Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change To Adopt a New Second Amended and Restated Cross-Margining Agreement Between The Options Clearing Corporation and The Chicago Mercantile Exchange, 75384-75388 [2020-26012]
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75384
Federal Register / Vol. 85, No. 228 / Wednesday, November 25, 2020 / Notices
FOR FURTHER INFORMATION CONTACT:
Sean Robinson, 202–268–8405.
SUPPLEMENTARY INFORMATION: The
United States Postal Service® hereby
gives notice that, pursuant to 39 U.S.C.
3642 and 3632(b)(3), on November 13,
2020, it filed with the Postal Regulatory
Commission a USPS Request to Add
First-Class Package Service Contract 114
to Competitive Product List. Documents
are available at www.prc.gov, Docket
Nos. MC2021–27, CP2021–27.
Sean Robinson,
Attorney, Corporate and Postal Business Law.
[FR Doc. 2020–26131 Filed 11–24–20; 8:45 am]
BILLING CODE 7710–12–P
Agreements in the Mail Classification
Schedule’s Competitive Products List.
SECURITIES AND EXCHANGE
COMMISSION
DATES:
Date of required notice:
November 25, 2020.
[Release No. 34–90464; File No. SR–OCC–
2020–011]
FOR FURTHER INFORMATION CONTACT:
Self-Regulatory Organizations; The
Options Clearing Corporation; Order
Approving Proposed Rule Change To
Adopt a New Second Amended and
Restated Cross-Margining Agreement
Between The Options Clearing
Corporation and The Chicago
Mercantile Exchange
Sean Robinson, 202–268–8405.
The
United States Postal Service® hereby
gives notice that, pursuant to 39 U.S.C.
3642 and 3632(b)(3), on November 12,
2020, it filed with the Postal Regulatory
Commission a USPS Request to Add
Priority Mail Contract 680 to
Competitive Product List. Documents
are available at www.prc.gov, Docket
Nos. MC2021–26, CP2021–26.
SUPPLEMENTARY INFORMATION:
Sean Robinson,
Attorney, Corporate and Postal Business Law.
POSTAL SERVICE
Product Change—Priority Mail and
First-Class Package Service
Negotiated Service Agreement
[FR Doc. 2020–26130 Filed 11–24–20; 8:45 am]
BILLING CODE 7710–12–P
Postal ServiceTM.
Notice.
AGENCY:
ACTION:
RAILROAD RETIREMENT BOARD
The Postal Service gives
notice of filing a request with the Postal
Regulatory Commission to add a
domestic shipping services contract to
the list of Negotiated Service
Agreements in the Mail Classification
Schedule’s Competitive Products List.
DATES: Date of required notice:
November 25, 2020.
FOR FURTHER INFORMATION CONTACT:
Sean Robinson, 202–268–8405.
SUPPLEMENTARY INFORMATION: The
United States Postal Service® hereby
gives notice that, pursuant to 39 U.S.C.
3642 and 3632(b)(3), on November 20,
2020, it filed with the Postal Regulatory
Commission a USPS Request to Add
Priority Mail & First-Class Package
Service Contract 178 to Competitive
Product List. Documents are available at
www.prc.gov, Docket Nos. MC2021–28,
CP2021–29.
SUMMARY:
Sean Robinson,
Attorney, Corporate and Postal Business Law.
[FR Doc. 2020–26132 Filed 11–24–20; 8:45 am]
BILLING CODE 7710–12–P
POSTAL SERVICE
Product Change—Priority Mail
Negotiated Service Agreement
Postal ServiceTM.
Notice.
jbell on DSKJLSW7X2PROD with NOTICES
[FR Doc. 2020–26116 Filed 11–24–20; 8:45 am]
The Postal Service gives
notice of filing a request with the Postal
Regulatory Commission to add a
domestic shipping services contract to
the list of Negotiated Service
SUMMARY:
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16:27 Nov 24, 2020
Notice is hereby given in accordance
with Public Law 92–463 that the
Actuarial Advisory Committee will hold
a virtual meeting on December 11, 2020,
at 10:00 a.m. (Central Standard Time) on
the conduct of the 28th Actuarial
Valuation of the Railroad Retirement
System. The agenda for this meeting
will include a discussion of the
assumptions to be used in the 28th
Actuarial Valuation. A report containing
recommended assumptions and the
experience on which the
recommendations are based will have
been sent by the Acting Chief Actuary
to the Committee before the meeting.
The meeting will be open to the
public. Persons wishing to submit
written statements, make oral
presentations, or attend the meeting
should address their communications or
notices to Patricia Pruitt,
(Patricia.Pruitt@rrb.gov), so that
information on how to join the virtual
meeting can be provided.
Dated: November 20, 2020.
Stephanie Hillyard,
Secretary to the Board.
AGENCY:
ACTION:
Actuarial Advisory Committee With
respect to the Railroad Retirement
Account; Notice of Public Meeting
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November 19, 2020.
I. Introduction
On September 22, 2020, the Options
Clearing Corporation (‘‘OCC’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change SR–OCC–2020–
011 (‘‘Proposed Rule Change’’) pursuant
to Section 19(b) of the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 1 and Rule 19b–4 2 thereunder to
provide OCC with express authority to
adopt a new Second Amended and
Restated Cross-Margining Agreement
(‘‘Proposed X–M Agreement’’) between
OCC and the Chicago Mercantile
Exchange (‘‘CME’’).3 The Proposed Rule
Change was published for public
comment in the Federal Register on
October 7, 2020.4 The Commission has
received no comments regarding the
Proposed Rule Change. This order
approves the Proposed Rule Change.
II. Background
OCC and CME are 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 crossmargining 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
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Notice of Filing infra note 4, 85 FR at 63305.
4 Securities Exchange Act Release No. 90065 (Oct.
1, 2020), 85 FR 63305 (Oct. 7, 2020) (File No. SR–
OCC–2020–011) (‘‘Notice of Filing’’).
5 Securities Exchange Act Release No. 58258 (Jul.
30, 2008), 73 FR 46133 (Aug. 7, 2008) (File No. 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 (Jun.
