Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection to Advance Notice Related to an Expansion of The Options Clearing Corporation's Non-Bank Liquidity Facility Program as Part of Its Overall Liquidity Plan, 55048-55053 [2022-19417]
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55048
Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Notices
B. Consistency With Rule 17Ad–22(e)(1)
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17A(b)(3)(F) of the Act 8 and Rule
17Ad–22(e)(1) thereunder.9
A. Consistency With Section
17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act
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 and, to the extent
applicable, derivative agreements,
contracts, and transactions.10
As noted above, the proposed rule
changes would introduce provisions
that support the operation of the
settlement finality provisions of EU and
UK law. These provisions ensure that
transfer orders by a Clearing Participant
that is domiciled in an EU member state
or in the UK will be cleared even if that
Clearing Participant enters into
insolvency proceedings after the transfer
order was entered into the system. As
noted in more detail above, the
proposed rule change would accomplish
this by adopting key definitions relating
to the Settlement Finality Laws, set out
general principles relevant to
implementation of the EU and UK
settlement finality arrangements (such
as participant acknowledgement of the
applicability of the settlement finality
rules to margin and collateral), specify
timing that each transfer order becomes
irrevocable for purposes of the relevant
Settlement Finality Laws, circumstances
under which transfer orders are deemed
satisfied, and specify that Rules
providing for default rights and
remedies would constitute default rules,
procedures and similar arrangements as
defined for purposes of relevant EU and
UK law, including EMIR, UK EMIR, and
the Settlement Finality Laws.
The Commission believes that these
proposed rule changes, while not
changing any of the existing default
rights or remedies of ICC but rather by
adopting explicit provisions relating to
settlement finality of transfer orders of
Clearing Participants in insolvency, will
help support the payment and transfer
of margin and collateral and thus the
prompt and accurate clearance and
settlement of securities transactions by
ensuring that its rules facilitate explicit
reference and participant awareness and
acknowledgement of the applicability of
EU and UK Settlement Finality Laws.
For these reasons, the Commission
believes that the proposed rule change
is consistent with Section 17A(b)(3)(F)
of the Act.11
8 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(1).
10 15 U.S.C. 78q–1(b)(3)(F).
11 15 U.S.C. 78q–1(b)(3)(F).
9 17
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Rule 17Ad–22(e)(1) requires that each
covered clearing agency establish,
implement, maintain and enforce
written policies and procedures
reasonably designed, as applicable, to
provide for a well-founded, clear,
transparent and enforceable legal basis
for each aspect of its activities in all
relevant jurisdictions.12
As noted above, ICC proposes to rely
on provisions of the Settlement Finality
Laws regulations that provide additional
support for the enforceability of the
ICC’s default rights and remedies. For
example, under the Settlement Finality
Directive, transfer orders and related
netting arrangements are enforceable,
even in the event of insolvency
proceedings against a participant. The
Commission believes that by proposing
to align key definitions and rules to the
Settlement Finality Laws as noted above
and by requiring relevant Clearing
Participants to comply with and
acknowledge the settlement finality
provisions, the proposed rule changes
would provide a well-founded and clear
legal basis for ICC to enforce its clearing
rules during an insolvency of a Clearing
Participant domiciled in the EU or the
UK.
For these reasons, the Commission
believes that the proposed rule changes
are consistent with Rule 17Ad–
22(e)(1).13
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Act, and in
particular, with the requirements of
Section 17A(b)(3)(F) of the Act 14 and
Rule 17Ad–22(e)(1) hereunder.15
It is therefore ordered pursuant to
Section 19(b)(2) of the Act 16 that the
proposed rule change (SR–ICC–2022–
012), be, and hereby is, approved.17
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022–19348 Filed 9–7–22; 8:45 am]
BILLING CODE 8011–01–P
12 17
CFR 240.17Ad–22(e)(1).
CFR 240.17Ad–22(e)(1).
14 15 U.S.C. 78q–1(b)(3)(F).
15 17 CFR 240.17Ad–22(e)(1).
16 15 U.S.C. 78s(b)(2).
17 In approving the proposed rule change, the
Commission considered the proposal’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
18 17 CFR 200.30–3(a)(12).
13 17
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–95670; File No. SR–OCC–
2022–803]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of No Objection to Advance Notice
Related to an Expansion of The
Options Clearing Corporation’s NonBank Liquidity Facility Program as Part
of Its Overall Liquidity Plan
September 2, 2022.
I. Introduction
On July 7, 2022, the Options Clearing
Corporation (‘‘OCC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) advance notice SR–
OCC–2022–803 (‘‘Advance Notice’’)
pursuant to Section 806(e)(1) of Title
VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act,
entitled Payment, Clearing and
Settlement Supervision Act of 2010
(‘‘Clearing Supervision Act’’) 1 and Rule
19b–4(n)(1)(i) 2 under the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 3 in connection with a proposed
change to its operations to expand
capacity under OCC’s program for
accessing additional committed sources
of liquidity that do not increase the
concentration of OCC’s counterparty
exposure (‘‘Non-Bank Liquidity
Facility’’) as part of OCC’s overall
liquidity plan.4 The Advance Notice
was published for public comment in
the Federal Register on July 26, 2022.5
The Commission has received
comments regarding the changes
proposed in the Advance Notice.6 The
Commission is hereby providing notice
of no objection to the Advance Notice.
II. Background 7
As the sole clearing agency for
standardized U.S. securities options
listed on national securities exchanges
registered with the Commission (‘‘listed
options’’), OCC is obligated to make
certain payments. In the event of a
Clearing Member default, OCC would be
obligated to make payments, on time,
1 12
U.S.C. 5465(e)(1).
CFR 240.19b–4(n)(1)(i).
3 15 U.S.C. 78a et seq.
4 See Notice of Filing, infra note 5, at 87 FR
44477.
5 See Exchange Act Release No. 95327 (Jul. 20,
2022), 87 FR 44477 (Jul. 26, 2022) (File No. SR–
OCC–2022–803) (‘‘Notice of Filing’’).
6 Comments on the Advance Notice are available
at https://www.sec.gov/comments/sr-occ-2022-803/
srocc2022803.htm.
7 Capitalized terms used but not defined herein
have the meanings specified in OCC’s Rules and ByLaws, available at https://www.theocc.com/about/
publications/bylaws.jsp.
2 17
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Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Notices
related to that member’s clearing
transactions. To meet such payment
obligations, OCC maintains access to
cash from a variety of sources, including
a requirement for members to pledge
cash collateral to OCC and various
agreements with banks and other
counterparties (‘‘liquidity facilities’’) to
provide OCC with cash in exchange for
collateral, such as U.S. Government
securities. OCC routinely considers
potential market stress scenarios that
could affect such payment obligations.
Based on such considerations, OCC now
believes that it should seek to expand its
liquidity facilities to increase OCC’s
access to cash to manage a member
default.8
OCC’s liquidity plan already provides
access to a diverse set of funding
sources, including banks (i.e., OCC’s
syndicated credit facility),9 the NonBank Liquidity Facility program
(defined above),10 and Clearing
Members’ Clearing Fund Cash
Requirement.11 OCC currently
maintains $8 billion in qualifying liquid
resources,12 consisting of $5 billion of
required Clearing Fund cash
contributions, $2 billion in the
syndicated bank credit facility, and $1
billion in the Non-Bank Liquidity
Facility. OCC intends to increase such
resources by $2.5 billion to a new total
of $10.5 billion. OCC’s proposed
expansion of its liquidity plan includes
several components: (1) creating a new
committed repurchase facility with a
commercial bank counterparty (‘‘Bank
Repo Facility’’); 13 (2) expanding OCC’s
existing Non-Bank Liquidity Facility
program; 14 (3) expanding OCC’s
existing syndicated credit facility; and
(4) establishing a target for the aggregate
amount of all external liquidity
resources (i.e., the syndicated credit
facility, Bank Repo Facility and the
8 See
Notice of Filing, 87 FR at 44477.
Exchange Act Release No. 88971 (May 28,
2020), 85 FR 34257 (Jun. 3, 2020) (File No. SR–
OCC–2020–804).
10 See Exchange Act Release No. 89039 (Jun. 10,
2020), 85 FR 36444 (Jun. 16, 2020) (File No. SR–
OCC–2020–803) (‘‘Notice of No Objection to 2020
Advance Notice’’); Exchange Act Release No. 76821
(Jan. 4, 2016), 81 FR 3208 (Jan. 20, 2016) (File No.
SR–OCC–2015–805) (‘‘Notice of No Objection to
2015 Advance Notice’’); Exchange Act Release No.
73979 (Jan. 2, 2015), 80 FR 1062 (Jan. 8, 2015) (File
No. SR–OCC–2014–809) (‘‘Notice of No Objection to
2014 Advance Notice’’).
11 See OCC Rule 1002.
12 See 17 CFR 240.17Ad-22(a)(14) (defining
qualifying liquid resources).
13 In a separate advance notice, OCC is proposing
to enter a new MRA with a commercial bank
counterparty. See Exchange Act Release No. 95326
(Jul. 20, 2022), 87 FR 44457 (Jul. 26, 2022) (File No.
SR–OCC–2022–802).
