Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change To Adopt a New Second Amended and Restated Cross-Margining Agreement Between The Options Clearing Corporation and The Chicago Mercantile Exchange, 63305-63312 [2020-22096]
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Federal Register / Vol. 85, No. 195 / Wednesday, October 7, 2020 / Notices
information to monitor and address
conflicts.
18. With respect to the relief
permitting Aggregate Fee Disclosure,
Applicants assert that it is appropriate
to disclose only aggregate fees paid to
Affiliated Sub-Advisers for the same
reasons that similar relief has been
granted previously with respect to
Wholly-Owned and Non-Affiliated SubAdvisers.
VI. Applicants’ Conditions
Applicants agree that any order
granting the requested relief will be
subject to the following conditions:
1. Before a Sub-Advised Fund may
rely on the order requested in the
Application, the operation of the SubAdvised Fund in the manner described
in the Application will be, or has been,
approved by a majority of the SubAdvised Fund’s outstanding voting
securities as defined in the Act, or, in
the case of a Sub-Advised Fund whose
public shareholders purchase shares on
the basis of a prospectus containing the
disclosure contemplated by condition 2
below, by the initial shareholder before
such Sub-Advised Fund’s shares are
offered to the public.
2. The prospectus for each SubAdvised Fund will disclose the
existence, substance and effect of any
order granted pursuant to the
Application. In addition, each SubAdvised Fund will hold itself out to the
public as employing the multi-manager
structure described in the Application.
The prospectus will prominently
disclose that the Adviser has the
ultimate responsibility, subject to
oversight by the Board, to oversee the
Sub-Advisers and recommend their
hiring, termination, and replacement.
3. The Adviser will provide general
management services to each SubAdvised Fund, including overall
supervisory responsibility for the
general management and investment of
the Sub-Advised Fund’s assets, and
subject to review and oversight of the
Board, will (i) set the Sub-Advised
Fund’s overall investment strategies, (ii)
evaluate, select, and recommend SubAdvisers for all or a portion of the SubAdvised Fund’s assets, (iii) allocate and,
when appropriate, reallocate the SubAdvised Fund’s assets among SubAdvisers, (iv) monitor and evaluate the
Sub-Advisers’ performance, and (v)
implement procedures reasonably
designed to ensure that Sub-Advisers
comply with the Sub-Advised Fund’s
investment objective, policies and
restrictions.
4. Sub-Advised Funds will inform
shareholders of the hiring of a new SubAdviser within 90 days after the hiring
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of the new Sub-Adviser pursuant to the
Modified Notice and Access Procedures.
5. At all times, at least a majority of
the Board will be Independent Trustees,
and the selection and nomination of
new or additional Independent Trustees
will be placed within the discretion of
the then-existing Independent Trustees.
6. Independent Legal Counsel, as
defined in Rule 0–1(a)(6) under the Act,
will be engaged to represent the
Independent Trustees. The selection of
such counsel will be within the
discretion of the then-existing
Independent Trustees.
7. Whenever a Sub-Adviser is hired or
terminated, the Adviser will provide the
Board with information showing the
expected impact on the profitability of
the Adviser.
8. The Board must evaluate any
material conflicts that may be present in
a sub-advisory arrangement.
Specifically, whenever a sub-adviser
change is proposed for a Sub-Advised
Fund (‘‘Sub-Adviser Change’’) or the
Board considers an existing SubAdvisory Agreement as part of its
annual review process (‘‘Sub-Adviser
Review’’):
(a) The Adviser will provide the
Board, to the extent not already being
provided pursuant to section 15(c) of
the Act, with all relevant information
concerning:
(i) Any material interest in the
proposed new Sub-Adviser, in the case
of a Sub-Adviser Change, or the SubAdviser in the case of a Sub-Adviser
Review, held directly or indirectly by
the Adviser or a parent or sister
company of the Adviser, and any
material impact the proposed SubAdvisory Agreement may have on that
interest;
(ii) any arrangement or understanding
in which the Adviser or any parent or
sister company of the Adviser is a
participant that (A) may have had a
material effect on the proposed SubAdviser Change or Sub-Adviser Review,
or (B) may be materially affected by the
proposed Sub-Adviser Change or SubAdviser Review;
(iii) any material interest in a SubAdviser held directly or indirectly by an
officer or Trustee of the Sub-Advised
Fund, or an officer or board member of
the Adviser (other than through a
pooled investment vehicle not
controlled by such person); and
(iv) any other information that may be
relevant to the Board in evaluating any
potential material conflicts of interest in
the proposed Sub-Adviser Change or
Sub-Adviser Review.
(b) the Board, including a majority of
the Independent Trustees, will make a
separate finding, reflected in the Board
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63305
minutes, that the Sub-Adviser Change or
continuation after Sub-Adviser Review
is in the best interests of the SubAdvised Fund and its shareholders and,
based on the information provided to
the Board, does not involve a conflict of
interest from which the Adviser, a SubAdviser, any officer or Trustee of the
Sub-Advised Fund, or any officer or
board member of the Adviser derives an
inappropriate advantage.
9. Each Sub-Advised Fund will
disclose in its registration statement the
Aggregate Fee Disclosure.
10. In the event that the Commission
adopts a rule under the Act providing
substantially similar relief to that in the
order requested in the Application, the
requested order will expire on the
effective date of that rule.
11. Any new Sub-Advisory
Agreement or any amendment to an
existing Investment Advisory
Agreement or Sub-Advisory Agreement
that directly or indirectly results in an
increase in the aggregate advisory fee
rate payable by the Sub-Advised Fund
will be submitted to the Sub-Advised
Fund’s shareholders for approval.
For the Commission, by the Division of
Investment Management, under delegated
authority.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–22111 Filed 10–6–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90065; File No. SR–OCC–
2020–011]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing of Proposed Rule Change To
Adopt a New Second Amended and
Restated Cross-Margining Agreement
Between The Options Clearing
Corporation and The Chicago
Mercantile Exchange
October 1, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on
September 22, 2020, The Options
Clearing Corporation (‘‘OCC’’) filed with
the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III below, which Items
have been prepared by OCC. The
Commission is publishing this notice to
1 15
2 17
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CFR 240.19b–4.
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Federal Register / Vol. 85, No. 195 / Wednesday, October 7, 2020 / Notices
solicit comments on the proposed rule
change from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
This proposed rule change by The
Options Clearing Corporation (‘‘OCC’’)
would adopt a new Second Amended
and Restated Cross-Margining
Agreement (‘‘Proposed X–M
Agreement’’) between OCC and the
Chicago Mercantile Exchange (‘‘CME’’).
This proposal is designed to: (1) Update
the existing X–M Agreement with the
Proposed X–M Agreement to bring it
into conformity with current operational
procedures and eliminate provisions
that are out-of-date; (2) improve the
clarity and readability by consolidating
certain redundant provisions and
moving certain operational details from
the existing X–M Agreement to a
standalone service level agreement; and
(3) streamline and consolidate certain
related Clearing Member agreements.
The Proposed X–M Agreement is
attached hereto as Exhibit 5 of filing
SR–OCC–2020–011. The Proposed X–M
Agreement includes the following as
appendices each of which is marked to
show changes: Proprietary Cross-Margin
Account Agreement and Security
Agreement; Non-Proprietary CrossMargin Account Agreement and
Security Agreement; and Market
Professional’s Agreement for CrossMargining.3
This proposed rule change does not
require any changes to the text of OCC’s
By-Laws or Rules. All terms with initial
capitalization that are not defined
herein have the same meaning as set
forth in OCC’s By-Laws and Rules.4
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission,
OCC included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. OCC has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of these statements.
3 Each of the Clearing Member agreement forms
includes a version for Joint and Affiliated Clearing
Members.
4 OCC’s By-Laws and Rules can be found on
OCC’s public website: https://www.theocc.com/
Company-Information/Documents-and-Archives/
By-Laws-and-Rules#rule-filings.
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(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
(1) Purpose
The purpose of this proposed rule
change is to adopt a new Second
Amended and Restated Cross-Margining
Agreement between OCC and CME that
would: (1) Update the existing X–M
Agreement with the Proposed X–M
Agreement to bring it into conformity
with current operational procedures and
eliminate provisions that are out-ofdate; (2) improve the clarity and
readability by consolidating certain
redundant provisions and moving
certain operational details to a
standalone service level agreement; and
(3) streamline and consolidate certain
related Clearing Member agreements.
Background
OCC and CME are currently parties to
an Amended and Restated CrossMargining Agreement dated May 28,
2008, as further amended by
Amendment No. 1 dated October 23,
2008 5 and Amendment No. 2 dated May
20, 2009 6 (the ‘‘Existing X–M
Agreement’’). OCC and CME first
implemented their cross-margining
program (the ‘‘X–M Program’’) in 1989.
The purpose of the X–M Program is to:
(1) Facilitate the cross-margining of
positions in options cleared by OCC
with positions in futures and
commodity options cleared by CME and
(2) address the fact that Clearing
Members may have been required to
meet higher margin requirements at
each clearinghouse than were warranted
by the risk of combined positions,
because each portfolio was margined
separately without regard to positions
held in the other portfolio.7 After the
1987 Market Break, several government
reports recommending market structure
reforms found that cross-margining
arrangements between clearinghouses
should be implemented or expanded,
because they could have a profound
effect on mitigating liquidity stress to
key market participants at critical
times.8 For example, the Bachmann
5 Securities Exchange Act Release No. 58258 (July
30, 2008), 73 FR 46133 (August 7, 2008) (SR–OCC–
2008–12) (amending the agreement to, among other
things, permit money market fund shares as
margin).
6 Securities Exchange Act Release No. 60063
(June 8, 2009), 74 FR 28738 (June 17, 2009) (SR–
OCC–2009–10) (amending the agreement to redefine
the term ‘‘Eligible Contracts’’ and deleting the list
of such contracts attached as Schedule A).
7 Securities Exchange Act Release Nos. 26607
(March 7, 1989), 48 FR 10608 (March 14, 1989) (SR–
OCC–89–1); 27296 (September 26, 1989) (SR–OCC–
89–11).
8 See Report of the Bachmann Task Force on
Clearance and Settlement Reform in U.S. Securities
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Task Force, which was formed at the
request of SEC Chairman Breeden to
address the issue of safety and
soundness of the clearance and
settlement system in the United States,
published a report on Clearance and
Settlement Reform in the U.S. Securities
Markets, and the staff of the SEC’s
Division of Market Regulation 9 also
published its own report to analyze
factors involved in the depth and
rapidity of the market decline. Both
reports noted that the existence of
separate clearinghouses for each market
segment increases systemic exposure
because no single clearinghouse is able
to accurately assess intermarket
exposure among its clearing members
and among their customers.10
Accordingly, the Bachmann Report
specifically advanced that the crossmargining agreement in place between
OCC and CME benefited dual
participants with hedged positions with
the respective clearing organizations,11
and it stated that OCC and relevant
futures exchanges should be encouraged
to expand their cross-margining
programs because they ‘‘reduce clearing
system risk by substituting correlated
positions for cash or cash equivalent
margins and provide financing relief
and settlement harmonization.’’ 12 Since
the X–M Program was implemented, the
parties have amended it twice.13
The Existing X–M Agreement
The Existing X–M Agreement governs
OCC and CME’s participation in a crossmargining program (the ‘‘X–M
Program’’), which permits positions in
certain futures and futures options
contracts cleared by CME to be cleared
in a special proprietary or nonproprietary cross-margining account (an
‘‘X–M Account’’) at CME, which is then
paired with a corresponding X–M
Markets, Submitted to The Chairman of the U.S.
