Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change Concerning Amendments to The Options Clearing Corporation's Rules, By-Laws, and Certain Clearing Member Documents, 5069-5075 [2024-01385]
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Federal Register / Vol. 89, No. 17 / Thursday, January 25, 2024 / Notices
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–2024–001 on the subject line.
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Paper Comments
• Send paper comments in triplicate
to Vanessa Countryman, Secretary,
Securities and Exchange Commission,
100 F Street NE, Washington, DC
20549–1090.
All submissions should refer to file
number SR–OCC–2024–001. 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
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of OCC
and on OCC’s website at https://
www.theocc.com/CompanyInformation/Documents-and-Archives/
By-Laws-and-Rules.
Do not include personal identifiable
information in submissions; you should
submit only information that you wish
to make available publicly. We may
redact in part or withhold entirely from
publication submitted material that is
obscene or subject to copyright
protection.
All submissions should refer to file
number SR–OCC–2024–001 and should
be submitted on or before February 15,
2024.
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.76
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–01386 Filed 1–24–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–99392; File No. SR–OCC–
2024–002]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing of Proposed Rule Change
Concerning Amendments to The
Options Clearing Corporation’s Rules,
By-Laws, and Certain Clearing Member
Documents
January 19, 2024.
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 January 10, 2024, The
Options Clearing Corporation (‘‘OCC’’ or
‘‘Corporation’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared primarily 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
amend the OCC Rules, By-Laws, certain
Clearing Member documents 3 in
connection with the recent amendments
adopted by the Commission to Rule
15c6–1(a) 4 under the Exchange Act. The
amendments to Rule 15c6–1(a) 5 shorten
the standard settlement cycle for most
broker-dealer securities transactions
from two business days after the trade
date to one business day after the trade
date.
The proposed changes are included in
Exhibits 5A through 5F to File No. SR–
OCC–2024–002. Material proposed to be
added as currently in effect is
76 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 The Clearing Member documents consist of
contracts and forms, that in conjunction with OCC’s
By-Laws and Rules, establish and govern the
relationship between OCC and each Clearing
Member. See Exchange Act Release No. 73577 (Nov.
12, 2014), 79 FR 68733 (Nov. 18, 2014) (File No.
SR–OCC–2014–20).
4 17 CFR 240.15c6–1(a).
5 Id.
1 15
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underlined and material proposed to be
deleted is marked in strikethrough text.
All capitalized terms not defined herein
have the same meaning as set forth in
the OCC By-Laws and Rules.6
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission,
OCC included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. OCC has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of these statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
(1) Purpose
The proposed rule change consists of
modifications to OCC Rules, By-Laws,
and certain Clearing Member documents
in connection with the recently adopted
amendments to Commission Rule 15c6–
1(a) to shorten the standard settlement
cycle for most broker-dealer securities
transactions from two business days
after the trade date (‘‘T+2’’) to one
business day after the trade date
(‘‘T+1’’).7 Specifically, OCC proposes to
(i) revise provisions connected to late
exercise that are impacted by a
shortened settlement cycle, (ii) change
timeframes related to the standard
settlement cycle to reflect T+1, and (iii)
make certain other conforming and
clarifying changes. The compliance date
regarding the amendments to Rule
15c6–1(a) is May 28, 2024.8
Background
Rule 15c6–1 establishes a standard
settlement cycle for most purchases or
sales of securities by broker-dealers. The
Commission adopted Rule 15c6–1(a) in
1993 to establish T+3 as the standard
trade settlement cycle (instead of five
business days after the trade date), and
it became effective in June 1995.9 In
6 OCC’s By-Laws and Rules can be found on
OCC’s public website, available https://
www.theocc.com/Company-Information/
Documents-and-Archives/By-Laws-and-Rules.
7 Exchange Act Release No. 96930 (Feb. 15, 2023),
88 FR 13872 (Mar. 6, 2023) (‘‘T+1 Adopting
Release’’).
8 Id.
9 Exchange Act Release No. 33023 (Oct. 6, 1993),
58 FR 52891 (Oct. 13, 1993) (final rule adopting
Rule 15c6–1); Exchange Act Release No. 34952
(Nov. 9, 1994), 59 FR 59137 (changing the effective
date of the final rule from June 1, 1995 to June 7,
1995).
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March 1995, the Commission approved
changes to OCC’s Rules that were
proposed to ensure consistency with the
new T+3 standard settlement cycle.10 In
2017, the Commission amended Rule
15c6–1(a) to shorten the standard
settlement cycle from T+3 to T+2.11 In
coordination with the Commission’s
designated September 2017 compliance
date, OCC adopted changes to its Rules
and By-Laws to ensure consistency with
the new T+2 standard settlement
cycle.12
Since the change to T+2, the
Commission and the financial services
industry have continued to explore the
idea of shortening the settlement cycle
even further. In February 2021, the
Depository Trust and Clearing
Corporation (‘‘DTCC’’) published a
White Paper discussing the benefits of
accelerated settlement beyond T+2.13
Following the publication, the securities
industry formed an Industry Steering
Committee (‘‘ISC’’) and an Industry
Working Group (‘‘IWG’’) to develop
industry consensus to transition to an
accelerated settlement cycle.14 The ISC
engaged Deloitte & Touche LLP
(‘‘Deloitte’’) to support the effort,
including facilitating analysis on the
benefits and barriers to transitioning to
T+1 and coordinating with the industry
on the transition.15 In December 2021,
DTCC, SIFMA, and ICI, together with
Deloitte, published a report containing
the ISC’s recommendations for
migrating to a T+1 standard settlement
cycle.16
On February 9, 2022, the Commission
proposed amendments to Rule 15c6–
1(a) to shorten the standard settlement
cycle to T+1 on the basis that the shorter
settlement cycle would reduce the
credit, market and liquidity risks in
securities transactions faced by market
10 Exchange Act Release No. 35552 (Mar. 30,
1995), 60 FR 17600 (Apr. 6, 1995) (SR–OCC–94–11).
11 Exchange Act Release No. 80295 (Mar. 22,
2017), 82 FR 15564 (Mar. 29, 2017).
12 Exchange Act Release No. 81008 (June 23,
2017), 82 FR 29598 (June 29, 2017) (SR–OCC–2017–
015) (filed for immediate effectiveness on June 9,
2017).
13 See DTCC, ‘‘Advancing Together: Leading the
Industry to Accelerated Settlement’’ (Feb. 2021),
available at https://www.dtcc.com/-/media/Files/
PDFs/White%20Paper/DTCC-Accelerated-SettleWP-2021.pdf.
14 Exchange Act Release No. 94196 (Feb. 9, 2022),
87 FR 10436 (Feb. 24, 2022) (‘‘T+1 Proposing
Release’’).
15 Id.
16 See Deloitte, DTCC, Investment Company
Institute (‘‘ICI’’), and Securities Industry and
Financial Markets Association (‘‘SIFMA’’),
‘‘Accelerating the U.S. Securities Settlement Cycle
to T+1’’ (Dec. 1, 2021), available at https://
www.sifma.org/wp-content/uploads/2021/12/
Accelerating-the-U.S.-Securities-Settlement-Cycleto-T1-December-1-2021.pdf.
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participants and U.S. investors.17 On
February 15, 2023, the Commission
adopted these amendments to Rule
15c6–1(a).18 In light of this action by the
Commission, OCC proposes to
implement the changes described herein
in connection with the T+1 settlement
cycle on the Commission’s designated
T+1 compliance date.
Proposed Changes
OCC proposes certain amendments in
light of the anticipated industry move to
a T+1 settlement cycle. OCC has
determined that shortening the
settlement cycle to T+1 would require
revisions to OCC Rules, By-Laws, and
Clearing Member documents, which are
currently aligned with a T+2 settlement
cycle. Specifically, OCC proposes to (i)
revise provisions connected to late
exercise that are impacted by a
shortened settlement cycle, (ii) change
timeframes related to the standard
settlement cycle to reflect T+1, and (iii)
make certain other conforming and
clarifying changes.
(i) Provisions Connected to Late
Exercise
OCC proposes to amend provisions in
Chapter VIII of the Rules that are
affected by a shortened settlement cycle.
Rules 801 and 805 require Clearing
Members to submit exercise notices
within the timeframes prescribed by
OCC.19 These Rules currently set out an
exception process to accommodate
notices submitted after these
timeframes. OCC’s late exercise process
provides final deadlines by which late
exercise notices must be received by
OCC and subjects Clearing Members to
potential disciplinary action (as the
filing of such notice may be deemed a
violation) and liability for a late filing
fee, among other things.20 More
specifically, subject to certain
conditions, Rule 801, which addresses
the exercise of options other than at
expiration, allows a Clearing Member to
file an exercise notice after the
prescribed deadline solely for the
17 T+1 Proposing Release, supra note 14; see also
Commission Press Release 2022–21: ‘‘SEC Issues
Proposal to Reduce Risks in Clearance and
Settlement’’ (Feb. 9, 2022).
18 T+1 Adopting Release, supra note 7.
19 The current deadline for submitting exercise
notices other than at expiration is 6:00 p.m. CT. The
current deadline for submitting exercise notices at
expiration is 8:00 p.m. CT on monthly standard
Friday expirations, 7:00 p.m. CT on weekly Friday
expirations, and 6:30 p.m. CT on Monday and
Wednesday expirations.
20 Under Rule 801, the deadline for submitting
late exercise notices is 6:00 a.m. CT. Under Rule
805, the deadline for submitting late exercise
notices is the expiration time of the option, which
is currently 10:59 p.m. CT (as set forth in Article
1, Section 1(E)(23) of the By-Laws).
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purpose of correcting a bona fide error
on the part of the Clearing Member or
a customer and imposes liability for a
late filing fee of $250,000 per line item
listed on the notice. Similarly, OCC
Rule 805, which addresses exercises on
expiration, imposes liability for a late
filing fee of $250,000 per line item on
a Clearing Member that submits an
exercise notice after the prescribed
deadline.
