Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change Concerning the Options Clearing Corporation's Cash and Investment Management, 1819-1825 [2022-00378]
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Federal Register / Vol. 87, No. 8 / Wednesday, January 12, 2022 / Notices
concerning loss allocation in the
extremely unlikely event that the failure
or disruption of a non-bank investment
counterparty results in a loss to OCC
arising from the investment of Clearing
Member Cash. The expansion of existing
authority to allocate such losses
attributable to a non-bank investment
counterparty helps establish a more
transparent and clear loss allocation
process and ensure OCC’s authority to
take action to contain losses and
continue to meet its clearance and
settlement obligations. Accordingly,
OCC believes the proposed changes to
OCC’s Rules are consistent with Rule
17Ad–22(e)(13).
III. Date of Effectiveness of the Advance
Notice and Timing for Commission
Action
The proposed change may be
implemented if the Commission does
not object to the proposed change
within 60 days of the later of (i) the date
the proposed change was filed with the
Commission or (ii) the date any
additional information requested by the
Commission is received. OCC shall not
implement the proposed change if the
Commission has any objection to the
proposed change.
The Commission may extend the
period for review by an additional 60
days if the proposed change raises novel
or complex issues, subject to the
Commission providing the clearing
agency with prompt written notice of
the extension. A proposed change may
be implemented in less than 60 days
from the date the advance notice is
filed, or the date further information
requested by the Commission is
received, if the Commission notifies the
clearing agency in writing that it does
not object to the proposed change and
authorizes the clearing agency to
implement the proposed change on an
earlier date, subject to any conditions
imposed by the Commission.
OCC shall post notice on its website
of proposed changes that are
implemented. The proposal shall not
take effect until all regulatory actions
required with respect to the proposal are
completed.
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IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the advance notice is
consistent with the Clearing
Supervision Act. Comments may be
submitted by any of the following
methods:
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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–2021–803 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549.
All submissions should refer to File
Number SR–OCC–2021–803. 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 advance notice that
are filed with the Commission, and all
written communications relating to the
advance notice 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 self-regulatory organization.
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–2021–803 and should
be submitted on or before February 2,
2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.51
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022–00377 Filed 1–11–22; 8:45 am]
BILLING CODE 8011–01–P
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1819
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93916; File No. SR–OCC–
2021–014]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing of Proposed Rule Change
Concerning the Options Clearing
Corporation’s Cash and Investment
Management
January 6, 2022.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’ or ‘‘Act’’),1 and Rule
19b–4 thereunder,2 notice is hereby
given that on December 23, 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
This proposed rule change would (1)
formalize OCC’s policy for safeguarding
cash and related investments and (2)
amend OCC’s Rules governing use of the
Clearing Fund in the event of the failure
of a bank to meet a settlement obligation
with OCC to ensure such access extends
to the failure of an investment
counterparty with whom OCC has
invested cash deposited by Clearing
Members in respect of margin or
Clearing Fund requirements under the
conditions identified in OCC Rule
1006(c) and (f), regardless of whether
the investment counterparty is a bank.
The Cash and Investment Management
Policy is included in confidential
Exhibit 5a of File Number SR–OCC–
2021–014. Proposed amendments to
OCC’s Rules are included in Exhibit 5b
of File Number SR–OCC–2021–014. All
terms with initial capitalization that are
not otherwise defined herein have the
same meaning as set forth in the OCC
By-Laws and Rules.3
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
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 website: https://www.theocc.com/CompanyInformation/Documents-and-Archives/By-Lawsand-Rules.
2 17
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Federal Register / Vol. 87, No. 8 / Wednesday, January 12, 2022 / Notices
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
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(1) Purpose
OCC is proposing to enhance its cash
and investment management practices
by: (1) Formalizing OCC’s policy for
safeguarding cash and related
investments, and (2) amending OCC’s
Rules to ensure access to the Clearing
Fund if a non-bank investment
counterparty fails to return Clearing
Member cash deposited in respect of
margin or Clearing Fund requirements
under the conditions identified in OCC
Rule 1006(c) and (f).
Background
OCC’s By-Laws and Rules govern the
management and investment of OCC’s
own funds and cash deposited by
Clearing Members. With respect to
OCC’s own funds (other than Clearing
Fund deposits), Article IX, Section 1 of
OCC’s By-Laws provides that funds in
excess of the amount needed as working
capital may be invested by the Board in
Government securities or such other
securities or financial instruments as the
Board or a Board-level committee may
from time to time approve.4 With
respect to cash deposited by Clearing
Members, OCC Rules 604(a) and 1002(c)
provide that cash deposited in respect of
a Clearing Member’s margin
requirements or Clearing Fund
contributions may from time to time be
partially or wholly invested by OCC for
its account in Government securities.5
OCC does not propose to amend these
By-Laws or Rules by this proposed rule
change.
OCC’s investments historically have
been limited to overnight transactions
under deliver-versus-payment (‘‘DVP’’)
reverse repurchase agreements. As
collateral, the investment counterparty
deliveries Government securities equal
to 102% of the cash invested at the time
the investment is made. Such
investments reduce OCC’s investment
risks by permitting quick liquidation
with little adverse price effect and
controlling the movement of OCC’s
assets via a custodian bank. To
minimize counterparty risk, OCC
restricts its potential counterparties to
4 See
5 See
By-Law Art. IX, Sec. 1.
OCC Rule 604(a); Rule 1006(c).
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financial institutions that meet certain
standards of size, capital adequacy,
product offering and operational
capacity.
In the event of a failure or disruption
of an investment counterparty that is a
bank, OCC’s Rules provide OCC with
authority to access the Clearing Fund to
address liquidity shortfalls, including
shortfalls arising from the investment of
Clearing Member cash in Government
securities. Specifically, OCC Rule
1006(f) authorizes OCC to take
possession of cash or securities
deposited by Clearing Members in
respect of the Clearing Fund when OCC
reasonably believes it necessary to meet
its liquidity needs for same-day
settlement as a result of the failure of
any bank to achieve daily settlement
with OCC.6 In the extremely unlikely
event that a bank investment
counterparty failed to return the cash
versus return of the Government
securities to unwind a transaction under
a reverse repurchase agreement—e.g.,
because of a systems disruption,
operational outage, or otherwise—OCC
could exercise authority under Rule
1006(f) to borrow from the Clearing
Fund to the extent required for OCC to
meet its settlement obligations with
Clearing Members.7
In the unlikely event that any part of
the borrowing under Rule 1006(f) is
outstanding after 30 calendar days, or if
OCC determines that some or all of the
amount borrowed constituted an actual
loss, OCC would charge the loss to the
Clearing Fund.8 In the unlikely event
that OCC incurred an investment loss
resulting from a bank’s failure to return
the invested cash because of
bankruptcy, insolvency, receivership,
suspension of operations or other
similar event, OCC may, at its
discretion, charge the loss to the
Clearing Fund.9 OCC may also, at its
discretion, apply skin-in-the-game to a
loss resulting from a borrowing or bank
failure in the form of liquid net assets
6 See OCC Rule 1006(f). As discussed, infra, this
proposed rule change would amend this clause to
apply when OCC reasonably believes it necessary
to meet its liquidity needs for ‘‘daily settlement’’ as
a result of the failure of any bank ‘‘to perform any
obligation to the Corporation when due.’’
7 OCC amended its Rules in 2018 to extend access
to the Clearing Fund in the extraordinary event that
OCC faces a liquidity need in order to complete
same-day settlement for reasons other than a bank
or clearing organization’s bankruptcy, insolvency,
receivership, suspension of operations, or any
similar event. See Securities Exchange Act
(‘‘Exchange Act’’) Release No. 82309 (Dec. 13,
2017), 82 FR 60262 (Dec. 19, 2017) (File No. SR–
OCC–2017–017).
8 See OCC Rule 1006(c)(ii).
9 See OCC Rule 1006(c)(i).
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funded by equity 10 in excess of 110%
of OCC’s Target Capital Requirement.11
Proposed Changes
Cash and Investment Management
Policy
OCC proposes to file its Cash and
Investment Management Policy (or
‘‘Policy’’) as a proposed rule of the
clearing agency within the meaning of
Section 19(b)(1) of the Exchange Act 12
and SEC Rule 19b–4.13 The Policy
would include statements of purpose,
applicability and scope, safeguarding
standards for maintaining cash and
related investments to minimize credit
and liquidity risk, and guidelines for
investing OCC Cash and Clearing
Member Cash, as defined below.
Purpose, Applicability and Scope
The Policy would include statements
of the Policy’s purpose, applicability,
and scope. The purpose of the Policy
would be to (1) outline the safeguarding
standards for cash and related
investments managed by OCC to
minimize credit and liquidity risk, and
(2) provide guidelines for investments
permitted by OCC’s By-Laws and Rules.
The Policy principally would apply to
OCC’s Treasury department
(‘‘Treasury’’), which has responsibility
for managing cash on behalf of OCC.
The Policy’s scope would include the
safeguarding standards and investment
activities specific to OCC’s own cash
(‘‘OCC Cash’’) and cash from OCC’s
Clearing Members (‘‘Clearing Member
Cash’’).
