Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection To Advance Notice Concerning Proposed Changes To Enhance OCC's Stock Loan Close-Out Process, 57276-57279 [2020-20252]

Download as PDF 57276 Federal Register / Vol. 85, No. 179 / Tuesday, September 15, 2020 / Notices at those other venues to be more favorable. Market share statistics provide ample evidence that price competition between exchanges is fierce, with liquidity and market share moving freely from one execution venue to another in reaction to pricing changes. In such an environment, the Exchange must continually adjust its fees and rebates to remain competitive with other exchanges and with offexchange venues. Because competitors are free to modify their own fees and credits in response, and because market participants may readily adjust their order routing practices, the Exchange does not believe this proposed fee change would impose any burden on intermarket competition. 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) 16 of the Act and subparagraph (f)(2) of Rule 19b–4 17 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 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) 18 of the Act to determine whether the proposed rule change should be approved or disapproved. jbell on DSKJLSW7X2PROD with NOTICES 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– NYSEArca–2020–81 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–NYSEArca–2020–81. 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 offices of the Exchange. 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–NYSEArca–2020–81, and should be submitted on or before October 6, 2020. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.19 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–20257 Filed 9–14–20; 8:45 am] BILLING CODE 8011–01–P 16 15 U.S.C. 78s(b)(3)(A). 17 17 CFR 240.19b–4(f)(2). 18 15 U.S.C. 78s(b)(2)(B). VerDate Sep<11>2014 16:57 Sep 14, 2020 19 17 Jkt 250001 PO 00000 CFR 200.30–3(a)(12). Frm 00096 Fmt 4703 Sfmt 4703 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–89792; File No. SR–OCC– 2020–805] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection To Advance Notice Concerning Proposed Changes To Enhance OCC’s Stock Loan Close-Out Process September 9, 2020. I. Introduction On July 14, 2020, The Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) advance notice SR–OCC–2020–805 (‘‘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 (‘‘Clearing Supervision Act’’) 1 and Rule 19b–4(n)(1)(i) 2 under the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 3 to require Clearing Members that OCC instructs to buy-in or sell-out securities to execute such transactions and provide OCC notice of such action by the settlement time on the business day after OCC gives the instruction.4 The Advance Notice was published for public comment in the Federal Register on August 14, 2020,5 and the Commission has received no comments regarding the changes proposed in the Advance Notice.6 The Commission is hereby providing notice of no objection to the Advance Notice. 1 12 U.S.C. 5465(e)(1). CFR 240.19b–4(n)(1)(i). 3 15 U.S.C. 78a et seq. 4 See Notice of Filing infra note 5, at 85 FR 49697. 5 Securities Exchange Act Release No. 89515 (Aug. 10, 2020), 85 FR 49697 (Aug. 14, 2020) (File No. SR–OCC–2020–805) (‘‘Notice of Filing’’). On July 14, 2020, OCC also filed a related proposed rule change (SR–OCC–2020–008) with the Commission pursuant to Section 19(b)(1) of the Exchange Act and Rule 19b–4 thereunder (‘‘Proposed Rule Change’’). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b–4, respectively. In the Proposed Rule Change, which was published in the Federal Register on July 30, 2020, OCC seeks approval of proposed changes to its rules necessary to implement the Advance Notice. Securities Exchange Act Release No. 89393 (Jul. 24, 2020), 85 FR 45943 (Jul. 30, 2020) (File No. SR–OCC–2020– 008). The comment period for the related Proposed Rule Change filing closed on August 20, 2020. 6 Since the proposal contained in the Advance Notice was also filed as a proposed rule change, all public comments received on the proposal are considered regardless of whether the comments are submitted on the Proposed Rule Change or the Advance Notice. 2 17 E:\FR\FM\15SEN1.SGM 15SEN1 Federal Register / Vol. 85, No. 179 / Tuesday, September 15, 2020 / Notices II. Background 7 jbell on DSKJLSW7X2PROD with NOTICES OCC serves as the sole clearing agency for standardized U.S. securities options listed on Commission-registered national securities exchanges (‘‘listed options’’).8 OCC also operates two programs under which it clears stock loan transactions (the ‘‘Stock Loan Programs’’).9 As described in more detail below, OCC proposes to align the timeframes for closing out the open stock loan and non-stock loan positions of a defaulting Clearing Member. In the event of a Clearing Member default, OCC would close out the defaulting Clearing Member’s open positions, liquidate collateral, and deposit the proceeds from such a closeout into a Liquidating Settlement Account.10 Generally, OCC would seek to close out the defaulting Clearing Member’s open positions through an auction conducted, before market open, on the day after a default occurs. Under its rules, however, OCC may also seek to close out open positions cleared under its Stock Loan Programs by instructing non-defaulting Clearing Member counterparties to the open position to execute buy-in or sell-out transactions by the end of the business day following the default.11 In the event that a Clearing Member counterparty fails to execute buy-in or sell-out transactions as instructed, OCC would terminate the relevant stock loan positions based on end of day prices from the business day following the default. Pursuant to the Advance Notice, OCC proposes to change (1) the time by which buy-in or sell-out transactions for defaulted open stock loan positions must be executed and (2) the price at which OCC would terminate positions not closed out through the execution of buy-in or sell-out transactions. 7 Capitalized terms used but not defined herein have the meanings specified in OCC’s Rules and ByLaws, available at https://www.theocc.com/about/ publications/bylaws.jsp. 8 See Securities Exchange Act Release No. 85121 (Feb. 13, 2019), 84 FR 5157 (Feb. 20, 2019) (File No. SR–OCC–2015–02). 