Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change Relating to Revisions to OCC's Auction Participation Requirements, 17868-17871 [2021-06989]

Download as PDF 17868 Federal Register / Vol. 86, No. 64 / Tuesday, April 6, 2021 / Notices SECURITIES AND EXCHANGE COMMISSION (A) Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change [Release No. 34–91445; File No. SR–OCC– 2021–004] (1) Purpose Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change Relating to Revisions to OCC’s Auction Participation Requirements March 31, 2021. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’ or ‘‘Exchange Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on March 19, 2021, the Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by OCC. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule Change The proposed rule change by OCC would amend the auction participation requirements set forth Interpretation and Policy (‘‘I&P’’) .02(c) to OCC Rule 1104 (Creation of Liquidating Settlement Account). The proposed changes to OCC Rules are included in Exhibit 5 of File No. SR–OCC–2021– 004. Material proposed to be added to OCC’s Rules as currently in effect is underlined and material proposed to be deleted is marked in strikethrough text. All capitalized terms not defined herein have the same meaning as set forth in the OCC By-Laws and Rules.3 khammond on DSKJM1Z7X2PROD with NOTICES II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, OCC included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. OCC has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of these statements. 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 OCC’s By-Laws and Rules can be found on OCC’s public website: https://www.theocc.com/ Company-Information/Documents-and-Archives/ By-Laws-and-Rules. 2 17 VerDate Sep<11>2014 17:34 Apr 05, 2021 Jkt 253001 Background Rule 1102 enumerates the grounds upon which OCC may suspend one of its Clearing Members.4 Following the suspension of any Clearing Member, OCC would take a number of steps designed to reasonably ensure that the Clearing Member’s suspension is managed in an orderly fashion. Among the steps that OCC may take to manage a Clearing Member’s suspension is liquidating the remaining collateral, open positions and/or exercised/ matured contracts (i.e., the remaining portfolio) of the suspended Clearing Member. Interpretation and Policy .02(a) to Rule 1104 clarifies that OCC ‘‘may elect to use one or more private auctions to liquidate all or any part’’ of a suspended Clearing Member’s remaining portfolio. In this context, the term ‘‘private auction’’ means an auction open to bidders who are invited by OCC and in which such bidders submit bids on a confidential basis.5 Interpretation and Policy .02(c) to Rule 1104 (‘‘I&P .02(c)’’) establishes certain basic requirements for OCC’s private auction process. I&P .02(c) states that OCC ‘‘will invite all Clearing Members to apply to become prequalified auction bidders’’ and that ‘‘[a]ny Clearing Member may be included in the pool of pre-qualified auction bidders by completing required auction documentation in advance.’’ Further, I&P .02(c) states that ‘‘[b]y posting notices on the [OCC]’s website from time to time, [OCC] will also invite non-Clearing Members to apply to become pre-qualified auction bidders.’’ I&P .02(c) also establishes that for a nonClearing Member to be pre-qualified as an auction bidder, it ‘‘must (i) actively trade in the asset class in which it proposes to submit bids, (ii) actively 4 The grounds for suspension, as summarized, include a Clearing Member (i) having been expelled or suspended from any self-regulatory organization; (ii) failing to make any delivery of cash, securities or other property to OCC in a timely manner as required by OCC’s By-Laws or Rules; (iii) failing to make any delivery of funds or securities to another Clearing Member required pursuant to OCC’s ByLaws or Rules; (iv) failing to make any delivery of funds or securities to the correspondent clearing corporation in a timely manner; (v) being in such financial or operating difficulty that OCC’s Board of Directors or a Designated Officer determines that suspension is necessary for the protection of OCC, other Clearing Members, or the general public; or (vi) in the case of a non-U.S. Clearing Member, having been expelled or suspended by its non-U.S. regulator or any securities exchange or clearing organization of which it is a member. 5 Interpretation and Policy .02(a) to Rule 1104. PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 trade in markets cleared by [OCC], (iii) be sponsored by, and submit its bids through, a Clearing Member that has agreed to guarantee and settle any accepted bid made by such non-Clearing Member and (iv) complete required auction documentation in advance.’’ I&P .02(c) also states that OCC ‘‘will endeavor to maintain a pool of prequalified auction bidders by periodically reviewing such bidders and their qualifications’’ and that OCC ‘‘will promptly notify any pre-qualified auction bidder removed from the pool of pre-qualified auction bidders.’’ Proposed Change OCC is proposing to change I&P .02(c) in order to clarify and further facilitate the process of on-boarding Clearing Members and non-Clearing Members as potential bidders in future auctions of a suspended Clearing Member’s remaining portfolio. To achieve a successful auction pursuant to Rule 1104 and enable OCC to take timely action to contain any losses and liquidity pressures that may be caused by a Clearing Member’s default, it is important for OCC to encourage participation in such auctions. OCC believes that participation by more bidders generally facilitates more competitive bids on a suspended Clearing Member’s portfolio. Competitive bids are necessary for OCC to sell the portfolio at a market price that minimizes the loss to OCC and its Clearing Members, and enable OCC to successfully complete an auction in a timely manner and thereby manage a Clearing Member default in a timely manner. Therefore, OCC proposes to make two related revisions to I&P .02(c), as described below. OCC also proposes to delete current rule text in I&P .02 related to OCC’s internal administration of pre-qualified auction bidders, also described below. First, OCC proposes to revise I&P .02(c) to reflect that Clearing Members would not need to be invited by OCC to become pre-qualified auction bidders; instead, the revised language in I&P .02(c) would make clear that all Clearing Members are invited to participate in auctions of a suspended Clearing Member’s remaining portfolio. OCC would retain, but slightly rephrase, the existing requirement that any Clearing Member seeking to be included in the pool of pre-qualified auction bidders must complete required auction documentation in advance; OCC’s proposed changes would explain that in order for a Clearing Member to be prequalified as an auction bidder, the Clearing Member would need to E:\FR\FM\06APN1.SGM 06APN1 khammond on DSKJM1Z7X2PROD with NOTICES Federal Register / Vol. 86, No. 64 / Tuesday, April 6, 2021 / Notices complete any required auction documentation in advance. Second, OCC proposes to revise I&P .02(c) to reflect that non-Clearing Members would no longer need to be invited to become pre-qualified auction bidders by OCC posting notices to its website from time-to-time. Further, the revisions to I&P .02(c) would remove the existing requirements that a nonClearing Member must actively trade in the asset class in which it proposes to submit bids and must actively trade in markets cleared by OCC. Instead, the revisions to I&P .02(c) would make clear that non-Clearing Members could become pre-qualified auction bidders by (i) having a Clearing Member sponsor to submit bids on behalf of the nonClearing Member, (ii) having a Clearing Member agree to guarantee and settle any accepted bid made by the nonClearing Member, and (iii) completing any required auction documentation in advance. OCC is also proposing to delete from I&P .02(c) two sentences that discuss OCC’s administration of the pool of prequalified auction bidders. Currently, I&P .02(c) explains that OCC maintains a pool of pre-qualified auction bidders, periodically reviews the pool of such bidders and their qualifications, and notifies any pre-qualified auction bidder that is removed from the pool. OCC is concerned that the trading activity review process contemplated by I&P .02(c) could inappropriately limit the number of pre-qualified bidders by excluding, inter alia, prospective bidders who did not have sufficient trading activity that was visible to OCC at the time of pre-qualification or review but were suitable bidders at the time of a particular auction. Accordingly, OCC proposes to eliminate the prequalification requirements related to a non-Clearing Member’s trading experience. OCC will continue to perform the preauction review described in Interpretation & Policy .02(d) to Rule 1104 (‘‘I&P .02(d)’’). This will allow OCC to maximize the number of prequalified bidders and select bidders for a particular auction based on an objective review that gives due consideration to the specific portfolio that will be auctioned. The proposal also eliminates the need for a periodic review and removal process. Under the proposed rule, a Clearing Member that terminates its required auction documentation or ceases to maintain its status as a Clearing Member will no longer be considered a pre-qualified auction bidder. Likewise, a non-Clearing Member will no longer be considered a pre-qualified bidder if its Clearing VerDate Sep<11>2014 17:34 Apr 05, 2021 Jkt 253001 Member sponsorship or guarantee is revoked or its required auction documentation is terminated. OCC notes that it would continue its current practice of maintaining a list of prequalified bidders through OCC’s default management testing and review of default management testing results. (2) Statutory Basis OCC believes that the proposed rule change is consistent with Section 17A(b)(3)(F) of the Securities Exchange Act of 1934, as amended (the ‘‘Act’’),6 and the rules and regulations thereunder because the proposed change is generally designed to (i) promote the prompt and accurate clearance and settlement of transactions cleared by OCC, (ii) assure the safeguarding of securities and funds in OCC’s custody, and (iii) protect investors and the public interest by clarifying and further facilitating the process of on-boarding Clearing Members and non-Clearing Members as potential bidders in future auctions of a suspended Clearing Member’s remaining portfolio. The proposed change would further facilitate onboarding of potential bidders by removing certain administrative obstacles in the process of becoming a pre-qualified auction bidder (e.g., nonClearing Members seeking invitations to become pre-qualified auction bidders posted to OCC’s website from time-totime). OCC believes that the removal of these administrative obstacles itself would not materially impact risks to OCC but would simplify the onboarding process in a way that is intended to facilitate on-boarding potential bidders in future auctions, which potentially could have the result of increasing participation in future auctions. As described herein, the potential for increased participation in future auctions would improve the likelihood that in any particular auction there is greater competition among auction bidders that results in a qualified bidder submitting a bid that OCC deems acceptable and that minimizes loss to OCC’s default management resources. If OCC does not obtain a satisfactory bid, OCC may need to conduct additional auctions on subsequent days or else determine the auction process has been unsuccessful and utilize other default management tools.7 Similarly, a lack of competitive bidding may require OCC to accept a best bid that results in greater 6 15 U.S.C. 78q–1(b)(3)(F). e.g., Securities Exchange Act Release No. 34–82351 (December 19, 2017); 82 FR 61107 (December 26, 2017) (File No. SR–OCC–2017–020). 7 See PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 17869 loss to OCC’s default management resources than OCC would have been able to accept through more competitive bidding that resulted in a higher best bid. Accordingly, to the extent OCC receives more competitive bids OCC could liquidate a suspended Clearing Member’s remaining portfolio without the need for additional auctions or the use of other default management tools, and similarly increase the likelihood that OCC receives a best bid that minimizes loss to its default management resources. OCC believes these improvements, generally, would (i) promote prompt and accurate clearance and settlement as a result of shorter close-out periods and more competitive auction prices; (ii) help assure the safeguarding of securities and funds in OCC’s custody by reducing the risk of loss to such securities and funds from unallocated open positions; and (iii) inure to the benefit of investors and the public for the same reasons. The proposed change would also remove existing limitations on nonClearing Members seeking to become pre-qualified bidders (e.g., a nonClearing Member must actively trade in the asset class in which it proposes to submit bids and must actively trade in markets cleared by OCC). OCC similarly believes that the removal of these requirements would not materially impact risks to OCC. Any Clearing Member sponsoring, submitting bids on behalf of, and guaranteeing a nonClearing Member auction bidder would itself need to have been approved by OCC to clear the products on which its sponsored non-Clearing Member might bid. In addition, the Clearing Member would need to have approved its sponsored non-Clearing Member to trade in the products on which the sponsored non-Clearing Member intends to bid. Finally, before submitting a bid on behalf of any sponsored non-Clearing Member, the Clearing Member would need to accept that it is willing to guarantee the sponsored non-Clearing Member’s performance should its bid be selected as the winning bid in the auction. OCC believes these safeguards obviate the need for maintaining the requirements in current I&P .02(c) that any nonClearing Member seeking to become prequalified auction bidders must actively trade in the asset class in which it proposes to submit bids and must actively trade in markets cleared by OCC, because they allow OCC to consider a non-Clearing Member’s (and/ or its sponsor Clearing Member’s) financial strength, demonstrated activity in the products being auctioned and E:\FR\FM\06APN1.SGM 06APN1 khammond on DSKJM1Z7X2PROD with NOTICES 17870 Federal Register / Vol. 86, No. 64 / Tuesday, April 6, 2021 / Notices qualification to clear transactions in the relevant asset classes at the time of a particular auction. Furthermore, a bidder’s prequalification does not mean that OCC would automatically include that bidder in any particular auction. Rather, OCC would continue to determine an appropriate pool of auction bidders on a case-by-case basis using the criteria established in I&P .02(d). OCC believes that reviewing the criteria set forth in I&P .02(d) with respect to a particular auction is the most appropriate way for OCC to identify, monitor and manage the material risks arising from a nonClearing Member auction participant in accordance with Rule 17Ad–22(e)(19).8 The financial strength, trading activity and Clearing Member relationships of a non-Clearing Member may vary over time. OCC in the best position to identify, monitor and manage the material risks arising from a nonClearing Member auction participant if it considers the criteria set forth in I&P .02(d) with respect to a particular auction portfolio at the time it selects bidders. For the reasons described above, OCC believes that the removal of the pre-qualification requirements related to a non-Clearing Member’s trading activities would not materially impact risks to OCC, but would simplify the on-boarding process in a way that is intended to facilitate on-boarding potential bidders in future auctions, which potentially could have the result of increasing participation in future auctions. The potential for increased participation in future auctions could improve the ability of OCC to timely liquidate a suspended Clearing Member’s remaining portfolio, which generally would inure to the benefit of investors and the public. OCC believes that the proposed rule change is also consistent with Rule 17Ad–22(e)(13) because it is reasonably designed to ensure OCC has operational capacity to take timely action to contain losses.9 As explained above, OCC believes that by removing certain administrative obstacles in the process of becoming a pre-qualified auction bidder (e.g., non-Clearing Members seeking invitations to become prequalified auction bidders posted to OCC’s website from time-to-time) and by removing existing limitations on non-Clearing Members seeking to become pre-qualified bidders (e.g., a non-Clearing Member must actively trade in the asset class in which it proposes to submit bids and must actively trade in markets cleared by 8 17 CFR 240.17Ad–22(e)(19). 