Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change To Adopt the OCC Third-Party Risk Management Framework and Retire the OCC Counterparty Credit Risk Management Framework, 86592-86595 [2020-28895]

Download as PDF 86592 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Notices Section 19(b)(2) of the Act 6 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 the proposed rule change is January 24, 2020. The Commission is extending the 45day time period for Commission action on the proposed rule change. The Commission finds that it is appropriate to designate a longer period within which to take action on the proposed rule change so that it has sufficient time to consider and take action on the proposed rule change. Accordingly, pursuant to Section 19(b)(2) of the Act 7 and for the reasons stated above, the Commission designates March 10, 2020 as the date by which the Commission shall either approve, disapprove, or institute proceedings to determine whether to disapprove the proposed rule change (File No. SR–FICC–2020–017). The Commission also seeks to extend the comment period to help further inform its analysis of the proposed rule change. The comment period for the proposed rule change ends on December 31, 2020.8 As of December 23, 2020, the Commission has received five comment letters to the proposed rule change.9 The Commission is extending the comment period for the proposed rule change to allow interested persons additional time to analyze the issues and prepare their comments. Accordingly, the Commission designates January 29, 2021 as the date comments should be submitted on or before. Specifically, the Commission invites interested persons to provide views, data, and arguments concerning the proposed rule change, including whether the proposed rule change is consistent with the Act and the FICC–2020–017), available at https://www.sec.gov/ comments/sr-ficc-2020-017/srficc2020017.htm. Because the proposal contained in the proposed rule change was also filed as an advance notice, supra note 3, the Commission is considering all public comments received on the proposal regardless of whether the comments were submitted to the advance notice or the proposed rule change. 6 15 U.S.C. 78s(b)(2). 7 Id. 8 Notice, 85 FR at 79548. 9 See supra note 5. VerDate Sep<11>2014 17:47 Dec 29, 2020 Jkt 253001 applicable rules or regulations thereunder. Please note that comments previously received on the substance of the proposed rule change will be considered together with comments submitted in response to this notice. Therefore, while commenters are free to submit additional comments at this time, they need not re-submit earlier comments. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– FICC–2020–017 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. All submissions should refer to File Number SR–FICC–2020–017. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of FICC and on DTCC’s website (https://dtcc.com/legal/sec-rulefilings.aspx). 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–FICC– PO 00000 Frm 00064 Fmt 4703 Sfmt 4703 2020–017 and should be submitted on or before January 21, 2021. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.10 Eduardo A. Aleman, Deputy Secretary. [FR Doc. 2020–28892 Filed 12–29–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–90797; File No. SR–OCC– 2020–014] Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change To Adopt the OCC Third-Party Risk Management Framework and Retire the OCC Counterparty Credit Risk Management Framework December 23, 2020. I. Introduction On November 4, 2020, the Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change SR–OCC–2020– 014 (‘‘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 adopt a proposed Third-Party Risk Management Framework (‘‘TPRMF’’) and retire OCC’s current Counterparty Credit Risk Management Policy (‘‘CCRMP’’).3 The Proposed Rule Change was published for public comment in the Federal Register on November 18, 2020.4 The Commission has received no comments regarding the Proposed Rule Change. This order approves the Proposed Rule Change. II. Background In 2017, OCC adopted the CCRMP, which outlines the key components of OCC’s framework for identifying, measuring, monitoring, and managing OCC’s exposures to its counterparties.5 OCC requested confidential treatment of the CCRMP when it was proposed.6 10 17 CFR 200.30–3(a)(31). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Notice of Filing infra note 4, 85 FR at 73582. 4 Securities Exchange Act Release No. 90406 (Nov. 12, 2020), 85 FR 73582 (Nov. 18, 2020) (File No. SR–OCC–2020–014) (‘‘Notice of Filing’’). 5 See Securities Exchange Act Release No. 82312 (Dec. 13, 2017), 82 FR 60242 (Dec. 19, 2017) (File No. SR–OCC–2017–009) (‘‘CCRMP Approval Order’’). 6 See Securities Exchange Act Release No. 81949 (Oct. 26, 2017), 82 FR 50719 (Nov. 1, 2017) (File No. SR–OCC–2017–009). 