The Policy would define OCC Cash to
include working capital related to future
operating costs, inclusive of financial
resource held to meet liquidity and
resiliency requirements,14 proceeds
from lines of credit, if any, maintained
to support OCC’s working capital,15 the
10 OCC’s Capital Management Policy defines
‘‘liquid net assets funded by equity’’ to be the level
of cash or cash equivalents, no greater than OCC’s
shareholders’ equity, less any approved adjustments
(e.g., agency-related liabilities such as Section 31
fees held by OCC and the Minimum Corporate
Contribution). See Exchange Act Release No. 91199
(Feb. 24, 2021), 86 FR 12237, 12241 (Mar. 2, 2021)
(File No. SR–OCC–2021–003).
11 See OCC Rule 1006(e)(ii).
12 15 U.S.C. 78s(b)(1).
13 17 CFR 240.19b–4.
14 See Exchange Act Release No. 88029 (Jan. 24,
2020), 85 FR 5500, 5501–02 (Jan. 30, 2020) (File No.
SR–OCC–2019–007) (discussing the determination
of Target Capital Requirement under OCC’s Capital
Management Policy).
15 Working capital lines of credit, if any, are
separate from the syndicated credit facility and
liquidity facilities that OCC maintains to cover
default losses or liquidity shortfalls. See Exchange
Act Release No. 88971 (May 28, 2020), 85 FR 34257
(June 3, 2020) (File No. SR–OCC–2020–804)
(discussing OCC’s revolving credit facility);
Exchange Act Release No. 89039 (June 10, 2020), 85
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Minimum Corporate Contribution,16
and investments made with OCC Cash.
The Policy would not apply to cash held
in respect of OCC’s pension plan, postretirement welfare plan, or other
deferred compensation plans. The
Policy would define Clearing Member
Cash to include Clearing Fund cash
deposits; cash deposited by Clearing
Members in respect of margin
requirements; cash held in liquidating
settlement accounts for suspended
Clearing Members,17 proceeds from
OCC’s syndicated credit facility and
liquidity facilities,18 and investments
made with Clearing Member Cash.19
The Policy would not apply to non-cash
collateral deposited by Clearing
Members to satisfy margin or Clearing
Fund requirements.
Safeguarding Standards
The Policy would address the
safeguarding standards for managing
OCC Cash and Clearing Member Cash,
which OCC would either hold in a
demand deposit or Federal Reserve
Bank accounts or invest in accordance
with OCC’s By-Laws and investment
strategy, as discussed below.
OCC Cash
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Unless invested, OCC Cash would be
held in demand deposit accounts or at
a Federal Reserve Bank. Demand
deposit accounts would be limited to
commercial financial institutions that
meet initial and ongoing standards for
depository banks outlined in OCC’s
procedures concerning its banking
relationships.
Treasury would be responsible for
maintaining appropriate levels of
liquidity in OCC’s operating accounts to
meet general business obligations and
regulatory requirements. To fulfill this
responsibility, the Policy would provide
that OCC may maintain bank lines of
credit for working capital purposes. The
source of such credit line would need to
meet the standards for credit facility
banks outlined in OCC’s procedures
concerning its banking relationships.
FR 36444 (June 16, 2020) (File No. SR–OCC–2020–
803) (discussing OCC’s non-bank liquidity facility).
16 See Exchange Act Release No. 92038 (May 27,
2021), 86 FR 29861 (Jun. 3, 2021) (File No. SR–
OCC–2021–003) (establishing a persistent minimum
level of OCC’s own capital that it would contribute
to default losses or liquidity shortfalls prior to
allocating a default loss to the Clearing Fund
contributions of non-defaulting Clearing Members).
17 See OCC Rule 1104.
18 See supra note 17 (citing SEC notices of noobjection to advance notices concerning OCC’s
credit and liquidity facilities).
19 See supra note 7 and accompanying text.
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Clearing Member Cash
The Policy would provide that unless
invested, Clearing Member Cash would
be held in a demand deposit account or
in accounts at a Federal Reserve Bank.
With respect to commercial banks,
Clearing Member Cash would only be
held in financial institutions that meet
the initial and ongoing standards for
depository banks as provided in in
OCC’s procedures concerning banking
relationships. The Policy would provide
that Clearing Member Cash collected at
OCC’s settlement banks may be
transferred to other depository banks,
including to and from OCC’s bank
accounts for settlement, investment, and
cash management purposes. Upon the
suspension of a Clearing Member, OCC
would promptly move all margin and
Clearing Fund cash related to the
Clearing Member into a liquidating
settlement account for use in meeting
the obligations of the Clearing Member,
as provided under OCC’s Rules.20
Treasury would be responsible for
ensuring accounts are appropriately
funded to meet financial obligations.
Interest earned on Clearing Fund cash
deposits held at a Federal Reserve Bank
would accrue to the benefit of Clearing
Members, less a cash management fee.
The Policy would also provide that
OCC would employ a bank account
structure that segregates customer funds
per applicable regulatory
requirements 21 and OCC’s By-Laws and
Rules.22 Futures customer segregated
cash would be held in segregated fund
accounts pursuant to applicable
Commodity and Futures Trading
Commission (‘‘CFTC’’) regulations,
including that OCC ensures that it
receives proper written
acknowledgment from the depository
for each new segregated funds account
that the account has been established to
hold segregated cash generated from
futures customers.23 The Policy would
further provide that if OCC sustains an
investment loss with respect to invested
margin cash OCC will not pass on the
loss to a futures customer segregated
account.
Investment Guidelines
The Policy would also provide
guidelines for investments permitted by
OCC’s By-Laws and Rules and approved
by the Board or Compensation and
Performance Committee (‘‘CPC’’),
20 See
OCC Rule 1104.
17 CFR 39.15 (requiring a derivatives
clearing organization to comply with the
segregation requirements section 4d of the
Commodity Exchange Act).
22 See OCC By-Laws Art. VI, Sec. 3(f) (providing
for maintenance of segregated futures accounts).
23 See 17 CFR 1.20(g)(4).
21 See
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including OCC’s investment strategy,
investment governance principles, and
guidelines for the investment of OCC
Cash and Clearing Member Cash.
Investment Strategy
The Policy would provide that OCC’s
investment strategy is to preserve
principal and maintain adequate
liquidity. After principal and liquidity
requirements are satisfied, only then
would Management seek to optimize
investment returns. OCC would disclose
its investment strategy through its
public website on a periodic basis via its
qualitative disclosures to the Principles
for Financial Market Infrastructure
Disclosures.24
Investment Governance Principles
The Policy would provide that OCC
may invest OCC Cash and Clearing
Member Cash in permitted investments
per applicable regulatory requirements,
OCC’s By-Laws and Rules, the
investment strategy and the following
governance principles. Current
investment practices would be outlined
in procedures maintained by OCC.
Investment counterparties would need
to be financial institutions or financial
market utilities that meet initial and ongoing standards outlined in OCC’s
procedures concerning its banking
relationships, which consider the
financial institution’s size, capital
adequacy, product offering and
operational capabilities. Any interest or
gain received on the investments would
belong to OCC except as may otherwise
be provided in OCC’s By-Laws, Rules or
Board-approved policies.25 OCC would
not commingle investments of OCC
Cash with investments of Clearing
Member Cash.
Investment of OCC Cash
The Policy would provide that OCC
Cash may be invested in instruments
that pose minimal credit and liquidity
risk pursuant to applicable regulatory
requirements, OCC’s By-Laws, the
investment strategy, and Board or CPC
approved investments. Approved
investments other than in Government
securities would continue to be subject
to Board or CPC approval, as required
under Section 1 of Article IX of OCC’s
By-Laws.26 In addition, investment of
24 See Disclosure Framework, available at https://
www.theocc.com/Risk-Management/PFMIDisclosures.
25 As discussed, interest earned on Clearing Fund
cash deposits held at a Federal Reserve Bank would
accrue to the benefit of Clearing Members, less a
cash management fee.
26 In addition to investments in Government
securities through overnight DVP transactions, the
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working capital in excess of 110% of
OCC’s Target Capital Requirement
would not be limited to overnight
transactions.27
Investment of Clearing Member Cash
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The Policy would further provide that
Clearing Member Cash may be invested
in Government securities by OCC in
transactions that provide next-day
liquidity in accordance with applicable
regulatory requirements, OCC’s Rules,
and the investment strategy, subject to
the following guiding principles. First,
the Policy would provide that
notwithstanding the authority to invest
Clearing Fund cash under OCC Rule
1002(c), it is OCC’s policy not to invest
Clearing Fund cash, which is instead
maintained in accounts at a Federal
Reserve Bank or a commercial bank.
This policy would be subject to an
exception approved by the Chief
Executive Officer or Chief Operating
Officer in emergency situations (such as
a disruption at a Federal Reserve Bank)
when necessary or advisable for the
protection of the Corporation or
otherwise in the public interest to
continue to facilitate the prompt and
accurate clearance and settlement of
confirmed trades or other transactions
and to provide OCC’s services in a safe
and sound manner. Second, the Policy
would provide that margin cash would
only be invested in instruments that
provide liquidity to OCC by the
following business day. Third, the
Policy would provide that OCC will
implement procedures to ensure that
end-of-day margin cash balances remain
above the aggregate level of any
Required Cash Deposits, as that term is
defined in OCC’s Liquidity Risk
Management Framework.28 The policy
Board has approved investments of OCC’s own cash
in U.S. government money market mutual funds.