8, 2009), 74 FR 28738 (Jun. 17, 2009) (File No. SR–
OCC–2009–10) (amending the agreement to redefine
the term ‘‘Eligible Contracts’’ and deleting the list
of such contracts attached as Schedule A).
2 17
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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
According to OCC, the Proposed X–M
Agreement is designed to 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
(‘‘SLA’’).8 OCC has also characterized
the proposed updates to the Existing X–
M Agreement as bringing it into
conformity with current operational
procedures and eliminating provisions
that are out of date.9 Finally, according
to OCC, the Proposed Rule Change is
designed to streamline and consolidate
certain related Clearing Member
Agreements.10
Creation of a Separate Service Level
Agreement
OCC proposes moving certain
operational details from the Existing X–
M Agreement to the new SLA,
including: (1) Section 6 of the Existing
X–M Agreement, which covers
acceptable forms of collateral; (2)
Section 7 of the Existing X–M
Agreement, which covers the timing,
methods, and forms of daily settlement
in the Cross-Margining accounts; and (3)
Section 15 of Existing X–M Agreement,
which covers OCC and CME’s
information-sharing regarding Joint and
Affiliated Clearing Members, banks, and
their financial status.
The other changes to the Existing X–
M Agreement that OCC proposes may be
considered in two broad categories. The
first category is modifications to
conform the terms of the agreement to
existing practices. The second category
is modifications to the X–M Program
(i.e., changes to both the Existing X–M
Agreement and related processes)
designed to improve existing practices.
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Changes Conforming to Existing
Practices
The first category, modifications to
conform the terms of the agreement to
existing practices, includes various new
or updated definitions: (1) The newlydefined terms ‘‘FSOC,’’ ‘‘Dodd Frank
Act,’’ ‘‘DCO,’’ ‘‘Exchange Act,’’ and
7 Securities Exchange Act Release Nos. 26607
(Mar. 7, 1989), 48 FR 10608 (Mar. 14, 1989) (File
No. SR–OCC–89–1); 27296 (Sep. 26, 1989) (File No.
SR–OCC–89–11).
8 See Notice of Filing, 85 FR at 63306.
9 Id.
10 Id.
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‘‘SEC’’ to reflect OCC and CME’s
registration statuses and designations as
systemically important by the Financial
Stability Oversight Counsel; 11 (2)
‘‘Eligible Contracts,’’ to conform with
the substance of the definition that was
adopted in 2009 as part of Amendment
No. 2 to the Existing X–M Agreement,
by including 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; (3) ‘‘Accepted
Transaction,’’ to provide certainty and
clarity regarding the specific
transactions for which OCC and CME
would be jointly responsible, and would
include all positions that are Eligible
Contracts and have been included on
the ‘‘daily margin detail report’’
generated by OCC and transmitted to
CME; (4) added and updated terms to
describe the accounts related to the X–
M Program and their purpose more
accurately, including ‘‘Proprietary Joint
Margin Cash Account’’ (in place of
‘‘Proprietary Joint Margin Account’’),
‘‘Segregated Joint Margin Cash
Account’’ (in place of ‘‘Segregated Joint
Margin Account’’), ‘‘Proprietary Joint
Margin Custody Account’’ (in place of
‘‘Proprietary Joint Custody Account’’),
‘‘Segregated Joint Margin Custody
Account’’ (in place of ‘‘Segregated Joint
Custody Account’’), ‘‘Proprietary Bank
Account,’’ ‘‘Segregated Funds Bank
Account,’’ and ‘‘Liquidating Accounts;’’
(5) updated terminology to more
accurately characterize the margin
requirement set by OCC’s System for
Theoretical Analysis and Numerical
Simulations (‘‘STANS’’), such as
‘‘Posted Collateral’’ (in place of
‘‘Margin’’ and ‘‘Initial Margin’’) and the
terms ‘‘Collateral Requirement,’’
‘‘Collateral Deficit,’’ and ‘‘Collateral
Excess’’ to replace references to margin
requirements and deficits or surpluses
in respect to such requirements; and (6)
defined terms that are already used and
defined elsewhere in the Existing X–M
Agreement but that are not currently
listed in Section 1, including 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 non-definitional changes or
additions reflecting already-existing
practices include the following: (1)
Removing references to X–M Pledge
Accounts and Section 3 of the Existing
11 See Financial Stability Oversight Council
(‘‘FSOC’’) 2012 Annual Report, Appendix A,
available at https://www.treasury.gov/initiatives/
fsoc/Documents/2012%20Annual%20Report.pdf.
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X–M Agreement, entitled
‘‘Establishment of X–M Pledge
Accounts,’’ as these accounts are no
longer in use; (2) revising Section 5 of
the Existing X–M Agreement to reflect
that the amount of collateral to be
deposited with regard to an X–M
Account would be determined using
OCC’s approved margin methodology,
because CME already elects to use the
margin requirements calculated by OCC;
(3) stating 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, to formalize the
existing practice of equally sharing
proceeds or losses from the investment
of X–M cash margin; (4) modifying
Section 7 and the relevant definitions in
Section 1 to reflect that the ‘‘Margin and
Settlement Report’’ would become the
‘‘Account Summary by Clearing
Corporation Report’’ provided by OCC
to Clearing Members, as only OCC has
provided the current Margin and
Settlement Report to Clearing Members
in practice; (5) revising Section 8 of the
X–M Agreement to clarify that each
clearinghouse will follow its own rules
for the default of a Clearing Member,
while using best efforts to coordinate
with the other clearinghouse regarding
liquidation or transfer of accepted
transactions; (6) clarifying the
requirement that one clearinghouse
must notify the other when subjected to
a court order to disclose confidential
information, only to the extent
permitted by law; (7) clarifying 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; (8) adding electronic mail
and removing facsimiles as acceptable
forms of communication for notice
requirements, in conformance with
current communication standards; and
(9) adding Section 17 to clarify that each
clearinghouse is responsible for
obtaining its own regulatory approval in
connection with the implementation of
the Proposed X–M Agreement.
