Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change, as Modified by Partial Amendment No. 1, by The Options Clearing Corporation Concerning Its Stock Loan Programs, 73466-73485 [2024-20329]
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Federal Register / Vol. 89, No. 175 / Tuesday, September 10, 2024 / Notices
Dated: September 5, 2024.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024–20366 Filed 9–9–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–100930; File No. SR–OCC–
2024–011]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing of Proposed Rule Change, as
Modified by Partial Amendment No. 1,
by The Options Clearing Corporation
Concerning Its Stock Loan Programs
September 4, 2024.
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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 August 22, 2024, The
Options Clearing Corporation (‘‘OCC’’ or
‘‘Corporation’’) 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 primarily by OCC. On
September 3, 2024, OCC filed a partial
amendment (‘‘Partial Amendment No.
1’’) to the proposed rule change.3 The
Commission is publishing this notice to
solicit comments on the proposed rule
change, as modified by Partial
Amendment No. 1 (hereafter ‘‘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
address limitations in the structure of
OCC’s Stock Loan/Hedge (‘‘Hedge’’)
Program and Market Loan Program
(together, the ‘‘Stock Loan Programs’’)
by creating the framework for a single,
enhanced program designed to support
current and future needs. The proposed
enhancements would, among other
things, (i) combine into the Market Loan
Program favorable aspects of both Stock
Loan Programs, including the
submission of bilaterally negotiated
transactions; (ii) conform the terms of
stock loans submitted under the Market
Loan Program (‘‘Market Loans’’) more
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 In Partial Amendment No. 1, OCC corrected an
error in Exhibit 5A to SR–OCC–2024–011 without
changing the substance of the proposed rule change.
Partial Amendment No. 1 does not materially alter
the substance of the proposed rule change or raise
any novel regulatory issues.
2 17
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closely to the provisions most
commonly included in stock loan
transactions executed under standard
loan market documents; (iii) provide a
uniform guaranty of terms across Market
Loans, regardless of how those Market
Loans are initiated under the enhanced
program; (iv) support transactions under
both Stock Loan Programs through
OCC’s new clearance and settlement
system; and (v) reorganize, restate, and
consolidate provisions of OCC’s ByLaws and Rules governing the Stock
Loan Programs.
The proposed amendments to OCC’s
Rules and By-Laws can be found in
Exhibit 5A and Exhibit 5B to File No.
SR–OCC–2024–011, respectively.
Proposed conforming changes to OCC’s
internal Margin Policy and Recovery
and Wind-Down (‘‘RWD’’) Plan, which
can be found in confidential Exhibits 5C
and 5D to File No. SR–OCC–2024–011,
respectively. Material proposed to be
added is marked by underlining and
material proposed to be deleted is
marked with strikethrough text. For ease
of presentation and to distinguish
between changes to rule text versus
relocation of existing rule text, Exhibits
5A and 5B to File No. OCC–2024–011
contain bracketed text to indicate when
existing text has been relocated from the
By-Laws to the Rules with changes as
marked. That bracketed text describes
changes that would be performed upon
implementation of File No. SR–OCC–
2024–011, but it is not intended to be
rule text. All terms with initial
capitalization that are not otherwise
defined herein have the same meaning
as set forth in the By-Laws and Rules.4
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
In its capacity as a central
counterparty registered with the
Commission, OCC currently operates
two programs through which it clears
4 OCC’s By-Laws and Rules can be found on
OCC’s public website: https://www.theocc.com/
Company-Information/Documents-and-Archives/
By-Laws-and-Rules.
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stock loan transactions: the Hedge
Program and the Market Loan Program.
Under both Stock Loan Programs, OCC
becomes the lender to the borrower and
the borrower to the lender, thereby
guaranteeing the return of the full value
of cash collateral to the Borrowing
Clearing Member and the return of the
Loaned Stock (or value of that Loaned
Stock) to the Lending Clearing Member.
Under the Market Loan Program, OCC
also offers certain additional guarantees,
discussed in more detail below, with
respect to other payment obligations
arising from the stock loan transactions
(e.g., dividend equivalent payments and
rebate payments). As a result of OCC’s
novation of cleared stock loan
transactions, the rights and obligations
of the Borrowing and Lending Clearing
Members are thereafter governed by
OCC’s By-Laws and Rules.5 OCC’s ByLaws and Rules also provide for, among
other things, how Clearing Members
initiate Stock Loans at OCC, how those
Stock Loans are recorded in OCC’s
books and records, how returns and
recalls are processed, and risk
management procedures specific to
Stock Loans in the event that OCC
suspends one of the Clearing Member
counterparties.
As announced in 2022, OCC intends
to replace its current clearance and
settlement system (ENCORE) with a
streamlined operational framework for
clearance and settlement (Ovation).6
The move to Ovation gives OCC the
opportunity to address limitations in the
structure of OCC’s Stock Loan Programs
and enhance OCC’s stock loan services
to support current and future needs.7
OCC proposes a number of amendments
to its By-Laws and Rules designed to,
5 Terms provided under a Master Stock Lending
Agreement (‘‘MSLA’’) between the parties to a Stock
Loan may remain in effect as between the parties
to the extent they are not inconsistent with the ByLaws and Rules, but do not impose any obligation
on OCC. See OCC Rule 2202(b).
6 See OCC Announces New Platform Name and
Launches Enhanced Transformation website (May
10, 2022), https://www.theocc.com/newsroom/
views/2022/05-10-occ-announces-new-platformname-and-launches-enhanced-transformationwebsite.
7 As discussed in more detail below, OCC’s
current programs are limited by certain inefficient
legacy practices including, for example: (1)
position-based recordkeeping that does not align
with the contract-level accounting that is common
throughout the stock loan industry, which adds
complexity to the process of ensuring that all
parties are in alignment on the state of their stock
loans; (2) workflows that involve settlement of
delivery versus payment obligations at the
Depository prior to clearance or settlement at OCC,
which adds further complexity to the reconciliation
process and can lead to position breaks; and (3)
payment flows common to stock loans that are not
guaranteed under OCC’s Hedge Loan program and
must currently be settled as between the parties
away from OCC.
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among other things, (i) combine into the
Market Loan Program favorable aspects
of both Stock Loan Programs, including
the submission of bilaterally negotiated
transactions; (ii) conform the terms of
Market Loans cleared by OCC more
closely to the provisions most
commonly included in stock loan
transactions executed under standard
loan market documents; (iii) provide a
uniform guaranty of terms across Market
Loans, regardless of how those Market
Loans are initiated under the enhanced
program; (iv) support transactions under
both Stock Loan Programs through
OCC’s new clearance and settlement
system; and (v) reorganize, restate, and
consolidate provisions of OCC’s ByLaws and Rules governing the Stock
Loan Programs.
OCC believes these changes will
address certain pain points that OCC’s
members have raised and enhance the
overall process. In particular, the
proposed changes would allow
members who currently participate in
the Hedge Loan Program to submit
transactions through an improved
workflow to the Market Loan Program,
under which the counterparties will
benefit from OCC’s enhanced guaranty
and the efficiency of allowing OCC’s
systems to handle certain post-trade
transactions that Hedge Loan Program
participants must currently address
bilaterally with each of their
counterparties, away from OCC. In
addition, the proposed changes would
align how OCC records stock loan
transactions in its books and records
with an industry-standard, contractlevel approach, which is expected to
alleviate operational burdens on
members that must currently reconcile
their internal records with OCC’s
position-based records on a daily basis.
These enhancements would also serve
as a foundation for consolidating OCC’s
Hedge Loan and Market Loan Programs.
As discussed more fully below, OCC
intends to eventually decommission the
Hedge Program, after which the Market
Loan Program would become OCC’s
single Stock Loan Program. OCC would
take a phased approach to
decommissioning the Hedge Program
and would commence its Hedge
Program phase-out plan only after
conferring with Clearing Members that
they are prepared for the transition.
(1) Purpose
Background
Stock Loan Initiation
In the Hedge Program, OCC acts as the
principal counterparty for stock loans
that are executed bilaterally between
Clearing Members and sent to OCC for
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clearance and settlement. Prospective
Lending and Borrowing Clearing
Members identify each other
(independent of OCC), agree to
bilaterally negotiated terms of the Hedge
Loan, and then send the details of the
stock loan to the Depository, the
Depository Trust Company (‘‘DTC’’),
with a certain ‘‘reason code,’’ 8 which
designates the stock loan as a Hedge
Loan for guarantee and clearance at
OCC. The Lending Clearing Member
then instructs DTC to transfer a
specified number of shares of Eligible
Stock to the account of the Borrowing
Clearing Member versus transfer of the
appropriate amount of cash collateral to
the account of the Lending Clearing
Member. This current process, in which
settlement at DTC occurs before
clearance at OCC, adds complexity to
balancing and reconciliation under the
current Hedge Program.
In the Market Loan Program, stock
loans are initiated through the matching
of bids and offers that are agreed upon
by the Market Loan Clearing Members
or otherwise matched through a Loan
Market. A Loan Market is an electronic
platform that supports securities
lending and borrowing transactions in
the Market Loan Program by matching
lenders and borrowers based on loan
terms that each party is willing to
accept.9 In order to initiate a Market
Loan, the Loan Market sends a matched
transaction to OCC, which in turn sends
two separate but linked settlement
instructions to DTC to effect the
movement of Eligible Stock and cash
collateral between the accounts of the
Market Loan Clearing Members through
OCC’s account at DTC.
Scope of OCC’s Guaranty
Regardless of whether a transaction is
initiated under the Hedge Program or
Market Loan Program, OCC novates the
transaction and becomes the lender to
the Borrowing Clearing Member and the
borrower to the Lending Clearing
Member.10 As the principal
counterparty to the Borrowing and
Lending Clearing Members, OCC
guarantees the return of the full value of
cash collateral to a Borrowing Clearing
Member and guarantees the return of the
Loaned Stock (or value of that Loaned
Stock) to the Lending Clearing Member.
Under the Market Loan Program, OCC
8 Unique reason codes were created by DTC for
Clearing Members to designate stock loan
transactions intended to be sent to OCC for
novation and guarantee.
9 Currently, one Loan Market operates within
OCC’s Market Loan Program—Automated Equity
Finance Markets, Inc. (‘‘AQS’’), a subsidiary of
Equilend Holdings LLC (‘‘Equilend’’).
10 See OCC Rules 2202(b) and 2202A(b).
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also provides a limited guaranty of
substitute dividend 11 and rebate
payments,12 in each case limited to the
amount OCC has collected in margins
from the responsible Market Loan
Clearing Member based upon
instructions received by the Loan
Market prior to the payment date. Under
the Hedge Program, OCC does not
currently offer a guaranty of dividends
or distributions, which must be resolved
bilaterally between the Borrowing and
Lending Clearing Members.
Mark-to-Market Payments
After novation, as part of the
guaranty, OCC processes mark-to-market
payments for all cleared stock loans on
a daily basis to collateralize all loans to
the negotiated levels. Mark-to-market
payments are based on the value of the
loaned securities and made between
Clearing Members using OCC’s cash
settlement system. In the Hedge
Program, the percentage of the value of
the loaned securities, either 100% or
102%, and the preferred mark-to-market
rounding are dependent upon the terms
of the Master Securities Loan Agreement
(‘‘MSLA’’) between the two Clearing
Member parties to the transaction.
Currently, members may select between
several default rates to which the mark
price would be rounded to the nearest
interval (1.00, .05, 0.25, 0.10, 0.05, and
0.01). In the Market Loan Program, all
Market Loans are collateralized based
on the rate and rounding convention
established by the Loan Market—
currently 102% with rounding to the
nearest dollar.
In both Stock Loan Programs, daily
mark-to-market of cash collateral
typically are settled in the firm lien
account or combined Market-Makers’
account of the Clearing Member.13
Settlements generally are combined and
netted against other OCC settlement
obligations in a Clearing Member’s
account, including trade premiums and
margin deficits. Clearing Member open
positions in the Stock Loan Programs
are factored into the Clearing Member’s
11 The terms ‘‘substitute dividend’’ or ‘‘dividend
equivalent payment’’ in respect of a stock loan
transaction means a payment made by the
Borrowing Clearing Member to the Lending
Clearing Member to reflect any cash dividend or
distribution made with respect to the Loaned Stock
during the term of the stock loan.
12 In respect of a stock loan transaction, a rebate
is typically a fee payable from the Lending Clearing
Member to the Borrowing Clearing Member,
expressed as a rate based on the amount of cash
Collateral held by the Lending Clearing Member
(‘‘Positive Rebate’’). However, if the rebate rate is
negative (‘‘Negative Rebate’’), the fee is payable
from the Borrowing Clearing Member to the
Lending Clearing Member.
13 See OCC Rule 2201(a)(iii); Rule 2201A(a)(iii).
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overall margin 14 and Clearing Fund
contribution requirements.15
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Position Aggregation
OCC aggregates all stock loan
positions and stock borrow positions of
a Clearing Member relating to the same
Eligible Stock for reporting and margin
calculation purposes. OCC separately
identifies stock loan and stock borrow
positions resulting from each of the
Stock Loan Programs, and such
positions are not fungible with positions
resulting from the other program.
Position aggregation in both Stock Loan
Programs is a legacy practice and does
not follow industry-standard bookkeeping practices. Because of position
aggregation, certain industry standard
post-trade activity must be performed
bilaterally away from OCC, such as rerate transactions that change the rebate
rate on an individual loan.
Dividends and Distributions
Dividend equivalent payments for the
Market Loan Program are ordinarily
effected through DTC’s Dividend
Service. If a Loan Market has advised
OCC that the dividend or distribution
for such Market Loan is not tracked by
DTC’s Dividend Service, or if OCC
determines, in its discretion, to remove
a Market Loan from the Dividend
Service, OCC Rule 2206A(a)(ii)
currently provides that dividend
equivalent payments are effected
through OCC’s cash settlement system
the day following the expected dividend
or distribution payment date. OCC Rule
2206A(a)(ii) further provides that the
calculation of the margin in respect of
dividend equivalent payments shall be
solely based on calculations provided
by the Loan Market, and OCC shall have
no responsibility to verify the accuracy
of the Loan Market’s calculation. In
addition, OCC Rule 2206A(a)(iii)
provides that with respect to non-cash
dividends and distributions, a Loan
Market may determine in its discretion
to fix a cash settlement value for which
the Loan Market may instruct OCC to
effect collection and payment. In the
event of a Borrowing Clearing Member’s
default, OCC guarantees dividend
equivalent payments to the extent that
OCC has collected margin equal to such
dividend equivalent according to the
instructions provided by the Loan
Market.
Termination of Stock Loans
Hedge Loans are typically terminated
when either (i) a Borrowing Clearing
Member instructs DTC to transfer a
14 See
15 See
OCC Rules 601, 2203 & 2203A.
OCC Rule 1001.
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specified quantity of the Loaned Stock
to the Lending Clearing Member against
payment of the settlement price by the
Lending Clearing Member to the
Borrowing Clearing Member, after
which DTC notifies OCC of the
transaction with special codes after the
transaction has settled; or (ii) the
Lending Clearing Member gives notice
to the Borrowing Clearing Member that
the Lending Clearing Member is
terminating the Stock Loan, or a portion
thereof and specifies the number of
shares of the Loaned Stock in respect of
which the Lending Clearing Member is
terminating the Stock Loan.16 The
current process of initiating return
transactions for the Hedge Program
through DTC can lead to position breaks
if the return transactions are not
properly coded. Market Loans are
typically terminated by a Market Loan
Clearing Member giving notice to the
relevant Loan Market calling for the
recall or return of a specified quantity
of the Loaned Stock.17 The Loan Market
then sends details of the matched
return/recall transaction to OCC, which
validates the transaction and sends a
pair of delivery orders to DTC in
connection with the recall/return.
However, in certain circumstances
when a Clearing Member under either
Stock Loan Program fails to return the
specified quantity of Loaned Stock or to
pay the applicable settlement price for
a Loaned Stock, the counterparty
Clearing Member may choose to execute
a ‘‘buy-in’’ or ‘‘sell-out’’ of the Loaned
Stock on its own.18 The Clearing
Member executing a buy-in or sell-out is
then required to provide notice to OCC
and its counterparty, in the case of a
Hedge Loan,19 or the Loan Market, in
the case of a Market Loan,20 of the buyin or sell-out after execution is
complete. Termination is not complete
until the records of OCC, which are the
official record of open and closed stock
loan transactions, reflect the termination
of the Stock Loan, and Clearing
Members remain liable for all
obligations related to open stock loan
positions as reflected in the records of
OCC.
Offset and Re-Matching of MatchedBook Positions
A portion of the activity in OCC’s
Hedge Program relates to what is often
referred to as matched-book activity,
when a Hedge Clearing Member
maintains in an account a stock loan
16 See
OCC Rule 2209(a).
OCC Rule 2209A(a).
18 See OCC Rule 2209(b), (f); Rules 2209A(b), (c).
19 See OCC Rule 2209A(b), (f).
20 See OCC Rule 2209A(b)(1), (c)(1).
17 See
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position for a specified number of
shares of an Eligible Stock reflecting a
stock lending transaction with one
Hedge Clearing Member (the Borrowing
Clearing Member) and also maintains in
that same account a stock borrow
position for the same number, or lesser
number, of shares of the same Eligible
Stock with another Hedge Clearing
Member (the Lending Clearing Member)
(such positions being ‘‘Matched-Book
Positions’’). In the event of a Clearing
Member suspension, OCC has authority
to re-match Matched-Book Positions of
the defaulting Clearing Member in the
Hedge Loan Program.21 Such rematching in suspension eliminates risk
associated with price dislocation if OCC
were required to instruct the surviving
lender to buy-in and the surviving
borrower to sell-out the same quantity of
Loaned Stock in order to unwind the
Matched-Book Positions.
Canadian Clearing Members
OCC expanded the Hedge Program to
accommodate Canadian Hedge Clearing
Members in 2013.22 To be eligible for
the Hedge Program, a Canadian Clearing
Member must appoint CDS Clearing and
Depository Services Inc. (‘‘CDS’’),
Canada’s national securities depository,
to act as its agent through CDS’s
arrangements with DTC and the
National Securities Clearing Corporation
(‘‘NSCC’’) to provide cross-border
service to clear and settle trades with
U.S. counterparties.23 Currently,
Canadian Clearing Members are not
eligible for the Market Loan Program.
Canadian Clearing Members are also
subject to additional requirements
intended to allow OCC to perform its
clearance and settlement services free
from tax withholding obligations with
respect to payments to such members.
Specifically, OCC has established rules
to address the application of Section
871(m) of the Internal Revenue Code of
1986, as amended (‘‘I.R.C.’’) 24 to listed
options transactions effective on January
1, 2017.25 Section 871(m) imposes a
30% withholding tax on ‘‘dividend
equivalent’’ payments that are made or
21 See
OCC Rule 2212.
Exchange Act Release No. 69534 (May 8,
2013), 78 FR 28267 (May 14, 2013) (File No. SR–
OCC–2013–03).
23 See OCC Rule 302(e), (f)(1).
24 26 U.S.C. 871(m).
25 In September 2015, the Treasury Department
adopted final regulations based on a proposal
issued in December 2013 expanding the types of
derivatives to which Section 871(m) applies to
include certain listed options transactions with an
effective date of January 1, 2017. See T.D. 9734, 80
FR 56866 (Sept. 18, 2015). The Treasury
Department adopted final regulations providing
additional guidance on section 871(m) in January
2017. See T.D. 9815, 82 FR 8144 (Jan. 24, 2017).
22 See
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deemed to be made to non-U.S. persons
with respect to certain derivatives that
reference equity of a U.S. issuer. OCC
Rule 202 provides that Clearing
Members that are non-U.S. entities for
U.S. federal tax purposes (‘‘FFI Clearing
Members’’) must establish to the OCC’s
satisfaction that the member’s conduct
of transactions or activities with or
through OCC will not result in the
imposition of taxes or withholding or
reporting obligations with respect to
amounts paid or received by OCC (other
than U.S. federal and State income taxes
imposed on OCC’s net income).26 When
taxes or obligations would be imposed
but for the qualification of a member for
a special U.S. or foreign tax status,
ongoing membership of such members
is conditioned on the member to qualify
for, maintain, and document such status
to OCC’s satisfaction.27 In addition, an
FFI Clearing Member is prohibited from
conducting transactions with or through
OCC that would result in the imposition
of taxes or withholding or reporting
obligations with respect to amounts
paid or received by OCC (other than
U.S. federal and State income taxes
imposed on OCC’s net income).28
Notwithstanding these requirements,
which OCC implemented to facilitate
the clearance and settlement of listed
options transactions, OCC has no
current tax withholding or reporting
obligations for Canadian Hedge Clearing
Members’ transactions under the Hedge
Program because substitute dividend
payments are handled bilaterally
between Hedge Clearing Members, away
from OCC.
Proposed Changes
OCC is proposing a number of
amendments to enhance the structure
and operation of the Stock Loan
Programs discussed above and provide
26 OCC
Rule 202(a).
OCC Rule 202. FFI Clearing Members
satisfy this requirement by (1) entering into a
‘‘qualified intermediary agreement’’ with the
Internal Revenue Service (‘‘IRS’’) under which the
Clearing Member assumes primary withholding
responsibility (such member being a ‘‘Qualified
Intermediary Assuming Primary Withholding
Responsibility’’) and qualifies under IRS procedures
for exemption from withholding under the Foreign
Account Tax Compliance Act (‘‘FATCA’’), 26 U.S.C.
1471–1474, such that OCC is not required to
withhold any amount with respect to any payment
or deemed payment to such FFI Clearing Member
under FATCA or Chapter 3 of subtitle A of the
I.R.C. (‘‘Chapter 3’’), 26 U.S.C. 1441–1446, for
transactions in the FFI Clearing Member’s customer
accounts; and (2) entering into an agreement with
the IRS that permits OCC to make dividend
equivalent payments or deemed payments to such
FFI Clearing Member free from U.S. withholding tax
for transactions or activity in the FFI Clearing
Member’s capacity as principal through its firm
account (such member being a ‘‘Qualified
Derivatives Dealer’’).
28 See OCC Rule 202(b)(1).
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27 See
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a framework for combining those
programs into a single Stock Loan
Program. First, OCC proposes to make
several changes to the rules governing
its Market Loan Program. Specifically,
the proposed rule change would
enhance OCC’s Market Loan Program
by:
(a) expanding the Market Loan Program to
include bilaterally negotiated stock loans
submitted by Clearing Members directly to
OCC, for which the original counterparties
shall remain paired in OCC’s system for
purposes of post-trade activity, including
modifications, recalls, and returns;
(b) allowing for and recognizing
supplementary or additional terms under an
MSLA between the counterparties to such
bilaterally negotiated transactions submitted
under the Market Loan Program, as OCC’s
Rules currently recognize under the Hedge
Loan Program;
(c) fixing cash collateral delivered and
returned versus a bilaterally negotiated
Market Loan submitted directly to OCC at
102%, as is the current practice for Market
Loans submitted through a Loan Market, and
allowing Clearing Members to select a default
rate at which mark-to-market payments
would be rounded to the nearest level for
Market Loans submitted directly to OCC, as
is the current practice for Hedge Loans;
(d) allowing for Clearing Members to
cancel pending transactions by sending
instructions directly to OCC as opposed to
through a Loan Market;
(e) establishing rules for affirmation of
Market Loan transactions submitted by
Clearing Members directly to OCC, as
opposed to through a Loan Market;
(f) allowing OCC’s clearance and
settlement system to calculate and handle
cash distributions, including substitute
dividends and rebates;
(g) allowing OCC’s clearance and
settlement system to accept and handle
contract modifications agreed to by the
parties to bilaterally negotiated contracts
submitted through the Market Loan Program,
including modifications to rebate rate,
interest rate benchmark, and loan terms;
(h) implementing additional OCC controls
over the buy-in process in the case of the
Borrowing Clearing Member’s failure to
deliver the Loaned Stock following a recall
by the Lending Clearing Member in
situations other than the suspension of the
Borrowing Clearing Member under Chapter
XI of the Rules;
(i) supporting Canadian Clearing Members
in the Market Loan Program while preventing
certain transactions that could otherwise
introduce tax withholding obligations; and
(j) providing that in lieu of being a
participant at the Depository for purposes of
delivering or receiving Eligible Stock in
connection with the initiation and
termination of Market Loans, an Appointing
Clearing Member may appoint an Appointed
Clearing Member who is a member of the
Depository to deliver or receive Eligible
Stock, in the same way as how the Rules
currently allow for Appointed Clearing
Members to deliver or receive underlying
securities arising from the exercise or
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73469
maturity of an Appointing Clearing Member’s
physically-settled equity options or stock
futures.
As discussed in more detail below,
OCC intends that with these
enhancements to the Market Loan
Program, OCC would eventually
decommission the Hedge Program, after
which the Market Loan Program would
become OCC’s single stock loan
program. In the interim, however, and
in addition to enhancements (a) through
(j) to the Market Loan Program, the
proposed rule changes would apply
amendments to both Stock Loan
Programs for the transition to OCC’s
new clearance and settlement system
by:
(k) replacing OCC’s current practice of
aggregating new stock loan positions and
stock borrow positions for the same Clearing
Member in the same Eligible Stock with
contract-level accounting, consistent with
industry-standard bookkeeping practices;
(l) aligning settlement of daily mark-tomarket of cash collateral through the account
in which the stock borrow or stock loan
position sits, rather than requiring that markto-market settlement occur in a Clearing
Member’s firm lien account or combined
Market-Makers’ account;
(m) simplifying the mark-to-market
calculation to focus on the change to the
contract value of a Clearing Member’s Stock
Loans; and
(n) allowing for re-matching of MatchedBook Positions across OCC’s Stock Loan
Programs in the event of a Clearing Member
default.
In conjunction with these changes to
the Stock Loan Programs, OCC would
also make certain other clarifying,
conforming, and organizational changes
to OCC’s By-Laws and Rules, and rulefiled policies that reference those ByLaws or Rules. In particular, OCC would
reorganize, restate, and consolidate
provisions of OCC’s By-Laws governing
the Stock Loan Programs into Chapter
XXII (Hedge Loan Program) and Chapter
XXIIA (Market Loan Program) of OCC’s
Rules, as amended by this proposed rule
change. As part of these changes, OCC
would preserve the governance
requirements concerning amendments
to the stock loan-related By-Laws
migrated to the Rules by amending
Article XI, Section 2 of the OCC ByLaws.
Plan To Consolidate OCC’s Stock Loan
Programs
OCC plans to consolidate its Stock
Loan Programs into a single, enhanced
stock loan program. OCC intends to
achieve this consolidation in three
phases. The first phase, which is
described in this proposed rule change,
would enhance the Market Loan
Program in a way that would allow that
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program to eventually become OCC’s
single, enhanced stock loan program.
The first phase will also involve certain
enhancements to both the Hedge and
Market Loan Programs in connection
with the implementation of OCC’s new
system for clearance and settlement.
After OCC implements the
enhancements and the new clearance
and settlement system becomes OCC’s
system of record, OCC will begin
authorizing and encouraging Hedge
Clearing Members to begin submitting
bilateral transactions through the
enhanced Market Loan Program. While
OCC would require Hedge Clearing
Members to provide the appropriate
documentation and certifications
required of Market Loan Clearing
Members and submit to certification
testing prior to utilizing the enhanced
program, OCC does not plan to require
business expansions for Hedge Clearing
Members migrating to the Market Loan
Program because they are already
approved for stock loan activity.29
Currently, the business expansion for
Market Loan Program participation
serves mainly to ensure that the
Clearing Member is properly subscribed
through a Loan Market, which will no
longer be necessary to participate in the
Market Loan Program.
During the second phase, which also
is covered by this proposed rule change,
OCC would encourage Clearing
Members to transition to the Market
Loan Program and would monitor the
movement of activity from the Hedge
Program to the enhanced Market Loan
Program. Based on interest expressed by
Clearing Members,30 OCC anticipates
that Clearing Members will be
motivated to migrate activity to the
Market Loan Program because of OCC’s
expanded guarantee under that program
and the operational enhancements
under this proposed rule change. Once
transition plans for each Clearing
Member are understood, OCC would
announce that on a future date, OCC
29 Currently, a Clearing Member that participates
in the Hedge Loan Program that desires to expand
its participation into the Market Loan Program is
subject to a business expansion review under OCC’s
Third-Party Risk Management Framework. See
Third-Party Risk Management Framework, available
at https://www.theocc.com/risk-management/riskmanagement-framework (providing for assessments
for Clearing Member onboarding, including with
respect to expanded relationships).
30 OCC has provided results of a survey and other
informal discussions with Clearing Members
concerning the enhancements to the OCC’s Stock
Loan Programs in confidential Exhibit 3B to SR–
OCC–2024–011. Members have expressed interest
in the enhancements such as having the rebate
amounts calculated, settled, and guaranteed by
OCC. The migration from Hedge to the Market Loan
Program is necessary for such expansion to OCC’s
services.
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will no longer accept new loans through
the Hedge Program, but would continue
to support existing Hedge Loans. The
decision to make this announcement
will be made by OCC’s Chief Executive
Officer or Chief Operating Officer based
upon factors including, but not limited
to, the number of participants that are
able to conduct business under the
enhanced Market Loan Program, the
amount of transactions flowing through
the enhanced Market Loan Program, the
proportion of loan balances between the
two Stock Loan Programs, and feedback
from members about when they expect
to be ready to migrate fully to the
enhanced Market Loan Program. OCC’s
goal is to transition all Hedge Program
participants to the enhanced Market
Loan Program within a year after
implementing the enhanced program.
Beginning on the announced date,
existing Hedge Loans will naturally
terminate through return or recall
instructions until none are left. OCC
does not expect that this period will last
more than six months from the
announced date given the average term
for stock loans.
This second phase would be reflected
in proposed Rule 2213(e)(2), which
would address the termination of the
Hedge Loan Program. Section 2(c) of
OCC By-Law Article XXI, which would
become OCC Rule 2213(e)(1) as part of
the reorganization of the Stock Loan ByLaws and Rules, already provides OCC
authority, upon two business days’
notice to Clearing Members, to
terminate the outstanding Hedge Loans
relating to one or more particular
Eligible Stock at its sole discretion for
certain enumerated reasons, including
the impending termination of that
business on the part of OCC. OCC Rule
2213(e)(2) would allow OCC to take a
phased approach to terminating the
Hedge Loan Program by first, upon
approval by the Chief Executive Officer
or Chief Operating Officer, announcing
that OCC will cease to accept the
initiation of new Hedge Loans. OCC
Rule 2213(e)(2) also would provide that
the determination to terminate the
Hedge Loan Program will be made based
upon factors including, but not limited
to, the number of participants that are
able to conduct business under the
Market Loan Program, the amount of
transactions flowing through the Market
Loan Program, the proportion of loan
balances between the two Stock Loan/
Hedge Programs and the Market Loan
Program, and feedback from members
about when they expect to be ready to
migrate fully to the Market Loan
Program. During this phasing out,
Clearing Members would be allowed to
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maintain open positions in Hedge Loans
until termination of those positions
through returns and recalls initiated by
the Clearing Members.
The third phase, which is not covered
by this proposed rule change, would be
the ultimate decommission of the Hedge
Program Rules. Once all Hedge Loans
terminate through return or recall, OCC
intends to file another proposed rule
change that would remove the Hedge
Program from OCC’s By-Laws and
Rules. Thereafter, the Market Loan
Program would then become OCC’s
single ‘‘Stock Loan Program.’’ Until
then, OCC is proposing to amend its
Rules to avoid ambiguity by using
‘‘Hedge Loan’’ instead of ‘‘Stock Loan’’
when referring to Stock Loans under the
Hedge Program unless in reference to
Stock Loans under either of the Stock
Loan Programs, consistent with the
current definition of that term in Article
I of the By-Laws.