9 OCC’s two Stock Loan Programs are the ‘‘Stock Loan/Hedge Program’’ and the ‘‘Market Loan Program.’’ Under its Stock Loan/Hedge Program, OCC clears transactions initiated directly between Clearing Members on a bilateral basis. Under its Market Loan Program, OCC clears transactions initiated on either a broker-to-broker basis or anonymously through the matching of bids and offers. 10 See OCC Rule 1104; available at https:// www.theocc.com/getmedia/9d3854cd-b782-450fbcf7-33169b0576ce/occ_rules.pdf. See also Notice of Filing, 85 FR at 49698. 11 ‘‘Buy-in’’ refers to a non-defaulting lender purchasing replacement stock. ‘‘Sell-out’’ refers to a non-defaulting borrower selling the loaned securities in order to recoup its collateral. See Notice of Filing, 85 FR at 49697, n. 4. VerDate Sep<11>2014 16:57 Sep 14, 2020 Jkt 250001 Current rules. Under its Rule 2211 and Rule 2211A, OCC may instruct a Clearing Member who is a party to stock loan transactions with a defaulting Clearing Member to execute buy-in or sell-out transactions, as applicable, with respect to each open stock borrow or loan position of the defaulting Clearing Member.12 Currently, a Clearing Member so instructed is obligated to execute the required transactions and provide notice of such execution to OCC by the close of the business on the day following receipt of such an instruction. If a Clearing Member fails to execute buy-in or sell-out transactions as instructed, OCC may terminate the relevant stock loan transactions. OCC would terminate such transactions based on prices from the end of the day after OCC issued buy-in or sell-out instructions (i.e., the same day by which the Clearing Member was obligated to execute the buy-in or sell-out transactions). Proposed change to execution time. OCC proposes to amend its Rules 2211 and 2211A with regard to the time by which a Clearing Member must execute buy-in or sell-out transactions and provide notice to OCC of such transactions. OCC would continue to require that such transactions be executed by or before the business day following receipt of the instruction to execute such transaction. OCC proposes, however, to move up the time by which the transaction must be executed from the close of business to ‘‘settlement time,’’ which OCC’s current rules define as 9:00 a.m. Central Time.13 OCC considered requiring the execution of buy-in or sell-out transaction by the close of business on the day it instructed a Clearing Member to execute such transactions; however, Clearing Members expressed a preference for setting the deadline at 9:00 a.m. Central Time the following business day because doing so would allow a non-defaulting Clearing Member the opportunity to trade at market opening.14 Because OCC typically issues buy-in or sell-out instructions on the day of default, the proposed rule would require such transactions to be executed by 9:00 a.m. Central Time on the business day following the default. The required transactions would, therefore, be executed on the same day on which OCC seeks to close out a defaulting Clearing Member’s other positions 12 See OCC Rules 2211 and 2211A. Typically, OCC issues such instructions on the day of default. See Notice of Filing, 85 FR at 49698. 13 See By-Law Article I, Section 1.S.(16); available at https://www.theocc.com/getmedia/3309eceb56cf-48fc-b3b3-498669a24572/occ_bylaws.pdf. 14 See Notice of Filing, 85 FR at 49698–99. PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 57277 through its auction procedures. OCC believes allowing non-defaulting Clearing Members to trade at market opening on the morning following default would provide additional time to execute the buy-in and sell-out transactions in a manner consistent with OCC’s two-day liquidation assumption.15 The proposed change would provide OCC with authority under its rules to compel execution of buy-in or sell out transactions designed to close out a defaulting Clearing Member’s stock loan positions at a point in time closer to OCC’s other default management processes (i.e., auctions) than is currently permitted under OCC’s rules. Proposed change to termination price. OCC also proposes to amend its Rules 2211 and 2211A with regard to the price on which termination of stock loan positions would be based if a Clearing Member fails to execute buy-in or sellout transactions within the required timeframes. Under the proposal, OCC would close out such positions based on end-of-day prices from the same day on which OCC instructed the Clearing Member to execute buy-in or sell-out transactions (i.e., the day before the Clearing Member was obligated to execute the buy-in or sell-out transactions).16 Such a price would be the last settlement price captured in OCC’s systems prior to the time by which the non-defaulting Clearing Member was required to execute buy-in or sell-out transactions.17 OCC believes that using such a price, already available in its system, would be superior to other options because it would allow for an automated process not susceptible to the delays and errors of manually pulling price information.18 III. Commission Findings and Notice of No Objection 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 15 See Notice of Filing, 85 FR at 49699. example, OCC might rely on such end-ofday prices if Clearing Members were unable to execute buy-in or sell-out transactions to terminate open stock loan positions during the morning of the business day following the default because of circuit breaker activity. The use of the end-of-day prices from the day of default, as opposed to endof-day prices following a full day of trading, would provide closer alignment of market conditions for OCC’s auction and stock loan terminations than the current rules. 17 See Notice of Filing, 85 FR at 49698. 18 See id. 16 For E:\FR\FM\15SEN1.SGM 15SEN1 57278 Federal Register / Vol. 85, No. 179 / Tuesday, September 15, 2020 / Notices management standards for SIFMUs and strengthening the liquidity of SIFMUs.19 Section 805(a)(2) of the Clearing Supervision Act 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.20 Section 805(b) of the Clearing Supervision Act provides the following objectives and principles for the Commission’s risk management standards prescribed under Section 805(a): 21 • 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.22 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’’).23 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.24 As such, it is appropriate for the Commission to review advance notices against the Clearing Agency Rules and the objectives and principles of these risk management standards as described in Section 805(b) of the Clearing Supervision Act. As discussed below, the Commission believes the changes proposed in the Advance Notice are consistent with the objectives and principles described in Section 805(b) of the Clearing Supervision Act,25 and in the Clearing Agency Rules, in particular Rule 17Ad–22(e)(13).26 19 See 12 U.S.C. 5461(b). U.S.C. 5464(a)(2). 