Changes to the X–M Program
The second category, modifications to
the X–M Program (i.e., changes to both
the Existing X–M Agreement and related
processes), includes the following
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updated definitions: (1) ‘‘Losses,’’ which
is revised to include claims and other
potential loss events; (2) ‘‘Affiliate,’’
which is revised to no longer state that
10% ownership of common stock would
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,
but rather that the clearinghouses would
make a facts-and-circumstances
determination; and (3) ‘‘Business Day,’’
which is revised to state 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.
The non-definitional modifications to
the cross-margining arrangement
include the following: (1) In Section 5
of the Proposed X–M Agreement, adding
a requirement for 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; (2) in Section 5,
requiring OCC and CME to each
determine net amount of premiums,
exercise settlement amounts, and
variation margin due for its respective
products (newly defined as ‘‘Net Pay/
Collect’’) because the determination is
made based upon the products cleared
by OCC and CME, and to notify each
other of the Net Pay/Collect amount in
accordance with the SLA; (3) to the
extent the two clearinghouses impose
different concentration limits for
eligible margin, requiring the use of the
more conservative limits; (4) amending
Section 7 to permit 30 minutes, rather
than 15 minutes, for OCC and CME to
approve or disapprove of revised
Settlement Instructions to all for a full
review of such instructions, to provide
additional time during the process of
performing a full review of such
instructions; (5) amending Section 7 to
provide for the communication of intraday instructions to X–M clearing banks
to facilitate the deposit of collateral in
response to an intra-day margin call
from CME or OCC, and amending
Section 1 to include the term ‘‘Intra-day
Instruction;’’ (6) amending Section 8 to
include new language regarding the
manner in which OCC and CME would
prepare for and manage a Clearing
Member default, including the
establishment of liquidation plan for the
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transfer or liquidation of the Clearing
Member’s Accepted Transactions, the
execution of liquidity agreements to
ensure that the clearinghouses can
obtain liquidity during a default
scenario and will be jointly and equally
responsible for providing liquidity, the
potential use of a joint liquidating
auction with respect to X–M Accounts
during a Clearing Member default
scenario, and joint default management
testing for the X–M accounts at least
annually; (7) amending Section 13 to
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; 12 and (8) streamlining
and consolidating six current Clearing
Member template agreements into three
templates, so that 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).
III. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Exchange
Act directs the Commission to approve
a proposed rule change of a selfregulatory organization if it finds that
such proposed rule change is consistent
with the requirements of the Exchange
Act and the rules and regulations
thereunder applicable to such
organization.13 After carefully
considering the Proposed Rule Change,
the Commission finds that the proposal
is consistent with the requirements of
the Exchange Act and the rules and
regulations thereunder applicable to
OCC. More specifically, the Commission
finds that the proposal is consistent
with Section 17A(b)(3)(F) of the
Exchange Act 14 and Rules 17Ad–
22(e)(20) and (13) thereunder.15
A. Consistency With Section
17A(b)(3)(F) of the Exchange Act
Section 17A(b)(3)(F) of the Exchange
Act requires, among other things, that
the rules of a clearing agency be
designed to remove impediments to and
help perfect the mechanism of a
national system for the prompt and
accurate clearance and settlement of
securities transactions; and to foster
cooperation and coordination with
persons engaged in the clearance and
settlement of securities transactions.16
Based on its review of the record, and
12 See
Notice of Filing, 85 FR at 63310.
U.S.C. 78s(b)(2)(C).
14 15 U.S.C. 78q–1(b)(3)(F).
15 17 CFR 240.17Ad–22(e)(20) and 17 CFR
240.17Ad–22(e)(13).
16 15 U.S.C. 78q–1(b)(3)(F).
13 15
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for the reasons described below, the
Commission believes that the rule
proposal as described above is
consistent with the requirements of
Section 17A(b)(3)(F).
The Commission continues to view
cross-margining programs as consistent
with clearing agency responsibilities
under Section 17A of the Exchange Act.
Cross-margining programs enhance
clearing member liquidity and systemic
liquidity both in times of normal trading
and in times of market stress by
reducing margin requirements for
clearing members, which could prove
crucial in maintaining Clearing Member
liquidity during periods of market
volatility, and enhancing market
liquidity as a whole. By enhancing
market liquidity, cross-margining
arrangements remove impediments to
and help perfect the mechanism of a
national system for the prompt and
accurate clearance and settlement of
securities transactions.17
The Commission believes that the
proposed updates to the Existing X–M
Agreement to conform to current
practices provide additional clarity and
certainty around the X–M Program to
the relevant clearance and settlement
topics, including the determination of
the collateral requirement for the X–M
Program, daily settlement, and
suspension and liquidation. For
example, replacing ‘‘Margin’’ or ‘‘Initial
Margin’’ with ‘‘Posted Collateral’’
clarifies that STANS is the methodology
used to determine the collateral
requirement for the X–M Program and
does not produce a separate initial
margin requirement. This conforming
change ensures that both clearinghouses
are like-minded regarding the
characterization of the margin
requirement. Similarly, by updating the
agreement to reflect that the amount of
collateral to be deposited with regard to
an X–M Account would be determined
using OCC’s margin methodology, the
change confirms the already-existing
practice of CME using OCC’s margin
calculation. Moreover, the proposed
streamlining and consolidation of the
Clearing Member Agreements would
provide Joint Clearing Members and
Affiliated Clearing Members with
additional clarity with respect to the X–
M Program. Reducing the number of
available templates from six to three by
having both Joint Clearing Members and
Affiliated Clearing Members use the
same three templates eliminates
redundancy and makes the preparation
17 Securities Exchange Act Release No. 38584
(May 8, 1997), 62 FR 26602, 26604–05 (May 14,
1997) (File No. SR–OCC–97–04) (establishing a
cross-margining agreement with OCC, CME, and the
Commodity Clearing Corporation).
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of Clearing Member Agreements more
efficient. In this manner, the proposed
changes to conform the terms of the
Existing X–M Agreement to alreadyexisting practices and to consolidate the
Clearing Member Agreements would be
consistent with the removal of
impediments to and help perfect the
mechanism of a national system for the
prompt and accurate clearance and
settlement of securities transactions.