1 15 E:\FR\FM\30DEN1.SGM 30DEN1 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Notices OCC proposes to remove the confidential CCRMP from its rules and replace it with the proposed TPRMF, which OCC would make publically available. As described in more detail below, the proposed TPRMF includes some, but not all of the substance of the existing CCRMP. OCC represents that the details not carried forward into the proposed TPRMF reside in OCC’s procedures, and that removing such procedural details from OCC’s rules would eliminate redundancy that could lead to confusion.7 The proposed TPRMF includes information about the risk management lifecycle for Clearing Members, Financial Institutions,8 and Financial Market Utilities (‘‘FMUs’’) 9— all of which are currently addressed in the existing CCRMP—as well as information about the risk management lifecycle for Exchanges 10 and vendors. OCC also proposes to make conforming changes to its Risk Management Framework Policy, Liquidity Risk Management Framework, Margin Policy, and Collateral Risk Management Policy, all of which reference the CCRMP. Removal of redundancies. As noted above, the proposed TPRMF does not include procedural details, found in the existing CCRMP, that are addressed elsewhere in OCC’s rules, policies, and procedures. With regard to access and participation, for example, OCC’s approach to risk management for Clearing Members, Financial Institutions and FMUs would not change under the proposed TPRMF, but the requirement that OCC monitor for a low probability of defaulting on obligations and assessing potential risks presented by indirect participants would reside in OCC’s procedures, not the proposed TPRMF. Additionally, specific information related to the qualification and approval of Clearing Members and Financial Institutions is publicly available in the OCC By-Laws 7 See Notice of Filing, 85 FR at 73586. In proposing the replacement of the CCRMP with the TPRMF, OCC provided certain internal procedures related to third-party risk management, for which OCC requested confidential treatment. See id. at 73582. 8 In the context of the proposed TPRMF, ‘‘Financial Institutions’’ include clearing banks, custodians, liquidity providers, and investment counterparties. See Notice of Filing, 85 FR at 73582–83. 9 Under the proposed TPRMF, FMUs may include any person that manages or operates a multilateral system for the purpose of transferring, clearing, or settling payments, securities, or other financial transactions among Financial Institutions or between Financial Institutions and the person. See Notice of Filing, 85 FR at 73583, n. 12. 10 Under the proposed TPRMF, Exchange relationships may include options exchanges, futures markets, OTC Trade Sources or Loan Markets. See Notice of Filing, 85 FR at 73583, n. 13. VerDate Sep<11>2014 17:47 Dec 29, 2020 Jkt 253001 and Rulebook.11 Similarly, with regard to counterparty credit risk, OCC’s procedures require the measurement and reporting of credit risk as part of OCC’s ongoing monitoring processes. In terms of managing counterparty credit risk, OCC proposes to describe the utilization of its Watch Level reporting in the proposed TPRMF, but to retain flexibility to respond to unforeseen circumstances by defining the details of its Watch Level tiers in procedure documents. Overall third-party risk management. The proposed TPRMF defines the set of risks that OCC faces from third-party relationships, including financial, operational, information technology, security, legal, and regulatory risks. In the context of the proposed TPRMF, financial risks would include the failure of Clearing Members to meet obligations to OCC as well as the failure of thirdparties supporting daily settlement processes and OCC’s access to collateral and liquidity. The proposed TPRMF describes OCC’s processes for identifying, measuring, monitoring, and managing risks from third-parties at onboarding, through ongoing monitoring, and finally, at off-boarding. The proposed TPRMF describes OCC’s processes for managing risks presented by Clearing Members, Financial Institutions, and vendors as well as risks presented through OCC’s links to FMUs and Exchanges. The proposed TPRMF also describes OCC’s processes regarding the escalation of identified risks through working groups that have defined decision-making authorities, functions, and responsibilities. Specifically, the proposed TPRMF describes the roles of the Credit and Liquidity Risk Working Group (‘‘CLRWG’’), the Exchange Working Group (‘‘EWG’’), and the Vendor Risk Working Group (‘‘VRWG’’) in managing risks presented by thirdparties. Under the proposed TPRMF, each working group would be responsible for escalating matters to OCC’s Management Committee (‘‘MC’’), which, in specific circumstances, would be responsible for escalating matters to the Risk Committee of OCC’s Board of Directors (‘‘RC’’). Further, the proposed TPRMF defines certain authorities relating to the management of Clearing Member, Financial Institution, and vendor 11 See e.g. OCC By-Laws, Art. V (Clearing Members), available at https://www.theocc.com/ getmedia/3309eceb-56cf-48fc-b3b3-498669a24572/ occ_bylaws.pdf (last visited November 25, 2020); OCC Rules, Ch. III (Financial Requirements), available at https://www.theocc.com/getmedia/ 9d3854cd-b782-450f-bcf7-33169b0576ce/occ_ rules.pdf (last visited November 25, 2020). PO 00000 Frm 00065 Fmt 4703 Sfmt 4703 86593 relationships. For example, the proposed TPRMF states that OCC’s Chief Executive Officer and Chief Operating Officer each has authority to approve the onboarding of Financial Institutions and FMUs. Similarly, the proposed TPRMF states that vendor agreements are executed by OCC officers (i.e., a Vice President or above). Risks posed by Clearing Members, Financial Institutions, and vendors. The proposed TPRMF describes OCC’s framework for managing risk throughout the relationship lifecycle (i.e., at onboarding, monitoring, and off-boarding) for Clearing Members, Financial Institutions, and vendors. The proposed TPRMF defines the teams responsible for managing the risks posed by Clearing Members, Financial Institutions, and vendors at the various lifecycle stages. For example, OCC’s Financial Risk Management team would be responsible for monitoring and reporting financial and operational risks posed by Clearing Members. The proposed TPRMF also describes the basis for OCC’s evaluation of Clearing Members, Financial Institutions, and vendors with which it has relationships. For example, the proposed TPRMF states that OCC’s evaluation of Clearing Member relationships is based on financial resources, operational capacity, personnel, and facilities pursuant to OCC’s membership standards. Similarly, the proposed TPRMF states that OCC’s evaluation of Financial Institution relationships is based on financial resources and operational capacity, such as whether a relationship is structured to allow prompt access to assets and whether a custodian is a supervised and regulated institution that adheres to generally accepted accounting practices, maintains safekeeping procedures, and has controls that fully protect these assets. Further, the proposed TPRMF states that OCC’s evaluation of vendor relationships is based on a vendor’s financial health and operational capacity, and that the level of due diligence and monitoring of a specific vendor is based on the inherent risk posed by OCC’s relationship with the vendor. Link-specific risk management. Similar to the management of risks posed by Clearing Members, Financial Institutions, and vendors, the proposed TPRMF describes OCC’s framework for managing risk for FMUs and Exchanges throughout the relationship lifecycle. The proposed TPRMF defines the teams responsible for managing the risks posed by FMUs and Exchanges at the various lifecycle stages. For example, OCC’s Business Operations, Financial E:\FR\FM\30DEN1.SGM 30DEN1 86594 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Notices Risk Management, Legal, and Thirdparty Risk Management teams are responsible for evaluating FMU relationships at on-boarding while OCC’s Product and Business Development team is responsible for evaluating Exchange relationships at onboarding. The proposed TPRMF also describes the basis for OCC’s evaluation of FMUs and Exchanges with which it has relationships. For example, the proposed TPRMF states that OCC’s evaluation of FMU relationships is based on financial condition, operational capabilities, and any legal or regulatory risks associated with the relationship. The proposed TPRMF states that OCC’s review of Exchange relationships on an ongoing basis includes the assessment of an Exchange’s operational performance, overall financial condition, and ability to meet contractual obligations. 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.12 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 13 as well as Rules 17Ad– 22(e)(3)(i) and (20) 14 thereunder, as described in detail below. 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 assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible, and to promote the prompt and accurate clearance and settlement of securities transactions and, to the extent applicable, derivative agreements.15 Based on its review of the record, and for the reasons described below, the Commission believes that replacing the U.S.C. 78s(b)(2)(C). U.S.C. 78q–1(b)(3)(F). 14 17 CFR 240.17Ad–22(e)(3)(i) and (20). 