21 12 U.S.C. 5464(b). 22 12 U.S.C. 5464(c). 23 17 CFR 240.17Ad–22. See Securities Exchange Act Release No. 68080 (Oct. 22, 2012), 77 FR 66220 (Nov. 2, 2012) (S7–08–11). See also Covered Clearing Agency Standards, 81 FR 70786. 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). 24 17 CFR 240.17Ad–22. 25 12 U.S.C. 5464(b). 26 17 CFR 240.17Ad–22(e)(13). jbell on DSKJLSW7X2PROD with NOTICES 20 12 VerDate Sep<11>2014 16:57 Sep 14, 2020 Jkt 250001 A. Consistency With Section 805(b) of the Clearing Supervision Act The Commission believes that the proposal contained in OCC’s Advance Notice is consistent with the stated objectives and principles of Section 805(b) of the Clearing Supervision Act. Specifically, as discussed below, the Commission believes that the changes proposed in the Advance Notice are consistent with promoting robust risk management, promoting safety and soundness, reducing systemic risks, and supporting the stability of the broader financial system.27 The Commission believes that the proposed changes are consistent with promoting robust risk management, in particular the management of risks arising out of a Clearing Member default, as well as promoting safety and soundness. As a central counterparty and SIFMU,28 it is imperative that OCC maintain default management processes designed to contain losses. As described above, OCC may, in the event of a Clearing Member default, seek to close out stock loan positions by requiring Clearing Members to execute buy-in or sell-out transactions while closing out non-stock loan positions and liquidating collateral via an auction. Pursuant to the Advance Notice, OCC proposes to more closely align the timeframe within which buy-in and sell-out transactions would occur with the timeframe of a default auction. In the event that such transactions do not occur within the required timeframes, OCC further proposes to terminate such stock loan transactions based on end of day prices from the same day on which OCC instructed the Clearing Member to execute buy-in or sell-out transactions. Such prices would likely represent the last market price received before OCC would auction off the rest of the defaulting Clearing Member’s portfolio prior to the market open on the following morning. Aligning the timeframes for closing out stock loan positions and non-stock loan positions and collateral would reduce the potential for significant market movements occurring between the time by which OCC closes out positions and liquidates collateral related to such positions. Avoiding the potential for such market movements would, in turn, increase the likelihood that such collateral would be sufficient to mitigate losses arising out of the close out of stock loan positions. As such, the 27 12 U.S.C. 5464(b). Financial Stability Oversight Council (‘‘FSOC’’) 2012 Annual Report, Appendix A, available at https://www.treasury.gov/initiatives/ fsoc/Documents/2012%20Annual%20Report.pdf. 28 See PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 Commission believes that the proposal would promote robust risk management practices at, and the safety and soundness of, OCC, consistent with Section 805(b) of the Clearing Supervision Act.29 The Commission also believes that the changes proposed in the Advance Notice are consistent with reducing systemic risks and promoting the stability of the broader financial system. As noted above, OCC is the sole registered clearing agency for the U.S. listed options markets and a SIFMU. By aligning OCC’s default management practices, the Commission believes that the proposed changes would enhance OCC’s ability to address events of Clearing Member default, thereby increasing the likelihood that OCC could liquidate a defaulting Clearing Member’s portfolio without realizing severe credit losses. Such losses, if realized, could be mutualized through OCC’s Clearing Fund, potentially during a period of market stress. While unavoidable under certain circumstances, reducing the probability of loss mutualization during periods of market stress could reduce the transmission of financial risks arising from a Clearing Member default to nondefaulting Clearing Members, their customers, and the broader options market. The Commission believes that the potential to avoid such severe credit losses would, therefore, reduce systemic risk and support the broader financial system. As such, the Commission believes the proposed changes are consistent with reducing systemic risks and promoting the stability of the broader financial system as contemplated in Section 805(b) of the Clearing Supervision Act.30 Accordingly, and for the reasons stated above, the Commission believes the changes proposed in the Advance Notice are consistent with Section 805(b) of the Clearing Supervision Act.31 B. Consistency With Rule 17Ad– 22(e)(13) Under the Exchange Act Rule 17Ad–22(e)(13) under the Exchange Act requires that a covered clearing agency establish, implement, maintain, and enforce written policies and procedures reasonably designed to ensure the covered clearing agency has the authority and operational capacity to take timely action to contain losses and liquidity demands and continue to meets its obligations.32 29 12 U.S.C. 5464(b). U.S.C. 5464(b). 31 12 U.S.C. 5464(b). 32 17 CFR 240.17Ad–22(e)(13). 