Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change To Enhance OCC's Stock Loan Close-Out Process, 57897-57899 [2020-20358]

Download as PDF Federal Register / Vol. 85, No. 180 / Wednesday, September 16, 2020 / Notices operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act 7 and Rule 19b– 4(f)(6) thereunder.8 A proposed rule change filed pursuant to Rule 19b–4(f)(6) under the Act 9 normally does not become operative for 30 days after the date of its filing. However, Rule 19b–4(f)(6)(iii) 10 permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has asked the Commission to waive the 30-day operative delay so that the proposed rule change may become operative immediately. According to the Exchange, such waiver is consistent with the protection of investors and the public interest because MIAX PEARL is expected to begin operating as an equities exchange in fewer than 30 days, and waiver of the operative delay would allow the Exchange to immediately provide transparency in its rules regarding its source of MIAX PEARL data for order handling, order execution, order routing, and regulatory compliance. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest, as doing so will ensure that the rule change becomes operative on or before the day that MIAX PEARL launches operations as an equities exchange, which is currently expected on September 25, 2020. Accordingly, the Commission hereby waives the operative delay and designates the proposed rule change operative upon filing.11 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 7 15 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). In addition, Rule 19b– 4(f)(6)(iii) requires a self-regulatory organization to give the Commission written notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement. 9 17 CFR 240.19b–4(f)(6). 10 17 CFR 240.19b–4(f)(6)(iii). 11 For purposes only of waiving the 30-day operative delay, the Commission also has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). jbell on DSKJLSW7X2PROD with NOTICES 8 17 VerDate Sep<11>2014 18:20 Sep 15, 2020 Jkt 250001 Commission shall institute proceedings to determine whether the proposed rule change should be approved or disapproved. IV. Solicitation of Comments 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– NYSENAT–2020–29 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–NYSENAT–2020–29. 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 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–NYSENAT–2020–29 and should be submitted on or before October 7, 2020. Frm 00079 Fmt 4703 Sfmt 4703 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.12 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–20363 Filed 9–15–20; 8:45 am] 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: PO 00000 57897 BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–89809; File No. SR–OCC– 2020–008] Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change To Enhance OCC’s Stock Loan Close-Out Process September 10, 2020. I. Introduction On July 14, 2020, the Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change SR–OCC–2020– 008 (‘‘Proposed Rule Change’’) pursuant to Section 19(b) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 1 and Rule 19b–4 2 thereunder to 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.3 The Proposed Rule Change was published for public comment in the Federal Register on July 30, 2020.4 The Commission has received no comments regarding the Proposed Rule Change.5 This order approves the Proposed Rule Change. 12 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Notice of Filing infra note 4, 85 FR at 45943. 4 Securities Exchange Act Release No. 89393 (Jul. 24, 2020), 85 FR 45943 (Jul. 30, 2020) (File No. SR– OCC–2020–008) (‘‘Notice of Filing’’). OCC also filed a related advance notice (SR–OCC–2020–805) (‘‘Advance Notice’’) with the Commission pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, entitled the Payment, Clearing, and Settlement Supervision Act of 2010 and Rule 19b–4(n)(1)(i) under the Exchange Act. 12 U.S.C. 5465(e)(1). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b–4, respectively. The Advance Notice was published in the Federal Register on August 14, 2020. Securities Exchange Act Release No. 89515 (Aug. 10, 2020), 85 FR 49697 (Aug. 14, 2020) (File No. SR–OCC– 2020–805). 5 Since the proposal contained in the Proposed Rule Change was also filed as an advance notice, all public comments received on the proposal are considered regardless of whether the comments are submitted on the Proposed Rule Change or Advance Notice. 1 15 E:\FR\FM\16SEN1.SGM 16SEN1 57898 Federal Register / Vol. 85, No. 180 / Wednesday, September 16, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES II. Background OCC serves as the sole clearing agency for standardized U.S. securities options listed on Commission-registered national securities exchanges (‘‘listed options’’).6 OCC also operates two programs under which it clears stock loan transactions (the ‘‘Stock Loan Programs’’).7 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.8 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.9 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 Proposed Rule Change, 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. Current rules. Under its Rule 2211 and Rule 2211A, OCC may instruct a Clearing Member who is a party to stock 6 See Securities Exchange Act Release No. 85121 (Feb. 13, 2019), 84 FR 5157 (Feb. 20, 2019) (File No. SR–OCC–2015–02). 7 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. 8 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 45944. 9 ‘‘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 45943, n. 3. VerDate Sep<11>2014 18:20 Sep 15, 2020 Jkt 250001 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.10 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.11 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.12 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 10 See OCC Rules 2211 and 2211A. Typically, OCC issues such instructions on the day of default. See Notice of Filing, 85 FR at 45944. 11 See By-Law Article I, Section 1.S.(16); available at https://www.theocc.com/getmedia/3309eceb56cf-48fc-b3b3-498669a24572/occ_bylaws.pdf. 12 See Notice of Filing, 85 FR at 45944–45. PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 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.13 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).14 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.15 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.16 III. Discussion and Commission Findings Section 19(b)(2)(C) of the Exchange Act directs the Commission to approve a proposed rule change of a selfregulatory organization if it finds that such proposed rule change is consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to such organization.17 After carefully considering the Proposed Rule Change, 13 See Notice of Filing, 85 FR at 45945. 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. 15 See Notice of Filing, 85 FR at 45944. 16 See Notice of Filing, 85 FR at 45945. 17 15 U.S.C. 78s(b)(2)(C). 14 For E:\FR\FM\16SEN1.SGM 16SEN1 Federal Register / Vol. 85, No. 180 / Wednesday, September 16, 2020 / Notices the Commission finds that the proposal is consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to OCC. More specifically, the Commission finds that the proposal is consistent with Section 17A(b)(3)(F) of the Exchange Act 18 and Rule 17Ad– 22(e)(13) thereunder.19 jbell on DSKJLSW7X2PROD with NOTICES A. Consistency With Section 17A(b)(3)(F) of the Exchange Act Section 17A(b)(3)(F) of the Exchange Act 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.20 Based on its review of the record, the Commission believes that the changes proposed in the Proposed Rule Change are consistent with the promotion of prompt and accurate clearance and settlement of securities transactions for the reasons described below. As a central counterparty and SIFMU,21 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 Proposed Rule Change, 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 18 15 U.S.C. 78q–1(b)(3)(F). CFR 240.17Ad–22(e)(13). 20 15 U.S.C. 78q–1(b)(3)(F). 21 See Financial Stability Oversight Council (‘‘FSOC’’) 2012 Annual Report, Appendix A, available at https://www.treasury.gov/initiatives/ fsoc/Documents/2012%20Annual%20Report.pdf. 19 17 VerDate Sep<11>2014 18:20 Sep 15, 2020 Jkt 250001 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. Mitigating such losses would increase likelihood that OCC could liquidate a defaulting Clearing Member’s portfolio without realizing severe credit losses. OCC is the sole registered clearing agency for the U.S. listed options markets. Increasing the likelihood that OCC could liquidate a defaulting Clearing Member’s portfolio without realizing severe credit losses strengthens OCC’s ability to manage Clearing Member defaults, which, in turn, facilitates the clearance and settlement of listed options. The Commission believes that the Proposed Rule Change would promote the prompt and accurate clearance and settlement of securities transactions and is, therefore, consistent with the requirements of Section 17A(b)(3)(F) of the Exchange Act.22 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.23 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 22 15 23 17 PO 00000 U.S.C. 78q–1(b)(3)(F). CFR 240.17Ad–22(e)(13). Frm 00081 Fmt 4703 Sfmt 9990 57899 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 Proposed Rule Change would be consistent with Rule 17Ad–22(e)(13) under the Exchange Act.24 IV. Conclusion On the basis of the foregoing, the Commission finds that the Proposed Rule Change is consistent with the requirements of the Exchange Act, and in particular, the requirements of Section 17A of the Exchange Act 25 and the rules and regulations thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act,26 that the Proposed Rule Change (SR– OCC–2020–008) be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.27 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–20358 Filed 9–15–20; 8:45 am] BILLING CODE 8011–01–P 24 17 CFR 240.17Ad–22(e)(13). approving this Proposed Rule Change, the Commission has considered the proposed rules’ impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 26 15 U.S.C. 78s(b)(2). 27 17 CFR 200.30–3(a)(12). 25 In E:\FR\FM\16SEN1.SGM 16SEN1