15 15 U.S.C. 78q–1(b)(3)(F). existing CCRMP with the proposed TPRMF as described above is consistent with assuring the safeguarding of securities and funds as well as promoting prompt and accurate clearance and settlement. The CCRMP outlines OCC’s framework for: (1) The identification of credit risk, (2) counterparty access and participation standards, (3) the measurement of counterparty exposures, (4) the monitoring and managing of counterparty exposures, and (5) voluntary termination of counterparty relationships.16 The Commission continues to believe that the formalization of the components captured in the existing CCRMP is consistent with the requirement that OCC’s rules be designed to assure the safeguarding of securities and funds which are in OCC’s custody or control or for which it is responsible.17 As described above, the proposed TPRMF carries forward the substance of the existing CCRMP with the exception of certain procedural details already addressed elsewhere in OCC’s rules, policies, and procedures. The proposed TPRMF also includes components that are not part of the existing CCRMP, such as the management of operational risk posed by relationships with Financial Institutions—namely, whether a relationship is structured to allow prompt access to assets and whether a custodian is a supervised and regulated institution that adheres to generally accepted accounting practices, maintains safekeeping procedures, and has controls that fully protect these assets. The Commission believes that the addition of such components to OCC’s rules is consistent with the assurance of safeguarding of securities and funds in OCC’s custody or control or for which it is responsible. While the existing CCRMP provides a framework for addressing credit risk specifically,18 the proposed TPRMF addresses financial risk more broadly, which includes risks related to daily settlement. Further, the proposed TPRMF specifically addresses risk posed by OCC’s relationships with entities more directly involved in the clearance and settlement of securities transactions. For example, the proposed TPRMF addresses risks posed by OCC’s relationship with other FMUs. One such relationship is OCC’s reliance on the National Securities Clearing Corporation to effect delivery of, and payment for, securities underlying certain physically settled stock options and single stock 12 15 13 15 VerDate Sep<11>2014 17:47 Dec 29, 2020 Jkt 253001 16 See CCRMP Approval Order, 82 FR at 60245. id. 18 See id. 17 See PO 00000 Frm 00066 Fmt 4703 Sfmt 4703 futures cleared by OCC.19 The Commission believes that replacement of the narrowly focused CCRMP with the broader proposed TPRMF that includes specific rules addressing risks related to OCC’s relationship with other FMUs is consistent with the promotion of prompt and accurate clearance and settlement. Based on the foregoing, the Commission believes that the Proposed Rule Change is consistent with the requirements of Section 17A(b)(3)(F) of the Exchange Act.20 B. Consistency With Rule 17Ad– 22(e)(3)(i) Under the Exchange Act Rule 17Ad–22(e)(3)(i) requires each covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain a sound risk management framework for comprehensively managing legal, credit risk, liquidity, operational, general business, investment, custody, and other risks that arise or are borne by the covered clearing agency, which includes risk management policies, procedures, and systems designed to identify, monitor, and manage the range of risks that arise in or are borne by the covered clearing agency, that are subject to review on a specified periodic basis and approved by the board of directors annually.21 As noted above, the existing CCRMP provides a framework for addressing credit risk specifically,22 but the proposed TPRMF addresses a broader range of risks. Specifically, the proposed TPRMF outlines OCC’s approach to identifying, measuring, monitoring, and managing financial, operational, information technology, security, legal, and regulatory risks posed by Clearing Members, Financial Institutions, FMUs, Exchanges, and vendors. The proposed TPRMF describes, among other things, OCC’s processes regarding the escalation of identified risks through working groups all the way up to the RC as appropriate. Further, the proposed TPRMF defines which teams within OCC are responsible for managing risks posed by specific types of third parties as well as the basis for evaluating relationships with such third parties. The Commission believes, therefore, that the replacement of the existing CCRMP with the proposed TPRMF is consistent with the requirements of Rule 19 See Securities Exchange Act Release No. 81266 (Jul. 31, 2017), 82 FR 36484 (Aug. 4, 2017) (File No. SR–OCC–2017–013). 20 15 U.S.C. 78q–1(b)(3)(F). 21 17 CFR 240.17Ad–22(e)(3)(i). 22 See CCRMP Approval Order, 82 FR at 60245. E:\FR\FM\30DEN1.SGM 30DEN1 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Notices 17Ad–22(e)(3)(i) under the Exchange Act.23 SECURITIES AND EXCHANGE COMMISSION C. Consistency With Rule 17Ad– 22(e)(20) Under the Exchange Act [Release No. 34–90782; File No. SR–ICEEU– 2020–017] Rule 17Ad–22(e)(20) requires each covered clearing agency to 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 (‘‘FMUs’’), or trading markets.24 As described above, the proposed TPRMF outlines OCC’s approach to identify, measure, monitor, and manage risks arising from relationships with FMUs and Exchanges. Just as with the management of risks from third parties more broadly, the proposed TPRMF defines which teams within OCC are responsible for managing risks posed by FMUs and Exchanges. Further, the proposed TPRMF