Self-Regulatory Organizations; Options Clearing Corporation; Order Approving Proposed Rule Change by The Options Clearing Corporation Concerning Modifications to Its By-Laws and Rules Primarily To Discontinue Certain Outmoded or Unused Products and Services, 91825-91831 [2024-27012]
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Federal Register / Vol. 89, No. 224 / Wednesday, November 20, 2024 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[SEC File No. 270–392, OMB Control No.
3235–0447]
khammond on DSK9W7S144PROD with NOTICES
Submission for OMB Review;
Comment Request; Extension: Rule
17f–6
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of FOIA
Services, 100 F Street NE,
Washington, DC 20549–2736
Notice is hereby given that, under the
Paperwork Reduction Act of 1995 (44
U.S.C. 3501–3520), the Securities and
Exchange Commission (the
‘‘Commission’’) has submitted to the
Office of Management and Budget a
request for extension of the previously
approved collection of information
discussed below.
Rule 17f–6 (17 CFR 270.17f–6) under
the Investment Company Act of 1940
(15 U.S.C. 80a) permits registered
investment companies (‘‘funds’’) to
maintain assets (i.e., margin) with
futures commission merchants
(‘‘FCMs’’) in connection with
commodity transactions effected on
both domestic and foreign exchanges.
Before the rule was adopted, funds
generally were required to maintain
such assets in special accounts with a
custodian bank.
The rule requires a written contract
that contains certain provisions
designed to ensure important safeguards
and other benefits relating to the
custody of fund assets by FCMs. To
protect fund assets, the contract must
require that FCMs comply with the
segregation or secured amount
requirements of the Commodity
Exchange Act (‘‘CEA’’) and the rules
under that statute. The contract also
must contain a requirement that FCMs
obtain an acknowledgment from any
clearing organization that the fund’s
assets are held on behalf of the FCM’s
customers according to CEA provisions.
Because rule 17f–6 does not impose
any ongoing obligations on funds or
FCMs, Commission staff estimates there
are only costs related to new contracts
between funds and FCMs. This estimate
does not include the time required by an
FCM to comply with the rule’s contract
requirements because, to the extent that
complying with the contract provisions
could be considered ‘‘collections of
information,’’ the burden hours for
compliance are already included in
other PRA submissions.1 Commission
1 The rule requires a contract with the FCM to
contain two provisions requiring the FCM to
comply with existing requirements under the CEA
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staff estimates that approximately 1,164
series of 151 funds which report that
futures commission merchants and
commodity clearing organizations
provide custodial services to the fund.2
Based on these estimates, the total
annual burden hours associated with
rule 17f–6 is 27 hours. The estimated
total annual burden hours associated
with rule 17f–6 have decreased 1 hour,
from 28 to 27 hours and external costs
increased from $11,900 to $15,534.
These changes in burden hours and
external costs reflect changes in the
number of affected entities and in the
external cost associated with the
information collection requirements.
These changes reflect revised estimates.
These estimates are made solely for
the purposes of the Paperwork
Reduction Act, and are not derived from
a comprehensive or even a
representative survey or study of the
costs of Commission rules and forms.
The collections of information
requirements of the rule are necessary to
obtain the benefit of relying on the rule.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless it
displays a currently valid control
number.
The public may view background
documentation for this information
collection at the following website:
www.reginfo.gov. Find this particular
information collection by selecting
‘‘Currently under 30-day Review—Open
for Public Comments’’ or by using the
search function. Written comments and
recommendations for the proposed
information collection should be sent
within 30 days of publication of this
notice by December 20, 2024 to (i)
www.reginfo.gov/public/do/PRAMain or
MBX.OMB.OIRA.SEC_desk_officer@
omb.eop.gov, and (ii) Austin Gerig,
Director/Chief Data Officer, Securities
and Exchange Commission, c/o Tanya
Ruttenberg, 100 F Street NE,
Washington, DC 20549, or by sending an
email to: PRA_Mailbox@sec.gov.
and rules adopted thereunder; thus, to the extent
these provisions could be considered collections of
information, the hours required for compliance
would be included in the collection of information
burden hours submitted by the CFTC for its rules.
2 This estimate is based on the average number of
funds that reported on Form N–CEN from April
2021–March 2024, in response to sub-items C.12.6.
and D.14.6; money market funds are excluded from
this estimate because exchange-traded futures
contracts or commodity options are not eligible
securities for money market funds; the number of
series and funds that reported on Form N–CEN in
response these sub-items were: 1,112 series of 150
funds for the period April 2021–March 2022; 1,180
series of 152 funds for the period April 2022–March
2023; and 1,210 series of 151 funds for the period
April 2023–March 2024 (for filings received
through June 30, 2024).
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91825
Dated: November 15, 2024.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024–27117 Filed 11–19–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–101621; File No. SR–OCC–
2024–013]
Self-Regulatory Organizations;
Options Clearing Corporation; Order
Approving Proposed Rule Change by
The Options Clearing Corporation
Concerning Modifications to Its ByLaws and Rules Primarily To
Discontinue Certain Outmoded or
Unused Products and Services
November 14, 2024.
I. Introduction
On September 13, 2024, The Options
Clearing Corporation (‘‘OCC’’), filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to make modifications to its ByLaws and Rules primarily to
discontinue certain outmoded or
unused products and services
(‘‘Proposed Rule Change’’). The
Proposed Rule Change was published
for comment in the Federal Register on
October 1, 2024.3 The Commission has
not received any comments on the
Proposed Rule Change. For the reasons
discussed below, the Commission is
approving the Proposed Rule Change.
II. Description of the Proposed Rule
Change
OCC is a clearing agency that clears a
number of transactions including
standardized equity options listed on
national securities exchanges and
registered with the Commission, stock
loans, and futures.4 Since 2000, for its
core clearing, risk management, and
data management applications, OCC has
relied on a platform it calls ‘‘ENCORE.’’
ENCORE operates in on-premises data
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Securities Exchange Act Release No. 101189
(Sept. 25, 2024), 89 FR 79978 (Oct. 1, 2024) (File
No. SR–OCC–2024–013) (‘‘Notice’’).
4 All capitalized terms not defined herein have
the same meaning as set forth in the OCC By-Laws
and Rules, available at https://www.theocc.com/
Company-Information/Documents-and-Archives/
By-Laws-and-Rules.
2 17
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centers.5 Among other things, ENCORE
is OCC’s system for receiving trade and
post-trade data on a transaction by
transaction basis, maintaining clearing
member positions, calculating margin
and clearing fund requirements, and
providing reporting to OCC staff,
regulators and clearing members.6 OCC
plans to discontinue ENCORE and
migrate its functions to a cloud-based
successor clearing system that it calls
Ovation.7
As part of the transition to Ovation,
OCC is determining which features of
ENCORE will migrate to Ovation.8 The
Proposed Rule Change describes certain
functions that OCC proposes
discontinuing because they are
outmoded, unused,9 or no longer
support OCC’s ability to clear and settle
transactions. In this category, under the
Proposed Rule Change, OCC would (i)
no longer facilitate the settlement of
commissions and fees owed between
Clearing Members that are party to a
Clearing Member Trade Assignment
(‘‘CMTA’’) arrangement; (ii) delete rule
provisions related to over-the-counter
(‘‘OTC’’) option products; 10 (iii) delete
from its rules the ‘‘associated Market
Maker’’ account subtype; and (iv) no
longer require that Clearing Members
maintain records of both parties to a
trade.
The Proposed Rule Change also
includes three sets of additional changes
that OCC proposed to make in
connection with the transition to
Ovation. In this category, OCC proposes
to (i) allow Clearing Members to ‘‘giveup’’ one or more positions in cleared
contracts that are futures or futures
options to another Clearing Member
without designating the specific account
of the Given-Up Clearing Member to
which such positions must be allocated;
(ii) categorize a trade as an opening
transaction when an opening or closing
indicator is not included on a trade; and
(iii) conform rules related to the
discharge of broker-to-broker settlement
obligations to current practice.
5 Securities Exchange Act Release No. 96113
(October 20, 2022), 87 FR 64824, 64825 (Oct. 26,
2022) (File No. SR–OCC–2021–802).
6 Notice, 89 FR at 79978–79.
7 Id.; Notice, 89 FR at 79979.
8 Id. at 79978–79.
9 Id. at 79979.
10 An OTC option is an option contract with
variable terms that are negotiated bilaterally
between the parties to such transaction (subject to
any specific requirements applicable to such
products as set forth in the By-Laws and Rules), and
that is affirmed through the facilities of an OTC
Trade Source and submitted to OCC for clearing as
a confirmed trade. OCC By-Laws, Article I.