30 12 E:\FR\FM\15SEN1.SGM 15SEN1 Federal Register / Vol. 85, No. 179 / Tuesday, September 15, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES As described above OCC, proposes to use its authority to alter the time when OCC will close out a defaulting Clearing Member’s open stock loan positions. The proposed change would move the point in time by which OCC can close out open stock loan positions closer to the point in time by which OCC would seek to close the defaulting Clearing Member’s non-stock loan positions and liquidate the defaulting Clearing Member’s collateral via an auction. Aligning the timeframes for closing out stock loan positions and non-stock loan positions and collateral would reduce the potential for significant market movements occurring between the time by which OCC closes out positions and liquidates collateral related to such positions. Avoiding the potential for such market movements would, in turn, increase the likelihood that such collateral would be sufficient to mitigate losses arising out of the close out of stock loan positions. OCC also proposes to terminate stock loan positions not closed out through buy-in or sell-out transactions based on end of day prices from the same day on which OCC instructed the Clearing Member to execute buy-in or sell-out transactions. As described above, such prices would likely represent the last market price received before OCC would auction off the rest of the defaulting Clearing Member’s portfolio prior to the market open on the following morning. Similar to the change in the time by which Clearing Members would be instructed to execute buy-in or sell-out transactions, the proposed change in termination price would mitigate losses arising out of the close out of open stock loan positions by reducing the potential for significant market movements between the close out of positions and liquidation of related collateral. Taken together, the Commission believes that proposed changes regarding the close out a defaulting Clearing Member’s open stock loan positions would enhance OCC’s authority to take timely action to contain losses. Accordingly, the Commission believes that Advance Notice would be consistent with Rule 17Ad–22(e)(13) under the Exchange Act.33 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–2020–805) and that OCC is authorized to implement the proposed change as of the date of this notice or the date of an order by the Commission 33 17 CFR 240.17Ad–22(e)(13). VerDate Sep<11>2014 16:57 Sep 14, 2020 Jkt 250001 approving proposed rule change SR– OCC–2020–008 whichever is later. By the Commission. J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–20252 Filed 9–14–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Investment Company Act Release No. 34005; File No. 811–07963] Nysa Series Trust September 9, 2020. Securities and Exchange Commission (‘‘Commission’’). ACTION: Notice. AGENCY: Notice of an application for deregistration under Section 8(f) of the Investment Company Act of 1940 (‘‘Act’’). SUMMARY OF APPLICATION: Applicant seeks an order declaring that it has ceased to be an investment company. APPLICANT: Nysa Series Trust (‘‘Trust’’). FILING DATE: The application was filed on September 9, 2020. HEARING OR NOTIFICATION OF HEARING: An order granting the requested relief will be issued unless the Commission orders a hearing. Interested persons may request a hearing by emailing the Commission’s Secretary at SecretarysOffice@sec.gov and serving Applicant with a copy of the request by email. Hearing requests should be received by the Commission by 5:30 p.m. on September 28, 2020, and should be accompanied by proof of service on the Applicant, in the form of an affidavit or, for lawyers, a certificate of service. Pursuant to rule 0–5 under the Act, hearing requests should state the nature of the writer’s interest, any facts bearing upon the desirability of a hearing on the matter, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request by emailing the Commission’s Secretary. ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090; Applicant, Joseph Masella, 507 Plum Street, Suite 120, Syracuse, NY 13204. FOR FURTHER INFORMATION CONTACT: Chief Counsel’s Office at (202) 551– 6821; SEC, Division of Investment Management, Chief Counsel’s Office, 100 F Street NE, Washington, DC 20549–8010. SUPPLEMENTARY INFORMATION: The following is a summary of the application. The complete application PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 57279 may be obtained via the Commission’s website by searching for the file number, or for an applicant using the Company name box, at https:// www.sec.gov/search/search.htm or by calling (202) 551–8090. Applicant’s Representations 1. Applicant, an open-end management investment company registered under the Act, seeks an order declaring that it has ceased to be an investment company. Applicant consists of a single series, the NYSA Fund (‘‘Fund’’). 2. On September 8, 2020, Applicant made a cash distribution of 64.4% of its assets to its shareholders on the basis of net assets. Applicant’s board of trustees (‘‘Board’’), including a majority of disinterested Board members, determined that it was in the best interests of its shareholders to deregister the Applicant under the Act. The Board also determined that Applicant should remain in existence temporarily for the limited purposes of (i) holding an illiquid asset pending (a) a liquidity event regarding such asset that will provide the Applicant with cash to distribute to shareholders or (b) the Board’s determination that such asset has no value; and (ii) continuing as plaintiff in a pending lawsuit. Applicant will maintain a cash reserve of $188,565 to be used for expenses in connection with its dissolution. Applicant’s Legal Analysis 1. In relevant part, Section 8(f) of the Act provides that ‘‘[w]henever the Commission, on its own motion or upon application, finds that a registered investment company has ceased to be an investment company, it shall so declare by order and upon the taking effect of such order the registration of such company shall cease to be in effect. If necessary for the protection of investors, an order under this subsection may be made upon appropriate conditions.’’ Applicant has filed an application for an order under Section 8(f). In support of its request, Applicant states that it has made a cash distribution of 64.4% of its assets to its shareholders on the basis of net assets, and has retained certain illiquid assets and cash temporarily for the limited purposes noted above. Applicant further states that the cash distribution of its assets was made pursuant to a provision in its Declaration of Trust that permits the Trust to redeem shares if the Board determines in its sole discretion that failure to redeem the shares may have materially adverse consequences to all or any of the Trust’s shareholders. Applicant states that at a meeting held E:\FR\FM\15SEN1.SGM 15SEN1