OCC proposes to cease facilitating the
late exercise process after the move to
T+1. OCC reviewed its internal
operational processes to assess the
implications of the shortened settlement
cycle on late exercises. Currently, when
a late exercise is processed, OCC sends
the delivery information to the National
Securities Clearing Corporation
(‘‘NSCC’’) for T+1 settlement.21
Reducing the standard settlement time
to T+1 would reduce the time available
to OCC and NSCC to transmit
information and perform operational
and risk management steps associated
with their arrangement. Specifically,
moving to T+1 would require settlement
activity from a late exercise to be sent
to NSCC for same-day settlement, which
is not supported by the Accord. Late
exercise activity would thus not be
guaranteed by NSCC, resulting in
various implications, as the link
between OCC and NSCC allows
common clearing members, and their
customers, to realize financial and
operational efficiencies through the
combined settlement of obligations from
their OCC and NSCC cleared positions.
OCC proposes to no longer
accommodate late exercises due to
operational challenges for same-day
settlement and limitations under the
Accord. Even if OCC were to find
another operational mechanism outside
of NSCC to process the settlement of a
late exercise submission in a T+1
environment, any such processing
would negate the settlement certainty
for all market participants that the
Commission seeks to achieve in its T+1
proposal.
OCC does not believe that such
changes represent a significant
departure from its current practices or
the practices of other self-regulatory
organizations. As described above,
OCC’s Rules allow OCC to prescribe
timeframes during which Clearing
21 OCC maintains a link with NSCC to facilitate
the settlement of physically settled stock options
and stock futures. More specifically, OCC and
NSCC are parties to a Stock Options and Futures
Settlement Agreement that specifies the time at
which responsibility for the settlement of such
obligations passes from OCC to NSCC (the
‘‘Accord’’). See Exchange Act Release No. 81266
(July 31, 2017), 82 FR 36484 (Aug. 4, 2017) (File
No. SR–OCC–2017–013).
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Members may submit exercise notices.
Following the proposed changes, OCC
would continue to maintain deadlines
for receiving exercise notices. The
Financial Industry Regulatory Authority
(‘‘FINRA’’) and the options exchanges
have similarly established a cut-off time
for receiving exercise notices.22
Moreover, the late exercise process at
OCC is intended to be used in
extenuating circumstances and is not
routinely performed. The filing of a late
exercise notice may be deemed a
violation subject to disciplinary action
under Rules 801 and 805. Most recently,
in 2020, OCC raised the late filing fee
from $75,000 to $250,000 per line item
to further disincentivize late exercises.23
For these reasons, OCC would cease
accepting late exercise notices and
proposes to amend the following
provisions in connection with such
change.
OCC proposes to revise Rule 801,
which addresses the exercise of options
other than at expiration. OCC propose to
remove language in paragraph (a) that
requires a Clearing Member to prepare
and preserve a memorandum describing
the error that gave rise to a late filing.
OCC also proposes to remove paragraph
(d) that grants certain individuals the
discretion to permit a Clearing Member
to file a late exercise notice to correct a
bona fide error, subject to certain
conditions, including liability for a late
filing fee, a final deadline for
submission, and potential disciplinary
action.24 OCC accordingly proposes to
remove a reference to paragraph (d) in
Rule 801, Interpretation and Policy .02.
OCC propose similar changes to Rule
805, which addresses exercises on
expiration. OCC proposes to remove the
language in paragraph (c) and related
language in paragraph (e) that allows
Clearing Members to file late exercise
notices subject to a final deadline for
submission. OCC would replace the text
in paragraph (c) with the term
22 See e.g., FINRA Rule 2360(b)(23)(A)(iii);
Nasdaq Options 6B, Section 1(c); NYSE Arca Rule
6.24–O(c).
23 See Exchange Act Release No. 88310 (Mar. 2,
2020), 85 FR 13198 (Mar. 6, 2020) (File No. SR–
OCC–2020–001) (noting that the late exercise fee is
intended to encourage Clearing Members to be
diligent in processing exercise notices and to
improve back office procedures).
24 For the avoidance of doubt, Clearing Members
may still correct errors following the proposed
changes but must make any corrections prior to
daily processing deadlines. OCC discussed the
cessation of late exercises following T+1 with the
Operations Roundtable, which solicits feedback
from interested stakeholders such as Clearing
Members. No substantive opposing views were
raised in these discussions. See confidential Exhibit
3A to File no. SR–OCC–2024–002 for supporting
data and analysis, including materials from
Operations Roundtable meetings and information
on past instances of late exercises.
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‘‘Reserved.’’ OCC proposes to remove
paragraphs (g), (h), and (i) that set out
various terms and conditions governing
the submission of late exercise notices,
including liability for a late filing fee
and potential disciplinary action for the
Clearing Member. OCC would eliminate
and update references to the provisions
in Rule 805 (including the Interpretation
and Policy) and make conforming
changes throughout the Rules, including
in Rules 1305, 1401, and 2702.
(ii) Timeframes Related to the Standard
Settlement Cycle
OCC proposes changes to timeframes
in its Rules, By-Laws, and Clearing
Member documents that are related to
the current T+2 standard settlement
cycle. The following provisions would
need to be updated to facilitate the
move to T+1 and are discussed in more
detail below:
• OCC Rule 901 (Settlement Through
Correspondent Clearing
Corporations); 25
• OCC Rule 903 (Obligation to
Deliver);
• OCC Rule 1302 (Delivery of
Underlying Securities);
• OCC Rule 1302B (Delivery of
Underlying Treasury Securities);
• OCC Rule 1503 (Exercise Settlement
Date for Event Options and Range
Options);
• OCC Rule 2201 (Instructions to the
Corporation);
• OCC Rule 2208 (Settlement Date);
• Article XXI of OCC’s By-Laws
(Stock Loan/Hedge Program);
• OCC Rule 2209A (Termination of
Market Loans); and
• OCC Rule 2502 (Settlement Date for
BOUNDs).
OCC proposes to amend certain of its
Rules that govern the settlement of
physically-settled options and futures
through NSCC. Rule 901 requires that
certain obligations be settled through
the facilities of NSCC. Consistent with
the new standard settlement cycle, OCC
proposes to amend paragraph (c) of Rule
901 to remove a parenthetical indicating
that ‘‘regular way’’ settlement under
NSCC’s rules and procedures does not
occur on T+1. Further, paragraph (d)
permits OCC to revoke a specification in
any delivery advice that settlement be
made through the facilities of NSCC at
25 Article I, Section 1.C.(32) of OCC’s By-Laws
defines the term ‘‘correspondent clearing
corporation’’ to mean National Securities Clearing
Corporation (‘‘NSCC’’) or any successor thereto
which, ‘‘by agreement with [OCC], provides
facilities for settlements in respect of exercised
option contracts or BOUNDs or in respect of
delivery obligations arising from physically-settled
stock futures.’’ The Accord is the current agreement
that governs NSCC settlement of OCC related
activity.
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any time prior to the obligation time. In
such event, Rule 901(d) allows specified
OCC senior officers to extend or
postpone the time for delivery to no
more than two business days after the
date of such revocation. To be
consistent with the T+1 settlement
cycle, OCC proposes to change the
amount of time that OCC has to extend
or postpone the time of delivery to one
business day.
OCC proposes related changes to
conform language with the T+1
settlement cycle in Rule 901(f) and (g)
and in certain associated Clearing
Member documents. Rule 901(f) permits
a Clearing Member (the ‘‘Appointing
Clearing Member’’) that is not an NSCC
member to appoint another Clearing
Member that is an NSCC member (the
‘‘Appointed Clearing Member’’) to act
on its behalf with respect to the
settlement of exercised or matured
cleared securities in its accounts
through NSCC. OCC maintains a related
Clearing Member document (the
‘‘Appointment of Clearing Member
Form’’ or an ‘‘appointment form’’) that
permits the Appointed Clearing Member
to act on behalf of the Appointing
Clearing Member for this purpose. Rule
901(g) permits a Canadian Clearing
Member, on behalf of which CDS
Clearing and Depository Services Inc.
(‘‘CDS’’) 26 maintains a subaccount at
NSCC, to appoint CDS to act on its
behalf with respect to the settlement of
exercised or matured cleared securities
in its accounts through NSCC. OCC also
maintains a related Clearing Member
document (the ‘‘Appointment of CDS—
Stock Settlement Form’’ or an
‘‘appointment form’’) that permits CDS
to act on behalf of the Canadian Clearing
Member for this purpose. Such
appointments currently become
effective as of the second business day
following the day on which OCC
receives written notice, or such later
date as may be specified. Under the
proposed rule change, OCC would
replace the ‘‘second’’ business day with
the ‘‘first’’ business day in Rule 901(f)
and (g) and in the appointment forms.
Rule 903 governs a Clearing Member’s
obligation to deliver when either a
delivery advice or OCC directs that
settlement be made on a broker-tobroker basis. Under Rule 903, the
delivery date for physically-settled
options is the second business day
following the day on which the exercise
notice was, or is deemed to have been,
properly tendered to OCC, and the
26 CDS is Canada’s national securities depository,
which, among other things, facilitates the
settlement of cross-border transactions with the
U.S. and has relationships with NSCC and The
Depository Trust Company (‘‘DTC’’).
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delivery date for physically settled
security futures is generally the second
business day following the maturity
date. OCC proposes to replace
references to the ‘‘second’’ business day
with the ‘‘first’’ business day.