14 See Notice of Filing, 87 FR at 44477.
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9 See
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Non-Bank Liquidity Facility).15 The
Advance Notice concerns the second
component described above, namely, a
change to OCC’s operations to expand
its Non-Bank Liquidity Facility
program.16
Under OCC’s existing Non-Bank
Liquidity Facility program, OCC
maintains a series of arrangements to
access cash in exchange for Government
securities (‘‘Eligible Securities’’)
deposited by Clearing Members in
respect of their Clearing Fund
requirements to meet OCC’s settlement
obligations. Currently, the aggregate
amount OCC may seek through the NonBank Liquidity Facility program is
limited to $1 billion.17 Through this
Advance Notice, OCC is proposing to
remove the $1 billion funding limit and
increase the capacity of its Non-Bank
Liquidity Facility to an amount to be
determined by OCC’s Board from time
to time, based on OCC’s liquidity needs
at the time and a number of other
factors.18 Instead of retaining the $1
billion funding limit for the Non-Bank
Liquidity Facility program, OCC
proposes to establish a target across all
external liquidity resources of at least $3
billion, which is the current aggregate
amount of external liquidity.19 OCC is
not, as part of this Advance Notice,
requiring its members or other market
participants to provide additional or
different collateral to OCC. Rather, the
purpose of the proposal is to provide
OCC with increased capacity for
accessing cash to meet its payment
obligations, including in the event that
one of its members fails to meet its
payment obligations to OCC.20
15 As discussed below, OCC would be required to
file an advance notice with the Commission if it
were to seek to reduce the commitments under the
Non-Bank Liquidity Facility so as to reduce external
liquidity below the $3 billion target.
16 The third and fourth components of OCC’s
proposed expansion of its liquidity plan are briefly
discussed below.
17 In 2020, OCC set the aggregate amount it may
seek through the Non-Bank Liquidity Facility
program to an amount up to $1 billion. See Notice
of No Objection to 2020 Advance Notice, 85 FR at
36446. $1 billion is the same as the aggregate value
established at the inception of the Non-Bank
Liquidity Facility program. See Notice of No
Objection to 2014 Advance Notice, 80 FR at 1064
& n.11. In 2015, OCC filed an advance notice that
set an aggregate value of at least $1 billion and up
to $1.5 billion. See Notice of No Objection to 2015
Advance Notice, 81 FR at 3208.
18 OCC’s Board has authorized OCC to seek up to
an additional $2.5 billion in external liquidity.
19 See Notice of Filing, 87 FR at 44479.
20 See OCC Rule 1006(f)(1)(A). OCC may also use
the Clearing Fund to address liquidity shortfalls
arising from the failure of any bank, securities or
commodities clearing organization, or investment
counterparty to perform any obligation to OCC
when due. See OCC Rule 1006(f)(1)(C); Exchange
Act Release No. 94304 (Feb. 24, 2022), 87 FR 11776
(Mar. 2, 2022) (File No. SR–OCC–2021–014).
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55049
With respect to OCC’s overall
liquidity plan, the Non-Bank Liquidity
Facility program reduces the
concentration of OCC’s counterparty
exposure by diversifying its base of
liquidity providers among banks and
non-bank, non-Clearing Member
institutional investors, such as pension
funds or insurance companies.
The currently approved Non-Bank
Liquidity Facility consists of two parts:
a Master Repurchase Agreement
(‘‘MRA’’), and confirmations with one or
more institutional investors, which
contain certain individualized terms
and conditions of transactions executed
between OCC, the institutional
investors, and their agents. The MRA is
structured so that the buyer (i.e., the
institutional investor) would purchase
Eligible Securities from OCC from time
to time.21 OCC, the seller, would
transfer Eligible Securities to the buyer
in exchange for a buyer payment to OCC
in immediately available funds
(‘‘Purchase Price’’). The buyer would
simultaneously agree to transfer the
purchased securities back to OCC at a
specified later date (‘‘Repurchase
Date’’), or on OCC’s demand against the
transfer of funds from OCC to the buyer,
where the funds would be equal to the
outstanding Purchase Price plus the
accrued and unpaid price differential
(together, ‘‘Repurchase Price’’).
The confirmations establish tailored
provisions of repurchase transactions
permitted under the Non-Bank Liquidity
Facility that are designed to reduce
concentration risk and promote
certainty of funding and operational
effectiveness based on the specific
needs of a party. For example, OCC
would only enter into confirmations
with an institutional investor that is not
a Clearing Member or affiliated bank,
such as a pension fund or an insurance
company, in order to allow OCC to
access stable and reliable sources of
funding without increasing the
concentration of its exposure to
counterparties that are affiliated banks,
broker-dealers, or futures commission
merchants. In addition, any such
institutional investor is obligated to
enter repurchase transactions even if
OCC experiences a material adverse
21 OCC would use Eligible Securities that are
included in Clearing Fund contributions by
Clearing Members and margin deposits of any
Clearing Member that has been suspended by OCC
for the repurchase arrangements. OCC Rule 1006(f)
and OCC Rule 1104(b) authorize OCC to use these
sources to obtain funds from third parties through
securities repurchases. The officers who may
exercise this authority include the Executive
Chairman, Chief Executive Officer, and Chief
Operating Officer.
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change,22 funds must be made available
to OCC within 60 minutes of OCC’s
delivering Eligible Securities, and the
institutional investor is not permitted to
rehypothecate purchased securities.23
Additionally, the confirmations set forth
the term and maximum dollar amounts
of the transaction permitted under the
MRA.
In 2020, OCC set the aggregate amount
it may seek through the Non-Bank
Liquidity Facility program to an amount
of up to $1 billion.24 OCC has since
secured commitments from multiple
pension funds in an aggregate amount of
$1 billion. Since setting and securing
commitments up to that aggregate
commitment limit, OCC has
experienced an increase in its stressed
liquidity demands. Under OCC’s
Liquidity Risk Management Framework
(‘‘LRMF’’), OCC performs daily liquidity
stress testing to assess its Base Liquidity
Resources 25 and Available Liquidity
Resources 26 against OCC’s liquidity risk
tolerance (‘‘Adequacy Scenarios’’).
Based in part on the results of this stress
testing, OCC has periodically adjusted
Clearing Member’s Clearing Fund Cash
Requirement to ensure that OCC
maintains sufficient liquidity resources
to cover its liquidity risk exposures at
all times.27 Through this Advance
Notice OCC proposes a change to its
22 A ‘‘material adverse change’’ is typically
defined contractually as a change that would have
a materially adverse effect on the business or
financial condition of a company.
23 See Notice of No Objection to 2014 Advance
Notice, 80 FR at 1064.
24 See Notice of No Objection to 2020 Advance
Notice, 85 FR at 36446. $1 billion is the same as
the aggregate value established at the inception of
the Non-Bank Liquidity Facility program. See
Notice of No Objection to 2014 Advance Notice, 80
FR at 1064 & n.11. In 2015, OCC filed an advance
notice that set an aggregate value of at least $1
billion and up to $1.5 billion. See Notice of No
Objection to 2015 Advance Notice, 81 FR at 3208.
25 The LRMF defines ‘‘Base Liquidity Resources’’
to mean the amount of committed liquidity
resources maintained at all times by OCC to meet
its Cover 1 liquidity resource requirements under
the applicable regulations. Base Liquidity Resources
are comprised of qualifying liquid resources in the
form of Clearing Fund cash deposited in respect of
the Clearing Fund Cash Requirement and assets that
are readily available and convertible into cash (i.e.,
U.S. Government securities) through prearranged
funding arrangements, such as the Non-Bank
Liquidity Facility.
26 The LRMF defines ‘‘Available Liquidity
Resources’’ to include Base Liquidity Resources
plus allowable Clearing Fund cash deposited in
excess of the Clearing Fund Cash Requirement. Any
Clearing Member request to substitute U.S.
Government securities for cash deposits in excess
of such Clearing Member’s proportionate share of
the Clearing Fund Cash Requirement is subject to
a two-day notice period. See OCC Rule 1002(a)(iv).
27 In response to increased stressed liquidity
demands in 2021, OCC exercised authority under
OCC Rule 1002(a) to increase the Clearing Fund
Cash Requirement from $3.5 billion to $4 billion in
July 2021, and from $4 billion to $5 billion in
October 2021.
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Non-Bank Liquidity Facility program to
give OCC greater capacity to source
liquidity from its non-bank liquidity
providers as needed.
The Proposed Change
In order to give OCC greater capacity
to source liquidity from external
liquidity providers as needed, OCC
would modify the Non-Bank Liquidity
Facility program to remove the aggregate
commitment limit of $1 billion,
identified in the 2020 advance notice.28
OCC proposes that its Board of Directors
(‘‘Board’’) set, by resolution and from
time to time, the level of aggregate
commitments under the program to
ensure that OCC maintains sufficient
liquidity resources to cover its liquidity
risk exposures at all times.29
OCC’s Board has authorized OCC to
seek up to an additional $2.5 billion in
external liquidity, including through the
Non-Bank Liquidity Facility, which
would give OCC access to a total of $5.5
billion in external liquidity.30 For the
additional $2.5 billion, OCC expects
that it will source $1.5 billion from bank
counterparties and $1 billion under the
Non-Bank Liquidity Facility. In the
event that OCC is unable to obtain the
full $1.5 billion from its bank
counterparties, however, OCC would
source the full $2.5 billion under the
Non-Bank Liquidity Facility program.31
Removing the present $1 billion
funding limit to the Non-Bank Liquidity
Facility program would remove one of
the specified terms that could require
OCC to file an advance notice.32
28 See Notice of No Objection to 2020 Advance
Notice, 85 FR at 36446.
29 In setting the level of aggregate commitments
for the Non-Bank Liquidity Facility, the Board
would consider factors including, but not limited
to: (1) the size and make-up of the Clearing Fund;
(2) the aggregate amount of OCC’s other liquidity
sources; and (3) changing market and business
conditions.