Market Loan Program Enhancements
OCC proposes enhancements to the
Market Loan Program that would (a)
expand the Market Loan Program to
allow for submission of Market Loans
bilaterally negotiated by Clearing
Members; (b) recognize MSLAs under
the Market Loan Program; (c) fix the
value of cash collateral delivered and
returned versus the Loaned Stock at
102% of the value of the Loaned Stock,
as Market Loans are currently
collateralized, and allow for flexible
pricing, as under the current Hedge
Loan Program; (d) provide for the
cancellation of pending transactions
that have not yet been accepted by OCC;
(e) establish rules for affirmation of
Market Loan transactions submitted by
Clearing Members directly to OCC; (f)
facilitate the calculation and processing
of cash distributions, including
substitute dividends and rebate
payments, by OCC’s new clearance and
settlement system, rather than by a Loan
Market; (g) provide for modification of
Market Loan terms agreed to by Market
Loan Clearing Members; (h) implement
additional OCC controls over the buy-in
process in the case of a Borrowing
Clearing Member’s failure to deliver
after the Lending Clearing Member
initiated a recall, as well as to prepare
those controls and OCC’s other Market
Loan and Hedge Loan Rules for the
shortening of the standard settlement
cycle for securities transactions; (i)
support Canadian Clearing Members in
the Market Loan Program while
preventing certain transactions that
could introduce tax withholding
obligations; and (j) provide a framework
for allow an Appointing Clearing
Member to settle its Market Loan
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activity through an Appointed Clearing
Member in lieu of maintaining
membership at a Depository.
(a) Bilaterally Negotiated Market Loans
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OCC is proposing to expand the
Market Loan Program to include
bilaterally negotiated Market Loans
submitted directly by Clearing
Members. Under the Market Loan
Program, OCC currently accepts
electronic messages from the Loan
Market for new loans and returns. OCC
would expand the Market Loan Program
to accept submissions directly from
Clearing Members (or their third-party
service providers). Following the
affirmation of a new loan or return, OCC
would instruct DTC to settle the
transaction using the account of the
lender, the borrower, or the Appointed
Clearing Members, or using OCC’s DTC
account. While there would be two
separate avenues for submitting loans
(i.e., through a Loan Market or direct
submission of bilaterally negotiated
Loans to OCC), the scope of OCC’s
guaranty and post-trade processing for
all transactions would be uniform. By
allowing for automated submission of
transactions to OCC prior to DTC
settlement and by controlling the
settlement process, the enhanced
program would help reduce the burden
and risks associated with the balancing
and reconciliation under the current
Hedge Program.31 As under the current
Hedge Program, counterparties to
bilaterally negotiated contracts
submitted through the Market Loan
Program would remain paired in OCC’s
system for purposes of recalls, returns,
and contract modifications.
Because certain proposed Rules
would apply differently to Loans
matched anonymously through a Loan
Market and those that would be
initiated bilaterally, whether through a
Loan Market or with OCC directly, OCC
would add definitions of ‘‘Anonymous
Market Loan’’ and ‘‘Disclosed Market
Loan’’ to OCC Rule 101. Anonymous
Market Loans would be defined as those
initiated through a Loan Market and for
which the identities of the Lending
Clearing Member and Borrowing
Clearing Member are not disclosed to
each other. Disclosed Market Loans
would be defined to include either those
Market Loans (i) initiated through a
31 Surveys of stock loan industry participants
indicate most firms have a significant spend for
stock loan post-trade and reconciliation processing.
Based on this industry feedback, OCC believes that
a service that can provide operational efficiencies
and further reduce manual processing and
operational risk would be well received. OCC’s
review of this feedback is provided in confidential
Exhibit 3B to SR–OCC–2024–011.
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Loan Market and for which the
identities of the Lending Clearing
Member and Borrowing Clearing
Member are disclosed to each other, or
(ii) initiated directly between the
Lending Clearing Member and
Borrowing Clearing Member away from
a Loan Market such that the identities
of the Lending Clearing Member and
Borrowing Clearing Member are
disclosed to each other. Paragraph (h) to
proposed OCC Rule 2202A (Initiation of
Market Loans) would provide that a
Market Loan may be either an
Anonymous Market Loan or a Disclosed
Market Loan. Paragraph (a) to proposed
OCC Rule 2206A (Maintaining Stock
Loan and Stock Borrow Positions in
Accounts) would provide that the
identities of the Lending Clearing
Member and Borrowing Clearing
Member would be elements identified
for stock loan positions and stock
borrow positions resulting from
Disclosed Market Loans.
To expand the Market Loan Program
to bilateral transactions, OCC would
amend OCC Rule 2202A. Specifically,
the proposed rule change would amend
current OCC Rule 2202A(a)(i), which
would be renumbered to OCC Rule
2202A(a)(1) as part of the restatement of
the Stock Loan Program rules, to add
that, in addition to initiation through a
Loan Market, a Market Loan may be
initiated when a Lending Clearing
Member and Borrowing Clearing
Member send details of a stock loan
between the two Clearing Members
directly to OCC. To ensure that the
original counterparties to such a
Disclosed Market Loan remain paired in
OCC system, notwithstanding OCC’s
novation, OCC would also amend
current Article XXIA, Section 5 of
OCC’s By-Laws (Maintaining Stock Loan
and Stock Borrow Positions in
Accounts), which would become OCC
Rule 2206A, by adding a new sentence
to the beginning of that provision that
introduces the concept of ‘‘matched
pairs,’’ consistent with the OCC ByLaw’s definition of Hedge Loans.32
In addition to providing for the
initiation of bilateral Market Loans, OCC
would also amend its Rules to
accommodate direct submission of other
types of post-trade transactions for
which the Rules currently rely on
actions taken by a Loan Market.
Specifically, OCC would amend the first
paragraph of current OCC Rule 2209A(a)
(Termination of Market Loans), which
would be numbered as OCC Rule
2216A(a) as part of the broader
reorganization of the Market Loan
Program Rules, and new OCC Rule
32 See
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73471
2214A (Modifications) by providing that
termination or modification of a Market
Loan, respectively, may be initiated
either through a Loan Market or OCC,
depending on the way in which the
Loan was initiated. Such instructions
would be made through the Loan
Market for Anonymous Market Loans;
through OCC for Disclosed Market
Loans initiated through OCC directly;
and through either the Loan Market or
OCC for Disclosed Market Loans
initiated through a Loan Market. OCC
would similarly amend the definitions
of ‘‘Recall’’ and ‘‘Return,’’ as migrated
from the By-Laws to OCC Rule 101, to
reflect the separate channels for
initiating such a transaction. OCC
would also make other conforming
changes to the text of the Rules to reflect
submission of bilaterally negotiated
loans directly to OCC:
• Throughout the rules governing the
Market Loan Program, OCC would also
remove references to ‘‘matching’’ or
‘‘matched’’ transactions (i.e., matched
through a Loan Market) to reflect that
Market Loan transactions could also be
initiated bilaterally, either through a
Loan Market or directly with OCC.33
• The definition of ‘‘Market Loan
Program,’’ as migrated from Section 1 of
Article I of the OCC By-Laws to OCC
Rule 101, would be amended to
recognize that Market Loans may be
initiated either through a Loan Market
or through direct submission of
bilaterally negotiated Loans to OCC.
(b) Recognizing MSLAs
Parties to a bilaterally negotiated
stock loan transaction typically execute
an MSLA. Under current OCC Rule
2202(b), Hedge Clearing Members are
permitted to establish and maintain
additional terms under the MSLA that
are not extinguished through OCC’s
novation provided that the additional
terms are not inconsistent with anything
in OCC’s By-Laws or Rules. Examples of
such additional or supplementary terms
include a term structure or fees for buyin transactions. The proposed rule
change would add the same provision to
the Market Loan Program in proposed
OCC Rule 2202A(b)(2)(E). As described
below, the recognition of MSLAs within
the Market Loan Program would also
33 See OCC By-Law Art. I, § 1.L.(5) (defining
‘‘Loan Market’’ as ‘‘an electronic platform . . . that
supports securities lending and borrowing
transactions by lenders and borrowers based on
loan terms that each party is willing to accept’’);
OCC Rules 2202A(a)(i) (‘‘If the matched transaction
passes [OCC]’s validation process . . .’’);
2202A(a)(ii) (‘‘previously reported matched
transaction’’ and ‘‘related matched transaction’’);
2202A(b) (‘‘the matched stock loan transaction
submitted by the Loan Market’’); 2209A(a)(1)
(‘‘matched return/recall transaction’’).
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facilitate the re-matching of Matched
Book Positions in suspension because
OCC would give priority to re-matching
counterparties with existing MSLAs,
both when re-matching within and
across the Stock Loan Programs.
(c) Collateral and Mark-to-Market
Pricing
To accommodate the submission of
bilaterally negotiated Market Loans
directly to OCC, OCC proposes to
establish rules that would fix the
collateral for Market Loans at 102%—
the same rate at which Market Loans
submitted through a Loan Market are
collateralized today. Specifically, OCC
would amend current OCC Rule 2204A
(Mark-to-Market Payments), which
would become proposed OCC Rule
2209A per the reorganization discussed
below, to provide in proposed
paragraph (b) (Market-to-Market
Payment Amount) that the
collateralization rate for all Market
Loans would be 102%, regardless of
whether initiated through a Loan Market
or submitted directly to OCC.
Accordingly, OCC would delete the
current text in Rule 2204A and the
definition of the term ‘‘Collateral’’ in
Article XXIA of the OCC By-Laws, as
migrated to OCC Rule 101, that provides
that the collateralization rate shall be set
by the relevant Loan Market. OCC
believes that fixing collateral at 102%
would help to preserve the
compatibility of OCC’s cleared offering
with standard practices for over-thecounter (‘‘OTC’’), uncleared stock loans
while minimizing complexity in OCC’s
risk management processes.
OCC previously considered
standardizing collateralization at 100%
because in a cleared transaction, OCC’s
guaranty replaces the additional
collateral in protecting Lenders from
market risk in the event of a
counterparty default. In a survey OCC
submitted to all Clearing Members who
participate in OCC’s Stock Loan
Programs, the vast majority of
respondents objected to a proposal to
standardize collateralization at 100%.34
The most common reasons cited for this
objection were (i) desire to align the
collateral amount and mark-to-market
cashflows for members who commonly
have uncleared positions at the OTCstandard 102% and a matching position
within clearing; and (ii) loss of the
additional 2% in collateral would
materially reduce what the income
lenders earn by investing the cash
collateral, which is one of the reasons
lenders choose to lend their shares. In
34 OCC has included a copy of the survey results
in confidential Exhibit 3B to SR–OCC–2024–011.
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response to this feedback, OCC now
proposes to fix collateral at 102%,
which would align OCC’s offering with
standard OTC practices and with OCC’s
current practice within the Market Loan
Program. Fixing the collateral at a single
rate—as under the current Market Loan
Program—would also minimize
complexity in OCC’s risk management
of stock loan positions by establishing a
single rate across all Market Loans.
OCC also proposes to establish rules
that would allow Clearing Members
submitting Market Loans directly to
OCC to select the default rate at which
mark-to-market payments would be
rounded up to the nearest level, which
is the current practice for Hedge Loans.
Specifically, OCC would amend OCC
Rule 2201A (Instructions to the
Corporation), which would become
proposed OCC Rule 2207A, to reflect
that the default rate is one of the
standing instructions that Market Loan
Clearing Members must submit with
respect to Market Loans submitted
directly to OCC. Rounding rates for
Market Loans submitted through a Loan
Market would not change. If the default
rate differs between a Borrowing
Clearing Member and a Lending
Clearing Member, the Lending Clearing
Member’s default rate would govern the
Market Loan. When surveyed, Clearing
Members cited the same reasons for
supporting flexibility in pricing as they
did in objecting to fixing collateral at
100%.35 OCC currently offers this
flexibility in the Hedge Program today.
OCC believes that offering the same
flexibility with respect to bilaterally
negotiated Market Loans submitted to
OCC directly will aid Clearing Members
in aligning cash flows between cleared
and OTC stock loan transactions.
(d) Cancellation of Pending
Transactions
To facilitate the acceptance of
bilaterally negotiated contracts in the
Market Loan Program, OCC is proposing
to modify its Rules that concern the
cancellation of pending transactions to
accommodate the submission of
cancellation instructions by Clearing
Members, in addition to a Loan Market.
Under current OCC Rule 2202A(a)(ii), a
Loan Market may instruct OCC to
disregard a previously reported matched
transaction that is pending settlement at
DTC, after which OCC instructs DTC to
cancel the previously issued delivery
order. Upon confirmation that DTC has
processed such cancellation
instructions, the related matched
transaction is deemed null and void and
35 OCC has included a copy of the survey results
in confidential Exhibit 3B to SR–OCC–2024–011.
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given no effect. OCC has no obligation
to any Market Loan Clearing Member in
acting pursuant to a Loan Market’s
instruction to disregard a previously
reported transaction. The proposed rule
change would amend OCC Rule
2202A(a)(ii), which would be
renumbered as proposed OCC Rule
2202A(a)(2), to recognize the ability of
a Market Loan Clearing Member to
submit an instruction to cancel a
pending transaction directly to OCC for
bilaterally negotiated transactions
submitted under the Market Loan
Program.
The proposed changes would also add
a new OCC Rule 2215A (Cancelation of
Pending Instructions) to address the
cancellation of pending post-trade
instructions other than cancellation of
loan initiation under Rule 2202A. For
example, under OCC’s current OCC Rule
2202A, Hedge Clearing Members
currently have the capability to cancel
return instructions or recall instructions
pending with DTC. Similarly, Market
Loan Clearing Members currently may
cancel pending transactions by issuing a
cancellation instruction to the Loan
Market, which may then instruct OCC to
disregard a previously reported
transaction under current OCC Rule
2202A(a)(ii). This new OCC Rule 2215A
would preserve that ability under the
enhanced program by allowing members
that submit bilaterally negotiated
Market Loans to issue cancellation
instructions directly to OCC, as they do
now to DTC and the Loan Market.
(e) Transaction Affirmation
Currently, Market Loan Program
transactions are presumed matched
when sent to OCC by a Loan Market.
OCC would establish a transaction
affirmation process for loans submitted
directly to OCC, rather than through a
Loan Market:
• New Loans: Counterparties to a new
loan would be required to affirm the
transaction details prior to OCC
submitting the new loan to DTC for
settlement. New loans that are not
affirmed by the time that OCC stops
accepting instructions for the day would
be rejected. This affirmation process
would be reflected in proposed OCC
Rule 2202A(a)(1), which would provide
that a Market Loan is initiated when (i)
the Loan Market sends details of a stock
loan transaction to OCC or (ii) a Lending
Clearing Member and Borrowing
Clearing Member send details to OCC of
a stock loan transaction between them
and such details, as applicable, are
either matched by OCC or affirmed by
the Clearing Members.
• Returns: Provided that the
Borrowing Clearing Member initiated a
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return within OCC’s timeframe for
submitting such instruction on a stock
loan business day, the Lending Clearing
Member would have the opportunity to
affirm or reject the initiation of a return
by a cut-off time on the same business
day.36 Any returns pending after that
cut-off time would be deemed affirmed
and submitted to DTC for processing.
This auto-affirmation would be reflected
in proposed OCC Rule 2216A(a)(2).
Based on conversations with Clearing
Members, OCC believes this affirmation
process balances Lending Clearing
Members’ desire to have the opportunity
to affirm or reject return instructions,
while also addressing Borrowing
Clearing Members’ concerns that delay
in affirmation or allowing the
transaction to pend indefinitely could
have regulatory consequences for the
Borrowing Clearing Member.37
• Recalls: Recalls would not need to
be affirmed. Per standard MSLA terms,
a Borrowing Clearing Member will be
deemed to have affirmed the initiation
of a recall provided that the Lending
Clearing Member requested the return of
the specific quantity of Loaned Stock no
earlier than the standard settlement date
that would apply to a purchase or sale
of the Loaned Stock in the principal
market of such Loaned Stock.38 This
understanding would be added to
proposed OCC Rule 2216A(a)(3).
• Contract Modifications: Contract
modifications to the rebate rate, interest
rate benchmark, or loan term submitted
by either a Borrowing Clearing Member
or Lending Clearing Member, the
proposed Rule amendments for which
are discussed below, would not become
effective until affirmed by both parties.
This affirmation requirement would be
added to new OCC Rule 2214A(a).
36 OCC anticipates that upon implementation of
these proposed changes, the cut-off for rejections
will be 30 minutes prior to DTC’s standard
settlement submission deadline.
37 OCC’s settlement procedures for Stock Loan
termination are intended to facilitate its Clearing
Member’s compliance with requirements under
applicable rules of the Commission and selfregulatory organizations, including the
requirements imposed by Regulation SHO. See
Exchange Act Release No. 59294 (Jan. 23, 2009), 74
FR 5958 (Feb. 3, 2009) (SR–OCC–2008–20).
However, the ultimate responsibility for compliance
with Regulation SHO rests with the Clearing
Member, and OCC has no liability for any Clearing
Member’s failure to comply with its obligations.
See, e.g., OCC Rules 2209A(g) (‘‘[OCC] shall not be
held liability for any Clearing Member’s failure to
comply with its responsibilities and obligations
under the federal and state securities laws,
including, but not limited to, Regulation SHO, or
any applicable rules of the relevant Loan Market or
any exchange or self-regulatory organization.’’).
38 The standard settlement cycle currently
corresponds with the one stock loan business day
after submission of the recall. See OCC Rule
2209A(a)(3).
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• Buy-Ins & Sell-Outs: For Market
Loans submitted directly through the
Corporation, the Borrowing Clearing
Member and Lending Clearing will be
given the opportunity to affirm or reject
a buy-in or sell-out, respectively, by a
cut-off time specified by OCC on the
stock loan business day the buy-in or
sell-out transaction is received by OCC.
If the Clearing Member does not affirm
or reject the buy-in or sell-out by that
time, OCC would deem the buy-in or
sell-out to be complete if OCC
determines that the Buy-In or Sell-Out
Costs for the Loaned Stock initiated is
more than the lowest market price and
less than the highest market price for
the Loaned Stock on the stock loan
business day the buy-in or sell-out is
submitted to OCC.39 Otherwise, the buyin or sell-out would be rejected. As with
buy-ins and sell-outs under the Hedge
Program today,40 any objection that the
contraparty has with respect to the
timeliness of the buy-in or sell-out or
the reasonableness of the Buy-In or SellOut Costs are matters that must be
resolved between the Lending Clearing
Member and the Borrowing Clearing
Member, away from OCC. These
understandings and processes would be
reflected in paragraphs (b)(2)(B) and
(c)(2) of proposed OCC Rule 2216A.
To support Clearing Members in
making the affirmations required under
these rules, OCC’s new stock loan
system would support automatic
affirmation based on system settings
that could be selected by the Clearing
Member.41 Through OCC’s new
clearance and settlement system,
Clearing Members will be able to create
and manage standing instructions for
affirmation of their Market Loans based
on variables including the type of
transaction, the counterparty, the
amount, or the rebate rate. For example,
a member would be able to set
instructions to: (i) affirm every
transaction; (ii) limit affirmation to a
certain set of counterparties; (iii)
establish more granular rules, such as
affirming any transaction with a rebate
rate less than 250 basis points; or (iv)
combine one or more of the above
39 OCC would evaluate the price per share paid
or received against market prices on that stock loan
business day, consistent with the Clearing
Member’s obligation to immediately give OCC
written notice of the buy-in or sell-out. In making
its determination, OCC would account for
transaction costs, fees or interest paid or incurred
in connection with the buy-in and sell-out that may
be included in the Buy-In and Sell-Out Costs
provided by the Clearing Member executing the
buy-in or sell-out.
40 See OCC Rule 2209(b), (f).
41 Buy-ins and sell-outs under OCC Rule 2216A
would require manual affirmation, subject to
automatic affirmation following a cut-off time
discussed above.
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instructions. When new loans are
received, the system would check
whether there is a standing instruction
that applies to the new loan. If no
instruction is found, then the new loan
would be pended for affirmation,
subject to the above referenced Rules. If
a standing instruction applies, then OCC
would follow that instruction as
satisfaction of the affirmation
requirement. Authority to permit such
standing instructions currently exists
under current OCC Rule 2201A
(Instructions to the Corporation), the
applicable provision of which would be
renumbered OCC Rule 2207A(a)(2).
(f) Cash Distributions
The proposed changes would allow
OCC to calculate and effect cash
entitlements through its new clearance
and settlement system, including
dividends, distributions and rebates.
OCC proposes to revise paragraphs
(a)(ii) and (a)(iii) of current OCC Rule
2206A (Dividends and Distributions;
Rebates), renumbered as proposed OCC
Rule 2211A(b) and (c), to reflect that
under OCC’s new clearance and
settlement system, OCC shall assume
responsibility for calculating the margin
add-on collected with respect to
dividend equivalent payments. While
OCC shall continue to effect dividend
equivalent payments primarily through
the facilities of DTC using its dividend
tracking service, OCC would effect the
payments through OCC’s new clearance
and settlement system if OCC
determines that the dividend or
distribution for a Market Loan is not
tracked through DTC’s dividend
tracking service or if OCC has
determined to remove a Market Loan
from the dividend tracking service, as
under OCC’s current Rules. In addition,
OCC would continue to add non-cash
dividends and distributions to the
Loaned Stock if OCC determines that
such dividends and distributions are
legally transferable and the transfer can
be effected through DTC. The
determination to fix a cash value for
non-cash dividends and distributions
not added to the Loaned Stock would be
OCC’s under the proposed changes,
rather than the Loan Market. Because
OCC will no longer be reliant on the
Loan Market for OCC’s margin add-on
process and settlement of dividend
equivalent payments, OCC proposes to
eliminate the limitations under the
current Rule, including the current
provision that OCC’s guaranty is limited
by the amount of margin OCC collected
in reliance on the Loan Market’s
calculation. This change would not have
any effect on OCC’s margin
methodology. OCC would continue to
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collect a margin add-on for such cash
distributions.
The proposed changes would also add
paragraph (d) to proposed OCC Rule
2211A to address the rights of a Lending
Clearing Member with respect to
optional dividends (i.e., a dividend the
shareholder can elect to receive in cash,
stock, or some combination of the two).
Proposed OCC Rule 2211A(d) would
provide that a Lending Clearing Member
will have the right to elect an option
only if it recalls the Loaned Stock in
time to make such election. If the
Lending Clearing Member does not
recall the Loaned Stock, the Lending
Clearing Member would be entitled to
receive the default option set by the
issuer of the Loaned Stock. OCC
understands this proposed rule would
match the Loan Market’s current process
for optional dividends. Because optional
dividends on Market Loans are
currently governed by the Loan Market’s
processes, OCC’s rules do not currently
address the rights of a Lending Clearing
Member with respect to optional
dividends.
OCC would also amend its rules to
facilitate calculation, collection, and
payment of rebates under the new
clearance and settlement system. OCC
Rule 2206A(b) currently provides that
OCC generally will collect and pay
rebate payments on a monthly basis as
instructed by the Loan Market. As with
dividend equivalent payments, the Loan
Market is currently responsible for
calculation of the rebate payments. OCC
would amend OCC Rule 2206A(b),
which would be renumbered OCC Rule
2211A(e), to reflect that OCC shall
assume responsibility for calculating
rebate payments under its new
clearance and settlement system. OCC
also proposes to amend the Rule so that
OCC will be prepared if and when the
stock loan industry transitions to daily,
rather than monthly, collection of rebate
payments. Because OCC anticipates that
upon implementation of the new
system, OCC will continue to calculate
and collect rebate on a monthly basis,
proposed OCC Rule 2211A(e) would
provide that the calculation and
collection of rebate payments could also
be made on such other basis, not to
exceed monthly.
(g) Market Loan Modifications
OCC is proposing to add a new rule
to support contract modifications to the
Market Loan Program made possible by
the change to contract-level
recordkeeping, discussed below.
Modifications agreed to by the Market
Loan Clearing Members over the life of
a Market Loan would be accepted by
OCC and handled by OCC’s new
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clearance and settlement system.
Specifically, modifications would be
permitted regarding the (a) rebate rate;
(b) interest rate benchmark; and (c) loan
term. Any modifications would be
maintained in OCC’s books and records
at the contract level. OCC’s new
clearance and settlement system would
allow, but not require, submission of
these terms.42 The channel through
which modification requests would be
processed would be determined by the
manner in which the loan was initiated.
Clearing Members would be required to
submit post-trade transactions for
Anonymous Market Loans through the
Loan Market on which the transaction
was initiated, consistent with current
practice. Clearing Members may submit
post-trade transactions for Disclosed
Market Loans to OCC directly or, if the
Disclosed Market Loan was submitted
through a Loan Market, Clearing
Members would have the option of
submitting the post-trade transaction
through the Loan Market.
The proposed change would add a
new rule, which would be numbered
OCC Rule 2214A as part of the broader
proposed reorganization of Chapter
XXIIA. In addition to specifying the
terms subject to modification, proposed
OCC Rule 2214A would provide that
OCC shall update the relevant terms in
its books and records if, as applicable,
(1) the Loan Market notifies OCC that
the parties agreed to the modification,
or, (2) with respect to Market Loans
initiated directly through OCC, the
parties provided OCC with matching or
affirmed instructions, as discussed
above. OCC would provide notice of the
modified terms in the daily reports that
OCC is required to make available to
Market Loan Clearing Members under
proposed OCC Rule 2210A.
(h) Buy-In Controls and Settlement
Cycle
The proposed changes would also
provide OCC with additional controls
over the buy-in process for the recall of
a Market Loan initiated by a Lending
Clearing Member if the Borrowing
Clearing Member fails to return the
Loaned Stock in situations other than
suspension of the Borrowing Clearing
Member.43 Under current OCC Rule
2209A, a Lending Clearing Member is
entitled to initiate a buy-in if a recall
transaction fails to settle by the
42 See infra item (k) (Contract-Level
Recordkeeping).
43 As a practical matter, if the Borrowing Clearing
Member initiates a return, it would have the shares
in its possession to return. Accordingly, the
proposed controls are limited to buy-ins following
failure to deliver initiated by a recall by the Lending
Clearing Member.
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Settlement Time on the first stock loan
business day after submitting the
recall.44 Under OCC’s current rules, the
Borrowing Clearing Member may return
the Loaned Stock up until the time that
the Lending Clearing Member that
initiated the return or recall provides
written notice to the Loan Market that
it has executed the buy-in or sell-out.
This process can lead to situations in
which the Borrowing Clearing Member
may return the Loaned Stock during the
period between when buy-in becomes
permissible, but before the Lending
Clearing Member executes the
transaction and provides written notice.
OCC proposes to provide for
enhanced controls over the buy-in
process by amending current OCC Rule
2209A(b), which would be renumbered
OCC Rule 2216A(b) as part of the
reorganization of Chapter XXIIA of
OCC’s Rules. Proposed OCC Rule
2216A(b) would be amended to provide
that upon timely notice from the
Lending Clearing Member that it intends
to execute a buy-in after a Borrowing
Clearing Member fails to return the Loan
Stock following a recall transaction,
OCC would prevent the Borrowing
Clearing Member from returning the
Loaned Stock while the Lending
Clearing Member executes the buy-in.
Until such time as the Lending Clearing
Member provides such notice, OCC
would recognize the Borrowing Clearing
Member’s return of the Loaned Stock.
The stock loan and stock borrow
positions would remain open until such
time as the Lending Clearing Member
provides notice that the buy-in is
complete.
(i) Supporting Canadian Clearing
Members
As described above, Canadian
Clearing Members are currently limited
to participation in OCC’s Hedge
Program. The proposed changes would
support Canadian Clearing Members in
the Market Loan Program while
preventing certain transactions that
could give rise to tax withholding
obligations.
First, OCC would revise certain of
OCC’s current By-Laws and Rules to
recognize Canadian Clearing Members
as potential participants in the Market
Loan Program and address certain
unique operational capabilities that will
be required to support that
participation:
• OCC would revise paragraph (f) of
OCC Rule 302 (Operational Capability)
to include Canadian Clearing Members
as among those members that qualify for
participation in the Market Loan
44 See
E:\FR\FM\10SEN1.SGM
OCC Rule 2209A(a)(3).
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Program, including by providing for
such Canadian Clearing Members to
settle transactions through a CDS subaccount at the Depository, as they do
under the Hedge Program today.
• OCC would further revise and
restate paragraph (f) to consolidate the
subparagraphs specific to the
operational requirements for
participation in the Hedge Loan
Program and the Market Loan Program.
The current division can be attributed to
the evolution of those programs, which
led OCC to make approval for
participation in the Hedge Loan
Program—OCC’s initial Stock Loan
Program—a condition for participation
in the Market Loan Program. The
proposed changes would consolidate
the provisions so that the present
division does not serve as an
impediment to the planned
decommission of the Hedge Loan
Program. Requirements specific to a
particular program, or a particular
means of initiating a Stock Loan through
one of the Stock Loan Programs, would
be amended to delineate the scope of
applicability.
• OCC would revise OCC Rule 306A
(Event-Based Reporting) to reflect that a
Canadian Clearing Member’s obligation
to notify OCC if CDS has or likely will
cease to act for that Canadian Clearing
Member extends to such members that
participate in both Stock Loan
Programs.
• OCC would replicate OCC Rule
2201(c), which concerns a Canadian
Clearing Member’s appointment of CDS
for purposes of settling Hedge Loan
delivery-versus-payment transactions,
as proposed OCC Rule 2207A(c). As
such, the same requirements would
apply to Canadian Clearing Members
that participate in the Market Loan
Program.
In making its determination to extend
the Market Loan Program to Canadian
Clearing Members, OCC has also
considered OCC’s ability to offer that
program’s expanded guaranty to
Canadian Clearing Members without
incurring tax or withholding obligations
on the associated payment obligations.
Under the expanded Market Loan
Program, OCC would clear and settle the
types of cash distributions, such as
substitute dividend and rebate
payments, that OCC does not guarantee
under the Hedge Program and must be
resolved bilaterally by Hedge Clearing
Members, away from OCC. OCC believes
its current Rules already provide the
framework to allow Canadian Clearing
Members to transact under the Market
Loan Program without imposing tax
withholding obligations on payments
made or received by OCC. As discussed
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16:45 Sep 09, 2024
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above, OCC currently imposes
obligations on Canadian Clearing
Members intended to allow OCC to clear
listed options transactions free from tax
withholding obligations on dividend
equivalent payments or deemed
payments. Current OCC Rule 202
generally would also allow OCC to make
substitute dividend payments to
Canadian Clearing Members as Lending
Clearing Members under the enhanced
Market Loan Program without imposing
tax or withholding obligations. While
OCC understands that, subject to the
conditions in OCC Rule 202, OCC’s
payments of substitute dividends to
Canadian Clearing Members would not
be subject to withholding, OCC would
report substitute dividend payments to
the IRS using information provided by
the Canadian Clearing Members, as OCC
currently does for dividend equivalent
payments or deemed payments to
Canadian Clearing Members in
connection with listed options
transactions. Pursuant to current OCC
Rule 202(b)(5), the Canadian Clearing
Member is required to indemnify OCC
for any loss, liability or expense
(including taxes and penalties) it may
sustain as a result of the member’s
failure to comply with requirements of
OCC Rule 202(b).
Current OCC Rule 202(b) also
provides OCC with authority to prohibit
or limit specific transactions with
respect to non-U.S. members that may
give rise to tax or withholding
obligations. Pursuant to that authority,
OCC expects to impose certain
limitations on the Market Loan activity
of Canadian Clearing Members to
address specific situations in which tax
withholding obligations might
otherwise arise, including limitations on
transactions involving (i) Canadian
underlying securities, (ii) Positive
Rebate, and (iii) Negative Rebate.
(i) Canadian Securities
Pursuant to OCC Rule 202(b), OCC
would preclude Canadian Clearing
Members from executing Market Loan
transactions as a Borrowing Clearing
Member, whether on behalf of a
customer or for its own account, for
which the Loaned Stock is issued by a
Canadian issuer because of tax
withholding obligations under Canadian
law for substitute dividend payments
that would be owed by the Canadian
Clearing Member in its capacity as the
lender. OCC understands that under
Canadian law, the loan of a security
issued by a Canadian company would
be treated as a loan of the underlying
shares for Canadian tax purposes. The
substitute dividend paid by the
Canadian Clearing Member as the
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73475
Borrowing Clearing Member to OCC, in
its capacity as the lender, would be a
payment made by the Canadian Clearing
Member, as a corporation, to OCC of a
dividend payable on the underlying
securities under subparagraph
260(8)(a)(ii) of the Income Tax Act
(Canada), and the payment would be
subject to Canadian withholding tax
under subsection 212(2) of that act.
