Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change To Establish OCC's Persistent Minimum Skin-In-The-Game, 29861-29864 [2021-11606]

Download as PDF khammond on DSKJM1Z7X2PROD with NOTICES Federal Register / Vol. 86, No. 105 / Thursday, June 3, 2021 / Notices At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. 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–BOX–2021–12, and should be submitted on or before June 24, 2021. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.37 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: J. Matthew DeLesDernier, Assistant Secretary. 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– BOX–2021–12 on the subject line. [Release No. 34–92038; File No. SR–OCC– 2021–003] 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–BOX–2021–12. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments May 27, 2021. designated by the Commission. The Exchange has satisfied this requirement. VerDate Sep<11>2014 17:23 Jun 02, 2021 Jkt 253001 [FR Doc. 2021–11691 Filed 6–2–21; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change To Establish OCC’s Persistent Minimum Skin-In-The-Game I. Introduction On February 10, 2021, the Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change SR–OCC–2021– 003, (‘‘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 establish a persistent minimum level of skin-in-the-game that OCC would contribute to cover default losses or liquidity shortfalls.3 The Proposed Rule Change was published for public comment in the Federal Register on March 2, 2021.4 The 37 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Notice of Filing infra note 4, 86 FR at 12237. 4 Securities Exchange Act Release No. 91199 (Feb. 24, 2021), 86 FR 12237 (Mar. 2, 2021) (File No. SR– OCC–2021–003) (‘‘Notice of Filing’’). OCC also filed a related advance notice (SR–OCC–2021–801) (‘‘Advance Notice’’) with the Commission pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, entitled the Payment, Clearing, and Settlement Supervision Act of 2010 and Rule 19b–4(n)(1)(i) under the Exchange Act. 12 U.S.C. 5465(e)(1). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b–4, respectively. The Advance Notice was published in the Federal Register on March 1, 2021. Securities Exchange Act Release No. 91184 (Feb. 23, 2021), 86 FR 12057 (Mar. 1, 2021) (File No. SR–OCC–2021– 801). A Notice of No Objection to the Advance Notice was published in the Federal Register on April 12, 2021. See Securities Exchange Act Release 1 15 PO 00000 Frm 00125 Fmt 4703 Sfmt 4703 29861 Commission has received comments regarding the proposal described in the Proposed Rule Change.5 This Order approves the Proposed Rule Change. II. Background 6 ‘‘Skin-in-the-game,’’ as a component of financial risk management, entails a covered clearing agency choosing, upon the occurrence of a default or series of defaults and application of all available assets of the defaulting participant(s), to apply its own capital contribution to the relevant clearing or guaranty fund in full to satisfy any remaining losses prior to the application of any (a) contributions by non-defaulting members to the clearing or guaranty fund, or (b) assessments that the covered clearing agency require non-defaulting participants to contribute following the exhaustion of such participant’s funded contributions to the relevant clearing or guaranty fund.7 OCC’s skin-in-the-game component of its financial risk management regime is described in its current rules, which provide for the use of OCC’s own capital to mitigate losses arising out of a Clearing Member default.8 Specifically, OCC’s rules provide for the offsetting of default losses remaining after the application of a defaulted Clearing Member’s margin deposits and Clearing Fund contributions with OCC’s capital in excess of 110 percent of the Target Capital Requirement at the time of the default.9 OCC’s rules also provide for charging losses remaining after the application of OCC’s excess capital to OCC senior management’s deferred No. 91491 (Apr. 7, 2021), 86 FR 19061 (Apr. 12, 2021) (File No. SR–OCC–2021–801). 5 Comments on the Proposed Rule Change are available at https://www.sec.gov/comments/sr-occ2021-003/srocc2021003.htm. Since the proposal contained in the Proposed Rule Change was also filed as an advance notice, all public comments received on the proposal are considered regardless of whether the comments are submitted on the Proposed Rule Change or the Advance Notice. Comments on the Advance Notice are available at https://www.sec.gov/comments/srocc-2021-801/occ2021801.htm. 6 Capitalized terms used but not defined herein have the meanings specified in OCC’s Rules and ByLaws, available at https://www.theocc.com/about/ publications/bylaws.jsp. 7 See Securities Exchange Act Release No. 78961 (Sep. 28, 2016), 81 FR 70786, 70806 (Oct. 13, 2016) (S7–03–14) (‘‘Covered Clearing Agency Standards’’). 8 See Securities Exchange Release No. 88029 (Jan. 24, 2020), 85 FR 5500, 5502 (Jan. 30, 2020) (File No. SR–OCC–2019–007) (‘‘CMP Approval Order’’). 9 See OCC Rule 1006(e), available at https:// www.theocc.com/getmedia/9d3854cd-b782-450fbcf7-33169b0576ce/occ_rules.pdf (last visited Mar. 16, 2021). See also CMP Approval Order at 5502. E:\FR\FM\03JNN1.SGM 03JNN1 29862 Federal Register / Vol. 86, No. 105 / Thursday, June 3, 2021 / Notices khammond on DSKJM1Z7X2PROD with NOTICES compensation 10 as well as nondefaulting Clearing Members.11 OCC reviewed feedback received in connection with the initial filing of its current rules, relevant papers from industry participants and stakeholders concerning skin-in-the-game, and regulatory regimes in jurisdictions outside the United States.12 OCC’s current rules do not, however, dedicate OCC’s excess capital for use solely as skin-in-the-game, or guaranty that OCC maintain a minimum amount of skin-inthe-game.13 Establishing the Minimum Corporate Contribution. OCC proposes to establish a persistent minimum level of skin-inthe-game that OCC would contribute to cover default losses or liquidity shortfalls. Such skin-in-the-game would consist of a minimum amount of OCC’s own pre-funded resources that OCC would contribute prior to charging a loss to the Clearing Fund (the ‘‘Minimum Corporate Contribution’’) and the EDCP Unvested Balance.14 As proposed, funds comprising the Minimum Corporate Contribution would be excluded from OCC’s liquid net assets funded by equity (‘‘LNAFBE’’) for purposes of meeting OCC’s Target Capital Requirement to ensure that OCC may maintain the Minimum Corporate Contribution exclusively for default management.15 OCC proposes to define the Minimum Corporate Contribution to mean the minimum level of OCC’s own funds maintained exclusively to cover credit 10 Such deferred compensation is in trust with respect to OCC’s Executive Deferred Compensation Plan (‘‘EDCP’’). See OCC Rule 101(e)(1), available at available at https://www.theocc.com/getmedia/ 9d3854cd-b782-450f-bcf7-33169b0576ce/occ_ rules.pdf (last visited Mar. 16, 2021). The specific EDCP funds that comprise a portion of OCC’s skinin-the-game are referred to in OCC’s rules as the ‘‘EDCP Unvested Balance.’’ See id. 11 See OCC Rule 1006(b), available at https:// www.theocc.com/getmedia/9d3854cd-b782-450fbcf7-33169b0576ce/occ_rules.pdf (last visited Mar. 16, 2021). See also CMP Approval Order at 5502. The application the EDCP Unvested Balance in parallel with non-defaulting Clearing Members’ Clearing Fund contributions would necessarily occur before assessments related to the exhaustion of OCC’s Clearing Fund. 12 See Notice of Filing, 86 FR at 12238–39. For example, OCC is cognizant of the European Market Infrastructure Regulation’s expectation that skin-inthe-game be a minimum of 25 percent of the central counterparty’s regulatory capital requirement. See Notice of Filing, 86 FR at 12239. 13 See Notice of Filing, 86 FR at 12239. 14 OCC does not propose altering its rules regarding the use or sizing of the EDCP Unvested Balance. 15 In addition to the Minimum Corporate Contribution, OCC would continue to commit its LNAFBE greater than 110 percent of its Target Capital Requirement prior to charging a loss to the Clearing Fund. As proposed, OCC would apply the Minimum Corporate Contribution to address default losses before applying its excess LNAFBE. VerDate Sep<11>2014 17:23 Jun 02, 2021 Jkt 253001 losses or liquidity shortfalls, the level of which OCC’s Board of Directors (the ‘‘Board’’) shall determine from time to time. To facilitate implementation of OCC’s proposal, the Board approved an initial Minimum Corporate Contribution at such a level that OCC’s total skin-inthe-game (i.e., the sum of the Minimum Corporate Contribution and OCC’s current EDCP Unvested Balance) would equal 25 percent of OCC’s Target Capital Requirement. OCC stated that, in setting the initial Minimum Corporate Contribution, the Board considered factors including, but not limited to, the regulatory requirements in each jurisdiction in which OCC is registered or in which OCC is actively seeking recognition, the amount similarly situated central counterparties commit of their own resources to address participant defaults, the EDCP Unvested Balance, OCC’s LNAFBE greater than 110 percent of its Target Capital Requirement, projected revenue and expenses, and other projected capital needs.16 Replenishing the Minimum Corporate Contribution. OCC proposes that, in the event it were to apply a portion of the Minimum Corporate Contribution to address losses or shortfalls arising out of a Clearing Member default, the size of the Minimum Corporate Contribution would be temporarily reduced, for a period of 270 days, to the amount remaining after its application.17 Each application of the Minimum Corporate Contribution would trigger a new 270day period.18 Under the proposal, OCC would be obligated to notify Clearing Members of any such reduction of the Minimum Corporate Contribution. OCC believes that 270 calendar days, or approximately nine months, is sufficient time for OCC to accumulate the funds necessary to reestablish the Minimum Corporate Contribution.19 OCC proposes change to its Rules, Capital Management Policy, Default Management Policy, Clearing Fund Methodology Policy, and Recovery and Orderly Wind-Down Plan to effectuate the changes described above. 16 See Notice of Filing, 86 FR at 12239–40. example, if the Minimum Corporate Contribution were $100 million and OCC applied $25 million to address default losses, then the Minimum Corporate Contribution would be temporarily set at $75 million. 18 For example, if OCC were to contribute a portion of the Minimum Corporate Contribution on day 1 and another portion 100 days later, the Minimum Corporate Contribution would remain temporarily reduced until day 370. 19 See Notice of Filing, 86 FR at 12240. OCC stated that the analysis on which its belief is based is the same analysis on which OCC relied to set various thresholds related to OCC’s plan for replenishing its regulatory capital. See id. 17 For PO 00000 Frm 00126 Fmt 4703 Sfmt 4703 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.20 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 21 and Rule17Ad–22(e)(2) thereunder.22 Before addressing the relevant portions of the Exchange Act and rules and regulations thereunder, however, we address a part of the comment submitted by Susquehanna International Group (‘‘SIG’’) not related to Section 17A(b)(3)(F) of the Exchange Act or Rule17Ad–22(e)(2) thereunder.23 SIG argued, as one of its concerns, that OCC’s fees, dues, and other charges would be per se unreasonable, and therefore inconsistent with Section 17A(b)(3)(D) of the Exchange Act, because funding the proposal with clearing fees would facilitate a shareholder windfall.24 We do not address these issues in this order because OCC has not proposed to change any fees, dues, or other charges in the Proposed Rule Change.25 The 20 15 U.S.C. 78s(b)(2)(C). U.S.C. 78q–1(b)(3)(F). 22 17 CFR 240.17Ad–22(e)(2). 23 See letter from Richard J. McDonald, SIG, dated March 30, 2021, to Vanessa Countryman, Secretary, Commission (‘‘SIG Letter’’), available at https:// www.sec.gov/comments/sr-occ-2021-003/ srocc2021003.htm. In its comment letter, SIG argues that the Proposed Rule Change is inconsistent with Sections 17A(b)(3)(D) and (F) of the Exchange Act. The Commission’s consideration of SIG’s concerns pertaining to Section 17A(b)(3)(F) is addressed in section III.A. below. 24 SIG Letter at 3–4. SIG also (i) expresses concern regarding OCC’s current retention of $325 million in capital; (ii) indicates that OCC should focus on reducing clearing fee rates; and (iii) suggests that the current organization of OCC’s shareholders as for profit entities creates a misalignment of interests. SIG Letter at 2. Because these issues do not bear on the grounds for approval or disapproval applicable to the Proposed Rule Change, the Commission does not address them in this order. 25 Another commenter read SIG’s comment to imply that the inclusion of fees as part of the proposed skin-in-the-game would incentivize OCC members to increase their charges for providing clearing services as a method of mitigating the risk of their actual skin-in-the-game. See comment submitted by CJ Chou (April 8, 2021), available at https://www.sec.gov/comments/sr-occ-2021-003/ 21 15 E:\FR\FM\03JNN1.SGM 03JNN1 Federal Register / Vol. 86, No. 105 / Thursday, June 3, 2021 / Notices reasonability of OCC’s existing fees, dues, or other charges pursuant to Section 17A(b)(3)(D) of the Exchange Act is therefore beyond the scope of this Proposed Rule Change. khammond on DSKJM1Z7X2PROD with NOTICES A. Consistency With Section 17A(b)(3)(F) of the Exchange Act Section 17A(b)(3)(F) of the Exchange Act requires, among other things, that the rules of a clearing agency be designed to 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, in general, to protect investors and the public interest.26 Based on its review of the record, the Commission finds the