30 OCC performs daily liquidity stress testing to
assess its liquidity resources. See Notice of Filing,
87 FR at 44478. Based on the results of such stress
testing, OCC increased Clearing Fund requirements
twice in 2021. Id. OCC management recommended
that OCC increase the capacity of its Non-Bank
Liquidity Facility, which would provide OCC
flexibility in how it increases liquidity resources in
response to stress testing. See Confidential Exhibit
3 to File No. SR–OCC–2022–803.
31 See Notice of Filing, 87 FR at 44479.
32 The facility is designed to allow OCC to seek
individual commitments from counterparties on
specified terms. See e.g., Exchange Act Release No.
89039 (Jun. 10, 2020), 85 FR 36444, 36446 (Jun. 16,
2020) (File No. SR–OCC–2020–803) (stating that
OCC may negotiate individual commitments within
an aggregate commitment limit). In 2015, the
Commission acknowledged that changes to
specified terms (e.g., funding levels) would require
the further submissions to the Commission for
review. See Exchange Act Release No. 76821 (Jan.
4, 2016), 81 FR 3208, 3209 (Jan. 20, 2016) (File No.
SR–OCC–2015–805). The terms of the current
facility, which OCC implemented the terms of its
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Consistent with the proposal to
establish a target for external liquidity,
and drawing from applicable conditions
for filing advance notices with respect
to renewals of OCC’s syndicated credit
facility and proposed Bank Repo
Facility, OCC would submit another
advance notice to execute individual
commitments under the Non-Bank
Liquidity Facility only if: (1) OCC
should seek to execute a commitment at
a level that would have the effect of
reducing total external liquidity below
the target of $3 billion; (2) OCC should
seek to change the terms and conditions
of the MRA or commitments thereunder
in a manner that materially affects the
nature or level of risk presented by
OCC; 33 or (3) OCC should seek to
execute a commitment with a
counterparty that has experienced a
negative change to its credit profile or
a material adverse change since OCC
last executed a commitment with that
counterparty. Consistent with another
prior advance notice, OCC may consider
changes to (1) liquidity providers,
provided that any new counterparty is
subject to a credit review under OCC’s
Third-Party Risk Management
Framework; 34 and (2) term lengths
consistent with those approved by
OCC’s Board, considering factors
including, but not limited to, the initial
committed length of the term, market
conditions, and OCC’s liquidity needs.35
OCC would not consider additional
counterparties or different commitment
terms within these specified parameters
as materially altering the terms and
conditions of MRAs or commitments
current facility in 2020 following publication of a
Notice of No Objection from the Commission, set
an aggregate commitment amount OCC may seek
under the Non-Bank Repo Facility program at $1
billion so that OCC may negotiate individual
commitment amounts, each less than $1 billion,
with multiple counterparties. See Exchange Act
Release No. 89039 (Jun. 10, 2020), 85 FR 36444,
36446 (Jun. 16, 2020) (File No. SR–OCC–2020–803).
33 For the purposes of clarity, OCC would not
consider changes to pricing or changes in
representations, covenants, and terms of events of
default, to be changes to a term or condition that
would require the filing of a subsequent advance
notice provided that pricing is at the then
prevailing market rate and changes to such other
provisions are immaterial to OCC as the seller and
do not impair materially OCC’s ability to draw
against the facility.
34 See Third-Party Risk Management Framework,
available at Documents & Archives, https://
www.theocc.com/Company-Information/
Documents-and-Archives. While credit monitoring
of insurance companies that may become liquidity
providers would necessarily be different than credit
monitoring of existing pension fund counterparties,
any new liquidity would be subject to the same
credit review for counterparties of the same type.
35 See Notice of No Objection to 2020 Advance
Notice, 85 FR at 36445–46.
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under the Non-Bank Liquidity Facility
program.
Provided that none of the conditions
under which OCC would file a
subsequent advance notice are present,
OCC would consider a new or renewed
commitment as being on substantially
the same terms and conditions as
existing commitments under the NonBank Liquidity Facility program, such
that executing such commitments
would not be subject to the requirement
to file an advance notice filing pursuant
to Section 806(e)(1) of the Clearing
Supervision Act.36 Conversely, a new
commitment or renewal under different
conditions would necessitate OCC
providing advance notice to the
Commission for consideration.
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III. Commission Findings and Notice of
No Objection
Although the Clearing Supervision
Act does not specify a standard of
review for an advance notice, the stated
purpose of the Clearing Supervision Act
is instructive: to mitigate systemic risk
in the financial system and promote
financial stability by, among other
things, promoting uniform risk
management standards for systemically
important financial market utilities
(‘‘SIFMUs’’) and strengthening the
liquidity of SIFMUs.37
Section 805(a)(2) of the Clearing
Supervision Act authorizes the
Commission to prescribe regulations
containing risk management standards
for the payment, clearing, and
settlement activities of designated
clearing entities engaged in designated
activities for which the Commission is
the supervisory agency.38 Section 805(b)
of the Clearing Supervision Act
provides the following objectives and
principles for the Commission’s risk
management standards prescribed under
Section 805(a): 39
• to promote robust risk management;
• to promote safety and soundness;
• to reduce systemic risks; and
• to support the stability of the
broader financial system.
Section 805(c) provides, in addition,
that the Commission’s risk management
standards may address such areas as
risk management and default policies
and procedures, among other areas.40
The Commission has adopted risk
management standards under Section
805(a)(2) of the Clearing Supervision
Act and Section 17A of the Exchange
36 12
U.S.C. 5465(e)(1).
12 U.S.C. 5461(b).
38 12 U.S.C. 5464(a)(2).
39 12 U.S.C. 5464(b).
40 12 U.S.C. 5464(c).
37 See
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Act (the ‘‘Clearing Agency Rules’’).41
The Clearing Agency Rules require,
among other things, each covered
clearing agency to establish, implement,
maintain, and enforce written policies
and procedures that are reasonably
designed to meet certain minimum
requirements for its operations and risk
management practices on an ongoing
basis.42 As such, it is appropriate for the
Commission to review advance notices
against the Clearing Agency Rules and
the objectives and principles of these
risk management standards as described
in Section 805(b) of the Clearing
Supervision Act. As discussed below,
the Commission believes the changes
proposed in the Advance Notice are
consistent with the objectives and
principles described in Section 805(b) of
the Clearing Supervision Act,43 and in
the Clearing Agency Rules, in particular
Rule 17Ad-22(e)(7).44
A. Consistency With Section 805(b) of
the Clearing Supervision Act
The Commission believes that the
proposal contained in OCC’s Advance
Notice is consistent with the stated
objectives and principles of Section
805(b) of the Clearing Supervision Act.
Specifically, as discussed below, the
Commission believes that the changes
proposed in the Advance Notice are
consistent with promoting robust risk
management, promoting safety and
soundness, reducing systemic risks, and
supporting the stability of the broader
financial system.45
The Commission believes that the
proposed changes are consistent with
promoting robust risk management, in
particular the management of liquidity
risk presented to OCC. As a central
counterparty and a SIFMU,46 it is
imperative that OCC have adequate
resources to be able to satisfy liquidity
needs arising from its settlement
obligations, including in the event of a
Clearing Member default.47 To support
this objective, OCC proposes to remove
the $1 billion aggregate commitment
41 17 CFR 240.17Ad–22. See Exchange Act
Release No. 68080 (Oct. 22, 2012), 77 FR 66220
(Nov. 2, 2012) (S7–08–11). See also Covered
Clearing Agency Standards, 81 FR 70786. The
Commission established an effective date of
December 12, 2016 and a compliance date of April
11, 2017 for the Covered Clearing Agency
Standards. OCC is a ‘‘covered clearing agency’’ as
defined in Rule 17Ad–22(a)(5).
42 17 CFR 240.17Ad–22.
43 12 U.S.C. 5464(b).
44 17 CFR 240.17Ad–22(e)(7).
45 12 U.S.C. 5464(b).
46 See Financial Stability Oversight Council
(‘‘FSOC’’) 2012 Annual Report, Appendix A,
available at https://www.treasury.gov/initiatives/
fsoc/Documents/2012%20Annual%20Report.pdf.
47 See Notice of No Objection to 2014 Advance
Notice, 80 FR at 1065.
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55051
limit it may seek through the Non-Bank
Liquidity Facility program, so that
OCC’s Board could adjust the level of
aggregate commitments under the
program to ensure that OCC maintains
sufficient liquidity resources to cover its
liquidity risk exposures.48 The
Commission believes that approving
these changes would give OCC greater
flexibility to obtain additional liquidity
resources in the form of commitments
under the Non-Bank Liquidity Facility.
Therefore, the Commission believes that
the Advance Notice could increase
OCC’s access to liquidity resources,
which in turn would strengthen OCC’s
overall ability to manage its liquidity
risk exposures. As such, the
Commission believes that the proposal
would promote robust liquidity risk
management at OCC consistent with
Section 805(b) of the Clearing
Supervision Act.49
The Commission also believes that the
changes proposed in the Advance
Notice are consistent with promoting
safety and soundness, reducing systemic
risks, and promoting the stability of the
broader financial system. By removing
the $1 billion aggregate commitment
limit, OCC will be in a position to
increase the aggregate commitments of
the Non-Bank Liquidity Facility
program to $2 billion.50 Allowing OCC
to increase aggregate commitments
under the facility would, in turn, reduce
the likelihood that OCC would have
insufficient financial resources to
address liquidity demands arising out of
a Clearing Member default. Further, the
Commission believes that, to the extent
the proposed changes are consistent
with promoting OCC’s safety and
soundness, they are also consistent with
supporting the stability of the broader
financial system. OCC has been
designated as a SIFMU, in part, because
its failure or disruption could increase
the risk of significant liquidity or credit
problems spreading among financial
institutions or markets.51 The
Commission believes that the proposed
changes would support OCC’s ability to
48 As proposed, the facility would not limit the
total aggregate commitments OCC may seek. As a
practical matter, OCC expressed its intent to source
approximately $1 billion in additional liquidity
under the Non-Bank Liquidity Facility following
removal of the aggregate commitment limit. See
Notice of Filing, 87 FR at 44479.
