impose any burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act. OCC does not
believe the proposed rule change would
impose any burden on competition. The
purpose of the proposed rule change is
to adopt a Clearing Agreement between
OCC and Small. The adoption of such
an agreement would not affect Clearing
Members’ access to OCC’s services, nor
would it disadvantage or favor any
particular user in relationship to
another user. As such, OCC believes that
the proposed rule change would not
impose any burden on competition.
C. Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants or Others
Written comments on the proposed
rule change were not and are not
14 17
12 15
U.S.C. 78q–1.
13 15 U.S.C. 78q–1(b)(3)(F).
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CFR 240.17Ad-22(e)(20).
15 Id.
16 15
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U.S.C. 78q–1(b)(3)(I).
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intended to be solicited with respect to
the proposed rule change and none have
been received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Pursuant to Section 19(b)(3)(A) of the
Act,17 and Rule 19b–4(f)(4)(ii)
thereunder,18 the proposed rule change
is filed for immediate effectiveness
because it effects a change in an existing
service of OCC that (i) primarily affects
the clearing operations of OCC with
respect to products that are not
securities, i.e., options on futures that
are not security futures, and (ii) does not
significantly affect any securities
clearing operations of OCC or any rights
or obligations of OCC with respect to
securities clearing or persons using such
securities clearing services.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.19
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Exchange
Act. Comments may be submitted by
any of the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
OCC–2019–011 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–OCC–2019–011. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
17 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(4)(ii).
19 Notwithstanding its immediate effectiveness,
implementation of this rule change will be delayed
until this change is deemed certified under CFTC
Rule 40.6.
18 17
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rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of OCC and on OCC’s website at
https://www.theocc.com/about/
publications/bylaws.jsp.
All comments received will be posted
without change. Persons submitting
comments are cautioned that we do not
redact or edit personal identifying
information from comment submissions.
You should submit only information
that you wish to make available
publicly.
All submissions should refer to File
Number SR–OCC–2019–011 and should
be submitted on or before January 13,
2020.
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
J. Matthew DeLesDernier,
Assistant Secretary.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
[FR Doc. 2019–27589 Filed 12–20–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87768; File No. SR–Phlx–
2019–53]
Self-Regulatory Organizations; Nasdaq
PHLX LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Adopt a New Rule
1059
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December 17, 2019.
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 December
4, 2019, Nasdaq PHLX LLC (‘‘Phlx’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I and II
20 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to adopt a
new Rule 1059 titled ‘‘In-Kind Exchange
of Options Positions and ETF Shares.’’
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaqphlx.cchwallstreet.com/,
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
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 aspects of such
statements.
1. Purpose
The Exchange proposes to adopt a
new Rule 1059 titled ‘‘In-Kind Exchange
of Options Positions and ETF Shares,’’
based on recent changes proposed by
Cboe Exchange, Inc. (‘‘Cboe’’) and
approved by the Commission.3
Background
As discussed further below, the
ability to effect ‘‘in kind’’ transfers is a
key component of the operational
structure of an exchange-traded fund
(‘‘ETF’’). Currently, in general, ETFs can
effect in-kind transfers with respect to
equity securities and fixed-income
securities. The in-kind process is a
major benefit to ETF shareholders and,
in general, the means by which assets
may be added to or removed from ETFs.
In-kind transfers protect ETF
shareholders from the undesirable tax
3 See Cboe Rule 6.9. See also Securities Exchange
Act Release No. 87340 (October 17, 2019) (SR–
CBOE–2019–048) (Order Approving on an
Accelerated Basis a Proposed Rule Change, as
Modified by Amendment Nos. 2 and 3, to Adopt
Rule 6.9 (In-Kind Exchange of Options Positions
and ETF Shares)).
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70605
effects of frequent ‘‘creations and
redemptions’’ (described below) and
improve the overall tax efficiency of the
products. However, currently, the
Exchange Rules do not provide for ETFs
to effect in-kind transfers of options off
of the Exchange, resulting in tax
inefficiencies for ETFs that hold them.
As a result, the use of options by ETFs
is substantially limited.
Currently, Rule 1058(a) permits
members or member organizations to
transfer their positions off of the
Exchange in specified, limited
circumstances. The circumstances
currently listed include: (1) The
dissolution of a joint account in which
the remaining member or member
organization assumes the positions of
the joint account; (2) the dissolution of
a corporation or partnership in which a
former nominee of that corporation or
partnership assumes the positions; (3)
positions transferred as part of a
member or member organization’s
capital contribution to a new joint
account, partnership, or corporation; (4)
the donation of positions to a not-forprofit corporation; (5) the transfer of
positions to a minor under the Uniform
Gifts to Minors Act; (6) a merger or
acquisition resulting in a continuity of
ownership or management; and (7)
consolidation of accounts within a
member or member organization.4 At
present, the list of limited
circumstances in Rule 1058(a) that
allows members to transfer their options
positions off the Exchange does not
include an exception for in-kind
transfers.