proposal is consistent with Section 17A(b)(3)(F) of the Exchange Act. The Commission continues to regard skin-in-the-game as a potential tool to align the various incentives of a covered clearing agency’s stakeholders, including management and clearing members.27 OCC’s current rules provide for the application of excess capital as skin-in-the-game. The Commission believes that OCC’s proposal to set aside capital to maintain a minimum amount of skin-in-the-game strengthens OCC’s existing skin-in-the-game rules. OCC’s current rules align senior management’s personal economic incentives with OCC’s overall risk management incentives,28 but do not guaranty that an amount of OCC capital would be set aside to ensure a pre-determined minimum level of skin-in-the-game. The Commission believes that holding a defined Minimum Corporate Contribution, as opposed to an undefined amount of excess capital, would incentivize OCC further to maintain the appropriate amount of srocc2021003.htm. As the Commission understands it, SIG’s argument pertains to the size and use of OCC’s fees, not changes in fees imposed on clients by the Clearing Members absent a fee increase by OCC. The commenter also expressed difficulty in obtaining quantitative data regarding clearing fee refunds and how much, proportionally, fees would contribute to the minimum skin-in-the-game under the Proposed Rule Change. Id. With regard to quantitative data describing clearing fee refunds, the audited financial statements that OCC posts annually include a line item for refundable clearing fees where applicable. See e.g., OCC’s 2020 Financials at page 5, available at https:// www.theocc.com/getattachment/9f5d22ff-d8104690-948d-f9a207df083d/attachment.aspx. With regard to how much, proportionally, fees would contribute to the minimum skin-in-the-game under the Proposed Rule Change, the Commission t notes that OCC has publically stated that its revenues primarily consist of clearing fee revenues. Id. at 7. 26 15 U.S.C. 78q–1(b)(3)(F). 27 Covered Clearing Agency Standards, 81 FR at 70805–06. 28 See Securities Exchange Act Release No. 87257 (Oct. 8, 2019), 84 FR 55194, 55199 (Oct. 15, 2019) (File No. SR–OCC–2019–805). VerDate Sep<11>2014 17:23 Jun 02, 2021 Jkt 253001 resources to manage a Clearing Member default because failure to do so would result in a direct cost to OCC. Incentivizing OCC to maintain an appropriate amount of resources, in turn, could reduce the potential losses charged to the Clearing Fund contributions of non-defaulting Clearing Members in the event of a Clearing Member default, which in turn would help assure the safeguarding of the Clearing Fund contributions of nondefaulting Clearing Members. In its comment letter, SIG argues that the Proposed Rule Change contravenes the protection of investors and the public interest.29 SIG states that OCC was established as a monopoly organization in order to serve as a market utility 30 and that it has always been recognized and accepted by concerned parties that monies held as excess OCC capital are excess fees not yet rebated, as opposed to retained earnings.31 In support of its argument that OCC should not retain earnings generated through clearing fees, SIG states that OCC has not previously had to draw on such funds to address a shortfall.32 The Commission is not persuaded by SIG’s arguments with regard to Section 17A(b)(3)(F). As discussed above, the Commission believes that holding a defined Minimum Corporate Contribution would incentivize OCC further to maintain the appropriate amount of resources to manage a Clearing Member default. Aligning OCC’s incentives with risk management considerations, such as default management, supports the public interest because it supports OCC’s role as a utility for clearing and settling U.S. listed options. Further, OCC’s rules do not require OCC to distribute retained earnings in excess of expenses.33 In addition to providing those services customarily provided by clearing houses of national securities exchanges,34 OCC is a Covered Clearing Agency registered with the 29 SIG Letter at 4. Letter at 1. 31 SIG Letter at 2. 32 SIG Letter at 2. 33 If OCC’s capital exceeds 110 percent of its Target Capital Requirement, rules authorize, but does not require, OCC’s Board to reduce the cost of clearing. See Securities Exchange Act Release No. 88029 (Jan. 24, 2020), 85 FR 5500, 5502 (Jan. 30, 2020) (File No. SR–OCC–2019–007). If the Board chooses to reduce the cost of clearing, it is authorized to do so by lowering fees or declaring a fee holiday as well as issuing refunds. See Id. 34 See Fourth Amended and Restated Certificate of Incorporation of OCC, Section III, available at https://www.theocc.com/getmedia/9d7754f6-99ca4d69-a934-a6fa996c9c16/OCC_Certificate_of_ Incorporation.pdf. 30 SIG PO 00000 Frm 00127 Fmt 4703 Sfmt 4703 29863 Commission.35 As a Covered Clearing Agency, OCC is obligated to comply with risk management standards that the Commission adopted under Section 805(a)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 36 and Section 17A of the Exchange Act (the ‘‘Clearing Agency Rules’’).37 The Clearing Agency Rules address having policies and procedures regarding, inter alia, the maintenance of assets to address losses attributable to Clearing Member defaults 38 as well as general business risk losses.39 SIG argues further that OCC’s proposal puts only the public’s skin in the game. SIG states that market participants bear the risk imprudent decisions by the exchanges in their capacity as the OCC shareholders and of their designee board members because such participants would be denied a rebate of excess fees.40 The Commission is not persuaded by this argument either. SIG’s argument assumes that OCC’s Clearing Members have a right to clearing fee revenues not applied to operating costs in a given year, but, as noted above in this section, OCC’s rules, as approved by the Commission, do not require OCC to distribute retained earnings in excess of expenses. SIG’s argument also assumes, without support, that OCC’s five Exchange Directors would not only be willing to make ‘‘imprudent decisions to the detriment of OCC’s Clearing Members,’’ but that the Exchange Directors would be able to enlist sufficient support among OCC’s nine Member Directors to force such ‘‘imprudent decisions’’ through the Board approval process. 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.41 B. Consistency With Rule 17Ad–22(e)(2) Under the Exchange Act Rule 17Ad–22(e)(2) under the Exchange Act requires that a covered clearing agency establish, implement, maintain, and enforce written policies and procedures reasonably designed to provide for governance arrangements 35 17 CFR 240.17Ad–22(a)(15). U.S.C. 5464(a)(2). 37 17 CFR 240.17Ad–22. See Securities Exchange Act Release No. 68080 (Oct. 22, 2012), 77 FR 66220 (Nov. 2, 2012) (S7–08–11). See also Covered Clearing Agency Standards, 81 FR 70786. OCC is a ‘‘covered clearing agency’’ as defined in Rule 17Ad–22(a)(5). 