49 12 U.S.C. 5464(b).
50 As noted above, OCC intends to expand its
aggregate external liquidity by $2.5 billion. While
OCC intends to seek $1 billion of that amount under
the Non-Bank Liquidity Facility, the removal of the
commitment limit would allow OCC to seek
additional commitments if it is unable to obtain
access to external liquidity through other facilities.
51 See FSOC 2012 Annual Report, Appendix A,
https://home.treasury.gov/system/files/261/here.pdf
(last visited Mar. 17, 2021).
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Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Notices
continue providing services to the
options markets by addressing losses
and shortfalls arising out of the default
of a Clearing Member. OCC’s continued
operations would, in turn, help support
the stability of the financial system by
reducing the risk of significant liquidity
or credit problems spreading among
market participants that rely on OCC’s
central role in the options market. As
such, the Commission believes the
proposed changes are consistent with
promoting safety and soundness,
reducing systemic risks, and promoting
the stability of the broader financial
system.52
The Commission received comments
asserting that the proposal would put
public retirement funds at risk to cover
investing choices made by Clearing
Members.53 The Commission has
carefully considered the risk to
investors’ retirement funds relative to
the benefits of expanding the Non-Bank
Liquidity Facility. Given that the NonBank Liquidity Facility has included
non-bank institutional investors such as
pension funds and insurance companies
among its liquidity providers since its
implementation in 2015, and has
retained substantially the same terms
throughout, the Commission does not
believe that the proposed expansion to
the Non-Bank Liquidity Facility would
introduce new risks to OCC’s
counterparties.54 Further, the terms of
the facility would require OCC to
provide Eligible Securities (e.g.,
Treasuries) subject to haircuts
negotiated by OCC and its
counterparties to address the potential
credit risk to OCC’s counterparties.
Moreover, the terms of the facility
would require OCC to pay the costs of
any covering transactions required if
OCC were to fail to perform its
obligation. As described above, the
expansion of commitments in the NonBank Liquidity Facility would reduce
the likelihood that OCC would have
insufficient financial resources resulting
52 12
U.S.C. 5464(b).
on the Advance Notice are available
at https://www.sec.gov/comments/sr-occ-2022-803/
srocc2022803.htm.
54 When OCC proposed the first iteration of the
Non-Bank Liquidity Facility, it acknowledged that,
like any liquidity source, it would involve certain
risks. See Exchange Act Release No. 73726 (Dec. 3,
2014), 79 FR 73116, 73119 (Dec. 9, 2014) (File No.
SR–OCC–2014–809). Upon review of the terms of
the facility, the Commission stated its belief that the
proposal should promote robust risk management,
promote safety and soundness in the marketplace,
reduce systemic risks, and support the stability of
the broader financial system by giving OCC access
to additional committed liquidity that will help
OCC meet its settlement obligations in a timely
manner, while also limiting the exposure that OCC
has to its counterparties. See Exchange Act Release
No. 73979 (Jan. 2, 2015), 80 FR 1062, 1065 (Jan. 8,
2015) (File No. SR–OCC–2014–809).
khammond on DSKJM1Z7X2PROD with NOTICES
53 Comments
VerDate Sep<11>2014
18:19 Sep 07, 2022
Jkt 256001
from a Clearing Member default. Taken
together, the Commission believes that
the terms of the agreement to protect
OCC and its counterparties, combined
with the reduced likelihood of OCC’s
failure to manage a default, would in
fact promote the safety and soundness
of the U.S. markets.
The Commission also received
comments asserting that ‘‘changing the
rules regarding advance notice’’ (likely
referring to OCC not having to file an
advance notice at renewal) has ‘‘no
value to the public.’’ 55 The Commission
has carefully considered the risk of
allowing new or renewed commitments
under the terms of Non-Bank Liquidity
Facility without requiring additional
advance notice filings from OCC. Given
that such additional commitments
would only be permitted without an
advance notice if executed on
substantially similar terms as the
current Non-Bank Liquidity Facility, to
which the Commission has previously
not objected, the Commission does not
believe that such additional
commitments would necessarily present
a material change to the risks that OCC
presents. Any change to the Non-Bank
Liquidity Facility that could materially
affect the nature or level of risk posed
by OCC would necessitate an advance
notice filing.56
Accordingly, and for the reasons
stated above, the Commission believes
the changes proposed in the Advance
Notice are consistent with Section
805(b) of the Clearing Supervision
Act.57
B. Consistency With Rule 17Ad–22(e)(7)
Under the Exchange Act
Rule 17Ad–22(e)(7)(ii) under the
Exchange Act requires that a covered
clearing agency establish, implement,
maintain, and enforce written policies
and procedures reasonably designed to
effectively measure, monitor, and
manage the liquidity risk that arises in
or is borne by the covered clearing
agency, including measuring,
monitoring, and managing its settlement
and funding flows on an ongoing and
55 Comments on the Advance Notice are available
at https://www.sec.gov/comments/sr-occ-2022-803/
srocc2022803.htm.
56 OCC would submit another advance notice
only if: (1) OCC should seek to execute a
commitment at a level that would have the effect
of reducing external liquidity below the target of $3
billion; (2) OCC seeks to change the terms and
conditions of the agreements underlying the facility
or commitments thereunder in a manner that
materially affects the nature or level of risk
presented by OCC; or (3) OCC seeks to execute a
commitment with a counterparty that has
experienced a negative change to its credit profile
or a material adverse change since OCC last
executed a commitment with that counterparty.
57 12 U.S.C. 5464(b).
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Sfmt 4703
timely basis, and its use of intraday
liquidity by, at a minimum, holding
qualifying liquid resources sufficient to
meet the minimum liquidity resource
requirement under Rule 17Ad–
22(e)(7)(i) 58 in each relevant currency
for which the covered clearing agency
has payment obligations owed to
clearing members.59 For any covered
clearing agency, ‘‘qualifying liquid
resources’’ means assets that are readily
available and convertible into cash
through prearranged funding
arrangements, such as committed
arrangements without material adverse
change provisions, including, among
others, repurchase agreements.60
The Non-Bank Liquidity Facility
provides OCC with prearranged
commitments to convert assets into cash
even if OCC experiences a material
adverse change, and the Commission
believes that the Non-Bank Liquidity
Facility provides OCC access to
qualifying liquid resources to the extent
that OCC has sufficient collateral to
access the facility.61 The Commission
believes, therefore, that the proposed
changes—to remove the existing
aggregate commitment limit, and to
allow the OCC Board to increase the
Non-Bank Liquidity Facility program
aggregate commitment levels as needed
to maintain sufficient liquidity—will
further enhance OCC’s ability to hold
qualifying liquid resources to meet its
liquidity resource requirements,
consistent with the requirements of Rule
17Ad–22(e)(7)(ii) under the Exchange
Act.62
The Commission received comments
raising concerns about the inability of
liquidity providers to deny funding in
58 Rule 17Ad–22(e)(7)(i) requires OCC to
establish, implement, maintain and enforce written
policies and procedures reasonably designed to
effectively measure, monitor, and manage liquidity
risk that arises in or is borne by OCC, including
measuring, monitoring, and managing its settlement
and funding flows on an ongoing and timely basis,
and its use of intraday liquidity by, at a minimum,
maintaining sufficient liquid resources at the
minimum in all relevant currencies to effect sameday settlement of payment obligations with a high
degree of confidence under a wide range of
foreseeable stress scenarios that includes, but is not
limited to, the default of the participant family that
would generate the largest aggregate payment of
obligation for the covered clearing agency in
extreme but plausible conditions. 17 CFR
240.17Ad–22(e)(7)(i).
59 17 CFR 240.17Ad–22(e)(7)(ii).
60 17 CFR 240.17Ad–22(a)(14)(ii)(3).
61 OCC would use Eligible Securities that are
included in Clearing Fund contributions by
Clearing Members (separate from any required cash
contributions to the Clearing Fund) and margin
deposits of any Clearing Member that has been
suspended by OCC for the repurchase
arrangements. See Notice of Filing, 85 FR at 31235
n.9.
62 17 CFR 240.17Ad–22(e)(7)(ii).
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the event of a material adverse change.63
As noted above, under Rule 17Ad–
22(a)(14), committed arrangements,
such as repurchase agreements, are only
qualifying liquid resources where such
agreements do not include material
adverse change provisions.64 Moreover,
the non-banks are voluntarily
participating in the facility. These
liquidity providers may consider the
benefits and costs of participation,
including the adverse change provision,
before determining that their
participation in the facility would be
preferable to alternative investments
and would benefit their shareholders
and beneficiaries.
Commenters also raised concerns
regarding the speed with which a
counterparty would be required to
provide funding.65 As discussed above,
a fundamental attribute of liquidity
resources is that OCC can quickly access
liquidity in the event of a Clearing
Member default or market disruption.
By necessity, funds must be made
available to OCC within 60 minutes of
OCC’s delivering Eligible Securities, and
the institutional investor is not
permitted to rehypothecate purchased
securities. Any requirement to allow
liquidity providers to deny or delay
funding would potentially delay OCC’s
access to liquidity resources, which
could negatively affect the safety and
soundness of the U.S. markets.