Accordingly, a Borrowing Clearing
Member would be precluded from
initiating a Market Loan in its capacity
as a Borrowing Clearing Member
because the Canadian Clearing Member
could not fulfil its obligation under
OCC’s Rules to provide a substitute
dividend payment free from tax and
withholding obligations. OCC
understands that no similar tax
withholding obligation would exist for
substitute dividend payments with
respect to a Canadian underlying
security made by OCC, in its capacity as
the borrower, to a Canadian Clearing
Member that was a Lending Clearing
Member.45
(ii) Positive Rebate
OCC believes that OCC Rule 202 also
allows OCC to clear and settle Positive
Rebate payments to Canadian Clearing
Members in connection with Market
Loans without introducing tax
withholding obligations. While neither
the I.R.C. or IRS regulations specifically
provide for the treatment of rebate
payments, OCC believes that Positive
Rebate would be treated as interest for
U.S. federal tax purposes because
Positive Rebate compensates the
Borrowing Clearing Member for the use
of the cash collateral by the Lending
Clearing Member,46 and would therefore
constitute U.S.-source ‘‘fixed or
determinable annual or periodic
income,’’ or ‘‘FDAPI,’’ under section
1442 of the I.R.C. While U.S.-source
FDAPI generally is subject to a 30% U.S.
withholding tax when paid to a foreign
45 OCC understands that dividends on Eligible
Stock of issuers that are not Canadian residents are
exempt from taxation on dividends under
subsection 212(2.1) of the Income Tax Act (Canada)
when paid as part of a fully collateralized stock
lending arrangement pursuant to 2021 amendments
thereto.
46 The U.S. Supreme Court has characterized
interest as ‘‘compensation for the use or forbearance
of money.’’ See Deputy v. du Pont, 308 U.S. 488,
498 (1940). Positive Rebate is a payment from the
Lending Clearing Member to the Borrowing
Clearing Member equal to the amount of cash
collateral posted by the Borrowing Clearing Member
multiplied by a positive rebate rate. The Lending
Clearing Member has the right to use the cash
collateral during the term of the stock loan.
Accordingly, Positive Rebate represents a payment
by the Lending Clearing Member to the Borrowing
Clearing Member for the right to use the cash
collateral and therefore is properly characterized as
interest.
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corporation, exemptions from
withholding apply to (i) payments to a
Qualified Intermediary in its capacity as
an intermediary that has accepted
primary withholding responsibility, and
(ii) interest paid to a Canadian Clearing
Member that qualifies for an exemption
from withholding on interest under
Article XI of the Convention Between
the United States of America and
Canada with Respect to Taxes on
Income, October 16, 1980, as amended
by subsequent Protocols (the ‘‘Canada
Treaty’’).
A Qualified Intermediary that has
accepted primary withholding
responsibility is exempt from U.S.
federal withholding on payments from a
withholding agent, including U.S.source interest, received in its capacity
as an intermediary.47 Accordingly, OCC
understands that rebate payments
(whether Positive Rebate or Negative
Rebate) to a Canadian Clearing Member
in its capacity as a Qualified
Intermediary, may be made by OCC free
from withholding, consistent with
treatment of dividend equivalent
payments in connection with listed
options transactions. As discussed
above,48 Canadian Clearing Members
are required to be Qualified
Intermediaries as a condition of
membership under OCC Rule 202. As
with substitute dividends, OCC would
add payment of rebates for transactions
in a Canadian Clearing Member’s
capacity as a Qualified Intermediary to
the current reporting OCC submits to
the IRS for dividend equivalent
payments on listed options, based on
information to be received from the
Canadian Clearing Member pursuant to
current OCC Rule 202(b)(3).
With respect to Positive Rebate
payments on Market Loans initiated by
a Canadian Clearing Member in its
capacity as principal, OCC would
require Canadian Clearing Members to
demonstrate, pursuant to OCC Rule 202,
that such payments are subject to
exemption from U.S. withholding
obligations under the Canada Treaty.
Article XI(1) of the Canada Treaty
reduces the rate of withholding from
30% to zero for U.S.-source interest
beneficially owned by a resident of
Canada entitled to treaty benefits,
provided that income is not attributable
47 See Treas. Reg. 1.1441–1(e)(5)(iv) (‘‘If a
withholding agent makes a payment of an amount
subject to withholding under chapter 3, a reportable
payment (as defined in section 3406(b)), or a
withholdable payment to a qualified intermediary
that represents to the withholding agent that it has
assumed primary withholding responsibility for the
payment, the withholding agent is not required to
withhold on the payment.’’).
48 See supra note 27.
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16:45 Sep 09, 2024
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to a permanent establishment, within
the meaning of the Canada Treaty, or
effectively connected with a trade or
business conducted in the United
States.49 Under current OCC Rule
202(b)(2), an FFI Clearing Member must
certify annually to OCC that the member
satisfies the requirements of OCC Rule
202 by submitting appropriate tax
documentation. A Canadian Clearing
Member participating in the Market
Loan Program may evidence its
entitlement to the benefits of the Canada
Treaty with respect to interest by
providing OCC with a correct and
complete IRS Form W–8 BEN–E. Under
OCC’s current Rules, a FFI Clearing
Member must promptly inform OCC in
writing if it undergoes a change in
circumstances that would affect its
compliance with Rule 202(b) or
otherwise knows or has reason to know
that it is not, or will not be, in
compliance with OCC Rule 202(b), in
each case, within two days of
knowledge thereof.50
(iii) Negative Rebate
Although exemptions for withholding
requirements would apply to payment
of Negative Rebate to a Canadian
Clearing Member acting as a Qualified
Intermediary with respect to customer
transactions, OCC understands that
there is a risk that no exemption from
U.S. tax withholding would apply to the
payment of Negative Rebate to a
Canadian Clearing Member outside its
capacity as a Qualified Intermediary.
Therefore, pursuant to OCC Rule 202(b),
OCC would limit Canadian Clearing
Members from initiating Market Loans
with a Negative Rebate as a Lending
Clearing Member other than in its
capacity as a Qualified Intermediary. In
addition, OCC would limit Canadian
Clearing Members’ ability to modify the
rebate on a Market Loan to a Negative
Rebate as a Lending Clearing Member
other than in its capacity as a Qualified
Intermediary. OCC’s new clearance and
settlement system will prevent a
Canadian Clearing Member from
initiating or modifying a Market Loan to
a Negative Rebate in its capacity as a
Lending Clearing Member for its firm
account.
(j) Provide for Appointed and
Appointing Clearing Members
Currently, OCC Rule 302 requires that
all participants in the Market Loan
Program must be members of the
Depository, DTC. As discussed above,
OCC would also extend the Market Loan
Program to Canadian Clearing Members
49 See
26 U.S.C. 894; Canada Treaty, Art. XI(1).
50 See OCC Rule 202(b)(4).
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by allowing for such members to settle
Market Loan transactions through a CDS
sub-account maintained at DTC.
However, OCC recently filed and the
Commission approved a proposed rule
change to allow OCC to expand its
membership to other types of
participants who may or may not be
members of the Depository, including
bank members and members of
jurisdictions other than the U.S. and
Canada.51
In order to build a framework for
accommodating such new types of
members in the Market Loan Program,
OCC proposes to revise OCC Rules 101,
302 and proposed OCC Rules 2202A,
2207A and 2216A to allow a Clearing
Member participating in the Market
Loan Program (the Appointing Clearing
Member) to appoint an Appointed
Clearing Member to make settlement of
obligations arising from the initiation or
termination of Market Loans, in a
similar manner to how OCC Rule 901
currently allows for Appointed and
Appointing Clearing Members with
respect to delivery or receipt of
underlying securities arising from the
exercise of equity options and maturity
of stock futures, or how OCC Rule 2201
current allows Canadian Clearing
Members to appoint CDS as its agent for
purposes of effective delivery orders for
stock loan and stock borrow
transactions. In lieu of membership at
the Depository, establishing a
relationship with an Appointed Clearing
Member would be a means by which
Clearing Members could access the
Market Loan Program. Specifically, OCC
would revise the current definitions in
OCC Rule 101 for ‘‘Appointed Clearing
Member’’ and ‘‘Appointing Clearing
Member’’ to reference the initiation and
termination of Market Loans. The
definitions would also refer to proposed
Rule 2207A (Instructions to the
Corporation), which like current OCC
Rule 901(f) would contain a paragraph
providing the mechanism for such
appointments. Proposed OCC Rules
2202A and 2216A (Termination of
Market Loans) would also provide for
OCC to submit delivery orders to the
Depository’s account for the Appointed
Clearing Member in connection with the
initiation or termination of a Market
Loan, respectively.
Enhancements To Facilitate OCC’s New
Clearance and Settlement System
In addition to the enhancements (a)
through (j) above, which are specific to
the Market Loan Program, except when
51 See Exchange Act Release No. 97439 (May 5,
2023), 88 FR 30373, 30373 (May 11, 2023) (SR–
OCC–2023–002).
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otherwise indicated, the proposed rule
change would also implement
enhancements to both Stock Loan
Programs to support the implementation
of OCC’s new clearance and settlement
system. Specifically, the proposed
changes would (k) replace the legacy
practice of position aggregation with
contract-level recordkeeping; (l) align
the settlement of daily mark-to-market
of cash collateral to accounts; (m)
simplify the mark-to-market calculation
to focus on the change to the contract
value of a Clearing Member’s Stock
Loan; and (n) allow for re-matching of
Matched-Book Positions across both
Stock Loan Programs in the event of a
Clearing Member default and
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(k) Contract-Level Recordkeeping
OCC proposes to eliminate the legacy
practice of aggregating stock loan and
stock borrow positions for the same
Eligible Stock in favor of contract-level
accounting, consistent with industrystandard bookkeeping practices. Under
the new contract-based approach, each
Stock Loan (i.e., a stock loan position or
stock borrow position) would be a
distinct contract and no aggregation
would be done when positions are
recorded in accounts. Every new loan
that is recorded will generate a new
stock borrow position and stock loan
position for the number of shares lent
and borrowed. Contract-level
recordkeeping would allow Clearing
Members to see more precisely the
contracts with shares lent by lender and
borrower, which aligns to industry
standard recordkeeping. By maintaining
stock loan positions and stock borrow
positions at the contract level, OCC
would also be able to record additional
terms, including but not limited to: (a)
rebate rate; (b) whether the rebate rate
is a fixed or a floating value (and if
floating the interest rate benchmark);
and (c) end date if it is a term loan.
Clearing Member submission of these
additional terms would not be
mandatory, and OCC would assume that
no such terms exist unless otherwise
directed by its Clearing Members.52
To implement contract-level
recordkeeping, the proposed rule
change would amend Article XXI,
Sections 2 (Hedge Program) and Article
XXIA, Section 5 (Market Loan Program)
of OCC’s By-Laws, retained portions of
which would migrate to become OCC
Rules 2203 and 2206A, respectively.
Specifically, OCC would amend
52 If these additional terms are not recorded on a
Market Loan submitted to OCC, OCC would not
make any assumptions and the fields would be left
blank in OCC’s system.
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proposed Rule 2203(c)(1)–(2) and
2206A(b)(1)–(2) to delete the text
providing for the aggregation of
positions, which OCC proposes to
eliminate. In addition, OCC would
delete the last sentence of Article XXI,
Section 2(b) and Article XXIA, Section
5(b), as relocated to proposed OCC
Rules 2203(d)(2)(B) and 2006A(a)(2),
which provide that OCC shall identify
stock loan and stock borrow positions
resulting from Hedge Loans separately
from positions resulting from Market
Loans. Because OCC proposes to
eliminate position aggregation
altogether, this prohibition against
aggregating positions across programs
would no longer be relevant.
The proposed changes would also
allow OCC to record additional terms at
the contract level. The By-Laws
currently provide that upon acceptance
of a Hedge Loan or Market Loan, OCC
creates a stock loan position and stock
borrow position in the account
designated by the Lending Clearing
Member and Borrowing Clearing
Member, respectively, that identifies the
Eligible Stock, the number of shares
loaned, the amount of Collateral
received, and the identities of the
Lending Clearing Member or the
Borrowing Clearing Member, as
applicable.53 OCC proposes to amend
proposed OCC Rules 2203(d)(2)(A) and
2206A(a)(1) to provide that in addition
to those terms, which are required for
OCC’s acceptance of a Hedge Loan or
Market Loan, OCC would record such
additional terms that the Clearing
Members may provide at the contract
level. Such additional terms could
include, but are not limited to, rebate
rate, interest rate benchmark and loan
term. Pursuant to proposed additions to
proposed OCC Rules 2202(b)(2)(E) and
2202A(b)(2)(E), recording additional
terms that are not associated with OCC’s
guaranty (i.e., rebate rate and interest
rate benchmark with respect to Hedge
Loans, and loan term with respect to
both Hedge Loans and Market Loans)
would not impose any additional
obligations on OCC. Rather, they would
be additional terms as between the
parties that survive OCC’s novation and
would be recorded in OCC’s system for
the Clearing Members’ convenience.
In addition to the changes related to
proposed OCC Rules 2203 and 2206A
above, OCC would make conforming
changes to other provisions to reflect the
change from position-level to contractlevel record keeping:
• Current Interpretation and Policy
.01 to OCC Rules 2201 and 2201A (i.e.,
53 See OCC By-Law Art. XXI, § 2(b); Art. XXIA,
§ 5(a).
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proposed OCC Rules 2206(b) and
2206A(d) per the reorganization
discussed below), which concern the
transfer of stock loan positions or stock
borrow positions between Clearing
Member accounts, would be amended to
delete the phrase ‘‘all or any portion of’’
as it relates to stock loan or stock
borrower positions, and the text
‘‘provided, that any such transfer will
result in the transfer of all shares related
to the relevant stock loan position or
stock borrow position’’ would be added.
These changes reflect that stock loan
positions and stock borrow positions
would be recorded at the contract level
and would not be aggregated.
Accordingly, any transfer of a stock loan
position or stock borrow position (each
representing an individual contract)
would be for all shares that are the
subject of the contract.
• Current Interpretation and Policy
.02 to OCC Rule 2201 (i.e., proposed
OCC Rule 2206(c)(1) per the
reorganization discussed below), which
concerns how OCC would apply Hedge
Loan return instructions received from
DTC to a Clearing Member’s default
account, would be modified to eliminate
functionality in ENCORE for Clearing
Members to designate OCC accounts in
DTC delivery orders that is not currently
utilized by Clearing Members
participating in the Hedge Loan Program
and, accordingly, is not being built for
the new clearance and settlement
system. To account for the shift to
contract-level recordkeeping, OCC
would also add OCC Rule 2206(c)(2),
which would provide that returns will
decrease the number of shares borrowed
beginning with the oldest Hedge Loan
between the Borrowing Clearing
Member and the Lending Clearing
Member on OCC’s books and records. If
the return exhausts the oldest Hedge
Loan, OCC would decrement the next
oldest, and so on and so forth.
• Current Interpretation and Policy
.02 to OCC Rule 2201A (i.e., proposed
OCC Rule 2206A(e) per the
reorganization discussed below), which
concerns how Market Loan return
instructions would be applied to a
Clearing Member’s accounts, would be
amended to reflect that if there are
insufficient shares in the account
designated by the delivery order
submitted to OCC, or in the default
account if the delivery order did not
specify an account, OCC would reject
the return instruction rather than fulfill
the return to the extent of the shares in
the designated or default account, as
applicable. If an account was designated
in the delivery order, OCC would fulfill
the return based only on that account
and would reject the return instruction
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if sufficient shares were not available in
that account rather than applying shares
in the default account to cover the
excess.
• Current OCC Rule 2209A(a)(2) (i.e.,
proposed OCC Rule 2216A(a)(5) per the
reorganization discussed below), which
concerns the termination of Market
Loans upon receipt of end-of-day
information from DTC concerning
return or recall delivery orders, would
be amended to delete the phrase ‘‘and
reduce the respective Clearing Members’
open stock loan and stock borrow
positions accordingly.’’ This phrase
refers to adjustments required for
aggregated stock loan and stock borrow
positions, which would not be relevant
under the contract-level recordkeeping
proposal. OCC would also remove the
phrase ‘‘the end of the day’’ with respect
to the stock loan activity files it receives
from DTC because OCC receives and
processes such information from DTC
throughout the business day.
(l) Aligning Mark-to-Market Settlement
to Accounts
Under the proposed rules designed to
facilitate OCC’s new clearance and
settlement system, OCC would end the
practice of limiting cash settlement of
daily mark-to-market of cash collateral
to the Clearing Member’s firm account
or combined Market-Makers’ account.
Instead, cash settlement will occur in
the account in which the stock loan or
stock borrow position is held. OCC
implemented the current structure for
settlement of mark-to-market payments
in 1997 and 1998.54 At that time, OCC
believed that settlement through a firm’s
lien account would prevent premiums
by option writers (which constitute
customer funds) from being netted
against stock loan mark-to-market
payments from a clearing member
(which do not constitute customer
funds). The assumption at the time
appears to have been that stock loan
transactions would be limited to loans
initiated by a Clearing Member in its
capacity as principal. However, fully
paid for lending programs have
developed over the last two decades that
allow customers to earn returns on their
portfolios by allowing their broker to
lend their shares.
The proposed change would align
mark-to-market cash settlements with
positions by deleting current OCC Rules
2201(a)(iii) and 2201A(a)(iii), as
relocated to proposed OCC Rules
2207(a)(1)(C) and 2207A(a)(1)(C), which
54 See Exchange Act Release No. 40083 (June 11,
1998), 63 FR 33424–01 (Jun 18, 1998) (File No. SR–
OCC–98–03); Exchange Act Release No. 39738 (Mar.
10, 1998), 63 FR 13082 (Mar. 17, 1998) (File No.
SR–OCC–97–11).
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require Clearing Members to provide
OCC with standing instructions
identifying the Clearing Member’s firm
accounts or combined Market-Makers’
accounts from which mark-to-market
payments are to be made. No standing
instruction would be needed because
OCC will simply settle the mark-tomarket payments in whichever account
the stock loan or stock borrow position
is held. In addition, OCC would amend
current OCC Rules 2204(a) and
2204A(a), the relevant portions of which
would be renumbered OCC Rules
2209(a) and 2209A(a), respectively, to
provide that any mark-to-market
payment shall be made in the account
in which the Hedge Loan or Market
Loan is held.
OCC would also delete the last clause
to Interpretation and Policy .04 to Rule
1104, which concerns the use of a
Liquidating Settlement Account to
satisfy mark-to-market obligations
arising from a suspended Clearing
Member’s stock loan or borrow
positions in customers’ accounts. That
clause provides for use of the
Liquidating Settlement Account
notwithstanding that such mark-tomarket payments may settle in another
account under current Rules 2201(a)
and 2201A(a). This clarifying clause
would no longer be relevant because of
the alignment of settlement with the
accounts in which the positions are
held.
(m) Simplifying Mark-to-Market
Calculations
Because OCC proposes to end the
practice of aggregating stock loan and
stock borrow positions, OCC also
proposes to simplify the mark-to-market
calculation described in proposed OCC
Rules 2209 and 2209A. Currently, the
mark-to-market calculation focuses on
the value of the loaned shares of stock.55
Specifically, it takes the quantity of
stock that is on loan each morning and
marks it to a closing price each night.
Quantities of stock that correspond to
new loans put on during the day are
also marked to the end-of-day closing
price. As such, the calculation was
designed with the practice of
aggregating stock loan and stock borrow
positions for the same Eligible Stock in
mind. The proposed mark-to-market
calculation will instead focus on the
change to the contract value of a
Clearing Member’s stock loans.
Specifically, proposed OCC Rules
2209(b) and 2209A(b) would provide
that the mark-to-market payment will be
the amount necessary to cause the
amount of Collateral to be equal to the
55 See
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Collateral requirement applicable to the
Stock Loan. For Hedge Loans, the
Collateral requirement is either 100% or
102% of the mark-to-market value of the
Loaned Stock, depending on which
percentage the parties selected when
initiating the Hedge Loan. For Market
Loans, as discussed above, the Collateral
requirement would be fixed at 102% of
the value of the Loaned Stock, which is
the collateralization for all Market Loans
currently. While this proposed
amendment would change the way OCC
makes mark-to-market calculations, the
change would have no impact on the
results of the calculation.
(n) Re-Matching Matched Book
Positions in Suspension Across Stock
Loan Programs
The proposed changes would also
extend OCC’s authority to close out and
re-establish the Matched-Book Positions
of a suspended Clearing Member to the
Market Loan Program and would allow
re-matching in suspension across the
Hedge and Market Loan Programs.
Under the current Hedge Program, OCC
has authority to terminate MatchedBook Positions by offset and rematching with other Clearing
Members.56 OCC’s authority to re-match
Matched-Book Positions in suspension
facilitates the orderly and efficient
termination and re-establishment of
stock loans involving suspended
Clearing Members, thereby mitigating
operational and price dislocation risks
that may arise for non-defaulting
Clearing Members if OCC were required
to unwind positions by recalling all
borrowed securities from specific
Borrowing Clearing Members and
returning those securities to specific
Lending Clearing Members. Extending
such re-matching authority to the
Market Loan Program and allowing rematching across OCC’s two Stock Loan
Programs would also align OCC’s closeout processes with how OCC already
margins stock loan and borrow
positions. Specifically, stock loan and
borrow positions covering the same
Eligible Stock in either program are
treated under OCC’s margin
methodology as fungible and are
permitted to offset one another in
calculating a Clearing Member’s margin
requirement for the relevant account.
OCC would extend re-matching
authority and allow for re-matching
across programs by inserting a new OCC
Rule 2219A to the Rules governing the
Market Loan Program. The new rule
would be similar in structure and
content to current OCC Rule 2212,
which concerns re-matching in
56 See
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suspension for the Hedge Program.
Proposed OCC Rule 2219A(a) would
provide that, in the event that a
suspended Clearing Member has
Matched-Book Positions within the
Hedge or Market Loan Programs, OCC
will, upon notice to affected Clearing
Members, close out the suspended
Clearing Member’s Matched-Book
Positions to the greatest extent possible
by (i) the termination by offset of stock
loan and stock borrow positions that are
Matched-Book Positions in the
suspended Clearing Member’s
account(s) and (ii) OCC’s re-matching in
the order of priority in paragraph (c) of
stock borrow positions for the same
number of shares in the same Eligible
Stock maintained in a designated
account of a Matched-Book Borrowing
Clearing Member against a stock lending
position for the same number of shares
in the same Eligible Stock maintained in
a designated account of a Matched-Book
Lending Clearing Member.
Under proposed OCC Rule 2219A(b),
as under current OCC Rule 2212(b), the
Matched-Book Borrowing Clearing
Member and Matched-Book Lending
Clearing Member would not be required
to issue instructions to DTC to terminate
the relevant stock loan and stock borrow
positions or to initiate new stock loan
transactions to reestablish such
positions, as the affected positions
would be re-matched without requiring
the transfer of securities against the
payment of settlement prices.
Proposed OCC Rule 2219A(c), as
under current OCC Rule 2212(c), would
provide that OCC shall make reasonable
efforts to re-match Matched-Book
Borrowing Clearing Members with
Matched-Book Lending Clearing
Members that maintain MSLAs
executed between them, based upon
information provided by Clearing
Members to OCC on an ongoing basis.
OCC would be entitled to rely on, and
would have no responsibility to verify,
the MSLA records provided by Clearing
Members and on record as of the time
of re-matching. As under current OCC
Rule 2212(d), proposed Rule OCC
2219A(c)(1) through (13) would require
the termination by offset and rematching be done using a matching
algorithm in which the Matched-Book
Positions of the suspended Clearing
Member are first terminated by offset
and then affected Matched-Book
Borrowing Clearing Members and
Matched-Book Lending Clearing
Members are re-matched in order of
priority based first upon whether the rematched Clearing Members have an
existing MSLA between them or, in the
case of Anonymous Market Loans, can
be kept anonymous by re-matching with
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a Matched-Book Position that is another
Anonymous Market Loan initiated
through the same Loan Market. OCC
believes prioritizing the re-matching of
Disclosed Market Loans between parties
that have MSLAs and re-matching that
results in maintaining Anonymous
Market Loans will limit the number of
returns that may be initiated for rematching that results in Disclosed
Market Loans between parties who have
not executed an MSLA.
Specifically, under the re-matching
algorithm, OCC would select the largest
stock loan or stock borrow position in
a given Eligible Stock from the
suspended Clearing Member’s MatchedBook Positions within the Hedge
Program. The selected positions would
then be re-matched with the largest
available stock borrow or stock loan
positions within the Hedge Program, as
applicable, for the selected Eligible
Stock for which a MSLA exists between
a Matched-Book Borrowing Clearing
Member and a Matched-Book Lending
Clearing Member. OCC would repeat
this process until all potential rematching between Matched-Book
Borrowing Clearing Members and
Matched-Book Lending Clearing
Members with MSLAs is completed for
positions within the Hedge Program.
Simultaneously, OCC would perform
the same re-matching process within the
Market Loan Program for (i) MatchedBook Positions that are Disclosed
Market Loans for which a MSLA exists
between a Matched-Book Borrowing
Clearing Member and a Matched-Book
Lending Clearing Member, and (ii)
Matched-Book Positions that are
Anonymous Market Loans initiated
through the same Loan Market. After rematching to the extent possible within
the Market Loan Program based on
manner of initiation and trade source,
OCC would proceed to re-match
Matched-Book Positions within the
Market Loan Program for which an
MSLA exists between a Matched-Book
Borrowing Clearing Member and a
Matched-Book Lending Clearing
Member, without regards to whether
Matched-Book Position was part of a
Disclosed Market Loan or Anonymous
Market Loan.
After matching Matched-Book
Positions to the extent possible between
borrowers and lenders with existing
MSLAs within both the Hedge Program
and the Market Loan Program, OCC
would then select the largest remaining
stock loan or stock borrow positions for
a given Eligible Stock regardless of
whether the position is a Hedge Loan or
a Market Loan and re-match it with the
largest available stock borrow or stock
loan position for the selected Eligible
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73479
Stock in the other Stock Loan Program
for which an MSLA exists between the
lenders and borrowers in the other
Stock Loan Program, regardless of
whether the Market Loan selected or
matched is a Disclosed Market Loan or
Anonymous Market Loan. OCC would
repeat this process until it has
rematched all Matched-Book Positions
to the extent possible between parties to
existing MSLAs between the two Stock
Loan Programs.
After re-matching among lenders and
borrowers with existing MSLAs, the
process would then be repeated for all
remaining Matched-Book Positions for
which MSLAs do not exist between the
lenders and borrowers. OCC would first
complete such rematching to the extent
possible within each program. The rematching process would then be
repeated for all remaining MatchedBook Positions across the Stock Loan
Programs for which MSLAs do not exist
between the lenders and borrowers.
Remaining positions that are not able to
be rematched either within or across
programs would then be closed-out
pursuant to the rules governing closeout of Hedge Loans or Market Loans, as
applicable.
Under proposed OCC Rule 2219A(d),
as under current OCC Rule 2212(e), in
the event Borrowing and Lending
Clearing Members are re-matched
through this process, the re-matched
positions would be governed by the predefined terms and instructions
established by the Lending Clearing
Member pursuant to renumbered OCC
Rule 2207 (for Hedge Loans) or Rule
2207A (for Market Loans). For MatchedBook Positions re-matched across
programs, the resulting re-matched loan
would be a Hedge Loan. If the rematched positions were Anonymous
Market Loans, the resulting Loan would
be an Anonymous Market Loan.
However, if one of the positions was a
Disclosed Market Loan or the positions
were Anonymous Market Loans
initiated through different Loan
Markets, the resulting loan would be a
Disclosed Market Loan. Going forward,
such a Disclosed Market Loan would be
deemed to have been initiated through
OCC, which would facilitate rematching within the Market Loan
Program for parties who are not
subscribers to a Loan Market. Pursuant
to proposed OCC Rule 2219A(j), the rematched Clearing Members may choose
to execute an MSLA or close-out the rematched positions in accordance with
proposed OCC Rules 2213 or 2216A, as
applicable.
Under proposed OCC Rule 2219A(e),
which corresponds to the second
sentence of current OCC Rule 2212(e),
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any change in Collateral requirements
arising from a change in the terms of
stock loan or stock borrow positions
between a Lending Clearing Member
and Borrowing Clearing Member with
re-matched positions would be included
in the calculation of the mark-to-market
payment obligations on the stock loan
business day following the completion
of the positions adjustments as set forth
in proposed OCC Rule 2219A(f).
Under proposed OCC Rule 2219A(f),
as under current OCC Rule 2212(f), the
termination by offset and re-matching of
positions would be complete upon OCC
completing all position adjustments in
the accounts of the suspended Clearing
Member and the Borrowing Clearing
Members and Lending Clearing
Members with re-matched positions and
the applicable systems reports are
produced and provided to the Clearing
Members reflecting the transactions.
Under proposed OCC Rules 2219A(g)
through (i), from and after the time OCC
has completed the position adjustments
as set forth in proposed OCC Rule
2219A(f), the suspended Clearing
Member would have no further
obligations under the By-Laws and
Rules with respect to such positions;
however, a Borrowing Clearing Member
with re-matched stock borrow positions
would remain obligated as a Borrowing
Clearing Member and a Lending
Clearing Member with re-matched stock
loan positions would remain obligated
as a Lending Clearing Member as
specified in the By-Laws and Rules
applicable to the Stock Loan Programs.
Furthermore, upon notification that
OCC has completed the termination by
offset and re-matching of stock loan and
borrow positions, the suspended
Clearing Member and Borrowing
Clearing Members and Lending Clearing
Members with re-matched positions
would be required promptly to make
any necessary bookkeeping entries at
DTC to ensure the accuracy and efficacy
of those stock loan terms not governed
by OCC’s By-Laws and Rules. Under
proposed OCC Rule 2219A(j), as under
current OCC Rule 2212(j), Borrowing
Clearing Members and Lending Clearing
Members that have been re-matched
would be required to work in good faith
to either (i) reestablish any terms,
representations, warranties and
covenants not covered by the By-Laws
and Rules (e.g., establish an MSLA) or
(ii) terminate the re-matched stock loan
or borrow positions in the ordinary
course pursuant to OCC Rules 2213 or
2216A, as applicable, as soon as
reasonably practicable.
Because OCC has designed proposed
OCC Rule 2219A to address the process
for re-matching in suspension in both
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Stock Loan Programs, OCC further
proposes to delete current OCC Rule
2212, which concerns re-matching in
suspension for the Hedge Program, and
replace it, as renumbered to proposed
OCC Rule 2217, with a cross-reference
to proposed OCC Rule 2219A.
By-Laws and Rules Reorganization and
Restatement
OCC would also make a number of
other clarifying, conforming, and
organizational changes to OCC’s ByLaws and Rules, and rule-filed policies
that reference the By-Law and Rules
provisions governing the Stock Loan
Programs.
(a) Reorganization
OCC proposes to reorganize the
provisions of OCC’s By-Laws and Rules
relating to the Stock Loan Programs into
newly revised Chapter XXII (Hedge
Loan Program) and Chapter XXIIA
(Market Loan Program). This
consolidation of rules governing the
Stock Loan Programs is similar to
changes OCC made to migrate By-Laws
governing OCC’s Clearing Fund and
membership standards to the Rules.57
As part of these changes, OCC would
preserve the governance requirements
concerning amendments to the stock
loan-related By-Laws migrated to the
Rules by amending Article XI, Section 2
of the By-Laws.