describes the basis for OCC’s evaluation of FMUs and Exchanges with which it has relationships. The proposed TPRMF also states that OCC’s Chief Executive Officer and Chief Operating Officer each has authority to approve the onboarding of FMUs. The Commission believes, therefore, that the proposed adoption of the proposed TPRMF is consistent with the requirements of Rule 17Ad– 22(e)(20) under the Exchange Act.25 Self-Regulatory Organizations; ICE Clear Europe Limited; Notice of Filing and Immediate Effectiveness of Proposed Rule Change, as Modified by Amendment No. 1, Relating to Amendments to the ICE Clear Europe Clearing Rules 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 26 and the rules and regulations thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act,27 that the Proposed Rule Change (SR– OCC–2020–014) be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.28 Eduardo A. Aleman, Deputy Secretary. [FR Doc. 2020–28895 Filed 12–29–20; 8:45 am] BILLING CODE 8011–01–P December 22, 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 December 14, 2020, ICE Clear Europe Limited (‘‘ICE Clear Europe’’ or the ‘‘Clearing House’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule changes described in Items I and II below, which Items have been prepared primarily by ICE Clear Europe. ICE Clear Europe filed the proposed rule change pursuant to Section 19(b)(3)(A) of the Act 3 and Rule 19b–4(f)(6) thereunder,4 so that the proposal was immediately effective upon filing with the Commission. On December 21, 2020, ICE Clear Europe filed Amendment No. 1 to the proposed rule change. The Commission is publishing this notice to solicit comments on the proposed rule change, as modified by Amendment No. 1 (hereafter the ‘‘proposed rule change’’), from interested persons. I. Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule Change ICE Clear Europe Limited (‘‘ICE Clear Europe’’) submitted the proposed rule change to amend its Clearing Rules (the ‘‘Rules’’) 5 to address certain requirements under the European Union General Data Protection Regulation (‘‘GDPR’’) 6 in the event that at the end of current transition period (ending December 31, 2020) (the ‘‘Transition Period’’) the United Kingdom (‘‘UK’’) exits the European Union (‘‘EU’’) in circumstances where: (i) No trade agreement has been agreed between the UK and the EU27 which stipulates that EU data protection law, among other 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b–4(f)(6). 5 Capitalized terms used but not defined herein have the meanings specified in the Rules. 6 Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data. 2 17 23 17 24 17 CFR 240.17Ad–22(e)(3)(i). CFR 240.17Ad–22(e)(20). 25 Id. 26 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). 27 15 U.S.C. 78s(b)(2). 28 17 CFR 200.30–3(a)(12). VerDate Sep<11>2014 17:47 Dec 29, 2020 Jkt 253001 PO 00000 Frm 00067 Fmt 4703 Sfmt 4703 86595 laws, shall continue to apply in the UK UK [sic] (a ‘‘trade agreement’’); and (ii) the UK’s data protection laws have not been found to provide for an adequate level of protection for the personal data of individuals in the EU pursuant to a decision made by the European Commission under Article 45 of the GDPR (an ‘‘adequacy decision’’). The proposed rule change is intended to supplement existing Rule provisions to reflect the judgment in a recent EU judicial decision. Amendment No. 1 was intended to (i) restate the description of the proposed rule change to clarify that ICE Clear Europe is now implementing certain amendments previously filed in 2019 7 (the ‘‘2019 Filing’’) and (ii) amend Exhibit 5 of the Initial Filing to provide a comparison of the proposed Rule changes (including those previously filed amendments in the 2019 Filing) to the current Rules in effect. The proposed rule changes in the initial filing were otherwise unchanged. II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, ICE Clear Europe 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. ICE Clear Europe has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of such statements. (A) Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change (a) Purpose The purpose of the proposed changes is to implement the amendments to Rule 106 and the adoption of Exhibit 5, Annex A and Annex B to the Rules that were submitted in the 2019 Filing (but not implemented at that time) and further to add certain supplemental data protection clauses to the Standard Contractual Clauses in Exhibit 5 of the Rules that address certain requirements under the GDPR relating to personal data. The amendments would be relevant upon the end of the Transition Period, in circumstances where: (i) No trade agreement has been agreed between the UK and the EU27; and (ii) the UK has 7 Exchange Act Release No. 34–85247 (SR– ICEEU–2019–004) (Mar. 5, 2019), 84 FR 8769 (Mar. 11, 2019). This earlier filing also generally addresses the situation where the UK would be treated as a ‘third country’ for GDPR purposes. E:\FR\FM\30DEN1.SGM 30DEN1