27 With respect to OCC’s liquid net assets funded
by equity in excess of 110% of the Target Capital
Requirement, the Board has initially approved
investment of such funds in Government securities
through DVP transactions for terms no more than
30 days.
28 The Liquidity Risk Management Framework
defines ‘‘Required Cash Deposits’’ (sometimes
referred to as minimum cash requirements or
‘‘MCR’’) as deposits of cash under OCC’s
Contingency Funding Plan that supplement OCC’s
Base Liquidity Resources (i.e., the amount of
committed liquidity resources maintained at all
times by OCC to meet its minimum Cover 1
liquidity resource requirements under the
applicable regulations). Under that framework, OCC
may require a Clearing Member Group to post such
additional cash collateral to supplement OCC’s
Available Liquidity Resources (i.e., Base Liquidity
Resources plus allowed Clearing Fund cash
deposits in excess of the minimum required
amount) when stressed liquidity demands for that
Clearing Member Group are above established
thresholds or until the settlement demand is met.
See Exchange Act Release No. 89014 (June 4, 2020),
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with respect to investing Required Cash
Deposits would be subject to the same
exception as for investment of Clearing
Fund cash. Fourth, any change
regarding whether to investment futures
customer segregated funds would be
approved by OCC’s Chief Financial
Officer in consultation with OCC’s Legal
and Compliance departments.29
The Policy would also describe how
OCC maintains liquidity facilities for
immediate access to liquidity in the
event of a suspension of a Clearing
Member or a failure of a bank, securities
or commodity clearing organization, or
investment counterparty (with respect
to the investment of Clearing Member
Cash) to meet an obligation owing to
OCC, or in anticipation thereof,
pursuant to OCC Rules 1006(c) and (f),
proposed amendments to which are
discussed below. The liquidity
providers for these facilities would be
approved and monitored according to
the OCC’s Third-Party Risk Management
Framework and Liquidity Risk
Management Framework.30
Amendments to OCC Rule 1006
OCC proposes to amend OCC Rule
1006, which governs its ability to access
the Clearing Fund in the event of the
failure (or anticipated failure) of bank to
meet a settlement obligation with OCC,
to extend such access to the failure of
a non-bank investment counterparty to
meet settlement obligations with OCC
under the conditions identified in OCC
Rule 1006(c) and (f). In addition, OCC
proposes to restate OCC Rule 1006(f) for
clarity.
To ensure that OCC may access the
Clearing Fund in the event of a failure
or disruption of a non-bank
counterparty with whom OCC has
invested Clearing Member Cash, OCC
would amend OCC Rule 1006(f) to
include ‘‘investment counterparty’’ to
the list of counterparties—currently, any
bank or securities or commodities
clearing organization—whose failure or
disruption may result in a borrowing
under Rule 1006(f). Similarly, OCC
would also amend OCC Rule 1006(a)
and (c) to add the same phrase to the list
85 FR 35446, 35449 (June 10, 2020) (File No. SR–
OCC–2020–003).
29 Like Clearing Fund cash, OCC does not
currently invest futures customer segregated funds.
If OCC determined to invest such funds, such
investments would be subject to CFTC regulations
regarding a derivatives clearing organization’s
investment of futures customer funds. See 17 CFR
1.25.
30 See Exchange Act Release No. 90797 (Dec. 23,
2020), 85 FR 86592 (Dec. 30, 2020) (File No. SR–
OCC–2020–014) (approving OCC’s framework for
identifying, measuring, monitoring, and managing
OCC’s exposures to its counterparties); Exchange
Act Release No. 89014, 85 FR 35446 (approving
OCC’s approach to managing liquidity risk).
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of counterparties whose failure resulting
from bankruptcy, insolvency,
receivership, suspension of operations,
or any similar event may result in
allocation of losses to the Clearing
Fund. Rule 1006(c) and (f) would be
further amended to provide that failure
of an investment counterparty under
those paragraphs would be limited to a
failure with respect to Clearing Member
Cash (i.e., cash invested under Rule
604(a) or Rule 1002(c)).31 Any
investment loss resulting from
investment of OCC Cash would be
treated as an operational loss that would
be addressed under OCC’s Capital
Management Policy, rather than a loss
that would be allocated to the Clearing
Fund.32
OCC would also amend the condition
that triggers borrowing authority under
Rule 1006(f)—currently clause (iii) of
the first sentence of Rule 1006(f)—
which would be renumbered as Rule
1006(f)(1)(C). That condition would be
amended to apply when the Corporation
reasonably believes it necessary to
borrow to meet its liquidity needs for
‘‘daily settlement’’ rather than ‘‘sameday settlement,’’ as in the current text.
OCC may reasonably believe that a
disruption at a bank, securities or
commodities clearing organization, or
investment counterparty could last
multiple days, resulting in liquidity
needs for daily settlement over more
than one day. This amendment would
ensure that OCC has authority to initiate
a borrowing for the amount OCC
believes necessary to meet its liquidity
needs over the timeframe OCC believes
the disruption will affect OCC’s ability
to meet daily settlement requirements
with Clearing Members, rather than only
that amount that OCC believes it needs
on a day-by-day basis.
OCC would further amend the
condition in Rule 1006(f)(1)(C) to apply
when OCC reasonably believes such a
liquidity need will arise because of one
of the identified counterparty’s failure
‘‘to perform any obligation to the
Corporation when due,’’ rather than
such a counterparty’s failure ‘‘to achieve
daily settlement.’’ This change aligns
with the condition for allocation of
losses under Rule 1006(c) and
eliminates any ambiguity that might
arise concerning the settlement
obligations to which the current Rule
refers. As under the current Rule, use of
funds obtained through such a
31 The same limitation would apply to Rule
1006(a), which incorporates the reasons specified in
Rule 1006(c) by reference.
32 See Exchange Act Release No. 88029, 85 FR at
5502–03 (discussing OCC’s plan for replenishing its
capital in the event that shareholders’ equity falls
below certain thresholds).
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Federal Register / Vol. 87, No. 8 / Wednesday, January 12, 2022 / Notices
borrowing would continue to be limited
to the purposes described in Rule
1006(f)(1)(C), as amended, i.e., to meet
OCC’s liquidity needs for daily
settlement with Clearing Members.
In addition to the substantive changes
discussed above, OCC would also
restate Rule 1006(f) for clarity. The
current paragraph would be divided
into four subparagraphs with courtesy
headings: (1) Conditions; (2) Uses; (3)
Term; Clearing Fund Charge; and (4)
Substitution Requests. The conditions in
Rule 1006(f)(1) would begin with the
first sentence of current Rule 1006(f),
less the conjoined clause beginning with
‘‘and use such assets,’’ the substance of
which would be moved to paragraph
(f)(2). The remaining clause before the
conjunction would be amended to
describe OCC’s investment of Clearing
Fund cash contributions in the active
voice. The three conditions for a
borrowing identified in Rule 1006(f),
currently numbered (i) through (iii),
would then follow after the conjunction
as items (A) through (C). Item (A) would
be further amended to remove legalese
and state the condition more plainly.
Item (C) would be amended
substantively as discussed above.
The prescribed uses for the borrowed
funds described in several places
throughout current Rule 1006(f) would
be aggregated in Rule 1006(f)(2). As
currently found in the conjoined clause
in the first sentence of current Rule
1006(f), Rule 1006(f)(2)(A) would
provide that OCC may use funds it takes
possession of under Rule 1006(f) to (i)
meet obligations, losses or liquidity
needs; or (ii) borrow or otherwise obtain
funds through any means determined to
be reasonable at the discretion of the
Chairman, Chief Executive Officer or the
Chief Operating Officer (including,
without limitation, pledging such assets
as security for loans and/or using such
assets to effect repurchase, securities
lending or other transactions). Proposed
Rule 1006(f)(ii) would also be restated to
remove a gendered pronoun. Rule
1006(f)(2)(B) would describe the
limitations on use of funds borrowed
under the renumbered conditions in
Rule 1006(f)(1)(A) and (C).
Rule 1006(f)(3) would contain the
term for a borrowing, as well as the
conditions that would trigger a loss
chargeable to the Clearing Fund. The 30day period before which OCC would be
obligated to charge a borrowed amount
as a loss to the Clearing Fund would be
located at Rule 1006(f)(3)(A), with
certain non-substantive edits to the text.
The conditions that would trigger the
loss allocation to the Clearing Fund
would be located at Rule 1006(f)(3)(B)
and would be restated to move the
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lengthy conditions after the main
clause, among other non-substantive
revisions.
Finally, Rule 1006(f)(4) would
relocate OCC’s authority to refuse
Clearing Member substitution requests
regarding securities contributed to the
Clearing Fund that the Corporation has
taken possession of under Rule 1006(f).