In Chapter XIII regarding futures,
futures options and commodity options,
OCC proposes to revise Rule 1302
concerning the delivery of underlying
securities and Rule 1302B concerning
the delivery of underlying Treasury
securities. With certain exceptions, Rule
1302 currently provides that the
delivery date for a physically-settled
stock future is the second business day
following the maturity date of the
applicable series. Rule 1302B(a)
currently provides that the delivery date
for each physically-settled Treasury
future in respect of which a delivery
intent has been submitted (or deemed
submitted) is the second business day
following such submission (or deemed
submission). OCC also maintains a
related Clearing Member document (the
‘‘Designation of Clearing Member’’ or a
‘‘designation form’’) that permits, among
other things, a Clearing Member to
designate another Clearing Member for
the purposes of effecting settlement of
physically-settled treasury futures
through the Fixed Income Clearing
Corporation (‘‘FICC’’).27 OCC proposes
to replace references to the ‘‘second’’
business day in Rules 1302 and 1302B
and in the designation form with the
‘‘first’’ business day. OCC also proposes
corresponding changes to update
references from the ‘‘second’’ business
day to the ‘‘first’’ business day with
respect to applicable deadlines specified
in paragraphs (d), (e), and (j) of Rule
1302B.
OCC proposes similar changes to
make language consistent with the T+1
settlement cycle in Rule 1503. With
certain exceptions, Rule 1503 currently
provides that the exercise settlement
date for a credit default option and
credit default basket option is the
second business day following the date
on which the option is deemed to have
been exercised. Under the proposed rule
change, OCC would replace the
‘‘second’’ business day with the ‘‘first’’
business day.
OCC also proposes to amend
provisions of its Rules and By-Laws
concerning its two Stock Loan
Programs. OCC operates two programs
in which it acts as a central
counterparty for stock loan transactions:
the Stock Loan/Hedge Program and
27 FICC provides central counterparty services to
firms that participate in the U.S. Government and
mortgage-backed securities markets.
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Market Loan Program.28 The Stock
Loan/Hedge Program allows Clearing
Members to use borrowed and loaned
securities to reduce OCC margin
requirements. The Market Loan Program
is a program whereby OCC processes
and maintains stock loan positions that
have originated through a Loan
Market.29
In respect of the Stock Loan/Hedge
Program, Rule 2201(c) currently permits
a Canadian Clearing Member on behalf
of which CDS maintains a subaccount at
DTC to appoint CDS to act on its behalf
with respect to effecting delivery orders
for stock loan and stock borrow
transactions in its accounts through
DTC. OCC also maintains a related
Clearing Member document (the
‘‘Appointment of CDS—Stock Loan
Form’’ or an ‘‘appointment form’’) that
permits CDS to act on behalf of the
Canadian Clearing Member for this
purpose. Such appointment currently
becomes effective as of the second
business day following the day on
which OCC receives written notice, or
such later date as may be specified.
Under the proposed rule change, OCC
would replace the ‘‘second’’ business
day with the ‘‘first’’ business day in
Rule 2201(c) and in the appointment
form.
In addition, with respect to the Stock
Loan/Hedge Program, Rule 2208(a)
currently provides that the settlement
date for the termination of a stock loan
will be the earlier of: (1) the date on
which the borrowing Clearing Member
initiates the termination or (2) the date
that is two stock loan business days
after the date on which the lending
Clearing Member initiates the
termination. OCC proposes to amend
Rule 2208(a) to change ‘‘two stock loan
business days’’ to ‘‘one stock loan
business day.’’
OCC may terminate outstanding stock
loans under certain conditions pursuant
to Article XXI, Section 2(c) of OCC’s ByLaws with respect to the Stock Loan/
Hedge Program. If any stock loans are so
terminated, OCC is required to provide
written notice to the affected Clearing
Members specifying the date on which
such termination is to become effective,
which will be at least two stock loan
business days after the date of such
28 Information on the Stock Loan/Hedge Program
and Market Loan Program can be found on OCC’s
public website, available at https://
www.theocc.com/clearance-and-settlement/stockloan-programs.
29 Article I, Section 1.L.(5) of OCC’s By-Laws
defines ‘‘Loan Market’’ as an electronic platform
included in OCC’s Market Loan Program that
supports securities lending and borrowing
transactions by matching lenders and borrowers
based on loan terms that each party is willing to
accept.
PO 00000
Frm 00182
Fmt 4703
Sfmt 4703
notice. OCC proposes to make the
effective date consistent with the new
T+1 settlement cycle by changing the
minimum number of days between
notice and termination from two to one.
Regarding the Market Loan Program, a
market loan (i.e., a loan of eligible stock
effected through a Loan Market) is
terminated by the relevant Clearing
Member providing a return or recall
notice to the Loan Market with respect
to a specified quantity of loaned stock
under Rule 2209A. Rule 2209A(a)(3)
discusses the scenario where a recall
transaction fails to settle by the
settlement time on the second stock
loan business day following the day that
the transaction was first submitted. OCC
proposes to replace ‘‘second’’ stock loan
business day with ‘‘first’’ stock loan
business day. Under Rule 2209A(d),
OCC may terminate outstanding market
loans under certain conditions. If any
market loans are so terminated, OCC is
required to provide written notice to the
affected Clearing Members specifying
the date on which such termination is
to become effective, which will be at
least two stock loan business days after
the date of such notice. OCC proposes
to make the effective date consistent
with the new T+1 settlement cycle by
changing the minimum number of days
between notice and termination from
two to one.
OCC proposes to amend Rule 2502
concerning the settlement date for
BOUNDs. Namely, OCC proposes to
update the settlement date for a BOUND
contract from the second business day
following the expiration date to the first
business day.
(iii) Conforming and Clarifying Changes
OCC proposes changes to Chapter VI
of its Rules related to deposits in lieu of
margin. In lieu of depositing margin,
OCC permits a Clearing Member or an
approved custodian to deposit eligible
collateral in respect of certain option
contracts included in a short position in
accordance with OCC Rule 610. More
specifically, OCC permits certain types
of deposits in lieu of margin, including
member specific deposits, third-party
specific deposits, and escrow deposits,
which are further described in Rules
610A, 610B and 610C, respectively.30
With certain exceptions, OCC Rule
610C(o) provides that any escrow
30 Member specific deposits are equity securities
deposited by clearing members at DTC at the
direction of their customers; third-party specific
deposits are equity securities deposited by
custodian banks at DTC at the direction of their
customers; and escrow deposits can consist of cash
deposits held at a custodian bank for the benefit of
OCC, in addition to equities, and U.S. Government
securities pledged to OCC through DTC by escrow
deposit banks at the direction of their customers.
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deposit in respect of a short position in
stock put options will be released by
OCC on its own initiative at a specified
time on the fourth business day
following the expiration date.31 OCC
proposes to amend this outdated
provision to state that such deposits will
be released by OCC at a specified time
following the expiration date. Reference
to the specific business day would be
removed from the Rules and, instead,
would be centralized in and made
available through the Operations
Manual, along with other timeframes
and deadlines specified by OCC.32 The
Operations Manual would state that this
release of collateral would occur on the
next business day following the
expiration date. Shortening the period
for the automatic release of collateral to
the next business day following the
expiration date would be in line with
the changes described above to shorten
the current settlement cycle to T+1.
OCC believes that such change would
align with the goals of the T+1 Adopting
Release to reduce central counterparty
exposure to credit, market, and liquidity
risk arising from its obligations to its
participants, as there is no need for OCC
to hold the collateral for an extended
period of time.33
OCC proposes conforming changes
throughout Chapter VI. OCC proposes to
amend Rule 610B(d)(2) regarding thirdparty specific deposits 34 and Rule
610C(p) regarding escrow deposits in
respect of a short position in index
options 35 to uniformly state that such
deposits will be released by OCC at a
specified time following the expiration
31 The exceptions in OCC Rule 610C(o) include
that (1) the Clearing Member’s obligations in respect
of such short position have not been satisfied or (2)
the deposit is subject to a ‘‘hold’’ instruction (i.e.,
an instruction requesting that OCC not release such
deposit).
32 See Confidential Exhibit 3B to File no. SR–
OCC–2024–002 containing the changes to the
Operations Manual with material to be added in
underlined text and material to be deleted in
strikethrough text.
33 See T+1 Adopting Release, supra note 7.
34 Rule 610B(d)(2) provides that any third-party
specific deposit will be released by OCC on its own
initiative at a specified time on the business day
following the exercise settlement date unless (1) the
settlement obligations in respect of such short
position have not been met, that NSCC has
determined to suspend, decline or cease to act for
the Clearing Member in respect of whose account
such deposit was made, or, that NSCC has
determined to prohibit or limit such Clearing
Member’s access to services; (2) OCC has directed
that the exercise be settled otherwise than through
NSCC; or (3) the deposit is subject to a ‘‘hold’’
instruction.
35 Rule 610C(p) provides that such escrow deposit
will be released by OCC on its own initiative at a
specified time on the first business day following
the expiration date unless (1) the Clearing Member
carrying the short position is not in full compliance
with its obligations to OCC or (2) the deposit is
subject to a ‘‘hold’’ instruction.
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17:22 Jan 24, 2024
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date, which would be consistent with
the language described above in
amended Rule 610C(o). OCC also
proposes language in new paragraph (2)
of Rule 610A(c) to address the automatic
release of any member specific deposits
by OCC, which would largely align with
the language in amended Rule
610B(d)(2).36 This addition is intended
to be clarifying in nature, as OCC
currently releases member specific
deposits in the same general manner as
set out in Rule 610B(d)(2) for third-party
specific deposits. Consistent with the
change described above, automatic
release would occur on the next
business day following the expiration
date for member specific, third-party
specific and escrow deposits and would
be set out in the Operations Manual.
These changes are intended to ensure
consistent language and practices to
promote clarity for market participants.