The provisions governing the Stock
Loan Programs are currently found in
Articles XXI and XXIA of OCC’s ByLaws and Chapters XXII and XXIIA of
the OCC Rules. Because the proposed
changes to the Stock Loan Programs
would substantially amend the relevant
By-Law and Rule provisions, OCC
believes that this is an appropriate
opportunity to consolidate the primary
provisions that address the Stock Loan
Programs into Chapters XXII and XXIIA
of the Rules. As a result, the content of
Articles XXI and XXIA of the By-Laws
would be consolidated into Chapters
XXII, XXIIA and, with respect to
definitions, Chapter I of the OCC Rules,
subject to the proposed amendments
described in this rule filing. OCC would
also migrate to the OCC Rules the
definitions currently located in Article I
of the By-Laws that are specific to the
Stock Loan Programs.58 To account for
migrated definitions of terms that are
57 See Exchange Act Release No. 97439, supra
note 51, 88 FR at 30377 (membership standards);
Exchange Act Release No. 83735 (July 27, 2018), 83
FR 37855, 36859 (File No. SR–OCC–2018–008)
(Clearing Fund).
58 See By-Law Art. I, § 1.B.(4), E.(3), H.(1), L.(2),
L.(5), M.(3)–(4), M.(7)–(9), S. (19), (21)–(23). Rule
101 provides that terms in the Rules have the
meanings defined in the By-Laws or as set forth in
the Rules.
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used elsewhere in the By-Laws, OCC
would revise the By-Law definition to
refer to the definition of that term in
OCC Rule 101.59 OCC believes that
consolidating the provisions governing
the Stock Loan Programs into one place
would provide more clarity around, and
enhance the readability of, OCC’s rules
governing the Stock Loan Programs.
OCC has included a chart mapping the
provisions moved from the By-Laws to
the Rules, and the resulting
renumbering of existing Rules, in
Exhibit 3A to File No. SR–OCC–2024–
011.
To preserve the governance
requirements for amendments to the ByLaw provisions that would be migrated
to the Rules, OCC would also amend
Article XI of the By-Laws. Specifically,
OCC would amend Article XI, Section 2
of the By-Laws, which requires the
affirmative vote of two-thirds of the
directors then in office (but not less than
a majority of the number of directors
fixed by the By-Laws) to amend certain
enumerated provisions. Specifically,
OCC would add Rule 2201, Rule 2203,
Rule 2204, Rule 2205, Rule 2206(a) and
(d), Rule 2213(e)(1), Rule 2214(e)(1),
Rule 2201A, Rule 2203A, Rule 2204A,
Rule 2205A and Rule 2206A(a)–(c) and
(f) to these enumerated provisions.
(b) Restatement
In addition to consolidating the ByLaws and Rules specific to the Stock
Loan Programs within the Rules, OCC
proposes to restate those provisions and
make certain other changes for clarity
and consistency. The changes would
include (i) global changes across the ByLaws and Rules to add courtesy titles
and standardize terms; (ii) integration of
Interpretations and Policies within the
Stock Loan Program rules into the body
of the text of the Rules themselves; and
(iii) certain other administrative or
technical changes to the rule text.
(i) Global Changes
Global changes to be applied across
the By-Laws and Rules concerning the
Stock Loan Programs include:
• Adding courtesy titles to the
beginning of paragraphs or other
subdivisions, where appropriate, to aid
the reader in locating provisions
governing specific topics.
• Replacing references to ‘‘Stock
Loan’’ that are specific to the Hedge
Program with ‘‘Hedge Loan’’ in order to
59 References to the definition of the terms ‘‘stock
borrow position’’ and ‘‘stock loan position’’ in
proposed Rule 101 would be retained in the ByLaws because these terms are referenced in certain
other definitions in the By-Laws, as well as Article
VI, Section 27 of the OCC By-Laws (Close-Out
Netting).
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better differentiate between Hedge
Loans and Market Loans while the
Hedge Program is still in place. Use of
the defined term ‘‘stock loan’’ would be
retained when referring to either a
Hedge Loan or a Market Loan or both as
the context requires.60 Reference to the
‘‘Stock Loan/Hedge Program’’ would
remain unchanged.
• Replacing references to ‘‘Hedge
Clearing Member’’ or ‘‘Market Loan
Clearing Member’’ with ‘‘Clearing
Member,’’ ‘‘Borrowing Clearing
Member,’’ or ‘‘Lending Clearing
Member,’’ as applicable, to simplify
OCC’s membership structure and reflect
that Clearing Members may be
authorized to transact in either
program.61
(ii) Interpretations and Policies
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OCC would also relocate current
Interpretations and Policies (‘‘I&P’’)
within Chapters XXI and XXIA of the
Rules by moving those provisions
within the body of the applicable Rules,
subject to any further amendments
discussed herein. The location of the
text as reorganized within the Rules is
included in Exhibit 3A to SR–OCC–
2024–011 and noted in footnotes to the
proposed rule text in Exhibit 5A to SR–
OCC–2024–011.62 OCC believes that
consolidating the I&Ps, which have no
less legal effect than the text of the
Rules themselves, would provide more
clarity around, and further enhance the
readability of, OCC’s Rules governing
the Stock Loan Programs.
In certain instances, OCC is proposing
to eliminate the existing Interpretations
and Policies altogether:
• Interpretations and Policies .01 to
current OCC Rules 2202 and 2202A,
which concern the position information
OCC provides to Clearing Members on
an intraday basis, would be deleted
because they concern a topic covered by
and more properly addressed in
proposed OCC Rules 2210 and 2210A
(Daily Reports). The specific
information referenced in those
Interpretations and Policies—i.e., new
position, transfer positions, returns and
60 See, e.g., Exhibit 5A to SR–OCC–2024–011,
proposed OCC Rule 101.S.(6), (7), (9), (10); Rules
2201–2206; Rules 2209–2216.
61 See, e.g., Exhibit 5A to SR–OCC–2024–011,
proposed OCC Rule 1006(h)(C); Rule 2202; Rules
2206–2210; Rules 2213- 2214; Rule 2215–17; Rule
2202A; Rules 2207A–2212A; Rules 2216A–2219A.
62 See, e.g., Exhibit 5A to SR–OCC–2024–011,
proposed OCC Rule 2206(b) (replacing Rule 2201,
I&P .01); Rule 2206(c)(1) (replacing Rule 2201 I&P
.02); Rule 2206(d) (replacing By-Law Art. XXI § 5,
I&P .01); Rule 2214(e)(1) (replacing By-Law Art. XXI
§ 2, I&P.01); Rule 2206A(d) (replacing Rule 2201A,
I&P .01); Rule 2206A(e) (replacing Rule 2201A, I&P
.02); Rule 2206A(f) (replacing I&P By-Law Art.
XXIA § 5, I&P .01).
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cancels—would be integrated into the
proposed Rules.
• I&P .01 to current OCC Rule 2210
(Suspension of Hedge Clearing
Members—Pending and Open Stock
Loans) and OCC Rule 2210A
(Suspension of Market Loan Clearing
Members—Pending and Open Market
Loans)—which refers the reader to
Interpretation and Policy .02 of OCC
Rule 1104 for a description of OCC’s
private auction process—would be
deleted. In its place, a cross-reference to
that description would be added to
paragraph (b) of that Rule, as
renumbered to OCC Rule 2215 per the
reorganization discussed above.
(iii) Administrative Changes
OCC would also improve the clarity
and readability of certain Rules,
including by:
• breaking certain lengthy Rule
provisions into subparagraphs with
additional convenience headings to aid
the reader in navigating the
requirements and obligations therein;
• numbering provisions with
multiple paragraphs that are currently
unnumbered, in whole or in part, or
with lengthy provisions that can be split
into multiple paragraphs, and adding
convenience headings to paragraphs,
where such convenience headings
would be helpful to the reader.63
• renumbering subdivisions in
Chapters XXII and XXIIA based on a
consistent numbering convention for (a)
paragraphs, (1) subparagraphs, and (A)
items.64
• updating cross-references found
throughout the By-Laws and Rules
based on the proposed reorganization
and renumbering.
• improving consistency of the text
between similar Hedge Program and
Market Loan Program rules; 65
• deleting duplicative provisions of
the Rules that merely refer the reader to
substantive rights and obligations
located elsewhere in the Rules; 66
63 See, e.g., Exhibit 5A to SR–OCC–2024–011,
proposed OCC Rule 2202(b)(1)–(3); Rule 2203(b)(1)–
(2), (c)(1)–(2), (d)(1)–(2); Rule 2204(a)–(b); Rule
2205(a)–(b); Rule 2207(a)(1)–(3); Rule 2213(b)(1)–
(2); Rule 2214(b)(1)–(6), (c)(1)–(4); Rule 2216(a)–(d);
Rule 2202A(b)(1)–(3); Rule 2206A(a)(1)–(2); Rule
2207A(a)(1)–(3); Rule 2216A (d)(1)–(2); Rule
2218A(a)–(d).
64 See, e.g., Exhibit 5A to SR–OCC–2024–011,
proposed Rule 2202(b)(2)(A)–(E).
65 See, e.g., Exhibit 5A to SR–OCC–2024–011,
proposed OCC Rule 101.C.(4), L.(2), M.(1), S.(2)
(conforming language in definitions specific to
Hedge Loans and Market Loans); Rule 2213
(modifying title to ‘‘Termination of Hedge Loans’’
based on a similar title for current Market Loan
Rule 2209A); Rule 2202A(b)(2)(E) (amending the
Rule for initiation of Market Loans to include
novation provisions governing Hedge Loans).
66 See, e.g., Exhibit 5A to SR–OCC–2024–011,
proposed OCC Rule 2202(d) & I&P .01 (deleting
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73481
OCC would also make conforming
edits to OCC’s Margin Policy and the
Recovery and Orderly Wind-Down Plan
(‘‘RWD Plan’’). Specifically, OCC’s
Margin Policy references OCC’s default
management practices under current
Rules 2211 and 2211A, which provide
that OCC may instruct a non-defaulting
Clearing Member to buy-in or sell-out of
positions. The proposed rule change
would renumber those references to
Rules 2216 and 2218A, respectively.
OCC would also amend the description
of the margin add-on in the Margin
Policy to capture the full range of factors
that determine the margin add-on
charge for stock loan activity (i.e.,
collateral rate, mark-to-market pricing,
dividends and distributions announced
by an issuer, and rebate payments).
Similarly, references in the RWD Plan to
Section 2(c) of Article XXI of the ByLaws and Rule 2209A(d), which refer to
OCC’s authority to terminate the Stock
Loan Programs, would be renumbered to
proposed Rules 2213(e) and
2216A(d)(2), respectively, and the
excerpted text of those Rules appearing
in the RWD Plan would be conformed
with the text as amended by this
proposed rule change.
Implementation Timeframe
OCC will implement the proposed
changes at the time Ovation becomes
OCC’s system of record, which is
planned to launch no earlier than July
of 2025.67 OCC will announce the
implementation date of the proposed
change by Information Memorandum
posted to its public website at least four
weeks prior to implementation. OCC
plans to launch Ovation and implement
the proposed changes no later than
December 31, 2025, and OCC will
announce another intended
implementation date by Information
Memorandum posted to its public
website if the changes will not be
implemented by that date.
(2) Statutory Basis
OCC believes the proposed rule
change is consistent with Section 17A of
the Exchange Act and the rules and
regulations thereunder. Section
17A(b)(3)(F) of the Exchange Act 68
requires, among other things, that the
rules of a clearing agency (i) promote
the prompt and accurate clearance and
duplicative Borrowing Clearing Member obligations
located in proposed OCC Rules 2209 and 2211);
Rule 2202A(e) (deleting duplicative Borrowing
Clearing Member obligations located in proposed
OCC Rules 2209A and 2211A).
67 See https://www.theocc.com/ParticipantResources (linking to reference guides and timelines
for the launch of Ovation).
68 15 U.S.C. 78q–1(b)(3)(F).
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settlement of securities transactions
and, to the extent applicable, derivative
agreements, contracts, and transactions;
(ii) assure the safeguarding of securities
and funds which are in the custody or
control of the clearing agency or for
which it is responsible; (iii) in general,
protect investors and the public interest;
and (iv) are not designed to permit
unfair discrimination among
participants in the use of the clearing
agency. OCC believes that the proposed
rule change would promote the prompt
and accurate clearance and settlement of
stock loan transactions, assure the
safeguarding of securities and funds at
OCC, protect investors and the public
interest, and not unfairly discriminate
among Clearing Members for the reasons
below.
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Enhancements To Facilitate OCC’s New
Clearance and Settlement System
As described above, the proposed
changes would involve certain changes
to accommodate OCC’s new clearance
and settlement system, including by
transitioning away from the legacy
practice of aggregating positions in the
same Eligible Stock into stock loan and
stock borrow positions to contract-level
record keeping. Contract-level
recordkeeping would allow Clearing
Members to see more precisely the
contracts with shares lent by lender and
borrower, which aligns to the record
keeping industry standard. Allowing for
terms to be recorded at the contract
level will allow OCC to record other
terms at the contract level, including
terms related to OCC’s guaranty of
substitute dividend and rebate
payments. Eliminating position
aggregation would also allow OCC to
simplify the calculation for mark-tomarket payments in OCC’s Rules. And
by aligning mark-to-market payments to
the accounts in which a stock loan
position is held, OCC would end the
practice of requiring cash mark-tomarket payments for stock loan or stock
borrow positions to settle in a Clearing
Member’s firm lien account or
combined Market-Makers’ account.
Aligning mark-to-market cash
settlements with the accounts in which
the position is held simplifies OCC’s
processes and reduces complexity.
Accordingly, OCC believes that
conforming its practices for maintaining
stock loan and stock borrow positions to
industry standards and simplifying its
processes for marking those positions to
market helps to promote the prompt and
accurate clearance and settlement of
stock loan transactions, and protect
investors and the public interest by
reducing operational complexity that
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could cause delay and impose costs on
market participants.
The proposed changes to allow for rematching of Matched-Book Positions in
suspension also promote the prompt
and accurate clearance and settlement of
securities and derivatives transactions,
the safeguarding of securities and funds
at OCC, and the protection of securities
investors and the public interest in
accordance with Section 17A(b)(3)(F) of
the Exchange Act 69 and Rule 17Ad–
22(e)(13) 70 and (e)(23) 71 thereunder.
Rule 17Ad–22(e)(13) requires covered
clearing agencies to establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to, in part, ensure
the covered clearing agency has the
authority and operational capacity to
take timely action to contain losses and
liquidity demands and continue to meet
its obligations in the event of a Clearing
Member default.72 Rule 17Ad–22(e)(23)
requires covered clearing agencies to
maintain written policies and
procedures reasonably designed to,
among other things, provide for publicly
disclosing all relevant rules and
material procedures, including key
aspects of its default rules and
procedures.73
As noted above, a significant portion
of the activity in OCC’s Hedge Program
relates to matched-book activity. Under
the current Hedge Program Rules, OCC
has authority to perform an orderly
close out of a suspended Hedge Clearing
Member’s Matched-Book Positions
through the termination by offset and
rematching of such positions without
requiring the transfer of securities
against the payment of settlement prices
as currently required under OCC Rule
2211. As a result, the Hedge Program
rules minimize the potential for
operational and execution risks and
eliminate any risk resulting from
potential price dislocation between
recall and return transactions.
Extending this authority to the Market
Loan Program would provide the same
benefits. In addition, by allowing rematching across OCC’s Stock Loan
Programs, the proposed rule change
would more closely align OCC’s closeout process with the assumptions
underlying OCC’s margin methodology,
STANS. Specifically, STANS assumes
stock loan and borrow positions
covering the same Eligible Stock in
OCC’s Stock Loan Programs are fungible
and are permitted to offset one another
69 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(13).
71 17 CFR 240.17Ad–22(e)(23).
72 17 CFR 240.17Ad–22(e)(13).
73 17 CFR 240.17Ad–22(e)(23).
70 17
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in calculating a Clearing Member’s
margin requirement for the relevant
account. Allowing for re-matching
across Stock Loan Programs is
consistent with this assumption. OCC
believes the proposed rule change will
strengthen the risk management
processes in place at OCC by mitigating
the risks involved in the buy-in/sell-out
of Matched-Book Positions as well as
provide the overall marketplace with
more stability with respect to the Stock
Loan Programs. OCC therefore believes
the proposed rule change is designed to
promote the prompt and accurate
clearance and settlement of securities
transactions, the safeguarding of
securities and funds in the custody or
control of OCC or for which it is
responsible and, in general, to protect
investors and the public interest in
accordance with Section 17A(b)(3)(F) of
the Exchange Act,74 and would establish
default procedures for the Market Loan
Program that ensure that OCC can take
timely action to contain losses and
liquidity pressures and continue
meeting its obligations in the event of a
participant default in accordance with
Rule 17Ad–22(e)(13).75
In addition, OCC would use a
matching algorithm to re-match stock
loan and stock borrow positions in order
of priority based on the largest available
stock borrow or stock loan positions, as
applicable, for the selected Eligible
Stock for which a MSLA exists between
the Borrowing and Lending Clearing
Members or for which both positions are
Anonymous Market Loans. In the event
parties to a resulting Disclosed Market
Loan do not have existing securities
lending relationships, those members
may choose to either work in good faith
to reestablish any terms,
representations, warranties and
covenants not governed by the By-Laws
and Rules (e.g., MSLA) or to terminate
the re-matched stock loan or borrow
positions in the ordinary course
pursuant to renumbered OCC Rules
2213 and 2216A, as soon as reasonably
practicable. The proposed rule change
therefore provides for an objective
process for re-matching stock loan and
borrow positions and ensures that
members that initiated Anonymous
Market Loans or that have existing
securities lending relationships are rematched to the greatest extent possible
and would still allow for Clearing
Members that are re-matched but that do
not have existing securities lending
relationships to terminate such
positions in the ordinary course
pursuant to renumbered OCC Rules
74 15
75 17
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2213 and 2216A. As a result, OCC
believes that the proposed rule change
is designed to not permit unfair
discrimination among participants in
the use of the clearing agency in
accordance with Section 17A(b)(3)(F) of
the Exchange Act.76 Furthermore, the
proposed rule change would make key
aspects of OCC’s default procedures
with respect to the close out of
Matched-Book Positions in suspension
public by amending OCC’s Rules, which
are posted to OCC’s website, consistent
with Rule 17Ad–22(e)(23).77
Market Loan Program Enhancements
The proposed enhancements specific
to the Market Loan Program would also
promote the prompt and accurate
clearance and settlement of stock loan
transactions and, in general, protect
investors and the public interest.
Allowing for bilaterally negotiated Stock
Loans in the Market Loan Program
would allow OCC to expand its guaranty
of cash distributions, such as substitute
dividend and rebate payments, to such
loans, limiting existing counterparty
risks that remain for Hedge Loans, in
which such payments must be resolved
by the counterparties away from OCC.
Transitioning bilaterally negotiated
transactions to the Market Loan Program
would also reduce operational burden
associated with the reconciliation
process and risk associated with errors
that currently occur under the Hedge
Program because settlement at DTC
currently occurs prior to OCC’s
validation and acceptance of the
transaction. Under the enhanced Market
Loan Program, such bilaterally
negotiated transactions would be
submitted directly to OCC, which would
validate the trade before sending
delivery instructions to DTC, thereby
helping to identify and resolve any
errors prior to settlement occurring.
Accordingly, OCC believes that
expanding the Market Loan Program to
include direct submission of bilaterally
negotiated stock loans would promote
the prompt and accurate clearance and
settlement of stock loan transactions
and protect investors and the public
interest.
Allowing for the submission of
bilateral transactions through the
Market Loan Program would also help
simplify OCC’s post-trade processing of
stock loan transactions. For instance,
allowing Borrowing Clearing Members
to send return instructions directly to
OCC for bilaterally initiated Market
Loans would help eliminate errors in
the Hedge Program that occur when
76 15
77 17
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(23).
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notices of returns initiated through DTC
are not received by OCC with the correct
reason codes, resulting in position
breaks. The proposed changes would
disclose OCC’s process for affirming
transactions related to bilaterally
negotiated Market Loans submitted
directly to OCC, which would give
members opportunities to affirm or
reject transactions within time-frames
specified by OCC, after which OCC
would either reject the transaction if not
affirmed (i.e., new loans) or would be
deemed affirmed and processed
accordingly (i.e., returns, buy-ins, sellouts), thereby avoiding transactions that
would pend indefinitely. The proposed
changes would also accommodate
modifications to certain terms, such as
the rebate rate, interest rate benchmark
or the loan term, without the need for
those loans to be returned. The
proposed changes would also improve
OCC’s control over the buy-in process
by giving OCC the authority to prevent
situations in which a Borrowing
Clearing Member that failed to deliver
the Loaned Stock in response to a recall
instruction then attempts to deliver the
Loaned Stock after the Lending Clearing
Member may initiate a buy-in.
OCC’s new clearance and settlement
system would also assume certain
processes currently performed by a Loan
Market, including calculation of
payments with respect to cash
distributions for substitute dividend and
rebate payments. Consolidating such
processing at OCC will help ensure
consistency across Market Loans,
regardless of whether initiated through
a Loan Market or directly with OCC.
Assuming the responsibility to calculate
such payments would also allow OCC to
eliminate Rules intended to limit OCC’s
guaranty for such payments to the
margin OCC collected in reliance on the
Loan Market’s determinations. OCC
would also modify the Market Loan
rules concerning the collateralization
rate and mark-to-market pricing, which
are currently set by the Loan Market.
Fixing collateral at the single rate of
102%, which is the Loan Market’s rate,
would minimize complexity in the
evaluation of a member’s Stock Loan
portfolio for the purposes of liquidation
in the event of a default. Accordingly,
OCC believes that these post-trade
processing enhancements to the Market
Loan Program would promote the
prompt and accurate clearance and
settlement of stock loan transactions
and protect investors and the public
interest.
Finally, the proposed enhancements
to support Canadian Clearing Members
in the Market Loan Program would also
promote the prompt and accurate
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73483
clearance and settlement of stock loan
transactions, assure the safeguarding of
securities and funds at OCC, and protect
investors and the public interest. The
introduction of withholding
responsibilities would introduce new
complications and risks into OCC’s
clearance and settlement process and
could create uncertainty around the
settlement of funds at OCC, as discussed
in detail in connection with OCC’s
proposed rule change to address the
implementation of I.R.C. Section 871(m)
with respect to OCC’s listed options
transactions.78 The proposed rule
change would implement prudent,
preventive measures to protect OCC
against the obligation for any
withholding (and any resulting liability)
by (a) applying similar conditions for
the payment of substitute dividends as
those for dividend equivalent payments
for listed options; (b) preventing a
Canadian Clearing Member from
executing Market Loans in its capacity
as a Borrowing Clearing Member for
Canadian Securities, which may give
rise to withholding obligations under
Canadian law; (c) clarifying Canadian
Clearing Member membership
requirements such that Positive Rebate
transactions would be subject to
exemptions from withholding under
U.S. law; and (d) preventing a Canadian
Clearing Member from executing Market
Loans with Negative Rebate in its
capacity as a Borrowing Clearing
Member for its own account, which may
give rise to withholding obligations
under U.S. Law. OCC believes these
steps are necessary to prevent tax
withholding obligations that OCC is not
currently able to identify or collect.
Thus, OCC believes the proposed rule
change is designed to promote the
prompt and accurate clearance and
78 See Exchange Act Release No. 79435 (Nov. 30,
2016), 81 FR 87984 (Dec. 6, 2016) (File No. SR–
OCC–2016–014). As the Commission recognized,
application of Section 871(m) to listed options
transactions would ‘‘have significant implications
for OCC and its Clearing Members’’—especially
with respect to Non-U.S. Clearing Members, for
which OCC would be required ‘‘to develop and
maintain systems (i) to identify transactions that are
Section 871(m) Transactions, (ii) to determine the
amount of any dividend equivalents, (iii) to
effectuate withholding, and (iv) to remit the
withheld tax to the IRS.’’ Id. at 87986. Treasury has
yet to release guidance on key aspects of Section
871(m) that would be needed to build such systems.
See IRS Notice 2024–44, Extension of the Phase-in
Period for the Enforcement and Administration of
Section 871(m), available at https://www.irs.gov/
pub/irs-drop/n-24-44.pdf. Like the changes
implemented when Section 871(m) went into effect,
this proposed change would transfer the costs and
liability associated with tax withholding
requirements to the Non-U.S. Clearing Members,
thereby eliminating the potential uncertainty and
risks in the daily settlement of funds at OCC that
otherwise would be imposed if those withholding
obligations rested with OCC.
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settlement of securities and derivatives
transactions, the safeguarding of
securities and funds at OCC, and the
protection of securities investors and
the public interest in accordance with
Section 17A(b)(3)(F) of the Exchange
Act.79
Furthermore, while the proposed rule
change would impose additional
requirements and restrictions on
Canadian Clearing Members, the
proposed rules are intended to address
specific issues and potential risks to
OCC arising from those Canadian
Clearing Members whose membership
and participation in the Market Loan
Program creates potential withholding
obligations for OCC. Because Canadian
Clearing Members are already subject to
similar requirements to accommodate
dividend equivalent payments or
deemed payments for listed options
transactions without imposing
withholding obligations under Section
871(m), OCC believes that the additional
conditions and requirements with
respect to participation in the Market
Loan Program will not impose a
significant burden. In addition, the
limitations on certain transactions OCC
proposes because of the heightened risk
of withholding obligations are narrowly
tailored to address the specific risks
based on the Canadian Clearing
Member’s role in the transaction and
whether it is transacting in its capacity
as principal or on behalf of a customer.
Therefore, OCC believes that the
proposed rule change is not unfairly
discriminatory among participants in
the use of the clearing agency and is
therefore consistent with Section
17A(b)(3)(F) of the Exchange Act.80
By-Laws and Rules Reorganization and
Restatement
OCC believes that the proposed
reorganization and restatement of OCC’s
By-Laws and Rules specific to OCC’s
Stock Loan Programs is consistent with
Section 17A(b)(3)(F) of the Exchange
Act 81 and Rule 17Ad–22(e)(1),82 which
requires OCC to, among other things,
maintain written policies and
procedures reasonably designed to
ensure a well-founded, clear,
transparent, and enforceable legal basis
for each aspect of OCC’s activities. OCC
believes that the proposed
reorganization improves the clarity and
transparency of its By-Laws and Rules
by consolidating provisions governing
the clearance and settlement of stock
loan transactions in the Rules, rather
79 15
U.S.C. 78q–1(b)(3)(F).
80 Id.
than split across OCC’s By-Laws and
Rules. Similarly, OCC believes that
integrating Interpretations and Policies
into the text of the Rules helps enhance
clarity and transparency by placing
those provisions closer to the text they
interpret. In addition, the global changes
and administrative changes discussed
above would apply consistent terms and
numbering conventions, improve
consistency of the text between similar
Hedge Program and Market Loan
Program rules, and remove duplicative
provisions. Accordingly, OCC believes
the proposed changes help ensure
OCC’s By-Laws and Rules, which form
the legal basis for OCC’s clearance and
settlement of stock loan transactions, are
clear and transparent.
(B) Clearing Agency’s Statement on
Burden on Competition
Section 17A(b)(3)(I) of the Exchange
Act requires that the rules of a clearing
agency not impose any burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Exchange Act.83 With
the exception of the Rules specific to
Canadian Clearing Members, addressed
further below, the proposed changes are
meant to enhance OCC’s Stock Loan
Programs, and would apply equally to
all Clearing Members.
The transition to the Market Loan
Program is not expected to impose a
burden on competition or inhibit access
for Clearing Members who currently
transact exclusively through the Hedge
Loan Program because the enhanced
Market Loan Program would allow for
the clearance of bilaterally negated
transactions submitted to OCC for
clearance, as the Hedge Loan Program
does today. Accordingly, the changes do
not require any participant in the Hedge
Loan Program to transact through a Loan
Market. In addition, OCC plans to
authorize Clearing Members that
currently participate in the Hedge Loan
Program to transact through the Market
Loan Program without requiring
additional onboarding from a
membership perspective, subject to
providing the necessary authorizations
required of all Market Loan Program
participants, thereby reducing the
administrative burden of the transition.
All Clearing Members would be subject
to training with respect to the new ways
of submitting transactions through the
Market Loan Program. In addition, the
proposed changes would facilitate,
rather than burden, competition with
respect to Canadian Clearing Members
by allowing them, for the first time, to
participate in the Market Loan Program.
81 Id.
82 17
The proposed rule change could
potentially impact or burden
competition by imposing upon
Canadian Clearing Members certain
requirements and limitations with
respect to participation in the Market
Loan Program. For example, Canadian
Clearing Members would be required to
provide certain documentation to satisfy
OCC that participation will not impose
tax or withholding obligations arising
from payments under the Market Loan
Program, as well as to allow OCC to
satisfy its own tax reporting obligations.
However, OCC does not believe that
conditioning Canadian Clearing
Members’ participation on compliance
with OCC Rule 202 would impose a
significant burden on competition.
Canadian Clearing Members are already
subject to ongoing certification and
reporting provisions of Rule 202 for
derivative equivalent payments made or
deemed to be made to such members
with respect to options. As a matter of
standard practice, Clearing Members are
required to inform OCC of material
changes in, for example, their formal
organization, ownership structure, or
financial condition 84 and are subject to
ongoing financial reporting
requirements.85 OCC believes the
proposed rule change would impose
reasonable reporting and notification
requirements with respect to Canadian
Clearing Members’ tax compliance
status similar to those rules referenced
above.
The proposed restrictions on certain
Market Loan transactions with Negative
Rebate rates and transactions for which
the Loaned Stock is a Canadian Security
are also narrowly tailored. These
restrictions address specific issues and
potential risks to OCC arising from those
firms whose membership creates
potential withholding obligations for
OCC. The proposed restriction on
transactions with Negative Rebate for a
Canadian Clearing Member’s own
account in its capacity as a Lending
Clearing Member would eliminate the
uncertainty in funds settlement that
would arise if OCC were subject to
withholding or tax obligations with
respect to Negative Rebate payments
owed to the Canadian Clearing Member.
Canadian Clearing Members would not
be restricted from entering into Market
Loans with Negative Rebate as a
Lending Clearing Member for its
customer accounts, for which OCC
could make Negative Rebate payments
free from withholding obligations by
virtue of the Canadian Clearing
Member’s status as a Qualified
84 See,
CFR 240.17Ad–22(e)(1).
VerDate Sep<11>2014
16:45 Sep 09, 2024
83 15
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Frm 00135
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85 See
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e.g., OCC Rules 201 and 303.
OCC Rule 306.
10SEN1
khammond on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 89, No. 175 / Tuesday, September 10, 2024 / Notices
Intermediary, or as a Borrowing Clearing
Member, either for its own account or
for its customer accounts.
The proposed restriction on
transactions where the Loaned Stock is
a Canadian Security when the Canadian
Clearing Member is the Borrowing
Clearing Member would similarly
eliminate uncertainty in funds
settlement that would arise if OCC or
the Canadian Clearing Member were
subject to tax withholding obligations
with respect to substitute dividends on
the Canadian Security. Canadian
Clearing Members would not be
restricted from executing Market Loan
transactions on Canadian Securities as a
Lending Clearing Member. As discussed
further above, OCC believes that the
proposed rule change is necessary to
eliminate potential complications and
risk to its clearance and settlement
process that would be presented by
OCC’s potential withholding
responsibilities (and which would be a
direct consequence of providing its
clearance and settlement services for
these Canadian Clearing Members). OCC
believes the proposed rule change is
necessary to promote the prompt and
accurate clearance and settlement of
securities and derivatives transactions,
to assure the safeguarding of securities
and funds in the custody or control of
OCC or for which it is responsible, and
in general, to protect investors and the
public interest in accordance with
Section 17A(b)(3)(F) of the Exchange
Act.86 Accordingly, OCC believes any
burden on competition that this
proposed change could be regarded as
imposing are necessary and appropriate
to promote the prompt and accurate
clearance and settlement of stock loan
transactions as required by the
Exchange Act. Furthermore, as stated
above, all of OCC’s current Canadian
Clearing Members are already Qualified
Intermediaries, FATCA Compliant, and
Qualified Derivatives Dealers.
Therefore, applying the same
requirements as conditions to
participate in the Market Loan Program
would not impose any additional
burden on those members.