Securities and Exchange Commission (May 1992)
(the ‘‘Bachmann Report’’); The October 1987 Market
Break, A Report by the Division of Market
Regulation, U.S. Securities and Exchange
Commission (February 1988) (the ‘‘1987 Market
Break Report’’).
9 This Division is now known as the Division of
Trading and Markets.
10 See Bachmann Report at 11 citing the Report
of the Presidential Task Force on Market
Mechanisms at 64 (January 1988); 1987 Market
Break Report at 10–57 (stating that ‘‘[i]n a fully
integrated cross-margin account, margin
requirements could be fixed to reflect more
accurately the net risk of such positions taken as a
whole, thus reducing certain margin requirements
. . .’’).
11 See Bachmann Report at 12.
12 See Bachmann Report at 31.
13 See, e.g., Securities Exchange Act Release Nos.
32534 (June 28, 1993), 58 FR 36234 (July 6, 1993)
(SR–OCC–92–98); 38584 (May 8, 1997), 62 FR
26602 (May 14, 1997); See also supra notes 5 and
6.
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Federal Register / Vol. 85, No. 195 / Wednesday, October 7, 2020 / Notices
Account (proprietary or nonproprietary, as the case may be) at OCC,
in which securities options contracts are
cleared (such contracts, ‘‘Eligible
Contracts’’). OCC Clearing Members that
are also CME members (‘‘Joint Clearing
Members’’), or that have qualified
affiliates that are CME members
(‘‘Affiliated Clearing Members’’),
provided that they have signed the
required X–M Program clearing member
participation agreement, are permitted
to participate in the X–M Program.
Currently, there are nine Joint Clearing
Members and one pair of Affiliated
Clearing Members that participate in the
X–M Program. Each Joint Clearing
Member or pair of Affiliated Clearing
Members electing to participate in the
X–M Program and establish a pair of X–
M Accounts is required to execute the
appropriate account agreements in the
forms prescribed by OCC and CME and
to designate the account as either
‘‘proprietary’’ or ‘‘non-proprietary.’’ 14
Proprietary X–M accounts are
confined to the confirmed trades and
positions of non-customers of Clearing
Members and other proprietary ‘‘market
professionals.’’ 15 A non-proprietary X–
M Account is limited to options marketmakers and other ‘‘market
professionals.’’
Non-proprietary X–M Accounts are
treated as futures customer accounts,
because they are carried subject to the
segregation provisions of Section 4d of
the Commodity Exchange Act 16 rather
than as securities accounts subject to
Rule 15c3–3 17 and other customer
protection rules under the Securities
Exchange Act of 1934.18 X–M Accounts
that are paired for purposes of the X–M
Program are treated for margin purposes
as if they were a single account, making
it possible to margin the paired X–M
Accounts based on the net risk of the
potentially offsetting positions within
them. The Existing X–M Agreement
governs the calculation, collection, and
holding of margin with respect to the
14 The Existing X–M Agreement also permits the
establishment of ‘‘X–M Pledge Accounts,’’ which
are X–M Accounts in respect of which the Clearing
Member grants a security interest in all contracts
purchased or carried in the particular account to a
bank, as security for a loan. X–M Pledge Accounts
may be either proprietary or non-proprietary. The
New X–M Agreement would eliminate the ability to
establish such X–M Pledge Accounts because they
are no longer being used. Historically, pledge
accounts were only used for the purpose of
supporting the pledging of money market mutual
fund shares as collateral. Now that money market
mutual fund shares are not acceptable collateral for
the XM Program, there is no longer a need for the
use of X–M Pledge Accounts.
15 See OCC By-Laws Article I, Section 1.O.(1).
16 7 U.S.C. 6d.
17 17 CFR 240.15c3–3.
18 17 CFR 240.8c–1; 17 CFR 240.15c2–1.
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paired X–M Accounts, as well as the
handling of daily settlement.
The Existing X–M Agreement also
addresses how OCC and CME may use
the contracts and margin held in X–M
Accounts in the event of the default of
a Joint Clearing Member or Affiliated
Clearing Member. Upon suspending a
Joint Clearing Member or Affiliated
Clearing Member, the suspending
clearinghouse is required to
immediately notify the other
clearinghouse of the suspension. Both
OCC and CME would then immediately
liquidate the contracts and margin in
each X–M Account carried for the
suspended Joint Clearing Member or the
Affiliated Clearing Members, unless
OCC and CME otherwise agree to delay
liquidation or to transfer the contracts.
OCC and CME are required to use their
best efforts to coordinate the transfer or
liquidation of such contracts and to
close out any hedged positions
simultaneously or, if transferring the
positions, to transfer them to the same
clearing firm or pair of affiliated
clearing firms.
Any funds received by either OCC or
CME upon liquidation of the proprietary
and non-proprietary X–M Accounts,
respectively, may be used to offset
expenses arising from the liquidation of
such account, and any net proceeds
thereafter are to be deposited in a
corresponding proprietary or nonproprietary liquidating account
established jointly by OCC and CME.
The funds in a proprietary or nonproprietary liquidating account are to be
used only to set off any liquidating
deficits or settlement obligations
remaining with respect to the
corresponding proprietary or nonproprietary X–M Account, respectively.
To the extent the proprietary liquidating
account has a surplus, after satisfying all
deficits and obligations, the proceeds
may be applied to set off any net
liquidating deficits or settlement
obligations arising from the Clearing
Member’s non-proprietary X–M
Accounts at OCC or CME.
After these offsets, if a liquidating
account still has a deficit, each of OCC
and CME bear 50% of the remaining
shortfall. If a proprietary liquidating
account has a surplus, OCC and CME
each are entitled to 50% of the surplus
to satisfy any losses whatsoever arising
from the other obligations of the
defaulting Clearing Member. However,
if one clearinghouse’s net loss is less
than 50% of the remaining surplus and
the other’s is greater, the former is only
entitled to the surplus up to the amount
of its loss, and the latter is entitled to
receive the balance up to the amount of
its loss. After all of this, if any amounts
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63307
remain in the liquidating accounts, such
funds are returned to the Joint Clearing
Member or pair of Affiliated Clearing
Members or their respective
representatives.
The Proposed X–M Agreement
The Proposed X–M Agreement retains
the same basic framework described
above regarding the Existing X–M
Agreement, and it would not
fundamentally alter the scope of the X–
M Program or the rights and
responsibilities of OCC and CME. The
primary purposes for proposing to
update the Existing X–M Agreement
with the Proposed X–M Agreement are
to: (1) Bring the Existing X–M
Agreement into conformity with current
operational procedures; (2) eliminate
provisions in the Existing X–M
Agreement that are out-of-date; and (3)
improve the clarity and readability of
the agreement by consolidating
redundant provisions. The Proposed X–
M Agreement would also move several
of the operational details regarding the
X–M Accounts to the OCC–CME CrossMargining Service Level Agreement
(‘‘SLA’’). OCC and CME believe that
having such operational details in a
separate document produces a more
streamlined Proposed X–M Agreement
that would be easier to comprehend and
that would therefore allow OCC and
CME to more easily review the service
levels and modify them as appropriate
without having to amend the entire
Proposed X–M Agreement. OCC
believes that these changes would make
the Proposed X–M Agreement and SLA
easier to read and comprehend and
would promote consistency with the
requirement in Rule 17Ad–22(e)(1) 19
that OCC must establish, implement,
maintain and enforce written policies
and procedures reasonably designed to,
as applicable, provide for a wellfounded, clear and transparent legal
basis for each aspect of its activities.
Key changes from the Existing X–M
Agreement to the Proposed X–M
Agreement are described in detail
below.
Eligible Contracts and Accepted
Transactions
The Proposed X–M Agreement would
not change the scope of products
eligible for participation in the X–M
Program. However, it would include a
definition of ‘‘Eligible Contracts’’ in
Section 1 that conforms with the
substance of the definition that was
adopted in 2009 as part of Amendment
19 17
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Federal Register / Vol. 85, No. 195 / Wednesday, October 7, 2020 / Notices
No. 2 to the Existing X–M Agreement.20
Consistent with these changes, the
definition of ‘‘Eligible Contracts’’ in the
Proposed X–M Agreement would
include any contracts that have been
‘‘jointly designated’’ by OCC and CME
as eligible for inclusion in the list of
eligible contracts jointly maintained by
OCC and CME. Prior to designating a
new set of contracts as Eligible
Contracts, OCC and CME would be
required to evaluate and approve the
additional contracts through internal
processes that consider each clearing
organization’s risk policies.
Section 1 of the Proposed X–M
Agreement would also be amended to
introduce the new defined term
‘‘Accepted Transaction’’ and to provide
a mechanism for confirming what
specific transactions are subject to the
Proposed X–M Agreement. The purpose
of this change is not to change the scope
of the X–M Program but rather to
provide certainty and clarity regarding
the specific transactions—the
‘‘Accepted Transactions’’—for which
OCC and CME would be jointly
responsible. ‘‘Accepted Transactions’’
would be defined to include all
positions that are Eligible Contracts and
have been included on the ‘‘daily
margin detail report’’ generated by OCC
and transmitted to CME. Positions
included in the ‘‘daily margin detail
report’’ would be deemed to be the final
record of positions in which OCC and
CME are obligated under the Proposed
X–M Agreement.
The Service Level Agreement
As part of the update to the Proposed
X–M Agreement, certain operational
terms previously covered in the Existing
X–M Agreement would be addressed in
the SLA. For example, this includes
provisions from the Existing X–M
Agreement in Section 6 regarding
acceptable forms of collateral, Section 7
regarding the timing, methods and
forms of daily settlement procedures,
and Section 15 regarding OCC and
CME’s commitment to share information
regarding Joint and Affiliated Clearing
Members, banks, and their own
financial status. The Proposed X–M
Agreement would address the existence
of this SLA in a proposed Section 2,
stating that all ‘‘times, methods and
forms of deliveries, notification and
consents’’ pertaining to the X–M
Program and X–M Accounts are
provided for in the SLA. CME and OCC
would also agree to review the SLA at
least annually.
20 See
supra note 13.