Agencies

[Federal Register Volume 85, Number 250 (Wednesday, December 30, 2020)]
[Notices]
[Pages 86592-86595]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28895]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90797; File No. SR-OCC-2020-014]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Adopt the OCC Third-Party Risk 
Management Framework and Retire the OCC Counterparty Credit Risk 
Management Framework

December 23, 2020.

I. Introduction

    On November 4, 2020, the Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2020-014 (``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 adopt a 
proposed Third-Party Risk Management Framework (``TPRMF'') and retire 
OCC's current Counterparty Credit Risk Management Policy 
(``CCRMP'').\3\ The Proposed Rule Change was published for public 
comment in the Federal Register on November 18, 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 73582.
    \4\ Securities Exchange Act Release No. 90406 (Nov. 12, 2020), 
85 FR 73582 (Nov. 18, 2020) (File No. SR-OCC-2020-014) (``Notice of 
Filing'').
---------------------------------------------------------------------------

II. Background

    In 2017, OCC adopted the CCRMP, which outlines the key components 
of OCC's framework for identifying, measuring, monitoring, and managing 
OCC's exposures to its counterparties.\5\ OCC requested confidential 
treatment of the CCRMP when it was proposed.\6\

[[Page 86593]]

OCC proposes to remove the confidential CCRMP from its rules and 
replace it with the proposed TPRMF, which OCC would make publically 
available. As described in more detail below, the proposed TPRMF 
includes some, but not all of the substance of the existing CCRMP. OCC 
represents that the details not carried forward into the proposed TPRMF 
reside in OCC's procedures, and that removing such procedural details 
from OCC's rules would eliminate redundancy that could lead to 
confusion.\7\ The proposed TPRMF includes information about the risk 
management lifecycle for Clearing Members, Financial Institutions,\8\ 
and Financial Market Utilities (``FMUs'') \9\--all of which are 
currently addressed in the existing CCRMP--as well as information about 
the risk management lifecycle for Exchanges \10\ and vendors. OCC also 
proposes to make conforming changes to its Risk Management Framework 
Policy, Liquidity Risk Management Framework, Margin Policy, and 
Collateral Risk Management Policy, all of which reference the CCRMP.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 82312 (Dec. 13, 
2017), 82 FR 60242 (Dec. 19, 2017) (File No. SR-OCC-2017-009) 
(``CCRMP Approval Order'').
    \6\ See Securities Exchange Act Release No. 81949 (Oct. 26, 
2017), 82 FR 50719 (Nov. 1, 2017) (File No. SR-OCC-2017-009).
    \7\ See Notice of Filing, 85 FR at 73586. In proposing the 
replacement of the CCRMP with the TPRMF, OCC provided certain 
internal procedures related to third-party risk management, for 
which OCC requested confidential treatment. See id. at 73582.
    \8\ In the context of the proposed TPRMF, ``Financial 
Institutions'' include clearing banks, custodians, liquidity 
providers, and investment counterparties. See Notice of Filing, 85 
FR at 73582-83.
    \9\ Under the proposed TPRMF, FMUs may include any person that 
manages or operates a multilateral system for the purpose of 
transferring, clearing, or settling payments, securities, or other 
financial transactions among Financial Institutions or between 
Financial Institutions and the person. See Notice of Filing, 85 FR 
at 73583, n. 12.
    \10\ Under the proposed TPRMF, Exchange relationships may 
include options exchanges, futures markets, OTC Trade Sources or 
Loan Markets. See Notice of Filing, 85 FR at 73583, n. 13.
---------------------------------------------------------------------------

    Removal of redundancies. As noted above, the proposed TPRMF does 
not include procedural details, found in the existing CCRMP, that are 
addressed elsewhere in OCC's rules, policies, and procedures. With 
regard to access and participation, for example, OCC's approach to risk 
management for Clearing Members, Financial Institutions and FMUs would 
not change under the proposed TPRMF, but the requirement that OCC 
monitor for a low probability of defaulting on obligations and 
assessing potential risks presented by indirect participants would 
reside in OCC's procedures, not the proposed TPRMF. Additionally, 
specific information related to the qualification and approval of 
Clearing Members and Financial Institutions is publicly available in 
the OCC By-Laws and Rulebook.\11\ Similarly, with regard to 
counterparty credit risk, OCC's procedures require the measurement and 
reporting of credit risk as part of OCC's ongoing monitoring processes. 
In terms of managing counterparty credit risk, OCC proposes to describe 
the utilization of its Watch Level reporting in the proposed TPRMF, but 
to retain flexibility to respond to unforeseen circumstances by 
defining the details of its Watch Level tiers in procedure documents.
---------------------------------------------------------------------------

    \11\ See e.g. OCC By-Laws, Art. V (Clearing Members), available 
at https://www.theocc.com/getmedia/3309eceb-56cf-48fc-b3b3-498669a24572/occ_bylaws.pdf (last visited November 25, 2020); OCC 
Rules, Ch. III (Financial Requirements), available at https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occ_rules.pdf (last visited November 25, 2020).
---------------------------------------------------------------------------