For the foregoing reasons, OCC
believes that the proposed rule change
is in the public interest, would be
consistent with the requirements of the
Exchange Act applicable to registered
clearing agencies, and would not
impose a burden on competition that is
unnecessary or inappropriate in
furtherance of the purposes of the
Exchange Act.
86 15
U.S.C. 78q–1(b)(3)(F).
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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.
IV. Solicitation of Comments
73485
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 such filing
also will be available for inspection and
copying at the principal office of OCC
and on OCC’s website at https://
www.theocc.com/CompanyInformation/
Documents-and-Archives/By-Laws-andRules.
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–2024–011 and should
be submitted on or before October 1,
2024.
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:
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.87
Vanessa A. Countryman,
Secretary.
Electronic Comments
BILLING CODE 8011–01–P
• Use the Commission’s internet
comment form (https://www.sec.gov/
rulesregulations/self-regulatoryorganization-rulemaking); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
OCC–2024–011 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–2024–011. 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/
rulesregulations/self-regulatoryorganization-rulemaking). Copies of the
submission, all subsequent
amendments, all written statements
PO 00000
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[FR Doc. 2024–20329 Filed 9–9–24; 8:45 am]
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–100927; File No. SR–LTSE–
2024–02]
Self-Regulatory Organizations; LongTerm Stock Exchange, Inc.; Notice of
Withdrawal of Proposed Rule Change
To Establish Fees for Industry
Members Related to Certain Historical
Costs of the National Market System
Plan Governing the Consolidated Audit
Trail
September 4, 2024.
On January 2, 2024, Long-Term Stock
Exchange, Inc. (the ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
87 17
CFR 200.30–3(a)(12).
U.S.C.78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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10SEN1
]]>Agencies
[Federal Register Volume 89, Number 175 (Tuesday, September 10, 2024)]
[Notices]
[Pages 73466-73485]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-20329]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100930; File No. SR-OCC-2024-011]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change, as Modified by Partial
Amendment No. 1, by The Options Clearing Corporation Concerning Its
Stock Loan Programs
September 4, 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 August 22, 2024, The Options Clearing
Corporation (``OCC'' or ``Corporation'') 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
primarily by OCC. On September 3, 2024, OCC filed a partial amendment
(``Partial Amendment No. 1'') to the proposed rule change.\3\ The
Commission is publishing this notice to solicit comments on the
proposed rule change, as modified by Partial Amendment No. 1 (hereafter
``the proposed rule change''), from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Partial Amendment No. 1, OCC corrected an error in
Exhibit 5A to SR-OCC-2024-011 without changing the substance of the
proposed rule change. Partial Amendment No. 1 does not materially
alter the substance of the proposed rule change or raise any novel
regulatory issues.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
This proposed rule change would address limitations in the
structure of OCC's Stock Loan/Hedge (``Hedge'') Program and Market Loan
Program (together, the ``Stock Loan Programs'') by creating the
framework for a single, enhanced program designed to support current
and future needs. The proposed enhancements would, among other things,
(i) combine into the Market Loan Program favorable aspects of both
Stock Loan Programs, including the submission of bilaterally negotiated
transactions; (ii) conform the terms of stock loans submitted under the
Market Loan Program (``Market Loans'') more closely to the provisions
most commonly included in stock loan transactions executed under
standard loan market documents; (iii) provide a uniform guaranty of
terms across Market Loans, regardless of how those Market Loans are
initiated under the enhanced program; (iv) support transactions under
both Stock Loan Programs through OCC's new clearance and settlement
system; and (v) reorganize, restate, and consolidate provisions of
OCC's By-Laws and Rules governing the Stock Loan Programs.
The proposed amendments to OCC's Rules and By-Laws can be found in
Exhibit 5A and Exhibit 5B to File No. SR-OCC-2024-011, respectively.
Proposed conforming changes to OCC's internal Margin Policy and
Recovery and Wind-Down (``RWD'') Plan, which can be found in
confidential Exhibits 5C and 5D to File No. SR-OCC-2024-011,
respectively. Material proposed to be added is marked by underlining
and material proposed to be deleted is marked with strikethrough text.
For ease of presentation and to distinguish between changes to rule
text versus relocation of existing rule text, Exhibits 5A and 5B to
File No. OCC-2024-011 contain bracketed text to indicate when existing
text has been relocated from the By-Laws to the Rules with changes as
marked. That bracketed text describes changes that would be performed
upon implementation of File No. SR-OCC-2024-011, but it is not intended
to be rule text. All terms with initial capitalization that are not
otherwise defined herein have the same meaning as set forth in the By-
Laws and Rules.\4\
---------------------------------------------------------------------------
\4\ OCC's By-Laws and Rules can be found on OCC's public
website: https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
---------------------------------------------------------------------------
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
In its capacity as a central counterparty registered with the
Commission, OCC currently operates two programs through which it clears
stock loan transactions: the Hedge Program and the Market Loan Program.
Under both Stock Loan Programs, OCC becomes the lender to the borrower
and the borrower to the lender, thereby guaranteeing the return of the
full value of cash collateral to the Borrowing Clearing Member and the
return of the Loaned Stock (or value of that Loaned Stock) to the
Lending Clearing Member. Under the Market Loan Program, OCC also offers
certain additional guarantees, discussed in more detail below, with
respect to other payment obligations arising from the stock loan
transactions (e.g., dividend equivalent payments and rebate payments).
As a result of OCC's novation of cleared stock loan transactions, the
rights and obligations of the Borrowing and Lending Clearing Members
are thereafter governed by OCC's By-Laws and Rules.\5\ OCC's By-Laws
and Rules also provide for, among other things, how Clearing Members
initiate Stock Loans at OCC, how those Stock Loans are recorded in
OCC's books and records, how returns and recalls are processed, and
risk management procedures specific to Stock Loans in the event that
OCC suspends one of the Clearing Member counterparties.
---------------------------------------------------------------------------
\5\ Terms provided under a Master Stock Lending Agreement
(``MSLA'') between the parties to a Stock Loan may remain in effect
as between the parties to the extent they are not inconsistent with
the By-Laws and Rules, but do not impose any obligation on OCC. See
OCC Rule 2202(b).
---------------------------------------------------------------------------
As announced in 2022, OCC intends to replace its current clearance
and settlement system (ENCORE) with a streamlined operational framework
for clearance and settlement (Ovation).\6\ The move to Ovation gives
OCC the opportunity to address limitations in the structure of OCC's
Stock Loan Programs and enhance OCC's stock loan services to support
current and future needs.\7\ OCC proposes a number of amendments to its
By-Laws and Rules designed to,
[[Page 73467]]
among other things, (i) combine into the Market Loan Program favorable
aspects of both Stock Loan Programs, including the submission of
bilaterally negotiated transactions; (ii) conform the terms of Market
Loans cleared by OCC more closely to the provisions most commonly
included in stock loan transactions executed under standard loan market
documents; (iii) provide a uniform guaranty of terms across Market
Loans, regardless of how those Market Loans are initiated under the
enhanced program; (iv) support transactions under both Stock Loan
Programs through OCC's new clearance and settlement system; and (v)
reorganize, restate, and consolidate provisions of OCC's By-Laws and
Rules governing the Stock Loan Programs.
---------------------------------------------------------------------------
\6\ See OCC Announces New Platform Name and Launches Enhanced
Transformation website (May 10, 2022), https://www.theocc.com/newsroom/views/2022/05-10-occ-announces-new-platform-name-and-launches-enhanced-transformation-website.
\7\ As discussed in more detail below, OCC's current programs
are limited by certain inefficient legacy practices including, for
example: (1) position-based recordkeeping that does not align with
the contract-level accounting that is common throughout the stock
loan industry, which adds complexity to the process of ensuring that
all parties are in alignment on the state of their stock loans; (2)
workflows that involve settlement of delivery versus payment
obligations at the Depository prior to clearance or settlement at
OCC, which adds further complexity to the reconciliation process and
can lead to position breaks; and (3) payment flows common to stock
loans that are not guaranteed under OCC's Hedge Loan program and
must currently be settled as between the parties away from OCC.
---------------------------------------------------------------------------
OCC believes these changes will address certain pain points that
OCC's members have raised and enhance the overall process. In
particular, the proposed changes would allow members who currently
participate in the Hedge Loan Program to submit transactions through an
improved workflow to the Market Loan Program, under which the
counterparties will benefit from OCC's enhanced guaranty and the
efficiency of allowing OCC's systems to handle certain post-trade
transactions that Hedge Loan Program participants must currently
address bilaterally with each of their counterparties, away from OCC.
In addition, the proposed changes would align how OCC records stock
loan transactions in its books and records with an industry-standard,
contract-level approach, which is expected to alleviate operational
burdens on members that must currently reconcile their internal records
with OCC's position-based records on a daily basis.
These enhancements would also serve as a foundation for
consolidating OCC's Hedge Loan and Market Loan Programs. As discussed
more fully below, OCC intends to eventually decommission the Hedge
Program, after which the Market Loan Program would become OCC's single
Stock Loan Program. OCC would take a phased approach to decommissioning
the Hedge Program and would commence its Hedge Program phase-out plan
only after conferring with Clearing Members that they are prepared for
the transition.
(1) Purpose
Background
Stock Loan Initiation
In the Hedge Program, OCC acts as the principal counterparty for
stock loans that are executed bilaterally between Clearing Members and
sent to OCC for clearance and settlement. Prospective Lending and
Borrowing Clearing Members identify each other (independent of OCC),
agree to bilaterally negotiated terms of the Hedge Loan, and then send
the details of the stock loan to the Depository, the Depository Trust
Company (``DTC''), with a certain ``reason code,'' \8\ which designates
the stock loan as a Hedge Loan for guarantee and clearance at OCC. The
Lending Clearing Member then instructs DTC to transfer a specified
number of shares of Eligible Stock to the account of the Borrowing
Clearing Member versus transfer of the appropriate amount of cash
collateral to the account of the Lending Clearing Member. This current
process, in which settlement at DTC occurs before clearance at OCC,
adds complexity to balancing and reconciliation under the current Hedge
Program.
---------------------------------------------------------------------------
\8\ Unique reason codes were created by DTC for Clearing Members
to designate stock loan transactions intended to be sent to OCC for
novation and guarantee.
---------------------------------------------------------------------------
In the Market Loan Program, stock loans are initiated through the
matching of bids and offers that are agreed upon by the Market Loan
Clearing Members or otherwise matched through a Loan Market. A Loan
Market is an electronic platform that supports securities lending and
borrowing transactions in the Market Loan Program by matching lenders
and borrowers based on loan terms that each party is willing to
accept.\9\ In order to initiate a Market Loan, the Loan Market sends a
matched transaction to OCC, which in turn sends two separate but linked
settlement instructions to DTC to effect the movement of Eligible Stock
and cash collateral between the accounts of the Market Loan Clearing
Members through OCC's account at DTC.
---------------------------------------------------------------------------
\9\ Currently, one Loan Market operates within OCC's Market Loan
Program--Automated Equity Finance Markets, Inc. (``AQS''), a
subsidiary of Equilend Holdings LLC (``Equilend'').
---------------------------------------------------------------------------
Scope of OCC's Guaranty
Regardless of whether a transaction is initiated under the Hedge
Program or Market Loan Program, OCC novates the transaction and becomes
the lender to the Borrowing Clearing Member and the borrower to the
Lending Clearing Member.\10\ As the principal counterparty to the
Borrowing and Lending Clearing Members, OCC guarantees the return of
the full value of cash collateral to a Borrowing Clearing Member and
guarantees the return of the Loaned Stock (or value of that Loaned
Stock) to the Lending Clearing Member. Under the Market Loan Program,
OCC also provides a limited guaranty of substitute dividend \11\ and
rebate payments,\12\ in each case limited to the amount OCC has
collected in margins from the responsible Market Loan Clearing Member
based upon instructions received by the Loan Market prior to the
payment date. Under the Hedge Program, OCC does not currently offer a
guaranty of dividends or distributions, which must be resolved
bilaterally between the Borrowing and Lending Clearing Members.
---------------------------------------------------------------------------
\10\ See OCC Rules 2202(b) and 2202A(b).
\11\ The terms ``substitute dividend'' or ``dividend equivalent
payment'' in respect of a stock loan transaction means a payment
made by the Borrowing Clearing Member to the Lending Clearing Member
to reflect any cash dividend or distribution made with respect to
the Loaned Stock during the term of the stock loan.
\12\ In respect of a stock loan transaction, a rebate is
typically a fee payable from the Lending Clearing Member to the
Borrowing Clearing Member, expressed as a rate based on the amount
of cash Collateral held by the Lending Clearing Member (``Positive
Rebate''). However, if the rebate rate is negative (``Negative
Rebate''), the fee is payable from the Borrowing Clearing Member to
the Lending Clearing Member.
---------------------------------------------------------------------------
Mark-to-Market Payments
After novation, as part of the guaranty, OCC processes mark-to-
market payments for all cleared stock loans on a daily basis to
collateralize all loans to the negotiated levels. Mark-to-market
payments are based on the value of the loaned securities and made
between Clearing Members using OCC's cash settlement system. In the
Hedge Program, the percentage of the value of the loaned securities,
either 100% or 102%, and the preferred mark-to-market rounding are
dependent upon the terms of the Master Securities Loan Agreement
(``MSLA'') between the two Clearing Member parties to the transaction.
Currently, members may select between several default rates to which
the mark price would be rounded to the nearest interval (1.00, .05,
0.25, 0.10, 0.05, and 0.01). In the Market Loan Program, all Market
Loans are collateralized based on the rate and rounding convention
established by the Loan Market--currently 102% with rounding to the
nearest dollar.
In both Stock Loan Programs, daily mark-to-market of cash
collateral typically are settled in the firm lien account or combined
Market-Makers' account of the Clearing Member.\13\ Settlements
generally are combined and netted against other OCC settlement
obligations in a Clearing Member's account, including trade premiums
and margin deficits. Clearing Member open positions in the Stock Loan
Programs are factored into the Clearing Member's
[[Page 73468]]
overall margin \14\ and Clearing Fund contribution requirements.\15\
---------------------------------------------------------------------------
\13\ See OCC Rule 2201(a)(iii); Rule 2201A(a)(iii).
\14\ See OCC Rules 601, 2203 & 2203A.
\15\ See OCC Rule 1001.
---------------------------------------------------------------------------
Position Aggregation
OCC aggregates all stock loan positions and stock borrow positions
of a Clearing Member relating to the same Eligible Stock for reporting
and margin calculation purposes. OCC separately identifies stock loan
and stock borrow positions resulting from each of the Stock Loan
Programs, and such positions are not fungible with positions resulting
from the other program. Position aggregation in both Stock Loan
Programs is a legacy practice and does not follow industry-standard
book-keeping practices. Because of position aggregation, certain
industry standard post-trade activity must be performed bilaterally
away from OCC, such as re-rate transactions that change the rebate rate
on an individual loan.
Dividends and Distributions
Dividend equivalent payments for the Market Loan Program are
ordinarily effected through DTC's Dividend Service. If a Loan Market
has advised OCC that the dividend or distribution for such Market Loan
is not tracked by DTC's Dividend Service, or if OCC determines, in its
discretion, to remove a Market Loan from the Dividend Service, OCC Rule
2206A(a)(ii) currently provides that dividend equivalent payments are
effected through OCC's cash settlement system the day following the
expected dividend or distribution payment date. OCC Rule 2206A(a)(ii)
further provides that the calculation of the margin in respect of
dividend equivalent payments shall be solely based on calculations
provided by the Loan Market, and OCC shall have no responsibility to
verify the accuracy of the Loan Market's calculation. In addition, OCC
Rule 2206A(a)(iii) provides that with respect to non-cash dividends and
distributions, a Loan Market may determine in its discretion to fix a
cash settlement value for which the Loan Market may instruct OCC to
effect collection and payment. In the event of a Borrowing Clearing
Member's default, OCC guarantees dividend equivalent payments to the
extent that OCC has collected margin equal to such dividend equivalent
according to the instructions provided by the Loan Market.
Termination of Stock Loans
Hedge Loans are typically terminated when either (i) a Borrowing
Clearing Member instructs DTC to transfer a specified quantity of the
Loaned Stock to the Lending Clearing Member against payment of the
settlement price by the Lending Clearing Member to the Borrowing
Clearing Member, after which DTC notifies OCC of the transaction with
special codes after the transaction has settled; or (ii) the Lending
Clearing Member gives notice to the Borrowing Clearing Member that the
Lending Clearing Member is terminating the Stock Loan, or a portion
thereof and specifies the number of shares of the Loaned Stock in
respect of which the Lending Clearing Member is terminating the Stock
Loan.\16\ The current process of initiating return transactions for the
Hedge Program through DTC can lead to position breaks if the return
transactions are not properly coded. Market Loans are typically
terminated by a Market Loan Clearing Member giving notice to the
relevant Loan Market calling for the recall or return of a specified
quantity of the Loaned Stock.\17\ The Loan Market then sends details of
the matched return/recall transaction to OCC, which validates the
transaction and sends a pair of delivery orders to DTC in connection
with the recall/return.
---------------------------------------------------------------------------
\16\ See OCC Rule 2209(a).
\17\ See OCC Rule 2209A(a).
---------------------------------------------------------------------------
However, in certain circumstances when a Clearing Member under
either Stock Loan Program fails to return the specified quantity of
Loaned Stock or to pay the applicable settlement price for a Loaned
Stock, the counterparty Clearing Member may choose to execute a ``buy-
in'' or ``sell-out'' of the Loaned Stock on its own.\18\ The Clearing
Member executing a buy-in or sell-out is then required to provide
notice to OCC and its counterparty, in the case of a Hedge Loan,\19\ or
the Loan Market, in the case of a Market Loan,\20\ of the buy-in or
sell-out after execution is complete. Termination is not complete until
the records of OCC, which are the official record of open and closed
stock loan transactions, reflect the termination of the Stock Loan, and
Clearing Members remain liable for all obligations related to open
stock loan positions as reflected in the records of OCC.
---------------------------------------------------------------------------
\18\ See OCC Rule 2209(b), (f); Rules 2209A(b), (c).
\19\ See OCC Rule 2209A(b), (f).
\20\ See OCC Rule 2209A(b)(1), (c)(1).
---------------------------------------------------------------------------
Offset and Re-Matching of Matched-Book Positions
A portion of the activity in OCC's Hedge Program relates to what is
often referred to as matched-book activity, when a Hedge Clearing
Member maintains in an account a stock loan position for a specified
number of shares of an Eligible Stock reflecting a stock lending
transaction with one Hedge Clearing Member (the Borrowing Clearing
Member) and also maintains in that same account a stock borrow position
for the same number, or lesser number, of shares of the same Eligible
Stock with another Hedge Clearing Member (the Lending Clearing Member)
(such positions being ``Matched-Book Positions''). In the event of a
Clearing Member suspension, OCC has authority to re-match Matched-Book
Positions of the defaulting Clearing Member in the Hedge Loan
Program.\21\ Such re-matching in suspension eliminates risk associated
with price dislocation if OCC were required to instruct the surviving
lender to buy-in and the surviving borrower to sell-out the same
quantity of Loaned Stock in order to unwind the Matched-Book Positions.
---------------------------------------------------------------------------
\21\ See OCC Rule 2212.
---------------------------------------------------------------------------
Canadian Clearing Members
OCC expanded the Hedge Program to accommodate Canadian Hedge
Clearing Members in 2013.\22\ To be eligible for the Hedge Program, a
Canadian Clearing Member must appoint CDS Clearing and Depository
Services Inc. (``CDS''), Canada's national securities depository, to
act as its agent through CDS's arrangements with DTC and the National
Securities Clearing Corporation (``NSCC'') to provide cross-border
service to clear and settle trades with U.S. counterparties.\23\
Currently, Canadian Clearing Members are not eligible for the Market
Loan Program.
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\22\ See Exchange Act Release No. 69534 (May 8, 2013), 78 FR
28267 (May 14, 2013) (File No. SR-OCC-2013-03).
\23\ See OCC Rule 302(e), (f)(1).
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Canadian Clearing Members are also subject to additional
requirements intended to allow OCC to perform its clearance and
settlement services free from tax withholding obligations with respect
to payments to such members. Specifically, OCC has established rules to
address the application of Section 871(m) of the Internal Revenue Code
of 1986, as amended (``I.R.C.'') \24\ to listed options transactions
effective on January 1, 2017.\25\ Section 871(m) imposes a 30%
withholding tax on ``dividend equivalent'' payments that are made or
[[Page 73469]]
deemed to be made to non-U.S. persons with respect to certain
derivatives that reference equity of a U.S. issuer. OCC Rule 202
provides that Clearing Members that are non-U.S. entities for U.S.
federal tax purposes (``FFI Clearing Members'') must establish to the
OCC's satisfaction that the member's conduct of transactions or
activities with or through OCC will not result in the imposition of
taxes or withholding or reporting obligations with respect to amounts
paid or received by OCC (other than U.S. federal and State income taxes
imposed on OCC's net income).\26\ When taxes or obligations would be
imposed but for the qualification of a member for a special U.S. or
foreign tax status, ongoing membership of such members is conditioned
on the member to qualify for, maintain, and document such status to
OCC's satisfaction.\27\ In addition, an FFI Clearing Member is
prohibited from conducting transactions with or through OCC that would
result in the imposition of taxes or withholding or reporting
obligations with respect to amounts paid or received by OCC (other than
U.S. federal and State income taxes imposed on OCC's net income).\28\
Notwithstanding these requirements, which OCC implemented to facilitate
the clearance and settlement of listed options transactions, OCC has no
current tax withholding or reporting obligations for Canadian Hedge
Clearing Members' transactions under the Hedge Program because
substitute dividend payments are handled bilaterally between Hedge
Clearing Members, away from OCC.
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\24\ 26 U.S.C. 871(m).
\25\ In September 2015, the Treasury Department adopted final
regulations based on a proposal issued in December 2013 expanding
the types of derivatives to which Section 871(m) applies to include
certain listed options transactions with an effective date of
January 1, 2017. See T.D. 9734, 80 FR 56866 (Sept. 18, 2015). The
Treasury Department adopted final regulations providing additional
guidance on section 871(m) in January 2017. See T.D. 9815, 82 FR
8144 (Jan. 24, 2017).
\26\ OCC Rule 202(a).
\27\ See OCC Rule 202. FFI Clearing Members satisfy this
requirement by (1) entering into a ``qualified intermediary
agreement'' with the Internal Revenue Service (``IRS'') under which
the Clearing Member assumes primary withholding responsibility (such
member being a ``Qualified Intermediary Assuming Primary Withholding
Responsibility'') and qualifies under IRS procedures for exemption
from withholding under the Foreign Account Tax Compliance Act
(``FATCA''), 26 U.S.C. 1471-1474, such that OCC is not required to
withhold any amount with respect to any payment or deemed payment to
such FFI Clearing Member under FATCA or Chapter 3 of subtitle A of
the I.R.C. (``Chapter 3''), 26 U.S.C. 1441-1446, for transactions in
the FFI Clearing Member's customer accounts; and (2) entering into
an agreement with the IRS that permits OCC to make dividend
equivalent payments or deemed payments to such FFI Clearing Member
free from U.S. withholding tax for transactions or activity in the
FFI Clearing Member's capacity as principal through its firm account
(such member being a ``Qualified Derivatives Dealer'').
\28\ See OCC Rule 202(b)(1).
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Proposed Changes
OCC is proposing a number of amendments to enhance the structure
and operation of the Stock Loan Programs discussed above and provide a
framework for combining those programs into a single Stock Loan
Program. First, OCC proposes to make several changes to the rules
governing its Market Loan Program. Specifically, the proposed rule
change would enhance OCC's Market Loan Program by:
(a) expanding the Market Loan Program to include bilaterally
negotiated stock loans submitted by Clearing Members directly to
OCC, for which the original counterparties shall remain paired in
OCC's system for purposes of post-trade activity, including
modifications, recalls, and returns;
(b) allowing for and recognizing supplementary or additional
terms under an MSLA between the counterparties to such bilaterally
negotiated transactions submitted under the Market Loan Program, as
OCC's Rules currently recognize under the Hedge Loan Program;
(c) fixing cash collateral delivered and returned versus a
bilaterally negotiated Market Loan submitted directly to OCC at
102%, as is the current practice for Market Loans submitted through
a Loan Market, and allowing Clearing Members to select a default
rate at which mark-to-market payments would be rounded to the
nearest level for Market Loans submitted directly to OCC, as is the
current practice for Hedge Loans;
(d) allowing for Clearing Members to cancel pending transactions
by sending instructions directly to OCC as opposed to through a Loan
Market;
(e) establishing rules for affirmation of Market Loan
transactions submitted by Clearing Members directly to OCC, as
opposed to through a Loan Market;
(f) allowing OCC's clearance and settlement system to calculate
and handle cash distributions, including substitute dividends and
rebates;
(g) allowing OCC's clearance and settlement system to accept and
handle contract modifications agreed to by the parties to
bilaterally negotiated contracts submitted through the Market Loan
Program, including modifications to rebate rate, interest rate
benchmark, and loan terms;
(h) implementing additional OCC controls over the buy-in process
in the case of the Borrowing Clearing Member's failure to deliver
the Loaned Stock following a recall by the Lending Clearing Member
in situations other than the suspension of the Borrowing Clearing
Member under Chapter XI of the Rules;
(i) supporting Canadian Clearing Members in the Market Loan
Program while preventing certain transactions that could otherwise
introduce tax withholding obligations; and
(j) providing that in lieu of being a participant at the
Depository for purposes of delivering or receiving Eligible Stock in
connection with the initiation and termination of Market Loans, an
Appointing Clearing Member may appoint an Appointed Clearing Member
who is a member of the Depository to deliver or receive Eligible
Stock, in the same way as how the Rules currently allow for
Appointed Clearing Members to deliver or receive underlying
securities arising from the exercise or maturity of an Appointing
Clearing Member's physically-settled equity options or stock
futures.
As discussed in more detail below, OCC intends that with these
enhancements to the Market Loan Program, OCC would eventually
decommission the Hedge Program, after which the Market Loan Program
would become OCC's single stock loan program. In the interim, however,
and in addition to enhancements (a) through (j) to the Market Loan
Program, the proposed rule changes would apply amendments to both Stock
Loan Programs for the transition to OCC's new clearance and settlement
system by:
(k) replacing OCC's current practice of aggregating new stock
loan positions and stock borrow positions for the same Clearing
Member in the same Eligible Stock with contract-level accounting,
consistent with industry-standard bookkeeping practices;
(l) aligning settlement of daily mark-to-market of cash
collateral through the account in which the stock borrow or stock
loan position sits, rather than requiring that mark-to-market
settlement occur in a Clearing Member's firm lien account or
combined Market-Makers' account;
(m) simplifying the mark-to-market calculation to focus on the
change to the contract value of a Clearing Member's Stock Loans; and
(n) allowing for re-matching of Matched-Book Positions across
OCC's Stock Loan Programs in the event of a Clearing Member default.
In conjunction with these changes to the Stock Loan Programs, OCC
would also make certain other clarifying, conforming, and
organizational changes to OCC's By-Laws and Rules, and rule-filed
policies that reference those By-Laws or Rules. In particular, OCC
would reorganize, restate, and consolidate provisions of OCC's By-Laws
governing the Stock Loan Programs into Chapter XXII (Hedge Loan
Program) and Chapter XXIIA (Market Loan Program) of OCC's Rules, as
amended by this proposed rule change. As part of these changes, OCC
would preserve the governance requirements concerning amendments to the
stock loan-related By-Laws migrated to the Rules by amending Article
XI, Section 2 of the OCC By-Laws.
Plan To Consolidate OCC's Stock Loan Programs
OCC plans to consolidate its Stock Loan Programs into a single,
enhanced stock loan program. OCC intends to achieve this consolidation
in three phases. The first phase, which is described in this proposed
rule change, would enhance the Market Loan Program in a way that would
allow that
[[Page 73470]]
program to eventually become OCC's single, enhanced stock loan program.
The first phase will also involve certain enhancements to both the
Hedge and Market Loan Programs in connection with the implementation of
OCC's new system for clearance and settlement. After OCC implements the
enhancements and the new clearance and settlement system becomes OCC's
system of record, OCC will begin authorizing and encouraging Hedge
Clearing Members to begin submitting bilateral transactions through the
enhanced Market Loan Program. While OCC would require Hedge Clearing
Members to provide the appropriate documentation and certifications
required of Market Loan Clearing Members and submit to certification
testing prior to utilizing the enhanced program, OCC does not plan to
require business expansions for Hedge Clearing Members migrating to the
Market Loan Program because they are already approved for stock loan
activity.\29\ Currently, the business expansion for Market Loan Program
participation serves mainly to ensure that the Clearing Member is
properly subscribed through a Loan Market, which will no longer be
necessary to participate in the Market Loan Program.
---------------------------------------------------------------------------
\29\ Currently, a Clearing Member that participates in the Hedge
Loan Program that desires to expand its participation into the
Market Loan Program is subject to a business expansion review under
OCC's Third-Party Risk Management Framework. See Third-Party Risk
Management Framework, available at https://www.theocc.com/risk-management/risk-management-framework (providing for assessments for
Clearing Member onboarding, including with respect to expanded
relationships).
---------------------------------------------------------------------------
During the second phase, which also is covered by this proposed
rule change, OCC would encourage Clearing Members to transition to the
Market Loan Program and would monitor the movement of activity from the
Hedge Program to the enhanced Market Loan Program. Based on interest
expressed by Clearing Members,\30\ OCC anticipates that Clearing
Members will be motivated to migrate activity to the Market Loan
Program because of OCC's expanded guarantee under that program and the
operational enhancements under this proposed rule change. Once
transition plans for each Clearing Member are understood, OCC would
announce that on a future date, OCC will no longer accept new loans
through the Hedge Program, but would continue to support existing Hedge
Loans. The decision to make this announcement will be made by OCC's
Chief Executive Officer or Chief Operating Officer based upon factors
including, but not limited to, the number of participants that are able
to conduct business under the enhanced Market Loan Program, the amount
of transactions flowing through the enhanced Market Loan Program, the
proportion of loan balances between the two Stock Loan Programs, and
feedback from members about when they expect to be ready to migrate
fully to the enhanced Market Loan Program. OCC's goal is to transition
all Hedge Program participants to the enhanced Market Loan Program
within a year after implementing the enhanced program. Beginning on the
announced date, existing Hedge Loans will naturally terminate through
return or recall instructions until none are left. OCC does not expect
that this period will last more than six months from the announced date
given the average term for stock loans.
---------------------------------------------------------------------------
\30\ OCC has provided results of a survey and other informal
discussions with Clearing Members concerning the enhancements to the
OCC's Stock Loan Programs in confidential Exhibit 3B to SR-OCC-2024-
011. Members have expressed interest in the enhancements such as
having the rebate amounts calculated, settled, and guaranteed by
OCC. The migration from Hedge to the Market Loan Program is
necessary for such expansion to OCC's services.
---------------------------------------------------------------------------
This second phase would be reflected in proposed Rule 2213(e)(2),
which would address the termination of the Hedge Loan Program. Section
2(c) of OCC By-Law Article XXI, which would become OCC Rule 2213(e)(1)
as part of the reorganization of the Stock Loan By-Laws and Rules,
already provides OCC authority, upon two business days' notice to
Clearing Members, to terminate the outstanding Hedge Loans relating to
one or more particular Eligible Stock at its sole discretion for
certain enumerated reasons, including the impending termination of that
business on the part of OCC. OCC Rule 2213(e)(2) would allow OCC to
take a phased approach to terminating the Hedge Loan Program by first,
upon approval by the Chief Executive Officer or Chief Operating
Officer, announcing that OCC will cease to accept the initiation of new
Hedge Loans. OCC Rule 2213(e)(2) also would provide that the
determination to terminate the Hedge Loan Program will be made based
upon factors including, but not limited to, the number of participants
that are able to conduct business under the Market Loan Program, the
amount of transactions flowing through the Market Loan Program, the
proportion of loan balances between the two Stock Loan/Hedge Programs
and the Market Loan Program, and feedback from members about when they
expect to be ready to migrate fully to the Market Loan Program. During
this phasing out, Clearing Members would be allowed to maintain open
positions in Hedge Loans until termination of those positions through
returns and recalls initiated by the Clearing Members.