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Account Structure
The same basic account structure in
Section 2 of the Existing X–M
Agreement would still be used in
Section 3 of the Proposed X–M
Agreement. Proprietary and/or nonproprietary paired clearing accounts
would still be established for Joint and
Affiliated Clearing Members that
participate in the X–M Program, and
OCC and CME would continue to have
a joint security interest in the contracts,
margin, and other property held in the
joint accounts. However, as noted
above, the Proposed X–M Agreement
would remove all references to X–M
Pledge Accounts because such accounts
are no longer in use. Along with
removing all references to such accounts
throughout the Proposed X–M
Agreement, Section 3 of the Existing X–
M Agreement, entitled ‘‘Establishment
of X–M Pledge Accounts,’’ would be
deleted in its entirety.
The Proposed X–M Agreement would
also change some of the defined terms
that are used to describe the accounts
related to the X–M Program to describe
their purpose more accurately. For
example, the ‘‘Proprietary Joint
Settlement Account’’ and ‘‘Segregated
Joint Margin Account’’ would be
referred to as the ‘‘Proprietary Joint
Margin Cash Account’’ and ‘‘Segregated
Joint Margin Cash Account,’’ and the
‘‘Proprietary Joint Custody Account’’
and ‘‘Segregated Joint Custody
Account’’ would be referred to as the
‘‘Proprietary Joint Margin Custody
Account’’ and ‘‘Segregated Joint Margin
Custody Account.’’ The terms
‘‘Proprietary Bank Account’’ and
‘‘Segregated Funds Bank Account’’
would also be added to the defined
terms section for readability and
consistency, though they were already
used in the body of the Existing X–M
Agreement. The proposed addition of
such terms to the defined terms section
would not change for the purposes of
the agreement. The defined term
‘‘Liquidating Accounts’’ would also be
added to the agreement to cover the
Non-Proprietary and Proprietary
Liquidating Accounts created in the
event of a Clearing Member suspension
and liquidation.
Margin and Posted Collateral
The Proposed X–M Agreement would
replace the provisions in Section 5 of
the Existing X–M Agreement regarding
the methodology for determining the
initial margin requirements for each X–
M Account with a statement that, with
respect to each pair of X–M Accounts,
the amount of cash, securities or other
property required to be deposited as
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collateral would be determined by using
OCC’s approved margin methodology,
as in effect as of the date of the Proposed
X–M Agreement. As a practical matter,
this change would not represent a
change from the existing operation of
the X–M Program because, consistent
with the authority in Section 5, CME
already elects to use the margin
calculation that is produced by OCC.
The Proposed X–M Agreement would
also require OCC to provide 30 calendar
days prior notice to CME of any
proposed changes to OCC’s margin
methodology, and any changes to the
way collateral requirements are
calculated with respect to X–M
Accounts would be required to be
agreed upon in writing in advance by
OCC and CME. The Proposed X–M
Agreement would also specify that OCC
and CME would each determine the net
amount of premiums, exercise
settlement amounts, and variation
margin due for its respective products
because the determination is made
based upon the products cleared by
OCC and CME, and adopts the defined
terms ‘‘Net Pay/Collect’’ to refer to such
amount. Each clearinghouse would be
required to notify the other of the Net
Pay/Collect amount in accordance with
the SLA.
Like under the Existing X–M
Agreement, OCC and CME would each
still have the ability to charge additional
margin at any amount as it deems
appropriate without the consent of the
other and each would be responsible for
determining the adequacy of the margin
requirement for each cross-margin
account.
As discussed above, Section 6 of the
Proposed X–M Agreement would no
longer specify the eligible forms of
initial margin, instead referring to the
SLA. The SLA would revise the list of
eligible collateral to include cash,
treasuries, and letters of credit from preapproved U.S. depository institutions,
and eliminate the eligibility of
government sponsored entity debt and
money market funds. OCC and CME are
proposing to eliminate the eligibility of
these instruments because, in practice,
OCC no longer accepts them as
collateral for the X–M Program. This is
because no money market mutual funds
currently meet OCC’s requirements for
such margin assets set forth in OCC Rule
604(b)(3), and OCC’s liquidity facilities
do not currently accept government
sponsored entity debt as collateral.
Consequently, all references to
government sponsored entity debt and
money market funds are removed from
the Proposed X–M Agreement. The
Proposed X–M Agreement would also
clarify that the more conservative limits
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would apply to the extent OCC and
CME’s rules with respect to
concentration limits for eligible margin
differ. Furthermore, if OCC reduces any
of its required haircuts for eligible
margin below CME’s required haircuts,
OCC is required to provide prompt
notice to CME.
The Proposed X–M Agreement would
also provide that OCC and CME would
each be permitted to invest any cash
deposited as collateral in their joint
margin cash accounts overnight in
certain eligible investments and with
certain custodians, depositories, and
counterparties, as OCC and CME may
mutually agree, with each clearinghouse
sharing equally in any proceeds
received, or losses incurred, from such
overnight investments. This formalizes
the existing practice of OCC and CME
and provides clarity that OCC and CME
share equally in any proceeds or losses
from overnight investments.
Additionally, the Proposed X–M
Agreement would no longer use the
term ‘‘Margin’’ or ‘‘Initial Margin’’ with
respect to the collateral deposited in an
X–M Account. Instead, it would use the
term ‘‘Posted Collateral.’’ OCC proposes
the change because it is a more accurate
characterization of the margin
requirement set by OCC’s System for
Theoretical Analysis and Numerical
Simulations (‘‘STANS’’)—which is the
methodology used to determine the
collateral requirement for the X–M
Program and does not produce a
separate Initial Margin requirement.
References to margin requirements and
deficits or surpluses in respect to such
requirements are proposed to be
replaced with references to the defined
terms ‘‘Collateral Requirement,’’
‘‘Collateral Deficit,’’ and ‘‘Collateral
Excess,’’ respectively.
Daily Settlement
Section 7 of the Proposed X–M
Agreement would be revised to increase
the time OCC and CME would have to
provide approval or non-approval of
revised Settlement Instructions from 15
minutes to 30 minutes. Based on OCC
and CME’s experience operating the X–
M Program, OCC believes the change
from 15 to 30 minutes would provide
additional time which would be useful
during the process of performing a full
review of any revised Settlement
Instructions and making determinations
for approval or non-approval of the
revised Settlement Instructions.
Furthermore, OCC has determined that
the proposed change to add additional
time to review revised Settlement
Instructions will not negatively impact
on the timing of other processes
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performed under the Proposed X–M
Agreement.
As described above, details regarding
the timing, methods, and form of daily
settlement in the X–M Accounts have
been moved to the SLA, and Section 7
of the Proposed X–M Agreement would
be amended to reflect that fact. Section
7 would also be amended to conform to
existing reporting practices for OCC and
CME with respect to settlement. For
example, under the Existing X–M
Agreement each clearing organization
issues a ‘‘Margin and Settlement
Report’’ to each Joint Clearing Member
or pair of Affiliated Clearing Members
for which it is the Designated Clearing
Organization. However, in practice,
OCC has been the only Designated
Clearing Organization. Accordingly, the
related provisions would be modified so
that the information contained in that
report is only provided by OCC to the
Clearing Members. The definition of
‘‘Margin and Settlement Report’’ in
Section 1 of the Proposed X–M
Agreement is correspondingly modified
and would refer to the report more
specifically as the ‘‘Account Summary
by Clearing Corporation Report.’’
The Proposed X–M Agreement would
also update Section 7 to provide for the
communication of intra-day instructions
to X–M clearing banks with respect to
the X–M Accounts, to facilitate the
deposit of collateral in response to an
intra-day margin call from CME or OCC.
A defined term for ‘‘Intra-day
Instruction’’ would also be added to
Section 1 to accommodate this change.
Suspension and Liquidation
Section 8 of the Proposed X–M
Agreement essentially retains the
Existing X–M Agreement’s procedures
for the handling of X–M Accounts in the
event of the default of a Joint Clearing
Member or pair of Affiliated Clearing
Members, as described above, with
certain modifications. First, paragraphs
8(a) and (b) would be revised to state
more generally that each clearinghouse
will follow its own rules with respect to
the default of a Clearing Member;
provided, however, that each
clearinghouse would also use its best
efforts to coordinate with the other
clearinghouse regarding the liquidation
or transfer of Accepted Transactions.
The proposed changes that expressly
provide that each clearinghouse would
follow its own rules with respect to the
default of a Clearing Member are not
intended to substantively change the
terms in the Existing X–M Agreement.
Instead, they are meant to provide each
clearinghouse with greater flexibility to
amend their suspension and liquidation
procedures pursuant to the normal rule
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63309
change process without having to also
amend the Proposed X–M Agreement.
The Proposed X–M Agreement also now
expressly contemplates the potential use
of a joint liquidating auction with
respect to X–M Accounts during a
Clearing Member default scenario.
Second, new sections 8(c) and (d)
would be added to the Proposed X–M
Agreement to provide that upon the
suspension of a defaulted Clearing
Member, the clearinghouses would
establish a plan pursuant to which
Accepted Transactions of the Clearing
Member would be liquidated or
transferred. The plan would be required,
at a minimum, to (i) identify the
primary point of contact at each
clearinghouse responsible for
coordinating communications and
actions related to the plan; (ii) currentday settlement information related to
the suspended Clearing Member; and
(iii) whether any transactions in
addition to Accepted Transactions
would be guaranteed. If by the close of
the markets on the business day that
follows the last successful margin
collection for the suspended Clearing
Member the clearinghouses do not take
action under a plan or have not
otherwise established a plan, then the
clearinghouses would be required to
take certain steps to transfer cleared
contracts prior to the open of trading on
the next business day. Specifically,
contracts cleared by each respective
clearinghouse would be transferred into
an account under its control to allow
that clearinghouse to liquidate or
transfer the contracts pursuant to its
rules. The closing prices for the cleared
contracts used to determine final
proceeds and any liquidity obligations
of the clearinghouses would be the
prices as of the business day that
immediately follows the last successful
margin collection for the suspended
Clearing Member.
Third, Section 8 would also be
revised to provide that each of OCC and
CME agree to enter into any agreements
reasonably necessary to ensure that the
other can obtain liquidity during a
default scenario and will be jointly and
equally responsible for providing
liquidity to ensure all obligations of a
non-defaulting Clearing Member with
respect to the X–M Accounts on a
timely basis. OCC believes this change
would help ensure OCC and CME have
sufficient access to liquidity and thereby
provide for efficient and effective
default management in the event of a
Clearing Member default.