In addition to relocating that provision
to the end of Rule 1006(f), this proposed
rule change would restate that provision
to reflect the reorganization of Rule
1006(f).
(2) Statutory Basis
Section 17A(b)(3)(F) of the Exchange
Ac,33 requires, among other things, that
the rules of a clearing agency be
designed to promote the prompt and
accurate clearance and settlement of
securities transactions, 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, to perfect the mechanism of
a national system for the prompt and
accurate clearance and settlement of
securities transactions, and, in general,
to protect investors and the public
interest. For the reasons discussed
below, OCC believes the proposed rule
change is consistent with Section
17A(b)(3)(F) 34 of the Exchange Act and
Rule 17Ad–22(e)(7)(viii),35 Rule 17Ad–
22(e)(13),36 and Rule 17Ad–22(e)(16) 37
thereunder.
Consistency With Section 17A(b)(3)(F)
of the Exchange Act
The Cash and Investment
Management Policy is designed to
safeguard cash and related investments
within OCC’s custody or control. The
Policy applies to, among other things,
cash deposited by Clearing Members in
respect of margin and Clearing Fund
requirements, any Government
securities in which OCC invests such
cash, and the Minimum Corporate
Contribution, each of which are liquid
resources available to facilitate
settlement and to cover potential losses
in the event of a Clearing Member
default. The Policy also extends to
OCC’s own cash, including cash OCC
maintains to cover potential general
business losses so that OCC can
continue operations and services as a
going concern if those losses
materialize, in accordance with OCC’s
Capital Management Policy. By
providing safeguarding standards for
33 15
U.S.C. 78q–1(b)(3)(F).
U.S.C. 78q–1(b)(3)(F).
35 17 CFR 240.17Ad–22(e)(7)(viii).
36 17 CFR 240.17Ad–22(e)(13).
37 17 CFR 240.17Ad–22(e)(16).
34 15
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Frm 00109
Fmt 4703
Sfmt 4703
1823
managing such cash and related
investments, the Policy would help
ensure those resources will be available
to facilitate settlement, cover potential
default losses, or cover potential general
business losses, as applicable.
Therefore, OCC believes the Policy is
designed to promote the prompt and
accurate clearance and settlement of
securities transactions, 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,
consistent with Section 17A(b)(3)(F) of
the Exchange Act.38
The proposed rule change is also
designed to ensure that OCC can
continue to promptly settle the
securities and derivatives transactions it
clears by enhancing the existing tools
OCC has to address potential liquidity
shortfalls. Specifically, the proposed
rule change would expand the existing
borrowing authority in OCC’s By-Laws
to authorize borrowing in the
extraordinary event that OCC faces a
liquidity need in order to complete
daily settlement with its Clearing
Members resulting from the failure or
disruption of an investment
counterparty with whom OCC has
invested Clearing Member Cash that is
not a bank.
It is conceivable, though extremely
unlikely, that an investment
counterparty may fail to return Clearing
Member Cash that OCC has invested in
Government securities with the
counterparty in a DVP transaction as a
result of a disruption or failure at that
investment counterparty. The proposed
rule change would enable OCC to
borrow against the Clearing Fund in this
scenario in order to avoid disrupting
OCC’s ordinary settlement cycle. In the
extremely unlikely event that OCC
incurs a loss resulting from the
investment of Clearing Member Cash,
OCC would retain authority to allocate
such loss to the Clearing Fund, at OCC’s
discretion. Accordingly, OCC believes
the proposed rule change is designed to
promote the prompt and accurate
clearance and settlement of securities
transactions, in accordance with the
requirements of Section 17A(b)(3)(F) of
the Exchange Act.39
Consistency With Rule 17Ad–22(e)(16)
Rule 17Ad–22(e)(16) under the
Exchange Act requires, in part, that OCC
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to safeguard OCC’s
38 15
U.S.C. 78q–1(b)(3)(F).
39 Id.
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Federal Register / Vol. 87, No. 8 / Wednesday, January 12, 2022 / Notices
own and its participants’ assets,
minimize the risk of loss and delay in
access to these assets, and invest such
assets in instruments with minimal
credit, market, and liquidity risks.40 As
discussed above, the Policy outlines
safeguarding standards for cash and
related investments intended to
minimize credit and liquidity risks. In
addition, the Policy sets forth OCC’s
conservative investment strategy,
according to which OCC’s primary
objective is to preserve principal and
maintain adequate liquidity. The Policy
also requires cash and related
investments to be maintained with
counterparties that have been initially
approved and routinely monitored in
accordance with OCC’s Third Party Risk
Management Policy and procedures
governing banking relationships.
Accordingly, OCC believes that the
Policy is consistent with Rule 17Ad–
22(e)(16).
lotter on DSK11XQN23PROD with NOTICES1
Consistency With Rule 17Ad–
22(e)(7)(viii)
Additionally, Rule 17Ad–22(e)(7)(viii)
requires that OCC address foreseeable
liquidity shortfalls that would not be
covered by OCC’s liquid resources and
seek to avoid unwinding, revoking, or
delaying the settlement of payment
obligations.41 As stated above, OCC
believes that it could be foreseeable,
though extremely unlikely, that an
investment counterparty that is not a
bank may fail to return Clearing Member
Cash as the result of the investment
counterparty’s disruption or failure. An
alternative available to OCC for
addressing uncovered liquidity
shortfalls would be to exercise authority
under Rule 505 to extend the settlement
window to the close of Fedwire.42 The
proposed rule change would improve
OCC’s ability to address such situations
by expanding OCC’s borrowing
authority to enable OCC to borrow
against the Clearing Fund to address a
failure or disruption at a non-bank
investment counterparty rather than
disrupting its ordinary settlement cycle.
Accordingly, OCC believes that
proposed changes to OCC Rules are
consistent with Rule 17Ad–
22(e)(7)(viii).
Consistency With Rule 17Ad–22(e)(13)
Finally, Rule 17Ad–22(e)(13) requires,
in part, that OCC establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
ensure OCC has the authority to take
timely action to contain losses and
CFR 240.17Ad–22(e)(16).
CFR 240.17Ad–22(e)(7)(viii).
42 See OCC Rule 505 (Extension of Settlements).
liquidity demands and continue to meet
its obligations.43 As described above,
this proposal would amend OCC’s Rules
concerning loss allocation in the
extremely unlikely event that the failure
or disruption of a non-bank investment
counterparty results in a loss to OCC
arising from the investment of Clearing
Member Cash. The expansion of existing
authority to allocate such losses
attributable to a non-bank investment
counterparty helps establish a more
transparent and clear loss allocation
process that ensures OCC’s authority to
take action to contain losses and
continue to meet its clearance and
settlement obligations. Accordingly,
OCC believes the proposed changes to
OCC’s Rules are consistent with Rule
17Ad–22(e)(13).
(B) Clearing Agency’s Statement on
Burden on Competition
Section 17A(b)(3)(I) of the Exchange
Act 44 requires that the rules of a
clearing agency not impose any burden
on competition not necessary or
appropriate in furtherance of the
purposes of the Exchange Act. OCC does
not believe the proposed rule change
would have any impact or impose any
burden on competition. The primary
purpose of the proposed rule change is
to formalize OCC’s Cash and Investment
Management Policy and enhance OCC’s
access to the Clearing Fund by
expanding the existing authority
concerning bank failures to also apply
in the case of failures by other
investment counterparties. The
proposed rule change would not affect
Clearing Members’ access to OCC’s
services or disadvantage or favor any
particular user in relationship to
another user. As such, OCC believes that
the proposed changes would not have
any impact or impose any burden on
competition.
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants or Others
Written comments 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
40 17
41 17
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17:04 Jan 11, 2022
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43 17
44 15
PO 00000
CFR 240.17Ad–22(e)(13).
U.S.C. 78q–1(b)(3)(I).
Frm 00110
Fmt 4703
Sfmt 4703
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
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
OCC shall post notice on its website
of proposed changes that are
implemented. The proposal shall not
take effect until all regulatory actions
required with respect to the proposal are
completed.
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 rule-comments@
sec.gov. Please include File Number SR–
OCC–2021–014 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–2021–014. 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
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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–2021–014 and should
be submitted on or before February 2,
2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.45
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022–00378 Filed 1–11–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Self-Regulatory Organizations; NYSE
American LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Extending the Expiration
Date of the Temporary Amendments to
Rules 9261 and 9830
January 6, 2022.
lotter on DSK11XQN23PROD with NOTICES1
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that on December
27, 2021, NYSE American LLC (‘‘NYSE
American’’ or the ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes extending the
expiration date of the temporary
amendments to Rules 9261 and 9830 as
set forth in SR–NYSEAMER–2020–69
from December 31, 2021 to March 31,
2022, in conformity with recent changes
by the Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’). The
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
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17:04 Jan 11, 2022
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
[Release No. 34–93917; File No. SR–
NYSEAMER–2021–49]
45 17
proposed rule change would not make
any changes to the text of NYSE
American Rules 9261 and 9830. The
proposed rule change is available on the
Exchange’s website at www.nyse.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
1. Purpose
The Exchange proposes extending the
expiration date of the temporary
amendments as set forth in SR–
NYSEAMER–2020–69 4 to Rules 9261
(Evidence and Procedure in Hearing)
and 9830 (Hearing) from December 31,
2021 to March 31, 2022, to harmonize
with recent changes by FINRA to extend
the expiration date of the temporary
amendments to its Rules 9261 and 9830.