Agencies

[Federal Register Volume 85, Number 179 (Tuesday, September 15, 2020)]
[Notices]
[Pages 57276-57279]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-20252]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89792; File No. SR-OCC-2020-805]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of No Objection To Advance Notice Concerning Proposed Changes To 
Enhance OCC's Stock Loan Close-Out Process

September 9, 2020.

I. Introduction

    On July 14, 2020, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') advance 
notice SR-OCC-2020-805 (``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 (``Clearing Supervision Act'') \1\ and Rule 
19b-4(n)(1)(i) \2\ under the Securities Exchange Act of 1934 
(``Exchange Act'') \3\ to require Clearing Members that OCC instructs 
to buy-in or sell-out securities to execute such transactions and 
provide OCC notice of such action by the settlement time on the 
business day after OCC gives the instruction.\4\ The Advance Notice was 
published for public comment in the Federal Register on August 14, 
2020,\5\ and the Commission has received no comments regarding the 
changes proposed in the Advance Notice.\6\ The Commission is hereby 
providing 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 85 FR 49697.
    \5\ Securities Exchange Act Release No. 89515 (Aug. 10, 2020), 
85 FR 49697 (Aug. 14, 2020) (File No. SR-OCC-2020-805) (``Notice of 
Filing''). On July 14, 2020, OCC also filed a related proposed rule 
change (SR-OCC-2020-008) with the Commission pursuant to Section 
19(b)(1) of the Exchange Act and Rule 19b-4 thereunder (``Proposed 
Rule Change''). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, 
respectively. In the Proposed Rule Change, which was published in 
the Federal Register on July 30, 2020, OCC seeks approval of 
proposed changes to its rules necessary to implement the Advance 
Notice. Securities Exchange Act Release No. 89393 (Jul. 24, 2020), 
85 FR 45943 (Jul. 30, 2020) (File No. SR-OCC-2020-008). The comment 
period for the related Proposed Rule Change filing closed on August 
20, 2020.
    \6\ Since the proposal contained in the Advance Notice was also 
filed as a proposed rule change, all public comments received on the 
proposal are considered regardless of whether the comments are 
submitted on the Proposed Rule Change or the Advance Notice.