The Exchange proposes to add a new
circumstance under which off-Exchange
transfers of options positions would be
permitted to occur. Specifically, under
proposed Rule 1059, positions in
options listed on the Exchange would be
permitted to be transferred off the
Exchange by a member or member
organization in connection with
transactions to purchase or redeem
‘‘creation units’’ of ETF shares between
an ‘‘authorized participant’’ 5 and the
4 The Exchange notes that other options
exchanges have adopted rules that provide for offExchange transfers under similar circumstances.
See, e.g., Cboe Rule 6.7(a); and NYSE Arca, Inc.
Rule 6.78–O(d)(1).
5 The Exchange is proposing that, for purposes of
proposed Rule 1059, the term ‘‘authorized
participant’’ would be defined as an entity that has
a written agreement with the issuer of ETF shares
or one of its service providers, which allows the
authorized participant to place orders for the
purchase and redemption of creation units (i.e.,
specified numbers of ETF shares). While an
authorized participant may be a member or member
organization and directly effect transactions in
options on the Exchange, an authorized participant
that is not a member or member organization may
E:\FR\FM\23DEN1.SGM
Continued
23DEN1
]]>Agencies
[Federal Register Volume 84, Number 246 (Monday, December 23, 2019)]
[Notices]
[Pages 70602-70605]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27589]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87774; File No. SR-OCC-2019-011]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Concerning an Agreement for Clearing and Settlement Services Between
The Options Clearing Corporation and Small Exchange, Inc.
December 17, 2019.
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 December 6, 2019, the Options Clearing Corporation (``OCC'') 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 OCC. OCC filed the proposed rule change
pursuant to Section 19(b)(3)(A) \3\ of the Act and Rule 19b-4(f)(4)(ii)
\4\ thereunder so that the proposal was effective upon filing with the
Commission. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(4)(ii).
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
OCC is proposing to execute an Agreement for Clearing and
Settlement Services (``Clearing Agreement'') between OCC and Small
Exchange, Inc. (``Small'') in connection with Small's intention to
operate as a designated contract market (``DCM'') regulated by the
Commodity Futures Trading
[[Page 70603]]
Commission (``CFTC''). There are no proposed changes to OCC's By-Laws
or Rules.
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, OCC 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. OCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.
A. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
(1) Purpose
OCC is proposing to provide clearance and settlement services to
Small pursuant to the terms set forth in the Clearing Agreement. Small
has applied for designation as a DCM by the CFTC.\5\ The purpose of
this proposed rule change is to adopt a new Clearing Agreement so that
OCC may begin providing clearing and settlement services for Small
after Small has received the requisite regulatory approvals.
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\5\ See https://www.cftc.gov/filings/documents/2018/orgsmfecoverletter181212.pdf.
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Clearing Agreement Proposal
On December 4, 2018, Small applied for designation as a DCM by the
CFTC.\6\ Contingent on the CFTC approving Small's application, OCC is
now proposing to provide the clearance and settlement services as
described in the Clearing Agreement.
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\6\ Id.
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The terms of the Clearing Agreement are based on the terms of the
Agreement for Clearing and Settlement Services entered into with Nasdaq
Futures, Inc. (``NFX Clearing Agreement''), which has been approved by
the Commission.\7\ The Clearing Agreement is substantially similar to
the NFX Clearing Agreement with several differences discussed in more
detail below.
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\7\ See Securities Exchange Act Release No. 74747 (April 16,
2015), 80 FR 22591 (April 22, 2015) (SR-OCC-2015-03).
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The Clearing Agreement includes new provisions that are designed to
protect OCC and the holders of outstanding contracts listed on Small.
These new provisions would enable OCC to better manage the risks
associated with a clearing relationship with a DCM such as the one OCC
proposes to enter into with Small. More specifically, the following
provisions would be added:
Section 12 of the Clearing Agreement, ``Information
Sharing by Market,'' would be revised to require Small to provide OCC
with audited financial statements (i) on an annual basis and (ii) upon
request by OCC. OCC believes this reporting will enable OCC to better
monitor the financial resources of Small.\8\
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\8\ Section 12 of the NFX Clearing Agreement provided that the
rights and obligations of purchasers and sellers of contracts
subject to that agreement are as set forth in the By-Laws and Rules
of OCC. This is a reiteration of provisions that already exist in
OCC's By-Laws and OCC therefore determined to replace it with the
provision noted above in the proposed Clearing Agreement. See, e.g.,
Article XII, Section 2(a).