9 17 CFR 240.17Ad–22(e)(13). VerDate Sep<11>2014 17:34 Apr 05, 2021 Jkt 253001 OCC), the proposed change would clarify and further facilitate the process of on-boarding Clearing Members and non-Clearing Members as potential bidders in future auctions of a suspended Clearing Member’s remaining portfolio. OCC believes the proposed change would not materially impact risks to OCC and would simplify the on-boarding process in a way that is intended to facilitate on-boarding potential bidders in future auctions, which potentially could have the result of increasing participation in future auctions. By improving the potential for increased participation in future auctions, the proposed change is reasonably designed to ensure OCC has operational capacity to take timely action to contain losses from a suspended Clearing Member’s remaining portfolio. Finally, Section 19(b)(1) of the Act and Rule 19b–4 thereunder set forth the requirements for self-regulatory organization (‘‘SRO’’) proposed rule changes, including the regulatory filing requirements for ‘‘stated policies, practices and interpretations’’ (‘‘SPPIs’’).10 OCC proposes to delete current rule text in I&P .02(c) describing OCC’s maintenance of the list of prequalified auction bidders. OCC believes that the current rule text describing OCC’s internal administration of prequalified auction bidders is concerned solely with the administration of OCC, and also is reasonably and fairly implied by the existing rule text, described herein, establishing the requirements to become a pre-qualified auction bidder, including the completion any required auction documentation, and therefore the current rule text does not constitute an SPPI of OCC. Accordingly, OCC believes the proposed changes would be consistent with the requirements of 10 Section 19(b)(1) of the Exchange Act requires an SRO such as OCC to file with the Commission any proposed rule or any proposed change in, addition to, or deletion from the rules of such SRO. See 15 U.S.C. 78s(b)(1). Section 3(a)(27) of the Exchange Act defines ‘‘rules of a clearing agency’’ to mean its (1) constitution, (2) articles of incorporation, (3) bylaws, (4) rules, (5) instruments corresponding to the foregoing and (6) such ‘‘stated policies, practices and interpretations’’ as the Commission may determine by rule. See 15 U.S.C. 78c(a)(27). Exchange Act Rule 19b–4(a)(6) defines the term ‘‘SPPI’’ to mean, in addition to certain publicly facing statements, ‘‘any material aspect of the operation of the facilities of the [SRO].’’ See 17 CFR 240.19b–4(a)(6). Rule 19b–4(c) provides, however, that an SPPI may not be deemed to be a proposed rule change if it is (i) reasonably and fairly implied by an existing rule of the SRO or (ii) concerned solely with the administration of the SRO and is not an SPPI with respect to the meaning, administration, or enforcement of an existing rule of the SRO. PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 Section 19(b)(1) of the Act and Rule 19b–4 thereunder.11 (B) Clearing Agency’s Statement on Burden on Competition OCC does not believe that the proposed rule change would impose any burden on competition.12 OCC believes the proposed rule change would not unfairly inhibit access to OCC’s services or disadvantage or favor any particular user in relationship to another user because the proposed rule change would apply equally to all Clearing Members. Similarly, OCC believes the proposed rule change would not unfairly inhibit access to OCC’s services or disadvantage or favor any particular user in relationship to another user because the proposed rule change would equally impose on non-Clearing Members the minimum requirements necessary to permit them to participate in auctions (i.e., (i) having a Clearing Member sponsor and submit bids on behalf of the non-Clearing Member, (ii) having a Clearing Member agree to guarantee and settle any accepted bid made by the non-Clearing Member, and (iii) completing any required auction documentation in advance). Moreover, participation in any auction of a suspended Clearing Member’s remaining portfolio is voluntary for Clearing Members and non-Clearing Members; so no particular user of OCC’s services would be required to become a pre-qualified auction bidder or participate in an auction. (C) Clearing Agency’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments on the proposed rule change were not and are not intended to be solicited with respect to the proposed rule change and none have been received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self- regulatory organization consents, the Commission will: (A) By order approve or disapprove the proposed rule change, or 11 See 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b– 4. 12 15 E:\FR\FM\06APN1.SGM U.S.C. 78–q1(b)(3)(I). 06APN1 Federal Register / Vol. 86, No. 64 / Tuesday, April 6, 2021 / Notices (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: khammond on DSKJM1Z7X2PROD with NOTICES 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– OCC–2021–004 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–OCC–2021–004. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of OCC and on OCC’s website at https://www.theocc.com/CompanyInformation/Documents-and-Archives/ By-Laws-and-Rules. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–OCC–2021–004 and should VerDate Sep<11>2014 17:34 Apr 05, 2021 Jkt 253001 be submitted on or before April 27, 2021. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.13 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–06989 Filed 4–5–21; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–91446; File No. SR– NASDAQ–2020–017] Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order Disapproving a Proposed Rule Change To Amend Nasdaq Rule 5704 March 31, 2021. I. Introduction On July 23, 2020, The Nasdaq Stock Market LLC (‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend certain listing requirements relating to maintaining a minimum number of beneficial holders and minimum number of shares outstanding. The proposed rule change was published for comment in the Federal Register on August 7, 2020.3 On September 10, 2020, pursuant to Section 19(b)(2) of the Exchange Act,4 the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.5 On November 5, 2020, the Commission instituted proceedings under Section 19(b)(2)(B) of the Exchange Act 6 to determine whether to approve or disapprove the proposed rule change.7 On January 26, 2021, the Commission designated a longer period for Commission action on the proposed rule change.8 The Commission has received 13 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 89464 (August 4, 2020), 85 FR 48012 (‘‘Notice’’). 4 15 U.S.C. 78s(b)(2). 5 See Securities Exchange Act Release No. 89823, 85 FR 57895 (September 16, 2020). 6 15 U.S.C. 78s(b)(2)(B). 7 See Securities Exchange Act Release No. 90355, 85 FR 71977 (November 12, 2020) (‘‘OIP’’). 8 See Securities Exchange Act Release No. 90994, 86 FR 7750 (February 1, 2021). 1 15 PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 17871 comment letters on the proposed rule change.9 This order disapproves the proposed rule change because, as discussed below, Nasdaq has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of Exchange Act Section 6(b)(5), and, in particular, the requirement that the rules of a national securities exchange be designed ‘‘to prevent fraudulent and manipulative acts and practices’’ and ‘‘to protect investors and the public interest.’’ 10 II. Description of the Proposal As described in detail in the Notice and OIP, the Exchange proposes to amend Nasdaq Rule 5704 to: (1) Remove the requirement that, twelve months after the commencement of trading on the Exchange, a series of Exchange Traded Fund Shares must have 50 or more beneficial holders (‘‘Beneficial Holders Rule’’); and (2) replace its existing minimum number of shares requirement (‘‘Minimum Shares Outstanding Rule’’) with a requirement that each series of Exchange Traded Fund Shares have a sufficient number of shares outstanding at the commencement of trading to facilitate the formation of at least one creation unit.11 The Exchange asserts that the Beneficial Holders Rule is no longer necessary. The Exchange argues that the requirements of Rule 6c–11 under the Investment Company Act of 1940 (‘‘1940 Act’’), coupled with the existing creation and redemption process, mitigate the potential lack of liquidity that, according to the Exchange, the Beneficial Holders Rule was intended to address.12 The Exchange further asserts that requiring a sufficient number of shares to be outstanding at all times to facilitate the formation of at least one creation unit, together with the daily portfolio transparency and other enhanced disclosure requirements of 9 Comments on the proposed rule change can be found on the Commission’s website at: https:// www.sec.gov/comments/sr-nasdaq-2020-017/ srnasdaq2020017.htm. 10 15 U.S.C. 78f(b)(5). 11 Currently, Nasdaq Rule 5704(b)(1)(A) provides that the Exchange will establish a minimum number of Exchange Traded Fund Shares required to be outstanding at the time of commencement of trading on the Exchange. 12 In contrast, Nasdaq believes that the shareholder requirement applicable to common stock is a measure of liquidity designed to help assure that there will be sufficient investor interest and trading to support price discovery once a security is listed. See Notice, supra note 3 at 48012, n.6. E:\FR\FM\06APN1.SGM 06APN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 86, Number 64 (Tuesday, April 6, 2021)]
[Notices]
[Pages 17868-17871]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-06989]