Finally, OCC and CME also would
agree to conduct joint default
management drills for the cross-margin
accounts at least annually. OCC believes
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that this change would promote
consistency with the requirement in
Rule 17Ad–22(e)(13) that OCC as a
covered clearing agency establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to ‘‘[e]nsure the
covered clearing agency has the
authority and operational capacity to
take timely action to contain losses and
liquidity demands and continue to meet
its obligations by, at a minimum,
requiring [its] participants and, when
practicable, other stakeholders to
participate in the testing and review of
its default procedures, including any
close-out procedure, at least annually
and following material changes
thereto.’’ 21
Miscellaneous Changes
Regarding other changes, first the
‘‘Recitals’’ to the Proposed X–M
Agreement would be updated to reflect
OCC and CME’s respective SEC and
CFTC registration statuses and
designations as systemically important
by the Financial Stability Oversight
Council. Related to this, defined terms
would be added for ‘‘FSOC,’’ ‘‘Dodd
Frank Act,’’ ‘‘DCO,’’ ‘‘Exchange Act,’’
and ‘‘SEC.’’
Second, Section 9 of the Proposed X–
M Agreement would be amended to
clarify that the requirement that one
clearinghouse notify the other when it
becomes subject to a court order to
disclose ‘‘confidential information’’ is
only required if it is permitted by law.
Third, Section 10 of the Proposed X–
M Agreement would rephrase the
section to only reference Losses because
the definition of Losses under the
Proposed X–M Agreement would be
revised to include claims and other
potential loss events.
Fourth, Section 13 of the proposed
agreement would change the process
and timing related to termination of the
agreement because OCC and CME
believe the revised language would
reduce risk in the event of a
termination.
Fifth, the Proposed X–M Agreement
would also revise Section 14, to clarify
that while OCC and CME are not
permitted to reject any transaction
effected in an X–M Account without the
other’s express consent, this condition
would not interfere with their respective
abilities to implement recovery and
orderly wind-down plans under their
own rules, as required under Rule
17Ad–22(e)(3)(ii) 22 and CFTC Rule
39.39(b).23
21 17
CFR 240.17Ad–22(e)(13).
CFR 240.17Ad–22(e)(3)(ii).
23 17 CFR 39.39(b).
22 17
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Sixth, as discussed above in the
description of the SLA, Section 15 of the
Existing X–M Agreement regarding
information sharing between OCC and
CME would be deleted from the
Proposed X–M Agreement and moved to
the SLA. OCC believes the more
succinctly drafted language in the SLA
maintains consistent rights and/or
obligations for OCC and CME to share
information which will continue to
allow OCC and CME to efficiently
manage the risks presented by Joint and
Affiliated Clearing Members.
Seventh, Section 15 of the Proposed
X–M Agreement regarding notifications
differs from the corresponding
provisions in Section 16 of the Existing
X–M Agreement, in that it would allow
for the use of electronic mail to satisfy
notice requirements, except with respect
to notifications relating to the
termination of the Proposed X–M
Agreement. It would also eliminate
facsimile as an appropriate method of
communication. OCC believes this
change conforms to current
communication procedures and
standards and ensures notices will be
received in a timely manner through a
communication method that is
monitored regularly.
Finally, the Proposed X–M Agreement
would also add Section 17 to clarify that
each of OCC and CME would be
responsible for obtaining their own
regulatory approvals in connection with
the implementation of the Proposed X–
M Agreement.
Additional Changes To Defined Terms
In addition to the proposed and
modified defined terms described
above, the Proposed X–M Agreement
would make certain additional
modifications to Section 1 of the
Existing X–M Agreement. Many of these
are non-substantive, including adding
defined terms that are already used and
defined elsewhere in the Existing X–M
Agreement but that are not currently
listed in Section 1—e.g., the defined
terms ‘‘AAA,’’ ‘‘Affiliated Clearing
Member,’’ ‘‘CME Clearing Member,’’
‘‘CME Rules,’’ ‘‘Confidential
Information,’’ ‘‘Indemnitor,’’
‘‘Indemnified Party,’’ ‘‘Losses,’’ ‘‘OCC
Clearing Member,’’ and ‘‘OCC Rules.’’
The Proposed X–M Agreement would
also modify the definition of ‘‘Affiliate’’
to remove the statement that 10%
ownership of common stock will be
deemed prima facie control of that
entity for purposes of determining
whether an entity is under direct or
indirect control of a Clearing Member,
to instead reflect that OCC and CME
believe that a facts-and-circumstances
approach is more appropriate. The
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definition of ‘‘Business Day’’ would be
modified to provide that when one or
more markets on which cleared
contracts trade are closed but banks are
open, OCC and CME would each make
their own determination regarding
whether and to what extent to treat any
such day as a Business Day for purposes
of Section 7 of the Proposed X–M
Agreement regarding daily settlements.
Clearing Member Agreements
In conjunction with the streamlining
efforts at the heart of the Proposed X–
M Agreement, OCC is proposing to
consolidate certain of the template
Clearing Member agreements that it
maintains for the X–M Program. As
noted above, a Clearing Member that
intends to participate in the X–M
Program must execute the appropriate
Clearing Member agreement. Currently,
there are six such template agreements,
and the appropriate agreement for the
participating Clearing Member depends
on the type of account it will be using
as its X–M Account (i.e., proprietary,
non-proprietary, or market professional)
and whether the Clearing Member will
be participating in the X–M Program as
a Joint Clearing Member or with an
Affiliated Clearing Member. To
maintain fewer templates and
streamline the Clearing Member
documentation, the six template
agreements would be consolidated into
three. Specifically, Joint Clearing
Members and Affiliated Clearing
Members would use the same template
agreement for the appropriate account
type (i.e., proprietary, non-proprietary,
or market professional). The revised
Clearing Member agreements include
language providing for OCC and CME’s
ability to move positions between
Clearing Member accounts, as
necessary, based upon Clearing Member
instruction, to maintain positions in the
appropriate account type. The substance
of the agreements is not otherwise being
altered.
(2) Statutory Basis
OCC believes the proposed rule
change is consistent with Section 17A of
the Act 24 and the rules thereunder
applicable to OCC. Section 17A(b)(3)(F)
of the Act requires, among other things,
that the rules of a clearing agency be
designed to remove impediments to and
perfect the mechanism of a national
system for the prompt and accurate
clearance and settlement of securities
transactions.25 OCC believes that the
proposal is consistent with this
requirement for the following reasons.
24 15
25 15
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U.S.C. 78q–1.
U.S.C. 78q–1(b)(3)(F).
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The proposed change would improve
the clarity and transparency of the
Existing X–M Agreement by moving
several of the operational details to an
SLA to produce a more streamlined
Proposed X–M Agreement that would be
easier to comprehend. Maintaining a
separate SLA would also allow OCC and
CME to more easily review the service
levels and modify them as appropriate
without having to amend the entire
Proposed X–M Agreement—improving
the ease with which the parties would
be able to keep the legal requirements of
X–M Program consistent with evolving
operational needs. Further, as described
above, certain aspects of the Existing X–
M Agreement would be clarified to
reflect current practice. For example,
the Proposed X–M Agreement would
remove provisions related to the X–M
Pledge Accounts to reflect the fact that
they are no longer used. Also, the
Proposed X–M Agreement would
modify provisions related to the
calculation of the margin requirements
for X–M Accounts to reflect the fact that
OCC’s margin methodology has
historically been and will continue to be
the margin methodology that is used.
Section 17A(b)(3)(F) of the Act also
requires that the rules of a clearing
agency be designed, in general, to
protect investors and the public
interest.26 OCC believes the proposal is
consistent with this requirement
because, under the Proposed X–M
Agreement, the X–M Program would
continue to benefit dual participants
with hedged positions at the respective
clearing organizations by permitting
them to meet margin requirements that
are based on the risk of the combined
positions.
Rule 17Ad–22(e)(20) 27 requires that a
covered clearing agency establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to ‘‘identify,
monitor, and manage risks related to
any link 28 the covered clearing agency
establishes with one or more other
clearing agencies, financial market
utilities, or trading markets.’’ OCC and
CME have each been designated as
systemically important financial market
utilities and OCC believes that the X–M
Program meets the definition of a ‘‘link’’
26 Id.
27 17
CFR 240.17Ad–22(e)(20).
‘‘link’’ for purposes of Rule 17Ad–22(e)(20)
means ‘‘a set of contractual and operational
arrangements between two or more clearing
agencies, financial market utilities, or trading
markets that connect them directly or indirectly for
the purposes of participating in settlement, cross
margining, expanding their services to additional
instruments or participants, or for any other
purposes material to their business.’’ [emphasis
added.] See 17 CFR 240.17Ad–22(a)(8).
28 A
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for this purpose. Replacing the Existing
X–M Agreement with a Proposed X–M
Agreement that better reflects OCC and
CME’s current operational procedures,
and which relocates several of the
operational details to an SLA that
allows them to be reviewed and updated
on a more regular basis, furthers the
purpose of identifying and managing
risks arising from the OCC–CME linkage
and therefore promotes robust risk
management and reducing systemic
risk. Accordingly, OCC believes that
adopting the Proposed X–M Agreement
is consistent with Rule 17Ad–
22(e)(20).29
OCC also believes that the proposed
change would promote compliance with
Rule 17Ad–22(e)(1),30 which requires
OCC as a covered clearing agency to
establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to ‘‘provide for a
well-founded, clear, transparent, and
enforceable legal basis for each aspect of
its activities in all relevant
jurisdictions.’’ The Proposed X–M
Agreement would move several of the
operational details regarding the X–M
Accounts to a standalone SLA, which
OCC believes would produce a more
streamlined Proposed X–M Agreement
that would be easier to comprehend.
The proposed change would also allow
OCC and CME to more easily review the
service levels and modify them as
appropriate without having to amend
the entire Proposed X–M Agreement—
thereby promoting the ability of the
parties to keep the agreements that are
the legal basis for the X–M Program
consistent with evolving operational
needs. Accordingly, OCC believes that
the proposed change is consistent with
Rule 17Ad–22(e)(1).
OCC further believes that the
proposed change would promote
compliance with Rule 17Ad–22(e)(13),31
which requires OCC as a covered
clearing agency to establish, implement,
maintain, and enforce written policies
and procedures reasonably designed to
‘‘ensure [it] has the authority and
operational capacity to take timely
action to contain losses and liquidity
demands and continue to meet its
obligations by, at a minimum, requiring
[its] participants and, when practicable,
other stakeholders to participate in the
testing and review of its default
procedures, including any close-out
procedures, at least annually and
following material changes thereto.’’
The Proposed X–M Agreement
specifically requires OCC and CME to
conduct joint default management drills
with respect to the X–M Account at
least annually. It also includes new
language providing that each of OCC
and CME will enter into any agreements
reasonably necessary to ensure that the
other can obtain liquidity during a
default scenario and that they will be
jointly and equally responsible for
providing liquidity to ensure all
obligations of non-defaulting Clearing
Members with respect to the X–M
Accounts on a timely basis. These
changes are specifically designed to
ensure OCC and CME retain operational
capacity with respect to the X–M
Program during a Clearing Member
default, and OCC accordingly believes
they are consistent with Rule 17Ad–
22(e)(13).