Accordingly, the Commission believes
that the changes proposed in the
Advance Notice are consistent with
Rule 17Ad–22(e)(7) under the Exchange
Act.66
IV. Conclusion
khammond on DSKJM1Z7X2PROD with NOTICES
It is therefore noticed, pursuant to
Section 806(e)(1)(I) of the Clearing
Supervision Act, that the Commission
does not object to Advance Notice (SR–
OCC–2022–803) and that OCC is
authorized to implement the proposed
change as of the date of this notice.
63 Comments on the Advance Notice are available
at https://www.sec.gov/comments/sr-occ-2022-803/
srocc2022803.htm.
64 17 CFR 240.17Ad–22(a)(14)(ii)(A).
65 Comments on the Advance Notice are available
at https://www.sec.gov/comments/sr-occ-2022-803/
srocc2022803.htm.
66 17 CFR 240.17Ad–22(e)(7).
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18:19 Sep 07, 2022
Jkt 256001
By the Commission.
J. Matthew DeLesDernier,
Deputy Secretary.
55053
change any terms of an order) and of a
cancel/replace message that does not
change the price or size of a resting
order but changes another term of an
[FR Doc. 2022–19417 Filed 9–7–22; 8:45 am]
order. CBOE Rule 5.32(e) describes
BILLING CODE 8011–01–P
whether a resting order’s priority
position may change if it is modified
with a cancel/replace message.
SECURITIES AND EXCHANGE
Specifically, current CBOE Rule 5.32(e)
COMMISSION
states if the price of an order is changed,
[Release No. 34–95657; File No. SR–CBOE–
the order loses position and is placed in
2022–038]
a priority position as if the Exchange’s
system (‘‘System’’) received the order at
Self-Regulatory Organizations; Cboe
the time the order was changed. If the
Exchange, Inc.; Order Approving a
quantity of an order is decreased, it
Proposed Rule Change To Amend
retains its priority position. If the
CBOE Rule 5.32 With Respect to the
Handling of Cancel/Replace Messages quantity of an order is increased, it loses
its priority position and is placed in a
September 1, 2022.
priority position as if the System
received the order at the time the
I. Introduction
quantity of the order is increased.
On July 7, 2022, Cboe Exchange, Inc.
The Exchange explains, however, that
(‘‘Exchange’’ or ‘‘CBOE’’) filed with the
CBOE Rule 5.32(e) is currently silent
Securities and Exchange Commission
regarding how the System handles a
(‘‘Commission’’), pursuant to Section
cancel/replace message comprised of a
19(b)(1) of the Securities Exchange Act
no-change order or an order that
1
of 1934 (‘‘Exchange Act’’) and Rule
changes terms other than price and
19b–4 thereunder,2 a proposed rule
size.5 The Exchange further represents
change to establish that a cancel/replace that it recently determined that the
message received for an order already
System does not handle all no-change
resting on the Exchange’s order book
orders and messages uniformly with
will cause such resting order to lose its
respect to how they affect resting orders.
original priority position, subject to
Specifically, the Exchange explains that
certain exceptions. The proposed rule
currently, when the System receives a
change was published for comment in
no-change order, the resting order
the Federal Register on July 26, 2022.3
would lose its priority position;
The Commission received no comment
however, if the System receives a noletters regarding the proposed rule
change bid or offer in a bulk message,
change. This order approves the
the resting bid or offer would not lose
proposed rule change.
its priority position.6
II. Summary of the Proposal
The Exchange proposes to amend
CBOE Rule 5.32(e) so that it states as
The Exchange proposes to amend
follows: if a User submits a cancel/
CBOE Rule 5.32(e) to describe the
replace message for a resting order,
impact on priority of a ‘‘no-change’’
order 4 (i.e., an order submitted to cancel regardless of whether the cancel/replace
message modifies any terms of the
or replace a resting order that does not
resting order, the order loses its priority
1 15 U.S.C. 78s(b)(1).
position and is placed in a priority
2 17 CFR 240.19b–4.
position based on the time the System
3 See Exchange Act Release No. 95328 (July 20,
receives the cancel/replace message,
2022), 87 FR 44438 (‘‘Notice’’).
unless the User only (1) decreases the
4 In this context, the term ‘‘order’’ includes bids
quantity of an order (as is currently set
and offers submitted in bulk messages. A bulk
forth in the Rules), (2) modifies the Max
message means a single electronic message a user
Floor (if a Reserve Order), or (3)
submits with an M (Market-Maker) capacity to the
Exchange in which the User may enter, modify, or
modifies the stop price (if a Stop or
cancel up to an Exchange-specified number of bids
Stop-Limit order), in which case the
and offers. See CBOE Rule 1.1 (definition of bulk
order retains its priority position.
message, which provides that the System handles
a bulk message bid or offer in the same manner as
it handles an order or quote, unless the Rules
specify otherwise).
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5 See
6 See
E:\FR\FM\08SEN1.SGM
Notice, supra note 3, at 44439.
id.
08SEN1
]]>Agencies
[Federal Register Volume 87, Number 173 (Thursday, September 8, 2022)]
[Notices]
[Pages 55048-55053]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-19417]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95670; File No. SR-OCC-2022-803]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of No Objection to Advance Notice Related to an Expansion of The
Options Clearing Corporation's Non-Bank Liquidity Facility Program as
Part of Its Overall Liquidity Plan
September 2, 2022.
I. Introduction
On July 7, 2022, the Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') advance
notice SR-OCC-2022-803 (``Advance Notice'') pursuant to Section
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, entitled Payment, Clearing and Settlement
Supervision Act of 2010 (``Clearing Supervision Act'') \1\ and Rule
19b-4(n)(1)(i) \2\ under the Securities Exchange Act of 1934
(``Exchange Act'') \3\ in connection with a proposed change to its
operations to expand capacity under OCC's program for accessing
additional committed sources of liquidity that do not increase the
concentration of OCC's counterparty exposure (``Non-Bank Liquidity
Facility'') as part of OCC's overall liquidity plan.\4\ The Advance
Notice was published for public comment in the Federal Register on July
26, 2022.\5\ The Commission has received comments regarding the changes
proposed in the Advance Notice.\6\ The Commission is hereby providing
notice of no objection to the Advance Notice.
---------------------------------------------------------------------------
\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ 15 U.S.C. 78a et seq.
\4\ See Notice of Filing, infra note 5, at 87 FR 44477.
\5\ See Exchange Act Release No. 95327 (Jul. 20, 2022), 87 FR
44477 (Jul. 26, 2022) (File No. SR-OCC-2022-803) (``Notice of
Filing'').
\6\ Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm.
---------------------------------------------------------------------------
II. Background 7
---------------------------------------------------------------------------
\7\ Capitalized terms used but not defined herein have the
meanings specified in OCC's Rules and By-Laws, available at https://www.theocc.com/about/publications/bylaws.jsp.
---------------------------------------------------------------------------
As the sole clearing agency for standardized U.S. securities
options listed on national securities exchanges registered with the
Commission (``listed options''), OCC is obligated to make certain
payments. In the event of a Clearing Member default, OCC would be
obligated to make payments, on time,
[[Page 55049]]
related to that member's clearing transactions. To meet such payment
obligations, OCC maintains access to cash from a variety of sources,
including a requirement for members to pledge cash collateral to OCC
and various agreements with banks and other counterparties (``liquidity
facilities'') to provide OCC with cash in exchange for collateral, such
as U.S. Government securities. OCC routinely considers potential market
stress scenarios that could affect such payment obligations. Based on
such considerations, OCC now believes that it should seek to expand its
liquidity facilities to increase OCC's access to cash to manage a
member default.\8\
---------------------------------------------------------------------------
\8\ See Notice of Filing, 87 FR at 44477.
---------------------------------------------------------------------------
OCC's liquidity plan already provides access to a diverse set of
funding sources, including banks (i.e., OCC's syndicated credit
facility),\9\ the Non-Bank Liquidity Facility program (defined
above),\10\ and Clearing Members' Clearing Fund Cash Requirement.\11\
OCC currently maintains $8 billion in qualifying liquid resources,\12\
consisting of $5 billion of required Clearing Fund cash contributions,
$2 billion in the syndicated bank credit facility, and $1 billion in
the Non-Bank Liquidity Facility. OCC intends to increase such resources
by $2.5 billion to a new total of $10.5 billion. OCC's proposed
expansion of its liquidity plan includes several components: (1)
creating a new committed repurchase facility with a commercial bank
counterparty (``Bank Repo Facility''); \13\ (2) expanding OCC's
existing Non-Bank Liquidity Facility program; \14\ (3) expanding OCC's
existing syndicated credit facility; and (4) establishing a target for
the aggregate amount of all external liquidity resources (i.e., the
syndicated credit facility, Bank Repo Facility and the Non-Bank
Liquidity Facility).\15\ The Advance Notice concerns the second
component described above, namely, a change to OCC's operations to
expand its Non-Bank Liquidity Facility program.\16\
---------------------------------------------------------------------------
\9\ See Exchange Act Release No. 88971 (May 28, 2020), 85 FR
34257 (Jun. 3, 2020) (File No. SR-OCC-2020-804).
\10\ See Exchange Act Release No. 89039 (Jun. 10, 2020), 85 FR
36444 (Jun. 16, 2020) (File No. SR-OCC-2020-803) (``Notice of No
Objection to 2020 Advance Notice''); Exchange Act Release No. 76821
(Jan. 4, 2016), 81 FR 3208 (Jan. 20, 2016) (File No. SR-OCC-2015-
805) (``Notice of No Objection to 2015 Advance Notice''); Exchange
Act Release No. 73979 (Jan. 2, 2015), 80 FR 1062 (Jan. 8, 2015)
(File No. SR-OCC-2014-809) (``Notice of No Objection to 2014 Advance
Notice'').
\11\ See OCC Rule 1002.