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[[Page 57277]]

II. Background 7
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    \7\ Capitalized terms used but not defined herein have the 
meanings specified in OCC's Rules and By-Laws, available at https://www.theocc.com/about/publications/bylaws.jsp.
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    OCC serves as the sole clearing agency for standardized U.S. 
securities options listed on Commission-registered national securities 
exchanges (``listed options'').\8\ OCC also operates two programs under 
which it clears stock loan transactions (the ``Stock Loan 
Programs'').\9\ As described in more detail below, OCC proposes to 
align the timeframes for closing out the open stock loan and non-stock 
loan positions of a defaulting Clearing Member.
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    \8\ See Securities Exchange Act Release No. 85121 (Feb. 13, 
2019), 84 FR 5157 (Feb. 20, 2019) (File No. SR-OCC-2015-02).
    \9\ OCC's two Stock Loan Programs are the ``Stock Loan/Hedge 
Program'' and the ``Market Loan Program.'' Under its Stock Loan/
Hedge Program, OCC clears transactions initiated directly between 
Clearing Members on a bilateral basis. Under its Market Loan 
Program, OCC clears transactions initiated on either a broker-to-
broker basis or anonymously through the matching of bids and offers.
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    In the event of a Clearing Member default, OCC would close out the 
defaulting Clearing Member's open positions, liquidate collateral, and 
deposit the proceeds from such a close-out into a Liquidating 
Settlement Account.\10\ Generally, OCC would seek to close out the 
defaulting Clearing Member's open positions through an auction 
conducted, before market open, on the day after a default occurs. Under 
its rules, however, OCC may also seek to close out open positions 
cleared under its Stock Loan Programs by instructing non-defaulting 
Clearing Member counterparties to the open position to execute buy-in 
or sell-out transactions by the end of the business day following the 
default.\11\ In the event that a Clearing Member counterparty fails to 
execute buy-in or sell-out transactions as instructed, OCC would 
terminate the relevant stock loan positions based on end of day prices 
from the business day following the default. Pursuant to the Advance 
Notice, OCC proposes to change (1) the time by which buy-in or sell-out 
transactions for defaulted open stock loan positions must be executed 
and (2) the price at which OCC would terminate positions not closed out 
through the execution of buy-in or sell-out transactions.
---------------------------------------------------------------------------

    \10\ See OCC Rule 1104; available at https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occ_rules.pdf. See 
also Notice of Filing, 85 FR at 49698.
    \11\ ``Buy-in'' refers to a non-defaulting lender purchasing 
replacement stock. ``Sell-out'' refers to a non-defaulting borrower 
selling the loaned securities in order to recoup its collateral. See 
Notice of Filing, 85 FR at 49697, n. 4.
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    Current rules. Under its Rule 2211 and Rule 2211A, OCC may instruct 
a Clearing Member who is a party to stock loan transactions with a 
defaulting Clearing Member to execute buy-in or sell-out transactions, 
as applicable, with respect to each open stock borrow or loan position 
of the defaulting Clearing Member.\12\ Currently, a Clearing Member so 
instructed is obligated to execute the required transactions and 
provide notice of such execution to OCC by the close of the business on 
the day following receipt of such an instruction. If a Clearing Member 
fails to execute buy-in or sell-out transactions as instructed, OCC may 
terminate the relevant stock loan transactions. OCC would terminate 
such transactions based on prices from the end of the day after OCC 
issued buy-in or sell-out instructions (i.e., the same day by which the 
Clearing Member was obligated to execute the buy-in or sell-out 
transactions).
---------------------------------------------------------------------------

    \12\ See OCC Rules 2211 and 2211A. Typically, OCC issues such 
instructions on the day of default. See Notice of Filing, 85 FR at 
49698.
---------------------------------------------------------------------------

    Proposed change to execution time. OCC proposes to amend its Rules 
2211 and 2211A with regard to the time by which a Clearing Member must 
execute buy-in or sell-out transactions and provide notice to OCC of 
such transactions. OCC would continue to require that such transactions 
be executed by or before the business day following receipt of the 
instruction to execute such transaction. OCC proposes, however, to move 
up the time by which the transaction must be executed from the close of 
business to ``settlement time,'' which OCC's current rules define as 
9:00 a.m. Central Time.\13\
---------------------------------------------------------------------------

    \13\ See By-Law Article I, Section 1.S.(16); available at 
https://www.theocc.com/getmedia/3309eceb-56cf-48fc-b3b3-498669a24572/occ_bylaws.pdf.
---------------------------------------------------------------------------

    OCC considered requiring the execution of buy-in or sell-out 
transaction by the close of business on the day it instructed a 
Clearing Member to execute such transactions; however, Clearing Members 
expressed a preference for setting the deadline at 9:00 a.m. Central 
Time the following business day because doing so would allow a non-
defaulting Clearing Member the opportunity to trade at market 
opening.\14\ Because OCC typically issues buy-in or sell-out 
instructions on the day of default, the proposed rule would require 
such transactions to be executed by 9:00 a.m. Central Time on the 
business day following the default. The required transactions would, 
therefore, be executed on the same day on which OCC seeks to close out 
a defaulting Clearing Member's other positions through its auction 
procedures. OCC believes allowing non-defaulting Clearing Members to 
trade at market opening on the morning following default would provide 
additional time to execute the buy-in and sell-out transactions in a 
manner consistent with OCC's two-day liquidation assumption.\15\ The 
proposed change would provide OCC with authority under its rules to 
compel execution of buy-in or sell out transactions designed to close 
out a defaulting Clearing Member's stock loan positions at a point in 
time closer to OCC's other default management processes (i.e., 
auctions) than is currently permitted under OCC's rules.
---------------------------------------------------------------------------