The third phase, which is not covered by this proposed rule change,
would be the ultimate decommission of the Hedge Program Rules. Once all
Hedge Loans terminate through return or recall, OCC intends to file
another proposed rule change that would remove the Hedge Program from
OCC's By-Laws and Rules. Thereafter, the Market Loan Program would then
become OCC's single ``Stock Loan Program.'' Until then, OCC is
proposing to amend its Rules to avoid ambiguity by using ``Hedge Loan''
instead of ``Stock Loan'' when referring to Stock Loans under the Hedge
Program unless in reference to Stock Loans under either of the Stock
Loan Programs, consistent with the current definition of that term in
Article I of the By-Laws.
Market Loan Program Enhancements
OCC proposes enhancements to the Market Loan Program that would (a)
expand the Market Loan Program to allow for submission of Market Loans
bilaterally negotiated by Clearing Members; (b) recognize MSLAs under
the Market Loan Program; (c) fix the value of cash collateral delivered
and returned versus the Loaned Stock at 102% of the value of the Loaned
Stock, as Market Loans are currently collateralized, and allow for
flexible pricing, as under the current Hedge Loan Program; (d) provide
for the cancellation of pending transactions that have not yet been
accepted by OCC; (e) establish rules for affirmation of Market Loan
transactions submitted by Clearing Members directly to OCC; (f)
facilitate the calculation and processing of cash distributions,
including substitute dividends and rebate payments, by OCC's new
clearance and settlement system, rather than by a Loan Market; (g)
provide for modification of Market Loan terms agreed to by Market Loan
Clearing Members; (h) implement additional OCC controls over the buy-in
process in the case of a Borrowing Clearing Member's failure to deliver
after the Lending Clearing Member initiated a recall, as well as to
prepare those controls and OCC's other Market Loan and Hedge Loan Rules
for the shortening of the standard settlement cycle for securities
transactions; (i) support Canadian Clearing Members in the Market Loan
Program while preventing certain transactions that could introduce tax
withholding obligations; and (j) provide a framework for allow an
Appointing Clearing Member to settle its Market Loan
[[Page 73471]]
activity through an Appointed Clearing Member in lieu of maintaining
membership at a Depository.
(a) Bilaterally Negotiated Market Loans
OCC is proposing to expand the Market Loan Program to include
bilaterally negotiated Market Loans submitted directly by Clearing
Members. Under the Market Loan Program, OCC currently accepts
electronic messages from the Loan Market for new loans and returns. OCC
would expand the Market Loan Program to accept submissions directly
from Clearing Members (or their third-party service providers).
Following the affirmation of a new loan or return, OCC would instruct
DTC to settle the transaction using the account of the lender, the
borrower, or the Appointed Clearing Members, or using OCC's DTC
account. While there would be two separate avenues for submitting loans
(i.e., through a Loan Market or direct submission of bilaterally
negotiated Loans to OCC), the scope of OCC's guaranty and post-trade
processing for all transactions would be uniform. By allowing for
automated submission of transactions to OCC prior to DTC settlement and
by controlling the settlement process, the enhanced program would help
reduce the burden and risks associated with the balancing and
reconciliation under the current Hedge Program.\31\ As under the
current Hedge Program, counterparties to bilaterally negotiated
contracts submitted through the Market Loan Program would remain paired
in OCC's system for purposes of recalls, returns, and contract
modifications.
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\31\ Surveys of stock loan industry participants indicate most
firms have a significant spend for stock loan post-trade and
reconciliation processing. Based on this industry feedback, OCC
believes that a service that can provide operational efficiencies
and further reduce manual processing and operational risk would be
well received. OCC's review of this feedback is provided in
confidential Exhibit 3B to SR-OCC-2024-011.
---------------------------------------------------------------------------
Because certain proposed Rules would apply differently to Loans
matched anonymously through a Loan Market and those that would be
initiated bilaterally, whether through a Loan Market or with OCC
directly, OCC would add definitions of ``Anonymous Market Loan'' and
``Disclosed Market Loan'' to OCC Rule 101. Anonymous Market Loans would
be defined as those initiated through a Loan Market and for which the
identities of the Lending Clearing Member and Borrowing Clearing Member
are not disclosed to each other. Disclosed Market Loans would be
defined to include either those Market Loans (i) initiated through a
Loan Market and for which the identities of the Lending Clearing Member
and Borrowing Clearing Member are disclosed to each other, or (ii)
initiated directly between the Lending Clearing Member and Borrowing
Clearing Member away from a Loan Market such that the identities of the
Lending Clearing Member and Borrowing Clearing Member are disclosed to
each other. Paragraph (h) to proposed OCC Rule 2202A (Initiation of
Market Loans) would provide that a Market Loan may be either an
Anonymous Market Loan or a Disclosed Market Loan. Paragraph (a) to
proposed OCC Rule 2206A (Maintaining Stock Loan and Stock Borrow
Positions in Accounts) would provide that the identities of the Lending
Clearing Member and Borrowing Clearing Member would be elements
identified for stock loan positions and stock borrow positions
resulting from Disclosed Market Loans.
To expand the Market Loan Program to bilateral transactions, OCC
would amend OCC Rule 2202A. Specifically, the proposed rule change
would amend current OCC Rule 2202A(a)(i), which would be renumbered to
OCC Rule 2202A(a)(1) as part of the restatement of the Stock Loan
Program rules, to add that, in addition to initiation through a Loan
Market, a Market Loan may be initiated when a Lending Clearing Member
and Borrowing Clearing Member send details of a stock loan between the
two Clearing Members directly to OCC. To ensure that the original
counterparties to such a Disclosed Market Loan remain paired in OCC
system, notwithstanding OCC's novation, OCC would also amend current
Article XXIA, Section 5 of OCC's By-Laws (Maintaining Stock Loan and
Stock Borrow Positions in Accounts), which would become OCC Rule 2206A,
by adding a new sentence to the beginning of that provision that
introduces the concept of ``matched pairs,'' consistent with the OCC
By-Law's definition of Hedge Loans.\32\
---------------------------------------------------------------------------
\32\ See By-Law Art. I, Sec. 1.H.(2).
---------------------------------------------------------------------------
In addition to providing for the initiation of bilateral Market
Loans, OCC would also amend its Rules to accommodate direct submission
of other types of post-trade transactions for which the Rules currently
rely on actions taken by a Loan Market. Specifically, OCC would amend
the first paragraph of current OCC Rule 2209A(a) (Termination of Market
Loans), which would be numbered as OCC Rule 2216A(a) as part of the
broader reorganization of the Market Loan Program Rules, and new OCC
Rule 2214A (Modifications) by providing that termination or
modification of a Market Loan, respectively, may be initiated either
through a Loan Market or OCC, depending on the way in which the Loan
was initiated. Such instructions would be made through the Loan Market
for Anonymous Market Loans; through OCC for Disclosed Market Loans
initiated through OCC directly; and through either the Loan Market or
OCC for Disclosed Market Loans initiated through a Loan Market. OCC
would similarly amend the definitions of ``Recall'' and ``Return,'' as
migrated from the By-Laws to OCC Rule 101, to reflect the separate
channels for initiating such a transaction. OCC would also make other
conforming changes to the text of the Rules to reflect submission of
bilaterally negotiated loans directly to OCC:
Throughout the rules governing the Market Loan Program,
OCC would also remove references to ``matching'' or ``matched''
transactions (i.e., matched through a Loan Market) to reflect that
Market Loan transactions could also be initiated bilaterally, either
through a Loan Market or directly with OCC.\33\
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\33\ See OCC By-Law Art. I, Sec. 1.L.(5) (defining ``Loan
Market'' as ``an electronic platform . . . that supports securities
lending and borrowing transactions by lenders and borrowers based on
loan terms that each party is willing to accept''); OCC Rules
2202A(a)(i) (``If the matched transaction passes [OCC]'s validation
process . . .''); 2202A(a)(ii) (``previously reported matched
transaction'' and ``related matched transaction''); 2202A(b) (``the
matched stock loan transaction submitted by the Loan Market'');
2209A(a)(1) (``matched return/recall transaction'').
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The definition of ``Market Loan Program,'' as migrated
from Section 1 of Article I of the OCC By-Laws to OCC Rule 101, would
be amended to recognize that Market Loans may be initiated either
through a Loan Market or through direct submission of bilaterally
negotiated Loans to OCC.
(b) Recognizing MSLAs
Parties to a bilaterally negotiated stock loan transaction
typically execute an MSLA. Under current OCC Rule 2202(b), Hedge
Clearing Members are permitted to establish and maintain additional
terms under the MSLA that are not extinguished through OCC's novation
provided that the additional terms are not inconsistent with anything
in OCC's By-Laws or Rules. Examples of such additional or supplementary
terms include a term structure or fees for buy-in transactions. The
proposed rule change would add the same provision to the Market Loan
Program in proposed OCC Rule 2202A(b)(2)(E). As described below, the
recognition of MSLAs within the Market Loan Program would also
[[Page 73472]]
facilitate the re-matching of Matched Book Positions in suspension
because OCC would give priority to re-matching counterparties with
existing MSLAs, both when re-matching within and across the Stock Loan
Programs.
(c) Collateral and Mark-to-Market Pricing
To accommodate the submission of bilaterally negotiated Market
Loans directly to OCC, OCC proposes to establish rules that would fix
the collateral for Market Loans at 102%--the same rate at which Market
Loans submitted through a Loan Market are collateralized today.
Specifically, OCC would amend current OCC Rule 2204A (Mark-to-Market
Payments), which would become proposed OCC Rule 2209A per the
reorganization discussed below, to provide in proposed paragraph (b)
(Market-to-Market Payment Amount) that the collateralization rate for
all Market Loans would be 102%, regardless of whether initiated through
a Loan Market or submitted directly to OCC. Accordingly, OCC would
delete the current text in Rule 2204A and the definition of the term
``Collateral'' in Article XXIA of the OCC By-Laws, as migrated to OCC
Rule 101, that provides that the collateralization rate shall be set by
the relevant Loan Market. OCC believes that fixing collateral at 102%
would help to preserve the compatibility of OCC's cleared offering with
standard practices for over-the-counter (``OTC''), uncleared stock
loans while minimizing complexity in OCC's risk management processes.
OCC previously considered standardizing collateralization at 100%
because in a cleared transaction, OCC's guaranty replaces the
additional collateral in protecting Lenders from market risk in the
event of a counterparty default. In a survey OCC submitted to all
Clearing Members who participate in OCC's Stock Loan Programs, the vast
majority of respondents objected to a proposal to standardize
collateralization at 100%.\34\ The most common reasons cited for this
objection were (i) desire to align the collateral amount and mark-to-
market cashflows for members who commonly have uncleared positions at
the OTC-standard 102% and a matching position within clearing; and (ii)
loss of the additional 2% in collateral would materially reduce what
the income lenders earn by investing the cash collateral, which is one
of the reasons lenders choose to lend their shares. In response to this
feedback, OCC now proposes to fix collateral at 102%, which would align
OCC's offering with standard OTC practices and with OCC's current
practice within the Market Loan Program. Fixing the collateral at a
single rate--as under the current Market Loan Program--would also
minimize complexity in OCC's risk management of stock loan positions by
establishing a single rate across all Market Loans.
---------------------------------------------------------------------------
\34\ OCC has included a copy of the survey results in
confidential Exhibit 3B to SR-OCC-2024-011.
---------------------------------------------------------------------------
OCC also proposes to establish rules that would allow Clearing
Members submitting Market Loans directly to OCC to select the default
rate at which mark-to-market payments would be rounded up to the
nearest level, which is the current practice for Hedge Loans.
Specifically, OCC would amend OCC Rule 2201A (Instructions to the
Corporation), which would become proposed OCC Rule 2207A, to reflect
that the default rate is one of the standing instructions that Market
Loan Clearing Members must submit with respect to Market Loans
submitted directly to OCC. Rounding rates for Market Loans submitted
through a Loan Market would not change. If the default rate differs
between a Borrowing Clearing Member and a Lending Clearing Member, the
Lending Clearing Member's default rate would govern the Market Loan.
When surveyed, Clearing Members cited the same reasons for supporting
flexibility in pricing as they did in objecting to fixing collateral at
100%.\35\ OCC currently offers this flexibility in the Hedge Program
today. OCC believes that offering the same flexibility with respect to
bilaterally negotiated Market Loans submitted to OCC directly will aid
Clearing Members in aligning cash flows between cleared and OTC stock
loan transactions.
---------------------------------------------------------------------------
\35\ OCC has included a copy of the survey results in
confidential Exhibit 3B to SR-OCC-2024-011.
---------------------------------------------------------------------------
(d) Cancellation of Pending Transactions
To facilitate the acceptance of bilaterally negotiated contracts in
the Market Loan Program, OCC is proposing to modify its Rules that
concern the cancellation of pending transactions to accommodate the
submission of cancellation instructions by Clearing Members, in
addition to a Loan Market. Under current OCC Rule 2202A(a)(ii), a Loan
Market may instruct OCC to disregard a previously reported matched
transaction that is pending settlement at DTC, after which OCC
instructs DTC to cancel the previously issued delivery order. Upon
confirmation that DTC has processed such cancellation instructions, the
related matched transaction is deemed null and void and given no
effect. OCC has no obligation to any Market Loan Clearing Member in
acting pursuant to a Loan Market's instruction to disregard a
previously reported transaction. The proposed rule change would amend
OCC Rule 2202A(a)(ii), which would be renumbered as proposed OCC Rule
2202A(a)(2), to recognize the ability of a Market Loan Clearing Member
to submit an instruction to cancel a pending transaction directly to
OCC for bilaterally negotiated transactions submitted under the Market
Loan Program.
The proposed changes would also add a new OCC Rule 2215A
(Cancelation of Pending Instructions) to address the cancellation of
pending post-trade instructions other than cancellation of loan
initiation under Rule 2202A. For example, under OCC's current OCC Rule
2202A, Hedge Clearing Members currently have the capability to cancel
return instructions or recall instructions pending with DTC. Similarly,
Market Loan Clearing Members currently may cancel pending transactions
by issuing a cancellation instruction to the Loan Market, which may
then instruct OCC to disregard a previously reported transaction under
current OCC Rule 2202A(a)(ii). This new OCC Rule 2215A would preserve
that ability under the enhanced program by allowing members that submit
bilaterally negotiated Market Loans to issue cancellation instructions
directly to OCC, as they do now to DTC and the Loan Market.
(e) Transaction Affirmation
Currently, Market Loan Program transactions are presumed matched
when sent to OCC by a Loan Market. OCC would establish a transaction
affirmation process for loans submitted directly to OCC, rather than
through a Loan Market:
New Loans: Counterparties to a new loan would be required
to affirm the transaction details prior to OCC submitting the new loan
to DTC for settlement. New loans that are not affirmed by the time that
OCC stops accepting instructions for the day would be rejected. This
affirmation process would be reflected in proposed OCC Rule
2202A(a)(1), which would provide that a Market Loan is initiated when
(i) the Loan Market sends details of a stock loan transaction to OCC or
(ii) a Lending Clearing Member and Borrowing Clearing Member send
details to OCC of a stock loan transaction between them and such
details, as applicable, are either matched by OCC or affirmed by the
Clearing Members.
Returns: Provided that the Borrowing Clearing Member
initiated a
[[Page 73473]]
return within OCC's timeframe for submitting such instruction on a
stock loan business day, the Lending Clearing Member would have the
opportunity to affirm or reject the initiation of a return by a cut-off
time on the same business day.\36\ Any returns pending after that cut-
off time would be deemed affirmed and submitted to DTC for processing.
This auto-affirmation would be reflected in proposed OCC Rule
2216A(a)(2). Based on conversations with Clearing Members, OCC believes
this affirmation process balances Lending Clearing Members' desire to
have the opportunity to affirm or reject return instructions, while
also addressing Borrowing Clearing Members' concerns that delay in
affirmation or allowing the transaction to pend indefinitely could have
regulatory consequences for the Borrowing Clearing Member.\37\
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\36\ OCC anticipates that upon implementation of these proposed
changes, the cut-off for rejections will be 30 minutes prior to
DTC's standard settlement submission deadline.
\37\ OCC's settlement procedures for Stock Loan termination are
intended to facilitate its Clearing Member's compliance with
requirements under applicable rules of the Commission and self-
regulatory organizations, including the requirements imposed by
Regulation SHO. See Exchange Act Release No. 59294 (Jan. 23, 2009),
74 FR 5958 (Feb. 3, 2009) (SR-OCC-2008-20). However, the ultimate
responsibility for compliance with Regulation SHO rests with the
Clearing Member, and OCC has no liability for any Clearing Member's
failure to comply with its obligations. See, e.g., OCC Rules
2209A(g) (``[OCC] shall not be held liability for any Clearing
Member's failure to comply with its responsibilities and obligations
under the federal and state securities laws, including, but not
limited to, Regulation SHO, or any applicable rules of the relevant
Loan Market or any exchange or self-regulatory organization.'').
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Recalls: Recalls would not need to be affirmed. Per
standard MSLA terms, a Borrowing Clearing Member will be deemed to have
affirmed the initiation of a recall provided that the Lending Clearing
Member requested the return of the specific quantity of Loaned Stock no
earlier than the standard settlement date that would apply to a
purchase or sale of the Loaned Stock in the principal market of such
Loaned Stock.\38\ This understanding would be added to proposed OCC
Rule 2216A(a)(3).
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\38\ The standard settlement cycle currently corresponds with
the one stock loan business day after submission of the recall. See
OCC Rule 2209A(a)(3).
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Contract Modifications: Contract modifications to the
rebate rate, interest rate benchmark, or loan term submitted by either
a Borrowing Clearing Member or Lending Clearing Member, the proposed
Rule amendments for which are discussed below, would not become
effective until affirmed by both parties. This affirmation requirement
would be added to new OCC Rule 2214A(a).
Buy-Ins & Sell-Outs: For Market Loans submitted directly
through the Corporation, the Borrowing Clearing Member and Lending
Clearing will be given the opportunity to affirm or reject a buy-in or
sell-out, respectively, by a cut-off time specified by OCC on the stock
loan business day the buy-in or sell-out transaction is received by
OCC. If the Clearing Member does not affirm or reject the buy-in or
sell-out by that time, OCC would deem the buy-in or sell-out to be
complete if OCC determines that the Buy-In or Sell-Out Costs for the
Loaned Stock initiated is more than the lowest market price and less
than the highest market price for the Loaned Stock on the stock loan
business day the buy-in or sell-out is submitted to OCC.\39\ Otherwise,
the buy-in or sell-out would be rejected. As with buy-ins and sell-outs
under the Hedge Program today,\40\ any objection that the contraparty
has with respect to the timeliness of the buy-in or sell-out or the
reasonableness of the Buy-In or Sell-Out Costs are matters that must be
resolved between the Lending Clearing Member and the Borrowing Clearing
Member, away from OCC. These understandings and processes would be
reflected in paragraphs (b)(2)(B) and (c)(2) of proposed OCC Rule
2216A.
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\39\ OCC would evaluate the price per share paid or received
against market prices on that stock loan business day, consistent
with the Clearing Member's obligation to immediately give OCC
written notice of the buy-in or sell-out. In making its
determination, OCC would account for transaction costs, fees or
interest paid or incurred in connection with the buy-in and sell-out
that may be included in the Buy-In and Sell-Out Costs provided by
the Clearing Member executing the buy-in or sell-out.
\40\ See OCC Rule 2209(b), (f).
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To support Clearing Members in making the affirmations required
under these rules, OCC's new stock loan system would support automatic
affirmation based on system settings that could be selected by the
Clearing Member.\41\ Through OCC's new clearance and settlement system,
Clearing Members will be able to create and manage standing
instructions for affirmation of their Market Loans based on variables
including the type of transaction, the counterparty, the amount, or the
rebate rate. For example, a member would be able to set instructions
to: (i) affirm every transaction; (ii) limit affirmation to a certain
set of counterparties; (iii) establish more granular rules, such as
affirming any transaction with a rebate rate less than 250 basis
points; or (iv) combine one or more of the above instructions. When new
loans are received, the system would check whether there is a standing
instruction that applies to the new loan. If no instruction is found,
then the new loan would be pended for affirmation, subject to the above
referenced Rules. If a standing instruction applies, then OCC would
follow that instruction as satisfaction of the affirmation requirement.
Authority to permit such standing instructions currently exists under
current OCC Rule 2201A (Instructions to the Corporation), the
applicable provision of which would be renumbered OCC Rule 2207A(a)(2).
---------------------------------------------------------------------------
\41\ Buy-ins and sell-outs under OCC Rule 2216A would require
manual affirmation, subject to automatic affirmation following a
cut-off time discussed above.
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(f) Cash Distributions
The proposed changes would allow OCC to calculate and effect cash
entitlements through its new clearance and settlement system, including
dividends, distributions and rebates. OCC proposes to revise paragraphs
(a)(ii) and (a)(iii) of current OCC Rule 2206A (Dividends and
Distributions; Rebates), renumbered as proposed OCC Rule 2211A(b) and
(c), to reflect that under OCC's new clearance and settlement system,
OCC shall assume responsibility for calculating the margin add-on
collected with respect to dividend equivalent payments. While OCC shall
continue to effect dividend equivalent payments primarily through the
facilities of DTC using its dividend tracking service, OCC would effect
the payments through OCC's new clearance and settlement system if OCC
determines that the dividend or distribution for a Market Loan is not
tracked through DTC's dividend tracking service or if OCC has
determined to remove a Market Loan from the dividend tracking service,
as under OCC's current Rules. In addition, OCC would continue to add
non-cash dividends and distributions to the Loaned Stock if OCC
determines that such dividends and distributions are legally
transferable and the transfer can be effected through DTC. The
determination to fix a cash value for non-cash dividends and
distributions not added to the Loaned Stock would be OCC's under the
proposed changes, rather than the Loan Market. Because OCC will no
longer be reliant on the Loan Market for OCC's margin add-on process
and settlement of dividend equivalent payments, OCC proposes to
eliminate the limitations under the current Rule, including the current
provision that OCC's guaranty is limited by the amount of margin OCC
collected in reliance on the Loan Market's calculation. This change
would not have any effect on OCC's margin methodology. OCC would
continue to
[[Page 73474]]
collect a margin add-on for such cash distributions.
The proposed changes would also add paragraph (d) to proposed OCC
Rule 2211A to address the rights of a Lending Clearing Member with
respect to optional dividends (i.e., a dividend the shareholder can
elect to receive in cash, stock, or some combination of the two).
Proposed OCC Rule 2211A(d) would provide that a Lending Clearing Member
will have the right to elect an option only if it recalls the Loaned
Stock in time to make such election. If the Lending Clearing Member
does not recall the Loaned Stock, the Lending Clearing Member would be
entitled to receive the default option set by the issuer of the Loaned
Stock. OCC understands this proposed rule would match the Loan Market's
current process for optional dividends. Because optional dividends on
Market Loans are currently governed by the Loan Market's processes,
OCC's rules do not currently address the rights of a Lending Clearing
Member with respect to optional dividends.
OCC would also amend its rules to facilitate calculation,
collection, and payment of rebates under the new clearance and
settlement system. OCC Rule 2206A(b) currently provides that OCC
generally will collect and pay rebate payments on a monthly basis as
instructed by the Loan Market. As with dividend equivalent payments,
the Loan Market is currently responsible for calculation of the rebate
payments. OCC would amend OCC Rule 2206A(b), which would be renumbered
OCC Rule 2211A(e), to reflect that OCC shall assume responsibility for
calculating rebate payments under its new clearance and settlement
system. OCC also proposes to amend the Rule so that OCC will be
prepared if and when the stock loan industry transitions to daily,
rather than monthly, collection of rebate payments. Because OCC
anticipates that upon implementation of the new system, OCC will
continue to calculate and collect rebate on a monthly basis, proposed
OCC Rule 2211A(e) would provide that the calculation and collection of
rebate payments could also be made on such other basis, not to exceed
monthly.
(g) Market Loan Modifications
OCC is proposing to add a new rule to support contract
modifications to the Market Loan Program made possible by the change to
contract-level recordkeeping, discussed below. Modifications agreed to
by the Market Loan Clearing Members over the life of a Market Loan
would be accepted by OCC and handled by OCC's new clearance and
settlement system. Specifically, modifications would be permitted
regarding the (a) rebate rate; (b) interest rate benchmark; and (c)
loan term. Any modifications would be maintained in OCC's books and
records at the contract level. OCC's new clearance and settlement
system would allow, but not require, submission of these terms.\42\ The
channel through which modification requests would be processed would be
determined by the manner in which the loan was initiated. Clearing
Members would be required to submit post-trade transactions for
Anonymous Market Loans through the Loan Market on which the transaction
was initiated, consistent with current practice. Clearing Members may
submit post-trade transactions for Disclosed Market Loans to OCC
directly or, if the Disclosed Market Loan was submitted through a Loan
Market, Clearing Members would have the option of submitting the post-
trade transaction through the Loan Market.
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\42\ See infra item (k) (Contract-Level Recordkeeping).
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The proposed change would add a new rule, which would be numbered
OCC Rule 2214A as part of the broader proposed reorganization of
Chapter XXIIA. In addition to specifying the terms subject to
modification, proposed OCC Rule 2214A would provide that OCC shall
update the relevant terms in its books and records if, as applicable,
(1) the Loan Market notifies OCC that the parties agreed to the
modification, or, (2) with respect to Market Loans initiated directly
through OCC, the parties provided OCC with matching or affirmed
instructions, as discussed above. OCC would provide notice of the
modified terms in the daily reports that OCC is required to make
available to Market Loan Clearing Members under proposed OCC Rule
2210A.
(h) Buy-In Controls and Settlement Cycle
The proposed changes would also provide OCC with additional
controls over the buy-in process for the recall of a Market Loan
initiated by a Lending Clearing Member if the Borrowing Clearing Member
fails to return the Loaned Stock in situations other than suspension of
the Borrowing Clearing Member.\43\ Under current OCC Rule 2209A, a
Lending Clearing Member is entitled to initiate a buy-in if a recall
transaction fails to settle by the Settlement Time on the first stock
loan business day after submitting the recall.\44\ Under OCC's current
rules, the Borrowing Clearing Member may return the Loaned Stock up
until the time that the Lending Clearing Member that initiated the
return or recall provides written notice to the Loan Market that it has
executed the buy-in or sell-out. This process can lead to situations in
which the Borrowing Clearing Member may return the Loaned Stock during
the period between when buy-in becomes permissible, but before the
Lending Clearing Member executes the transaction and provides written
notice.
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\43\ As a practical matter, if the Borrowing Clearing Member
initiates a return, it would have the shares in its possession to
return. Accordingly, the proposed controls are limited to buy-ins
following failure to deliver initiated by a recall by the Lending
Clearing Member.
\44\ See OCC Rule 2209A(a)(3).
---------------------------------------------------------------------------
OCC proposes to provide for enhanced controls over the buy-in
process by amending current OCC Rule 2209A(b), which would be
renumbered OCC Rule 2216A(b) as part of the reorganization of Chapter
XXIIA of OCC's Rules. Proposed OCC Rule 2216A(b) would be amended to
provide that upon timely notice from the Lending Clearing Member that
it intends to execute a buy-in after a Borrowing Clearing Member fails
to return the Loan Stock following a recall transaction, OCC would
prevent the Borrowing Clearing Member from returning the Loaned Stock
while the Lending Clearing Member executes the buy-in. Until such time
as the Lending Clearing Member provides such notice, OCC would
recognize the Borrowing Clearing Member's return of the Loaned Stock.
The stock loan and stock borrow positions would remain open until such
time as the Lending Clearing Member provides notice that the buy-in is
complete.
(i) Supporting Canadian Clearing Members
As described above, Canadian Clearing Members are currently limited
to participation in OCC's Hedge Program. The proposed changes would
support Canadian Clearing Members in the Market Loan Program while
preventing certain transactions that could give rise to tax withholding
obligations.
First, OCC would revise certain of OCC's current By-Laws and Rules
to recognize Canadian Clearing Members as potential participants in the
Market Loan Program and address certain unique operational capabilities
that will be required to support that participation:
OCC would revise paragraph (f) of OCC Rule 302
(Operational Capability) to include Canadian Clearing Members as among
those members that qualify for participation in the Market Loan
[[Page 73475]]
Program, including by providing for such Canadian Clearing Members to
settle transactions through a CDS sub-account at the Depository, as
they do under the Hedge Program today.
OCC would further revise and restate paragraph (f) to
consolidate the subparagraphs specific to the operational requirements
for participation in the Hedge Loan Program and the Market Loan
Program. The current division can be attributed to the evolution of
those programs, which led OCC to make approval for participation in the
Hedge Loan Program--OCC's initial Stock Loan Program--a condition for
participation in the Market Loan Program. The proposed changes would
consolidate the provisions so that the present division does not serve
as an impediment to the planned decommission of the Hedge Loan Program.
Requirements specific to a particular program, or a particular means of
initiating a Stock Loan through one of the Stock Loan Programs, would
be amended to delineate the scope of applicability.
OCC would revise OCC Rule 306A (Event-Based Reporting) to
reflect that a Canadian Clearing Member's obligation to notify OCC if
CDS has or likely will cease to act for that Canadian Clearing Member
extends to such members that participate in both Stock Loan Programs.
OCC would replicate OCC Rule 2201(c), which concerns a
Canadian Clearing Member's appointment of CDS for purposes of settling
Hedge Loan delivery-versus-payment transactions, as proposed OCC Rule
2207A(c). As such, the same requirements would apply to Canadian
Clearing Members that participate in the Market Loan Program.
In making its determination to extend the Market Loan Program to
Canadian Clearing Members, OCC has also considered OCC's ability to
offer that program's expanded guaranty to Canadian Clearing Members
without incurring tax or withholding obligations on the associated
payment obligations. Under the expanded Market Loan Program, OCC would
clear and settle the types of cash distributions, such as substitute
dividend and rebate payments, that OCC does not guarantee under the
Hedge Program and must be resolved bilaterally by Hedge Clearing
Members, away from OCC. OCC believes its current Rules already provide
the framework to allow Canadian Clearing Members to transact under the
Market Loan Program without imposing tax withholding obligations on
payments made or received by OCC. As discussed above, OCC currently
imposes obligations on Canadian Clearing Members intended to allow OCC
to clear listed options transactions free from tax withholding
obligations on dividend equivalent payments or deemed payments. Current
OCC Rule 202 generally would also allow OCC to make substitute dividend
payments to Canadian Clearing Members as Lending Clearing Members under
the enhanced Market Loan Program without imposing tax or withholding
obligations. While OCC understands that, subject to the conditions in
OCC Rule 202, OCC's payments of substitute dividends to Canadian
Clearing Members would not be subject to withholding, OCC would report
substitute dividend payments to the IRS using information provided by
the Canadian Clearing Members, as OCC currently does for dividend
equivalent payments or deemed payments to Canadian Clearing Members in
connection with listed options transactions. Pursuant to current OCC
Rule 202(b)(5), the Canadian Clearing Member is required to indemnify
OCC for any loss, liability or expense (including taxes and penalties)
it may sustain as a result of the member's failure to comply with
requirements of OCC Rule 202(b).
Current OCC Rule 202(b) also provides OCC with authority to
prohibit or limit specific transactions with respect to non-U.S.
members that may give rise to tax or withholding obligations. Pursuant
to that authority, OCC expects to impose certain limitations on the
Market Loan activity of Canadian Clearing Members to address specific
situations in which tax withholding obligations might otherwise arise,
including limitations on transactions involving (i) Canadian underlying
securities, (ii) Positive Rebate, and (iii) Negative Rebate.