OCC also believes that the proposed
change would promote compliance with
Rule 17Ad–22(e)(17),32 which requires
OCC as a covered clearing agency to
establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to ‘‘manage the
covered clearing agency’s operational
risks by,’’ among other things,
‘‘identifying the plausible sources of
operational risk . . . and mitigating
their impact through the use of
appropriate systems, policies,
procedures, and controls [and] ensuring
that systems have a high degree of
security, resiliency, operational
reliability, and adequate, scalable
capacity.’’ As described above, certain
aspects of the Existing X–M Agreement
do not reflect current operational
realities with respect to the X–M
Program, which potentially could be a
source of operational risk to OCC. OCC
believes that the Proposed X–M
Agreement would reduce this potential
source of operational risk by removing
and updating provisions and
requirements that are out of date, like
those related to determining the margin
requirements for an X–M Account or
various required methods of
communication and notification.
Accordingly, OCC believes that the
proposed change is consistent with Rule
17Ad–22(e)(17). In these ways, OCC
believes the proposed changes are
consistent with Section 17A(b)(3)(F) of
the Act 33 and Rules 17Ad–22(e)(1), (13),
(17), and (20).34
29 17
32 17
30 17
33 15
CFR 240.17Ad–22(e)(20).
CFR 240.17Ad–22(e)(1).
31 17 CFR 240.17Ad–22(e)(13).
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CFR 240.17Ad–22(e)(17).
U.S.C. 78q–1(b)(3)(F).
34 17 CFR 240.17Ad–22(e)(1), (13), (17), and (20).
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Electronic Comments
(B) Clearing Agency’s Statement on
Burden on Competition
Section 17A(b)(3)(I) of the Act 35
requires that the rules of a clearing
agency not impose any burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act. OCC does not
believe that the proposal would impose
any burden on competition.36 The
primary purpose of the proposed rule
change is to update and clarify the
existing X–M Agreement to reflect
current practices and also streamline
Clearing Member agreements. The
proposed rule change would not affect
any individual Clearing Member’s
current rights or ability to access OCC
services or disadvantage or favor any
particular user in relationship to
another. As such, OCC believes that the
proposed changes would not have any
impact or impose any burden on
competition.
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants or Others
Written comments were not and are
not intended to be solicited with respect
to the proposed change and none have
been received. OCC will notify the
Commission of any written comments
received by OCC.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self- regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
OCC–2020–011 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–OCC–2020–011. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of OCC and on OCC’s website at
https://www.theocc.com/CompanyInformation/Documents-and-Archives/
By-Laws-and-Rules#rule-filings.
All comments received will be posted
without change. Persons submitting
comments are cautioned that we do not
redact or edit personal identifying
information from comment submissions.
You should submit only information
that you wish to make available
publicly.
All submissions should refer to File
Number SR–OCC–2020–011 and should
be submitted on or before October 28,
2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.37
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–22096 Filed 10–6–20; 8:45 am]
BILLING CODE 8011–01–P
35 15
U.S.C. 78q–1(b)(3)(I).
36 Id.
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90062; File No. SR–CBOE–
2020–075]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Designation
of a Longer Period for Commission
Action on a Proposed Rule Change To
Make Qualified Contingent Cross
Orders Available for FLEX Trading
October 1, 2020.
On August 3, 2020, Cboe Exchange,
Inc. (the ‘‘Exchange’’ or ‘‘Cboe
Options’’) filed with the Securities and
Exchange Commission (‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to make Qualified
Contingent Cross Orders available for
FLEX trading. The proposed rule change
was published for comment in the
Federal Register on August 20, 2020.3
Section 19(b)(2) of the Act 4 provides
that, within 45 days of the publication
of notice of the filing of a proposed rule
change, or within such longer period up
to 90 days as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding, or as to which the
self-regulatory organization consents,
the Commission shall either approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether the
proposed rule change should be
disapproved. The 45th day after
publication of the notice for this
proposed rule change is October 4,
2020.
The Commission is extending this 45day time period. The Commission finds
that it is appropriate to designate a
longer period within which to take
action on the proposal so that it has
sufficient time to consider the proposed
rule change. Accordingly, the
Commission, pursuant to Section
19(b)(2) of the Act,5 designates
November 18, 2020, as the date by
which the Commission shall either
approve or disapprove, or institute
proceedings to determine whether to
disapprove, the proposed rule change
(File No. SR–CBOE–2020–075).
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 89564
(August 14, 2020), 85 FR 51531.
4 15 U.S.C. 78s(b)(2).
5 Id.
2 17
E:\FR\FM\07OCN1.SGM
07OCN1
]]>Agencies
[Federal Register Volume 85, Number 195 (Wednesday, October 7, 2020)]
[Notices]
[Pages 63305-63312]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-22096]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90065; File No. SR-OCC-2020-011]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change To Adopt a New Second Amended
and Restated Cross-Margining Agreement Between The Options Clearing
Corporation and The Chicago Mercantile Exchange
October 1, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 22, 2020, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I, II, and III below,
which Items have been prepared by OCC. The Commission is publishing
this notice to
[[Page 63306]]
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
This proposed rule change by The Options Clearing Corporation
(``OCC'') would adopt a new Second Amended and Restated Cross-Margining
Agreement (``Proposed X-M Agreement'') between OCC and the Chicago
Mercantile Exchange (``CME''). This proposal is designed to: (1) Update
the existing X-M Agreement with the Proposed X-M Agreement to bring it
into conformity with current operational procedures and eliminate
provisions that are out-of-date; (2) improve the clarity and
readability by consolidating certain redundant provisions and moving
certain operational details from the existing X-M Agreement to a
standalone service level agreement; and (3) streamline and consolidate
certain related Clearing Member agreements.
The Proposed X-M Agreement is attached hereto as Exhibit 5 of
filing SR-OCC-2020-011. The Proposed X-M Agreement includes the
following as appendices each of which is marked to show changes:
Proprietary Cross-Margin Account Agreement and Security Agreement; Non-
Proprietary Cross-Margin Account Agreement and Security Agreement; and
Market Professional's Agreement for Cross-Margining.\3\
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\3\ Each of the Clearing Member agreement forms includes a
version for Joint and Affiliated Clearing Members.
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This proposed rule change does not require any changes to the text
of OCC's By-Laws or Rules. All terms with initial capitalization that
are not defined herein have the same meaning as set forth in OCC's By-
Laws and Rules.\4\
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\4\ OCC's By-Laws and Rules can be found on OCC's public
website: https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules#rule-filings.
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. OCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
(1) Purpose
The purpose of this proposed rule change is to adopt a new Second
Amended and Restated Cross-Margining Agreement between OCC and CME that
would: (1) Update the existing X-M Agreement with the Proposed X-M
Agreement to bring it into conformity with current operational
procedures and eliminate provisions that are out-of-date; (2) improve
the clarity and readability by consolidating certain redundant
provisions and moving certain operational details to a standalone
service level agreement; and (3) streamline and consolidate certain
related Clearing Member agreements.
Background
OCC and CME are currently parties to an Amended and Restated Cross-
Margining Agreement dated May 28, 2008, as further amended by Amendment
No. 1 dated October 23, 2008 \5\ and Amendment No. 2 dated May 20, 2009
\6\ (the ``Existing X-M Agreement''). OCC and CME first implemented
their cross-margining program (the ``X-M Program'') in 1989. The
purpose of the X-M Program is to: (1) Facilitate the cross-margining of
positions in options cleared by OCC with positions in futures and
commodity options cleared by CME and (2) address the fact that Clearing
Members may have been required to meet higher margin requirements at
each clearinghouse than were warranted by the risk of combined
positions, because each portfolio was margined separately without
regard to positions held in the other portfolio.\7\ After the 1987
Market Break, several government reports recommending market structure
reforms found that cross-margining arrangements between clearinghouses
should be implemented or expanded, because they could have a profound
effect on mitigating liquidity stress to key market participants at
critical times.\8\ For example, the Bachmann Task Force, which was
formed at the request of SEC Chairman Breeden to address the issue of
safety and soundness of the clearance and settlement system in the
United States, published a report on Clearance and Settlement Reform in
the U.S. Securities Markets, and the staff of the SEC's Division of
Market Regulation \9\ also published its own report to analyze factors
involved in the depth and rapidity of the market decline. Both reports
noted that the existence of separate clearinghouses for each market
segment increases systemic exposure because no single clearinghouse is
able to accurately assess intermarket exposure among its clearing
members and among their customers.\10\ Accordingly, the Bachmann Report
specifically advanced that the cross-margining agreement in place
between OCC and CME benefited dual participants with hedged positions
with the respective clearing organizations,\11\ and it stated that OCC
and relevant futures exchanges should be encouraged to expand their
cross-margining programs because they ``reduce clearing system risk by
substituting correlated positions for cash or cash equivalent margins
and provide financing relief and settlement harmonization.'' \12\ Since
the X-M Program was implemented, the parties have amended it twice.\13\
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\5\ Securities Exchange Act Release No. 58258 (July 30, 2008),
73 FR 46133 (August 7, 2008) (SR-OCC-2008-12) (amending the
agreement to, among other things, permit money market fund shares as
margin).
\6\ Securities Exchange Act Release No. 60063 (June 8, 2009), 74
FR 28738 (June 17, 2009) (SR-OCC-2009-10) (amending the agreement to
redefine the term ``Eligible Contracts'' and deleting the list of
such contracts attached as Schedule A).
\7\ Securities Exchange Act Release Nos. 26607 (March 7, 1989),
48 FR 10608 (March 14, 1989) (SR-OCC-89-1); 27296 (September 26,
1989) (SR-OCC-89-11).
\8\ See Report of the Bachmann Task Force on Clearance and
Settlement Reform in U.S. Securities Markets, Submitted to The
Chairman of the U.S. Securities and Exchange Commission (May 1992)
(the ``Bachmann Report''); The October 1987 Market Break, A Report
by the Division of Market Regulation, U.S. Securities and Exchange
Commission (February 1988) (the ``1987 Market Break Report'').
\9\ This Division is now known as the Division of Trading and
Markets.
\10\ See Bachmann Report at 11 citing the Report of the
Presidential Task Force on Market Mechanisms at 64 (January 1988);
1987 Market Break Report at 10-57 (stating that ``[i]n a fully
integrated cross-margin account, margin requirements could be fixed
to reflect more accurately the net risk of such positions taken as a
whole, thus reducing certain margin requirements . . .'').
\11\ See Bachmann Report at 12.
\12\ See Bachmann Report at 31.
\13\ See, e.g., Securities Exchange Act Release Nos. 32534 (June
28, 1993), 58 FR 36234 (July 6, 1993) (SR-OCC-92-98); 38584 (May 8,
1997), 62 FR 26602 (May 14, 1997); See also supra notes 5 and 6.