[[Page 17868]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91445; File No. SR-OCC-2021-004]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Relating to Revisions to OCC's 
Auction Participation Requirements

March 31, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on March 19, 2021, the Options Clearing 
Corporation (``OCC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by OCC. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change by OCC would amend the auction 
participation requirements set forth Interpretation and Policy 
(``I&P'') .02(c) to OCC Rule 1104 (Creation of Liquidating Settlement 
Account). The proposed changes to OCC Rules are included in Exhibit 5 
of File No. SR-OCC-2021-004. Material proposed to be added to OCC's 
Rules as currently in effect is underlined and material proposed to be 
deleted is marked in strikethrough text. All capitalized terms not 
defined herein have the same meaning as set forth in the OCC By-Laws 
and Rules.\3\
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    \3\ OCC's By-Laws and Rules can be found on OCC's public 
website: https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. OCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(1) Purpose
Background
    Rule 1102 enumerates the grounds upon which OCC may suspend one of 
its Clearing Members.\4\ Following the suspension of any Clearing 
Member, OCC would take a number of steps designed to reasonably ensure 
that the Clearing Member's suspension is managed in an orderly fashion. 
Among the steps that OCC may take to manage a Clearing Member's 
suspension is liquidating the remaining collateral, open positions and/
or exercised/matured contracts (i.e., the remaining portfolio) of the 
suspended Clearing Member. Interpretation and Policy .02(a) to Rule 
1104 clarifies that OCC ``may elect to use one or more private auctions 
to liquidate all or any part'' of a suspended Clearing Member's 
remaining portfolio. In this context, the term ``private auction'' 
means an auction open to bidders who are invited by OCC and in which 
such bidders submit bids on a confidential basis.\5\
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    \4\ The grounds for suspension, as summarized, include a 
Clearing Member (i) having been expelled or suspended from any self-
regulatory organization; (ii) failing to make any delivery of cash, 
securities or other property to OCC in a timely manner as required 
by OCC's By-Laws or Rules; (iii) failing to make any delivery of 
funds or securities to another Clearing Member required pursuant to 
OCC's By-Laws or Rules; (iv) failing to make any delivery of funds 
or securities to the correspondent clearing corporation in a timely 
manner; (v) being in such financial or operating difficulty that 
OCC's Board of Directors or a Designated Officer determines that 
suspension is necessary for the protection of OCC, other Clearing 
Members, or the general public; or (vi) in the case of a non-U.S. 
Clearing Member, having been expelled or suspended by its non-U.S. 
regulator or any securities exchange or clearing organization of 
which it is a member.
    \5\ Interpretation and Policy .02(a) to Rule 1104.
---------------------------------------------------------------------------