These changes are made in conjunction
with the revisions to Rule 610C(o) and
align with the goals of the T+1 Adopting
Release to reduce central counterparty
exposure to credit, market, and liquidity
risk arising from its obligations to its
participants, as there is no need for OCC
to hold the collateral for an extended
period of time.37
OCC further proposes revisions to
Chapter XIV in relation to Treasury
securities options. As U.S. Treasury
securities commonly settle on a T+1
basis, OCC proposes to update the
exercise settlement date for Treasury
securities options from the second
business day following the expiration
date to the first business day in Rule
1402(a). Additionally, Clearing
Members are required to notify OCC
within a prescribed timeframe if a trade
required to be completed pursuant to
Rule 1403 has not been successfully
matched at FICC.38 Under Rule 1404, if
OCC receives timely notice of a failure
to match a trade, the affected Clearing
Members are required to attempt to
resolve the failure such that settlement
could occur through FICC by the
specified deadline on the second
business day following the expiration
date. If the failure is not resolved by
such deadline, the Clearing Members
are required to notify OCC within a
specified time on the second business
36 The proposed text in Rule 610A(c)(2) would
mirror the amended text in Rule 610B(d)(2) with
minor changes to remove or replace provisions
associated with third-party specific deposits with
member specific deposits.
37 See T+1 Adopting Release, supra note 7.
38 Under Rule 1403, OCC requires every Treasury
Securities Clearing Member to be a participant in
the Government Securities Division (‘‘GSD’’) of
FICC or designate a GSD participant as its
representative to submit trade information into
FICC’s real-time trade matching system.
PO 00000
Frm 00183
Fmt 4703
Sfmt 4703
5073
day following the expiration date. OCC
also proposes to update these references
from the ‘‘second’’ business day to the
‘‘first’’ business day in Rule 1404.
Similar to the changes described above,
these changes would promote
consistency between OCC’s Rules and
the settlement cycle for the relevant
asset class.
Implementation Timeframe
As discussed above, OCC would
implement the proposed rule change in
coordination with the Commission’s
compliance date for the amendments to
Rule 15c6–1(a) and the transition to
T+1. OCC would provide notice to
Clearing Members of the
implementation through an Information
Memorandum posted to its public
website at least two (2) weeks prior to
implementation.
(2) Statutory Basis
For the following reasons, OCC
believes that the proposed rule change
is consistent with Section 17A(b)(3)(F)
of the Act 39 and Rule 17Ad–22(e)(1) 40
thereunder. Section 17A(b)(3)(F) of the
Act 41 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, and, in general, to protect
investors and the public interest. OCC
believes the proposed rule change is
consistent with these requirements
because it would coordinate the terms of
certain provisions in OCC’s Rules, ByLaws, and Clearing Member documents
with the Commission’s amendments to
Rule 15c6–1(a) to support a T+1
standard settlement cycle. First, OCC
proposes to remove provisions
connected to late exercise that are
impacted by a shortened settlement
cycle. As discussed above, OCC would
no longer accommodate late exercise
notices due to operational challenges for
same-day settlement and limitations
under the Accord. In OCC’s view, this
change does not represent a significant
departure from OCC’s current practices
or the practices of other self-regulatory
organizations. OCC would continue to
maintain timeframes during which
Clearing Members may submit exercise
notices following the amendments. The
proposed change is intended to preserve
the successful and timely completion of
exercise and assignment processes,
39 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(1).
41 15 U.S.C. 78q–1(b)(3)(F).
40 17
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Federal Register / Vol. 89, No. 17 / Thursday, January 25, 2024 / Notices
which are important to the prompt and
accurate settlement of securities
transactions, following the transition to
a T+1 settlement cycle.
OCC believes that the proposed
changes to amend timeframes related to
the standard settlement cycle are also
consistent with Section 17A(b)(3)(F) of
the Act.42 Where a current OCC Rule,
By-Law, or Clearing Member document
is based upon or otherwise references
the T+2 standard securities settlement
cycle, the provision would be changed
to support T+1. Harmonizing OCC’s
Rules, By-Laws, and Clearing Member
documents with the new T+1 standard
settlement cycle would remove
impediments to and support the prompt
and accurate clearance and settlement of
securities transactions by, for example,
ensuring that provisions in these
documents that are related to T+1 are
consistent with the rules concerning the
standard settlement cycle that are
maintained by the exchanges for which
OCC clears and settles transactions and
the rules of clearing agencies that
provide clearance and settlement
services for securities transactions that
underlie physically-settled stock option
and stock future contracts cleared by
OCC. OCC believes that conforming its
Rules, By-Laws, and Clearing Member
documents to the new T+1 standard
settlement cycle would also protect
investors and the public interest by
ensuring that OCC provides clearance
and settlement services in a manner that
supports the Commission’s
requirements for the T+1 standard
settlement cycle.
Additionally, OCC believes that the
proposed conforming and clarifying
changes to its Rules are consistent with
Section 17A(b)(3)(F) of the Act.43
Automatic release would consistently
occur on the next business day
following the expiration date for
member specific, third-party specific
and escrow deposits and associated
language would be set out in the
Operations Manual, along with other
timeframes and deadlines specified by
OCC. As described above, the proposed
changes would ensure consistent
language and practices by OCC,
including with respect to the settlement
cycle for the relevant asset class and the
automatic release of deposits, thereby
promoting clarity and avoiding potential
confusion for market participants,
which would help support OCC’s
prompt and accurate clearance and
settlement of securities transactions. For
these reasons, the proposed changes are
reasonably designed to promote the
prompt and accurate clearance and
settlement of securities transactions, to
assure the safeguarding of securities and
funds in OCC’s custody or control, and,
in general, to protect investors and the
public interest in accordance with
Section 17A(b)(3)(F) of the Act.44
OCC believes the proposed changes
are also consistent with the
requirements in Rule 17Ad–22(e)(1)
under the Act.45 Rule 17Ad–22(e)(1)
requires that each covered clearing
agency establish, implement, maintain
and enforce written policies and
procedures reasonably designed to
provide for a well-founded, clear,
transparent, and enforceable legal basis
for each aspect of its activities in all
relevant jurisdictions.46 The changes are
designed to modify OCC’s Rules, ByLaws, and Clearing Member documents
that would otherwise become outdated
upon the change to the T+1 standard
settlement cycle, or present other
operational difficulties or concerns. The
proposed changes would allow OCC to
maintain provisions and practices that
are both clear and consistent with the
standard settlement cycle that is
specified in Rule 15c6–1(a), which
would help ensure that OCC’s Rules,
By-Laws, and Clearing Member
documents remain well-founded, clear,
transparent, and enforceable. Additional
changes are proposed to OCC’s Rules
that would amend an outdated
provision and ensure consistency with
the settlement cycle for the relevant
asset class and regarding the automatic
release of deposits, which would ensure
that OCC’s Rules are well-founded,
clear, transparent, and enforceable.
Therefore, OCC believes that the
proposed changes promote compliance
and consistency with the requirements
in Rule 17Ad–22(e)(1) to establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to provide for a
well-founded, clear, transparent and
enforceable legal basis.
(B) Clearing Agency’s Statement on
Burden on Competition
Section 17A(b)(3)(I) of the Act 47
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 Act. OCC does not
believe that the proposed rule change
would impose any burden on
competition not necessary or
appropriate in furtherance of the
44 Id.
45 17
42 Id.
46 Id.
43 Id.
47 15
VerDate Sep<11>2014
17:22 Jan 24, 2024
Jkt 262001
PO 00000
CFR 240.17Ad–22(e)(1).
U.S.C. 78q–1(b)(3)(I).
Frm 00184
Fmt 4703
Sfmt 4703
purposes of the Act. As discussed
above, OCC proposes amendments to its
Rules, By-Laws, and Clearing Member
documents to (i) revise provisions
connected to late exercise that are
impacted by a shortened settlement
cycle, (ii) change timeframes related to
the standard settlement cycle to reflect
T+1, and (iii) make certain other
conforming and clarifying changes. OCC
does not believe that the proposed rule
change would impose any burden or
have any impact on competition. The
proposed rule change would implement
revisions that ensure consistency with
amendments recently adopted by the
Commission in Rule 15c6–1(a) to
change the standard securities
settlement cycle to T+1 and additional
changes that promote clarity or
uniformity amongst OCC’s Rules, ByLaws, and Clearing Member documents,
as described above. All Clearing
Members would be equally subject to
the changes, and the proposed changes
would not provide any Clearing Member
with a competitive advantage over any
other Clearing Member. This proposed
rule change would also not inhibit
access to OCC’s services or disadvantage
or favor any particular user in
relationship to another. As a result, OCC
believes the proposed rule change
would not impact or impose a burden
on competition.
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants or Others
Written comments 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.
The proposal shall not take effect
until all regulatory actions required
with respect to the proposal are
completed.
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Federal Register / Vol. 89, No. 17 / Thursday, January 25, 2024 / Notices
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–2024–002 on the subject line.
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Paper Comments
• Send paper comments in triplicate
to Vanessa Countryman, Secretary,
Securities and Exchange Commission,
100 F Street NE, Washington, DC
20549–1090.
All submissions should refer to file
number SR–OCC–2024–002. 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
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of OCC
and on OCC’s website at https://
www.theocc.com/CompanyInformation/Documents-and-Archives/
By-Laws-and-Rules.
Do not include personal identifiable
information in submissions; you should
submit only information that you wish
to make available publicly. We may
redact in part or withhold entirely from
publication submitted material that is
obscene or subject to copyright
protection.
All submissions should refer to file
number SR–OCC–2024–002 and should
be submitted on or before February 15,
2024.