\12\ See 17 CFR 240.17Ad-22(a)(14) (defining qualifying liquid
resources).
\13\ In a separate advance notice, OCC is proposing to enter a
new MRA with a commercial bank counterparty. See Exchange Act
Release No. 95326 (Jul. 20, 2022), 87 FR 44457 (Jul. 26, 2022) (File
No. SR-OCC-2022-802).
\14\ See Notice of Filing, 87 FR at 44477.
\15\ As discussed below, OCC would be required to file an
advance notice with the Commission if it were to seek to reduce the
commitments under the Non-Bank Liquidity Facility so as to reduce
external liquidity below the $3 billion target.
\16\ The third and fourth components of OCC's proposed expansion
of its liquidity plan are briefly discussed below.
---------------------------------------------------------------------------
Under OCC's existing Non-Bank Liquidity Facility program, OCC
maintains a series of arrangements to access cash in exchange for
Government securities (``Eligible Securities'') deposited by Clearing
Members in respect of their Clearing Fund requirements to meet OCC's
settlement obligations. Currently, the aggregate amount OCC may seek
through the Non-Bank Liquidity Facility program is limited to $1
billion.\17\ Through this Advance Notice, OCC is proposing to remove
the $1 billion funding limit and increase the capacity of its Non-Bank
Liquidity Facility to an amount to be determined by OCC's Board from
time to time, based on OCC's liquidity needs at the time and a number
of other factors.\18\ Instead of retaining the $1 billion funding limit
for the Non-Bank Liquidity Facility program, OCC proposes to establish
a target across all external liquidity resources of at least $3
billion, which is the current aggregate amount of external
liquidity.\19\ OCC is not, as part of this Advance Notice, requiring
its members or other market participants to provide additional or
different collateral to OCC. Rather, the purpose of the proposal is to
provide OCC with increased capacity for accessing cash to meet its
payment obligations, including in the event that one of its members
fails to meet its payment obligations to OCC.\20\
---------------------------------------------------------------------------
\17\ In 2020, OCC set the aggregate amount it may seek through
the Non-Bank Liquidity Facility program to an amount up to $1
billion. See Notice of No Objection to 2020 Advance Notice, 85 FR at
36446. $1 billion is the same as the aggregate value established at
the inception of the Non-Bank Liquidity Facility program. See Notice
of No Objection to 2014 Advance Notice, 80 FR at 1064 & n.11. In
2015, OCC filed an advance notice that set an aggregate value of at
least $1 billion and up to $1.5 billion. See Notice of No Objection
to 2015 Advance Notice, 81 FR at 3208.
\18\ OCC's Board has authorized OCC to seek up to an additional
$2.5 billion in external liquidity.
\19\ See Notice of Filing, 87 FR at 44479.
\20\ See OCC Rule 1006(f)(1)(A). OCC may also use the Clearing
Fund to address liquidity shortfalls arising from the failure of any
bank, securities or commodities clearing organization, or investment
counterparty to perform any obligation to OCC when due. See OCC Rule
1006(f)(1)(C); Exchange Act Release No. 94304 (Feb. 24, 2022), 87 FR
11776 (Mar. 2, 2022) (File No. SR-OCC-2021-014).
---------------------------------------------------------------------------
With respect to OCC's overall liquidity plan, the Non-Bank
Liquidity Facility program reduces the concentration of OCC's
counterparty exposure by diversifying its base of liquidity providers
among banks and non-bank, non-Clearing Member institutional investors,
such as pension funds or insurance companies.
The currently approved Non-Bank Liquidity Facility consists of two
parts: a Master Repurchase Agreement (``MRA''), and confirmations with
one or more institutional investors, which contain certain
individualized terms and conditions of transactions executed between
OCC, the institutional investors, and their agents. The MRA is
structured so that the buyer (i.e., the institutional investor) would
purchase Eligible Securities from OCC from time to time.\21\ OCC, the
seller, would transfer Eligible Securities to the buyer in exchange for
a buyer payment to OCC in immediately available funds (``Purchase
Price''). The buyer would simultaneously agree to transfer the
purchased securities back to OCC at a specified later date
(``Repurchase Date''), or on OCC's demand against the transfer of funds
from OCC to the buyer, where the funds would be equal to the
outstanding Purchase Price plus the accrued and unpaid price
differential (together, ``Repurchase Price'').
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\21\ OCC would use Eligible Securities that are included in
Clearing Fund contributions by Clearing Members and margin deposits
of any Clearing Member that has been suspended by OCC for the
repurchase arrangements. OCC Rule 1006(f) and OCC Rule 1104(b)
authorize OCC to use these sources to obtain funds from third
parties through securities repurchases. The officers who may
exercise this authority include the Executive Chairman, Chief
Executive Officer, and Chief Operating Officer.
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The confirmations establish tailored provisions of repurchase
transactions permitted under the Non-Bank Liquidity Facility that are
designed to reduce concentration risk and promote certainty of funding
and operational effectiveness based on the specific needs of a party.
For example, OCC would only enter into confirmations with an
institutional investor that is not a Clearing Member or affiliated
bank, such as a pension fund or an insurance company, in order to allow
OCC to access stable and reliable sources of funding without increasing
the concentration of its exposure to counterparties that are affiliated
banks, broker-dealers, or futures commission merchants. In addition,
any such institutional investor is obligated to enter repurchase
transactions even if OCC experiences a material adverse
[[Page 55050]]
change,\22\ funds must be made available to OCC within 60 minutes of
OCC's delivering Eligible Securities, and the institutional investor is
not permitted to rehypothecate purchased securities.\23\ Additionally,
the confirmations set forth the term and maximum dollar amounts of the
transaction permitted under the MRA.
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\22\ A ``material adverse change'' is typically defined
contractually as a change that would have a materially adverse
effect on the business or financial condition of a company.
\23\ See Notice of No Objection to 2014 Advance Notice, 80 FR at
1064.
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In 2020, OCC set the aggregate amount it may seek through the Non-
Bank Liquidity Facility program to an amount of up to $1 billion.\24\
OCC has since secured commitments from multiple pension funds in an
aggregate amount of $1 billion. Since setting and securing commitments
up to that aggregate commitment limit, OCC has experienced an increase
in its stressed liquidity demands. Under OCC's Liquidity Risk
Management Framework (``LRMF''), OCC performs daily liquidity stress
testing to assess its Base Liquidity Resources \25\ and Available
Liquidity Resources \26\ against OCC's liquidity risk tolerance
(``Adequacy Scenarios''). Based in part on the results of this stress
testing, OCC has periodically adjusted Clearing Member's Clearing Fund
Cash Requirement to ensure that OCC maintains sufficient liquidity
resources to cover its liquidity risk exposures at all times.\27\
Through this Advance Notice OCC proposes a change to its Non-Bank
Liquidity Facility program to give OCC greater capacity to source
liquidity from its non-bank liquidity providers as needed.
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\24\ See Notice of No Objection to 2020 Advance Notice, 85 FR at
36446. $1 billion is the same as the aggregate value established at
the inception of the Non-Bank Liquidity Facility program. See Notice
of No Objection to 2014 Advance Notice, 80 FR at 1064 & n.11. In
2015, OCC filed an advance notice that set an aggregate value of at
least $1 billion and up to $1.5 billion. See Notice of No Objection
to 2015 Advance Notice, 81 FR at 3208.
\25\ The LRMF defines ``Base Liquidity Resources'' to mean the
amount of committed liquidity resources maintained at all times by
OCC to meet its Cover 1 liquidity resource requirements under the
applicable regulations. Base Liquidity Resources are comprised of
qualifying liquid resources in the form of Clearing Fund cash
deposited in respect of the Clearing Fund Cash Requirement and
assets that are readily available and convertible into cash (i.e.,
U.S. Government securities) through prearranged funding
arrangements, such as the Non-Bank Liquidity Facility.
\26\ The LRMF defines ``Available Liquidity Resources'' to
include Base Liquidity Resources plus allowable Clearing Fund cash
deposited in excess of the Clearing Fund Cash Requirement. Any
Clearing Member request to substitute U.S. Government securities for
cash deposits in excess of such Clearing Member's proportionate
share of the Clearing Fund Cash Requirement is subject to a two-day
notice period. See OCC Rule 1002(a)(iv).
\27\ In response to increased stressed liquidity demands in
2021, OCC exercised authority under OCC Rule 1002(a) to increase the
Clearing Fund Cash Requirement from $3.5 billion to $4 billion in
July 2021, and from $4 billion to $5 billion in October 2021.
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The Proposed Change
In order to give OCC greater capacity to source liquidity from
external liquidity providers as needed, OCC would modify the Non-Bank
Liquidity Facility program to remove the aggregate commitment limit of
$1 billion, identified in the 2020 advance notice.\28\ OCC proposes
that its Board of Directors (``Board'') set, by resolution and from
time to time, the level of aggregate commitments under the program to
ensure that OCC maintains sufficient liquidity resources to cover its
liquidity risk exposures at all times.\29\
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\28\ See Notice of No Objection to 2020 Advance Notice, 85 FR at
36446.
\29\ In setting the level of aggregate commitments for the Non-
Bank Liquidity Facility, the Board would consider factors including,
but not limited to: (1) the size and make-up of the Clearing Fund;
(2) the aggregate amount of OCC's other liquidity sources; and (3)
changing market and business conditions.