    Overall third-party risk management. The proposed TPRMF defines the 
set of risks that OCC faces from third-party relationships, including 
financial, operational, information technology, security, legal, and 
regulatory risks. In the context of the proposed TPRMF, financial risks 
would include the failure of Clearing Members to meet obligations to 
OCC as well as the failure of third-parties supporting daily settlement 
processes and OCC's access to collateral and liquidity. The proposed 
TPRMF describes OCC's processes for identifying, measuring, monitoring, 
and managing risks from third-parties at on-boarding, through ongoing 
monitoring, and finally, at off-boarding. The proposed TPRMF describes 
OCC's processes for managing risks presented by Clearing Members, 
Financial Institutions, and vendors as well as risks presented through 
OCC's links to FMUs and Exchanges.
    The proposed TPRMF also describes OCC's processes regarding the 
escalation of identified risks through working groups that have defined 
decision-making authorities, functions, and responsibilities. 
Specifically, the proposed TPRMF describes the roles of the Credit and 
Liquidity Risk Working Group (``CLRWG''), the Exchange Working Group 
(``EWG''), and the Vendor Risk Working Group (``VRWG'') in managing 
risks presented by third-parties. Under the proposed TPRMF, each 
working group would be responsible for escalating matters to OCC's 
Management Committee (``MC''), which, in specific circumstances, would 
be responsible for escalating matters to the Risk Committee of OCC's 
Board of Directors (``RC'').
    Further, the proposed TPRMF defines certain authorities relating to 
the management of Clearing Member, Financial Institution, and vendor 
relationships. For example, the proposed TPRMF states that OCC's Chief 
Executive Officer and Chief Operating Officer each has authority to 
approve the onboarding of Financial Institutions and FMUs. Similarly, 
the proposed TPRMF states that vendor agreements are executed by OCC 
officers (i.e., a Vice President or above).
    Risks posed by Clearing Members, Financial Institutions, and 
vendors. The proposed TPRMF describes OCC's framework for managing risk 
throughout the relationship lifecycle (i.e., at on-boarding, 
monitoring, and off-boarding) for Clearing Members, Financial 
Institutions, and vendors. The proposed TPRMF defines the teams 
responsible for managing the risks posed by Clearing Members, Financial 
Institutions, and vendors at the various lifecycle stages. For example, 
OCC's Financial Risk Management team would be responsible for 
monitoring and reporting financial and operational risks posed by 
Clearing Members.
    The proposed TPRMF also describes the basis for OCC's evaluation of 
Clearing Members, Financial Institutions, and vendors with which it has 
relationships. For example, the proposed TPRMF states that OCC's 
evaluation of Clearing Member relationships is based on financial 
resources, operational capacity, personnel, and facilities pursuant to 
OCC's membership standards. Similarly, the proposed TPRMF states that 
OCC's evaluation of Financial Institution relationships is based on 
financial resources and operational capacity, such as whether a 
relationship is structured to allow prompt access to assets and whether 
a custodian is a supervised and regulated institution that adheres to 
generally accepted accounting practices, maintains safekeeping 
procedures, and has controls that fully protect these assets. Further, 
the proposed TPRMF states that OCC's evaluation of vendor relationships 
is based on a vendor's financial health and operational capacity, and 
that the level of due diligence and monitoring of a specific vendor is 
based on the inherent risk posed by OCC's relationship with the vendor.
    Link-specific risk management. Similar to the management of risks 
posed by Clearing Members, Financial Institutions, and vendors, the 
proposed TPRMF describes OCC's framework for managing risk for FMUs and 
Exchanges throughout the relationship lifecycle. The proposed TPRMF 
defines the teams responsible for managing the risks posed by FMUs and 
Exchanges at the various lifecycle stages. For example, OCC's Business 
Operations, Financial

[[Page 86594]]

Risk Management, Legal, and Third-party Risk Management teams are 
responsible for evaluating FMU relationships at on-boarding while OCC's 
Product and Business Development team is responsible for evaluating 
Exchange relationships at on-boarding.
    The proposed TPRMF also describes the basis for OCC's evaluation of 
FMUs and Exchanges with which it has relationships. For example, the 
proposed TPRMF states that OCC's evaluation of FMU relationships is 
based on financial condition, operational capabilities, and any legal 
or regulatory risks associated with the relationship. The proposed 
TPRMF states that OCC's review of Exchange relationships on an ongoing 
basis includes the assessment of an Exchange's operational performance, 
overall financial condition, and ability to meet contractual 
obligations.

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.\12\ 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 \13\ as well as Rules 17Ad-
22(e)(3)(i) and (20) \14\ thereunder, as described in detail below.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(2)(C).
    \13\ 15 U.S.C. 78q-1(b)(3)(F).
    \14\ 17 CFR 240.17Ad-22(e)(3)(i) and (20).
---------------------------------------------------------------------------

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 assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible, and to 
promote the prompt and accurate clearance and settlement of securities 
transactions and, to the extent applicable, derivative agreements.\15\ 
Based on its review of the record, and for the reasons described below, 
the Commission believes that replacing the existing CCRMP with the 
proposed TPRMF as described above is consistent with assuring the 
safeguarding of securities and funds as well as promoting prompt and 
accurate clearance and settlement.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The CCRMP outlines OCC's framework for: (1) The identification of 
credit risk, (2) counterparty access and participation standards, (3) 
the measurement of counterparty exposures, (4) the monitoring and 
managing of counterparty exposures, and (5) voluntary termination of 
counterparty relationships.\16\ The Commission continues to believe 
that the formalization of the components captured in the existing CCRMP 
is consistent with the requirement that OCC's rules be designed to 
assure the safeguarding of securities and funds which are in OCC's 
custody or control or for which it is responsible.\17\ As described 
above, the proposed TPRMF carries forward the substance of the existing 
CCRMP with the exception of certain procedural details already 
addressed elsewhere in OCC's rules, policies, and procedures. The 
proposed TPRMF also includes components that are not part of the 
existing CCRMP, such as the management of operational risk posed by 
relationships with Financial Institutions--namely, whether a 
relationship is structured to allow prompt access to assets and whether 
a custodian is a supervised and regulated institution that adheres to 
generally accepted accounting practices, maintains safekeeping 
procedures, and has controls that fully protect these assets. The 
Commission believes that the addition of such components to OCC's rules 
is consistent with the assurance of safeguarding of securities and 
funds in OCC's custody or control or for which it is responsible.
---------------------------------------------------------------------------