(i) Canadian Securities
Pursuant to OCC Rule 202(b), OCC would preclude Canadian Clearing
Members from executing Market Loan transactions as a Borrowing Clearing
Member, whether on behalf of a customer or for its own account, for
which the Loaned Stock is issued by a Canadian issuer because of tax
withholding obligations under Canadian law for substitute dividend
payments that would be owed by the Canadian Clearing Member in its
capacity as the lender. OCC understands that under Canadian law, the
loan of a security issued by a Canadian company would be treated as a
loan of the underlying shares for Canadian tax purposes. The substitute
dividend paid by the Canadian Clearing Member as the Borrowing Clearing
Member to OCC, in its capacity as the lender, would be a payment made
by the Canadian Clearing Member, as a corporation, to OCC of a dividend
payable on the underlying securities under subparagraph 260(8)(a)(ii)
of the Income Tax Act (Canada), and the payment would be subject to
Canadian withholding tax under subsection 212(2) of that act.
Accordingly, a Borrowing Clearing Member would be precluded from
initiating a Market Loan in its capacity as a Borrowing Clearing Member
because the Canadian Clearing Member could not fulfil its obligation
under OCC's Rules to provide a substitute dividend payment free from
tax and withholding obligations. OCC understands that no similar tax
withholding obligation would exist for substitute dividend payments
with respect to a Canadian underlying security made by OCC, in its
capacity as the borrower, to a Canadian Clearing Member that was a
Lending Clearing Member.\45\
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\45\ OCC understands that dividends on Eligible Stock of issuers
that are not Canadian residents are exempt from taxation on
dividends under subsection 212(2.1) of the Income Tax Act (Canada)
when paid as part of a fully collateralized stock lending
arrangement pursuant to 2021 amendments thereto.
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(ii) Positive Rebate
OCC believes that OCC Rule 202 also allows OCC to clear and settle
Positive Rebate payments to Canadian Clearing Members in connection
with Market Loans without introducing tax withholding obligations.
While neither the I.R.C. or IRS regulations specifically provide for
the treatment of rebate payments, OCC believes that Positive Rebate
would be treated as interest for U.S. federal tax purposes because
Positive Rebate compensates the Borrowing Clearing Member for the use
of the cash collateral by the Lending Clearing Member,\46\ and would
therefore constitute U.S.-source ``fixed or determinable annual or
periodic income,'' or ``FDAPI,'' under section 1442 of the I.R.C. While
U.S.-source FDAPI generally is subject to a 30% U.S. withholding tax
when paid to a foreign
[[Page 73476]]
corporation, exemptions from withholding apply to (i) payments to a
Qualified Intermediary in its capacity as an intermediary that has
accepted primary withholding responsibility, and (ii) interest paid to
a Canadian Clearing Member that qualifies for an exemption from
withholding on interest under Article XI of the Convention Between the
United States of America and Canada with Respect to Taxes on Income,
October 16, 1980, as amended by subsequent Protocols (the ``Canada
Treaty'').
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\46\ The U.S. Supreme Court has characterized interest as
``compensation for the use or forbearance of money.'' See Deputy v.
du Pont, 308 U.S. 488, 498 (1940). Positive Rebate is a payment from
the Lending Clearing Member to the Borrowing Clearing Member equal
to the amount of cash collateral posted by the Borrowing Clearing
Member multiplied by a positive rebate rate. The Lending Clearing
Member has the right to use the cash collateral during the term of
the stock loan. Accordingly, Positive Rebate represents a payment by
the Lending Clearing Member to the Borrowing Clearing Member for the
right to use the cash collateral and therefore is properly
characterized as interest.
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A Qualified Intermediary that has accepted primary withholding
responsibility is exempt from U.S. federal withholding on payments from
a withholding agent, including U.S.-source interest, received in its
capacity as an intermediary.\47\ Accordingly, OCC understands that
rebate payments (whether Positive Rebate or Negative Rebate) to a
Canadian Clearing Member in its capacity as a Qualified Intermediary,
may be made by OCC free from withholding, consistent with treatment of
dividend equivalent payments in connection with listed options
transactions. As discussed above,\48\ Canadian Clearing Members are
required to be Qualified Intermediaries as a condition of membership
under OCC Rule 202. As with substitute dividends, OCC would add payment
of rebates for transactions in a Canadian Clearing Member's capacity as
a Qualified Intermediary to the current reporting OCC submits to the
IRS for dividend equivalent payments on listed options, based on
information to be received from the Canadian Clearing Member pursuant
to current OCC Rule 202(b)(3).
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\47\ See Treas. Reg. 1.1441-1(e)(5)(iv) (``If a withholding
agent makes a payment of an amount subject to withholding under
chapter 3, a reportable payment (as defined in section 3406(b)), or
a withholdable payment to a qualified intermediary that represents
to the withholding agent that it has assumed primary withholding
responsibility for the payment, the withholding agent is not
required to withhold on the payment.'').
\48\ See supra note 27.
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With respect to Positive Rebate payments on Market Loans initiated
by a Canadian Clearing Member in its capacity as principal, OCC would
require Canadian Clearing Members to demonstrate, pursuant to OCC Rule
202, that such payments are subject to exemption from U.S. withholding
obligations under the Canada Treaty. Article XI(1) of the Canada Treaty
reduces the rate of withholding from 30% to zero for U.S.-source
interest beneficially owned by a resident of Canada entitled to treaty
benefits, provided that income is not attributable to a permanent
establishment, within the meaning of the Canada Treaty, or effectively
connected with a trade or business conducted in the United States.\49\
Under current OCC Rule 202(b)(2), an FFI Clearing Member must certify
annually to OCC that the member satisfies the requirements of OCC Rule
202 by submitting appropriate tax documentation. A Canadian Clearing
Member participating in the Market Loan Program may evidence its
entitlement to the benefits of the Canada Treaty with respect to
interest by providing OCC with a correct and complete IRS Form W-8 BEN-
E. Under OCC's current Rules, a FFI Clearing Member must promptly
inform OCC in writing if it undergoes a change in circumstances that
would affect its compliance with Rule 202(b) or otherwise knows or has
reason to know that it is not, or will not be, in compliance with OCC
Rule 202(b), in each case, within two days of knowledge thereof.\50\
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\49\ See 26 U.S.C. 894; Canada Treaty, Art. XI(1).
\50\ See OCC Rule 202(b)(4).
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(iii) Negative Rebate
Although exemptions for withholding requirements would apply to
payment of Negative Rebate to a Canadian Clearing Member acting as a
Qualified Intermediary with respect to customer transactions, OCC
understands that there is a risk that no exemption from U.S. tax
withholding would apply to the payment of Negative Rebate to a Canadian
Clearing Member outside its capacity as a Qualified Intermediary.
Therefore, pursuant to OCC Rule 202(b), OCC would limit Canadian
Clearing Members from initiating Market Loans with a Negative Rebate as
a Lending Clearing Member other than in its capacity as a Qualified
Intermediary. In addition, OCC would limit Canadian Clearing Members'
ability to modify the rebate on a Market Loan to a Negative Rebate as a
Lending Clearing Member other than in its capacity as a Qualified
Intermediary. OCC's new clearance and settlement system will prevent a
Canadian Clearing Member from initiating or modifying a Market Loan to
a Negative Rebate in its capacity as a Lending Clearing Member for its
firm account.
(j) Provide for Appointed and Appointing Clearing Members
Currently, OCC Rule 302 requires that all participants in the
Market Loan Program must be members of the Depository, DTC. As
discussed above, OCC would also extend the Market Loan Program to
Canadian Clearing Members by allowing for such members to settle Market
Loan transactions through a CDS sub-account maintained at DTC. However,
OCC recently filed and the Commission approved a proposed rule change
to allow OCC to expand its membership to other types of participants
who may or may not be members of the Depository, including bank members
and members of jurisdictions other than the U.S. and Canada.\51\
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\51\ See Exchange Act Release No. 97439 (May 5, 2023), 88 FR
30373, 30373 (May 11, 2023) (SR-OCC-2023-002).
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In order to build a framework for accommodating such new types of
members in the Market Loan Program, OCC proposes to revise OCC Rules
101, 302 and proposed OCC Rules 2202A, 2207A and 2216A to allow a
Clearing Member participating in the Market Loan Program (the
Appointing Clearing Member) to appoint an Appointed Clearing Member to
make settlement of obligations arising from the initiation or
termination of Market Loans, in a similar manner to how OCC Rule 901
currently allows for Appointed and Appointing Clearing Members with
respect to delivery or receipt of underlying securities arising from
the exercise of equity options and maturity of stock futures, or how
OCC Rule 2201 current allows Canadian Clearing Members to appoint CDS
as its agent for purposes of effective delivery orders for stock loan
and stock borrow transactions. In lieu of membership at the Depository,
establishing a relationship with an Appointed Clearing Member would be
a means by which Clearing Members could access the Market Loan Program.
Specifically, OCC would revise the current definitions in OCC Rule 101
for ``Appointed Clearing Member'' and ``Appointing Clearing Member'' to
reference the initiation and termination of Market Loans. The
definitions would also refer to proposed Rule 2207A (Instructions to
the Corporation), which like current OCC Rule 901(f) would contain a
paragraph providing the mechanism for such appointments. Proposed OCC
Rules 2202A and 2216A (Termination of Market Loans) would also provide
for OCC to submit delivery orders to the Depository's account for the
Appointed Clearing Member in connection with the initiation or
termination of a Market Loan, respectively.
Enhancements To Facilitate OCC's New Clearance and Settlement System
In addition to the enhancements (a) through (j) above, which are
specific to the Market Loan Program, except when
[[Page 73477]]
otherwise indicated, the proposed rule change would also implement
enhancements to both Stock Loan Programs to support the implementation
of OCC's new clearance and settlement system. Specifically, the
proposed changes would (k) replace the legacy practice of position
aggregation with contract-level recordkeeping; (l) align the settlement
of daily mark-to-market of cash collateral to accounts; (m) simplify
the mark-to-market calculation to focus on the change to the contract
value of a Clearing Member's Stock Loan; and (n) allow for re-matching
of Matched-Book Positions across both Stock Loan Programs in the event
of a Clearing Member default and suspension.
(k) Contract-Level Recordkeeping
OCC proposes to eliminate the legacy practice of aggregating stock
loan and stock borrow positions for the same Eligible Stock in favor of
contract-level accounting, consistent with industry-standard
bookkeeping practices. Under the new contract-based approach, each
Stock Loan (i.e., a stock loan position or stock borrow position) would
be a distinct contract and no aggregation would be done when positions
are recorded in accounts. Every new loan that is recorded will generate
a new stock borrow position and stock loan position for the number of
shares lent and borrowed. Contract-level recordkeeping would allow
Clearing Members to see more precisely the contracts with shares lent
by lender and borrower, which aligns to industry standard
recordkeeping. By maintaining stock loan positions and stock borrow
positions at the contract level, OCC would also be able to record
additional terms, including but not limited to: (a) rebate rate; (b)
whether the rebate rate is a fixed or a floating value (and if floating
the interest rate benchmark); and (c) end date if it is a term loan.
Clearing Member submission of these additional terms would not be
mandatory, and OCC would assume that no such terms exist unless
otherwise directed by its Clearing Members.\52\
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\52\ If these additional terms are not recorded on a Market Loan
submitted to OCC, OCC would not make any assumptions and the fields
would be left blank in OCC's system.
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To implement contract-level recordkeeping, the proposed rule change
would amend Article XXI, Sections 2 (Hedge Program) and Article XXIA,
Section 5 (Market Loan Program) of OCC's By-Laws, retained portions of
which would migrate to become OCC Rules 2203 and 2206A, respectively.
Specifically, OCC would amend proposed Rule 2203(c)(1)-(2) and
2206A(b)(1)-(2) to delete the text providing for the aggregation of
positions, which OCC proposes to eliminate. In addition, OCC would
delete the last sentence of Article XXI, Section 2(b) and Article XXIA,
Section 5(b), as relocated to proposed OCC Rules 2203(d)(2)(B) and
2006A(a)(2), which provide that OCC shall identify stock loan and stock
borrow positions resulting from Hedge Loans separately from positions
resulting from Market Loans. Because OCC proposes to eliminate position
aggregation altogether, this prohibition against aggregating positions
across programs would no longer be relevant.
The proposed changes would also allow OCC to record additional
terms at the contract level. The By-Laws currently provide that upon
acceptance of a Hedge Loan or Market Loan, OCC creates a stock loan
position and stock borrow position in the account designated by the
Lending Clearing Member and Borrowing Clearing Member, respectively,
that identifies the Eligible Stock, the number of shares loaned, the
amount of Collateral received, and the identities of the Lending
Clearing Member or the Borrowing Clearing Member, as applicable.\53\
OCC proposes to amend proposed OCC Rules 2203(d)(2)(A) and 2206A(a)(1)
to provide that in addition to those terms, which are required for
OCC's acceptance of a Hedge Loan or Market Loan, OCC would record such
additional terms that the Clearing Members may provide at the contract
level. Such additional terms could include, but are not limited to,
rebate rate, interest rate benchmark and loan term. Pursuant to
proposed additions to proposed OCC Rules 2202(b)(2)(E) and
2202A(b)(2)(E), recording additional terms that are not associated with
OCC's guaranty (i.e., rebate rate and interest rate benchmark with
respect to Hedge Loans, and loan term with respect to both Hedge Loans
and Market Loans) would not impose any additional obligations on OCC.
Rather, they would be additional terms as between the parties that
survive OCC's novation and would be recorded in OCC's system for the
Clearing Members' convenience.
---------------------------------------------------------------------------
\53\ See OCC By-Law Art. XXI, Sec. 2(b); Art. XXIA, Sec. 5(a).
---------------------------------------------------------------------------
In addition to the changes related to proposed OCC Rules 2203 and
2206A above, OCC would make conforming changes to other provisions to
reflect the change from position-level to contract-level record
keeping:
Current Interpretation and Policy .01 to OCC Rules 2201
and 2201A (i.e., proposed OCC Rules 2206(b) and 2206A(d) per the
reorganization discussed below), which concern the transfer of stock
loan positions or stock borrow positions between Clearing Member
accounts, would be amended to delete the phrase ``all or any portion
of'' as it relates to stock loan or stock borrower positions, and the
text ``provided, that any such transfer will result in the transfer of
all shares related to the relevant stock loan position or stock borrow
position'' would be added. These changes reflect that stock loan
positions and stock borrow positions would be recorded at the contract
level and would not be aggregated. Accordingly, any transfer of a stock
loan position or stock borrow position (each representing an individual
contract) would be for all shares that are the subject of the contract.
Current Interpretation and Policy .02 to OCC Rule 2201
(i.e., proposed OCC Rule 2206(c)(1) per the reorganization discussed
below), which concerns how OCC would apply Hedge Loan return
instructions received from DTC to a Clearing Member's default account,
would be modified to eliminate functionality in ENCORE for Clearing
Members to designate OCC accounts in DTC delivery orders that is not
currently utilized by Clearing Members participating in the Hedge Loan
Program and, accordingly, is not being built for the new clearance and
settlement system. To account for the shift to contract-level
recordkeeping, OCC would also add OCC Rule 2206(c)(2), which would
provide that returns will decrease the number of shares borrowed
beginning with the oldest Hedge Loan between the Borrowing Clearing
Member and the Lending Clearing Member on OCC's books and records. If
the return exhausts the oldest Hedge Loan, OCC would decrement the next
oldest, and so on and so forth.
Current Interpretation and Policy .02 to OCC Rule 2201A
(i.e., proposed OCC Rule 2206A(e) per the reorganization discussed
below), which concerns how Market Loan return instructions would be
applied to a Clearing Member's accounts, would be amended to reflect
that if there are insufficient shares in the account designated by the
delivery order submitted to OCC, or in the default account if the
delivery order did not specify an account, OCC would reject the return
instruction rather than fulfill the return to the extent of the shares
in the designated or default account, as applicable. If an account was
designated in the delivery order, OCC would fulfill the return based
only on that account and would reject the return instruction
[[Page 73478]]
if sufficient shares were not available in that account rather than
applying shares in the default account to cover the excess.
Current OCC Rule 2209A(a)(2) (i.e., proposed OCC Rule
2216A(a)(5) per the reorganization discussed below), which concerns the
termination of Market Loans upon receipt of end-of-day information from
DTC concerning return or recall delivery orders, would be amended to
delete the phrase ``and reduce the respective Clearing Members' open
stock loan and stock borrow positions accordingly.'' This phrase refers
to adjustments required for aggregated stock loan and stock borrow
positions, which would not be relevant under the contract-level
recordkeeping proposal. OCC would also remove the phrase ``the end of
the day'' with respect to the stock loan activity files it receives
from DTC because OCC receives and processes such information from DTC
throughout the business day.
(l) Aligning Mark-to-Market Settlement to Accounts
Under the proposed rules designed to facilitate OCC's new clearance
and settlement system, OCC would end the practice of limiting cash
settlement of daily mark-to-market of cash collateral to the Clearing
Member's firm account or combined Market-Makers' account. Instead, cash
settlement will occur in the account in which the stock loan or stock
borrow position is held. OCC implemented the current structure for
settlement of mark-to-market payments in 1997 and 1998.\54\ At that
time, OCC believed that settlement through a firm's lien account would
prevent premiums by option writers (which constitute customer funds)
from being netted against stock loan mark-to-market payments from a
clearing member (which do not constitute customer funds). The
assumption at the time appears to have been that stock loan
transactions would be limited to loans initiated by a Clearing Member
in its capacity as principal. However, fully paid for lending programs
have developed over the last two decades that allow customers to earn
returns on their portfolios by allowing their broker to lend their
shares.
---------------------------------------------------------------------------
\54\ See Exchange Act Release No. 40083 (June 11, 1998), 63 FR
33424-01 (Jun 18, 1998) (File No. SR-OCC-98-03); Exchange Act
Release No. 39738 (Mar. 10, 1998), 63 FR 13082 (Mar. 17, 1998) (File
No. SR-OCC-97-11).
---------------------------------------------------------------------------
The proposed change would align mark-to-market cash settlements
with positions by deleting current OCC Rules 2201(a)(iii) and
2201A(a)(iii), as relocated to proposed OCC Rules 2207(a)(1)(C) and
2207A(a)(1)(C), which require Clearing Members to provide OCC with
standing instructions identifying the Clearing Member's firm accounts
or combined Market-Makers' accounts from which mark-to-market payments
are to be made. No standing instruction would be needed because OCC
will simply settle the mark-to-market payments in whichever account the
stock loan or stock borrow position is held. In addition, OCC would
amend current OCC Rules 2204(a) and 2204A(a), the relevant portions of
which would be renumbered OCC Rules 2209(a) and 2209A(a), respectively,
to provide that any mark-to-market payment shall be made in the account
in which the Hedge Loan or Market Loan is held.
OCC would also delete the last clause to Interpretation and Policy
.04 to Rule 1104, which concerns the use of a Liquidating Settlement
Account to satisfy mark-to-market obligations arising from a suspended
Clearing Member's stock loan or borrow positions in customers'
accounts. That clause provides for use of the Liquidating Settlement
Account notwithstanding that such mark-to-market payments may settle in
another account under current Rules 2201(a) and 2201A(a). This
clarifying clause would no longer be relevant because of the alignment
of settlement with the accounts in which the positions are held.
(m) Simplifying Mark-to-Market Calculations
Because OCC proposes to end the practice of aggregating stock loan
and stock borrow positions, OCC also proposes to simplify the mark-to-
market calculation described in proposed OCC Rules 2209 and 2209A.
Currently, the mark-to-market calculation focuses on the value of the
loaned shares of stock.\55\ Specifically, it takes the quantity of
stock that is on loan each morning and marks it to a closing price each
night. Quantities of stock that correspond to new loans put on during
the day are also marked to the end-of-day closing price. As such, the
calculation was designed with the practice of aggregating stock loan
and stock borrow positions for the same Eligible Stock in mind. The
proposed mark-to-market calculation will instead focus on the change to
the contract value of a Clearing Member's stock loans. Specifically,
proposed OCC Rules 2209(b) and 2209A(b) would provide that the mark-to-
market payment will be the amount necessary to cause the amount of
Collateral to be equal to the Collateral requirement applicable to the
Stock Loan. For Hedge Loans, the Collateral requirement is either 100%
or 102% of the mark-to-market value of the Loaned Stock, depending on
which percentage the parties selected when initiating the Hedge Loan.
For Market Loans, as discussed above, the Collateral requirement would
be fixed at 102% of the value of the Loaned Stock, which is the
collateralization for all Market Loans currently. While this proposed
amendment would change the way OCC makes mark-to-market calculations,
the change would have no impact on the results of the calculation.
---------------------------------------------------------------------------
\55\ See OCC Rules 2204(a); 2204A(a).
---------------------------------------------------------------------------
(n) Re-Matching Matched Book Positions in Suspension Across Stock Loan
Programs
The proposed changes would also extend OCC's authority to close out
and re-establish the Matched-Book Positions of a suspended Clearing
Member to the Market Loan Program and would allow re-matching in
suspension across the Hedge and Market Loan Programs. Under the current
Hedge Program, OCC has authority to terminate Matched-Book Positions by
offset and re-matching with other Clearing Members.\56\ OCC's authority
to re-match Matched-Book Positions in suspension facilitates the
orderly and efficient termination and re-establishment of stock loans
involving suspended Clearing Members, thereby mitigating operational
and price dislocation risks that may arise for non-defaulting Clearing
Members if OCC were required to unwind positions by recalling all
borrowed securities from specific Borrowing Clearing Members and
returning those securities to specific Lending Clearing Members.
Extending such re-matching authority to the Market Loan Program and
allowing re-matching across OCC's two Stock Loan Programs would also
align OCC's close-out processes with how OCC already margins stock loan
and borrow positions. Specifically, stock loan and borrow positions
covering the same Eligible Stock in either program are treated under
OCC's margin methodology as fungible and are permitted to offset one
another in calculating a Clearing Member's margin requirement for the
relevant account.
---------------------------------------------------------------------------
\56\ See OCC Rule 2212.
---------------------------------------------------------------------------
OCC would extend re-matching authority and allow for re-matching
across programs by inserting a new OCC Rule 2219A to the Rules
governing the Market Loan Program. The new rule would be similar in
structure and content to current OCC Rule 2212, which concerns re-
matching in
[[Page 73479]]
suspension for the Hedge Program. Proposed OCC Rule 2219A(a) would
provide that, in the event that a suspended Clearing Member has
Matched-Book Positions within the Hedge or Market Loan Programs, OCC
will, upon notice to affected Clearing Members, close out the suspended
Clearing Member's Matched-Book Positions to the greatest extent
possible by (i) the termination by offset of stock loan and stock
borrow positions that are Matched-Book Positions in the suspended
Clearing Member's account(s) and (ii) OCC's re-matching in the order of
priority in paragraph (c) of stock borrow positions for the same number
of shares in the same Eligible Stock maintained in a designated account
of a Matched-Book Borrowing Clearing Member against a stock lending
position for the same number of shares in the same Eligible Stock
maintained in a designated account of a Matched-Book Lending Clearing
Member.
Under proposed OCC Rule 2219A(b), as under current OCC Rule
2212(b), the Matched-Book Borrowing Clearing Member and Matched-Book
Lending Clearing Member would not be required to issue instructions to
DTC to terminate the relevant stock loan and stock borrow positions or
to initiate new stock loan transactions to reestablish such positions,
as the affected positions would be re-matched without requiring the
transfer of securities against the payment of settlement prices.
Proposed OCC Rule 2219A(c), as under current OCC Rule 2212(c),
would provide that OCC shall make reasonable efforts to re-match
Matched-Book Borrowing Clearing Members with Matched-Book Lending
Clearing Members that maintain MSLAs executed between them, based upon
information provided by Clearing Members to OCC on an ongoing basis.
OCC would be entitled to rely on, and would have no responsibility to
verify, the MSLA records provided by Clearing Members and on record as
of the time of re-matching. As under current OCC Rule 2212(d), proposed
Rule OCC 2219A(c)(1) through (13) would require the termination by
offset and re-matching be done using a matching algorithm in which the
Matched-Book Positions of the suspended Clearing Member are first
terminated by offset and then affected Matched-Book Borrowing Clearing
Members and Matched-Book Lending Clearing Members are re-matched in
order of priority based first upon whether the re-matched Clearing
Members have an existing MSLA between them or, in the case of Anonymous
Market Loans, can be kept anonymous by re-matching with a Matched-Book
Position that is another Anonymous Market Loan initiated through the
same Loan Market. OCC believes prioritizing the re-matching of
Disclosed Market Loans between parties that have MSLAs and re-matching
that results in maintaining Anonymous Market Loans will limit the
number of returns that may be initiated for re-matching that results in
Disclosed Market Loans between parties who have not executed an MSLA.
Specifically, under the re-matching algorithm, OCC would select the
largest stock loan or stock borrow position in a given Eligible Stock
from the suspended Clearing Member's Matched-Book Positions within the
Hedge Program. The selected positions would then be re-matched with the
largest available stock borrow or stock loan positions within the Hedge
Program, as applicable, for the selected Eligible Stock for which a
MSLA exists between a Matched-Book Borrowing Clearing Member and a
Matched-Book Lending Clearing Member. OCC would repeat this process
until all potential re-matching between Matched-Book Borrowing Clearing
Members and Matched-Book Lending Clearing Members with MSLAs is
completed for positions within the Hedge Program. Simultaneously, OCC
would perform the same re-matching process within the Market Loan
Program for (i) Matched-Book Positions that are Disclosed Market Loans
for which a MSLA exists between a Matched-Book Borrowing Clearing
Member and a Matched-Book Lending Clearing Member, and (ii) Matched-
Book Positions that are Anonymous Market Loans initiated through the
same Loan Market. After re-matching to the extent possible within the
Market Loan Program based on manner of initiation and trade source, OCC
would proceed to re-match Matched-Book Positions within the Market Loan
Program for which an MSLA exists between a Matched-Book Borrowing
Clearing Member and a Matched-Book Lending Clearing Member, without
regards to whether Matched-Book Position was part of a Disclosed Market
Loan or Anonymous Market Loan.
After matching Matched-Book Positions to the extent possible
between borrowers and lenders with existing MSLAs within both the Hedge
Program and the Market Loan Program, OCC would then select the largest
remaining stock loan or stock borrow positions for a given Eligible
Stock regardless of whether the position is a Hedge Loan or a Market
Loan and re-match it with the largest available stock borrow or stock
loan position for the selected Eligible Stock in the other Stock Loan
Program for which an MSLA exists between the lenders and borrowers in
the other Stock Loan Program, regardless of whether the Market Loan
selected or matched is a Disclosed Market Loan or Anonymous Market
Loan. OCC would repeat this process until it has rematched all Matched-
Book Positions to the extent possible between parties to existing MSLAs
between the two Stock Loan Programs.
After re-matching among lenders and borrowers with existing MSLAs,
the process would then be repeated for all remaining Matched-Book
Positions for which MSLAs do not exist between the lenders and
borrowers. OCC would first complete such rematching to the extent
possible within each program. The re-matching process would then be
repeated for all remaining Matched-Book Positions across the Stock Loan
Programs for which MSLAs do not exist between the lenders and
borrowers. Remaining positions that are not able to be rematched either
within or across programs would then be closed-out pursuant to the
rules governing close-out of Hedge Loans or Market Loans, as
applicable.
Under proposed OCC Rule 2219A(d), as under current OCC Rule
2212(e), in the event Borrowing and Lending Clearing Members are re-
matched through this process, the re-matched positions would be
governed by the pre-defined terms and instructions established by the
Lending Clearing Member pursuant to renumbered OCC Rule 2207 (for Hedge
Loans) or Rule 2207A (for Market Loans). For Matched-Book Positions re-
matched across programs, the resulting re-matched loan would be a Hedge
Loan. If the re-matched positions were Anonymous Market Loans, the
resulting Loan would be an Anonymous Market Loan. However, if one of
the positions was a Disclosed Market Loan or the positions were
Anonymous Market Loans initiated through different Loan Markets, the
resulting loan would be a Disclosed Market Loan. Going forward, such a
Disclosed Market Loan would be deemed to have been initiated through
OCC, which would facilitate re-matching within the Market Loan Program
for parties who are not subscribers to a Loan Market. Pursuant to
proposed OCC Rule 2219A(j), the re-matched Clearing Members may choose
to execute an MSLA or close-out the re-matched positions in accordance
with proposed OCC Rules 2213 or 2216A, as applicable.
Under proposed OCC Rule 2219A(e), which corresponds to the second
sentence of current OCC Rule 2212(e),
[[Page 73480]]
any change in Collateral requirements arising from a change in the
terms of stock loan or stock borrow positions between a Lending
Clearing Member and Borrowing Clearing Member with re-matched positions
would be included in the calculation of the mark-to-market payment
obligations on the stock loan business day following the completion of
the positions adjustments as set forth in proposed OCC Rule 2219A(f).
Under proposed OCC Rule 2219A(f), as under current OCC Rule
2212(f), the termination by offset and re-matching of positions would
be complete upon OCC completing all position adjustments in the
accounts of the suspended Clearing Member and the Borrowing Clearing
Members and Lending Clearing Members with re-matched positions and the
applicable systems reports are produced and provided to the Clearing
Members reflecting the transactions.
Under proposed OCC Rules 2219A(g) through (i), from and after the
time OCC has completed the position adjustments as set forth in
proposed OCC Rule 2219A(f), the suspended Clearing Member would have no
further obligations under the By-Laws and Rules with respect to such
positions; however, a Borrowing Clearing Member with re-matched stock
borrow positions would remain obligated as a Borrowing Clearing Member
and a Lending Clearing Member with re-matched stock loan positions
would remain obligated as a Lending Clearing Member as specified in the
By-Laws and Rules applicable to the Stock Loan Programs. Furthermore,
upon notification that OCC has completed the termination by offset and
re-matching of stock loan and borrow positions, the suspended Clearing
Member and Borrowing Clearing Members and Lending Clearing Members with
re-matched positions would be required promptly to make any necessary
bookkeeping entries at DTC to ensure the accuracy and efficacy of those
stock loan terms not governed by OCC's By-Laws and Rules. Under
proposed OCC Rule 2219A(j), as under current OCC Rule 2212(j),
Borrowing Clearing Members and Lending Clearing Members that have been
re-matched would be required to work in good faith to either (i)
reestablish any terms, representations, warranties and covenants not
covered by the By-Laws and Rules (e.g., establish an MSLA) or (ii)
terminate the re-matched stock loan or borrow positions in the ordinary
course pursuant to OCC Rules 2213 or 2216A, as applicable, as soon as
reasonably practicable.
Because OCC has designed proposed OCC Rule 2219A to address the
process for re-matching in suspension in both Stock Loan Programs, OCC
further proposes to delete current OCC Rule 2212, which concerns re-
matching in suspension for the Hedge Program, and replace it, as
renumbered to proposed OCC Rule 2217, with a cross-reference to
proposed OCC Rule 2219A.
By-Laws and Rules Reorganization and Restatement
OCC would also make a number of other clarifying, conforming, and
organizational changes to OCC's By-Laws and Rules, and rule-filed
policies that reference the By-Law and Rules provisions governing the
Stock Loan Programs.
(a) Reorganization
OCC proposes to reorganize the provisions of OCC's By-Laws and
Rules relating to the Stock Loan Programs into newly revised Chapter
XXII (Hedge Loan Program) and Chapter XXIIA (Market Loan Program). This
consolidation of rules governing the Stock Loan Programs is similar to
changes OCC made to migrate By-Laws governing OCC's Clearing Fund and
membership standards to the Rules.\57\ As part of these changes, OCC
would preserve the governance requirements concerning amendments to the
stock loan-related By-Laws migrated to the Rules by amending Article
XI, Section 2 of the By-Laws.
---------------------------------------------------------------------------
\57\ See Exchange Act Release No. 97439, supra note 51, 88 FR at
30377 (membership standards); Exchange Act Release No. 83735 (July
27, 2018), 83 FR 37855, 36859 (File No. SR-OCC-2018-008) (Clearing
Fund).