The Commission believes that the
Proposed Rule Change is also consistent
with the fostering of cooperation and
coordination with persons engaged in
the clearance and settlement of
securities transactions. Based on a
review of the documents provided by
OCC, the Commission believes that the
SLA presents operational details, such
as those related to daily settlement
procedures, more clearly than the
Existing X–M Agreement. By moving
Sections 6, 7, and 15 of the Existing X–
M Agreement to a separate and newlycreated SLA, OCC will be able to modify
specific terms regarding forms of
collateral, daily settlement, and
information-sharing provisions without
having to modify the language of the
Proposed X–M Agreement. The
Commission believes that clarifying
operational details and reducing the
cost of updating such details would
foster cooperation and coordination
between OCC and CME.
Similarly, the proposed changes to the
X–M Program reflected in the Proposed
X–M Agreement would modify certain
program details that would augment the
existing cooperation and coordination
between OCC and CME. For example,
OCC has proposed to amend Section 7
to facilitate the deposit of collateral in
response to an intra-day margin call
from CME or OCC by providing for the
communication of intra-day instructions
to X–M clearing banks with respect to
the X–M Account. The non-definitional
modifications that are new to the X–M
Program would also serve to enhance
the already existing cooperation
between the two clearinghouses. For
example, the proposed addition of the
30-calendar day notice period for
changes to OCC’s margin methodology
would provide CME with additional
time to understand and address the
implications of the methodology
changes. The Commission believes,
therefore, that the proposed changes to
the X–M Program reflected in the
Proposed X–M Agreement would be
consistent with the fostering of
cooperation and coordination between
OCC and CME in the settlement of
securities transactions.
For the above reasons, the
Commission believes that the Proposed
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Rule Change is designed to promote the
prompt and accurate clearance and
settlement of securities transactions
and, to the extent applicable, derivative
agreements, contracts and transactions;
and to foster cooperation and
coordination with persons engaged in
the clearance and settlement of
securities transactions. The Commission
believes, therefore, that the Proposed
Rule Change is consistent with the
requirements of Section 17A(b)(3)(F) of
the Exchange Act.18
B. Consistency With Rule 17Ad–
22(e)(20) Under the Exchange Act
Rule 17Ad–22(e)(20) under the
Exchange Act 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 the covered clearing
agency establishes with one or more
other clearing agencies, financial market
utilities, or trading markets.19
One of the primary objectives of the
Proposed Rule Change is to update the
Existing X–M Agreement to bring it into
conformity with current operational
procedures and eliminate provisions
that are out of date. Updating the terms
of the X–M Program to reflect existing
operational procedures ensures that the
two clearinghouses may incorporate the
latest considerations and any resulting
updated practices for identifying,
monitoring, and managing risks
associated with the link between OCC
and CME. Moreover, the Proposed Rule
Change also includes changes to the
Existing X–M Agreement to reflect
changes in the X–M Program. Regardless
of whether the additions or changes in
the Proposed X–M Agreement conform
to already-existing practices or if they
are new to the X–M Program, the terms
of the Proposed X–M Agreement are, as
discussed above, clearer than those in
the Existing X–M Agreement. This
greater clarity serves to reduce risk
related to the link between the two
clearinghouses; specifically, the
increased clarity reduces potential
operational risks by promoting a
common understanding between the
two clearinghouses of the terms
governing the X–M Program.
Further, the transfer of certain
sections of the Existing X–M Agreement
to a separate SLA would streamline the
Proposed X–M Agreement and more
18 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(20). For the purposes
of Rule 17Ad–22(e)(20), the Commission defines a
link, in part, as a set of contractual and operational
arrangements between two clearing agencies that
connect them for the purpose of cross-margining. 17
CFR 240.17Ad–22(a)(8).
19 17
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75387
clearly present operational details, such
as those related to daily settlement
procedures. The clearinghouses would
also have the ability to review the
service level details separately and
modify them without requiring changes
to the full agreement. Simplifying the
presentation and maintenance of such
operational details would serve to
reduce risks associated with the link
between OCC and CME.
The Commission believes, therefore,
that the Proposed Rule Change is
consistent with the requirements of Rule
17Ad–22(e)(20) under the Exchange Act.
C. Consistency With Rule 17Ad–
22(e)(13) Under the Exchange Act
Rule 17Ad–22(e)(13) under the
Exchange Act requires that a covered
clearing agency establish, implement,
maintain, and enforce written policies
and procedures reasonably designed to
ensure the covered clearing agency has
the authority and operational capacity
to take timely action to contain losses
and liquidity demands and continue to
meet its obligations by, at a minimum,
requiring the covered clearing agency’s
participants to participate in the testing
and review of its default procedures at
least annually.20 In recognizing that
there may be a number of ways to
address compliance with Rule 17Ad–
22(e)(13), the Commission has stated
that a covered clearing agency generally
should consider, when establishing and
maintaining policies and procedures
that address participant-default rules
and procedures: (1) Whether it involves
its participants and other stakeholders
in the testing and review of its default
procedures; and (2) whether such
testing and review is conducted at least
annually or following material changes
to the rules and procedures to ensure
that the testing and review are practical
and effective.21
The Proposed X–M Agreement would
require OCC and CME to conduct joint
default management drills for the crossmargin accounts at least annually. The
Commission believes that the adoption
of rules requiring such joint default
management tests on an at-least-annual
basis is consistent with the involvement
of stakeholders in default management
testing as well as ensuring that such
tests are conducted at least annually.
The Commission believes, therefore,
that the Proposed Rule Change is
consistent with the requirements of Rule
17Ad–22(e)(13) under the Exchange Act.
20 17
CFR 240.17Ad–22(e)(13).
Securities Exchange Act Release 78961, 81
FR 70786, 70830 (Oct. 13, 2016) (File No. S7–03–
14).