    Interpretation and Policy .02(c) to Rule 1104 (``I&P .02(c)'') 
establishes certain basic requirements for OCC's private auction 
process. I&P .02(c) states that OCC ``will invite all Clearing Members 
to apply to become pre-qualified auction bidders'' and that ``[a]ny 
Clearing Member may be included in the pool of pre-qualified auction 
bidders by completing required auction documentation in advance.'' 
Further, I&P .02(c) states that ``[b]y posting notices on the [OCC]'s 
website from time to time, [OCC] will also invite non-Clearing Members 
to apply to become pre-qualified auction bidders.'' I&P .02(c) also 
establishes that for a non-Clearing Member to be pre-qualified as an 
auction bidder, it ``must (i) actively trade in the asset class in 
which it proposes to submit bids, (ii) actively trade in markets 
cleared by [OCC], (iii) be sponsored by, and submit its bids through, a 
Clearing Member that has agreed to guarantee and settle any accepted 
bid made by such non-Clearing Member and (iv) complete required auction 
documentation in advance.'' I&P .02(c) also states that OCC ``will 
endeavor to maintain a pool of pre-qualified auction bidders by 
periodically reviewing such bidders and their qualifications'' and that 
OCC ``will promptly notify any pre-qualified auction bidder removed 
from the pool of pre-qualified auction bidders.''