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The Existing X-M Agreement
The Existing X-M Agreement governs OCC and CME's participation in a
cross-margining program (the ``X-M Program''), which permits positions
in certain futures and futures options contracts cleared by CME to be
cleared in a special proprietary or non-proprietary cross-margining
account (an ``X-M Account'') at CME, which is then paired with a
corresponding X-M
[[Page 63307]]
Account (proprietary or non-proprietary, as the case may be) at OCC, in
which securities options contracts are cleared (such contracts,
``Eligible Contracts''). OCC Clearing Members that are also CME members
(``Joint Clearing Members''), or that have qualified affiliates that
are CME members (``Affiliated Clearing Members''), provided that they
have signed the required X-M Program clearing member participation
agreement, are permitted to participate in the X-M Program. Currently,
there are nine Joint Clearing Members and one pair of Affiliated
Clearing Members that participate in the X-M Program. Each Joint
Clearing Member or pair of Affiliated Clearing Members electing to
participate in the X-M Program and establish a pair of X-M Accounts is
required to execute the appropriate account agreements in the forms
prescribed by OCC and CME and to designate the account as either
``proprietary'' or ``non-proprietary.'' \14\
---------------------------------------------------------------------------
\14\ The Existing X-M Agreement also permits the establishment
of ``X-M Pledge Accounts,'' which are X-M Accounts in respect of
which the Clearing Member grants a security interest in all
contracts purchased or carried in the particular account to a bank,
as security for a loan. X-M Pledge Accounts may be either
proprietary or non-proprietary. The New X-M Agreement would
eliminate the ability to establish such X-M Pledge Accounts because
they are no longer being used. Historically, pledge accounts were
only used for the purpose of supporting the pledging of money market
mutual fund shares as collateral. Now that money market mutual fund
shares are not acceptable collateral for the XM Program, there is no
longer a need for the use of X-M Pledge Accounts.
---------------------------------------------------------------------------
Proprietary X-M accounts are confined to the confirmed trades and
positions of non-customers of Clearing Members and other proprietary
``market professionals.'' \15\ A non-proprietary X-M Account is limited
to options market-makers and other ``market professionals.''
---------------------------------------------------------------------------
\15\ See OCC By-Laws Article I, Section 1.O.(1).
---------------------------------------------------------------------------
Non-proprietary X-M Accounts are treated as futures customer
accounts, because they are carried subject to the segregation
provisions of Section 4d of the Commodity Exchange Act \16\ rather than
as securities accounts subject to Rule 15c3-3 \17\ and other customer
protection rules under the Securities Exchange Act of 1934.\18\ X-M
Accounts that are paired for purposes of the X-M Program are treated
for margin purposes as if they were a single account, making it
possible to margin the paired X-M Accounts based on the net risk of the
potentially offsetting positions within them. The Existing X-M
Agreement governs the calculation, collection, and holding of margin
with respect to the paired X-M Accounts, as well as the handling of
daily settlement.
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\16\ 7 U.S.C. 6d.
\17\ 17 CFR 240.15c3-3.
\18\ 17 CFR 240.8c-1; 17 CFR 240.15c2-1.
---------------------------------------------------------------------------
The Existing X-M Agreement also addresses how OCC and CME may use
the contracts and margin held in X-M Accounts in the event of the
default of a Joint Clearing Member or Affiliated Clearing Member. Upon
suspending a Joint Clearing Member or Affiliated Clearing Member, the
suspending clearinghouse is required to immediately notify the other
clearinghouse of the suspension. Both OCC and CME would then
immediately liquidate the contracts and margin in each X-M Account
carried for the suspended Joint Clearing Member or the Affiliated
Clearing Members, unless OCC and CME otherwise agree to delay
liquidation or to transfer the contracts. OCC and CME are required to
use their best efforts to coordinate the transfer or liquidation of
such contracts and to close out any hedged positions simultaneously or,
if transferring the positions, to transfer them to the same clearing
firm or pair of affiliated clearing firms.
Any funds received by either OCC or CME upon liquidation of the
proprietary and non-proprietary X-M Accounts, respectively, may be used
to offset expenses arising from the liquidation of such account, and
any net proceeds thereafter are to be deposited in a corresponding
proprietary or non-proprietary liquidating account established jointly
by OCC and CME. The funds in a proprietary or non-proprietary
liquidating account are to be used only to set off any liquidating
deficits or settlement obligations remaining with respect to the
corresponding proprietary or non-proprietary X-M Account, respectively.
To the extent the proprietary liquidating account has a surplus, after
satisfying all deficits and obligations, the proceeds may be applied to
set off any net liquidating deficits or settlement obligations arising
from the Clearing Member's non-proprietary X-M Accounts at OCC or CME.
After these offsets, if a liquidating account still has a deficit,
each of OCC and CME bear 50% of the remaining shortfall. If a
proprietary liquidating account has a surplus, OCC and CME each are
entitled to 50% of the surplus to satisfy any losses whatsoever arising
from the other obligations of the defaulting Clearing Member. However,
if one clearinghouse's net loss is less than 50% of the remaining
surplus and the other's is greater, the former is only entitled to the
surplus up to the amount of its loss, and the latter is entitled to
receive the balance up to the amount of its loss. After all of this, if
any amounts remain in the liquidating accounts, such funds are returned
to the Joint Clearing Member or pair of Affiliated Clearing Members or
their respective representatives.
The Proposed X-M Agreement
The Proposed X-M Agreement retains the same basic framework
described above regarding the Existing X-M Agreement, and it would not
fundamentally alter the scope of the X-M Program or the rights and
responsibilities of OCC and CME. The primary purposes for proposing to
update the Existing X-M Agreement with the Proposed X-M Agreement are
to: (1) Bring the Existing X-M Agreement into conformity with current
operational procedures; (2) eliminate provisions in the Existing X-M
Agreement that are out-of-date; and (3) improve the clarity and
readability of the agreement by consolidating redundant provisions. The
Proposed X-M Agreement would also move several of the operational
details regarding the X-M Accounts to the OCC-CME Cross-Margining
Service Level Agreement (``SLA''). OCC and CME believe that having such
operational details in a separate document produces a more streamlined
Proposed X-M Agreement that would be easier to comprehend and that
would therefore allow OCC and CME to more easily review the service
levels and modify them as appropriate without having to amend the
entire Proposed X-M Agreement. OCC believes that these changes would
make the Proposed X-M Agreement and SLA easier to read and comprehend
and would promote consistency with the requirement in Rule 17Ad-
22(e)(1) \19\ that OCC must establish, implement, maintain and enforce
written policies and procedures reasonably designed to, as applicable,
provide for a well-founded, clear and transparent legal basis for each
aspect of its activities.
---------------------------------------------------------------------------
\19\ 17 CFR 240.17Ad-22(e)(1).
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Key changes from the Existing X-M Agreement to the Proposed X-M
Agreement are described in detail below.
Eligible Contracts and Accepted Transactions
The Proposed X-M Agreement would not change the scope of products
eligible for participation in the X-M Program. However, it would
include a definition of ``Eligible Contracts'' in Section 1 that
conforms with the substance of the definition that was adopted in 2009
as part of Amendment
[[Page 63308]]
No. 2 to the Existing X-M Agreement.\20\ Consistent with these changes,
the definition of ``Eligible Contracts'' in the Proposed X-M Agreement
would include any contracts that have been ``jointly designated'' by
OCC and CME as eligible for inclusion in the list of eligible contracts
jointly maintained by OCC and CME. Prior to designating a new set of
contracts as Eligible Contracts, OCC and CME would be required to
evaluate and approve the additional contracts through internal
processes that consider each clearing organization's risk policies.
---------------------------------------------------------------------------
\20\ See supra note 13.
---------------------------------------------------------------------------
Section 1 of the Proposed X-M Agreement would also be amended to
introduce the new defined term ``Accepted Transaction'' and to provide
a mechanism for confirming what specific transactions are subject to
the Proposed X-M Agreement. The purpose of this change is not to change
the scope of the X-M Program but rather to provide certainty and
clarity regarding the specific transactions--the ``Accepted
Transactions''--for which OCC and CME would be jointly responsible.
``Accepted Transactions'' would be defined to include all positions
that are Eligible Contracts and have been included on the ``daily
margin detail report'' generated by OCC and transmitted to CME.
Positions included in the ``daily margin detail report'' would be
deemed to be the final record of positions in which OCC and CME are
obligated under the Proposed X-M Agreement.
The Service Level Agreement
As part of the update to the Proposed X-M Agreement, certain
operational terms previously covered in the Existing X-M Agreement
would be addressed in the SLA. For example, this includes provisions
from the Existing X-M Agreement in Section 6 regarding acceptable forms
of collateral, Section 7 regarding the timing, methods and forms of
daily settlement procedures, and Section 15 regarding OCC and CME's
commitment to share information regarding Joint and Affiliated Clearing
Members, banks, and their own financial status. The Proposed X-M
Agreement would address the existence of this SLA in a proposed Section
2, stating that all ``times, methods and forms of deliveries,
notification and consents'' pertaining to the X-M Program and X-M
Accounts are provided for in the SLA. CME and OCC would also agree to
review the SLA at least annually.
Account Structure
The same basic account structure in Section 2 of the Existing X-M
Agreement would still be used in Section 3 of the Proposed X-M
Agreement. Proprietary and/or non-proprietary paired clearing accounts
would still be established for Joint and Affiliated Clearing Members
that participate in the X-M Program, and OCC and CME would continue to
have a joint security interest in the contracts, margin, and other
property held in the joint accounts. However, as noted above, the
Proposed X-M Agreement would remove all references to X-M Pledge
Accounts because such accounts are no longer in use. Along with
removing all references to such accounts throughout the Proposed X-M
Agreement, Section 3 of the Existing X-M Agreement, entitled
``Establishment of X-M Pledge Accounts,'' would be deleted in its
entirety.
The Proposed X-M Agreement would also change some of the defined
terms that are used to describe the accounts related to the X-M Program
to describe their purpose more accurately. For example, the
``Proprietary Joint Settlement Account'' and ``Segregated Joint Margin
Account'' would be referred to as the ``Proprietary Joint Margin Cash
Account'' and ``Segregated Joint Margin Cash Account,'' and the
``Proprietary Joint Custody Account'' and ``Segregated Joint Custody
Account'' would be referred to as the ``Proprietary Joint Margin
Custody Account'' and ``Segregated Joint Margin Custody Account.'' The
terms ``Proprietary Bank Account'' and ``Segregated Funds Bank
Account'' would also be added to the defined terms section for
readability and consistency, though they were already used in the body
of the Existing X-M Agreement. The proposed addition of such terms to
the defined terms section would not change for the purposes of the
agreement. The defined term ``Liquidating Accounts'' would also be
added to the agreement to cover the Non-Proprietary and Proprietary
Liquidating Accounts created in the event of a Clearing Member
suspension and liquidation.