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OCC's Board has authorized OCC to seek up to an additional $2.5
billion in external liquidity, including through the Non-Bank Liquidity
Facility, which would give OCC access to a total of $5.5 billion in
external liquidity.\30\ For the additional $2.5 billion, OCC expects
that it will source $1.5 billion from bank counterparties and $1
billion under the Non-Bank Liquidity Facility. In the event that OCC is
unable to obtain the full $1.5 billion from its bank counterparties,
however, OCC would source the full $2.5 billion under the Non-Bank
Liquidity Facility program.\31\
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\30\ OCC performs daily liquidity stress testing to assess its
liquidity resources. See Notice of Filing, 87 FR at 44478. Based on
the results of such stress testing, OCC increased Clearing Fund
requirements twice in 2021. Id. OCC management recommended that OCC
increase the capacity of its Non-Bank Liquidity Facility, which
would provide OCC flexibility in how it increases liquidity
resources in response to stress testing. See Confidential Exhibit 3
to File No. SR-OCC-2022-803.
\31\ See Notice of Filing, 87 FR at 44479.
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Removing the present $1 billion funding limit to the Non-Bank
Liquidity Facility program would remove one of the specified terms that
could require OCC to file an advance notice.\32\ Consistent with the
proposal to establish a target for external liquidity, and drawing from
applicable conditions for filing advance notices with respect to
renewals of OCC's syndicated credit facility and proposed Bank Repo
Facility, OCC would submit another advance notice to execute individual
commitments under the Non-Bank Liquidity Facility only if: (1) OCC
should seek to execute a commitment at a level that would have the
effect of reducing total external liquidity below the target of $3
billion; (2) OCC should seek to change the terms and conditions of the
MRA or commitments thereunder in a manner that materially affects the
nature or level of risk presented by OCC; \33\ or (3) OCC should seek
to execute a commitment with a counterparty that has experienced a
negative change to its credit profile or a material adverse change
since OCC last executed a commitment with that counterparty. Consistent
with another prior advance notice, OCC may consider changes to (1)
liquidity providers, provided that any new counterparty is subject to a
credit review under OCC's Third-Party Risk Management Framework; \34\
and (2) term lengths consistent with those approved by OCC's Board,
considering factors including, but not limited to, the initial
committed length of the term, market conditions, and OCC's liquidity
needs.\35\ OCC would not consider additional counterparties or
different commitment terms within these specified parameters as
materially altering the terms and conditions of MRAs or commitments
[[Page 55051]]
under the Non-Bank Liquidity Facility program.
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\32\ The facility is designed to allow OCC to seek individual
commitments from counterparties on specified terms. See e.g.,
Exchange Act Release No. 89039 (Jun. 10, 2020), 85 FR 36444, 36446
(Jun. 16, 2020) (File No. SR-OCC-2020-803) (stating that OCC may
negotiate individual commitments within an aggregate commitment
limit). In 2015, the Commission acknowledged that changes to
specified terms (e.g., funding levels) would require the further
submissions to the Commission for review. See Exchange Act Release
No. 76821 (Jan. 4, 2016), 81 FR 3208, 3209 (Jan. 20, 2016) (File No.
SR-OCC-2015-805). The terms of the current facility, which OCC
implemented the terms of its current facility in 2020 following
publication of a Notice of No Objection from the Commission, set an
aggregate commitment amount OCC may seek under the Non-Bank Repo
Facility program at $1 billion so that OCC may negotiate individual
commitment amounts, each less than $1 billion, with multiple
counterparties. See Exchange Act Release No. 89039 (Jun. 10, 2020),
85 FR 36444, 36446 (Jun. 16, 2020) (File No. SR-OCC-2020-803).
\33\ For the purposes of clarity, OCC would not consider changes
to pricing or changes in representations, covenants, and terms of
events of default, to be changes to a term or condition that would
require the filing of a subsequent advance notice provided that
pricing is at the then prevailing market rate and changes to such
other provisions are immaterial to OCC as the seller and do not
impair materially OCC's ability to draw against the facility.
\34\ See Third-Party Risk Management Framework, available at
Documents & Archives, https://www.theocc.com/Company-Information/Documents-and-Archives. While credit monitoring of insurance
companies that may become liquidity providers would necessarily be
different than credit monitoring of existing pension fund
counterparties, any new liquidity would be subject to the same
credit review for counterparties of the same type.
\35\ See Notice of No Objection to 2020 Advance Notice, 85 FR at
36445-46.
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Provided that none of the conditions under which OCC would file a
subsequent advance notice are present, OCC would consider a new or
renewed commitment as being on substantially the same terms and
conditions as existing commitments under the Non-Bank Liquidity
Facility program, such that executing such commitments would not be
subject to the requirement to file an advance notice filing pursuant to
Section 806(e)(1) of the Clearing Supervision Act.\36\ Conversely, a
new commitment or renewal under different conditions would necessitate
OCC providing advance notice to the Commission for consideration.
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\36\ 12 U.S.C. 5465(e)(1).
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III. Commission Findings and Notice of No Objection
Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, the stated purpose of the Clearing
Supervision Act is instructive: to mitigate systemic risk in the
financial system and promote financial stability by, among other
things, promoting uniform risk management standards for systemically
important financial market utilities (``SIFMUs'') and strengthening the
liquidity of SIFMUs.\37\
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\37\ See 12 U.S.C. 5461(b).
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Section 805(a)(2) of the Clearing Supervision Act authorizes the
Commission to prescribe regulations containing risk management
standards for the payment, clearing, and settlement activities of
designated clearing entities engaged in designated activities for which
the Commission is the supervisory agency.\38\ Section 805(b) of the
Clearing Supervision Act provides the following objectives and
principles for the Commission's risk management standards prescribed
under Section 805(a): \39\
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\38\ 12 U.S.C. 5464(a)(2).
\39\ 12 U.S.C. 5464(b).
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to promote robust risk management;
to promote safety and soundness;
to reduce systemic risks; and
to support the stability of the broader financial system.
Section 805(c) provides, in addition, that the Commission's risk
management standards may address such areas as risk management and
default policies and procedures, among other areas.\40\
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\40\ 12 U.S.C. 5464(c).
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The Commission has adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act and Section 17A of the
Exchange Act (the ``Clearing Agency Rules'').\41\ The Clearing Agency
Rules require, among other things, each covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures that are reasonably designed to meet certain minimum
requirements for its operations and risk management practices on an
ongoing basis.\42\ As such, it is appropriate for the Commission to
review advance notices against the Clearing Agency Rules and the
objectives and principles of these risk management standards as
described in Section 805(b) of the Clearing Supervision Act. As
discussed below, the Commission believes the changes proposed in the
Advance Notice are consistent with the objectives and principles
described in Section 805(b) of the Clearing Supervision Act,\43\ and in
the Clearing Agency Rules, in particular Rule 17Ad-22(e)(7).\44\
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\41\ 17 CFR 240.17Ad-22. See Exchange Act Release No. 68080
(Oct. 22, 2012), 77 FR 66220 (Nov. 2, 2012) (S7-08-11). See also
Covered Clearing Agency Standards, 81 FR 70786. The Commission
established an effective date of December 12, 2016 and a compliance
date of April 11, 2017 for the Covered Clearing Agency Standards.
OCC is a ``covered clearing agency'' as defined in Rule 17Ad-
22(a)(5).
\42\ 17 CFR 240.17Ad-22.
\43\ 12 U.S.C. 5464(b).
\44\ 17 CFR 240.17Ad-22(e)(7).
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A. Consistency With Section 805(b) of the Clearing Supervision Act
The Commission believes that the proposal contained in OCC's
Advance Notice is consistent with the stated objectives and principles
of Section 805(b) of the Clearing Supervision Act. Specifically, as
discussed below, the Commission believes that the changes proposed in
the Advance Notice are consistent with promoting robust risk
management, promoting safety and soundness, reducing systemic risks,
and supporting the stability of the broader financial system.\45\
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\45\ 12 U.S.C. 5464(b).
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The Commission believes that the proposed changes are consistent
with promoting robust risk management, in particular the management of
liquidity risk presented to OCC. As a central counterparty and a
SIFMU,\46\ it is imperative that OCC have adequate resources to be able
to satisfy liquidity needs arising from its settlement obligations,
including in the event of a Clearing Member default.\47\ To support
this objective, OCC proposes to remove the $1 billion aggregate
commitment limit it may seek through the Non-Bank Liquidity Facility
program, so that OCC's Board could adjust the level of aggregate
commitments under the program to ensure that OCC maintains sufficient
liquidity resources to cover its liquidity risk exposures.\48\ The
Commission believes that approving these changes would give OCC greater
flexibility to obtain additional liquidity resources in the form of
commitments under the Non-Bank Liquidity Facility. Therefore, the
Commission believes that the Advance Notice could increase OCC's access
to liquidity resources, which in turn would strengthen OCC's overall
ability to manage its liquidity risk exposures. As such, the Commission
believes that the proposal would promote robust liquidity risk
management at OCC consistent with Section 805(b) of the Clearing
Supervision Act.\49\
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\46\ See Financial Stability Oversight Council (``FSOC'') 2012
Annual Report, Appendix A, available at https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
\47\ See Notice of No Objection to 2014 Advance Notice, 80 FR at
1065.
\48\ As proposed, the facility would not limit the total
aggregate commitments OCC may seek. As a practical matter, OCC
expressed its intent to source approximately $1 billion in
additional liquidity under the Non-Bank Liquidity Facility following
removal of the aggregate commitment limit. See Notice of Filing, 87
FR at 44479.
\49\ 12 U.S.C. 5464(b).