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A. Discontinuing Existing Functions
i. Discontinuing the Facilitation of
Commissions and Fees Between CMTA
Clearing Members
CMTA arrangements allow a Clearing
Member that executed a securities
options trade (Executing Clearing
Member), to send the trade directly
through OCC to another Clearing
Member (Carrying Clearing Member) for
clearance and settlement.11 Clearing
Members generally use CMTA
arrangements when they execute
transactions for correspondent brokers
that custody their assets with separate
Carrying Clearing Members or execute
transactions for an institutional
customer that has a prime brokerage
arrangement with a separate Clearing
Member.12
Currently, subject to certain
conditions, Clearing Members that are
parties to a CMTA arrangement may opt
to have OCC facilitate the settlement of
fees and commissions for transactions
pursuant to the CMTA arrangement.
However, no Clearing Member has used
the service since 2016, nor have any
expressed interest in using it in the
future.13 Accordingly, OCC proposes to
eliminate it.
To effect the discontinuation of the
service, OCC proposes a number of
changes to its Rules. Specifically, OCC
proposes deleting Rules 407(a)(2) and
504(e), as well as certain text in Rule
504(g).14
Rule 407(a)(2) allows Clearing
Members that are parties to a CMTA
arrangement to authorize OCC to settle
fees and commissions owed by the
Carrying Clearing Member to the
Executing Clearing Member in respect of
transfers effected pursuant to the CMTA
arrangement. It also discusses Clearing
Members’ requirements 15 and
11 Securities Exchange Act Release No. 88974
(May 29, 2020), 85 FR 34468, 34469 (June 4, 2020)
(File No. SR–OCC–2020–005).
12 Securities Exchange Act Release No. 49841
(June 9, 2004), 69 FR 34207, 34207 (June 18, 2004)
(File No. SR–OCC–2003–011).
13 Notice, 89 FR at 79979.
14 OCC proposes to replace the deleted text in
Rule 504(e) with the word Reserved.
15 Specifically, OCC requires Clearing Members
making such an election to specifically register that
aspect of their CMTA arrangement with OCC.
Clearing Members making such election authorize
(1) the Executing Clearing Member to enter into
OCC’s systems fee and commission information
with respect to transfers effected pursuant to the
CMTA arrangement between the Clearing members,
subject to such system checks as may be established
by OCC from time to time and (2) OCC to calculate
and settle, in accordance with the applicable
provisions of Rule 504, the aggregate of such
entered amounts on the next following business day
without any further authorization or consent of the
Carrying Clearing Member.
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restrictions 16 for electing to have OCC
settle the applicable fees and
commissions for transactions under the
CMTA as well as guidance as to when
the Clearing Members’ election to have
OCC settle applicable fees and
commissions under the CMTA
arrangement is effective.
Rule 504(e) provides that OCC, as
agent, is authorized to effect nonguaranteed settlement of fees and
commissions owed by a Carrying
Clearing Member to an Executing
Clearing Member for transfers effected
pursuant to their registered CMTA
arrangement, provided their CMTA
registration authorizes OCC to effect
such settlements.17
Finally, certain text in Rule 504(g)
indicates that OCC has no obligation to
effect settlement of fees and
commissions as provided in Rule 407 if
either the Executing Clearing Member or
the Carrying Clearing Member has been
suspended by OCC. The Proposed Rule
Change would delete this text but leave
the remainder of Rule 504(g) untouched.
ii. Deleting Provisions Related to
Clearing and Settling OTC Options
OCC’s current Rules and By-Laws are
designed to support the clearing and
settling of OTC options.18 However,
OCC has only ever cleared OTC options
based on the S&P 500 index,19 and has
not cleared and settled an OTC option
since 2014. OCC does not currently have
any open interest in OTC options and
OCC’s Clearing Members have not
expressed interest in clearing OTC
options with OCC in the future.20 As
such, OCC proposes removing all
provisions from its By-Laws and Rules
related to clearing and settling OTC
options.21
16 Rule 407 notes that any entries of commission
and fee information under Rule 407(a)(2) shall be
solely fees and commissions related to transfers
effected pursuant to the Clearing Members’ CMTA
arrangement and for no other purposes.
17 Further, Rule 504(e) also indicates how OCC
determines the aggregate amounts to be settled,
warns that OCC is not obligated to validate the
accuracy of information input into OCC’s systems
to determine settlement amounts, indicates when
OCC effects settlement, and confirms that OCC
settlement facilitation under the CMTA
arrangement does not require the Carrying Clearing
Member to give any additional authorization or
consent and that OCC does not have any role in
resolving disputes between the Carrying Clearing
Member and the Executing Clearing Member
regarding these settlements. OCC would replace the
text of Rule 504(e) with the word ‘‘Reserved.’’
18 Securities Exchange Act Release No. 68434
(Dec. 14, 2012), 77 FR 75243 (Dec. 19, 2012) (File
No. SR–OCC–2012–14).
19 Notice, 89 FR at 79980.
20 Id.
21 Id. OCC indicates that it would submit a
proposed rule change to the Commission as
necessary in the event that it decides to support the
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To effect this change, OCC proposes
deleting from the By-Laws the
definitions for ‘‘OTC option,’’ ‘‘OTC
index option,’’ ‘‘OTC Trade Source,’’
‘‘OTC Trade Source Rules,’’ and
‘‘Backloaded OTC Option.’’ The
Proposed Rule Change would also
delete text in provisions of the By-Laws
and Rules that reference the above terms
or that are otherwise related to OCC’s
clearance and settlement of OTC
options. As a result, the following
provisions in the By-Laws would have
relevant OTC-related terms deleted from
them (or, where indicated, be deleted in
their entirety): Article I; 22 Article VI,
Section 1, Interpretation and Policies
.01(a); Article VI, Section 3,
Interpretations and Policies .09 (deleted
in its entirety); Article VI, Sections 10(b)
and (g); Article VI, Sections 27(a) and
(b); Article XVII, Introduction; Article
XVII, Definitions, Section 1; 23 Article
XVII, Section 3(h); Article XVII, Section
3, Interpretation and Policies .01
(deleted in its entirety); Article XVII,
Section 4(a)(2); Article XVII, Section
5(a); and Article XVII, Section 6 (deleted
in its entirety).
Likewise, the following provisions in
the Rules would have relevant OTCrelated terms deleted from them (or,
where indicated, be deleted in their
entirety): Rule 201(b)(6) (deleted in its
entirety); Rules 401(a), (a)(1)(i), (b), (d),
(e), (f), and (g); Rule 405; Rule 406; Rule
407(l) (deleted in its entirety); Rule
408(a); Rules 611(a), (b), and (d) (deleted
in its entirety); Rule 801(b); Rule 803
Interpretation and Policy .01; Rule 804;
Rule 1003 Interpretation and Policy .02
(deleted in its entirety); Rule 1104
Interpretation and Policy .03 (deleted in
its entirety); Rule 1105; Rule 1106(e)(2)
(deleted in its entirety); Rule 1106
Interpretation and Policy .01; Chapter
XVIII of the Rules, Introduction; Rules
clearance and settlement of OTC Options in the
future. Id.
22 OCC proposes deleting definitions for ‘‘OTC
Index Option Clearing Member’’ and ‘‘Origination
Date.’’ Additionally, OCC proposes deleting text
from the definitions for ‘‘Class,’’ ‘‘Clearing
Member,’’ ‘‘Confirmed Trade,’’ ‘‘Index Multiplier,’’
‘‘Index Value Determinant,’’ ‘‘Trade Date,’’ and
‘‘Variable Terms’’ that discusses the definitions in
the context of OTC Options or that is related to OTC
Options. As a result of the removal of provisions
related to OTC Options, the Proposed Rule change
would also delete text from Interpretation and
Policy .01 to Section C of Article I that indicates
that the term ‘‘Exchange Transaction’’ was removed
from the By-Laws and Rules and replaced with the
term ‘‘Confirmed Trade’’ to reflect the expansion of
OCC’s clearing activities into OTC options. Id. at
79980 n.11.
23 OCC proposes deleting text related to OTC
options in the definitions for ‘‘Class of Options,’’
‘‘Current Underlying Interest Value; Current Index
Value,’’ ‘‘Expiration Date,’’ ‘‘Expiration Time
(deleted entirely),’’ ‘‘Reporting Authority,’’ and
‘‘Series of Options.’’