Proposed Change

    OCC is proposing to change I&P .02(c) in order to clarify and 
further facilitate the process of on-boarding Clearing Members and non-
Clearing Members as potential bidders in future auctions of a suspended 
Clearing Member's remaining portfolio. To achieve a successful auction 
pursuant to Rule 1104 and enable OCC to take timely action to contain 
any losses and liquidity pressures that may be caused by a Clearing 
Member's default, it is important for OCC to encourage participation in 
such auctions. OCC believes that participation by more bidders 
generally facilitates more competitive bids on a suspended Clearing 
Member's portfolio. Competitive bids are necessary for OCC to sell the 
portfolio at a market price that minimizes the loss to OCC and its 
Clearing Members, and enable OCC to successfully complete an auction in 
a timely manner and thereby manage a Clearing Member default in a 
timely manner. Therefore, OCC proposes to make two related revisions to 
I&P .02(c), as described below. OCC also proposes to delete current 
rule text in I&P .02 related to OCC's internal administration of pre-
qualified auction bidders, also described below.
    First, OCC proposes to revise I&P .02(c) to reflect that Clearing 
Members would not need to be invited by OCC to become pre-qualified 
auction bidders; instead, the revised language in I&P .02(c) would make 
clear that all Clearing Members are invited to participate in auctions 
of a suspended Clearing Member's remaining portfolio. OCC would retain, 
but slightly rephrase, the existing requirement that any Clearing 
Member seeking to be included in the pool of pre-qualified auction 
bidders must complete required auction documentation in advance; OCC's 
proposed changes would explain that in order for a Clearing Member to 
be pre-qualified as an auction bidder, the Clearing Member would need 
to

[[Page 17869]]

complete any required auction documentation in advance.
    Second, OCC proposes to revise I&P .02(c) to reflect that non-
Clearing Members would no longer need to be invited to become pre-
qualified auction bidders by OCC posting notices to its website from 
time-to-time. Further, the revisions to I&P .02(c) would remove the 
existing requirements that a non-Clearing Member must actively trade in 
the asset class in which it proposes to submit bids and must actively 
trade in markets cleared by OCC. Instead, the revisions to I&P .02(c) 
would make clear that non-Clearing Members could become pre-qualified 
auction bidders by (i) having a Clearing Member sponsor to submit bids 
on behalf of the non-Clearing Member, (ii) having a Clearing Member 
agree to guarantee and settle any accepted bid made by the non-Clearing 
Member, and (iii) completing any required auction documentation in 
advance.
    OCC is also proposing to delete from I&P .02(c) two sentences that 
discuss OCC's administration of the pool of pre-qualified auction 
bidders. Currently, I&P .02(c) explains that OCC maintains a pool of 
pre-qualified auction bidders, periodically reviews the pool of such 
bidders and their qualifications, and notifies any pre-qualified 
auction bidder that is removed from the pool. OCC is concerned that the 
trading activity review process contemplated by I&P .02(c) could 
inappropriately limit the number of pre-qualified bidders by excluding, 
inter alia, prospective bidders who did not have sufficient trading 
activity that was visible to OCC at the time of pre-qualification or 
review but were suitable bidders at the time of a particular auction. 
Accordingly, OCC proposes to eliminate the pre-qualification 
requirements related to a non-Clearing Member's trading experience.
    OCC will continue to perform the pre-auction review described in 
Interpretation & Policy .02(d) to Rule 1104 (``I&P .02(d)''). This will 
allow OCC to maximize the number of pre-qualified bidders and select 
bidders for a particular auction based on an objective review that 
gives due consideration to the specific portfolio that will be 
auctioned. The proposal also eliminates the need for a periodic review 
and removal process. Under the proposed rule, a Clearing Member that 
terminates its required auction documentation or ceases to maintain its 
status as a Clearing Member will no longer be considered a pre-
qualified auction bidder. Likewise, a non-Clearing Member will no 
longer be considered a pre-qualified bidder if its Clearing Member 
sponsorship or guarantee is revoked or its required auction 
documentation is terminated. OCC notes that it would continue its 
current practice of maintaining a list of pre-qualified bidders through 
OCC's default management testing and review of default management 
testing results.
(2) Statutory Basis
    OCC believes that the proposed rule change is consistent with 
Section 17A(b)(3)(F) of the Securities Exchange Act of 1934, as amended 
(the ``Act''),\6\ and the rules and regulations thereunder because the 
proposed change is generally designed to (i) promote the prompt and 
accurate clearance and settlement of transactions cleared by OCC, (ii) 
assure the safeguarding of securities and funds in OCC's custody, and 
(iii) protect investors and the public interest by clarifying and 
further facilitating the process of on-boarding Clearing Members and 
non-Clearing Members as potential bidders in future auctions of a 
suspended Clearing Member's remaining portfolio. The proposed change 
would further facilitate on-boarding of potential bidders by removing 
certain administrative obstacles in the process of becoming a pre-
qualified auction bidder (e.g., non-Clearing Members seeking 
invitations to become pre-qualified auction bidders posted to OCC's 
website from time-to-time). OCC believes that the removal of these 
administrative obstacles itself would not materially impact risks to 
OCC but would simplify the on-boarding process in a way that is 
intended to facilitate on-boarding potential bidders in future 
auctions, which potentially could have the result of increasing 
participation in future auctions.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As described herein, the potential for increased participation in 
future auctions would improve the likelihood that in any particular 
auction there is greater competition among auction bidders that results 
in a qualified bidder submitting a bid that OCC deems acceptable and 
that minimizes loss to OCC's default management resources. If OCC does 
not obtain a satisfactory bid, OCC may need to conduct additional 
auctions on subsequent days or else determine the auction process has 
been unsuccessful and utilize other default management tools.\7\ 
Similarly, a lack of competitive bidding may require OCC to accept a 
best bid that results in greater loss to OCC's default management 
resources than OCC would have been able to accept through more 
competitive bidding that resulted in a higher best bid. Accordingly, to 
the extent OCC receives more competitive bids OCC could liquidate a 
suspended Clearing Member's remaining portfolio without the need for 
additional auctions or the use of other default management tools, and 
similarly increase the likelihood that OCC receives a best bid that 
minimizes loss to its default management resources. OCC believes these 
improvements, generally, would (i) promote prompt and accurate 
clearance and settlement as a result of shorter close-out periods and 
more competitive auction prices; (ii) help assure the safeguarding of 
securities and funds in OCC's custody by reducing the risk of loss to 
such securities and funds from unallocated open positions; and (iii) 
inure to the benefit of investors and the public for the same reasons.
---------------------------------------------------------------------------