SR–NYSEAMER–2020–69 temporarily
granted to the Chief or Deputy Chief
Hearing Officer the authority to order
that hearings be conducted by video
conference if warranted by public health
risks posed by in-person hearings
during the ongoing COVID–19
pandemic. The proposed rule change
would not make any changes to the text
of Exchange Rules 9261 and 9830.5
Background
In 2016, NYSE American (then known
as NYSE MKT LLC) adopted
disciplinary rules that are, with certain
exceptions, substantially the same as the
Rule 8000 Series and Rule 9000 Series
4 See Securities Exchange Act Release No. 90085
(October 2, 2020), 85 FR 63603 (October 8, 2020)
(SR–NYSEAMER–2020–69) (‘‘SR–NYSEAMER–
2020–69’’).
5 The Exchange may submit a separate rule filing
to extend the expiration date of the proposed
extension beyond March 31, 2022 if the Exchange
requires additional temporary relief from the rule
requirements identified in SR–NYSEAMER–2020–
69. The amended NYSE American rules will revert
back to their original state at the conclusion of the
temporary relief period and any extension thereof.
PO 00000
Frm 00111
Fmt 4703
Sfmt 4703
1825
of FINRA and its affiliate the New York
Stock Exchange LLC (‘‘NYSE’’), and
which set forth rules for conducting
investigations and enforcement actions.6
The NYSE American disciplinary rules
were implemented on April 15, 2016.7
In adopting disciplinary rules
modeled on FINRA’s rules, NYSE
American adopted the hearing and
evidentiary processes set forth in Rule
9261 and in Rule 9830 for hearings in
matters involving temporary and
permanent cease and desist orders
under the Rule 9800 Series. As adopted,
the text of Rule 9261 and Rule 9830 are
substantially the same as the FINRA
rules with certain modifications.8
In response to the COVID–19 global
health crisis and the corresponding
need to restrict in-person activities, on
August 31, 2020, FINRA filed with the
Commission a proposed rule change for
immediate effectiveness, SR–FINRA–
2020–027, which allowed FINRA’s
Office of Hearing Officers (‘‘OHO’’) to
conduct hearings, on a temporary basis,
by video conference, if warranted by the
current COVID–19-related public health
risks posed by an in-person hearing.
Among the rules FINRA amended were
Rules 9261 and 9830.9
Given that FINRA and OHO
administers disciplinary hearings on the
Exchange’s behalf, and that the public
health concerns addressed by FINRA’s
amendments apply equally to Exchange
disciplinary hearings, on September 15,
2020, the Exchange filed to temporarily
amend Rule 9261 and Rule 9830 to
permit FINRA to conduct virtual
hearings on its behalf.10 In December
2020, FINRA filed a proposed rule
change, SR–FINRA–2020–042, to extend
the expiration date of the temporary
amendments in SR–FINRA–2020–027
from December 31, 2020, to April 30,
2021.11 On December 22, 2020, the
Exchange similarly filed to extend the
temporary amendments to Rule 9261
and Rule 9830 to April 30, 2021.12 On
April 1, 2021, FINRA filed a proposed
rule change, SR–FINRA–2021–006, to
extend the expiration date of the
6 See Securities Exchange Act Release Nos. 77241
(February 26, 2016), 81 FR 11311 (March 3, 2016)
(SR–NYSEMKT–2016–30) (‘‘2016 Notice’’).
7 See NYSE MKT Information Memorandum 16–
02 (March 14, 2016).
8 See 2016 Notice, 81 FR at 11327 & 11332.
9 See Securities Exchange Act Release No. 89737
(September 2, 2020), 85 FR 55712 (September 9,
2020) (SR–FINRA–2020–027) (‘‘SR–FINRA–2020–
027’’).
10 See note 4, supra.
11 See Securities Exchange Act Release No. 90619
(December 9, 2020), 85 FR 81250 (December 15,
2020) (SR–FINRA–2020–042).
12 See Securities Exchange Act Release No. 90823
(December 30, 2020), 86 FR 650 (January 6, 2021)
(SR–NYSEAMER–2020–88).
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]]>Agencies
[Federal Register Volume 87, Number 8 (Wednesday, January 12, 2022)]
[Notices]
[Pages 1819-1825]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-00378]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93916; File No. SR-OCC-2021-014]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change Concerning the Options
Clearing Corporation's Cash and Investment Management
January 6, 2022.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on December 23, 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
This proposed rule change would (1) formalize OCC's policy for
safeguarding cash and related investments and (2) amend OCC's Rules
governing use of the Clearing Fund in the event of the failure of a
bank to meet a settlement obligation with OCC to ensure such access
extends to the failure of an investment counterparty with whom OCC has
invested cash deposited by Clearing Members in respect of margin or
Clearing Fund requirements under the conditions identified in OCC Rule
1006(c) and (f), regardless of whether the investment counterparty is a
bank. The Cash and Investment Management Policy is included in
confidential Exhibit 5a of File Number SR-OCC-2021-014. Proposed
amendments to OCC's Rules are included in Exhibit 5b of File Number SR-
OCC-2021-014. All terms with initial capitalization that are not
otherwise defined herein have the same meaning as set forth in the OCC
By-Laws and Rules.\3\
---------------------------------------------------------------------------
\3\ OCC's By-Laws and Rules can be found on OCC's website:
https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
---------------------------------------------------------------------------
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
[[Page 1820]]
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
OCC is proposing to enhance its cash and investment management
practices by: (1) Formalizing OCC's policy for safeguarding cash and
related investments, and (2) amending OCC's Rules to ensure access to
the Clearing Fund if a non-bank investment counterparty fails to return
Clearing Member cash deposited in respect of margin or Clearing Fund
requirements under the conditions identified in OCC Rule 1006(c) and
(f).
Background
OCC's By-Laws and Rules govern the management and investment of
OCC's own funds and cash deposited by Clearing Members. With respect to
OCC's own funds (other than Clearing Fund deposits), Article IX,
Section 1 of OCC's By-Laws provides that funds in excess of the amount
needed as working capital may be invested by the Board in Government
securities or such other securities or financial instruments as the
Board or a Board-level committee may from time to time approve.\4\ With
respect to cash deposited by Clearing Members, OCC Rules 604(a) and
1002(c) provide that cash deposited in respect of a Clearing Member's
margin requirements or Clearing Fund contributions may from time to
time be partially or wholly invested by OCC for its account in
Government securities.\5\ OCC does not propose to amend these By-Laws
or Rules by this proposed rule change.
---------------------------------------------------------------------------
\4\ See By-Law Art. IX, Sec. 1.
\5\ See OCC Rule 604(a); Rule 1006(c).
---------------------------------------------------------------------------
OCC's investments historically have been limited to overnight
transactions under deliver-versus-payment (``DVP'') reverse repurchase
agreements. As collateral, the investment counterparty deliveries
Government securities equal to 102% of the cash invested at the time
the investment is made. Such investments reduce OCC's investment risks
by permitting quick liquidation with little adverse price effect and
controlling the movement of OCC's assets via a custodian bank. To
minimize counterparty risk, OCC restricts its potential counterparties
to financial institutions that meet certain standards of size, capital
adequacy, product offering and operational capacity.
In the event of a failure or disruption of an investment
counterparty that is a bank, OCC's Rules provide OCC with authority to
access the Clearing Fund to address liquidity shortfalls, including
shortfalls arising from the investment of Clearing Member cash in
Government securities. Specifically, OCC Rule 1006(f) authorizes OCC to
take possession of cash or securities deposited by Clearing Members in
respect of the Clearing Fund when OCC reasonably believes it necessary
to meet its liquidity needs for same-day settlement as a result of the
failure of any bank to achieve daily settlement with OCC.\6\ In the
extremely unlikely event that a bank investment counterparty failed to
return the cash versus return of the Government securities to unwind a
transaction under a reverse repurchase agreement--e.g., because of a
systems disruption, operational outage, or otherwise--OCC could
exercise authority under Rule 1006(f) to borrow from the Clearing Fund
to the extent required for OCC to meet its settlement obligations with
Clearing Members.\7\
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\6\ See OCC Rule 1006(f). As discussed, infra, this proposed
rule change would amend this clause to apply when OCC reasonably
believes it necessary to meet its liquidity needs for ``daily
settlement'' as a result of the failure of any bank ``to perform any
obligation to the Corporation when due.''
\7\ OCC amended its Rules in 2018 to extend access to the
Clearing Fund in the extraordinary event that OCC faces a liquidity
need in order to complete same-day settlement for reasons other than
a bank or clearing organization's bankruptcy, insolvency,
receivership, suspension of operations, or any similar event. See
Securities Exchange Act (``Exchange Act'') Release No. 82309 (Dec.
13, 2017), 82 FR 60262 (Dec. 19, 2017) (File No. SR-OCC-2017-017).