VerDate Sep<11>2014
17:22 Jan 24, 2024
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.48
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–01385 Filed 1–24–24; 8:45 am]
BILLING CODE 8011–01–P
5075
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–99395; File No. SR–CBOE–
2024–005]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change To Permit Cboe
To List and Trade Options on ETPs
That Hold Bitcoin
January 19, 2024.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (‘‘Act’’)
and Rule 19b–4 thereunder,2 notice is
hereby given that on January 5, 2024,
Cboe Exchange, Inc. (the ‘‘Exchange’’ or
‘‘Cboe Options’’) 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 the Exchange. 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
Cboe Exchange, Inc. (the ‘‘Exchange’’
or ‘‘Cboe Options’’) proposes to amend
Rule 4.3. The text of the proposed rule
change is provided in Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/CBOELegalRegulatory
Home.aspx), at the Exchange’s Office of
the Secretary, and at the Commission’s
Public Reference Room.
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
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
48 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
PO 00000
Frm 00185
Fmt 4703
Sfmt 4703
The Exchange proposes to amend
Rule 4.3 regarding the criteria for
underlying securities. Specifically, the
Exchange proposes to amend Rule 4.3,
Interpretation and Policy .06(a)(4) to
allow the Exchange to list and trade
options on Units 3 that represent
interests in a trust that holds bitcoin
(‘‘Bitcoin ETPs’’), designating them as
‘‘Units’’ deemed appropriate for options
trading on the Exchange. Current Rule
4.3, Interpretation and Policy .06
provides that, subject to certain other
criteria set forth in that Rule, securities
deemed appropriate for options trading
include Units that represent certain
types of interests,4 including interests in
3 Rule 1.1 defines a ‘‘Unit’’ (which may also be
referred to as an exchange-traded fund (‘‘ETF’’)) as
a share or other security traded on a national
securities exchange and defined as an NMS stock
as set forth in Rule 4.3.
4 See Rule 4.3, Interpretation and Policy .06(a),
which permits options trading on Units that
represent (1) interests in registered investment
companies (or series thereof) organized as open-end
management investment companies, unit
investment trusts or similar entities that hold
portfolios of securities and/or financial instruments
including, but not limited to, stock index futures
contracts, options on futures, options on securities
and indexes, equity caps, collars and floors, swap
agreements, forward contracts, repurchase
agreements and reverse purchase agreements (the
‘‘Financial Instruments’’), and money market
instruments, including, but no limited to, U.S.
government securities and repurchase agreements
(the ‘‘Money Market Instruments’’) comprising or
otherwise based on or representing investments in
indexes or portfolios of securities and/or Financial
Instruments and Money Market Instruments (or that
hold securities in one or more other registered
investment companies that themselves hold such
portfolios of securities and/or Financial Instruments
and Money Market Instruments); (2) interests in a
trust or similar entity that holds a specified nonU.S. currency deposited with the trust or similar
entity when aggregated in some specified minimum
number may be surrendered to the trust by the
beneficial owner to receive the specified non-U.S.
currency and pays the beneficial owner interest and
other distributions on deposited non-U.S. currency,
if any, declared and paid by the trust (‘‘Currency
Trust Shares’’); (3) commodity pool interests
principally engaged, directly or indirectly, in
holding and/or managing portfolios or baskets of
securities, commodity futures contracts, options on
commodity futures contracts, swaps, forward
contracts and/or options on physical commodities
and/or non-U.S. currency (‘‘Commodity Pool
Units’’); (4) interests in the SPDR Gold Trust, the
iShares COMEX Gold Trust, the iShares Silver
Trust, the Aberdeen Standard Physical Silver Trust,
the Aberdeen Standard Physical Gold Trust, the
Aberdeen Standard Physical Palladium Trust, the
Aberdeen Standard Physical Platinum Trust, the
Sprott Physical Gold Trust or the Goldman Sachs
Physical Gold ETF; or (5) an interest in a registered
Continued
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]]>Agencies
[Federal Register Volume 89, Number 17 (Thursday, January 25, 2024)]
[Notices]
[Pages 5069-5075]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-01385]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99392; File No. SR-OCC-2024-002]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change Concerning Amendments to The
Options Clearing Corporation's Rules, By-Laws, and Certain Clearing
Member Documents
January 19, 2024.
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 January 10, 2024, The Options Clearing
Corporation (``OCC'' or ``Corporation'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared primarily 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 amend the OCC Rules, By-Laws,
certain Clearing Member documents \3\ in connection with the recent
amendments adopted by the Commission to Rule 15c6-1(a) \4\ under the
Exchange Act. The amendments to Rule 15c6-1(a) \5\ shorten the standard
settlement cycle for most broker-dealer securities transactions from
two business days after the trade date to one business day after the
trade date.
---------------------------------------------------------------------------
\3\ The Clearing Member documents consist of contracts and
forms, that in conjunction with OCC's By-Laws and Rules, establish
and govern the relationship between OCC and each Clearing Member.
See Exchange Act Release No. 73577 (Nov. 12, 2014), 79 FR 68733
(Nov. 18, 2014) (File No. SR-OCC-2014-20).
\4\ 17 CFR 240.15c6-1(a).
\5\ Id.
---------------------------------------------------------------------------
The proposed changes are included in Exhibits 5A through 5F to File
No. SR-OCC-2024-002. Material proposed to be added as currently in
effect is underlined and material proposed to be deleted is marked in
strikethrough text. All capitalized terms not defined herein have the
same meaning as set forth in the OCC By-Laws and Rules.\6\
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\6\ OCC's By-Laws and Rules can be found on OCC's public
website, available https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. OCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
(1) Purpose
The proposed rule change consists of modifications to OCC Rules,
By-Laws, and certain Clearing Member documents in connection with the
recently adopted amendments to Commission Rule 15c6-1(a) to shorten the
standard settlement cycle for most broker-dealer securities
transactions from two business days after the trade date (``T+2'') to
one business day after the trade date (``T+1'').\7\ Specifically, OCC
proposes to (i) revise provisions connected to late exercise that are
impacted by a shortened settlement cycle, (ii) change timeframes
related to the standard settlement cycle to reflect T+1, and (iii) make
certain other conforming and clarifying changes. The compliance date
regarding the amendments to Rule 15c6-1(a) is May 28, 2024.\8\
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\7\ Exchange Act Release No. 96930 (Feb. 15, 2023), 88 FR 13872
(Mar. 6, 2023) (``T+1 Adopting Release'').
\8\ Id.
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Background
Rule 15c6-1 establishes a standard settlement cycle for most
purchases or sales of securities by broker-dealers. The Commission
adopted Rule 15c6-1(a) in 1993 to establish T+3 as the standard trade
settlement cycle (instead of five business days after the trade date),
and it became effective in June 1995.\9\ In
[[Page 5070]]
March 1995, the Commission approved changes to OCC's Rules that were
proposed to ensure consistency with the new T+3 standard settlement
cycle.\10\ In 2017, the Commission amended Rule 15c6-1(a) to shorten
the standard settlement cycle from T+3 to T+2.\11\ In coordination with
the Commission's designated September 2017 compliance date, OCC adopted
changes to its Rules and By-Laws to ensure consistency with the new T+2
standard settlement cycle.\12\
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\9\ Exchange Act Release No. 33023 (Oct. 6, 1993), 58 FR 52891
(Oct. 13, 1993) (final rule adopting Rule 15c6-1); Exchange Act
Release No. 34952 (Nov. 9, 1994), 59 FR 59137 (changing the
effective date of the final rule from June 1, 1995 to June 7, 1995).
\10\ Exchange Act Release No. 35552 (Mar. 30, 1995), 60 FR 17600
(Apr. 6, 1995) (SR-OCC-94-11).
\11\ Exchange Act Release No. 80295 (Mar. 22, 2017), 82 FR 15564
(Mar. 29, 2017).
\12\ Exchange Act Release No. 81008 (June 23, 2017), 82 FR 29598
(June 29, 2017) (SR-OCC-2017-015) (filed for immediate effectiveness
on June 9, 2017).
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Since the change to T+2, the Commission and the financial services
industry have continued to explore the idea of shortening the
settlement cycle even further. In February 2021, the Depository Trust
and Clearing Corporation (``DTCC'') published a White Paper discussing
the benefits of accelerated settlement beyond T+2.\13\ Following the
publication, the securities industry formed an Industry Steering
Committee (``ISC'') and an Industry Working Group (``IWG'') to develop
industry consensus to transition to an accelerated settlement
cycle.\14\ The ISC engaged Deloitte & Touche LLP (``Deloitte'') to
support the effort, including facilitating analysis on the benefits and
barriers to transitioning to T+1 and coordinating with the industry on
the transition.\15\ In December 2021, DTCC, SIFMA, and ICI, together
with Deloitte, published a report containing the ISC's recommendations
for migrating to a T+1 standard settlement cycle.\16\
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\13\ See DTCC, ``Advancing Together: Leading the Industry to
Accelerated Settlement'' (Feb. 2021), available at https://www.dtcc.com/-/media/Files/PDFs/White%20Paper/DTCC-Accelerated-Settle-WP-2021.pdf.
\14\ Exchange Act Release No. 94196 (Feb. 9, 2022), 87 FR 10436
(Feb. 24, 2022) (``T+1 Proposing Release'').
\15\ Id.
\16\ See Deloitte, DTCC, Investment Company Institute (``ICI''),
and Securities Industry and Financial Markets Association
(``SIFMA''), ``Accelerating the U.S. Securities Settlement Cycle to
T+1'' (Dec. 1, 2021), available at https://www.sifma.org/wp-content/uploads/2021/12/Accelerating-the-U.S.-Securities-Settlement-Cycle-to-T1-December-1-2021.pdf.
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On February 9, 2022, the Commission proposed amendments to Rule
15c6-1(a) to shorten the standard settlement cycle to T+1 on the basis
that the shorter settlement cycle would reduce the credit, market and
liquidity risks in securities transactions faced by market participants
and U.S. investors.\17\ On February 15, 2023, the Commission adopted
these amendments to Rule 15c6-1(a).\18\ In light of this action by the
Commission, OCC proposes to implement the changes described herein in
connection with the T+1 settlement cycle on the Commission's designated
T+1 compliance date.