38 See 17 CFR 240.17Ad–22(e)(4). 39 See 17 CFR 240.17Ad–22(e)(15). 40 SIG Letter at 3. 41 15 U.S.C. 78q–1(b)(3)(F). 36 12 E:\FR\FM\03JNN1.SGM 03JNN1 29864 Federal Register / Vol. 86, No. 105 / Thursday, June 3, 2021 / Notices that, among other things, are clear and transparent; clearly prioritize the safety and efficiency of the covered clearing agency; and support the public interest requirements of the Exchange Act.42 In adopting Rule 17Ad–22(e)(2), the Commission discussed comments it received regarding the concept of skinin-the-game as a potential tool to align the various incentives of a covered clearing agency’s stakeholders, including management and clearing members.43 And, while the Commission declined to include a specific skin-inthe-game requirement in the rule, it stated its belief that ‘‘the proper alignment of incentives is an important element of a covered clearing agency’s risk management practices,’’ and noted that skin-in-the-game ‘‘may play a role in those risk management practices in many instances.’’ 44 OCC’s current rules require the application management compensation and excess capital as skin-in-the-game, which in turn should help further align the interests of OCC’s stakeholders, including OCC management and Clearing Members.45 As described above, OCC’s proposal would not reduce the resources OCC would apply to address default losses or remove the current skin-in-the-game component of OCC’s rules. Rather, OCC proposes to set aside a defined amount of capital for the sole purpose of absorbing losses and shortfalls arising out of a Clearing Member default. OCC has clearly stated the factors that the Board would consider when determining the amount of resources to hold as skin-in-the-game, a portion of which would comprise the Minimum Corporate Contribution. OCC also proposes to establish a clear process for addressing reductions in the Minimum Corporate Contribution arising out of a Clearing Member’s default. Accordingly, the Commission believes that the proposed changes to establish a persistent minimum level of skin-in-thegame are consistent with Rule 17Ad– 22(e)(2) under the Exchange Act.46 khammond on DSKJM1Z7X2PROD with NOTICES IV. Conclusion On the basis of the foregoing, the Commission finds that the Proposed Rule Change is consistent with the requirements of the Exchange Act, and in particular, the requirements of 42 17 CFR 240.17Ad–22(e)(2). Clearing Agency Standards, 81 FR at 70805–06. 44 Covered Clearing Agency Standards, 81 FR at 70806. 45 See CMP Approval Order at 5507. 46 17 CFR 240.17Ad–22(e)(2). 43 Covered VerDate Sep<11>2014 17:23 Jun 02, 2021 Jkt 253001 Section 17A of the Exchange Act 47 and the rules and regulations thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act,48 that the Proposed Rule Change (SR– OCC–2021–003) be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.49 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–11606 Filed 6–2–21; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–92068; File No. SR– NASDAQ–2021–009] Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1, To Amend Equity 4, Rule 4754 Relating to the Limit UpLimit Down Closing Cross May 28, 2021. I. Introduction On February 11, 2021, The Nasdaq Stock Market LLC (‘‘Exchange’’ or ‘‘Nasdaq’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend Equity 4, Rule (‘‘Rule’’) 4754 relating to the Limit Up-Limit Down (‘‘LULD’’) closing cross. The proposed rule change was published for comment in the Federal Register on March 3, 2021.3 On April 9, 2021, the Exchange filed Amendment No. 1 to the proposed rule change, which amended and superseded the proposed rule change as originally filed.4 On April 15, 2021, pursuant to 47 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). 48 15 U.S.C. 78s(b)(2). 49 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 91208 (February 25, 2021), 86 FR 12503. 4 In Amendment No. 1, the Exchange amended the proposal to: (1) Specify the dissemination of certain imbalance information before the LULD closing cross; (2) clarify the process for calculating the LULD closing cross price and the benchmark prices for the LULD closing cross; (3) specify the treatment of imbalance only orders for purposes of LULD closing cross price selection; (4) provide additional explanation to support the proposal; (5) specify the implementation date for the proposal; PO 00000 Frm 00128 Fmt 4703 Sfmt 4703 Section 19(b)(2) of the Act,5 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.6 The Commission has not received any comment letters on the proposed rule change. The Commission is publishing this notice to solicit comments on Amendment No. 1 from interested persons, and is approving the proposed rule change, as modified by Amendment No. 1, on an accelerated basis. II. Description of the Proposed Rule Change, as Modified by Amendment No. 1 The Nasdaq closing cross is the Exchange’s process for determining the price at which orders will be executed at the close and for executing those orders, and the price determined by the Nasdaq closing cross is the Nasdaq official closing price for securities that participate in the cross.7 The Nasdaq closing cross begins at 4:00 p.m.,8 and the Exchange applies a price range within which the Nasdaq closing cross must occur.9 Currently, the Exchange applies a threshold amount that is the greater of $0.50 or 10% of the midpoint of the Nasdaq best bid and offer, and that amount is then added to the Nasdaq best offer and subtracted from the Nasdaq best bid to establish the price range.10 The LULD closing cross is the Exchange’s process for executing closing trades in Nasdaq-listed securities when an LULD trading pause pursuant to Rule 4120(a)(12) exists at or after 3:50 p.m. and (6) make other clarifying, technical, and conforming changes. Amendment No. 1 is available on the Commission’s website at: https:// www.sec.gov/comments/sr-nasdaq-2021-009/ srnasdaq2021009-8670132-235426.pdf. 5 15 U.S.C. 78s(b)(2). 6 See Securities Exchange Act Release No. 91581, 86 FR 20759 (April 21, 2021). The Commission designated June 1, 2021, as the date by which the Commission shall approve or disapprove, or institute proceedings to determine whether to disapprove, the proposed rule change, as modified by Amendment No. 1. 7 See Rule 4754(a)(6) and (b)(4). See also Rule 4754(b)(2) (describing the methodology for determining the Nasdaq closing cross price). 8 All times referenced are in Eastern Time. 9 See Rule 4754(b). If the Nasdaq closing cross price established pursuant to Rule 4754(b)(2)(A)– (D) is outside the benchmarks established by the Exchange by a threshold amount, the Nasdaq closing cross will occur at a price within the threshold amounts that best satisfies the conditions of Rule 4754(b)(2)(A)–(D). See Rule 4754(b)(2)(E). 10 See Amendment No. 1, supra note 4, at 6. Nasdaq management may set and modify the benchmarks and thresholds from time to time upon prior notice to market participants. See Rule 4754(b)(2)(E). E:\FR\FM\03JNN1.SGM 03JNN1