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In the unlikely event that any part of the borrowing under Rule
1006(f) is outstanding after 30 calendar days, or if OCC determines
that some or all of the amount borrowed constituted an actual loss, OCC
would charge the loss to the Clearing Fund.\8\ In the unlikely event
that OCC incurred an investment loss resulting from a bank's failure to
return the invested cash because of bankruptcy, insolvency,
receivership, suspension of operations or other similar event, OCC may,
at its discretion, charge the loss to the Clearing Fund.\9\ OCC may
also, at its discretion, apply skin-in-the-game to a loss resulting
from a borrowing or bank failure in the form of liquid net assets
funded by equity \10\ in excess of 110% of OCC's Target Capital
Requirement.\11\
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\8\ See OCC Rule 1006(c)(ii).
\9\ See OCC Rule 1006(c)(i).
\10\ OCC's Capital Management Policy defines ``liquid net assets
funded by equity'' to be the level of cash or cash equivalents, no
greater than OCC's shareholders' equity, less any approved
adjustments (e.g., agency-related liabilities such as Section 31
fees held by OCC and the Minimum Corporate Contribution). See
Exchange Act Release No. 91199 (Feb. 24, 2021), 86 FR 12237, 12241
(Mar. 2, 2021) (File No. SR-OCC-2021-003).
\11\ See OCC Rule 1006(e)(ii).
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Proposed Changes
Cash and Investment Management Policy
OCC proposes to file its Cash and Investment Management Policy (or
``Policy'') as a proposed rule of the clearing agency within the
meaning of Section 19(b)(1) of the Exchange Act \12\ and SEC Rule 19b-
4.\13\ The Policy would include statements of purpose, applicability
and scope, safeguarding standards for maintaining cash and related
investments to minimize credit and liquidity risk, and guidelines for
investing OCC Cash and Clearing Member Cash, as defined below.
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\12\ 15 U.S.C. 78s(b)(1).
\13\ 17 CFR 240.19b-4.
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Purpose, Applicability and Scope
The Policy would include statements of the Policy's purpose,
applicability, and scope. The purpose of the Policy would be to (1)
outline the safeguarding standards for cash and related investments
managed by OCC to minimize credit and liquidity risk, and (2) provide
guidelines for investments permitted by OCC's By-Laws and Rules. The
Policy principally would apply to OCC's Treasury department
(``Treasury''), which has responsibility for managing cash on behalf of
OCC. The Policy's scope would include the safeguarding standards and
investment activities specific to OCC's own cash (``OCC Cash'') and
cash from OCC's Clearing Members (``Clearing Member Cash'').
The Policy would define OCC Cash to include working capital related
to future operating costs, inclusive of financial resource held to meet
liquidity and resiliency requirements,\14\ proceeds from lines of
credit, if any, maintained to support OCC's working capital,\15\ the
[[Page 1821]]
Minimum Corporate Contribution,\16\ and investments made with OCC Cash.
The Policy would not apply to cash held in respect of OCC's pension
plan, post-retirement welfare plan, or other deferred compensation
plans. The Policy would define Clearing Member Cash to include Clearing
Fund cash deposits; cash deposited by Clearing Members in respect of
margin requirements; cash held in liquidating settlement accounts for
suspended Clearing Members,\17\ proceeds from OCC's syndicated credit
facility and liquidity facilities,\18\ and investments made with
Clearing Member Cash.\19\ The Policy would not apply to non-cash
collateral deposited by Clearing Members to satisfy margin or Clearing
Fund requirements.
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\14\ See Exchange Act Release No. 88029 (Jan. 24, 2020), 85 FR
5500, 5501-02 (Jan. 30, 2020) (File No. SR-OCC-2019-007) (discussing
the determination of Target Capital Requirement under OCC's Capital
Management Policy).
\15\ Working capital lines of credit, if any, are separate from
the syndicated credit facility and liquidity facilities that OCC
maintains to cover default losses or liquidity shortfalls. See
Exchange Act Release No. 88971 (May 28, 2020), 85 FR 34257 (June 3,
2020) (File No. SR-OCC-2020-804) (discussing OCC's revolving credit
facility); Exchange Act Release No. 89039 (June 10, 2020), 85 FR
36444 (June 16, 2020) (File No. SR-OCC-2020-803) (discussing OCC's
non-bank liquidity facility).
\16\ See Exchange Act Release No. 92038 (May 27, 2021), 86 FR
29861 (Jun. 3, 2021) (File No. SR-OCC-2021-003) (establishing a
persistent minimum level of OCC's own capital that it would
contribute to default losses or liquidity shortfalls prior to
allocating a default loss to the Clearing Fund contributions of non-
defaulting Clearing Members).
\17\ See OCC Rule 1104.
\18\ See supra note 17 (citing SEC notices of no-objection to
advance notices concerning OCC's credit and liquidity facilities).
\19\ See supra note 7 and accompanying text.
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Safeguarding Standards
The Policy would address the safeguarding standards for managing
OCC Cash and Clearing Member Cash, which OCC would either hold in a
demand deposit or Federal Reserve Bank accounts or invest in accordance
with OCC's By-Laws and investment strategy, as discussed below.
OCC Cash
Unless invested, OCC Cash would be held in demand deposit accounts
or at a Federal Reserve Bank. Demand deposit accounts would be limited
to commercial financial institutions that meet initial and ongoing
standards for depository banks outlined in OCC's procedures concerning
its banking relationships.
Treasury would be responsible for maintaining appropriate levels of
liquidity in OCC's operating accounts to meet general business
obligations and regulatory requirements. To fulfill this
responsibility, the Policy would provide that OCC may maintain bank
lines of credit for working capital purposes. The source of such credit
line would need to meet the standards for credit facility banks
outlined in OCC's procedures concerning its banking relationships.
Clearing Member Cash
The Policy would provide that unless invested, Clearing Member Cash
would be held in a demand deposit account or in accounts at a Federal
Reserve Bank. With respect to commercial banks, Clearing Member Cash
would only be held in financial institutions that meet the initial and
ongoing standards for depository banks as provided in in OCC's
procedures concerning banking relationships. The Policy would provide
that Clearing Member Cash collected at OCC's settlement banks may be
transferred to other depository banks, including to and from OCC's bank
accounts for settlement, investment, and cash management purposes. Upon
the suspension of a Clearing Member, OCC would promptly move all margin
and Clearing Fund cash related to the Clearing Member into a
liquidating settlement account for use in meeting the obligations of
the Clearing Member, as provided under OCC's Rules.\20\ Treasury would
be responsible for ensuring accounts are appropriately funded to meet
financial obligations. Interest earned on Clearing Fund cash deposits
held at a Federal Reserve Bank would accrue to the benefit of Clearing
Members, less a cash management fee.
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\20\ See OCC Rule 1104.
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The Policy would also provide that OCC would employ a bank account
structure that segregates customer funds per applicable regulatory
requirements \21\ and OCC's By-Laws and Rules.\22\ Futures customer
segregated cash would be held in segregated fund accounts pursuant to
applicable Commodity and Futures Trading Commission (``CFTC'')
regulations, including that OCC ensures that it receives proper written
acknowledgment from the depository for each new segregated funds
account that the account has been established to hold segregated cash
generated from futures customers.\23\ The Policy would further provide
that if OCC sustains an investment loss with respect to invested margin
cash OCC will not pass on the loss to a futures customer segregated
account.
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\21\ See 17 CFR 39.15 (requiring a derivatives clearing
organization to comply with the segregation requirements section 4d
of the Commodity Exchange Act).
\22\ See OCC By-Laws Art. VI, Sec. 3(f) (providing for
maintenance of segregated futures accounts).
\23\ See 17 CFR 1.20(g)(4).
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Investment Guidelines
The Policy would also provide guidelines for investments permitted
by OCC's By-Laws and Rules and approved by the Board or Compensation
and Performance Committee (``CPC''), including OCC's investment
strategy, investment governance principles, and guidelines for the
investment of OCC Cash and Clearing Member Cash.
Investment Strategy
The Policy would provide that OCC's investment strategy is to
preserve principal and maintain adequate liquidity. After principal and
liquidity requirements are satisfied, only then would Management seek
to optimize investment returns. OCC would disclose its investment
strategy through its public website on a periodic basis via its
qualitative disclosures to the Principles for Financial Market
Infrastructure Disclosures.\24\
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\24\ See Disclosure Framework, available at https://www.theocc.com/Risk-Management/PFMI-Disclosures.
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Investment Governance Principles
The Policy would provide that OCC may invest OCC Cash and Clearing
Member Cash in permitted investments per applicable regulatory
requirements, OCC's By-Laws and Rules, the investment strategy and the
following governance principles. Current investment practices would be
outlined in procedures maintained by OCC. Investment counterparties
would need to be financial institutions or financial market utilities
that meet initial and on-going standards outlined in OCC's procedures
concerning its banking relationships, which consider the financial
institution's size, capital adequacy, product offering and operational
capabilities. Any interest or gain received on the investments would
belong to OCC except as may otherwise be provided in OCC's By-Laws,
Rules or Board-approved policies.\25\ OCC would not commingle
investments of OCC Cash with investments of Clearing Member Cash.