Agencies

[Federal Register Volume 85, Number 180 (Wednesday, September 16, 2020)]
[Notices]
[Pages 57897-57899]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-20358]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89809; File No. SR-OCC-2020-008]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Enhance OCC's Stock Loan Close-
Out Process

September 10, 2020.

I. Introduction

    On July 14, 2020, the Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2020-008 (``Proposed Rule Change'') 
pursuant to Section 19(b) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to 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.\3\ 
The Proposed Rule Change was published for public comment in the 
Federal Register on July 30, 2020.\4\ The Commission has received no 
comments regarding the Proposed Rule Change.\5\ This order approves the 
Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Notice of Filing infra note 4, 85 FR at 45943.
    \4\ Securities Exchange Act Release No. 89393 (Jul. 24, 2020), 
85 FR 45943 (Jul. 30, 2020) (File No. SR-OCC-2020-008) (``Notice of 
Filing''). OCC also filed a related advance notice (SR-OCC-2020-805) 
(``Advance Notice'') with the Commission pursuant to Section 
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, entitled the Payment, Clearing, and 
Settlement Supervision Act of 2010 and Rule 19b-4(n)(1)(i) under the 
Exchange Act. 12 U.S.C. 5465(e)(1). 15 U.S.C. 78s(b)(1) and 17 CFR 
240.19b-4, respectively. The Advance Notice was published in the 
Federal Register on August 14, 2020. Securities Exchange Act Release 
No. 89515 (Aug. 10, 2020), 85 FR 49697 (Aug. 14, 2020) (File No. SR-
OCC-2020-805).
    \5\ Since the proposal contained in the Proposed Rule Change was 
also filed as an advance notice, all public comments received on the 
proposal are considered regardless of whether the comments are 
submitted on the Proposed Rule Change or Advance Notice.