21 See
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75388
Federal Register / Vol. 85, No. 228 / Wednesday, November 25, 2020 / Notices
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the Proposed
Rule Change is consistent with the
requirements of the Exchange Act, and
in particular, the requirements of
Section 17A of the Exchange Act 22 and
the rules and regulations thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,23
that the Proposed Rule Change (SR–
OCC–2020–011) be, and hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.24
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–26012 Filed 11–24–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90458; File No. SR–NYSE–
2020–97]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Shorten the
Time Period Before a Letter of
Acceptance, Waiver, and Consent
Under Rule 9216 and an Uncontested
Offer of Settlement Under Rule 9270(f)
November 19, 2020.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934
(‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that on November
16, 2020, New York Stock Exchange
LLC (‘‘NYSE’’ or the ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to shorten the
time period before a letter of acceptance,
waiver, and consent under Rule 9216
jbell on DSKJLSW7X2PROD with NOTICES
22 In
approving this Proposed Rule Change, the
Commission has considered the proposed rules’
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
23 15 U.S.C. 78s(b)(2).
24 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
VerDate Sep<11>2014
16:27 Nov 24, 2020
Jkt 253001
and an uncontested offer of settlement
under Rule 9270(f) becomes final and
the corresponding time period to
request review of these settlements
under Rule 9310 from 25 days to 10
days. The proposed rule change is
available on the Exchange’s website at
www.nyse.com, at the principal office of
the Exchange, and at the Commission’s
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization 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 those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
a Hearing Panel or Extended Hearing
Panel. In 2015, the Exchange amended
Rules 9216, 9270 and 9310 to permit a
Director and any member of the
Committee for Review (‘‘CFR’’) to
require a review by the Board of any
AWC letter under Rule 9216 and any
offer of settlement under Rule 9270
within 25 days after the AWC letter or
offer of settlement was sent to each
Director and each member of the CFR.7
1. Purpose
The Exchange proposes to shorten the
time period before a letter of acceptance,
waiver, and consent (‘‘AWC’’) under
Rule 9216 and an uncontested offer of
settlement under Rule 9270(f) becomes
final and the corresponding time period
to request review of these settlements
under Rule 9310 from 25 days to 10
days.
In 2013, the NYSE adopted
disciplinary rules that are, with certain
exceptions, substantially the same as the
FINRA Rule 8000 Series and Rule 9000
Series, and which set forth rules for
conducting investigations and
enforcement actions.4 The NYSE
disciplinary rules were implemented on
July 1, 2013.5
In adopting disciplinary rules
modeled on FINRA’s rules, the NYSE
established processes for settling
disciplinary matters both before and
after issuance of a complaint.6 At the
time, the Exchange retained a 25 day
call for review process only for
determinations or penalties imposed by
Proposed Rule Change
Rule 9216 (Acceptance, Waiver, and
Consent; Procedure for Imposition of
Fines for Minor Violation(s) of Rules)
establishes AWC procedures by which a
member organization or covered person,
prior to the issuance of a complaint,
may execute a letter accepting a finding
of violation, consenting to the
imposition of sanctions, and agreeing to
waive such member organization’s or
covered person’s right to a hearing,
appeal and certain other procedures.
The rule also establishes procedures for
executing a minor rule violation plan
letter.
Under Rule 9216(a)(4), an AWC
accepted by the Chief Regulatory Officer
(‘‘CRO’’) must be sent to each Director
and each member of the CFR and would
be deemed final and constitute the
complaint, answer, and decision in the
matter 25 days after being sent to each
Director and each member of the CFR,
unless review by the Exchange Board of
Directors is requested pursuant to Rule
9310(a)(1)(B).8
The Exchange proposes that an AWC
accepted by the CRO would be deemed
final and constitute the complaint,
answer, and decision in a matter 10
days after being sent to each Director
and each member of the CFR, unless
review is requested pursuant to Rule
9310(a)(1)(B)(i). As described below, the
time period to request review under
Rule 9310(a)(1)(B)(i) would also be
shortened to 10 days.
Rule 9270 (Settlement Procedure)
provides a settlement procedure for a
Respondent who has been notified of
the initiation of a proceeding.
Specifically, Rule 9270(f) provides that
uncontested settlement offers accepted
by the CRO, the Hearing Panel or, if
applicable, Extended Hearing Panel
must be issued and sent to each Director
and each member of the CFR and
4 See Securities Exchange Act Release Nos. 68678
(January 16, 2013), 78 FR 5213 (January 24, 2013)
(SR–NYSE–2013–02) (‘‘2013 Notice’’), 69045
(March 5, 2013), 78 FR 15394 (March 11, 2013) (SR–
NYSE–2013–02) (‘‘2013 Approval Order’’), and
69963 (July 10, 2013), 78 FR 42573 (July 16, 2013)
(SR–NYSE–2013–49).
5 See NYSE Information Memorandum 13–8 (May
24, 2013).
6 See 2013 Approval Order, 78 FR at 15396–98.
7 See Securities Exchange Act Release Nos. 76436
(November 13, 2015), 80 FR 72460, 72462–63
(November 19, 2015) (SR–NYSE–2015–35).
8 Requests for review of an AWC accepted by the
CRO are governed by Rule 9310(a)(1)(B)(i). For the
sake of clarity and transparency, the Exchange
proposes the non-substantive change of including
the omitted reference to subsection (B)(i) of Rule
9310(a)(1) in both in the current and proposed text
of Rule 9216(a)(4).
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
PO 00000
Frm 00106
Fmt 4703
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]]>Agencies
[Federal Register Volume 85, Number 228 (Wednesday, November 25, 2020)]
[Notices]
[Pages 75384-75388]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26012]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90464; File No. SR-OCC-2020-011]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving Proposed Rule Change To Adopt a New Second Amended and
Restated Cross-Margining Agreement Between The Options Clearing
Corporation and The Chicago Mercantile Exchange
November 19, 2020.
I. Introduction
On September 22, 2020, the Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2020-011 (``Proposed Rule Change'')
pursuant to Section 19(b) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to provide OCC
with express authority to adopt a new Second Amended and Restated
Cross-Margining Agreement (``Proposed X-M Agreement'') between OCC and
the Chicago Mercantile Exchange (``CME'').\3\ The Proposed Rule Change
was published for public comment in the Federal Register on October 7,
2020.\4\ The Commission has received no comments regarding the Proposed
Rule Change. This order approves the Proposed Rule Change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Notice of Filing infra note 4, 85 FR at 63305.