Agencies

[Federal Register Volume 86, Number 105 (Thursday, June 3, 2021)]
[Notices]
[Pages 29861-29864]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-11606]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92038; File No. SR-OCC-2021-003]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Establish OCC's Persistent 
Minimum Skin-In-The-Game

May 27, 2021.

I. Introduction

    On February 10, 2021, the Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2021-003, (``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 establish a 
persistent minimum level of skin-in-the-game that OCC would contribute 
to cover default losses or liquidity shortfalls.\3\ The Proposed Rule 
Change was published for public comment in the Federal Register on 
March 2, 2021.\4\ The Commission has received comments regarding the 
proposal described in the Proposed Rule Change.\5\ This Order approves 
the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Notice of Filing infra note 4, 86 FR at 12237.
    \4\ Securities Exchange Act Release No. 91199 (Feb. 24, 2021), 
86 FR 12237 (Mar. 2, 2021) (File No. SR-OCC-2021-003) (``Notice of 
Filing''). OCC also filed a related advance notice (SR-OCC-2021-801) 
(``Advance Notice'') with the Commission pursuant to Section 
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, entitled the Payment, Clearing, and 
Settlement Supervision Act of 2010 and Rule 19b-4(n)(1)(i) under the 
Exchange Act. 12 U.S.C. 5465(e)(1). 15 U.S.C. 78s(b)(1) and 17 CFR 
240.19b-4, respectively. The Advance Notice was published in the 
Federal Register on March 1, 2021. Securities Exchange Act Release 
No. 91184 (Feb. 23, 2021), 86 FR 12057 (Mar. 1, 2021) (File No. SR-
OCC-2021-801). A Notice of No Objection to the Advance Notice was 
published in the Federal Register on April 12, 2021. See Securities 
Exchange Act Release No. 91491 (Apr. 7, 2021), 86 FR 19061 (Apr. 12, 
2021) (File No. SR-OCC-2021-801).
    \5\ Comments on the Proposed Rule Change are available at 
https://www.sec.gov/comments/sr-occ-2021-003/srocc2021003.htm.
    Since the proposal contained in the Proposed Rule Change was 
also filed as an advance notice, all public comments received on the 
proposal are considered regardless of whether the comments are 
submitted on the Proposed Rule Change or the Advance Notice. 
Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-occ-2021-801/occ2021801.htm.
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II. Background 6
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    \6\ Capitalized terms used but not defined herein have the 
meanings specified in OCC's Rules and By-Laws, available at https://www.theocc.com/about/publications/bylaws.jsp.
---------------------------------------------------------------------------

    ``Skin-in-the-game,'' as a component of financial risk management, 
entails a covered clearing agency choosing, upon the occurrence of a 
default or series of defaults and application of all available assets 
of the defaulting participant(s), to apply its own capital contribution 
to the relevant clearing or guaranty fund in full to satisfy any 
remaining losses prior to the application of any (a) contributions by 
non-defaulting members to the clearing or guaranty fund, or (b) 
assessments that the covered clearing agency require non-defaulting 
participants to contribute following the exhaustion of such 
participant's funded contributions to the relevant clearing or guaranty 
fund.\7\
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    \7\ See Securities Exchange Act Release No. 78961 (Sep. 28, 
2016), 81 FR 70786, 70806 (Oct. 13, 2016) (S7-03-14) (``Covered 
Clearing Agency Standards'').
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    OCC's skin-in-the-game component of its financial risk management 
regime is described in its current rules, which provide for the use of 
OCC's own capital to mitigate losses arising out of a Clearing Member 
default.\8\ Specifically, OCC's rules provide for the offsetting of 
default losses remaining after the application of a defaulted Clearing 
Member's margin deposits and Clearing Fund contributions with OCC's 
capital in excess of 110 percent of the Target Capital Requirement at 
the time of the default.\9\ OCC's rules also provide for charging 
losses remaining after the application of OCC's excess capital to OCC 
senior management's deferred