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1804(b) and (c); and Rule 1804
Interpretation and Policy .03 (deleted in
its entirety).
iii. Eliminating the Associated Market
Maker Sub-Account Type
OCC currently allows its Clearing
Members to use combined market maker
accounts. OCC’s rules provide for three
types of combined market maker
accounts: a combined account limited to
Market-Makers that are neither
Proprietary Market-Makers 24 nor
Associated Market-Makers; 25 a
combined account limited to Proprietary
Market-Makers; and a combined account
limited to Associated Market-Makers.26
Currently, Clearing Members do not
use the Associated Market-Maker subaccount type. Thus, OCC proposes
deleting references to this sub-account
type from its By-Laws.27 To effect this
change, the Proposed Rule Change
would delete the definition for
Associated Market-Maker from Article I
of the By-Laws. It would also remove
from the By-Laws language related to
Associated Market-Makers and the
accounts their trades may be included
in from Article VI, Section 3(c),
Interpretation and Policy .03, and
Interpretation and Policy .06. Finally,
the Proposed Rule Change would
replace a reference to Section 3(i) with
a reference to Section 3(c) in the first
sentence of Interpretation and Policy
.06. As a result of the changes, OCC’s
By-Laws would provide for only two
combined market-maker accounts going
24 A Proprietary Market-Maker is a Market-Maker
that is (A) a non-customer of such Clearing Member
or (B) a Related Person of such Clearing Member
that (i) is not a customer of such Clearing Member
for purposes of Rule 15c3–3 of the Securities and
Exchange Commission, (ii) does not carry the
accounts of persons who are customers of such
Market-Maker for purposes of Rule 15c3–3, and (iii)
has consented to be treated as a proprietary MarketMaker for purposes of the By-Laws and Rules. This
term includes any participant, as such, in an
account that is not required to be segregated under
Section 4d of the Commodity Exchange Act of
which 10% or more is owned by a proprietary
Market-Maker.
25 An Associated Market-Maker is a person
maintaining an account with a Clearing Member as
a Market-Maker, specialist, stock market-maker,
stock specialist, or Registered Trader that is a
Related Person of the Clearing Member and shall
include any participant, as such in an account of
which 10% or more is owned by an associated
Market-Maker, or an aggregate of 10% or more of
which is owned by one or more associated MarketMakers.
26 OCC By-Laws, Article VI, Section 3,
Interpretation and Policy .06. The Commission has
previously acknowledged that Clearing Members
may find these accounts attractive because
positions in these accounts can offset one another
in a manner that may lead to lower margin
requirements. Securities Exchange Act Release No.
33492 (Jan. 19, 1994), 59 FR 3896, 3897 n.11 (Jan.
27, 1994) (File No. SR–OCC–90–11).
27 Notice, 89 FR at 79982.
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91827
forward—one limited to Market-Makers
that are not proprietary Market-Makers
and one limited to Proprietary MarketMakers.
iv. Recordkeeping Requirements
OCC’s rules currently require Clearing
Members to maintain a record of the
Purchasing Clearing Member and the
Writing Clearing Member to each
confirmed trade.28 Before electronic
trading was adopted, this requirement
helped OCC reconcile counterparty
settlement obligations and efficiently
clear and settle confirmed trades, which
aided OCC in avoiding settlement
delays and disputes.29
With the adoption of electronic
trading, OCC no longer needs Clearing
Members to keep a record of the
Purchasing Clearing Member and the
Writing Clearing Member to each
transaction.30 OCC’s role as a CCP
further diminishes the need for this
requirement because OCC novates all
confirmed trades in options contracts so
that it becomes the buyer to every seller
and the seller to every buyer. As such,
the original counterparty information in
transactions is not relevant or necessary
in respect of OCC’s clearance and
settlement process.31
OCC proposes no longer requiring that
Clearing Members keep records of the
Purchasing Clearing Member and the
Writing Clearing Member to
transactions. To accomplish this, OCC
proposes adding an exception to its Rule
208 so that it would require only that
Clearing Members keep records showing
all confirmed trade data required
pursuant to OCC’s By-Laws and Rules,
including confirmed trade information
reported to OCC under Rule 401 except
for the identity of the counterparty
Clearing Member.
B. Miscellaneous Changes
As noted above, OCC also proposes
three miscellaneous changes to its ByLaws and Rules. First, the Proposed
Rule Change would allow Clearing
Members to ‘‘give up’’ one or more
positions in cleared contracts that are
futures or futures options to another
28 Under Rule 208, Clearing Members must keep
records showing all confirmed trade data required
by OCC’s By-Laws and Rules including confirmed
trade information reported to OCC under Rule 401.
OCC Rules, Rule 208. Rule 401 requires that
confirmed trades include the identity of the
Purchasing Clearing Member and the Writing
Clearing Member to the transaction. OCC Rules,
Rule 401(a)(1)(i).
29 Notice, 89 FR at 79980.
30 Id.
31 Id. at 79981. Additionally, OCC asserts that
configuring Ovation to maintain such records
would require OCC to invest significant resources
that could impact Ovation’s release timeline. Id. at
79980.
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Clearing Member without designating
the specific account of the Given-Up
Clearing Member to which such
positions must be allocated in order to
better facilitate give-up allocations to
the appropriate account. Second, OCC’s
amendments would categorize a trade as
an opening transaction when an
opening or closing indicator is not
included on a trade for an options or
futures contract to ensure that an
existing position is not inadvertently
closed out. Third, OCC proposes
changes related to the discharge of
broker-to-broker settlement obligations
to better reflect its current practice.32
i. Designating the Appropriate Given-Up
Clearing Member Account
Similar to the CMTA arrangements
described above, a second way that OCC
provides flexibility with respect to
which broker executes a transaction is
through give-up transactions.33 Rule 408
allows for one or more positions in
cleared contracts to be allocated from a
designated account of a Giving-Up
Clearing Member to a designated
account of a Given-Up Clearing
Member. Mechanically, these
transactions are initiated post-trade by
the Giving-Up Clearing Member by
instructing OCC to move a position in
one of its accounts to the designated
account of the Given-Up Clearing
Member. The Giving-Up Clearing
Member may designate the Given-Up
Clearing Member’s account to which it
would like to allocate positions.
Currently, this allocation process is only
available for positions in futures and
options on futures cleared and settled
by OCC.34
OCC proposes changing which
Clearing Member must designate the
account to which OCC should allocate
given-up positions from the Giving-Up
Clearing Member to the Given-Up
Clearing Member. OCC believes this
change will help reduce the risk of
positions being transferred to an
incorrect account because it would
provide the Given-Up Clearing Member
with more control over where positions
it executes ultimately are transferred.35
To do this, OCC would delete certain
references to designated accounts in
Rules 408(a) and (b). Currently, Rule
408(a) provides that positions may be
allocated to a designated account of a
Given-Up Clearing Member. OCC
proposes deleting the reference to a
designated account so that Rule 408(a)
provides that positions may be allocated
to a Given-Up Clearing Member. Rule
408(b) contemplates instructions to
allocate positions from a designated
account of the Giving-Up Clearing
Member to a designated account of the
Given-Up Clearing Member. Under
OCC’s proposal, the revised rule text
would instead contemplate instructions
to allocate positions from a designated
account of the Giving-Up Clearing
Member to a Given-Up Clearing
Member. OCC also proposed to add text
to Rule 408(b) indicating that, if certain
conditions are met, the Given-Up
Clearing Member may designate an
account to which the allocation will be
made. Once the Given-Up Clearing
Member designates an account, OCC
will adjust the positions in the
respective designated accounts of the
Giving-Up and Given-Up Clearing
Members in accordance with the
allocation instruction.
In line with current practice, the
Proposed Rule Change would also
clarify that this allocation process is
only available for futures and options on
futures. OCC would amend the title of
Rule 408 to be ‘‘Allocations of Positions
for Futures and Futures Options’’ rather
than just ‘‘Allocations of Positions.’’
Currently, Rule 408(a) provides that give
up allocations are available for cleared
contracts. OCC’s proposal would clarify
that one or more positions in cleared
contracts that are futures or futures
options may be allocated in a give up
allocation. Similarly, in Rule 408(e),
OCC proposes replacing the word
‘‘options’’ with ‘‘futures options’’ in
multiple locations to clarify that give-up
allocations are only available for futures
and options on futures contracts.36
To remove duplicative text from Rule
408, OCC proposes deleting the last
sentence from Rule 408(b), which
currently provides that if the Giving-Up
Clearing Member and the Given-Up
Clearing Member are not parties to an
allocation agreement registered with
OCC, then OCC shall adjust the
positions in the respective designated
accounts of the Giving-Up and GivenUp Clearing Member in accordance with
the allocation instruction only upon
receipt of notice from the Given-Up
Clearing Member of its affirmative
acceptance of the allocation.37 OCC
believes this rule text is already covered
elsewhere in Rule 408.38
36 Id.
37 Id.
32 Id.
at 79979.
Exchange Act Release No. 85779
(May 6, 2019), 84 FR 20689 (May 10, 2019) (File No.
SR–OCC–2019–003).
34 Notice, 89 FR at 79981.
35 Id.
33 Securities
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38 Id. As discussed above, proposed Rule 408(b)
would indicate that OCC will adjust positions in the
respective designated accounts of the Giving-Up
and Given-Up Clearing Members in accordance
with an allocation instruction only after the GivenUp Clearing Member designates the account to
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Similarly, OCC proposes removing a
reference to allocation agreements in
Rule 408(b) because that reference is
duplicative of Rule 408(d).39 Rule
408(b) requires the Giving-Up Clearing
Member and the Given-Up clearing
Member to be parties to an allocation
agreement registered with OCC before
OCC is required to allocate positions
pursuant to a give-up transaction. OCC
Rule 408(d), however, provides that the
Given-Up Clearing Member is
responsible for all settlement and other
obligations in respect of each position
that has been allocated to one of its
accounts pursuant to a its acceptance of
an allocation instruction. Further, under
Rule 408(c) registration of an allocation
agreement functionally is notice of
affirmative acceptance of an
allocation.40 In OCC’s view, because of
Rule 408(c), there is no need for this
separate requirement in Rule 408(b).