\4\ Securities Exchange Act Release No. 90065 (Oct. 1, 2020), 85
FR 63305 (Oct. 7, 2020) (File No. SR-OCC-2020-011) (``Notice of
Filing'').
---------------------------------------------------------------------------
II. Background
OCC and CME are 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
[[Page 75385]]
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\
---------------------------------------------------------------------------
\5\ Securities Exchange Act Release No. 58258 (Jul. 30, 2008),
73 FR 46133 (Aug. 7, 2008) (File No. 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 (Jun. 8, 2009), 74
FR 28738 (Jun. 17, 2009) (File No. 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 (Mar. 7, 1989),
48 FR 10608 (Mar. 14, 1989) (File No. SR-OCC-89-1); 27296 (Sep. 26,
1989) (File No. SR-OCC-89-11).
---------------------------------------------------------------------------
According to OCC, the Proposed X-M Agreement is designed to 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 (``SLA'').\8\ OCC has
also characterized the proposed updates to the Existing X-M Agreement
as bringing it into conformity with current operational procedures and
eliminating provisions that are out of date.\9\ Finally, according to
OCC, the Proposed Rule Change is designed to streamline and consolidate
certain related Clearing Member Agreements.\10\
---------------------------------------------------------------------------
\8\ See Notice of Filing, 85 FR at 63306.
\9\ Id.
\10\ Id.
---------------------------------------------------------------------------
Creation of a Separate Service Level Agreement
OCC proposes moving certain operational details from the Existing
X-M Agreement to the new SLA, including: (1) Section 6 of the Existing
X-M Agreement, which covers acceptable forms of collateral; (2) Section
7 of the Existing X-M Agreement, which covers the timing, methods, and
forms of daily settlement in the Cross-Margining accounts; and (3)
Section 15 of Existing X-M Agreement, which covers OCC and CME's
information-sharing regarding Joint and Affiliated Clearing Members,
banks, and their financial status.
The other changes to the Existing X-M Agreement that OCC proposes
may be considered in two broad categories. The first category is
modifications to conform the terms of the agreement to existing
practices. The second category is modifications to the X-M Program
(i.e., changes to both the Existing X-M Agreement and related
processes) designed to improve existing practices.
Changes Conforming to Existing Practices
The first category, modifications to conform the terms of the
agreement to existing practices, includes various new or updated
definitions: (1) The newly-defined terms ``FSOC,'' ``Dodd Frank Act,''
``DCO,'' ``Exchange Act,'' and ``SEC'' to reflect OCC and CME's
registration statuses and designations as systemically important by the
Financial Stability Oversight Counsel; \11\ (2) ``Eligible Contracts,''
to conform with the substance of the definition that was adopted in
2009 as part of Amendment No. 2 to the Existing X-M Agreement, by
including 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; (3) ``Accepted Transaction,'' to
provide certainty and clarity regarding the specific transactions for
which OCC and CME would be jointly responsible, and would include all
positions that are Eligible Contracts and have been included on the
``daily margin detail report'' generated by OCC and transmitted to CME;
(4) added and updated terms to describe the accounts related to the X-M
Program and their purpose more accurately, including ``Proprietary
Joint Margin Cash Account'' (in place of ``Proprietary Joint Margin
Account''), ``Segregated Joint Margin Cash Account'' (in place of
``Segregated Joint Margin Account''), ``Proprietary Joint Margin
Custody Account'' (in place of ``Proprietary Joint Custody Account''),
``Segregated Joint Margin Custody Account'' (in place of ``Segregated
Joint Custody Account''), ``Proprietary Bank Account,'' ``Segregated
Funds Bank Account,'' and ``Liquidating Accounts;'' (5) updated
terminology to more accurately characterize the margin requirement set
by OCC's System for Theoretical Analysis and Numerical Simulations
(``STANS''), such as ``Posted Collateral'' (in place of ``Margin'' and
``Initial Margin'') and the terms ``Collateral Requirement,''
``Collateral Deficit,'' and ``Collateral Excess'' to replace references
to margin requirements and deficits or surpluses in respect to such
requirements; and (6) defined terms that are already used and defined
elsewhere in the Existing X-M Agreement but that are not currently
listed in Section 1, including the defined terms ``AAA,'' ``Affiliated
Clearing Member,'' ``CME Clearing Member,'' ``CME Rules,''
``Confidential Information,'' ``Indemnitor,'' ``Indemnified Party,''
``Losses,'' ``OCC Clearing Member,'' and ``OCC Rules.''
---------------------------------------------------------------------------
\11\ See Financial Stability Oversight Council (``FSOC'') 2012
Annual Report, Appendix A, available at https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
---------------------------------------------------------------------------
The non-definitional changes or additions reflecting already-
existing practices include the following: (1) Removing references to X-
M Pledge Accounts and Section 3 of the Existing X-M Agreement, entitled
``Establishment of X-M Pledge Accounts,'' as these accounts are no
longer in use; (2) revising Section 5 of the Existing X-M Agreement to
reflect that the amount of collateral to be deposited with regard to an
X-M Account would be determined using OCC's approved margin
methodology, because CME already elects to use the margin requirements
calculated by OCC; (3) stating 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, to
formalize the existing practice of equally sharing proceeds or losses
from the investment of X-M cash margin; (4) modifying Section 7 and the
relevant definitions in Section 1 to reflect that the ``Margin and
Settlement Report'' would become the ``Account Summary by Clearing
Corporation Report'' provided by OCC to Clearing Members, as only OCC
has provided the current Margin and Settlement Report to Clearing
Members in practice; (5) revising Section 8 of the X-M Agreement to
clarify that each clearinghouse will follow its own rules for the
default of a Clearing Member, while using best efforts to coordinate
with the other clearinghouse regarding liquidation or transfer of
accepted transactions; (6) clarifying the requirement that one
clearinghouse must notify the other when subjected to a court order to
disclose confidential information, only to the extent permitted by law;
(7) clarifying 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; (8) adding electronic mail and removing facsimiles as
acceptable forms of communication for notice requirements, in
conformance with current communication standards; and (9) adding
Section 17 to clarify that each clearinghouse is responsible for
obtaining its own regulatory approval in connection with the
implementation of the Proposed X-M Agreement.