[[Page 29862]]

compensation \10\ as well as non-defaulting Clearing Members.\11\
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    \8\ See Securities Exchange Release No. 88029 (Jan. 24, 2020), 
85 FR 5500, 5502 (Jan. 30, 2020) (File No. SR-OCC-2019-007) (``CMP 
Approval Order'').
    \9\ See OCC Rule 1006(e), available at https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occ_rules.pdf (last 
visited Mar. 16, 2021). See also CMP Approval Order at 5502.
    \10\ Such deferred compensation is in trust with respect to 
OCC's Executive Deferred Compensation Plan (``EDCP''). See OCC Rule 
101(e)(1), available at available at https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occ_rules.pdf (last 
visited Mar. 16, 2021). The specific EDCP funds that comprise a 
portion of OCC's skin-in-the-game are referred to in OCC's rules as 
the ``EDCP Unvested Balance.'' See id.
    \11\ See OCC Rule 1006(b), available at https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occ_rules.pdf (last 
visited Mar. 16, 2021). See also CMP Approval Order at 5502. The 
application the EDCP Unvested Balance in parallel with non-
defaulting Clearing Members' Clearing Fund contributions would 
necessarily occur before assessments related to the exhaustion of 
OCC's Clearing Fund.
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    OCC reviewed feedback received in connection with the initial 
filing of its current rules, relevant papers from industry participants 
and stakeholders concerning skin-in-the-game, and regulatory regimes in 
jurisdictions outside the United States.\12\ OCC's current rules do 
not, however, dedicate OCC's excess capital for use solely as skin-in-
the-game, or guaranty that OCC maintain a minimum amount of skin-in-
the-game.\13\
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    \12\ See Notice of Filing, 86 FR at 12238-39. For example, OCC 
is cognizant of the European Market Infrastructure Regulation's 
expectation that skin-in-the-game be a minimum of 25 percent of the 
central counterparty's regulatory capital requirement. See Notice of 
Filing, 86 FR at 12239.
    \13\ See Notice of Filing, 86 FR at 12239.
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    Establishing the Minimum Corporate Contribution. OCC proposes to 
establish a persistent minimum level of skin-in-the-game that OCC would 
contribute to cover default losses or liquidity shortfalls. Such skin-
in-the-game would consist of a minimum amount of OCC's own pre-funded 
resources that OCC would contribute prior to charging a loss to the 
Clearing Fund (the ``Minimum Corporate Contribution'') and the EDCP 
Unvested Balance.\14\ As proposed, funds comprising the Minimum 
Corporate Contribution would be excluded from OCC's liquid net assets 
funded by equity (``LNAFBE'') for purposes of meeting OCC's Target 
Capital Requirement to ensure that OCC may maintain the Minimum 
Corporate Contribution exclusively for default management.\15\
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    \14\ OCC does not propose altering its rules regarding the use 
or sizing of the EDCP Unvested Balance.
    \15\ In addition to the Minimum Corporate Contribution, OCC 
would continue to commit its LNAFBE greater than 110 percent of its 
Target Capital Requirement prior to charging a loss to the Clearing 
Fund. As proposed, OCC would apply the Minimum Corporate 
Contribution to address default losses before applying its excess 
LNAFBE.
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    OCC proposes to define the Minimum Corporate Contribution to mean 
the minimum level of OCC's own funds maintained exclusively to cover 
credit losses or liquidity shortfalls, the level of which OCC's Board 
of Directors (the ``Board'') shall determine from time to time. To 
facilitate implementation of OCC's proposal, the Board approved an 
initial Minimum Corporate Contribution at such a level that OCC's total 
skin-in-the-game (i.e., the sum of the Minimum Corporate Contribution 
and OCC's current EDCP Unvested Balance) would equal 25 percent of 
OCC's Target Capital Requirement. OCC stated that, in setting the 
initial Minimum Corporate Contribution, the Board considered factors 
including, but not limited to, the regulatory requirements in each 
jurisdiction in which OCC is registered or in which OCC is actively 
seeking recognition, the amount similarly situated central 
counterparties commit of their own resources to address participant 
defaults, the EDCP Unvested Balance, OCC's LNAFBE greater than 110 
percent of its Target Capital Requirement, projected revenue and 
expenses, and other projected capital needs.\16\
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    \16\ See Notice of Filing, 86 FR at 12239-40.
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    Replenishing the Minimum Corporate Contribution. OCC proposes that, 
in the event it were to apply a portion of the Minimum Corporate 
Contribution to address losses or shortfalls arising out of a Clearing 
Member default, the size of the Minimum Corporate Contribution would be 
temporarily reduced, for a period of 270 days, to the amount remaining 
after its application.\17\ Each application of the Minimum Corporate 
Contribution would trigger a new 270-day period.\18\ Under the 
proposal, OCC would be obligated to notify Clearing Members of any such 
reduction of the Minimum Corporate Contribution. OCC believes that 270 
calendar days, or approximately nine months, is sufficient time for OCC 
to accumulate the funds necessary to reestablish the Minimum Corporate 
Contribution.\19\
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    \17\ For example, if the Minimum Corporate Contribution were 
$100 million and OCC applied $25 million to address default losses, 
then the Minimum Corporate Contribution would be temporarily set at 
$75 million.
    \18\ For example, if OCC were to contribute a portion of the 
Minimum Corporate Contribution on day 1 and another portion 100 days 
later, the Minimum Corporate Contribution would remain temporarily 
reduced until day 370.
    \19\ See Notice of Filing, 86 FR at 12240. OCC stated that the 
analysis on which its belief is based is the same analysis on which 
OCC relied to set various thresholds related to OCC's plan for 
replenishing its regulatory capital. See id.
---------------------------------------------------------------------------

    OCC proposes change to its Rules, Capital Management Policy, 
Default Management Policy, Clearing Fund Methodology Policy, and 
Recovery and Orderly Wind-Down Plan to effectuate the changes described 
above.