OCC also proposes removing
duplicative text from Rule 408(d) to
clarify Rule 408.41 Currently, Rule
408(d) contains references to registered
allocation agreements alongside
references to acceptances of allocation
instructions. For instance, 408(d)
indicates that the Given-Up Clearing
Member shall be responsible for all
settlement and other obligations in
respect of each position that has been
allocated to one of its accounts pursuant
to a registered allocation agreement or
pursuant to its acceptance of an
allocation instruction. Rule 408(d) also
provides that, if there is not a registered
allocation agreement on file with OCC
or the Given-Up Clearing Member has
rejected or not timely provided OCC
with notice of its affirmative acceptance
of an allocation, the relevant position
will remain in the account of the
Giving-Up Clearing Member. As noted
above, registration of an allocation
agreement is functionally the same as
notice of affirmative acceptance of an
allocation. Thus, referring to allocation
which the allocation instruction will be made.
Moreover, Rule 408(d) would provide that if the
Given-Up Clearing Member has rejected or not
provided OCC with notice of its affirmative
acceptance of an allocation at or before the deadline
prescribed by OCC, the position(s) that is (are) the
subject of such allocation instruction shall remain
in the account of the Giving-Up Clearing Member,
which shall be responsible for all settlement and
other obligations in respect thereof, unless the
position is transferred or adjusted pursuant to other
provisions of the By-Laws and Rules.
39 Notice, 89 FR at 79981.
40 Rule 408(c) provides that the registration of an
allocation agreement constitutes notice to OCC that
the Giving-Up Clearing Member has been
authorized by the Given-Up clearing Member to
allocate positions to an account of the Given-Up
Clearing Member without further action by the
Given-Up Clearing Member.
41 Notice, 89 FR at 79981.
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agreements in addition to acceptance of
allocation instructions is duplicative. As
such, OCC proposes removing
references to allocation agreements in
Rule 408(d).42
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ii. Default Treatment for Certain
Confirmed Transactions
OCC currently accepts and novates
confirmed transactions in options, sent
to OCC by an options exchange,
irrespective of whether there is an
indication that the transaction is either
an opening or closing transaction. In
practice, if the transaction is not
identified as either an opening or
closing transaction, then OCC treats it as
an opening transaction.
OCC proposes to reflect this current
practice in its rules.43 Rule 401,
Interpretation and Policy .01 already
provides that, in the case of futures,
trade information submitted by an
Exchange need not identify a
transaction as opening or closing. It also
indicates that if trade information
submitted by an Exchange for a futures
trade does not identify a transaction as
opening or closing, OCC will treat all
purchase and sale transactions in
futures in accounts other than Market
Maker accounts as opening transactions.
OCC proposes to broaden the
application of Rule 401, Interpretation
and Policy .01 to encompass options as
well as futures.
OCC also proposes to broaden the
scope of Rule 401, Interpretation and
Policy .01 to apply to Market-Maker
accounts. Currently, Rule 401,
Interpretation and Policy .01 does not
apply to purchase and sale transactions
in futures and options in Market Maker
accounts. OCC proposes removing this
limitation because it believes that the
practice of treating unidentified trades
as opening transactions is operationally
safer because it helps avoid the
unintentional closure of existing
positions, irrespective of whether the
specific unidentified trade is in a
Market Maker account or not.44
iii. Broker-Broker Settlement
Obligations
OCC proposes two changes related to
its broker-to-broker settlement
obligations to align its rules with its
practices. Ordinarily, settlement of
exercise and assignment activity occurs
through OCC’s correspondent clearing
corporation, the National Securities
Clearing Corporation (‘‘NSCC’’)
pursuant to OCC’s Rule 901.45 In certain
42 Notice,
89 FR at 79981.
43 Id.
44 Id.
at 79982.
Interpretation and Policy .02 to OCC Rule
45 See
901.
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circumstances, such as when an
underlying security is not CCCeligible,46 OCC directs that settlement
will occur on a broker-to-broker basis
pursuant to Rules 903–912. Under OCC
Rule 909, when settlement is not made
through the correspondent clearing
corporation, for example when brokerbroker settlement is directed, the
Delivering Clearing Member and the
Receiving Clearing Member must send
notices to OCC as to the number of units
of the underlying security delivered and
the amount received. Under OCC Rule
909(d), when a Delivering or Receiving
Clearing Member submits to OCC notice
of a delivery, payment, or receipt of
delivery or payment, and the contra
Clearing Member does not respond to
such notice within two business days,
the contraparty’s failure to respond
constitutes acknowledgement to OCC
that the obligation has been settled as
indicated in the submitting Clearing
Member’s notice, provided that the
designated delivery date has occurred.
However, OCC’s current practice differs
from this provision in Rule 909. Rather,
when OCC directs broker-broker
settlement it also indicates that, if it is
not possible for the Delivering Clearing
Member to effect delivery of the
underlying shares on the designated
settlement date, then the settlement
obligations of both Delivering and
Receiving Clearing Members will be
delayed until OCC designates a new
exercise settlement date, settlement
method, and/or settlement value.47
The Proposed Rule Change would
amend Rule 909 to align the Rule with
current practice. Specifically, OCC
would amend Rule 909(d) to provide
that OCC will construe a contraparty’s
failure to respond to indicate that the
obligation is unsettled until such time
as either (i) both Delivering and
Receiving Clearing Members mutually
agree to settle the obligation and notify
OCC; or (ii) OCC settles the obligation
on behalf of both Delivering and
Receiving Clearing Members pursuant to
OCC’s policies and procedures.
Separately, OCC Rule 909 currently
requires Clearing Members to submit
notices indicating the number of units
of the underlying security delivered
(received) and the amount received
(paid) therefor for transactions not
settled via NSCC. In practice, however,
the amount received or paid is
46 Id. The term CCC-eligible means that securities
contracts in the underlying security arising from the
exercise or maturity of a cleared security are eligible
for settlement through the Continuous Net
Settlement Accounting Operation of NSCC. OCC
By-Laws, Article I, Section C.6.
47 Taking such action is allowed under Article VI,
Section 19 of the By-Laws.
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91829
systematically determined at OCC rather
than being specified by the Clearing
Members.48 Therefore, OCC proposes
removing ‘‘and the amount received
(paid)’’ from the text of Rule 909.
III. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Act requires
the Commission to approve a proposed
rule change of a self-regulatory
organization if it finds that the proposed
rule change is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
the organization.49 Under the
Commission’s Rules of Practice, the
‘‘burden to demonstrate that a proposed
rule change is consistent with the [Act]
and the rules and regulations issued
thereunder . . . is on the self-regulatory
organization [‘SRO’] that proposed the
rule change.’’ 50 The description of a
proposed rule change, its purpose and
operation, its effect, and a legal analysis
of its consistency with applicable
requirements must all be sufficiently
detailed and specific to support an
affirmative Commission finding,51 and
any failure of an SRO to provide this
information may result in the
Commission not having a sufficient
basis to make an affirmative finding that
a proposed rule change is consistent
with the Act and the applicable rules
and regulations.52 Moreover,
‘‘unquestioning reliance’’ on an SRO’s
representations in a proposed rule
change is not sufficient to justify
Commission approval of a proposed rule
change.53
After carefully considering the
Proposed Rule Change, the Commission
finds that the Proposed Rule Change is
consistent with Section 17A(b)(3)(F) of
the Act 54 and Rule 17Ad–22(e)(21).55
A. Consistency With Section
17A(b)(3)(F) of the Act
Under Section 17A(b)(3)(F) of the Act,
OCC’s rules, among other things, must
be ‘‘designed to promote the prompt and
accurate clearance and settlement of
securities transactions and, to the extent
applicable, derivative agreements,
48 OCC states that the practice of systematically
calculating cash amounts helps OCC avoid
processing notices entered by Clearing Members
that may be inaccurate. See Notice, 89 FR at 79982.
49 15 U.S.C. 78s(b)(2)(C).
50 Rule 700(b)(3), Commission Rules of Practice,
17 CFR 201.700(b)(3).
51 Id.
52 Id.
53 Susquehanna Int’l Group, LLP v. Securities and
Exchange Commission, 866 F.3d 442, 447 (D.C. Cir.
2017) (‘‘Susquehanna’’).
54 15 U.S.C. 78q–1(b)(3)(F).
55 17 CFR 240Ad–22(e)(21).