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\17\ T+1 Proposing Release, supra note 14; see also Commission
Press Release 2022-21: ``SEC Issues Proposal to Reduce Risks in
Clearance and Settlement'' (Feb. 9, 2022).
\18\ T+1 Adopting Release, supra note 7.
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Proposed Changes
OCC proposes certain amendments in light of the anticipated
industry move to a T+1 settlement cycle. OCC has determined that
shortening the settlement cycle to T+1 would require revisions to OCC
Rules, By-Laws, and Clearing Member documents, which are currently
aligned with a T+2 settlement cycle. Specifically, OCC proposes to (i)
revise provisions connected to late exercise that are impacted by a
shortened settlement cycle, (ii) change timeframes related to the
standard settlement cycle to reflect T+1, and (iii) make certain other
conforming and clarifying changes.
(i) Provisions Connected to Late Exercise
OCC proposes to amend provisions in Chapter VIII of the Rules that
are affected by a shortened settlement cycle. Rules 801 and 805 require
Clearing Members to submit exercise notices within the timeframes
prescribed by OCC.\19\ These Rules currently set out an exception
process to accommodate notices submitted after these timeframes. OCC's
late exercise process provides final deadlines by which late exercise
notices must be received by OCC and subjects Clearing Members to
potential disciplinary action (as the filing of such notice may be
deemed a violation) and liability for a late filing fee, among other
things.\20\ More specifically, subject to certain conditions, Rule 801,
which addresses the exercise of options other than at expiration,
allows a Clearing Member to file an exercise notice after the
prescribed deadline solely for the purpose of correcting a bona fide
error on the part of the Clearing Member or a customer and imposes
liability for a late filing fee of $250,000 per line item listed on the
notice. Similarly, OCC Rule 805, which addresses exercises on
expiration, imposes liability for a late filing fee of $250,000 per
line item on a Clearing Member that submits an exercise notice after
the prescribed deadline.
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\19\ The current deadline for submitting exercise notices other
than at expiration is 6:00 p.m. CT. The current deadline for
submitting exercise notices at expiration is 8:00 p.m. CT on monthly
standard Friday expirations, 7:00 p.m. CT on weekly Friday
expirations, and 6:30 p.m. CT on Monday and Wednesday expirations.
\20\ Under Rule 801, the deadline for submitting late exercise
notices is 6:00 a.m. CT. Under Rule 805, the deadline for submitting
late exercise notices is the expiration time of the option, which is
currently 10:59 p.m. CT (as set forth in Article 1, Section 1(E)(23)
of the By-Laws).
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OCC proposes to cease facilitating the late exercise process after
the move to T+1. OCC reviewed its internal operational processes to
assess the implications of the shortened settlement cycle on late
exercises. Currently, when a late exercise is processed, OCC sends the
delivery information to the National Securities Clearing Corporation
(``NSCC'') for T+1 settlement.\21\ Reducing the standard settlement
time to T+1 would reduce the time available to OCC and NSCC to transmit
information and perform operational and risk management steps
associated with their arrangement. Specifically, moving to T+1 would
require settlement activity from a late exercise to be sent to NSCC for
same-day settlement, which is not supported by the Accord. Late
exercise activity would thus not be guaranteed by NSCC, resulting in
various implications, as the link between OCC and NSCC allows common
clearing members, and their customers, to realize financial and
operational efficiencies through the combined settlement of obligations
from their OCC and NSCC cleared positions. OCC proposes to no longer
accommodate late exercises due to operational challenges for same-day
settlement and limitations under the Accord. Even if OCC were to find
another operational mechanism outside of NSCC to process the settlement
of a late exercise submission in a T+1 environment, any such processing
would negate the settlement certainty for all market participants that
the Commission seeks to achieve in its T+1 proposal.
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\21\ OCC maintains a link with NSCC to facilitate the settlement
of physically settled stock options and stock futures. More
specifically, OCC and NSCC are parties to a Stock Options and
Futures Settlement Agreement that specifies the time at which
responsibility for the settlement of such obligations passes from
OCC to NSCC (the ``Accord''). See Exchange Act Release No. 81266
(July 31, 2017), 82 FR 36484 (Aug. 4, 2017) (File No. SR-OCC-2017-
013).
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OCC does not believe that such changes represent a significant
departure from its current practices or the practices of other self-
regulatory organizations. As described above, OCC's Rules allow OCC to
prescribe timeframes during which Clearing
[[Page 5071]]
Members may submit exercise notices. Following the proposed changes,
OCC would continue to maintain deadlines for receiving exercise
notices. The Financial Industry Regulatory Authority (``FINRA'') and
the options exchanges have similarly established a cut-off time for
receiving exercise notices.\22\ Moreover, the late exercise process at
OCC is intended to be used in extenuating circumstances and is not
routinely performed. The filing of a late exercise notice may be deemed
a violation subject to disciplinary action under Rules 801 and 805.
Most recently, in 2020, OCC raised the late filing fee from $75,000 to
$250,000 per line item to further disincentivize late exercises.\23\
For these reasons, OCC would cease accepting late exercise notices and
proposes to amend the following provisions in connection with such
change.
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\22\ See e.g., FINRA Rule 2360(b)(23)(A)(iii); Nasdaq Options
6B, Section 1(c); NYSE Arca Rule 6.24-O(c).
\23\ See Exchange Act Release No. 88310 (Mar. 2, 2020), 85 FR
13198 (Mar. 6, 2020) (File No. SR-OCC-2020-001) (noting that the
late exercise fee is intended to encourage Clearing Members to be
diligent in processing exercise notices and to improve back office
procedures).
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OCC proposes to revise Rule 801, which addresses the exercise of
options other than at expiration. OCC propose to remove language in
paragraph (a) that requires a Clearing Member to prepare and preserve a
memorandum describing the error that gave rise to a late filing. OCC
also proposes to remove paragraph (d) that grants certain individuals
the discretion to permit a Clearing Member to file a late exercise
notice to correct a bona fide error, subject to certain conditions,
including liability for a late filing fee, a final deadline for
submission, and potential disciplinary action.\24\ OCC accordingly
proposes to remove a reference to paragraph (d) in Rule 801,
Interpretation and Policy .02.
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\24\ For the avoidance of doubt, Clearing Members may still
correct errors following the proposed changes but must make any
corrections prior to daily processing deadlines. OCC discussed the
cessation of late exercises following T+1 with the Operations
Roundtable, which solicits feedback from interested stakeholders
such as Clearing Members. No substantive opposing views were raised
in these discussions. See confidential Exhibit 3A to File no. SR-
OCC-2024-002 for supporting data and analysis, including materials
from Operations Roundtable meetings and information on past
instances of late exercises.
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OCC propose similar changes to Rule 805, which addresses exercises
on expiration. OCC proposes to remove the language in paragraph (c) and
related language in paragraph (e) that allows Clearing Members to file
late exercise notices subject to a final deadline for submission. OCC
would replace the text in paragraph (c) with the term ``Reserved.'' OCC
proposes to remove paragraphs (g), (h), and (i) that set out various
terms and conditions governing the submission of late exercise notices,
including liability for a late filing fee and potential disciplinary
action for the Clearing Member. OCC would eliminate and update
references to the provisions in Rule 805 (including the Interpretation
and Policy) and make conforming changes throughout the Rules, including
in Rules 1305, 1401, and 2702.
(ii) Timeframes Related to the Standard Settlement Cycle
OCC proposes changes to timeframes in its Rules, By-Laws, and
Clearing Member documents that are related to the current T+2 standard
settlement cycle. The following provisions would need to be updated to
facilitate the move to T+1 and are discussed in more detail below:
OCC Rule 901 (Settlement Through Correspondent Clearing
Corporations); \25\
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\25\ Article I, Section 1.C.(32) of OCC's By-Laws defines the
term ``correspondent clearing corporation'' to mean National
Securities Clearing Corporation (``NSCC'') or any successor thereto
which, ``by agreement with [OCC], provides facilities for
settlements in respect of exercised option contracts or BOUNDs or in
respect of delivery obligations arising from physically-settled
stock futures.'' The Accord is the current agreement that governs
NSCC settlement of OCC related activity.
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OCC Rule 903 (Obligation to Deliver);
OCC Rule 1302 (Delivery of Underlying Securities);
OCC Rule 1302B (Delivery of Underlying Treasury
Securities);
OCC Rule 1503 (Exercise Settlement Date for Event Options
and Range Options);
OCC Rule 2201 (Instructions to the Corporation);
OCC Rule 2208 (Settlement Date);
Article XXI of OCC's By-Laws (Stock Loan/Hedge Program);
OCC Rule 2209A (Termination of Market Loans); and
OCC Rule 2502 (Settlement Date for BOUNDs).
OCC proposes to amend certain of its Rules that govern the
settlement of physically-settled options and futures through NSCC. Rule
901 requires that certain obligations be settled through the facilities
of NSCC. Consistent with the new standard settlement cycle, OCC
proposes to amend paragraph (c) of Rule 901 to remove a parenthetical
indicating that ``regular way'' settlement under NSCC's rules and
procedures does not occur on T+1. Further, paragraph (d) permits OCC to
revoke a specification in any delivery advice that settlement be made
through the facilities of NSCC at any time prior to the obligation
time. In such event, Rule 901(d) allows specified OCC senior officers
to extend or postpone the time for delivery to no more than two
business days after the date of such revocation. To be consistent with
the T+1 settlement cycle, OCC proposes to change the amount of time
that OCC has to extend or postpone the time of delivery to one business
day.