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.\20\ 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 \21\ and Rule17Ad-22(e)(2) 
thereunder.\22\
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    \20\ 15 U.S.C. 78s(b)(2)(C).
    \21\ 15 U.S.C. 78q-1(b)(3)(F).
    \22\ 17 CFR 240.17Ad-22(e)(2).
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    Before addressing the relevant portions of the Exchange Act and 
rules and regulations thereunder, however, we address a part of the 
comment submitted by Susquehanna International Group (``SIG'') not 
related to Section 17A(b)(3)(F) of the Exchange Act or Rule17Ad-
22(e)(2) thereunder.\23\ SIG argued, as one of its concerns, that OCC's 
fees, dues, and other charges would be per se unreasonable, and 
therefore inconsistent with Section 17A(b)(3)(D) of the Exchange Act, 
because funding the proposal with clearing fees would facilitate a 
shareholder windfall.\24\ We do not address these issues in this order 
because OCC has not proposed to change any fees, dues, or other charges 
in the Proposed Rule Change.\25\ The

[[Page 29863]]

reasonability of OCC's existing fees, dues, or other charges pursuant 
to Section 17A(b)(3)(D) of the Exchange Act is therefore beyond the 
scope of this Proposed Rule Change.
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    \23\ See letter from Richard J. McDonald, SIG, dated March 30, 
2021, to Vanessa Countryman, Secretary, Commission (``SIG Letter''), 
available at https://www.sec.gov/comments/sr-occ-2021-003/srocc2021003.htm. In its comment letter, SIG argues that the 
Proposed Rule Change is inconsistent with Sections 17A(b)(3)(D) and 
(F) of the Exchange Act. The Commission's consideration of SIG's 
concerns pertaining to Section 17A(b)(3)(F) is addressed in section 
III.A. below.
    \24\ SIG Letter at 3-4.
     SIG also (i) expresses concern regarding OCC's current 
retention of $325 million in capital; (ii) indicates that OCC should 
focus on reducing clearing fee rates; and (iii) suggests that the 
current organization of OCC's shareholders as for profit entities 
creates a misalignment of interests. SIG Letter at 2. Because these 
issues do not bear on the grounds for approval or disapproval 
applicable to the Proposed Rule Change, the Commission does not 
address them in this order.
    \25\ Another commenter read SIG's comment to imply that the 
inclusion of fees as part of the proposed skin-in-the-game would 
incentivize OCC members to increase their charges for providing 
clearing services as a method of mitigating the risk of their actual 
skin-in-the-game. See comment submitted by CJ Chou (April 8, 2021), 
available at https://www.sec.gov/comments/sr-occ-2021-003/srocc2021003.htm. As the Commission understands it, SIG's argument 
pertains to the size and use of OCC's fees, not changes in fees 
imposed on clients by the Clearing Members absent a fee increase by 
OCC.
    The commenter also expressed difficulty in obtaining 
quantitative data regarding clearing fee refunds and how much, 
proportionally, fees would contribute to the minimum skin-in-the-
game under the Proposed Rule Change. Id. With regard to quantitative 
data describing clearing fee refunds, the audited financial 
statements that OCC posts annually include a line item for 
refundable clearing fees where applicable. See e.g., OCC's 2020 
Financials at page 5, available at https://www.theocc.com/getattachment/9f5d22ff-d810-4690-948d-f9a207df083d/attachment.aspx. 
With regard to how much, proportionally, fees would contribute to 
the minimum skin-in-the-game under the Proposed Rule Change, the 
Commission t notes that OCC has publically stated that its revenues 
primarily consist of clearing fee revenues. Id. at 7.
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A. Consistency With Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Exchange Act requires, among other 
things, that the rules of a clearing agency be designed to 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, in 
general, to protect investors and the public interest.\26\ Based on its 
review of the record, the Commission finds the proposal is consistent 
with Section 17A(b)(3)(F) of the Exchange Act.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission continues to regard skin-in-the-game as a potential 
tool to align the various incentives of a covered clearing agency's 
stakeholders, including management and clearing members.\27\ OCC's 
current rules provide for the application of excess capital as skin-in-
the-game. The Commission believes that OCC's proposal to set aside 
capital to maintain a minimum amount of skin-in-the-game strengthens 
OCC's existing skin-in-the-game rules. OCC's current rules align senior 
management's personal economic incentives with OCC's overall risk 
management incentives,\28\ but do not guaranty that an amount of OCC 
capital would be set aside to ensure a pre-determined minimum level of 
skin-in-the-game.
---------------------------------------------------------------------------

    \27\ Covered Clearing Agency Standards, 81 FR at 70805-06.
    \28\ See Securities Exchange Act Release No. 87257 (Oct. 8, 
2019), 84 FR 55194, 55199 (Oct. 15, 2019) (File No. SR-OCC-2019-
805).
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    The Commission believes that holding a defined Minimum Corporate 
Contribution, as opposed to an undefined amount of excess capital, 
would incentivize OCC further to maintain the appropriate amount of 
resources to manage a Clearing Member default because failure to do so 
would result in a direct cost to OCC. Incentivizing OCC to maintain an 
appropriate amount of resources, in turn, could reduce the potential 
losses charged to the Clearing Fund contributions of non-defaulting 
Clearing Members in the event of a Clearing Member default, which in 
turn would help assure the safeguarding of the Clearing Fund 
contributions of non-defaulting Clearing Members.
    In its comment letter, SIG argues that the Proposed Rule Change 
contravenes the protection of investors and the public interest.\29\ 
SIG states that OCC was established as a monopoly organization in order 
to serve as a market utility \30\ and that it has always been 
recognized and accepted by concerned parties that monies held as excess 
OCC capital are excess fees not yet rebated, as opposed to retained 
earnings.\31\ In support of its argument that OCC should not retain 
earnings generated through clearing fees, SIG states that OCC has not 
previously had to draw on such funds to address a shortfall.\32\
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    \29\ SIG Letter at 4.
    \30\ SIG Letter at 1.
    \31\ SIG Letter at 2.
    \32\ SIG Letter at 2.
---------------------------------------------------------------------------