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contracts, and transactions.’’ 56 Based on
the Commission’s review of the record,
and for the reasons discussed below,
OCC’s proposed rule change is
consistent with Section 17A(b)(3)(F).
OCC proposes amending its rules to
discontinue a number of existing
functions that are outmoded or unused.
As described above, OCC would no
longer offer services through which it
facilitates the settlement of commissions
and fees owed between Clearing
Members that are party to a CMTA
arrangement because Clearing Members
have neither expressed interest in using
this service nor, since 2016, have they
used it.57 OCC would cease clearing and
settlement services with respect to OTC
options because it has not cleared or
settled an OTC option since 2014, its
Clearing Members have not expressed
interest in OCC doing so in the future,
and it does not currently have any open
interest in OTC options.58 OCC’s
amendments would also discontinue the
Associated Market-Maker account
subtype because its Clearing Members
do not use it.59 OCC also proposes to
eliminate the requirement that Clearing
Members maintain records of both
parties to a trade because the original
counterparty information in transactions
is not relevant or necessary in respect of
OCC’s clearance and settlement process.
Discontinuing services no longer in
use, and the rules related to such
services, removes unnecessary
complexity from OCC’s rules without
impeding the clearance or settlement of
securities transactions. Similarly,
removing from its rules obligations on
Clearing Members that are no longer
necessary to support OCC’s ability to
clear and settle transactions, such as the
obligation for Clearing Members to
maintain unnecessary records, reduces
complexity without impeding OCC’s
clearance and settlement activities.
Reducing complexity would also
improve the clarity of OCC’s rules.
As described above, OCC also
proposes changes to improve the
accuracy of its clearance and settlement
of transactions. Specifically, OCC
proposes requiring the Given-Up
Clearing Member, rather than the
Giving-Up Clearing Member, to
designate an account to which the
allocation in a give up transaction will
be made. This proposed change would
provide a Given-Up Clearing Member
with more control over its own account
and could help reduce the risk that such
a Clearing Member would receive
56 15
U.S.C. 78q–1(b)(3)(F).
89 FR at 79979.
58 Id. at 79980.
59 Id. at 79982.
57 Notice,
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positions it does not want.60 Separately,
OCC proposes to treat confirmed
transactions in options and futures as
opening transactions where the trade
information provided to OCC does not
indicate whether the transaction is an
opening or closing transaction. This
would reduce the risk of an
unintentional closure of existing
positions. By avoiding mistakenly
closing existing positions and reducing
the risk that a transaction will be
transferred to the wrong account, OCC’s
proposed changes promote the accurate
clearance and settlement of securities
transactions.
Finally, OCC proposes to amend its
rules to no longer construe a Clearing
Member’s failure to act as
acknowledgement of settlement in
broker-to-broker transactions. Rather,
OCC would not construe such a
transaction to have settled until either it
receives notice from both Clearing
Members of their mutual agreement to
settle the obligation or OCC settles the
positions pursuant to its policies and
procedures. This could reduce potential
inaccuracies in OCC’s settlement of the
contracts it clears, and would also be
consistent with current practice.61
By removing the duplicative portions
of Rule 408, OCC would improve the
clarity of its Rules,62 which in turn
increases the likelihood that its
participants understand the methods
available to clear and settle transactions
and how those methods function.
Similarly, ensuring that the rules align
with current practice, in the ways
discussed above, helps prevent
confusion by OCC’s Clearing Members
as to the methods available to clear and
settle transactions and how those
methods function. By preventing such
confusion, OCC makes it more likely
that participants are able to efficiently
and accurately execute their
transactions. As such, the Proposed
Rule Change promotes the prompt and
accurate clearance and settlement of
securities transactions.
The Proposed Rule Change is,
therefore, consistent with the
60 As noted above, OCC also proposes to remove
duplicative provisions in the rules governing such
transactions.
61 As discussed above, other proposed changes
that align the rules with current practice include
clarifying that give-up transactions are only
available for futures and options on futures;
removing the requirement to include certain
information in notices; and defaulting to an opening
transaction when certain trade information do not
indicate that a transaction is either an opening or
closing transaction.
62 OCC also proposes correcting an inaccurate
reference to Section 3 of its By-Laws, Paragraph I.
This too increases the clarity of its rules.
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Fmt 4703
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requirements of Section 17A(b)(3)(F) of
the Act.63
B. Consistency With Rule 17Ad–
22(e)(21)
Rule 17Ad–22(e)(21) requires OCC to
‘‘establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to . . . be efficient
and effective in meeting the
requirements of its participants and the
markets it serves . . . .’’ 64 Based on its
review of the record, and for the reasons
discussed below, OCC’s Proposed Rule
Change is consistent with Rule 17Ad–
22(e)(21). When clearing agencies
establish policies and procedures that
address Rule 17Ad–22(e)(21), the
Commission has indicated that they
should ask whether their policies’ and
procedures’ design meets the needs of
its participants and the markets it
serves, particularly with respect to
choice of a clearance and settlement
arrangement, operating structure, scope
of products cleared, settled, or recorded,
and use of technology and procedures.65
OCC’s policies and procedures would
meet the needs of its participants and
the markets it serves after its proposed
discontinuation of products and
services its Clearing Members no longer
use. OCC proposes discontinuing its
facilitation of the settlement of
commissions and fees owed between
Clearing Members that are party to a
CMTA arrangement because Clearing
Members have neither expressed
interest in using this service nor, since
2016, have they used it.66 OCC plans on
no longer offering clearing and
settlement services with respect to OTC
options because it has not cleared and
settled an OTC option since 2014, its
Clearing Members have not expressed
interest in OCC doing so in the future,
and it does not currently have any open
interest in OTC options.67 OCC also
would discontinue the Associated
Market-Maker account subtype because
its Clearing Members do not use it.68
OCC is not obligated to offer these
products and services. Further, its
Clearing Members’ lack of interest in
these products and services suggests
that they do not need them. As such,
OCC’s proposed discontinuation of
these products and services is consistent
with the requirements of Rule 17Ad–
22(e)(21).69
63 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(21).
65 Securities Exchange Act Release No. 78961, 81
FR 70786, 70841 (Oct. 13, 2016) (File No. S7–03–
14).
66 Notice, 89 FR at 79979.
67 Id. at 79980.
68 Id. at 79982.
69 17 CFR 240.17Ad–22(e)(21).
64 17
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The Proposed Rule Change is,
therefore, consistent with the
requirements of Rule 17Ad–22(e)(21).70
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Act, and in
particular, Section 17A(b)(3)(F) of the
Act 71 and Rule 17Ad–22(e)(21).72
It is therefore Oodered pursuant to
Section 19(b)(2) of the Act that the
proposed rule change (SR–OCC–2024–
013) be, and hereby is, approved.73
For the Commission by the Division of
Trading and Markets, pursuant to delegated
authority.74
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024–27012 Filed 11–19–24; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–101628; File No. SR–
NYSEAMER–2024–68]
Self-Regulatory Organizations; NYSE
American LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Change To Establish Fees for the
NYSE American Aggregated Lite Data
Feed
November 14, 2024.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934
(‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on
November 4, 2024, NYSE American LLC
(‘‘NYSE American’’ or the ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to establish
fees for the NYSE American Aggregated
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CFR 240.17Ad–22(e)(21).
U.S.C. 78q–1(b)(3)(F).
72 17 CFR 240.17Ad–22(e)(21).
73 In approving the proposed rule change, the
Commission considered the proposal’s impacts on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
74 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
71 15
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
70 17
Lite data feed. The proposed rule
change is available on the Exchange’s
website at www.nyse.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
1. Purpose
The Exchange proposes to amend the
NYSE American LLC Equities
Proprietary Market Data Fees Schedule
(‘‘Fee Schedule’’) and establish fees for
the NYSE American Aggregated Lite
(‘‘NYSE American Agg Lite’’) data feed,4
effective November 4, 2024.5
In summary, the NYSE American Agg
Lite is a NYSE American-only
frequency-based depth of book market
data feed of the NYSE American’s limit
order book for up to ten (10) price levels
on both the bid and offer sides of the
order book for securities traded on the
Exchange and for which the Exchange
reports quotes and trades under the
Consolidated Tape Association (‘‘CTA’’)
Plan or the Nasdaq/UTP Plan. The
NYSE American Agg Lite is a
compilation of limit order data that the
Exchange provides to vendors and
subscribers. The NYSE American Agg
Lite includes partial depth of book order
4 The proposed rule change establishing the
NYSE American Agg Lite data feed was
immediately effective on February 27, 2024. See
Securities Exchange Act Release No. 99690 (March
7, 2024), 89 FR 18445 (March 13, 2024) (SR–
NYSEAMER–2024–14) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change
To Establish the NYSE American Aggregated Lite
Market Data Feed).