Changes to the X-M Program
The second category, modifications to the X-M Program (i.e.,
changes to both the Existing X-M Agreement and related processes),
includes the following
[[Page 75386]]
updated definitions: (1) ``Losses,'' which is revised to include claims
and other potential loss events; (2) ``Affiliate,'' which is revised to
no longer state that 10% ownership of common stock would 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, but
rather that the clearinghouses would make a facts-and-circumstances
determination; and (3) ``Business Day,'' which is revised to state 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.
The non-definitional modifications to the cross-margining
arrangement include the following: (1) In Section 5 of the Proposed X-M
Agreement, adding a requirement for 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; (2) in Section 5, requiring
OCC and CME to each determine net amount of premiums, exercise
settlement amounts, and variation margin due for its respective
products (newly defined as ``Net Pay/Collect'') because the
determination is made based upon the products cleared by OCC and CME,
and to notify each other of the Net Pay/Collect amount in accordance
with the SLA; (3) to the extent the two clearinghouses impose different
concentration limits for eligible margin, requiring the use of the more
conservative limits; (4) amending Section 7 to permit 30 minutes,
rather than 15 minutes, for OCC and CME to approve or disapprove of
revised Settlement Instructions to all for a full review of such
instructions, to provide additional time during the process of
performing a full review of such instructions; (5) amending Section 7
to provide for the communication of intra-day instructions to X-M
clearing banks to facilitate the deposit of collateral in response to
an intra-day margin call from CME or OCC, and amending Section 1 to
include the term ``Intra-day Instruction;'' (6) amending Section 8 to
include new language regarding the manner in which OCC and CME would
prepare for and manage a Clearing Member default, including the
establishment of liquidation plan for the transfer or liquidation of
the Clearing Member's Accepted Transactions, the execution of liquidity
agreements to ensure that the clearinghouses can obtain liquidity
during a default scenario and will be jointly and equally responsible
for providing liquidity, the potential use of a joint liquidating
auction with respect to X-M Accounts during a Clearing Member default
scenario, and joint default management testing for the X-M accounts at
least annually; (7) amending Section 13 to 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; \12\ and (8) streamlining and consolidating six current
Clearing Member template agreements into three templates, so that 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).
---------------------------------------------------------------------------
\12\ See Notice of Filing, 85 FR at 63310.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Exchange Act directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to such organization.\13\ After carefully
considering the Proposed Rule Change, the Commission finds that the
proposal is consistent with the requirements of the Exchange Act and
the rules and regulations thereunder applicable to OCC. More
specifically, the Commission finds that the proposal is consistent with
Section 17A(b)(3)(F) of the Exchange Act \14\ and Rules 17Ad-22(e)(20)
and (13) thereunder.\15\
---------------------------------------------------------------------------
\13\ 15 U.S.C. 78s(b)(2)(C).
\14\ 15 U.S.C. 78q-1(b)(3)(F).
\15\ 17 CFR 240.17Ad-22(e)(20) and 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F) of the Exchange Act
Section 17A(b)(3)(F) of the Exchange Act requires, among other
things, that the rules of a clearing agency be designed to remove
impediments to and help perfect the mechanism of a national system for
the prompt and accurate clearance and settlement of securities
transactions; and to foster cooperation and coordination with persons
engaged in the clearance and settlement of securities transactions.\16\
Based on its review of the record, and for the reasons described below,
the Commission believes that the rule proposal as described above is
consistent with the requirements of Section 17A(b)(3)(F).
---------------------------------------------------------------------------
\16\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The Commission continues to view cross-margining programs as
consistent with clearing agency responsibilities under Section 17A of
the Exchange Act. Cross-margining programs enhance clearing member
liquidity and systemic liquidity both in times of normal trading and in
times of market stress by reducing margin requirements for clearing
members, which could prove crucial in maintaining Clearing Member
liquidity during periods of market volatility, and enhancing market
liquidity as a whole. By enhancing market liquidity, cross-margining
arrangements remove impediments to and help perfect the mechanism of a
national system for the prompt and accurate clearance and settlement of
securities transactions.\17\
---------------------------------------------------------------------------
\17\ Securities Exchange Act Release No. 38584 (May 8, 1997), 62
FR 26602, 26604-05 (May 14, 1997) (File No. SR-OCC-97-04)
(establishing a cross-margining agreement with OCC, CME, and the
Commodity Clearing Corporation).
---------------------------------------------------------------------------
The Commission believes that the proposed updates to the Existing
X-M Agreement to conform to current practices provide additional
clarity and certainty around the X-M Program to the relevant clearance
and settlement topics, including the determination of the collateral
requirement for the X-M Program, daily settlement, and suspension and
liquidation. For example, replacing ``Margin'' or ``Initial Margin''
with ``Posted Collateral'' clarifies that STANS is the methodology used
to determine the collateral requirement for the X-M Program and does
not produce a separate initial margin requirement. This conforming
change ensures that both clearinghouses are like-minded regarding the
characterization of the margin requirement. Similarly, by updating the
agreement to reflect that the amount of collateral to be deposited with
regard to an X-M Account would be determined using OCC's margin
methodology, the change confirms the already-existing practice of CME
using OCC's margin calculation. Moreover, the proposed streamlining and
consolidation of the Clearing Member Agreements would provide Joint
Clearing Members and Affiliated Clearing Members with additional
clarity with respect to the X-M Program. Reducing the number of
available templates from six to three by having both Joint Clearing
Members and Affiliated Clearing Members use the same three templates
eliminates redundancy and makes the preparation
[[Page 75387]]
of Clearing Member Agreements more efficient. In this manner, the
proposed changes to conform the terms of the Existing X-M Agreement to
already-existing practices and to consolidate the Clearing Member
Agreements would be consistent with the removal of impediments to and
help perfect the mechanism of a national system for the prompt and
accurate clearance and settlement of securities transactions.