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Section 18(d) of the Clearing Agreement, ``Financial
Resources or Agreement with Another Exchange,'' would be added to
require that Small either (i) maintain at all times at least one year
of projected operating expenses, as updated on an annual basis \9\ or
(ii) maintain an arrangement with another DCM to provide a listing and
trading venue for contracts that would be listed by Small and cleared
by OCC in the event Small becomes unavailable to provide a trading
venue for its contracts.\10\ OCC believes this will better enable it to
manage the potential risk of Small not being available to provide a
trading venue for contracts listed on the exchange.
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\9\ OCC notes that 17 CFR 38.1101(a) requires a DCM to maintain
minimum financial resources ``equal to a total amount that would
enable the designated contract market, or applicant for designation
as such, to cover its operating costs for a period of at least one
year, calculated on a rolling basis.''
\10\ It is anticipated that any such DCM would be cleared by
OCC.
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In addition to the above, the Clearing Agreement would include
several other differences from the NFX Clearing Agreement, which
include:
Section 3 ``Selection of Underlying Interests; Classes and
Series of Commodity Contracts'' would be revised to clearly reflect
that security futures would not be cleared by OCC pursuant to the
Clearing Agreement, as Small is not planning to list such contracts.
Section 3 would also be revised to: (i) Add the condition
that OCC be satisfied that it is able to appropriately process
contracts proposed for clearing by Small using commercially reasonable
efforts, (ii) describe the manner in which Small initially would notify
OCC of proposed new products, (iii) require Small to submit a
certificate to OCC detailing certain information on a new product as
specified in Section 3(c) no later than ten trading days before Small
plans to commence trading the product, and (iv) specify expectations
around the clearance and settlement of a contract with a new maturity
or expiration date not set forth in the certificate described in
Section 3(c).
Section 5(a) of the Clearing Agreement, ``Confirmed Trade
Reports,'' would be amended to eliminate the reference to exchange-for-
physical transactions, as the exchange is not planning to provide for
such transactions in its rules. Section 26 from NFX Clearing Agreement
also would be deleted for this reason as well as the fact that Article
XII, Section VII of OCC's By-Laws already contains provisions regarding
block trades that mirror what was in Section 26.
Section 10 of the Clearing Agreement, ``Margin
Requirements of Corporation,'' would be revised to clarify that OCC
maintains the exclusive right to enforce its margin requirements with
respect to its Clearing Members, but will maintain good faith
communications with Small concerning OCC's establishment and
communication of margin requirements. Section 10 also would be revised
to remove a provision that would have required the exchange's consent
prior to a listed product being made fungible with other products.
Section 11 of the Clearing Agreement, ``Financial
Requirements for Clearing Members,'' would be revised to provide that
OCC would have the exclusive authority to establish in its By-Laws and
Rules financial responsibility standards with which its Clearing
Members must comply.
Section 13 of the Clearing Agreement, ``Fees for Clearing
Services and Changes Related to Commodity Contracts,'' would be revised
to clarify that in the future, OCC would have the ability to charge
Small fees reasonably related to OCC's costs to make any change(s)
necessary to clear a product for Small, with the condition that prior
to imposing any such fee, OCC would provide Small with advance written
notice of the fee.\11\
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\11\ If OCC ever made a decision to charge Small fees reasonably
related to OCC's costs to make any change(s) necessary to clear a
product for Small, OCC would provide Small ample prior written
notice (e.g., 30 days) of any such fees. It is also anticipated that
OCC would make a determination as to whether a proposed rule change
would be needed in connection with any such fee.
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Section 15(c) of the Clearing Agreement, ``Indemnification
in Respect of Intellectual Property,'' would be amended to provide that
only Small would indemnify OCC if Small were alleged to have violated
the patent or
[[Page 70604]]
other intellectual property rights of others.
Section 18(b) of the Clearing Agreement, ``Other Grounds
for Termination,'' would be amended to provide that there would be a
365-day period in which to transfer contracts to another DCO if either
party to the Clearing Agreement voluntarily terminated it. Under this
amended provision, OCC also would have the right to terminate the
agreement earlier if such a transfer were accomplished prior to this
365-day period.