5 The Exchange originally filed to amend the Fee
Schedule on May 13, 2024 (SR–NYSEAMER–2024–
31). On July 11, 2024, the Exchange withdrew SR–
NYSEAMER–2024–31 and replaced it with SR–
NYSEAMER–2024–44. On September 6, 2024, the
Exchange withdrew SR–NYSEAMER–2024–44 and
replaced it with SR–NYSEAMER–2024–55. On
November 4, 2024, the Exchange withdrew SR–
NYSEAMER–2024–55 and replaced it with this
filing.
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91831
data as well as security status messages.
The security status message informs
subscribers of changes in the status of a
specific security, such as trading halts,
short sale restriction, etc. In addition,
the NYSE American Agg Lite includes
order imbalance information prior to the
opening and closing of trading.
Background
The Exchange operates in a highly
competitive market. The Commission
has repeatedly expressed its preference
for competition over regulatory
intervention in determining prices,
products, and services in the securities
markets. In Regulation NMS, the
Commission highlighted the importance
of market forces in determining prices
and SRO revenues and, also, recognized
that current regulation of the market
system ‘‘has been remarkably successful
in promoting market competition in its
broader forms that are most important to
investors and listed companies.’’ 6
While Regulation NMS has enhanced
competition, it has also fostered a
‘‘fragmented’’ market structure where
trading in a single stock can occur
across multiple trading centers. When
multiple trading centers compete for
order flow in the same stock, the
Commission has recognized that ‘‘such
competition can lead to the
fragmentation of order flow in that
stock.’’ 7 Indeed, cash equity trading is
currently dispersed across 16
exchanges,8 numerous alternative
trading systems,9 and broker-dealer
internalizers and wholesalers, all
competing for order flow. Based on
publicly-available information, no
single exchange currently has more than
20% market share (whether including or
excluding auction volume).10
Proposed NYSE American Agg Lite Data
Feed Fees
The Exchange proposes to establish
the fees listed below for the NYSE
American Agg Lite data feed. The
6 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496, 37499 (June 29, 2005)
(File No. S7–10–04) (Final Rule) (‘‘Regulation
NMS’’).
7 See Securities Exchange Act Release No. 61358,
75 FR 3594, 3597 (January 21, 2010) (File No. S7–
02–10) (Concept Release on Equity Market
Structure).
8 See Cboe U.S. Equities Market Volume
Summary, available at https://markets.cboe.com/us/
equities/market_share. See generally https://
www.sec.gov/fastanswers/
divisionsmarketregmrexchangesshtml.html.
9 See FINRA ATS Transparency Data, available at
https://otctransparency.finra.org/otctransparency/
AtsIssueData. A list of alternative trading systems
registered with the Commission is available at
https://www.sec.gov/foia/docs/atslist.htm.
10 See Cboe Global Markets, U.S. Equities Market
Volume Summary, available at https://markets.
cboe.com/us/equities/market_share/.
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]]>Agencies
[Federal Register Volume 89, Number 224 (Wednesday, November 20, 2024)]
[Notices]
[Pages 91825-91831]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-27012]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101621; File No. SR-OCC-2024-013]
Self-Regulatory Organizations; Options Clearing Corporation;
Order Approving Proposed Rule Change by The Options Clearing
Corporation Concerning Modifications to Its By-Laws and Rules Primarily
To Discontinue Certain Outmoded or Unused Products and Services
November 14, 2024.
I. Introduction
On September 13, 2024, The Options Clearing Corporation (``OCC''),
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
make modifications to its By-Laws and Rules primarily to discontinue
certain outmoded or unused products and services (``Proposed Rule
Change''). The Proposed Rule Change was published for comment in the
Federal Register on October 1, 2024.\3\ The Commission has not received
any comments on the Proposed Rule Change. For the reasons discussed
below, the Commission is approving the Proposed Rule Change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 101189 (Sept. 25, 2024),
89 FR 79978 (Oct. 1, 2024) (File No. SR-OCC-2024-013) (``Notice'').
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II. Description of the Proposed Rule Change
OCC is a clearing agency that clears a number of transactions
including standardized equity options listed on national securities
exchanges and registered with the Commission, stock loans, and
futures.\4\ Since 2000, for its core clearing, risk management, and
data management applications, OCC has relied on a platform it calls
``ENCORE.'' ENCORE operates in on-premises data
[[Page 91826]]
centers.\5\ Among other things, ENCORE is OCC's system for receiving
trade and post-trade data on a transaction by transaction basis,
maintaining clearing member positions, calculating margin and clearing
fund requirements, and providing reporting to OCC staff, regulators and
clearing members.\6\ OCC plans to discontinue ENCORE and migrate its
functions to a cloud-based successor clearing system that it calls
Ovation.\7\
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\4\ All capitalized terms not defined herein have the same
meaning as set forth in the OCC By-Laws and Rules, available at
https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
\5\ Securities Exchange Act Release No. 96113 (October 20,
2022), 87 FR 64824, 64825 (Oct. 26, 2022) (File No. SR-OCC-2021-
802).
\6\ Notice, 89 FR at 79978-79.
\7\ Id.; Notice, 89 FR at 79979.
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As part of the transition to Ovation, OCC is determining which
features of ENCORE will migrate to Ovation.\8\ The Proposed Rule Change
describes certain functions that OCC proposes discontinuing because
they are outmoded, unused,\9\ or no longer support OCC's ability to
clear and settle transactions. In this category, under the Proposed
Rule Change, OCC would (i) no longer facilitate the settlement of
commissions and fees owed between Clearing Members that are party to a
Clearing Member Trade Assignment (``CMTA'') arrangement; (ii) delete
rule provisions related to over-the-counter (``OTC'') option products;
\10\ (iii) delete from its rules the ``associated Market Maker''
account subtype; and (iv) no longer require that Clearing Members
maintain records of both parties to a trade.
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\8\ Id. at 79978-79.
\9\ Id. at 79979.
\10\ An OTC option is an option contract with variable terms
that are negotiated bilaterally between the parties to such
transaction (subject to any specific requirements applicable to such
products as set forth in the By-Laws and Rules), and that is
affirmed through the facilities of an OTC Trade Source and submitted
to OCC for clearing as a confirmed trade. OCC By-Laws, Article I.
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The Proposed Rule Change also includes three sets of additional
changes that OCC proposed to make in connection with the transition to
Ovation. In this category, OCC proposes to (i) allow Clearing Members
to ``give-up'' one or more positions in cleared contracts that are
futures or futures options to another Clearing Member without
designating the specific account of the Given-Up Clearing Member to
which such positions must be allocated; (ii) categorize a trade as an
opening transaction when an opening or closing indicator is not
included on a trade; and (iii) conform rules related to the discharge
of broker-to-broker settlement obligations to current practice.
A. Discontinuing Existing Functions
i. Discontinuing the Facilitation of Commissions and Fees Between CMTA
Clearing Members
CMTA arrangements allow a Clearing Member that executed a
securities options trade (Executing Clearing Member), to send the trade
directly through OCC to another Clearing Member (Carrying Clearing
Member) for clearance and settlement.\11\ Clearing Members generally
use CMTA arrangements when they execute transactions for correspondent
brokers that custody their assets with separate Carrying Clearing
Members or execute transactions for an institutional customer that has
a prime brokerage arrangement with a separate Clearing Member.\12\
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\11\ Securities Exchange Act Release No. 88974 (May 29, 2020),
85 FR 34468, 34469 (June 4, 2020) (File No. SR-OCC-2020-005).
\12\ Securities Exchange Act Release No. 49841 (June 9, 2004),
69 FR 34207, 34207 (June 18, 2004) (File No. SR-OCC-2003-011).
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Currently, subject to certain conditions, Clearing Members that are
parties to a CMTA arrangement may opt to have OCC facilitate the
settlement of fees and commissions for transactions pursuant to the
CMTA arrangement. However, no Clearing Member has used the service
since 2016, nor have any expressed interest in using it in the
future.\13\ Accordingly, OCC proposes to eliminate it.
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\13\ Notice, 89 FR at 79979.
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To effect the discontinuation of the service, OCC proposes a number
of changes to its Rules. Specifically, OCC proposes deleting Rules
407(a)(2) and 504(e), as well as certain text in Rule 504(g).\14\
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\14\ OCC proposes to replace the deleted text in Rule 504(e)
with the word Reserved.
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Rule 407(a)(2) allows Clearing Members that are parties to a CMTA
arrangement to authorize OCC to settle fees and commissions owed by the
Carrying Clearing Member to the Executing Clearing Member in respect of
transfers effected pursuant to the CMTA arrangement. It also discusses
Clearing Members' requirements \15\ and restrictions \16\ for electing
to have OCC settle the applicable fees and commissions for transactions
under the CMTA as well as guidance as to when the Clearing Members'
election to have OCC settle applicable fees and commissions under the
CMTA arrangement is effective.