Margin and Posted Collateral
The Proposed X-M Agreement would replace the provisions in Section
5 of the Existing X-M Agreement regarding the methodology for
determining the initial margin requirements for each X-M Account with a
statement that, with respect to each pair of X-M Accounts, the amount
of cash, securities or other property required to be deposited as
collateral would be determined by using OCC's approved margin
methodology, as in effect as of the date of the Proposed X-M Agreement.
As a practical matter, this change would not represent a change from
the existing operation of the X-M Program because, consistent with the
authority in Section 5, CME already elects to use the margin
calculation that is produced by OCC. The Proposed X-M Agreement would
also require OCC to provide 30 calendar days prior notice to CME of any
proposed changes to OCC's margin methodology, and any changes to the
way collateral requirements are calculated with respect to X-M Accounts
would be required to be agreed upon in writing in advance by OCC and
CME. The Proposed X-M Agreement would also specify that OCC and CME
would each determine the net amount of premiums, exercise settlement
amounts, and variation margin due for its respective products because
the determination is made based upon the products cleared by OCC and
CME, and adopts the defined terms ``Net Pay/Collect'' to refer to such
amount. Each clearinghouse would be required to notify the other of the
Net Pay/Collect amount in accordance with the SLA.
Like under the Existing X-M Agreement, OCC and CME would each still
have the ability to charge additional margin at any amount as it deems
appropriate without the consent of the other and each would be
responsible for determining the adequacy of the margin requirement for
each cross-margin account.
As discussed above, Section 6 of the Proposed X-M Agreement would
no longer specify the eligible forms of initial margin, instead
referring to the SLA. The SLA would revise the list of eligible
collateral to include cash, treasuries, and letters of credit from pre-
approved U.S. depository institutions, and eliminate the eligibility of
government sponsored entity debt and money market funds. OCC and CME
are proposing to eliminate the eligibility of these instruments
because, in practice, OCC no longer accepts them as collateral for the
X-M Program. This is because no money market mutual funds currently
meet OCC's requirements for such margin assets set forth in OCC Rule
604(b)(3), and OCC's liquidity facilities do not currently accept
government sponsored entity debt as collateral. Consequently, all
references to government sponsored entity debt and money market funds
are removed from the Proposed X-M Agreement. The Proposed X-M Agreement
would also clarify that the more conservative limits
[[Page 63309]]
would apply to the extent OCC and CME's rules with respect to
concentration limits for eligible margin differ. Furthermore, if OCC
reduces any of its required haircuts for eligible margin below CME's
required haircuts, OCC is required to provide prompt notice to CME.
The Proposed X-M Agreement would also provide that OCC and CME
would each be permitted to invest any cash deposited as collateral in
their joint margin cash accounts overnight in certain eligible
investments and with certain custodians, depositories, and
counterparties, as OCC and CME may mutually agree, with each
clearinghouse sharing equally in any proceeds received, or losses
incurred, from such overnight investments. This formalizes the existing
practice of OCC and CME and provides clarity that OCC and CME share
equally in any proceeds or losses from overnight investments.
Additionally, the Proposed X-M Agreement would no longer use the
term ``Margin'' or ``Initial Margin'' with respect to the collateral
deposited in an X-M Account. Instead, it would use the term ``Posted
Collateral.'' OCC proposes the change because it is a more accurate
characterization of the margin requirement set by OCC's System for
Theoretical Analysis and Numerical Simulations (``STANS'')--which is
the methodology used to determine the collateral requirement for the X-
M Program and does not produce a separate Initial Margin requirement.
References to margin requirements and deficits or surpluses in respect
to such requirements are proposed to be replaced with references to the
defined terms ``Collateral Requirement,'' ``Collateral Deficit,'' and
``Collateral Excess,'' respectively.
Daily Settlement
Section 7 of the Proposed X-M Agreement would be revised to
increase the time OCC and CME would have to provide approval or non-
approval of revised Settlement Instructions from 15 minutes to 30
minutes. Based on OCC and CME's experience operating the X-M Program,
OCC believes the change from 15 to 30 minutes would provide additional
time which would be useful during the process of performing a full
review of any revised Settlement Instructions and making determinations
for approval or non-approval of the revised Settlement Instructions.
Furthermore, OCC has determined that the proposed change to add
additional time to review revised Settlement Instructions will not
negatively impact on the timing of other processes performed under the
Proposed X-M Agreement.
As described above, details regarding the timing, methods, and form
of daily settlement in the X-M Accounts have been moved to the SLA, and
Section 7 of the Proposed X-M Agreement would be amended to reflect
that fact. Section 7 would also be amended to conform to existing
reporting practices for OCC and CME with respect to settlement. For
example, under the Existing X-M Agreement each clearing organization
issues a ``Margin and Settlement Report'' to each Joint Clearing Member
or pair of Affiliated Clearing Members for which it is the Designated
Clearing Organization. However, in practice, OCC has been the only
Designated Clearing Organization. Accordingly, the related provisions
would be modified so that the information contained in that report is
only provided by OCC to the Clearing Members. The definition of
``Margin and Settlement Report'' in Section 1 of the Proposed X-M
Agreement is correspondingly modified and would refer to the report
more specifically as the ``Account Summary by Clearing Corporation
Report.''
The Proposed X-M Agreement would also update Section 7 to provide
for the communication of intra-day instructions to X-M clearing banks
with respect to the X-M Accounts, to facilitate the deposit of
collateral in response to an intra-day margin call from CME or OCC. A
defined term for ``Intra-day Instruction'' would also be added to
Section 1 to accommodate this change.
Suspension and Liquidation
Section 8 of the Proposed X-M Agreement essentially retains the
Existing X-M Agreement's procedures for the handling of X-M Accounts in
the event of the default of a Joint Clearing Member or pair of
Affiliated Clearing Members, as described above, with certain
modifications. First, paragraphs 8(a) and (b) would be revised to state
more generally that each clearinghouse will follow its own rules with
respect to the default of a Clearing Member; provided, however, that
each clearinghouse would also use its best efforts to coordinate with
the other clearinghouse regarding the liquidation or transfer of
Accepted Transactions. The proposed changes that expressly provide that
each clearinghouse would follow its own rules with respect to the
default of a Clearing Member are not intended to substantively change
the terms in the Existing X-M Agreement. Instead, they are meant to
provide each clearinghouse with greater flexibility to amend their
suspension and liquidation procedures pursuant to the normal rule
change process without having to also amend the Proposed X-M Agreement.
The Proposed X-M Agreement also now expressly contemplates the
potential use of a joint liquidating auction with respect to X-M
Accounts during a Clearing Member default scenario.
Second, new sections 8(c) and (d) would be added to the Proposed X-
M Agreement to provide that upon the suspension of a defaulted Clearing
Member, the clearinghouses would establish a plan pursuant to which
Accepted Transactions of the Clearing Member would be liquidated or
transferred. The plan would be required, at a minimum, to (i) identify
the primary point of contact at each clearinghouse responsible for
coordinating communications and actions related to the plan; (ii)
current-day settlement information related to the suspended Clearing
Member; and (iii) whether any transactions in addition to Accepted
Transactions would be guaranteed. If by the close of the markets on the
business day that follows the last successful margin collection for the
suspended Clearing Member the clearinghouses do not take action under a
plan or have not otherwise established a plan, then the clearinghouses
would be required to take certain steps to transfer cleared contracts
prior to the open of trading on the next business day. Specifically,
contracts cleared by each respective clearinghouse would be transferred
into an account under its control to allow that clearinghouse to
liquidate or transfer the contracts pursuant to its rules. The closing
prices for the cleared contracts used to determine final proceeds and
any liquidity obligations of the clearinghouses would be the prices as
of the business day that immediately follows the last successful margin
collection for the suspended Clearing Member.
Third, Section 8 would also be revised to provide that each of OCC
and CME agree to enter into any agreements reasonably necessary to
ensure that the other can obtain liquidity during a default scenario
and will be jointly and equally responsible for providing liquidity to
ensure all obligations of a non-defaulting Clearing Member with respect
to the X-M Accounts on a timely basis. OCC believes this change would
help ensure OCC and CME have sufficient access to liquidity and thereby
provide for efficient and effective default management in the event of
a Clearing Member default.
Finally, OCC and CME also would agree to conduct joint default
management drills for the cross-margin accounts at least annually. OCC
believes
[[Page 63310]]
that this change would promote consistency with the requirement in Rule
17Ad-22(e)(13) that OCC as a covered clearing agency establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to ``[e]nsure the covered clearing agency has the
authority and operational capacity to take timely action to contain
losses and liquidity demands and continue to meet its obligations by,
at a minimum, requiring [its] participants and, when practicable, other
stakeholders to participate in the testing and review of its default
procedures, including any close-out procedure, at least annually and
following material changes thereto.'' \21\
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\21\ 17 CFR 240.17Ad-22(e)(13).
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Miscellaneous Changes
Regarding other changes, first the ``Recitals'' to the Proposed X-M
Agreement would be updated to reflect OCC and CME's respective SEC and
CFTC registration statuses and designations as systemically important
by the Financial Stability Oversight Council. Related to this, defined
terms would be added for ``FSOC,'' ``Dodd Frank Act,'' ``DCO,''
``Exchange Act,'' and ``SEC.''
Second, Section 9 of the Proposed X-M Agreement would be amended to
clarify that the requirement that one clearinghouse notify the other
when it becomes subject to a court order to disclose ``confidential
information'' is only required if it is permitted by law.
Third, Section 10 of the Proposed X-M Agreement would rephrase the
section to only reference Losses because the definition of Losses under
the Proposed X-M Agreement would be revised to include claims and other
potential loss events.
Fourth, Section 13 of the proposed agreement would change the
process and timing related to termination of the agreement because OCC
and CME believe the revised language would reduce risk in the event of
a termination.
Fifth, the Proposed X-M Agreement would also revise Section 14, to
clarify that while OCC and CME are not permitted to reject any
transaction effected in an X-M Account without the other's express
consent, this condition would not interfere with their respective
abilities to implement recovery and orderly wind-down plans under their
own rules, as required under Rule 17Ad-22(e)(3)(ii) \22\ and CFTC Rule
39.39(b).\23\
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\22\ 17 CFR 240.17Ad-22(e)(3)(ii).
\23\ 17 CFR 39.39(b).
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Sixth, as discussed above in the description of the SLA, Section 15
of the Existing X-M Agreement regarding information sharing between OCC
and CME would be deleted from the Proposed X-M Agreement and moved to
the SLA. OCC believes the more succinctly drafted language in the SLA
maintains consistent rights and/or obligations for OCC and CME to share
information which will continue to allow OCC and CME to efficiently
manage the risks presented by Joint and Affiliated Clearing Members.