---------------------------------------------------------------------------
The provisions governing the Stock Loan Programs are currently
found in Articles XXI and XXIA of OCC's By-Laws and Chapters XXII and
XXIIA of the OCC Rules. Because the proposed changes to the Stock Loan
Programs would substantially amend the relevant By-Law and Rule
provisions, OCC believes that this is an appropriate opportunity to
consolidate the primary provisions that address the Stock Loan Programs
into Chapters XXII and XXIIA of the Rules. As a result, the content of
Articles XXI and XXIA of the By-Laws would be consolidated into
Chapters XXII, XXIIA and, with respect to definitions, Chapter I of the
OCC Rules, subject to the proposed amendments described in this rule
filing. OCC would also migrate to the OCC Rules the definitions
currently located in Article I of the By-Laws that are specific to the
Stock Loan Programs.\58\ To account for migrated definitions of terms
that are used elsewhere in the By-Laws, OCC would revise the By-Law
definition to refer to the definition of that term in OCC Rule 101.\59\
OCC believes that consolidating the provisions governing the Stock Loan
Programs into one place would provide more clarity around, and enhance
the readability of, OCC's rules governing the Stock Loan Programs. OCC
has included a chart mapping the provisions moved from the By-Laws to
the Rules, and the resulting renumbering of existing Rules, in Exhibit
3A to File No. SR-OCC-2024-011.
---------------------------------------------------------------------------
\58\ See By-Law Art. I, Sec. 1.B.(4), E.(3), H.(1), L.(2),
L.(5), M.(3)-(4), M.(7)-(9), S. (19), (21)-(23). Rule 101 provides
that terms in the Rules have the meanings defined in the By-Laws or
as set forth in the Rules.
\59\ References to the definition of the terms ``stock borrow
position'' and ``stock loan position'' in proposed Rule 101 would be
retained in the By-Laws because these terms are referenced in
certain other definitions in the By-Laws, as well as Article VI,
Section 27 of the OCC By-Laws (Close-Out Netting).
---------------------------------------------------------------------------
To preserve the governance requirements for amendments to the By-
Law provisions that would be migrated to the Rules, OCC would also
amend Article XI of the By-Laws. Specifically, OCC would amend Article
XI, Section 2 of the By-Laws, which requires the affirmative vote of
two-thirds of the directors then in office (but not less than a
majority of the number of directors fixed by the By-Laws) to amend
certain enumerated provisions. Specifically, OCC would add Rule 2201,
Rule 2203, Rule 2204, Rule 2205, Rule 2206(a) and (d), Rule 2213(e)(1),
Rule 2214(e)(1), Rule 2201A, Rule 2203A, Rule 2204A, Rule 2205A and
Rule 2206A(a)-(c) and (f) to these enumerated provisions.
(b) Restatement
In addition to consolidating the By-Laws and Rules specific to the
Stock Loan Programs within the Rules, OCC proposes to restate those
provisions and make certain other changes for clarity and consistency.
The changes would include (i) global changes across the By-Laws and
Rules to add courtesy titles and standardize terms; (ii) integration of
Interpretations and Policies within the Stock Loan Program rules into
the body of the text of the Rules themselves; and (iii) certain other
administrative or technical changes to the rule text.
(i) Global Changes
Global changes to be applied across the By-Laws and Rules
concerning the Stock Loan Programs include:
Adding courtesy titles to the beginning of paragraphs or
other subdivisions, where appropriate, to aid the reader in locating
provisions governing specific topics.
Replacing references to ``Stock Loan'' that are specific
to the Hedge Program with ``Hedge Loan'' in order to
[[Page 73481]]
better differentiate between Hedge Loans and Market Loans while the
Hedge Program is still in place. Use of the defined term ``stock loan''
would be retained when referring to either a Hedge Loan or a Market
Loan or both as the context requires.\60\ Reference to the ``Stock
Loan/Hedge Program'' would remain unchanged.
---------------------------------------------------------------------------
\60\ See, e.g., Exhibit 5A to SR-OCC-2024-011, proposed OCC Rule
101.S.(6), (7), (9), (10); Rules 2201-2206; Rules 2209-2216.
---------------------------------------------------------------------------
Replacing references to ``Hedge Clearing Member'' or
``Market Loan Clearing Member'' with ``Clearing Member,'' ``Borrowing
Clearing Member,'' or ``Lending Clearing Member,'' as applicable, to
simplify OCC's membership structure and reflect that Clearing Members
may be authorized to transact in either program.\61\
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\61\ See, e.g., Exhibit 5A to SR-OCC-2024-011, proposed OCC Rule
1006(h)(C); Rule 2202; Rules 2206-2210; Rules 2213- 2214; Rule 2215-
17; Rule 2202A; Rules 2207A-2212A; Rules 2216A-2219A.
---------------------------------------------------------------------------
(ii) Interpretations and Policies
OCC would also relocate current Interpretations and Policies
(``I&P'') within Chapters XXI and XXIA of the Rules by moving those
provisions within the body of the applicable Rules, subject to any
further amendments discussed herein. The location of the text as
reorganized within the Rules is included in Exhibit 3A to SR-OCC-2024-
011 and noted in footnotes to the proposed rule text in Exhibit 5A to
SR-OCC-2024-011.\62\ OCC believes that consolidating the I&Ps, which
have no less legal effect than the text of the Rules themselves, would
provide more clarity around, and further enhance the readability of,
OCC's Rules governing the Stock Loan Programs.
---------------------------------------------------------------------------
\62\ See, e.g., Exhibit 5A to SR-OCC-2024-011, proposed OCC Rule
2206(b) (replacing Rule 2201, I&P .01); Rule 2206(c)(1) (replacing
Rule 2201 I&P .02); Rule 2206(d) (replacing By-Law Art. XXI Sec. 5,
I&P .01); Rule 2214(e)(1) (replacing By-Law Art. XXI Sec. 2,
I&P.01); Rule 2206A(d) (replacing Rule 2201A, I&P .01); Rule
2206A(e) (replacing Rule 2201A, I&P .02); Rule 2206A(f) (replacing
I&P By-Law Art. XXIA Sec. 5, I&P .01).
---------------------------------------------------------------------------
In certain instances, OCC is proposing to eliminate the existing
Interpretations and Policies altogether:
Interpretations and Policies .01 to current OCC Rules 2202
and 2202A, which concern the position information OCC provides to
Clearing Members on an intraday basis, would be deleted because they
concern a topic covered by and more properly addressed in proposed OCC
Rules 2210 and 2210A (Daily Reports). The specific information
referenced in those Interpretations and Policies--i.e., new position,
transfer positions, returns and cancels--would be integrated into the
proposed Rules.
I&P .01 to current OCC Rule 2210 (Suspension of Hedge
Clearing Members--Pending and Open Stock Loans) and OCC Rule 2210A
(Suspension of Market Loan Clearing Members--Pending and Open Market
Loans)--which refers the reader to Interpretation and Policy .02 of OCC
Rule 1104 for a description of OCC's private auction process--would be
deleted. In its place, a cross-reference to that description would be
added to paragraph (b) of that Rule, as renumbered to OCC Rule 2215 per
the reorganization discussed above.
(iii) Administrative Changes
OCC would also improve the clarity and readability of certain
Rules, including by:
breaking certain lengthy Rule provisions into
subparagraphs with additional convenience headings to aid the reader in
navigating the requirements and obligations therein;
numbering provisions with multiple paragraphs that are
currently unnumbered, in whole or in part, or with lengthy provisions
that can be split into multiple paragraphs, and adding convenience
headings to paragraphs, where such convenience headings would be
helpful to the reader.\63\
---------------------------------------------------------------------------
\63\ See, e.g., Exhibit 5A to SR-OCC-2024-011, proposed OCC Rule
2202(b)(1)-(3); Rule 2203(b)(1)-(2), (c)(1)-(2), (d)(1)-(2); Rule
2204(a)-(b); Rule 2205(a)-(b); Rule 2207(a)(1)-(3); Rule 2213(b)(1)-
(2); Rule 2214(b)(1)-(6), (c)(1)-(4); Rule 2216(a)-(d); Rule
2202A(b)(1)-(3); Rule 2206A(a)(1)-(2); Rule 2207A(a)(1)-(3); Rule
2216A (d)(1)-(2); Rule 2218A(a)-(d).
---------------------------------------------------------------------------
renumbering subdivisions in Chapters XXII and XXIIA based
on a consistent numbering convention for (a) paragraphs, (1)
subparagraphs, and (A) items.\64\
---------------------------------------------------------------------------
\64\ See, e.g., Exhibit 5A to SR-OCC-2024-011, proposed Rule
2202(b)(2)(A)-(E).
---------------------------------------------------------------------------
updating cross-references found throughout the By-Laws and
Rules based on the proposed reorganization and renumbering.
improving consistency of the text between similar Hedge
Program and Market Loan Program rules; \65\
---------------------------------------------------------------------------
\65\ See, e.g., Exhibit 5A to SR-OCC-2024-011, proposed OCC Rule
101.C.(4), L.(2), M.(1), S.(2) (conforming language in definitions
specific to Hedge Loans and Market Loans); Rule 2213 (modifying
title to ``Termination of Hedge Loans'' based on a similar title for
current Market Loan Rule 2209A); Rule 2202A(b)(2)(E) (amending the
Rule for initiation of Market Loans to include novation provisions
governing Hedge Loans).
---------------------------------------------------------------------------
deleting duplicative provisions of the Rules that merely
refer the reader to substantive rights and obligations located
elsewhere in the Rules; \66\
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\66\ See, e.g., Exhibit 5A to SR-OCC-2024-011, proposed OCC Rule
2202(d) & I&P .01 (deleting duplicative Borrowing Clearing Member
obligations located in proposed OCC Rules 2209 and 2211); Rule
2202A(e) (deleting duplicative Borrowing Clearing Member obligations
located in proposed OCC Rules 2209A and 2211A).
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OCC would also make conforming edits to OCC's Margin Policy and the
Recovery and Orderly Wind-Down Plan (``RWD Plan''). Specifically, OCC's
Margin Policy references OCC's default management practices under
current Rules 2211 and 2211A, which provide that OCC may instruct a
non-defaulting Clearing Member to buy-in or sell-out of positions. The
proposed rule change would renumber those references to Rules 2216 and
2218A, respectively. OCC would also amend the description of the margin
add-on in the Margin Policy to capture the full range of factors that
determine the margin add-on charge for stock loan activity (i.e.,
collateral rate, mark-to-market pricing, dividends and distributions
announced by an issuer, and rebate payments). Similarly, references in
the RWD Plan to Section 2(c) of Article XXI of the By-Laws and Rule
2209A(d), which refer to OCC's authority to terminate the Stock Loan
Programs, would be renumbered to proposed Rules 2213(e) and
2216A(d)(2), respectively, and the excerpted text of those Rules
appearing in the RWD Plan would be conformed with the text as amended
by this proposed rule change.
Implementation Timeframe
OCC will implement the proposed changes at the time Ovation becomes
OCC's system of record, which is planned to launch no earlier than July
of 2025.\67\ OCC will announce the implementation date of the proposed
change by Information Memorandum posted to its public website at least
four weeks prior to implementation. OCC plans to launch Ovation and
implement the proposed changes no later than December 31, 2025, and OCC
will announce another intended implementation date by Information
Memorandum posted to its public website if the changes will not be
implemented by that date.
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\67\ See https://www.theocc.com/Participant-Resources (linking
to reference guides and timelines for the launch of Ovation).
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(2) Statutory Basis
OCC believes the proposed rule change is consistent with Section
17A of the Exchange Act and the rules and regulations thereunder.
Section 17A(b)(3)(F) of the Exchange Act \68\ requires, among other
things, that the rules of a clearing agency (i) promote the prompt and
accurate clearance and
[[Page 73482]]
settlement of securities transactions and, to the extent applicable,
derivative agreements, contracts, and transactions; (ii) assure the
safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible; (iii) in
general, protect investors and the public interest; and (iv) are not
designed to permit unfair discrimination among participants in the use
of the clearing agency. OCC believes that the proposed rule change
would promote the prompt and accurate clearance and settlement of stock
loan transactions, assure the safeguarding of securities and funds at
OCC, protect investors and the public interest, and not unfairly
discriminate among Clearing Members for the reasons below.
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\68\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
Enhancements To Facilitate OCC's New Clearance and Settlement System
As described above, the proposed changes would involve certain
changes to accommodate OCC's new clearance and settlement system,
including by transitioning away from the legacy practice of aggregating
positions in the same Eligible Stock into stock loan and stock borrow
positions to contract-level record keeping. Contract-level
recordkeeping would allow Clearing Members to see more precisely the
contracts with shares lent by lender and borrower, which aligns to the
record keeping industry standard. Allowing for terms to be recorded at
the contract level will allow OCC to record other terms at the contract
level, including terms related to OCC's guaranty of substitute dividend
and rebate payments. Eliminating position aggregation would also allow
OCC to simplify the calculation for mark-to-market payments in OCC's
Rules. And by aligning mark-to-market payments to the accounts in which
a stock loan position is held, OCC would end the practice of requiring
cash mark-to-market payments for stock loan or stock borrow positions
to settle in a Clearing Member's firm lien account or combined Market-
Makers' account. Aligning mark-to-market cash settlements with the
accounts in which the position is held simplifies OCC's processes and
reduces complexity. Accordingly, OCC believes that conforming its
practices for maintaining stock loan and stock borrow positions to
industry standards and simplifying its processes for marking those
positions to market helps to promote the prompt and accurate clearance
and settlement of stock loan transactions, and protect investors and
the public interest by reducing operational complexity that could cause
delay and impose costs on market participants.
The proposed changes to allow for re-matching of Matched-Book
Positions in suspension also promote the prompt and accurate clearance
and settlement of securities and derivatives transactions, the
safeguarding of securities and funds at OCC, and the protection of
securities investors and the public interest in accordance with Section
17A(b)(3)(F) of the Exchange Act \69\ and Rule 17Ad-22(e)(13) \70\ and
(e)(23) \71\ thereunder. Rule 17Ad-22(e)(13) requires covered clearing
agencies to establish, implement, maintain and enforce written policies
and procedures reasonably designed to, in part, ensure the covered
clearing agency has the authority and operational capacity to take
timely action to contain losses and liquidity demands and continue to
meet its obligations in the event of a Clearing Member default.\72\
Rule 17Ad-22(e)(23) requires covered clearing agencies to maintain
written policies and procedures reasonably designed to, among other
things, provide for publicly disclosing all relevant rules and material
procedures, including key aspects of its default rules and
procedures.\73\
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\69\ 15 U.S.C. 78q-1(b)(3)(F).
\70\ 17 CFR 240.17Ad-22(e)(13).
\71\ 17 CFR 240.17Ad-22(e)(23).
\72\ 17 CFR 240.17Ad-22(e)(13).
\73\ 17 CFR 240.17Ad-22(e)(23).
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As noted above, a significant portion of the activity in OCC's
Hedge Program relates to matched-book activity. Under the current Hedge
Program Rules, OCC has authority to perform an orderly close out of a
suspended Hedge Clearing Member's Matched-Book Positions through the
termination by offset and rematching of such positions without
requiring the transfer of securities against the payment of settlement
prices as currently required under OCC Rule 2211. As a result, the
Hedge Program rules minimize the potential for operational and
execution risks and eliminate any risk resulting from potential price
dislocation between recall and return transactions. Extending this
authority to the Market Loan Program would provide the same benefits.
In addition, by allowing re-matching across OCC's Stock Loan Programs,
the proposed rule change would more closely align OCC's close-out
process with the assumptions underlying OCC's margin methodology,
STANS. Specifically, STANS assumes stock loan and borrow positions
covering the same Eligible Stock in OCC's Stock Loan Programs are
fungible and are permitted to offset one another in calculating a
Clearing Member's margin requirement for the relevant account. Allowing
for re-matching across Stock Loan Programs is consistent with this
assumption. OCC believes the proposed rule change will strengthen the
risk management processes in place at OCC by mitigating the risks
involved in the buy-in/sell-out of Matched-Book Positions as well as
provide the overall marketplace with more stability with respect to the
Stock Loan Programs. OCC therefore believes the proposed rule change is
designed to promote the prompt and accurate clearance and settlement of
securities transactions, the safeguarding of securities and funds in
the custody or control of OCC or for which it is responsible and, in
general, to protect investors and the public interest in accordance
with Section 17A(b)(3)(F) of the Exchange Act,\74\ and would establish
default procedures for the Market Loan Program that ensure that OCC can
take timely action to contain losses and liquidity pressures and
continue meeting its obligations in the event of a participant default
in accordance with Rule 17Ad-22(e)(13).\75\
---------------------------------------------------------------------------
\74\ 15 U.S.C. 78q-1(b)(3)(F).
\75\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------
In addition, OCC would use a matching algorithm to re-match stock
loan and stock borrow positions in order of priority based on the
largest available stock borrow or stock loan positions, as applicable,
for the selected Eligible Stock for which a MSLA exists between the
Borrowing and Lending Clearing Members or for which both positions are
Anonymous Market Loans. In the event parties to a resulting Disclosed
Market Loan do not have existing securities lending relationships,
those members may choose to either work in good faith to reestablish
any terms, representations, warranties and covenants not governed by
the By-Laws and Rules (e.g., MSLA) or to terminate the re-matched stock
loan or borrow positions in the ordinary course pursuant to renumbered
OCC Rules 2213 and 2216A, as soon as reasonably practicable. The
proposed rule change therefore provides for an objective process for
re-matching stock loan and borrow positions and ensures that members
that initiated Anonymous Market Loans or that have existing securities
lending relationships are re-matched to the greatest extent possible
and would still allow for Clearing Members that are re-matched but that
do not have existing securities lending relationships to terminate such
positions in the ordinary course pursuant to renumbered OCC Rules
[[Page 73483]]
2213 and 2216A. As a result, OCC believes that the proposed rule change
is designed to not permit unfair discrimination among participants in
the use of the clearing agency in accordance with Section 17A(b)(3)(F)
of the Exchange Act.\76\ Furthermore, the proposed rule change would
make key aspects of OCC's default procedures with respect to the close
out of Matched-Book Positions in suspension public by amending OCC's
Rules, which are posted to OCC's website, consistent with Rule 17Ad-
22(e)(23).\77\
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\76\ 15 U.S.C. 78q-1(b)(3)(F).
\77\ 17 CFR 240.17Ad-22(e)(23).
---------------------------------------------------------------------------
Market Loan Program Enhancements
The proposed enhancements specific to the Market Loan Program would
also promote the prompt and accurate clearance and settlement of stock
loan transactions and, in general, protect investors and the public
interest. Allowing for bilaterally negotiated Stock Loans in the Market
Loan Program would allow OCC to expand its guaranty of cash
distributions, such as substitute dividend and rebate payments, to such
loans, limiting existing counterparty risks that remain for Hedge
Loans, in which such payments must be resolved by the counterparties
away from OCC. Transitioning bilaterally negotiated transactions to the
Market Loan Program would also reduce operational burden associated
with the reconciliation process and risk associated with errors that
currently occur under the Hedge Program because settlement at DTC
currently occurs prior to OCC's validation and acceptance of the
transaction. Under the enhanced Market Loan Program, such bilaterally
negotiated transactions would be submitted directly to OCC, which would
validate the trade before sending delivery instructions to DTC, thereby
helping to identify and resolve any errors prior to settlement
occurring. Accordingly, OCC believes that expanding the Market Loan
Program to include direct submission of bilaterally negotiated stock
loans would promote the prompt and accurate clearance and settlement of
stock loan transactions and protect investors and the public interest.
Allowing for the submission of bilateral transactions through the
Market Loan Program would also help simplify OCC's post-trade
processing of stock loan transactions. For instance, allowing Borrowing
Clearing Members to send return instructions directly to OCC for
bilaterally initiated Market Loans would help eliminate errors in the
Hedge Program that occur when notices of returns initiated through DTC
are not received by OCC with the correct reason codes, resulting in
position breaks. The proposed changes would disclose OCC's process for
affirming transactions related to bilaterally negotiated Market Loans
submitted directly to OCC, which would give members opportunities to
affirm or reject transactions within time-frames specified by OCC,
after which OCC would either reject the transaction if not affirmed
(i.e., new loans) or would be deemed affirmed and processed accordingly
(i.e., returns, buy-ins, sell-outs), thereby avoiding transactions that
would pend indefinitely. The proposed changes would also accommodate
modifications to certain terms, such as the rebate rate, interest rate
benchmark or the loan term, without the need for those loans to be
returned. The proposed changes would also improve OCC's control over
the buy-in process by giving OCC the authority to prevent situations in
which a Borrowing Clearing Member that failed to deliver the Loaned
Stock in response to a recall instruction then attempts to deliver the
Loaned Stock after the Lending Clearing Member may initiate a buy-in.
OCC's new clearance and settlement system would also assume certain
processes currently performed by a Loan Market, including calculation
of payments with respect to cash distributions for substitute dividend
and rebate payments. Consolidating such processing at OCC will help
ensure consistency across Market Loans, regardless of whether initiated
through a Loan Market or directly with OCC. Assuming the responsibility
to calculate such payments would also allow OCC to eliminate Rules
intended to limit OCC's guaranty for such payments to the margin OCC
collected in reliance on the Loan Market's determinations. OCC would
also modify the Market Loan rules concerning the collateralization rate
and mark-to-market pricing, which are currently set by the Loan Market.
Fixing collateral at the single rate of 102%, which is the Loan
Market's rate, would minimize complexity in the evaluation of a
member's Stock Loan portfolio for the purposes of liquidation in the
event of a default. Accordingly, OCC believes that these post-trade
processing enhancements to the Market Loan Program would promote the
prompt and accurate clearance and settlement of stock loan transactions
and protect investors and the public interest.
Finally, the proposed enhancements to support Canadian Clearing
Members in the Market Loan Program would also promote the prompt and
accurate clearance and settlement of stock loan transactions, assure
the safeguarding of securities and funds at OCC, and protect investors
and the public interest. The introduction of withholding
responsibilities would introduce new complications and risks into OCC's
clearance and settlement process and could create uncertainty around
the settlement of funds at OCC, as discussed in detail in connection
with OCC's proposed rule change to address the implementation of I.R.C.
Section 871(m) with respect to OCC's listed options transactions.\78\
The proposed rule change would implement prudent, preventive measures
to protect OCC against the obligation for any withholding (and any
resulting liability) by (a) applying similar conditions for the payment
of substitute dividends as those for dividend equivalent payments for
listed options; (b) preventing a Canadian Clearing Member from
executing Market Loans in its capacity as a Borrowing Clearing Member
for Canadian Securities, which may give rise to withholding obligations
under Canadian law; (c) clarifying Canadian Clearing Member membership
requirements such that Positive Rebate transactions would be subject to
exemptions from withholding under U.S. law; and (d) preventing a
Canadian Clearing Member from executing Market Loans with Negative
Rebate in its capacity as a Borrowing Clearing Member for its own
account, which may give rise to withholding obligations under U.S. Law.
OCC believes these steps are necessary to prevent tax withholding
obligations that OCC is not currently able to identify or collect.
Thus, OCC believes the proposed rule change is designed to promote the
prompt and accurate clearance and
[[Page 73484]]
settlement of securities and derivatives transactions, the safeguarding
of securities and funds at OCC, and the protection of securities
investors and the public interest in accordance with Section
17A(b)(3)(F) of the Exchange Act.\79\
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\78\ See Exchange Act Release No. 79435 (Nov. 30, 2016), 81 FR
87984 (Dec. 6, 2016) (File No. SR-OCC-2016-014). As the Commission
recognized, application of Section 871(m) to listed options
transactions would ``have significant implications for OCC and its
Clearing Members''--especially with respect to Non-U.S. Clearing
Members, for which OCC would be required ``to develop and maintain
systems (i) to identify transactions that are Section 871(m)
Transactions, (ii) to determine the amount of any dividend
equivalents, (iii) to effectuate withholding, and (iv) to remit the
withheld tax to the IRS.'' Id. at 87986. Treasury has yet to release
guidance on key aspects of Section 871(m) that would be needed to
build such systems. See IRS Notice 2024-44, Extension of the Phase-
in Period for the Enforcement and Administration of Section 871(m),
available at https://www.irs.gov/pub/irs-drop/n-24-44.pdf. Like the
changes implemented when Section 871(m) went into effect, this
proposed change would transfer the costs and liability associated
with tax withholding requirements to the Non-U.S. Clearing Members,
thereby eliminating the potential uncertainty and risks in the daily
settlement of funds at OCC that otherwise would be imposed if those
withholding obligations rested with OCC.
\79\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
Furthermore, while the proposed rule change would impose additional
requirements and restrictions on Canadian Clearing Members, the
proposed rules are intended to address specific issues and potential
risks to OCC arising from those Canadian Clearing Members whose
membership and participation in the Market Loan Program creates
potential withholding obligations for OCC. Because Canadian Clearing
Members are already subject to similar requirements to accommodate
dividend equivalent payments or deemed payments for listed options
transactions without imposing withholding obligations under Section
871(m), OCC believes that the additional conditions and requirements
with respect to participation in the Market Loan Program will not
impose a significant burden. In addition, the limitations on certain
transactions OCC proposes because of the heightened risk of withholding
obligations are narrowly tailored to address the specific risks based
on the Canadian Clearing Member's role in the transaction and whether
it is transacting in its capacity as principal or on behalf of a
customer. Therefore, OCC believes that the proposed rule change is not
unfairly discriminatory among participants in the use of the clearing
agency and is therefore consistent with Section 17A(b)(3)(F) of the
Exchange Act.\80\
---------------------------------------------------------------------------
\80\ Id.
---------------------------------------------------------------------------
By-Laws and Rules Reorganization and Restatement
OCC believes that the proposed reorganization and restatement of
OCC's By-Laws and Rules specific to OCC's Stock Loan Programs is
consistent with Section 17A(b)(3)(F) of the Exchange Act \81\ and Rule
17Ad-22(e)(1),\82\ which requires OCC to, among other things, maintain
written policies and procedures reasonably designed to ensure a well-
founded, clear, transparent, and enforceable legal basis for each
aspect of OCC's activities. OCC believes that the proposed
reorganization improves the clarity and transparency of its By-Laws and
Rules by consolidating provisions governing the clearance and
settlement of stock loan transactions in the Rules, rather than split
across OCC's By-Laws and Rules. Similarly, OCC believes that
integrating Interpretations and Policies into the text of the Rules
helps enhance clarity and transparency by placing those provisions
closer to the text they interpret. In addition, the global changes and
administrative changes discussed above would apply consistent terms and
numbering conventions, improve consistency of the text between similar
Hedge Program and Market Loan Program rules, and remove duplicative
provisions. Accordingly, OCC believes the proposed changes help ensure
OCC's By-Laws and Rules, which form the legal basis for OCC's clearance
and settlement of stock loan transactions, are clear and transparent.
---------------------------------------------------------------------------
\81\ Id.
\82\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------
(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Exchange Act requires that the rules of
a clearing agency not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act.\83\
With the exception of the Rules specific to Canadian Clearing Members,
addressed further below, the proposed changes are meant to enhance
OCC's Stock Loan Programs, and would apply equally to all Clearing
Members.
---------------------------------------------------------------------------
\83\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
The transition to the Market Loan Program is not expected to impose
a burden on competition or inhibit access for Clearing Members who
currently transact exclusively through the Hedge Loan Program because
the enhanced Market Loan Program would allow for the clearance of
bilaterally negated transactions submitted to OCC for clearance, as the
Hedge Loan Program does today. Accordingly, the changes do not require
any participant in the Hedge Loan Program to transact through a Loan
Market. In addition, OCC plans to authorize Clearing Members that
currently participate in the Hedge Loan Program to transact through the
Market Loan Program without requiring additional onboarding from a
membership perspective, subject to providing the necessary
authorizations required of all Market Loan Program participants,
thereby reducing the administrative burden of the transition. All
Clearing Members would be subject to training with respect to the new
ways of submitting transactions through the Market Loan Program. In
addition, the proposed changes would facilitate, rather than burden,
competition with respect to Canadian Clearing Members by allowing them,
for the first time, to participate in the Market Loan Program.
The proposed rule change could potentially impact or burden
competition by imposing upon Canadian Clearing Members certain
requirements and limitations with respect to participation in the
Market Loan Program. For example, Canadian Clearing Members would be
required to provide certain documentation to satisfy OCC that
participation will not impose tax or withholding obligations arising
from payments under the Market Loan Program, as well as to allow OCC to
satisfy its own tax reporting obligations. However, OCC does not
believe that conditioning Canadian Clearing Members' participation on
compliance with OCC Rule 202 would impose a significant burden on
competition. Canadian Clearing Members are already subject to ongoing
certification and reporting provisions of Rule 202 for derivative
equivalent payments made or deemed to be made to such members with
respect to options. As a matter of standard practice, Clearing Members
are required to inform OCC of material changes in, for example, their
formal organization, ownership structure, or financial condition \84\
and are subject to ongoing financial reporting requirements.\85\ OCC
believes the proposed rule change would impose reasonable reporting and
notification requirements with respect to Canadian Clearing Members'
tax compliance status similar to those rules referenced above.
---------------------------------------------------------------------------
\84\ See, e.g., OCC Rules 201 and 303.
\85\ See OCC Rule 306.
---------------------------------------------------------------------------
The proposed restrictions on certain Market Loan transactions with
Negative Rebate rates and transactions for which the Loaned Stock is a
Canadian Security are also narrowly tailored. These restrictions
address specific issues and potential risks to OCC arising from those
firms whose membership creates potential withholding obligations for
OCC. The proposed restriction on transactions with Negative Rebate for
a Canadian Clearing Member's own account in its capacity as a Lending
Clearing Member would eliminate the uncertainty in funds settlement
that would arise if OCC were subject to withholding or tax obligations
with respect to Negative Rebate payments owed to the Canadian Clearing
Member. Canadian Clearing Members would not be restricted from entering
into Market Loans with Negative Rebate as a Lending Clearing Member for
its customer accounts, for which OCC could make Negative Rebate
payments free from withholding obligations by virtue of the Canadian
Clearing Member's status as a Qualified
[[Page 73485]]
Intermediary, or as a Borrowing Clearing Member, either for its own
account or for its customer accounts.
The proposed restriction on transactions where the Loaned Stock is
a Canadian Security when the Canadian Clearing Member is the Borrowing
Clearing Member would similarly eliminate uncertainty in funds
settlement that would arise if OCC or the Canadian Clearing Member were
subject to tax withholding obligations with respect to substitute
dividends on the Canadian Security. Canadian Clearing Members would not
be restricted from executing Market Loan transactions on Canadian
Securities as a Lending Clearing Member. As discussed further above,
OCC believes that the proposed rule change is necessary to eliminate
potential complications and risk to its clearance and settlement
process that would be presented by OCC's potential withholding
responsibilities (and which would be a direct consequence of providing
its clearance and settlement services for these Canadian Clearing
Members). OCC believes the proposed rule change is necessary to promote
the prompt and accurate clearance and settlement of securities and
derivatives transactions, to assure the safeguarding of securities and
funds in the custody or control of OCC or for which it is responsible,
and in general, to protect investors and the public interest in
accordance with Section 17A(b)(3)(F) of the Exchange Act.\86\
Accordingly, OCC believes any burden on competition that this proposed
change could be regarded as imposing are necessary and appropriate to
promote the prompt and accurate clearance and settlement of stock loan
transactions as required by the Exchange Act. Furthermore, as stated
above, all of OCC's current Canadian Clearing Members are already
Qualified Intermediaries, FATCA Compliant, and Qualified Derivatives
Dealers. Therefore, applying the same requirements as conditions to
participate in the Market Loan Program would not impose any additional
burden on those members.
---------------------------------------------------------------------------
\86\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
For the foregoing reasons, OCC believes that the proposed rule
change is in the public interest, would be consistent with the
requirements of the Exchange Act applicable to registered clearing
agencies, and would not impose a burden on competition that is
unnecessary or inappropriate in furtherance of the purposes of the
Exchange Act.
(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.
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/rulesregulations/self-regulatory-organization-rulemaking);
or
Send an email to [email protected]. Please include
file number SR-OCC-2024-011 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-2024-011. 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/rulesregulations/self-regulatory-organization-rulemaking). 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 such filing also will be available for inspection and
copying at the principal office of OCC and on OCC's website at https://www.theocc.com/CompanyInformation/Documents-and-Archives/By-Laws-and-Rules.
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-2024-011 and
should be submitted on or before October 1, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\87\
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\87\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-20329 Filed 9-9-24; 8:45 am]
BILLING CODE 8011-01-P