---------------------------------------------------------------------------
\15\ Specifically, OCC requires Clearing Members making such an
election to specifically register that aspect of their CMTA
arrangement with OCC. Clearing Members making such election
authorize (1) the Executing Clearing Member to enter into OCC's
systems fee and commission information with respect to transfers
effected pursuant to the CMTA arrangement between the Clearing
members, subject to such system checks as may be established by OCC
from time to time and (2) OCC to calculate and settle, in accordance
with the applicable provisions of Rule 504, the aggregate of such
entered amounts on the next following business day without any
further authorization or consent of the Carrying Clearing Member.
\16\ Rule 407 notes that any entries of commission and fee
information under Rule 407(a)(2) shall be solely fees and
commissions related to transfers effected pursuant to the Clearing
Members' CMTA arrangement and for no other purposes.
---------------------------------------------------------------------------
Rule 504(e) provides that OCC, as agent, is authorized to effect
non-guaranteed settlement of fees and commissions owed by a Carrying
Clearing Member to an Executing Clearing Member for transfers effected
pursuant to their registered CMTA arrangement, provided their CMTA
registration authorizes OCC to effect such settlements.\17\
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\17\ Further, Rule 504(e) also indicates how OCC determines the
aggregate amounts to be settled, warns that OCC is not obligated to
validate the accuracy of information input into OCC's systems to
determine settlement amounts, indicates when OCC effects settlement,
and confirms that OCC settlement facilitation under the CMTA
arrangement does not require the Carrying Clearing Member to give
any additional authorization or consent and that OCC does not have
any role in resolving disputes between the Carrying Clearing Member
and the Executing Clearing Member regarding these settlements. OCC
would replace the text of Rule 504(e) with the word ``Reserved.''
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Finally, certain text in Rule 504(g) indicates that OCC has no
obligation to effect settlement of fees and commissions as provided in
Rule 407 if either the Executing Clearing Member or the Carrying
Clearing Member has been suspended by OCC. The Proposed Rule Change
would delete this text but leave the remainder of Rule 504(g)
untouched.
ii. Deleting Provisions Related to Clearing and Settling OTC Options
OCC's current Rules and By-Laws are designed to support the
clearing and settling of OTC options.\18\ However, OCC has only ever
cleared OTC options based on the S&P 500 index,\19\ and has not cleared
and settled an OTC option since 2014. OCC does not currently have any
open interest in OTC options and OCC's Clearing Members have not
expressed interest in clearing OTC options with OCC in the future.\20\
As such, OCC proposes removing all provisions from its By-Laws and
Rules related to clearing and settling OTC options.\21\
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\18\ Securities Exchange Act Release No. 68434 (Dec. 14, 2012),
77 FR 75243 (Dec. 19, 2012) (File No. SR-OCC-2012-14).
\19\ Notice, 89 FR at 79980.
\20\ Id.
\21\ Id. OCC indicates that it would submit a proposed rule
change to the Commission as necessary in the event that it decides
to support the clearance and settlement of OTC Options in the
future. Id.
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[[Page 91827]]
To effect this change, OCC proposes deleting from the By-Laws the
definitions for ``OTC option,'' ``OTC index option,'' ``OTC Trade
Source,'' ``OTC Trade Source Rules,'' and ``Backloaded OTC Option.''
The Proposed Rule Change would also delete text in provisions of the
By-Laws and Rules that reference the above terms or that are otherwise
related to OCC's clearance and settlement of OTC options. As a result,
the following provisions in the By-Laws would have relevant OTC-related
terms deleted from them (or, where indicated, be deleted in their
entirety): Article I; \22\ Article VI, Section 1, Interpretation and
Policies .01(a); Article VI, Section 3, Interpretations and Policies
.09 (deleted in its entirety); Article VI, Sections 10(b) and (g);
Article VI, Sections 27(a) and (b); Article XVII, Introduction; Article
XVII, Definitions, Section 1; \23\ Article XVII, Section 3(h); Article
XVII, Section 3, Interpretation and Policies .01 (deleted in its
entirety); Article XVII, Section 4(a)(2); Article XVII, Section 5(a);
and Article XVII, Section 6 (deleted in its entirety).
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\22\ OCC proposes deleting definitions for ``OTC Index Option
Clearing Member'' and ``Origination Date.'' Additionally, OCC
proposes deleting text from the definitions for ``Class,''
``Clearing Member,'' ``Confirmed Trade,'' ``Index Multiplier,''
``Index Value Determinant,'' ``Trade Date,'' and ``Variable Terms''
that discusses the definitions in the context of OTC Options or that
is related to OTC Options. As a result of the removal of provisions
related to OTC Options, the Proposed Rule change would also delete
text from Interpretation and Policy .01 to Section C of Article I
that indicates that the term ``Exchange Transaction'' was removed
from the By-Laws and Rules and replaced with the term ``Confirmed
Trade'' to reflect the expansion of OCC's clearing activities into
OTC options. Id. at 79980 n.11.
\23\ OCC proposes deleting text related to OTC options in the
definitions for ``Class of Options,'' ``Current Underlying Interest
Value; Current Index Value,'' ``Expiration Date,'' ``Expiration Time
(deleted entirely),'' ``Reporting Authority,'' and ``Series of
Options.''
---------------------------------------------------------------------------
Likewise, the following provisions in the Rules would have relevant
OTC-related terms deleted from them (or, where indicated, be deleted in
their entirety): Rule 201(b)(6) (deleted in its entirety); Rules
401(a), (a)(1)(i), (b), (d), (e), (f), and (g); Rule 405; Rule 406;
Rule 407(l) (deleted in its entirety); Rule 408(a); Rules 611(a), (b),
and (d) (deleted in its entirety); Rule 801(b); Rule 803 Interpretation
and Policy .01; Rule 804; Rule 1003 Interpretation and Policy .02
(deleted in its entirety); Rule 1104 Interpretation and Policy .03
(deleted in its entirety); Rule 1105; Rule 1106(e)(2) (deleted in its
entirety); Rule 1106 Interpretation and Policy .01; Chapter XVIII of
the Rules, Introduction; Rules 1804(b) and (c); and Rule 1804
Interpretation and Policy .03 (deleted in its entirety).
iii. Eliminating the Associated Market Maker Sub-Account Type
OCC currently allows its Clearing Members to use combined market
maker accounts. OCC's rules provide for three types of combined market
maker accounts: a combined account limited to Market-Makers that are
neither Proprietary Market-Makers \24\ nor Associated Market-Makers;
\25\ a combined account limited to Proprietary Market-Makers; and a
combined account limited to Associated Market-Makers.\26\
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\24\ A Proprietary Market-Maker is a Market-Maker that is (A) a
non-customer of such Clearing Member or (B) a Related Person of such
Clearing Member that (i) is not a customer of such Clearing Member
for purposes of Rule 15c3-3 of the Securities and Exchange
Commission, (ii) does not carry the accounts of persons who are
customers of such Market-Maker for purposes of Rule 15c3-3, and
(iii) has consented to be treated as a proprietary Market-Maker for
purposes of the By-Laws and Rules. This term includes any
participant, as such, in an account that is not required to be
segregated under Section 4d of the Commodity Exchange Act of which
10% or more is owned by a proprietary Market-Maker.
\25\ An Associated Market-Maker is a person maintaining an
account with a Clearing Member as a Market-Maker, specialist, stock
market-maker, stock specialist, or Registered Trader that is a
Related Person of the Clearing Member and shall include any
participant, as such in an account of which 10% or more is owned by
an associated Market-Maker, or an aggregate of 10% or more of which
is owned by one or more associated Market-Makers.
\26\ OCC By-Laws, Article VI, Section 3, Interpretation and
Policy .06. The Commission has previously acknowledged that Clearing
Members may find these accounts attractive because positions in
these accounts can offset one another in a manner that may lead to
lower margin requirements. Securities Exchange Act Release No. 33492
(Jan. 19, 1994), 59 FR 3896, 3897 n.11 (Jan. 27, 1994) (File No. SR-
OCC-90-11).
---------------------------------------------------------------------------
Currently, Clearing Members do not use the Associated Market-Maker
sub-account type. Thus, OCC proposes deleting references to this sub-
account type from its By-Laws.\27\ To effect this change, the Proposed
Rule Change would delete the definition for Associated Market-Maker
from Article I of the By-Laws. It would also remove from the By-Laws
language related to Associated Market-Makers and the accounts their
trades may be included in from Article VI, Section 3(c), Interpretation
and Policy .03, and Interpretation and Policy .06. Finally, the
Proposed Rule Change would replace a reference to Section 3(i) with a
reference to Section 3(c) in the first sentence of Interpretation and
Policy .06. As a result of the changes, OCC's By-Laws would provide for
only two combined market-maker accounts going forward--one limited to
Market-Makers that are not proprietary Market-Makers and one limited to
Proprietary Market-Makers.
---------------------------------------------------------------------------
\27\ Notice, 89 FR at 79982.