    \7\ See e.g., Securities Exchange Act Release No. 34-82351 
(December 19, 2017); 82 FR 61107 (December 26, 2017) (File No. SR-
OCC-2017-020).
---------------------------------------------------------------------------

    The proposed change would also remove existing limitations on non-
Clearing Members seeking to become pre-qualified bidders (e.g., a non-
Clearing Member must actively trade in the asset class in which it 
proposes to submit bids and must actively trade in markets cleared by 
OCC). OCC similarly believes that the removal of these requirements 
would not materially impact risks to OCC. Any Clearing Member 
sponsoring, submitting bids on behalf of, and guaranteeing a non-
Clearing Member auction bidder would itself need to have been approved 
by OCC to clear the products on which its sponsored non-Clearing Member 
might bid. In addition, the Clearing Member would need to have approved 
its sponsored non-Clearing Member to trade in the products on which the 
sponsored non-Clearing Member intends to bid. Finally, before 
submitting a bid on behalf of any sponsored non-Clearing Member, the 
Clearing Member would need to accept that it is willing to guarantee 
the sponsored non-Clearing Member's performance should its bid be 
selected as the winning bid in the auction. OCC believes these 
safeguards obviate the need for maintaining the requirements in current 
I&P .02(c) that any non-Clearing Member seeking to become pre-qualified 
auction bidders must actively trade in the asset class in which it 
proposes to submit bids and must actively trade in markets cleared by 
OCC, because they allow OCC to consider a non-Clearing Member's (and/or 
its sponsor Clearing Member's) financial strength, demonstrated 
activity in the products being auctioned and

[[Page 17870]]

qualification to clear transactions in the relevant asset classes at 
the time of a particular auction.
    Furthermore, a bidder's pre-qualification does not mean that OCC 
would automatically include that bidder in any particular auction. 
Rather, OCC would continue to determine an appropriate pool of auction 
bidders on a case-by-case basis using the criteria established in I&P 
.02(d). OCC believes that reviewing the criteria set forth in I&P 
.02(d) with respect to a particular auction is the most appropriate way 
for OCC to identify, monitor and manage the material risks arising from 
a non-Clearing Member auction participant in accordance with Rule 17Ad-
22(e)(19).\8\ The financial strength, trading activity and Clearing 
Member relationships of a non-Clearing Member may vary over time. OCC 
in the best position to identify, monitor and manage the material risks 
arising from a non-Clearing Member auction participant if it considers 
the criteria set forth in I&P .02(d) with respect to a particular 
auction portfolio at the time it selects bidders. For the reasons 
described above, OCC believes that the removal of the pre-qualification 
requirements related to a non-Clearing Member's trading activities 
would not materially impact risks to OCC, but would simplify the on-
boarding process in a way that is intended to facilitate on-boarding 
potential bidders in future auctions, which potentially could have the 
result of increasing participation in future auctions. The potential 
for increased participation in future auctions could improve the 
ability of OCC to timely liquidate a suspended Clearing Member's 
remaining portfolio, which generally would inure to the benefit of 
investors and the public.
---------------------------------------------------------------------------