Seventh, Section 15 of the Proposed X-M Agreement regarding
notifications differs from the corresponding provisions in Section 16
of the Existing X-M Agreement, in that it would allow for the use of
electronic mail to satisfy notice requirements, except with respect to
notifications relating to the termination of the Proposed X-M
Agreement. It would also eliminate facsimile as an appropriate method
of communication. OCC believes this change conforms to current
communication procedures and standards and ensures notices will be
received in a timely manner through a communication method that is
monitored regularly.
Finally, the Proposed X-M Agreement would also add Section 17 to
clarify that each of OCC and CME would be responsible for obtaining
their own regulatory approvals in connection with the implementation of
the Proposed X-M Agreement.
Additional Changes To Defined Terms
In addition to the proposed and modified defined terms described
above, the Proposed X-M Agreement would make certain additional
modifications to Section 1 of the Existing X-M Agreement. Many of these
are non-substantive, including adding defined terms that are already
used and defined elsewhere in the Existing X-M Agreement but that are
not currently listed in Section 1--e.g., the defined terms ``AAA,''
``Affiliated Clearing Member,'' ``CME Clearing Member,'' ``CME Rules,''
``Confidential Information,'' ``Indemnitor,'' ``Indemnified Party,''
``Losses,'' ``OCC Clearing Member,'' and ``OCC Rules.'' The Proposed X-
M Agreement would also modify the definition of ``Affiliate'' to remove
the statement that 10% ownership of common stock will be deemed prima
facie control of that entity for purposes of determining whether an
entity is under direct or indirect control of a Clearing Member, to
instead reflect that OCC and CME believe that a facts-and-circumstances
approach is more appropriate. The definition of ``Business Day'' would
be modified to provide that when one or more markets on which cleared
contracts trade are closed but banks are open, OCC and CME would each
make their own determination regarding whether and to what extent to
treat any such day as a Business Day for purposes of Section 7 of the
Proposed X-M Agreement regarding daily settlements.
Clearing Member Agreements
In conjunction with the streamlining efforts at the heart of the
Proposed X-M Agreement, OCC is proposing to consolidate certain of the
template Clearing Member agreements that it maintains for the X-M
Program. As noted above, a Clearing Member that intends to participate
in the X-M Program must execute the appropriate Clearing Member
agreement. Currently, there are six such template agreements, and the
appropriate agreement for the participating Clearing Member depends on
the type of account it will be using as its X-M Account (i.e.,
proprietary, non-proprietary, or market professional) and whether the
Clearing Member will be participating in the X-M Program as a Joint
Clearing Member or with an Affiliated Clearing Member. To maintain
fewer templates and streamline the Clearing Member documentation, the
six template agreements would be consolidated into three. Specifically,
Joint Clearing Members and Affiliated Clearing Members would use the
same template agreement for the appropriate account type (i.e.,
proprietary, non-proprietary, or market professional). The revised
Clearing Member agreements include language providing for OCC and CME's
ability to move positions between Clearing Member accounts, as
necessary, based upon Clearing Member instruction, to maintain
positions in the appropriate account type. The substance of the
agreements is not otherwise being altered.
(2) Statutory Basis
OCC believes the proposed rule change is consistent with Section
17A of the Act \24\ and the rules thereunder applicable to OCC. Section
17A(b)(3)(F) of the Act requires, among other things, that the rules of
a clearing agency be designed to remove impediments to and perfect the
mechanism of a national system for the prompt and accurate clearance
and settlement of securities transactions.\25\ OCC believes that the
proposal is consistent with this requirement for the following reasons.
[[Page 63311]]
The proposed change would improve the clarity and transparency of the
Existing X-M Agreement by moving several of the operational details to
an SLA to produce a more streamlined Proposed X-M Agreement that would
be easier to comprehend. Maintaining a separate SLA would also allow
OCC and CME to more easily review the service levels and modify them as
appropriate without having to amend the entire Proposed X-M Agreement--
improving the ease with which the parties would be able to keep the
legal requirements of X-M Program consistent with evolving operational
needs. Further, as described above, certain aspects of the Existing X-M
Agreement would be clarified to reflect current practice. For example,
the Proposed X-M Agreement would remove provisions related to the X-M
Pledge Accounts to reflect the fact that they are no longer used. Also,
the Proposed X-M Agreement would modify provisions related to the
calculation of the margin requirements for X-M Accounts to reflect the
fact that OCC's margin methodology has historically been and will
continue to be the margin methodology that is used.
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\24\ 15 U.S.C. 78q-1.
\25\ 15 U.S.C. 78q-1(b)(3)(F).
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Section 17A(b)(3)(F) of the Act also requires that the rules of a
clearing agency be designed, in general, to protect investors and the
public interest.\26\ OCC believes the proposal is consistent with this
requirement because, under the Proposed X-M Agreement, the X-M Program
would continue to benefit dual participants with hedged positions at
the respective clearing organizations by permitting them to meet margin
requirements that are based on the risk of the combined positions.
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\26\ Id.
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Rule 17Ad-22(e)(20) \27\ requires that a covered clearing agency
establish, implement, maintain and enforce written policies and
procedures reasonably designed to ``identify, monitor, and manage risks
related to any link \28\ the covered clearing agency establishes with
one or more other clearing agencies, financial market utilities, or
trading markets.'' OCC and CME have each been designated as
systemically important financial market utilities and OCC believes that
the X-M Program meets the definition of a ``link'' for this purpose.
Replacing the Existing X-M Agreement with a Proposed X-M Agreement that
better reflects OCC and CME's current operational procedures, and which
relocates several of the operational details to an SLA that allows them
to be reviewed and updated on a more regular basis, furthers the
purpose of identifying and managing risks arising from the OCC-CME
linkage and therefore promotes robust risk management and reducing
systemic risk. Accordingly, OCC believes that adopting the Proposed X-M
Agreement is consistent with Rule 17Ad-22(e)(20).\29\
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\27\ 17 CFR 240.17Ad-22(e)(20).
\28\ A ``link'' for purposes of Rule 17Ad-22(e)(20) means ``a
set of contractual and operational arrangements between two or more
clearing agencies, financial market utilities, or trading markets
that connect them directly or indirectly for the purposes of
participating in settlement, cross margining, expanding their
services to additional instruments or participants, or for any other
purposes material to their business.'' [emphasis added.] See 17 CFR
240.17Ad-22(a)(8).
\29\ 17 CFR 240.17Ad-22(e)(20).
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OCC also believes that the proposed change would promote compliance
with Rule 17Ad-22(e)(1),\30\ which requires OCC as a covered clearing
agency to establish, implement, maintain, and enforce written policies
and procedures reasonably designed to ``provide for a well-founded,
clear, transparent, and enforceable legal basis for each aspect of its
activities in all relevant jurisdictions.'' The Proposed X-M Agreement
would move several of the operational details regarding the X-M
Accounts to a standalone SLA, which OCC believes would produce a more
streamlined Proposed X-M Agreement that would be easier to comprehend.
The proposed change would also allow OCC and CME to more easily review
the service levels and modify them as appropriate without having to
amend the entire Proposed X-M Agreement--thereby promoting the ability
of the parties to keep the agreements that are the legal basis for the
X-M Program consistent with evolving operational needs. Accordingly,
OCC believes that the proposed change is consistent with Rule 17Ad-
22(e)(1).
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\30\ 17 CFR 240.17Ad-22(e)(1).
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OCC further believes that the proposed change would promote
compliance with Rule 17Ad-22(e)(13),\31\ which requires OCC as a
covered clearing agency to establish, implement, maintain, and enforce
written policies and procedures reasonably designed to ``ensure [it]
has the authority and operational capacity to take timely action to
contain losses and liquidity demands and continue to meet its
obligations by, at a minimum, requiring [its] participants and, when
practicable, other stakeholders to participate in the testing and
review of its default procedures, including any close-out procedures,
at least annually and following material changes thereto.'' The
Proposed X-M Agreement specifically requires OCC and CME to conduct
joint default management drills with respect to the X-M Account at
least annually. It also includes new language providing that each of
OCC and CME will enter into any agreements reasonably necessary to
ensure that the other can obtain liquidity during a default scenario
and that they will be jointly and equally responsible for providing
liquidity to ensure all obligations of non-defaulting Clearing Members
with respect to the X-M Accounts on a timely basis. These changes are
specifically designed to ensure OCC and CME retain operational capacity
with respect to the X-M Program during a Clearing Member default, and
OCC accordingly believes they are consistent with Rule 17Ad-22(e)(13).
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\31\ 17 CFR 240.17Ad-22(e)(13).
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OCC also believes that the proposed change would promote compliance
with Rule 17Ad-22(e)(17),\32\ which requires OCC as a covered clearing
agency to establish, implement, maintain, and enforce written policies
and procedures reasonably designed to ``manage the covered clearing
agency's operational risks by,'' among other things, ``identifying the
plausible sources of operational risk . . . and mitigating their impact
through the use of appropriate systems, policies, procedures, and
controls [and] ensuring that systems have a high degree of security,
resiliency, operational reliability, and adequate, scalable capacity.''
As described above, certain aspects of the Existing X-M Agreement do
not reflect current operational realities with respect to the X-M
Program, which potentially could be a source of operational risk to
OCC. OCC believes that the Proposed X-M Agreement would reduce this
potential source of operational risk by removing and updating
provisions and requirements that are out of date, like those related to
determining the margin requirements for an X-M Account or various
required methods of communication and notification. Accordingly, OCC
believes that the proposed change is consistent with Rule 17Ad-
22(e)(17). In these ways, OCC believes the proposed changes are
consistent with Section 17A(b)(3)(F) of the Act \33\ and Rules 17Ad-
22(e)(1), (13), (17), and (20).\34\
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\32\ 17 CFR 240.17Ad-22(e)(17).
\33\ 15 U.S.C. 78q-1(b)(3)(F).
\34\ 17 CFR 240.17Ad-22(e)(1), (13), (17), and (20).
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[[Page 63312]]
(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \35\ requires that the rules of a
clearing agency not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act. OCC does not
believe that the proposal would impose any burden on competition.\36\
The primary purpose of the proposed rule change is to update and
clarify the existing X-M Agreement to reflect current practices and
also streamline Clearing Member agreements. The proposed rule change
would not affect any individual Clearing Member's current rights or
ability to access OCC services or disadvantage or favor any particular
user in relationship to another. As such, OCC believes that the
proposed changes would not have any impact or impose any burden on
competition.
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\35\ 15 U.S.C. 78q-1(b)(3)(I).
\36\ Id.
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments were not and are not intended to be solicited with
respect to the proposed change and none have been received. OCC will
notify the Commission of any written comments received by OCC.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self- regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-OCC-2020-011 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2020-011. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of OCC and on OCC's website at
https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules#rule-filings.
All comments received will be posted without change. Persons
submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly.
All submissions should refer to File Number SR-OCC-2020-011 and
should be submitted on or before October 28, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\37\
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\37\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-22096 Filed 10-6-20; 8:45 am]
BILLING CODE 8011-01-P