OCC proposes related changes to conform language with the T+1
settlement cycle in Rule 901(f) and (g) and in certain associated
Clearing Member documents. Rule 901(f) permits a Clearing Member (the
``Appointing Clearing Member'') that is not an NSCC member to appoint
another Clearing Member that is an NSCC member (the ``Appointed
Clearing Member'') to act on its behalf with respect to the settlement
of exercised or matured cleared securities in its accounts through
NSCC. OCC maintains a related Clearing Member document (the
``Appointment of Clearing Member Form'' or an ``appointment form'')
that permits the Appointed Clearing Member to act on behalf of the
Appointing Clearing Member for this purpose. Rule 901(g) permits a
Canadian Clearing Member, on behalf of which CDS Clearing and
Depository Services Inc. (``CDS'') \26\ maintains a subaccount at NSCC,
to appoint CDS to act on its behalf with respect to the settlement of
exercised or matured cleared securities in its accounts through NSCC.
OCC also maintains a related Clearing Member document (the
``Appointment of CDS--Stock Settlement Form'' or an ``appointment
form'') that permits CDS to act on behalf of the Canadian Clearing
Member for this purpose. Such appointments currently become effective
as of the second business day following the day on which OCC receives
written notice, or such later date as may be specified. Under the
proposed rule change, OCC would replace the ``second'' business day
with the ``first'' business day in Rule 901(f) and (g) and in the
appointment forms.
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\26\ CDS is Canada's national securities depository, which,
among other things, facilitates the settlement of cross-border
transactions with the U.S. and has relationships with NSCC and The
Depository Trust Company (``DTC'').
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Rule 903 governs a Clearing Member's obligation to deliver when
either a delivery advice or OCC directs that settlement be made on a
broker-to-broker basis. Under Rule 903, the delivery date for
physically-settled options is the second business day following the day
on which the exercise notice was, or is deemed to have been, properly
tendered to OCC, and the
[[Page 5072]]
delivery date for physically settled security futures is generally the
second business day following the maturity date. OCC proposes to
replace references to the ``second'' business day with the ``first''
business day.
In Chapter XIII regarding futures, futures options and commodity
options, OCC proposes to revise Rule 1302 concerning the delivery of
underlying securities and Rule 1302B concerning the delivery of
underlying Treasury securities. With certain exceptions, Rule 1302
currently provides that the delivery date for a physically-settled
stock future is the second business day following the maturity date of
the applicable series. Rule 1302B(a) currently provides that the
delivery date for each physically-settled Treasury future in respect of
which a delivery intent has been submitted (or deemed submitted) is the
second business day following such submission (or deemed submission).
OCC also maintains a related Clearing Member document (the
``Designation of Clearing Member'' or a ``designation form'') that
permits, among other things, a Clearing Member to designate another
Clearing Member for the purposes of effecting settlement of physically-
settled treasury futures through the Fixed Income Clearing Corporation
(``FICC'').\27\ OCC proposes to replace references to the ``second''
business day in Rules 1302 and 1302B and in the designation form with
the ``first'' business day. OCC also proposes corresponding changes to
update references from the ``second'' business day to the ``first''
business day with respect to applicable deadlines specified in
paragraphs (d), (e), and (j) of Rule 1302B.
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\27\ FICC provides central counterparty services to firms that
participate in the U.S. Government and mortgage-backed securities
markets.
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OCC proposes similar changes to make language consistent with the
T+1 settlement cycle in Rule 1503. With certain exceptions, Rule 1503
currently provides that the exercise settlement date for a credit
default option and credit default basket option is the second business
day following the date on which the option is deemed to have been
exercised. Under the proposed rule change, OCC would replace the
``second'' business day with the ``first'' business day.
OCC also proposes to amend provisions of its Rules and By-Laws
concerning its two Stock Loan Programs. OCC operates two programs in
which it acts as a central counterparty for stock loan transactions:
the Stock Loan/Hedge Program and Market Loan Program.\28\ The Stock
Loan/Hedge Program allows Clearing Members to use borrowed and loaned
securities to reduce OCC margin requirements. The Market Loan Program
is a program whereby OCC processes and maintains stock loan positions
that have originated through a Loan Market.\29\
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\28\ Information on the Stock Loan/Hedge Program and Market Loan
Program can be found on OCC's public website, available at https://www.theocc.com/clearance-and-settlement/stock-loan-programs.
\29\ Article I, Section 1.L.(5) of OCC's By-Laws defines ``Loan
Market'' as an electronic platform included in OCC's Market Loan
Program that supports securities lending and borrowing transactions
by matching lenders and borrowers based on loan terms that each
party is willing to accept.
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In respect of the Stock Loan/Hedge Program, Rule 2201(c) currently
permits a Canadian Clearing Member on behalf of which CDS maintains a
subaccount at DTC to appoint CDS to act on its behalf with respect to
effecting delivery orders for stock loan and stock borrow transactions
in its accounts through DTC. OCC also maintains a related Clearing
Member document (the ``Appointment of CDS--Stock Loan Form'' or an
``appointment form'') that permits CDS to act on behalf of the Canadian
Clearing Member for this purpose. Such appointment currently becomes
effective as of the second business day following the day on which OCC
receives written notice, or such later date as may be specified. Under
the proposed rule change, OCC would replace the ``second'' business day
with the ``first'' business day in Rule 2201(c) and in the appointment
form.
In addition, with respect to the Stock Loan/Hedge Program, Rule
2208(a) currently provides that the settlement date for the termination
of a stock loan will be the earlier of: (1) the date on which the
borrowing Clearing Member initiates the termination or (2) the date
that is two stock loan business days after the date on which the
lending Clearing Member initiates the termination. OCC proposes to
amend Rule 2208(a) to change ``two stock loan business days'' to ``one
stock loan business day.''
OCC may terminate outstanding stock loans under certain conditions
pursuant to Article XXI, Section 2(c) of OCC's By-Laws with respect to
the Stock Loan/Hedge Program. If any stock loans are so terminated, OCC
is required to provide written notice to the affected Clearing Members
specifying the date on which such termination is to become effective,
which will be at least two stock loan business days after the date of
such notice. OCC proposes to make the effective date consistent with
the new T+1 settlement cycle by changing the minimum number of days
between notice and termination from two to one.
Regarding the Market Loan Program, a market loan (i.e., a loan of
eligible stock effected through a Loan Market) is terminated by the
relevant Clearing Member providing a return or recall notice to the
Loan Market with respect to a specified quantity of loaned stock under
Rule 2209A. Rule 2209A(a)(3) discusses the scenario where a recall
transaction fails to settle by the settlement time on the second stock
loan business day following the day that the transaction was first
submitted. OCC proposes to replace ``second'' stock loan business day
with ``first'' stock loan business day. Under Rule 2209A(d), OCC may
terminate outstanding market loans under certain conditions. If any
market loans are so terminated, OCC is required to provide written
notice to the affected Clearing Members specifying the date on which
such termination is to become effective, which will be at least two
stock loan business days after the date of such notice. OCC proposes to
make the effective date consistent with the new T+1 settlement cycle by
changing the minimum number of days between notice and termination from
two to one.
OCC proposes to amend Rule 2502 concerning the settlement date for
BOUNDs. Namely, OCC proposes to update the settlement date for a BOUND
contract from the second business day following the expiration date to
the first business day.
(iii) Conforming and Clarifying Changes
OCC proposes changes to Chapter VI of its Rules related to deposits
in lieu of margin. In lieu of depositing margin, OCC permits a Clearing
Member or an approved custodian to deposit eligible collateral in
respect of certain option contracts included in a short position in
accordance with OCC Rule 610. More specifically, OCC permits certain
types of deposits in lieu of margin, including member specific
deposits, third-party specific deposits, and escrow deposits, which are
further described in Rules 610A, 610B and 610C, respectively.\30\
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\30\ Member specific deposits are equity securities deposited by
clearing members at DTC at the direction of their customers; third-
party specific deposits are equity securities deposited by custodian
banks at DTC at the direction of their customers; and escrow
deposits can consist of cash deposits held at a custodian bank for
the benefit of OCC, in addition to equities, and U.S. Government
securities pledged to OCC through DTC by escrow deposit banks at the
direction of their customers.
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With certain exceptions, OCC Rule 610C(o) provides that any escrow
[[Page 5073]]
deposit in respect of a short position in stock put options will be
released by OCC on its own initiative at a specified time on the fourth
business day following the expiration date.\31\ OCC proposes to amend
this outdated provision to state that such deposits will be released by
OCC at a specified time following the expiration date. Reference to the
specific business day would be removed from the Rules and, instead,
would be centralized in and made available through the Operations
Manual, along with other timeframes and deadlines specified by OCC.\32\
The Operations Manual would state that this release of collateral would
occur on the next business day following the expiration date.
Shortening the period for the automatic release of collateral to the
next business day following the expiration date would be in line with
the changes described above to shorten the current settlement cycle to
T+1. OCC believes that such change would align with the goals of the
T+1 Adopting Release to reduce central counterparty exposure to credit,
market, and liquidity risk arising from its obligations to its
participants, as there is no need for OCC to hold the collateral for an
extended period of time.\33\
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\31\ The exceptions in OCC Rule 610C(o) include that (1) the
Clearing Member's obligations in respect of such short position have
not been satisfied or (2) the deposit is subject to a ``hold''
instruction (i.e., an instruction requesting that OCC not release
such deposit).
\32\ See Confidential Exhibit 3B to File no. SR-OCC-2024-002
containing the changes to the Operations Manual with material to be
added in underlined text and material to be deleted in strikethrough
text.
\33\ See T+1 Adopting Release, supra note 7.