    \14\ See Notice of Filing, 85 FR at 49698-99.
    \15\ See Notice of Filing, 85 FR at 49699.
---------------------------------------------------------------------------

    Proposed change to termination price. OCC also proposes to amend 
its Rules 2211 and 2211A with regard to the price on which termination 
of stock loan positions would be based if a Clearing Member fails to 
execute buy-in or sell-out transactions within the required timeframes. 
Under the proposal, OCC would close out such positions based on end-of-
day prices from the same day on which OCC instructed the Clearing 
Member to execute buy-in or sell-out transactions (i.e., the day before 
the Clearing Member was obligated to execute the buy-in or sell-out 
transactions).\16\ Such a price would be the last settlement price 
captured in OCC's systems prior to the time by which the non-defaulting 
Clearing Member was required to execute buy-in or sell-out 
transactions.\17\ OCC believes that using such a price, already 
available in its system, would be superior to other options because it 
would allow for an automated process not susceptible to the delays and 
errors of manually pulling price information.\18\
---------------------------------------------------------------------------

    \16\ For example, OCC might rely on such end-of-day prices if 
Clearing Members were unable to execute buy-in or sell-out 
transactions to terminate open stock loan positions during the 
morning of the business day following the default because of circuit 
breaker activity. The use of the end-of-day prices from the day of 
default, as opposed to end-of-day prices following a full day of 
trading, would provide closer alignment of market conditions for 
OCC's auction and stock loan terminations than the current rules.
    \17\ See Notice of Filing, 85 FR at 49698.
    \18\ See id.
---------------------------------------------------------------------------

III. Commission Findings and Notice of No Objection

    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

[[Page 57278]]

management standards for SIFMUs and strengthening the liquidity of 
SIFMUs.\19\
---------------------------------------------------------------------------

    \19\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------

    Section 805(a)(2) of the Clearing Supervision Act 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.\20\ Section 805(b) of the 
Clearing Supervision Act provides the following objectives and 
principles for the Commission's risk management standards prescribed 
under Section 805(a): \21\
---------------------------------------------------------------------------

    \20\ 12 U.S.C. 5464(a)(2).
    \21\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

     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.\22\
---------------------------------------------------------------------------

    \22\ 12 U.S.C. 5464(c).
---------------------------------------------------------------------------

    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'').\23\ 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.\24\ As such, it is appropriate for the Commission to 
review advance notices against the Clearing Agency Rules and the 
objectives and principles of these risk management standards as 
described in Section 805(b) of the Clearing Supervision Act. As 
discussed below, the Commission believes the changes proposed in the 
Advance Notice are consistent with the objectives and principles 
described in Section 805(b) of the Clearing Supervision Act,\25\ and in 
the Clearing Agency Rules, in particular Rule 17Ad-22(e)(13).\26\
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    \23\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No. 
68080 (Oct. 22, 2012), 77 FR 66220 (Nov. 2, 2012) (S7-08-11). See 
also Covered Clearing Agency Standards, 81 FR 70786. 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).
    \24\ 17 CFR 240.17Ad-22.
    \25\ 12 U.S.C. 5464(b).
    \26\ 17 CFR 240.17Ad-22(e)(13).
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A. Consistency With Section 805(b) of the Clearing Supervision Act

    The Commission believes that the proposal contained in OCC's 
Advance Notice is consistent with the stated objectives and principles 
of Section 805(b) of the Clearing Supervision Act. Specifically, as 
discussed below, the Commission believes that the changes proposed in 
the Advance Notice are consistent with promoting robust risk 
management, promoting safety and soundness, reducing systemic risks, 
and supporting the stability of the broader financial system.\27\
---------------------------------------------------------------------------