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\25\ As discussed, interest earned on Clearing Fund cash
deposits held at a Federal Reserve Bank would accrue to the benefit
of Clearing Members, less a cash management fee.
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Investment of OCC Cash
The Policy would provide that OCC Cash may be invested in
instruments that pose minimal credit and liquidity risk pursuant to
applicable regulatory requirements, OCC's By-Laws, the investment
strategy, and Board or CPC approved investments. Approved investments
other than in Government securities would continue to be subject to
Board or CPC approval, as required under Section 1 of Article IX of
OCC's By-Laws.\26\ In addition, investment of
[[Page 1822]]
working capital in excess of 110% of OCC's Target Capital Requirement
would not be limited to overnight transactions.\27\
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\26\ In addition to investments in Government securities through
overnight DVP transactions, the Board has approved investments of
OCC's own cash in U.S. government money market mutual funds.
\27\ With respect to OCC's liquid net assets funded by equity in
excess of 110% of the Target Capital Requirement, the Board has
initially approved investment of such funds in Government securities
through DVP transactions for terms no more than 30 days.
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Investment of Clearing Member Cash
The Policy would further provide that Clearing Member Cash may be
invested in Government securities by OCC in transactions that provide
next-day liquidity in accordance with applicable regulatory
requirements, OCC's Rules, and the investment strategy, subject to the
following guiding principles. First, the Policy would provide that
notwithstanding the authority to invest Clearing Fund cash under OCC
Rule 1002(c), it is OCC's policy not to invest Clearing Fund cash,
which is instead maintained in accounts at a Federal Reserve Bank or a
commercial bank. This policy would be subject to an exception approved
by the Chief Executive Officer or Chief Operating Officer in emergency
situations (such as a disruption at a Federal Reserve Bank) when
necessary or advisable for the protection of the Corporation or
otherwise in the public interest to continue to facilitate the prompt
and accurate clearance and settlement of confirmed trades or other
transactions and to provide OCC's services in a safe and sound manner.
Second, the Policy would provide that margin cash would only be
invested in instruments that provide liquidity to OCC by the following
business day. Third, the Policy would provide that OCC will implement
procedures to ensure that end-of-day margin cash balances remain above
the aggregate level of any Required Cash Deposits, as that term is
defined in OCC's Liquidity Risk Management Framework.\28\ The policy
with respect to investing Required Cash Deposits would be subject to
the same exception as for investment of Clearing Fund cash. Fourth, any
change regarding whether to investment futures customer segregated
funds would be approved by OCC's Chief Financial Officer in
consultation with OCC's Legal and Compliance departments.\29\
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\28\ The Liquidity Risk Management Framework defines ``Required
Cash Deposits'' (sometimes referred to as minimum cash requirements
or ``MCR'') as deposits of cash under OCC's Contingency Funding Plan
that supplement OCC's Base Liquidity Resources (i.e., the amount of
committed liquidity resources maintained at all times by OCC to meet
its minimum Cover 1 liquidity resource requirements under the
applicable regulations). Under that framework, OCC may require a
Clearing Member Group to post such additional cash collateral to
supplement OCC's Available Liquidity Resources (i.e., Base Liquidity
Resources plus allowed Clearing Fund cash deposits in excess of the
minimum required amount) when stressed liquidity demands for that
Clearing Member Group are above established thresholds or until the
settlement demand is met. See Exchange Act Release No. 89014 (June
4, 2020), 85 FR 35446, 35449 (June 10, 2020) (File No. SR-OCC-2020-
003).
\29\ Like Clearing Fund cash, OCC does not currently invest
futures customer segregated funds. If OCC determined to invest such
funds, such investments would be subject to CFTC regulations
regarding a derivatives clearing organization's investment of
futures customer funds. See 17 CFR 1.25.
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The Policy would also describe how OCC maintains liquidity
facilities for immediate access to liquidity in the event of a
suspension of a Clearing Member or a failure of a bank, securities or
commodity clearing organization, or investment counterparty (with
respect to the investment of Clearing Member Cash) to meet an
obligation owing to OCC, or in anticipation thereof, pursuant to OCC
Rules 1006(c) and (f), proposed amendments to which are discussed
below. The liquidity providers for these facilities would be approved
and monitored according to the OCC's Third-Party Risk Management
Framework and Liquidity Risk Management Framework.\30\
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\30\ See Exchange Act Release No. 90797 (Dec. 23, 2020), 85 FR
86592 (Dec. 30, 2020) (File No. SR-OCC-2020-014) (approving OCC's
framework for identifying, measuring, monitoring, and managing OCC's
exposures to its counterparties); Exchange Act Release No. 89014, 85
FR 35446 (approving OCC's approach to managing liquidity risk).
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Amendments to OCC Rule 1006
OCC proposes to amend OCC Rule 1006, which governs its ability to
access the Clearing Fund in the event of the failure (or anticipated
failure) of bank to meet a settlement obligation with OCC, to extend
such access to the failure of a non-bank investment counterparty to
meet settlement obligations with OCC under the conditions identified in
OCC Rule 1006(c) and (f). In addition, OCC proposes to restate OCC Rule
1006(f) for clarity.
To ensure that OCC may access the Clearing Fund in the event of a
failure or disruption of a non-bank counterparty with whom OCC has
invested Clearing Member Cash, OCC would amend OCC Rule 1006(f) to
include ``investment counterparty'' to the list of counterparties--
currently, any bank or securities or commodities clearing
organization--whose failure or disruption may result in a borrowing
under Rule 1006(f). Similarly, OCC would also amend OCC Rule 1006(a)
and (c) to add the same phrase to the list of counterparties whose
failure resulting from bankruptcy, insolvency, receivership, suspension
of operations, or any similar event may result in allocation of losses
to the Clearing Fund. Rule 1006(c) and (f) would be further amended to
provide that failure of an investment counterparty under those
paragraphs would be limited to a failure with respect to Clearing
Member Cash (i.e., cash invested under Rule 604(a) or Rule
1002(c)).\31\ Any investment loss resulting from investment of OCC Cash
would be treated as an operational loss that would be addressed under
OCC's Capital Management Policy, rather than a loss that would be
allocated to the Clearing Fund.\32\
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\31\ The same limitation would apply to Rule 1006(a), which
incorporates the reasons specified in Rule 1006(c) by reference.
\32\ See Exchange Act Release No. 88029, 85 FR at 5502-03
(discussing OCC's plan for replenishing its capital in the event
that shareholders' equity falls below certain thresholds).
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OCC would also amend the condition that triggers borrowing
authority under Rule 1006(f)--currently clause (iii) of the first
sentence of Rule 1006(f)--which would be renumbered as Rule
1006(f)(1)(C). That condition would be amended to apply when the
Corporation reasonably believes it necessary to borrow to meet its
liquidity needs for ``daily settlement'' rather than ``same-day
settlement,'' as in the current text. OCC may reasonably believe that a
disruption at a bank, securities or commodities clearing organization,
or investment counterparty could last multiple days, resulting in
liquidity needs for daily settlement over more than one day. This
amendment would ensure that OCC has authority to initiate a borrowing
for the amount OCC believes necessary to meet its liquidity needs over
the timeframe OCC believes the disruption will affect OCC's ability to
meet daily settlement requirements with Clearing Members, rather than
only that amount that OCC believes it needs on a day-by-day basis.
OCC would further amend the condition in Rule 1006(f)(1)(C) to
apply when OCC reasonably believes such a liquidity need will arise
because of one of the identified counterparty's failure ``to perform
any obligation to the Corporation when due,'' rather than such a
counterparty's failure ``to achieve daily settlement.'' This change
aligns with the condition for allocation of losses under Rule 1006(c)
and eliminates any ambiguity that might arise concerning the settlement
obligations to which the current Rule refers. As under the current
Rule, use of funds obtained through such a
[[Page 1823]]
borrowing would continue to be limited to the purposes described in
Rule 1006(f)(1)(C), as amended, i.e., to meet OCC's liquidity needs for
daily settlement with Clearing Members.
In addition to the substantive changes discussed above, OCC would
also restate Rule 1006(f) for clarity. The current paragraph would be
divided into four subparagraphs with courtesy headings: (1) Conditions;
(2) Uses; (3) Term; Clearing Fund Charge; and (4) Substitution
Requests. The conditions in Rule 1006(f)(1) would begin with the first
sentence of current Rule 1006(f), less the conjoined clause beginning
with ``and use such assets,'' the substance of which would be moved to
paragraph (f)(2). The remaining clause before the conjunction would be
amended to describe OCC's investment of Clearing Fund cash
contributions in the active voice. The three conditions for a borrowing
identified in Rule 1006(f), currently numbered (i) through (iii), would
then follow after the conjunction as items (A) through (C). Item (A)
would be further amended to remove legalese and state the condition
more plainly. Item (C) would be amended substantively as discussed
above.