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[[Page 57898]]

II. Background

    OCC serves as the sole clearing agency for standardized U.S. 
securities options listed on Commission-registered national securities 
exchanges (``listed options'').\6\ OCC also operates two programs under 
which it clears stock loan transactions (the ``Stock Loan 
Programs'').\7\ 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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    \6\ See Securities Exchange Act Release No. 85121 (Feb. 13, 
2019), 84 FR 5157 (Feb. 20, 2019) (File No. SR-OCC-2015-02).
    \7\ 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.\8\ 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.\9\ 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 Proposed 
Rule Change, 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.
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    \8\ 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 45944.
    \9\ ``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 45943, n. 3.
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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.\10\ 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).
---------------------------------------------------------------------------

    \10\ See OCC Rules 2211 and 2211A. Typically, OCC issues such 
instructions on the day of default. See Notice of Filing, 85 FR at 
45944.
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    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.\11\
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    \11\ See By-Law Article I, Section 1.S.(16); available at 
https://www.theocc.com/getmedia/3309eceb-56cf-48fc-b3b3-498669a24572/occ_bylaws.pdf.
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    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.\12\ 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.\13\ 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.
---------------------------------------------------------------------------

    \12\ See Notice of Filing, 85 FR at 45944-45.
    \13\ See Notice of Filing, 85 FR at 45945.
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    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).\14\ 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.\15\ 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.\16\
---------------------------------------------------------------------------

    \14\ 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.
    \15\ See Notice of Filing, 85 FR at 45944.
    \16\ See Notice of Filing, 85 FR at 45945.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Exchange Act directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to such organization.\17\ After carefully 
considering the Proposed Rule Change,

[[Page 57899]]

the Commission finds that the proposal is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to OCC. More specifically, the Commission finds 
that the proposal is consistent with Section 17A(b)(3)(F) of the 
Exchange Act \18\ and Rule 17Ad-22(e)(13) thereunder.\19\
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    \17\ 15 U.S.C. 78s(b)(2)(C).
    \18\ 15 U.S.C. 78q-1(b)(3)(F).
    \19\ 17 CFR 240.17Ad-22(e)(13).
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A. Consistency With Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Exchange Act 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.\20\ Based on its review of the record, the Commission 
believes that the changes proposed in the Proposed Rule Change are 
consistent with the promotion of prompt and accurate clearance and 
settlement of securities transactions for the reasons described below.
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    \20\ 15 U.S.C. 78q-1(b)(3)(F).
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    As a central counterparty and SIFMU,\21\ 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 Proposed Rule Change, 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.
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    \21\ See Financial Stability Oversight Council (``FSOC'') 2012 
Annual Report, Appendix A, available at https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
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    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. Mitigating such losses would increase likelihood that OCC 
could liquidate a defaulting Clearing Member's portfolio without 
realizing severe credit losses.
    OCC is the sole registered clearing agency for the U.S. listed 
options markets. Increasing the likelihood that OCC could liquidate a 
defaulting Clearing Member's portfolio without realizing severe credit 
losses strengthens OCC's ability to manage Clearing Member defaults, 
which, in turn, facilitates the clearance and settlement of listed 
options. The Commission believes that the Proposed Rule Change would 
promote the prompt and accurate clearance and settlement of securities 
transactions and is, therefore, consistent with the requirements of 
Section 17A(b)(3)(F) of the Exchange Act.\22\
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    \22\ 15 U.S.C. 78q-1(b)(3)(F).
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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.\23\
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    \23\ 17 CFR 240.17Ad-22(e)(13).
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    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 Proposed Rule Change 
would be consistent with Rule 17Ad-22(e)(13) under the Exchange 
Act.\24\
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    \24\ 17 CFR 240.17Ad-22(e)(13).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the 
Exchange Act, and in particular, the requirements of Section 17A of the 
Exchange Act \25\ and the rules and regulations thereunder.
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    \25\ In approving this Proposed Rule Change, the Commission has 
considered the proposed rules' impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\26\ that the Proposed Rule Change (SR-OCC-2020-008) be, 
and hereby is, approved.
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    \26\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-20358 Filed 9-15-20; 8:45 am]
BILLING CODE 8011-01-P
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