    \16\ See CCRMP Approval Order, 82 FR at 60245.
    \17\ See id.
---------------------------------------------------------------------------

    While the existing CCRMP provides a framework for addressing credit 
risk specifically,\18\ the proposed TPRMF addresses financial risk more 
broadly, which includes risks related to daily settlement. Further, the 
proposed TPRMF specifically addresses risk posed by OCC's relationships 
with entities more directly involved in the clearance and settlement of 
securities transactions. For example, the proposed TPRMF addresses 
risks posed by OCC's relationship with other FMUs. One such 
relationship is OCC's reliance on the National Securities Clearing 
Corporation to effect delivery of, and payment for, securities 
underlying certain physically settled stock options and single stock 
futures cleared by OCC.\19\ The Commission believes that replacement of 
the narrowly focused CCRMP with the broader proposed TPRMF that 
includes specific rules addressing risks related to OCC's relationship 
with other FMUs is consistent with the promotion of prompt and accurate 
clearance and settlement.
---------------------------------------------------------------------------

    \18\ See id.
    \19\ See Securities Exchange Act Release No. 81266 (Jul. 31, 
2017), 82 FR 36484 (Aug. 4, 2017) (File No. SR-OCC-2017-013).
---------------------------------------------------------------------------

    Based on the foregoing, the Commission believes that the Proposed 
Rule Change is consistent with the requirements of Section 17A(b)(3)(F) 
of the Exchange Act.\20\
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(3)(i) Under the Exchange Act

    Rule 17Ad-22(e)(3)(i) requires each covered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to maintain a sound risk management 
framework for comprehensively managing legal, credit risk, liquidity, 
operational, general business, investment, custody, and other risks 
that arise or are borne by the covered clearing agency, which includes 
risk management policies, procedures, and systems designed to identify, 
monitor, and manage the range of risks that arise in or are borne by 
the covered clearing agency, that are subject to review on a specified 
periodic basis and approved by the board of directors annually.\21\
---------------------------------------------------------------------------

    \21\ 17 CFR 240.17Ad-22(e)(3)(i).
---------------------------------------------------------------------------

    As noted above, the existing CCRMP provides a framework for 
addressing credit risk specifically,\22\ but the proposed TPRMF 
addresses a broader range of risks. Specifically, the proposed TPRMF 
outlines OCC's approach to identifying, measuring, monitoring, and 
managing financial, operational, information technology, security, 
legal, and regulatory risks posed by Clearing Members, Financial 
Institutions, FMUs, Exchanges, and vendors. The proposed TPRMF 
describes, among other things, OCC's processes regarding the escalation 
of identified risks through working groups all the way up to the RC as 
appropriate. Further, the proposed TPRMF defines which teams within OCC 
are responsible for managing risks posed by specific types of third 
parties as well as the basis for evaluating relationships with such 
third parties. The Commission believes, therefore, that the replacement 
of the existing CCRMP with the proposed TPRMF is consistent with the 
requirements of Rule

[[Page 86595]]

17Ad-22(e)(3)(i) under the Exchange Act.\23\
---------------------------------------------------------------------------

    \22\ See CCRMP Approval Order, 82 FR at 60245.
    \23\ 17 CFR 240.17Ad-22(e)(3)(i).
---------------------------------------------------------------------------

C. Consistency With Rule 17Ad-22(e)(20) Under the Exchange Act

    Rule 17Ad-22(e)(20) requires each covered clearing agency to 
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 (``FMUs''), or 
trading markets.\24\ As described above, the proposed TPRMF outlines 
OCC's approach to identify, measure, monitor, and manage risks arising 
from relationships with FMUs and Exchanges. Just as with the management 
of risks from third parties more broadly, the proposed TPRMF defines 
which teams within OCC are responsible for managing risks posed by FMUs 
and Exchanges. Further, the proposed TPRMF describes the basis for 
OCC's evaluation of FMUs and Exchanges with which it has relationships. 
The proposed TPRMF also states that OCC's Chief Executive Officer and 
Chief Operating Officer each has authority to approve the onboarding of 
FMUs. The Commission believes, therefore, that the proposed adoption of 
the proposed TPRMF is consistent with the requirements of Rule 17Ad-
22(e)(20) under the Exchange Act.\25\
---------------------------------------------------------------------------

    \24\ 17 CFR 240.17Ad-22(e)(20).
    \25\ Id.
---------------------------------------------------------------------------

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 \26\ and the rules and regulations thereunder.
---------------------------------------------------------------------------

    \26\ 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).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\27\ that the Proposed Rule Change (SR-OCC-2020-014) be, 
and hereby is, approved.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
---------------------------------------------------------------------------

    \28\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2020-28895 Filed 12-29-20; 8:45 am]
BILLING CODE 8011-01-P
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.