    The Commission is not persuaded by SIG's arguments with regard to 
Section 17A(b)(3)(F). As discussed above, the Commission believes that 
holding a defined Minimum Corporate Contribution would incentivize OCC 
further to maintain the appropriate amount of resources to manage a 
Clearing Member default. Aligning OCC's incentives with risk management 
considerations, such as default management, supports the public 
interest because it supports OCC's role as a utility for clearing and 
settling U.S. listed options. Further, OCC's rules do not require OCC 
to distribute retained earnings in excess of expenses.\33\
---------------------------------------------------------------------------

    \33\ If OCC's capital exceeds 110 percent of its Target Capital 
Requirement, rules authorize, but does not require, OCC's Board to 
reduce the cost of clearing. See Securities Exchange Act Release No. 
88029 (Jan. 24, 2020), 85 FR 5500, 5502 (Jan. 30, 2020) (File No. 
SR-OCC-2019-007). If the Board chooses to reduce the cost of 
clearing, it is authorized to do so by lowering fees or declaring a 
fee holiday as well as issuing refunds. See Id.
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    In addition to providing those services customarily provided by 
clearing houses of national securities exchanges,\34\ OCC is a Covered 
Clearing Agency registered with the Commission.\35\ As a Covered 
Clearing Agency, OCC is obligated to comply with risk management 
standards that the Commission adopted under Section 805(a)(2) of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 \36\ 
and Section 17A of the Exchange Act (the ``Clearing Agency 
Rules'').\37\ The Clearing Agency Rules address having policies and 
procedures regarding, inter alia, the maintenance of assets to address 
losses attributable to Clearing Member defaults \38\ as well as general 
business risk losses.\39\
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    \34\ See Fourth Amended and Restated Certificate of 
Incorporation of OCC, Section III, available at https://www.theocc.com/getmedia/9d7754f6-99ca-4d69-a934-a6fa996c9c16/OCC_Certificate_of_Incorporation.pdf.
    \35\ 17 CFR 240.17Ad-22(a)(15).
    \36\ 12 U.S.C. 5464(a)(2).
    \37\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No. 
68080 (Oct. 22, 2012), 77 FR 66220 (Nov. 2, 2012) (S7-08-11). See 
also Covered Clearing Agency Standards, 81 FR 70786. OCC is a 
``covered clearing agency'' as defined in Rule 17Ad-22(a)(5).
    \38\ See 17 CFR 240.17Ad-22(e)(4).
    \39\ See 17 CFR 240.17Ad-22(e)(15).
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    SIG argues further that OCC's proposal puts only the public's skin 
in the game. SIG states that market participants bear the risk 
imprudent decisions by the exchanges in their capacity as the OCC 
shareholders and of their designee board members because such 
participants would be denied a rebate of excess fees.\40\
---------------------------------------------------------------------------

    \40\ SIG Letter at 3.
---------------------------------------------------------------------------

    The Commission is not persuaded by this argument either. SIG's 
argument assumes that OCC's Clearing Members have a right to clearing 
fee revenues not applied to operating costs in a given year, but, as 
noted above in this section, OCC's rules, as approved by the 
Commission, do not require OCC to distribute retained earnings in 
excess of expenses. SIG's argument also assumes, without support, that 
OCC's five Exchange Directors would not only be willing to make 
``imprudent decisions to the detriment of OCC's Clearing Members,'' but 
that the Exchange Directors would be able to enlist sufficient support 
among OCC's nine Member Directors to force such ``imprudent decisions'' 
through the Board approval process.
    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.\41\
---------------------------------------------------------------------------

    \41\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(2) Under the Exchange Act

    Rule 17Ad-22(e)(2) under the Exchange Act requires that a covered 
clearing agency establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to provide for governance 
arrangements

[[Page 29864]]

that, among other things, are clear and transparent; clearly prioritize 
the safety and efficiency of the covered clearing agency; and support 
the public interest requirements of the Exchange Act.\42\ In adopting 
Rule 17Ad-22(e)(2), the Commission discussed comments it received 
regarding the concept of skin-in-the-game as a potential tool to align 
the various incentives of a covered clearing agency's stakeholders, 
including management and clearing members.\43\ And, while the 
Commission declined to include a specific skin-in-the-game requirement 
in the rule, it stated its belief that ``the proper alignment of 
incentives is an important element of a covered clearing agency's risk 
management practices,'' and noted that skin-in-the-game ``may play a 
role in those risk management practices in many instances.'' \44\ OCC's 
current rules require the application management compensation and 
excess capital as skin-in-the-game, which in turn should help further 
align the interests of OCC's stakeholders, including OCC management and 
Clearing Members.\45\
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    \42\ 17 CFR 240.17Ad-22(e)(2).
    \43\ Covered Clearing Agency Standards, 81 FR at 70805-06.
    \44\ Covered Clearing Agency Standards, 81 FR at 70806.
    \45\ See CMP Approval Order at 5507.
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    As described above, OCC's proposal would not reduce the resources 
OCC would apply to address default losses or remove the current skin-
in-the-game component of OCC's rules. Rather, OCC proposes to set aside 
a defined amount of capital for the sole purpose of absorbing losses 
and shortfalls arising out of a Clearing Member default. OCC has 
clearly stated the factors that the Board would consider when 
determining the amount of resources to hold as skin-in-the-game, a 
portion of which would comprise the Minimum Corporate Contribution. OCC 
also proposes to establish a clear process for addressing reductions in 
the Minimum Corporate Contribution arising out of a Clearing Member's 
default. Accordingly, the Commission believes that the proposed changes 
to establish a persistent minimum level of skin-in-the-game are 
consistent with Rule 17Ad-22(e)(2) under the Exchange Act.\46\
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    \46\ 17 CFR 240.17Ad-22(e)(2).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the 
Exchange Act, and in particular, the requirements of Section 17A of the 
Exchange Act \47\ and the rules and regulations thereunder.
---------------------------------------------------------------------------

    \47\ In approving this Proposed Rule Change, the Commission has 
considered the proposed rules' impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\48\ that the Proposed Rule Change (SR-OCC-2021-003) be, 
and hereby is, approved.
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    \48\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\49\
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    \49\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-11606 Filed 6-2-21; 8:45 am]
BILLING CODE 8011-01-P
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