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OCC proposes conforming changes throughout Chapter VI. OCC proposes
to amend Rule 610B(d)(2) regarding third-party specific deposits \34\
and Rule 610C(p) regarding escrow deposits in respect of a short
position in index options \35\ to uniformly state that such deposits
will be released by OCC at a specified time following the expiration
date, which would be consistent with the language described above in
amended Rule 610C(o). OCC also proposes language in new paragraph (2)
of Rule 610A(c) to address the automatic release of any member specific
deposits by OCC, which would largely align with the language in amended
Rule 610B(d)(2).\36\ This addition is intended to be clarifying in
nature, as OCC currently releases member specific deposits in the same
general manner as set out in Rule 610B(d)(2) for third-party specific
deposits. Consistent with the change described above, automatic release
would occur on the next business day following the expiration date for
member specific, third-party specific and escrow deposits and would be
set out in the Operations Manual. These changes are intended to ensure
consistent language and practices to promote clarity for market
participants. These changes are made in conjunction with the revisions
to Rule 610C(o) and align with the goals of the T+1 Adopting Release to
reduce central counterparty exposure to credit, market, and liquidity
risk arising from its obligations to its participants, as there is no
need for OCC to hold the collateral for an extended period of time.\37\
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\34\ Rule 610B(d)(2) provides that any third-party specific
deposit will be released by OCC on its own initiative at a specified
time on the business day following the exercise settlement date
unless (1) the settlement obligations in respect of such short
position have not been met, that NSCC has determined to suspend,
decline or cease to act for the Clearing Member in respect of whose
account such deposit was made, or, that NSCC has determined to
prohibit or limit such Clearing Member's access to services; (2) OCC
has directed that the exercise be settled otherwise than through
NSCC; or (3) the deposit is subject to a ``hold'' instruction.
\35\ Rule 610C(p) provides that such escrow deposit will be
released by OCC on its own initiative at a specified time on the
first business day following the expiration date unless (1) the
Clearing Member carrying the short position is not in full
compliance with its obligations to OCC or (2) the deposit is subject
to a ``hold'' instruction.
\36\ The proposed text in Rule 610A(c)(2) would mirror the
amended text in Rule 610B(d)(2) with minor changes to remove or
replace provisions associated with third-party specific deposits
with member specific deposits.
\37\ See T+1 Adopting Release, supra note 7.
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OCC further proposes revisions to Chapter XIV in relation to
Treasury securities options. As U.S. Treasury securities commonly
settle on a T+1 basis, OCC proposes to update the exercise settlement
date for Treasury securities options from the second business day
following the expiration date to the first business day in Rule
1402(a). Additionally, Clearing Members are required to notify OCC
within a prescribed timeframe if a trade required to be completed
pursuant to Rule 1403 has not been successfully matched at FICC.\38\
Under Rule 1404, if OCC receives timely notice of a failure to match a
trade, the affected Clearing Members are required to attempt to resolve
the failure such that settlement could occur through FICC by the
specified deadline on the second business day following the expiration
date. If the failure is not resolved by such deadline, the Clearing
Members are required to notify OCC within a specified time on the
second business day following the expiration date. OCC also proposes to
update these references from the ``second'' business day to the
``first'' business day in Rule 1404. Similar to the changes described
above, these changes would promote consistency between OCC's Rules and
the settlement cycle for the relevant asset class.
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\38\ Under Rule 1403, OCC requires every Treasury Securities
Clearing Member to be a participant in the Government Securities
Division (``GSD'') of FICC or designate a GSD participant as its
representative to submit trade information into FICC's real-time
trade matching system.
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Implementation Timeframe
As discussed above, OCC would implement the proposed rule change in
coordination with the Commission's compliance date for the amendments
to Rule 15c6-1(a) and the transition to T+1. OCC would provide notice
to Clearing Members of the implementation through an Information
Memorandum posted to its public website at least two (2) weeks prior to
implementation.
(2) Statutory Basis
For the following reasons, OCC believes that the proposed rule
change is consistent with Section 17A(b)(3)(F) of the Act \39\ and Rule
17Ad-22(e)(1) \40\ thereunder. Section 17A(b)(3)(F) of the Act \41\
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, and, in general, to protect investors and the
public interest. OCC believes the proposed rule change is consistent
with these requirements because it would coordinate the terms of
certain provisions in OCC's Rules, By-Laws, and Clearing Member
documents with the Commission's amendments to Rule 15c6-1(a) to support
a T+1 standard settlement cycle. First, OCC proposes to remove
provisions connected to late exercise that are impacted by a shortened
settlement cycle. As discussed above, OCC would no longer accommodate
late exercise notices due to operational challenges for same-day
settlement and limitations under the Accord. In OCC's view, this change
does not represent a significant departure from OCC's current practices
or the practices of other self-regulatory organizations. OCC would
continue to maintain timeframes during which Clearing Members may
submit exercise notices following the amendments. The proposed change
is intended to preserve the successful and timely completion of
exercise and assignment processes,
[[Page 5074]]
which are important to the prompt and accurate settlement of securities
transactions, following the transition to a T+1 settlement cycle.
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\39\ 15 U.S.C. 78q-1(b)(3)(F).
\40\ 17 CFR 240.17Ad-22(e)(1).
\41\ 15 U.S.C. 78q-1(b)(3)(F).
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OCC believes that the proposed changes to amend timeframes related
to the standard settlement cycle are also consistent with Section
17A(b)(3)(F) of the Act.\42\ Where a current OCC Rule, By-Law, or
Clearing Member document is based upon or otherwise references the T+2
standard securities settlement cycle, the provision would be changed to
support T+1. Harmonizing OCC's Rules, By-Laws, and Clearing Member
documents with the new T+1 standard settlement cycle would remove
impediments to and support the prompt and accurate clearance and
settlement of securities transactions by, for example, ensuring that
provisions in these documents that are related to T+1 are consistent
with the rules concerning the standard settlement cycle that are
maintained by the exchanges for which OCC clears and settles
transactions and the rules of clearing agencies that provide clearance
and settlement services for securities transactions that underlie
physically-settled stock option and stock future contracts cleared by
OCC. OCC believes that conforming its Rules, By-Laws, and Clearing
Member documents to the new T+1 standard settlement cycle would also
protect investors and the public interest by ensuring that OCC provides
clearance and settlement services in a manner that supports the
Commission's requirements for the T+1 standard settlement cycle.
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\42\ Id.
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Additionally, OCC believes that the proposed conforming and
clarifying changes to its Rules are consistent with Section
17A(b)(3)(F) of the Act.\43\ Automatic release would consistently occur
on the next business day following the expiration date for member
specific, third-party specific and escrow deposits and associated
language would be set out in the Operations Manual, along with other
timeframes and deadlines specified by OCC. As described above, the
proposed changes would ensure consistent language and practices by OCC,
including with respect to the settlement cycle for the relevant asset
class and the automatic release of deposits, thereby promoting clarity
and avoiding potential confusion for market participants, which would
help support OCC's prompt and accurate clearance and settlement of
securities transactions. For these reasons, the proposed changes are
reasonably designed to promote the prompt and accurate clearance and
settlement of securities transactions, to assure the safeguarding of
securities and funds in OCC's custody or control, and, in general, to
protect investors and the public interest in accordance with Section
17A(b)(3)(F) of the Act.\44\
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\43\ Id.
\44\ Id.
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OCC believes the proposed changes are also consistent with the
requirements in Rule 17Ad-22(e)(1) under the Act.\45\ Rule 17Ad-
22(e)(1) requires that each covered clearing agency establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide for a well-founded, clear, transparent,
and enforceable legal basis for each aspect of its activities in all
relevant jurisdictions.\46\ The changes are designed to modify OCC's
Rules, By-Laws, and Clearing Member documents that would otherwise
become outdated upon the change to the T+1 standard settlement cycle,
or present other operational difficulties or concerns. The proposed
changes would allow OCC to maintain provisions and practices that are
both clear and consistent with the standard settlement cycle that is
specified in Rule 15c6-1(a), which would help ensure that OCC's Rules,
By-Laws, and Clearing Member documents remain well-founded, clear,
transparent, and enforceable. Additional changes are proposed to OCC's
Rules that would amend an outdated provision and ensure consistency
with the settlement cycle for the relevant asset class and regarding
the automatic release of deposits, which would ensure that OCC's Rules
are well-founded, clear, transparent, and enforceable. Therefore, OCC
believes that the proposed changes promote compliance and consistency
with the requirements in Rule 17Ad-22(e)(1) to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to provide for a well-founded, clear, transparent and
enforceable legal basis.
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\45\ 17 CFR 240.17Ad-22(e)(1).
\46\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \47\ 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 Act. OCC does not
believe that the proposed rule change would impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act. As discussed above, OCC proposes amendments to its Rules,
By-Laws, and Clearing Member documents to (i) revise provisions
connected to late exercise that are impacted by a shortened settlement
cycle, (ii) change timeframes related to the standard settlement cycle
to reflect T+1, and (iii) make certain other conforming and clarifying
changes. OCC does not believe that the proposed rule change would
impose any burden or have any impact on competition. The proposed rule
change would implement revisions that ensure consistency with
amendments recently adopted by the Commission in Rule 15c6-1(a) to
change the standard securities settlement cycle to T+1 and additional
changes that promote clarity or uniformity amongst OCC's Rules, By-
Laws, and Clearing Member documents, as described above. All Clearing
Members would be equally subject to the changes, and the proposed
changes would not provide any Clearing Member with a competitive
advantage over any other Clearing Member. This proposed rule change
would also not inhibit access to OCC's services or disadvantage or
favor any particular user in relationship to another. As a result, OCC
believes the proposed rule change would not impact or impose a burden
on competition.
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\47\ 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 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.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
[[Page 5075]]
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-2024-002 on the subject line.
Paper Comments
Send paper comments in triplicate to Vanessa Countryman,
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090.
All submissions should refer to file number SR-OCC-2024-002. 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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of OCC and on OCC's
website at https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
Do not include personal identifiable information in submissions;
you should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to file number SR-OCC-2024-002 and
should be submitted on or before February 15, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
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\48\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-01385 Filed 1-24-24; 8:45 am]
BILLING CODE 8011-01-P