In addition to the foregoing, various minor and administrative
changes have been made throughout the document including, but not
limited to, updated references to the names of the parties and clean-up
of outdated terms.
(2) Statutory Basis
OCC believes the proposed rule change is consistent with Section
17A of the Act \12\ and the rules thereunder applicable to OCC. Section
17A(b)(3)(F) of the Act \13\ requires, among other things, that the
rules of a clearing agency be designed to promote the prompt and
accurate clearance and settlement of securities transactions and, to
the extent applicable, derivative agreements, contracts, and
transactions, to 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. The proposed rule change is designed to promote the prompt
and accurate clearance and settlement of derivatives contracts traded
on Small by providing that such contracts will be cleared through OCC's
existing clearance and settlement processes for futures contracts,
which have functioned efficiently for many years with regard to other
futures markets for which OCC provides clearance and settlement
services. Similarly, OCC believes that the proposed rule change is
designed to assure the safeguarding of securities and funds which are
in the custody or control of the clearing agency by bringing contracts
traded on Small and funds associated with those contracts within the
scope of OCC's existing custody and control arrangements, which have
effectively served OCC's Clearing Members and their customers for many
years. Finally, OCC believes the proposed rule change is designed to
the protect investors and the public interest. By providing that
futures contracts traded on Small and cleared by OCC are risk managed
under OCC's risk management framework, which is designed to provide
protections to customers and other market participants in the event of
a Clearing Member default, OCC believes the proposed rule change
contributes to the protection of investors and the public interest.
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\12\ 15 U.S.C. 78q-1.
\13\ 15 U.S.C. 78q-1(b)(3)(F).
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Rule 17Ad-22(e)(20) \14\ requires that a covered clearing agency
``establish, implement, maintain and enforce written policies and
procedures reasonably designed to . . . [i]dentify, monitor, and manage
risks related to any link the covered clearing agency establishes with
one or more other clearing agencies, financial market utilities, or
trading markets.'' OCC believes that the proposed rule change is also
consistent with Rule 17Ad-22(e)(20) \15\ because the proposed Clearing
Agreement is designed to help OCC identify, monitor, and manage the
risks associated with providing clearance and settlement services for
Small, which is a trading market. For example, the Clearing Agreement
would require Small to report financial information to OCC, which would
enable OCC to monitor for changes in Small's financial condition. It
also would require Small to maintain sufficient financial resources or
arrangements with another DCM to mitigate the impact to the marketplace
should Small become unavailable as a trading venue for its contracts.
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\14\ 17 CFR 240.17Ad-22(e)(20).
\15\ Id.
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B. Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \16\ requires that the rules of a
clearing agency not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act. OCC does not
believe the proposed rule change would impose any burden on
competition. The purpose of the proposed rule change is to adopt a
Clearing Agreement between OCC and Small. The adoption of such an
agreement would not affect Clearing Members' access to OCC's services,
nor would it disadvantage or favor any particular user in relationship
to another user. As such, OCC believes that the proposed rule change
would not impose any burden on competition.
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\16\ 15 U.S.C. 78q-1(b)(3)(I).
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C. Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments on the proposed rule change were not and are not
intended to be solicited with respect to the proposed rule change and
none have been received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Pursuant to Section 19(b)(3)(A) of the Act,\17\ and Rule 19b-
4(f)(4)(ii) thereunder,\18\ the proposed rule change is filed for
immediate effectiveness because it effects a change in an existing
service of OCC that (i) primarily affects the clearing operations of
OCC with respect to products that are not securities, i.e., options on
futures that are not security futures, and (ii) does not significantly
affect any securities clearing operations of OCC or any rights or
obligations of OCC with respect to securities clearing or persons using
such securities clearing services.
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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(f)(4)(ii).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.\19\
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\19\ Notwithstanding its immediate effectiveness, implementation
of this rule change will be delayed until this change is deemed
certified under CFTC Rule 40.6.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Exchange Act. Comments may be submitted
by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-OCC-2019-011 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2019-011. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/
[[Page 70605]]
rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for website
viewing and printing in the Commission's Public Reference Room, 100 F
Street NE, Washington, DC 20549, on official business days between the
hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be
available for inspection and copying at the principal office of OCC and
on OCC's website at https://www.theocc.com/about/publications/bylaws.jsp.
All comments received will be posted without change. Persons
submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly.
All submissions should refer to File Number SR-OCC-2019-011 and
should be submitted on or before January 13, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-27589 Filed 12-20-19; 8:45 am]
BILLING CODE 8011-01-P