    \27\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    The Commission believes that the proposed changes are consistent 
with promoting robust risk management, in particular the management of 
risks arising out of a Clearing Member default, as well as promoting 
safety and soundness. As a central counterparty and SIFMU,\28\ it is 
imperative that OCC maintain default management processes designed to 
contain losses. As described above, OCC may, in the event of a Clearing 
Member default, seek to close out stock loan positions by requiring 
Clearing Members to execute buy-in or sell-out transactions while 
closing out non-stock loan positions and liquidating collateral via an 
auction. Pursuant to the Advance Notice, OCC proposes to more closely 
align the timeframe within which buy-in and sell-out transactions would 
occur with the timeframe of a default auction. In the event that such 
transactions do not occur within the required timeframes, OCC further 
proposes to terminate such stock loan transactions based on end of day 
prices from the same day on which OCC instructed the Clearing Member to 
execute buy-in or sell-out transactions. Such prices would likely 
represent the last market price received before OCC would auction off 
the rest of the defaulting Clearing Member's portfolio prior to the 
market open on the following morning. Aligning the timeframes for 
closing out stock loan positions and non-stock loan positions and 
collateral would reduce the potential for significant market movements 
occurring between the time by which OCC closes out positions and 
liquidates collateral related to such positions. Avoiding the potential 
for such market movements would, in turn, increase the likelihood that 
such collateral would be sufficient to mitigate losses arising out of 
the close out of stock loan positions. As such, the Commission believes 
that the proposal would promote robust risk management practices at, 
and the safety and soundness of, OCC, consistent with Section 805(b) of 
the Clearing Supervision Act.\29\
---------------------------------------------------------------------------

    \28\ See Financial Stability Oversight Council (``FSOC'') 2012 
Annual Report, Appendix A, available at https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
    \29\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    The Commission also believes that the changes proposed in the 
Advance Notice are consistent with reducing systemic risks and 
promoting the stability of the broader financial system. As noted 
above, OCC is the sole registered clearing agency for the U.S. listed 
options markets and a SIFMU. By aligning OCC's default management 
practices, the Commission believes that the proposed changes would 
enhance OCC's ability to address events of Clearing Member default, 
thereby increasing the likelihood that OCC could liquidate a defaulting 
Clearing Member's portfolio without realizing severe credit losses. 
Such losses, if realized, could be mutualized through OCC's Clearing 
Fund, potentially during a period of market stress. While unavoidable 
under certain circumstances, reducing the probability of loss 
mutualization during periods of market stress could reduce the 
transmission of financial risks arising from a Clearing Member default 
to non-defaulting Clearing Members, their customers, and the broader 
options market. The Commission believes that the potential to avoid 
such severe credit losses would, therefore, reduce systemic risk and 
support the broader financial system. As such, the Commission believes 
the proposed changes are consistent with reducing systemic risks and 
promoting the stability of the broader financial system as contemplated 
in Section 805(b) of the Clearing Supervision Act.\30\
---------------------------------------------------------------------------

    \30\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    Accordingly, and for the reasons stated above, the Commission 
believes the changes proposed in the Advance Notice are consistent with 
Section 805(b) of the Clearing Supervision Act.\31\
---------------------------------------------------------------------------

    \31\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(13) Under the Exchange Act

    Rule 17Ad-22(e)(13) under the Exchange Act requires that a covered 
clearing agency establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to ensure the covered 
clearing agency has the authority and operational capacity to take 
timely action to contain losses and liquidity demands and continue to 
meets its obligations.\32\
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    \32\ 17 CFR 240.17Ad-22(e)(13).

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[[Page 57279]]

    As described above OCC, proposes to use its authority to alter the 
time when OCC will close out a defaulting Clearing Member's open stock 
loan positions. The proposed change would move the point in time by 
which OCC can close out open stock loan positions closer to the point 
in time by which OCC would seek to close the defaulting Clearing 
Member's non-stock loan positions and liquidate the defaulting Clearing 
Member's collateral via an auction. Aligning the timeframes for closing 
out stock loan positions and non-stock loan positions and collateral 
would reduce the potential for significant market movements occurring 
between the time by which OCC closes out positions and liquidates 
collateral related to such positions. Avoiding the potential for such 
market movements would, in turn, increase the likelihood that such 
collateral would be sufficient to mitigate losses arising out of the 
close out of stock loan positions.
    OCC also proposes to terminate stock loan positions not closed out 
through buy-in or sell-out transactions based on end of day prices from 
the same day on which OCC instructed the Clearing Member to execute 
buy-in or sell-out transactions. As described above, such prices would 
likely represent the last market price received before OCC would 
auction off the rest of the defaulting Clearing Member's portfolio 
prior to the market open on the following morning. Similar to the 
change in the time by which Clearing Members would be instructed to 
execute buy-in or sell-out transactions, the proposed change in 
termination price would mitigate losses arising out of the close out of 
open stock loan positions by reducing the potential for significant 
market movements between the close out of positions and liquidation of 
related collateral. Taken together, the Commission believes that 
proposed changes regarding the close out a defaulting Clearing Member's 
open stock loan positions would enhance OCC's authority to take timely 
action to contain losses.
    Accordingly, the Commission believes that Advance Notice would be 
consistent with Rule 17Ad-22(e)(13) under the Exchange Act.\33\
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    \33\ 17 CFR 240.17Ad-22(e)(13).
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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-2020-805) and that OCC is authorized to 
implement the proposed change as of the date of this notice or the date 
of an order by the Commission approving proposed rule change SR-OCC-
2020-008 whichever is later.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-20252 Filed 9-14-20; 8:45 am]
BILLING CODE 8011-01-P
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