The Commission believes that the Proposed Rule Change is also
consistent with the fostering of cooperation and coordination with
persons engaged in the clearance and settlement of securities
transactions. Based on a review of the documents provided by OCC, the
Commission believes that the SLA presents operational details, such as
those related to daily settlement procedures, more clearly than the
Existing X-M Agreement. By moving Sections 6, 7, and 15 of the Existing
X-M Agreement to a separate and newly-created SLA, OCC will be able to
modify specific terms regarding forms of collateral, daily settlement,
and information-sharing provisions without having to modify the
language of the Proposed X-M Agreement. The Commission believes that
clarifying operational details and reducing the cost of updating such
details would foster cooperation and coordination between OCC and CME.
Similarly, the proposed changes to the X-M Program reflected in the
Proposed X-M Agreement would modify certain program details that would
augment the existing cooperation and coordination between OCC and CME.
For example, OCC has proposed to amend Section 7 to facilitate the
deposit of collateral in response to an intra-day margin call from CME
or OCC by providing for the communication of intra-day instructions to
X-M clearing banks with respect to the X-M Account. The non-
definitional modifications that are new to the X-M Program would also
serve to enhance the already existing cooperation between the two
clearinghouses. For example, the proposed addition of the 30-calendar
day notice period for changes to OCC's margin methodology would provide
CME with additional time to understand and address the implications of
the methodology changes. The Commission believes, therefore, that the
proposed changes to the X-M Program reflected in the Proposed X-M
Agreement would be consistent with the fostering of cooperation and
coordination between OCC and CME in the settlement of securities
transactions.
For the above reasons, the Commission believes that the Proposed
Rule Change is designed to promote the prompt and accurate clearance
and settlement of securities transactions and, to the extent
applicable, derivative agreements, contracts and transactions; and to
foster cooperation and coordination with persons engaged in the
clearance and settlement of securities transactions. The Commission
believes, therefore, that the Proposed Rule Change is consistent with
the requirements of Section 17A(b)(3)(F) of the Exchange Act.\18\
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(20) Under the Exchange Act
Rule 17Ad-22(e)(20) under the Exchange Act 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 the covered clearing agency
establishes with one or more other clearing agencies, financial market
utilities, or trading markets.\19\
---------------------------------------------------------------------------
\19\ 17 CFR 240.17Ad-22(e)(20). For the purposes of Rule 17Ad-
22(e)(20), the Commission defines a link, in part, as a set of
contractual and operational arrangements between two clearing
agencies that connect them for the purpose of cross-margining. 17
CFR 240.17Ad-22(a)(8).
---------------------------------------------------------------------------
One of the primary objectives of the Proposed Rule Change is to
update the Existing X-M Agreement to bring it into conformity with
current operational procedures and eliminate provisions that are out of
date. Updating the terms of the X-M Program to reflect existing
operational procedures ensures that the two clearinghouses may
incorporate the latest considerations and any resulting updated
practices for identifying, monitoring, and managing risks associated
with the link between OCC and CME. Moreover, the Proposed Rule Change
also includes changes to the Existing X-M Agreement to reflect changes
in the X-M Program. Regardless of whether the additions or changes in
the Proposed X-M Agreement conform to already-existing practices or if
they are new to the X-M Program, the terms of the Proposed X-M
Agreement are, as discussed above, clearer than those in the Existing
X-M Agreement. This greater clarity serves to reduce risk related to
the link between the two clearinghouses; specifically, the increased
clarity reduces potential operational risks by promoting a common
understanding between the two clearinghouses of the terms governing the
X-M Program.
Further, the transfer of certain sections of the Existing X-M
Agreement to a separate SLA would streamline the Proposed X-M Agreement
and more clearly present operational details, such as those related to
daily settlement procedures. The clearinghouses would also have the
ability to review the service level details separately and modify them
without requiring changes to the full agreement. Simplifying the
presentation and maintenance of such operational details would serve to
reduce risks associated with the link between OCC and CME.
The Commission believes, therefore, that the Proposed Rule Change
is consistent with the requirements of Rule 17Ad-22(e)(20) under the
Exchange Act.
C. Consistency With Rule 17Ad-22(e)(13) Under the Exchange Act
Rule 17Ad-22(e)(13) under the Exchange Act requires that a covered
clearing agency establish, implement, maintain, and enforce written
policies and procedures reasonably designed to ensure the covered
clearing agency has the authority and operational capacity to take
timely action to contain losses and liquidity demands and continue to
meet its obligations by, at a minimum, requiring the covered clearing
agency's participants to participate in the testing and review of its
default procedures at least annually.\20\ In recognizing that there may
be a number of ways to address compliance with Rule 17Ad-22(e)(13), the
Commission has stated that a covered clearing agency generally should
consider, when establishing and maintaining policies and procedures
that address participant-default rules and procedures: (1) Whether it
involves its participants and other stakeholders in the testing and
review of its default procedures; and (2) whether such testing and
review is conducted at least annually or following material changes to
the rules and procedures to ensure that the testing and review are
practical and effective.\21\
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\20\ 17 CFR 240.17Ad-22(e)(13).
\21\ See Securities Exchange Act Release 78961, 81 FR 70786,
70830 (Oct. 13, 2016) (File No. S7-03-14).
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The Proposed X-M Agreement would require OCC and CME to conduct
joint default management drills for the cross-margin accounts at least
annually. The Commission believes that the adoption of rules requiring
such joint default management tests on an at-least-annual basis is
consistent with the involvement of stakeholders in default management
testing as well as ensuring that such tests are conducted at least
annually.
The Commission believes, therefore, that the Proposed Rule Change
is consistent with the requirements of Rule 17Ad-22(e)(13) under the
Exchange Act.
[[Page 75388]]
IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the
Exchange Act, and in particular, the requirements of Section 17A of the
Exchange Act \22\ and the rules and regulations thereunder.
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\22\ In approving this Proposed Rule Change, the Commission has
considered the proposed rules' impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\23\ that the Proposed Rule Change (SR-OCC-2020-011) be,
and hereby is, approved.
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\23\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-26012 Filed 11-24-20; 8:45 am]
BILLING CODE 8011-01-P