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The Commission also believes that the changes proposed in the
Advance Notice are consistent with promoting safety and soundness,
reducing systemic risks, and promoting the stability of the broader
financial system. By removing the $1 billion aggregate commitment
limit, OCC will be in a position to increase the aggregate commitments
of the Non-Bank Liquidity Facility program to $2 billion.\50\ Allowing
OCC to increase aggregate commitments under the facility would, in
turn, reduce the likelihood that OCC would have insufficient financial
resources to address liquidity demands arising out of a Clearing Member
default. Further, the Commission believes that, to the extent the
proposed changes are consistent with promoting OCC's safety and
soundness, they are also consistent with supporting the stability of
the broader financial system. OCC has been designated as a SIFMU, in
part, because its failure or disruption could increase the risk of
significant liquidity or credit problems spreading among financial
institutions or markets.\51\ The Commission believes that the proposed
changes would support OCC's ability to
[[Page 55052]]
continue providing services to the options markets by addressing losses
and shortfalls arising out of the default of a Clearing Member. OCC's
continued operations would, in turn, help support the stability of the
financial system by reducing the risk of significant liquidity or
credit problems spreading among market participants that rely on OCC's
central role in the options market. As such, the Commission believes
the proposed changes are consistent with promoting safety and
soundness, reducing systemic risks, and promoting the stability of the
broader financial system.\52\
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\50\ As noted above, OCC intends to expand its aggregate
external liquidity by $2.5 billion. While OCC intends to seek $1
billion of that amount under the Non-Bank Liquidity Facility, the
removal of the commitment limit would allow OCC to seek additional
commitments if it is unable to obtain access to external liquidity
through other facilities.
\51\ See FSOC 2012 Annual Report, Appendix A, https://home.treasury.gov/system/files/261/here.pdf (last visited Mar. 17,
2021).
\52\ 12 U.S.C. 5464(b).
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The Commission received comments asserting that the proposal would
put public retirement funds at risk to cover investing choices made by
Clearing Members.\53\ The Commission has carefully considered the risk
to investors' retirement funds relative to the benefits of expanding
the Non-Bank Liquidity Facility. Given that the Non-Bank Liquidity
Facility has included non-bank institutional investors such as pension
funds and insurance companies among its liquidity providers since its
implementation in 2015, and has retained substantially the same terms
throughout, the Commission does not believe that the proposed expansion
to the Non-Bank Liquidity Facility would introduce new risks to OCC's
counterparties.\54\ Further, the terms of the facility would require
OCC to provide Eligible Securities (e.g., Treasuries) subject to
haircuts negotiated by OCC and its counterparties to address the
potential credit risk to OCC's counterparties. Moreover, the terms of
the facility would require OCC to pay the costs of any covering
transactions required if OCC were to fail to perform its obligation. As
described above, the expansion of commitments in the Non-Bank Liquidity
Facility would reduce the likelihood that OCC would have insufficient
financial resources resulting from a Clearing Member default. Taken
together, the Commission believes that the terms of the agreement to
protect OCC and its counterparties, combined with the reduced
likelihood of OCC's failure to manage a default, would in fact promote
the safety and soundness of the U.S. markets.
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\53\ Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm.
\54\ When OCC proposed the first iteration of the Non-Bank
Liquidity Facility, it acknowledged that, like any liquidity source,
it would involve certain risks. See Exchange Act Release No. 73726
(Dec. 3, 2014), 79 FR 73116, 73119 (Dec. 9, 2014) (File No. SR-OCC-
2014-809). Upon review of the terms of the facility, the Commission
stated its belief that the proposal should promote robust risk
management, promote safety and soundness in the marketplace, reduce
systemic risks, and support the stability of the broader financial
system by giving OCC access to additional committed liquidity that
will help OCC meet its settlement obligations in a timely manner,
while also limiting the exposure that OCC has to its counterparties.
See Exchange Act Release No. 73979 (Jan. 2, 2015), 80 FR 1062, 1065
(Jan. 8, 2015) (File No. SR-OCC-2014-809).
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The Commission also received comments asserting that ``changing the
rules regarding advance notice'' (likely referring to OCC not having to
file an advance notice at renewal) has ``no value to the public.'' \55\
The Commission has carefully considered the risk of allowing new or
renewed commitments under the terms of Non-Bank Liquidity Facility
without requiring additional advance notice filings from OCC. Given
that such additional commitments would only be permitted without an
advance notice if executed on substantially similar terms as the
current Non-Bank Liquidity Facility, to which the Commission has
previously not objected, the Commission does not believe that such
additional commitments would necessarily present a material change to
the risks that OCC presents. Any change to the Non-Bank Liquidity
Facility that could materially affect the nature or level of risk posed
by OCC would necessitate an advance notice filing.\56\
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\55\ Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm.
\56\ OCC would submit another advance notice only if: (1) OCC
should seek to execute a commitment at a level that would have the
effect of reducing external liquidity below the target of $3
billion; (2) OCC seeks to change the terms and conditions of the
agreements underlying the facility or commitments thereunder in a
manner that materially affects the nature or level of risk presented
by OCC; or (3) OCC seeks to execute a commitment with a counterparty
that has experienced a negative change to its credit profile or a
material adverse change since OCC last executed a commitment with
that counterparty.
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Accordingly, and for the reasons stated above, the Commission
believes the changes proposed in the Advance Notice are consistent with
Section 805(b) of the Clearing Supervision Act.\57\
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\57\ 12 U.S.C. 5464(b).
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B. Consistency With Rule 17Ad-22(e)(7) Under the Exchange Act
Rule 17Ad-22(e)(7)(ii) under the Exchange Act requires that a
covered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to effectively
measure, monitor, and manage the liquidity risk that arises in or is
borne by the covered clearing agency, including measuring, monitoring,
and managing its settlement and funding flows on an ongoing and timely
basis, and its use of intraday liquidity by, at a minimum, holding
qualifying liquid resources sufficient to meet the minimum liquidity
resource requirement under Rule 17Ad-22(e)(7)(i) \58\ in each relevant
currency for which the covered clearing agency has payment obligations
owed to clearing members.\59\ For any covered clearing agency,
``qualifying liquid resources'' means assets that are readily available
and convertible into cash through prearranged funding arrangements,
such as committed arrangements without material adverse change
provisions, including, among others, repurchase agreements.\60\
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\58\ Rule 17Ad-22(e)(7)(i) requires OCC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to effectively measure, monitor, and manage liquidity risk
that arises in or is borne by OCC, including measuring, monitoring,
and managing its settlement and funding flows on an ongoing and
timely basis, and its use of intraday liquidity by, at a minimum,
maintaining sufficient liquid resources at the minimum in all
relevant currencies to effect same-day settlement of payment
obligations with a high degree of confidence under a wide range of
foreseeable stress scenarios that includes, but is not limited to,
the default of the participant family that would generate the
largest aggregate payment of obligation for the covered clearing
agency in extreme but plausible conditions. 17 CFR 240.17Ad-
22(e)(7)(i).
\59\ 17 CFR 240.17Ad-22(e)(7)(ii).
\60\ 17 CFR 240.17Ad-22(a)(14)(ii)(3).
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The Non-Bank Liquidity Facility provides OCC with prearranged
commitments to convert assets into cash even if OCC experiences a
material adverse change, and the Commission believes that the Non-Bank
Liquidity Facility provides OCC access to qualifying liquid resources
to the extent that OCC has sufficient collateral to access the
facility.\61\ The Commission believes, therefore, that the proposed
changes--to remove the existing aggregate commitment limit, and to
allow the OCC Board to increase the Non-Bank Liquidity Facility program
aggregate commitment levels as needed to maintain sufficient
liquidity--will further enhance OCC's ability to hold qualifying liquid
resources to meet its liquidity resource requirements, consistent with
the requirements of Rule 17Ad-22(e)(7)(ii) under the Exchange Act.\62\
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\61\ OCC would use Eligible Securities that are included in
Clearing Fund contributions by Clearing Members (separate from any
required cash contributions to the Clearing Fund) and margin
deposits of any Clearing Member that has been suspended by OCC for
the repurchase arrangements. See Notice of Filing, 85 FR at 31235
n.9.
\62\ 17 CFR 240.17Ad-22(e)(7)(ii).
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The Commission received comments raising concerns about the
inability of liquidity providers to deny funding in
[[Page 55053]]
the event of a material adverse change.\63\ As noted above, under Rule
17Ad-22(a)(14), committed arrangements, such as repurchase agreements,
are only qualifying liquid resources where such agreements do not
include material adverse change provisions.\64\ Moreover, the non-banks
are voluntarily participating in the facility. These liquidity
providers may consider the benefits and costs of participation,
including the adverse change provision, before determining that their
participation in the facility would be preferable to alternative
investments and would benefit their shareholders and beneficiaries.
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\63\ Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm.
\64\ 17 CFR 240.17Ad-22(a)(14)(ii)(A).
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Commenters also raised concerns regarding the speed with which a
counterparty would be required to provide funding.\65\ As discussed
above, a fundamental attribute of liquidity resources is that OCC can
quickly access liquidity in the event of a Clearing Member default or
market disruption. By necessity, funds must be made available to OCC
within 60 minutes of OCC's delivering Eligible Securities, and the
institutional investor is not permitted to rehypothecate purchased
securities. Any requirement to allow liquidity providers to deny or
delay funding would potentially delay OCC's access to liquidity
resources, which could negatively affect the safety and soundness of
the U.S. markets.
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\65\ Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm.
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Accordingly, the Commission believes that the changes proposed in
the Advance Notice are consistent with Rule 17Ad-22(e)(7) under the
Exchange Act.\66\
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\66\ 17 CFR 240.17Ad-22(e)(7).
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IV. Conclusion
It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act, that the Commission does not object to
Advance Notice (SR-OCC-2022-803) and that OCC is authorized to
implement the proposed change as of the date of this notice.
By the Commission.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-19417 Filed 9-7-22; 8:45 am]
BILLING CODE 8011-01-P