The prescribed uses for the borrowed funds described in several
places throughout current Rule 1006(f) would be aggregated in Rule
1006(f)(2). As currently found in the conjoined clause in the first
sentence of current Rule 1006(f), Rule 1006(f)(2)(A) would provide that
OCC may use funds it takes possession of under Rule 1006(f) to (i) meet
obligations, losses or liquidity needs; or (ii) borrow or otherwise
obtain funds through any means determined to be reasonable at the
discretion of the Chairman, Chief Executive Officer or the Chief
Operating Officer (including, without limitation, pledging such assets
as security for loans and/or using such assets to effect repurchase,
securities lending or other transactions). Proposed Rule 1006(f)(ii)
would also be restated to remove a gendered pronoun. Rule 1006(f)(2)(B)
would describe the limitations on use of funds borrowed under the
renumbered conditions in Rule 1006(f)(1)(A) and (C).
Rule 1006(f)(3) would contain the term for a borrowing, as well as
the conditions that would trigger a loss chargeable to the Clearing
Fund. The 30-day period before which OCC would be obligated to charge a
borrowed amount as a loss to the Clearing Fund would be located at Rule
1006(f)(3)(A), with certain non-substantive edits to the text. The
conditions that would trigger the loss allocation to the Clearing Fund
would be located at Rule 1006(f)(3)(B) and would be restated to move
the lengthy conditions after the main clause, among other non-
substantive revisions.
Finally, Rule 1006(f)(4) would relocate OCC's authority to refuse
Clearing Member substitution requests regarding securities contributed
to the Clearing Fund that the Corporation has taken possession of under
Rule 1006(f). In addition to relocating that provision to the end of
Rule 1006(f), this proposed rule change would restate that provision to
reflect the reorganization of Rule 1006(f).
(2) Statutory Basis
Section 17A(b)(3)(F) of the Exchange Ac,\33\ requires, among other
things, that the rules of a clearing agency be designed to promote the
prompt and accurate clearance and settlement of securities
transactions, 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, to perfect the mechanism of a national system for the
prompt and accurate clearance and settlement of securities
transactions, and, in general, to protect investors and the public
interest. For the reasons discussed below, OCC believes the proposed
rule change is consistent with Section 17A(b)(3)(F) \34\ of the
Exchange Act and Rule 17Ad-22(e)(7)(viii),\35\ Rule 17Ad-22(e)(13),\36\
and Rule 17Ad-22(e)(16) \37\ thereunder.
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\33\ 15 U.S.C. 78q-1(b)(3)(F).
\34\ 15 U.S.C. 78q-1(b)(3)(F).
\35\ 17 CFR 240.17Ad-22(e)(7)(viii).
\36\ 17 CFR 240.17Ad-22(e)(13).
\37\ 17 CFR 240.17Ad-22(e)(16).
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Consistency With Section 17A(b)(3)(F) of the Exchange Act
The Cash and Investment Management Policy is designed to safeguard
cash and related investments within OCC's custody or control. The
Policy applies to, among other things, cash deposited by Clearing
Members in respect of margin and Clearing Fund requirements, any
Government securities in which OCC invests such cash, and the Minimum
Corporate Contribution, each of which are liquid resources available to
facilitate settlement and to cover potential losses in the event of a
Clearing Member default. The Policy also extends to OCC's own cash,
including cash OCC maintains to cover potential general business losses
so that OCC can continue operations and services as a going concern if
those losses materialize, in accordance with OCC's Capital Management
Policy. By providing safeguarding standards for managing such cash and
related investments, the Policy would help ensure those resources will
be available to facilitate settlement, cover potential default losses,
or cover potential general business losses, as applicable. Therefore,
OCC believes the Policy is designed to promote the prompt and accurate
clearance and settlement of securities transactions, 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, consistent with
Section 17A(b)(3)(F) of the Exchange Act.\38\
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\38\ 15 U.S.C. 78q-1(b)(3)(F).
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The proposed rule change is also designed to ensure that OCC can
continue to promptly settle the securities and derivatives transactions
it clears by enhancing the existing tools OCC has to address potential
liquidity shortfalls. Specifically, the proposed rule change would
expand the existing borrowing authority in OCC's By-Laws to authorize
borrowing in the extraordinary event that OCC faces a liquidity need in
order to complete daily settlement with its Clearing Members resulting
from the failure or disruption of an investment counterparty with whom
OCC has invested Clearing Member Cash that is not a bank.
It is conceivable, though extremely unlikely, that an investment
counterparty may fail to return Clearing Member Cash that OCC has
invested in Government securities with the counterparty in a DVP
transaction as a result of a disruption or failure at that investment
counterparty. The proposed rule change would enable OCC to borrow
against the Clearing Fund in this scenario in order to avoid disrupting
OCC's ordinary settlement cycle. In the extremely unlikely event that
OCC incurs a loss resulting from the investment of Clearing Member
Cash, OCC would retain authority to allocate such loss to the Clearing
Fund, at OCC's discretion. Accordingly, OCC believes the proposed rule
change is designed to promote the prompt and accurate clearance and
settlement of securities transactions, in accordance with the
requirements of Section 17A(b)(3)(F) of the Exchange Act.\39\
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\39\ Id.
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Consistency With Rule 17Ad-22(e)(16)
Rule 17Ad-22(e)(16) under the Exchange Act requires, in part, that
OCC establish, implement, maintain and enforce written policies and
procedures reasonably designed to safeguard OCC's
[[Page 1824]]
own and its participants' assets, minimize the risk of loss and delay
in access to these assets, and invest such assets in instruments with
minimal credit, market, and liquidity risks.\40\ As discussed above,
the Policy outlines safeguarding standards for cash and related
investments intended to minimize credit and liquidity risks. In
addition, the Policy sets forth OCC's conservative investment strategy,
according to which OCC's primary objective is to preserve principal and
maintain adequate liquidity. The Policy also requires cash and related
investments to be maintained with counterparties that have been
initially approved and routinely monitored in accordance with OCC's
Third Party Risk Management Policy and procedures governing banking
relationships. Accordingly, OCC believes that the Policy is consistent
with Rule 17Ad-22(e)(16).
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\40\ 17 CFR 240.17Ad-22(e)(16).
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Consistency With Rule 17Ad-22(e)(7)(viii)
Additionally, Rule 17Ad-22(e)(7)(viii) requires that OCC address
foreseeable liquidity shortfalls that would not be covered by OCC's
liquid resources and seek to avoid unwinding, revoking, or delaying the
settlement of payment obligations.\41\ As stated above, OCC believes
that it could be foreseeable, though extremely unlikely, that an
investment counterparty that is not a bank may fail to return Clearing
Member Cash as the result of the investment counterparty's disruption
or failure. An alternative available to OCC for addressing uncovered
liquidity shortfalls would be to exercise authority under Rule 505 to
extend the settlement window to the close of Fedwire.\42\ The proposed
rule change would improve OCC's ability to address such situations by
expanding OCC's borrowing authority to enable OCC to borrow against the
Clearing Fund to address a failure or disruption at a non-bank
investment counterparty rather than disrupting its ordinary settlement
cycle. Accordingly, OCC believes that proposed changes to OCC Rules are
consistent with Rule 17Ad-22(e)(7)(viii).
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\41\ 17 CFR 240.17Ad-22(e)(7)(viii).
\42\ See OCC Rule 505 (Extension of Settlements).
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Consistency With Rule 17Ad-22(e)(13)
Finally, Rule 17Ad-22(e)(13) requires, in part, that OCC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to ensure OCC has the authority to take timely
action to contain losses and liquidity demands and continue to meet its
obligations.\43\ As described above, this proposal would amend OCC's
Rules concerning loss allocation in the extremely unlikely event that
the failure or disruption of a non-bank investment counterparty results
in a loss to OCC arising from the investment of Clearing Member Cash.
The expansion of existing authority to allocate such losses
attributable to a non-bank investment counterparty helps establish a
more transparent and clear loss allocation process that ensures OCC's
authority to take action to contain losses and continue to meet its
clearance and settlement obligations. Accordingly, OCC believes the
proposed changes to OCC's Rules are consistent with Rule 17Ad-
22(e)(13).
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\43\ 17 CFR 240.17Ad-22(e)(13).
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(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Exchange Act \44\ requires that the
rules of a clearing agency not impose any burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act. OCC does not believe the proposed rule change would have any
impact or impose any burden on competition. The primary purpose of the
proposed rule change is to formalize OCC's Cash and Investment
Management Policy and enhance OCC's access to the Clearing Fund by
expanding the existing authority concerning bank failures to also apply
in the case of failures by other investment counterparties. The
proposed rule change would not affect Clearing Members' access to OCC's
services or disadvantage or favor any particular user in relationship
to another user. As such, OCC believes that the proposed changes would
not have any impact or impose any burden on competition.
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\44\ 15 U.S.C. 78q-1(b)(3)(I).
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(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 such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
OCC shall post notice on its website of proposed changes that are
implemented. The proposal shall not take effect until all regulatory
actions required with respect to the proposal are completed.
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-2021-014 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-2021-014. 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
[[Page 1825]]
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-2021-014 and
should be submitted on or before February 2, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\45\
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\45\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-00378 Filed 1-11-22; 8:45 am]
BILLING CODE 8011-01-P