    \8\ 17 CFR 240.17Ad-22(e)(19).
---------------------------------------------------------------------------

    OCC believes that the proposed rule change is also consistent with 
Rule 17Ad-22(e)(13) because it is reasonably designed to ensure OCC has 
operational capacity to take timely action to contain losses.\9\ As 
explained above, OCC believes that by removing certain administrative 
obstacles in the process of becoming a pre-qualified auction bidder 
(e.g., non-Clearing Members seeking invitations to become pre-qualified 
auction bidders posted to OCC's website from time-to-time) and by 
removing existing limitations on non-Clearing Members seeking to become 
pre-qualified bidders (e.g., a non-Clearing Member must actively trade 
in the asset class in which it proposes to submit bids and must 
actively trade in markets cleared by OCC), the proposed change would 
clarify and further facilitate the process of on-boarding Clearing 
Members and non-Clearing Members as potential bidders in future 
auctions of a suspended Clearing Member's remaining portfolio. OCC 
believes the proposed change would not materially impact risks to OCC 
and would simplify the on-boarding process in a way that is intended to 
facilitate on-boarding potential bidders in future auctions, which 
potentially could have the result of increasing participation in future 
auctions. By improving the potential for increased participation in 
future auctions, the proposed change is reasonably designed to ensure 
OCC has operational capacity to take timely action to contain losses 
from a suspended Clearing Member's remaining portfolio.
---------------------------------------------------------------------------

    \9\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------

    Finally, Section 19(b)(1) of the Act and Rule 19b-4 thereunder set 
forth the requirements for self-regulatory organization (``SRO'') 
proposed rule changes, including the regulatory filing requirements for 
``stated policies, practices and interpretations'' (``SPPIs'').\10\ OCC 
proposes to delete current rule text in I&P .02(c) describing OCC's 
maintenance of the list of pre-qualified auction bidders. OCC believes 
that the current rule text describing OCC's internal administration of 
pre-qualified auction bidders is concerned solely with the 
administration of OCC, and also is reasonably and fairly implied by the 
existing rule text, described herein, establishing the requirements to 
become a pre-qualified auction bidder, including the completion any 
required auction documentation, and therefore the current rule text 
does not constitute an SPPI of OCC. Accordingly, OCC believes the 
proposed changes would be consistent with the requirements of Section 
19(b)(1) of the Act and Rule 19b-4 thereunder.\11\
---------------------------------------------------------------------------

    \10\ Section 19(b)(1) of the Exchange Act requires an SRO such 
as OCC to file with the Commission any proposed rule or any proposed 
change in, addition to, or deletion from the rules of such SRO. See 
15 U.S.C. 78s(b)(1). Section 3(a)(27) of the Exchange Act defines 
``rules of a clearing agency'' to mean its (1) constitution, (2) 
articles of incorporation, (3) bylaws, (4) rules, (5) instruments 
corresponding to the foregoing and (6) such ``stated policies, 
practices and interpretations'' as the Commission may determine by 
rule. See 15 U.S.C. 78c(a)(27). Exchange Act Rule 19b-4(a)(6) 
defines the term ``SPPI'' to mean, in addition to certain publicly 
facing statements, ``any material aspect of the operation of the 
facilities of the [SRO].'' See 17 CFR 240.19b-4(a)(6). Rule 19b-4(c) 
provides, however, that an SPPI may not be deemed to be a proposed 
rule change if it is (i) reasonably and fairly implied by an 
existing rule of the SRO or (ii) concerned solely with the 
administration of the SRO and is not an SPPI with respect to the 
meaning, administration, or enforcement of an existing rule of the 
SRO.
    \11\ See 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4.
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would impose any 
burden on competition.\12\ OCC believes the proposed rule change would 
not unfairly inhibit access to OCC's services or disadvantage or favor 
any particular user in relationship to another user because the 
proposed rule change would apply equally to all Clearing Members. 
Similarly, OCC believes the proposed rule change would not unfairly 
inhibit access to OCC's services or disadvantage or favor any 
particular user in relationship to another user because the proposed 
rule change would equally impose on non-Clearing Members the minimum 
requirements necessary to permit them to participate in auctions (i.e., 
(i) having a Clearing Member sponsor and submit bids on behalf of the 
non-Clearing Member, (ii) having a Clearing Member agree to guarantee 
and settle any accepted bid made by the non-Clearing Member, and (iii) 
completing any required auction documentation in advance). Moreover, 
participation in any auction of a suspended Clearing Member's remaining 
portfolio is voluntary for Clearing Members and non-Clearing Members; 
so no particular user of OCC's services would be required to become a 
pre-qualified auction bidder or participate in an auction.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78-q1(b)(3)(I).
---------------------------------------------------------------------------

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments on the proposed rule change were not and are not 
intended to be solicited with respect to the proposed rule change and 
none have been received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self- regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or

[[Page 17871]]

    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-OCC-2021-004 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2021-004. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of OCC and on OCC's website at 
https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File Number SR-OCC-2021-004 and 
should be submitted on or before April 27, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-06989 Filed 4-5-21; 8:45 am]
BILLING CODE 8011-01-P

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