---------------------------------------------------------------------------
iv. Recordkeeping Requirements
OCC's rules currently require Clearing Members to maintain a record
of the Purchasing Clearing Member and the Writing Clearing Member to
each confirmed trade.\28\ Before electronic trading was adopted, this
requirement helped OCC reconcile counterparty settlement obligations
and efficiently clear and settle confirmed trades, which aided OCC in
avoiding settlement delays and disputes.\29\
---------------------------------------------------------------------------
\28\ Under Rule 208, Clearing Members must keep records showing
all confirmed trade data required by OCC's By-Laws and Rules
including confirmed trade information reported to OCC under Rule
401. OCC Rules, Rule 208. Rule 401 requires that confirmed trades
include the identity of the Purchasing Clearing Member and the
Writing Clearing Member to the transaction. OCC Rules, Rule
401(a)(1)(i).
\29\ Notice, 89 FR at 79980.
---------------------------------------------------------------------------
With the adoption of electronic trading, OCC no longer needs
Clearing Members to keep a record of the Purchasing Clearing Member and
the Writing Clearing Member to each transaction.\30\ OCC's role as a
CCP further diminishes the need for this requirement because OCC
novates all confirmed trades in options contracts so that it becomes
the buyer to every seller and the seller to every buyer. As such, the
original counterparty information in transactions is not relevant or
necessary in respect of OCC's clearance and settlement process.\31\
---------------------------------------------------------------------------
\30\ Id.
\31\ Id. at 79981. Additionally, OCC asserts that configuring
Ovation to maintain such records would require OCC to invest
significant resources that could impact Ovation's release timeline.
Id. at 79980.
---------------------------------------------------------------------------
OCC proposes no longer requiring that Clearing Members keep records
of the Purchasing Clearing Member and the Writing Clearing Member to
transactions. To accomplish this, OCC proposes adding an exception to
its Rule 208 so that it would require only that Clearing Members keep
records showing all confirmed trade data required pursuant to OCC's By-
Laws and Rules, including confirmed trade information reported to OCC
under Rule 401 except for the identity of the counterparty Clearing
Member.
B. Miscellaneous Changes
As noted above, OCC also proposes three miscellaneous changes to
its By-Laws and Rules. First, the Proposed Rule Change would allow
Clearing Members to ``give up'' one or more positions in cleared
contracts that are futures or futures options to another
[[Page 91828]]
Clearing Member without designating the specific account of the Given-
Up Clearing Member to which such positions must be allocated in order
to better facilitate give-up allocations to the appropriate account.
Second, OCC's amendments would categorize a trade as an opening
transaction when an opening or closing indicator is not included on a
trade for an options or futures contract to ensure that an existing
position is not inadvertently closed out. Third, OCC proposes changes
related to the discharge of broker-to-broker settlement obligations to
better reflect its current practice.\32\
---------------------------------------------------------------------------
\32\ Id. at 79979.
---------------------------------------------------------------------------
i. Designating the Appropriate Given-Up Clearing Member Account
Similar to the CMTA arrangements described above, a second way that
OCC provides flexibility with respect to which broker executes a
transaction is through give-up transactions.\33\ Rule 408 allows for
one or more positions in cleared contracts to be allocated from a
designated account of a Giving-Up Clearing Member to a designated
account of a Given-Up Clearing Member. Mechanically, these transactions
are initiated post-trade by the Giving-Up Clearing Member by
instructing OCC to move a position in one of its accounts to the
designated account of the Given-Up Clearing Member. The Giving-Up
Clearing Member may designate the Given-Up Clearing Member's account to
which it would like to allocate positions. Currently, this allocation
process is only available for positions in futures and options on
futures cleared and settled by OCC.\34\
---------------------------------------------------------------------------
\33\ Securities Exchange Act Release No. 85779 (May 6, 2019), 84
FR 20689 (May 10, 2019) (File No. SR-OCC-2019-003).
\34\ Notice, 89 FR at 79981.
---------------------------------------------------------------------------
OCC proposes changing which Clearing Member must designate the
account to which OCC should allocate given-up positions from the
Giving-Up Clearing Member to the Given-Up Clearing Member. OCC believes
this change will help reduce the risk of positions being transferred to
an incorrect account because it would provide the Given-Up Clearing
Member with more control over where positions it executes ultimately
are transferred.\35\ To do this, OCC would delete certain references to
designated accounts in Rules 408(a) and (b). Currently, Rule 408(a)
provides that positions may be allocated to a designated account of a
Given-Up Clearing Member. OCC proposes deleting the reference to a
designated account so that Rule 408(a) provides that positions may be
allocated to a Given-Up Clearing Member. Rule 408(b) contemplates
instructions to allocate positions from a designated account of the
Giving-Up Clearing Member to a designated account of the Given-Up
Clearing Member. Under OCC's proposal, the revised rule text would
instead contemplate instructions to allocate positions from a
designated account of the Giving-Up Clearing Member to a Given-Up
Clearing Member. OCC also proposed to add text to Rule 408(b)
indicating that, if certain conditions are met, the Given-Up Clearing
Member may designate an account to which the allocation will be made.
Once the Given-Up Clearing Member designates an account, OCC will
adjust the positions in the respective designated accounts of the
Giving-Up and Given-Up Clearing Members in accordance with the
allocation instruction.
---------------------------------------------------------------------------
\35\ Id.
---------------------------------------------------------------------------
In line with current practice, the Proposed Rule Change would also
clarify that this allocation process is only available for futures and
options on futures. OCC would amend the title of Rule 408 to be
``Allocations of Positions for Futures and Futures Options'' rather
than just ``Allocations of Positions.'' Currently, Rule 408(a) provides
that give up allocations are available for cleared contracts. OCC's
proposal would clarify that one or more positions in cleared contracts
that are futures or futures options may be allocated in a give up
allocation. Similarly, in Rule 408(e), OCC proposes replacing the word
``options'' with ``futures options'' in multiple locations to clarify
that give-up allocations are only available for futures and options on
futures contracts.\36\
---------------------------------------------------------------------------
\36\ Id.
---------------------------------------------------------------------------
To remove duplicative text from Rule 408, OCC proposes deleting the
last sentence from Rule 408(b), which currently provides that if the
Giving-Up Clearing Member and the Given-Up Clearing Member are not
parties to an allocation agreement registered with OCC, then OCC shall
adjust the positions in the respective designated accounts of the
Giving-Up and Given-Up Clearing Member in accordance with the
allocation instruction only upon receipt of notice from the Given-Up
Clearing Member of its affirmative acceptance of the allocation.\37\
OCC believes this rule text is already covered elsewhere in Rule
408.\38\
---------------------------------------------------------------------------
\37\ Id.
\38\ Id. As discussed above, proposed Rule 408(b) would indicate
that OCC will adjust positions in the respective designated accounts
of the Giving-Up and Given-Up Clearing Members in accordance with an
allocation instruction only after the Given-Up Clearing Member
designates the account to which the allocation instruction will be
made. Moreover, Rule 408(d) would provide that if the Given-Up
Clearing Member has rejected or not provided OCC with notice of its
affirmative acceptance of an allocation at or before the deadline
prescribed by OCC, the position(s) that is (are) the subject of such
allocation instruction shall remain in the account of the Giving-Up
Clearing Member, which shall be responsible for all settlement and
other obligations in respect thereof, unless the position is
transferred or adjusted pursuant to other provisions of the By-Laws
and Rules.
---------------------------------------------------------------------------
Similarly, OCC proposes removing a reference to allocation
agreements in Rule 408(b) because that reference is duplicative of Rule
408(d).\39\ Rule 408(b) requires the Giving-Up Clearing Member and the
Given-Up clearing Member to be parties to an allocation agreement
registered with OCC before OCC is required to allocate positions
pursuant to a give-up transaction. OCC Rule 408(d), however, provides
that the Given-Up Clearing Member is responsible for all settlement and
other obligations in respect of each position that has been allocated
to one of its accounts pursuant to a its acceptance of an allocation
instruction. Further, under Rule 408(c) registration of an allocation
agreement functionally is notice of affirmative acceptance of an
allocation.\40\ In OCC's view, because of Rule 408(c), there is no need
for this separate requirement in Rule 408(b).
---------------------------------------------------------------------------
\39\ Notice, 89 FR at 79981.
\40\ Rule 408(c) provides that the registration of an allocation
agreement constitutes notice to OCC that the Giving-Up Clearing
Member has been authorized by the Given-Up clearing Member to
allocate positions to an account of the Given-Up Clearing Member
without further action by the Given-Up Clearing Member.
---------------------------------------------------------------------------
OCC also proposes removing duplicative text from Rule 408(d) to
clarify Rule 408.\41\ Currently, Rule 408(d) contains references to
registered allocation agreements alongside references to acceptances of
allocation instructions. For instance, 408(d) indicates that the Given-
Up Clearing Member shall be responsible for all settlement and other
obligations in respect of each position that has been allocated to one
of its accounts pursuant to a registered allocation agreement or
pursuant to its acceptance of an allocation instruction. Rule 408(d)
also provides that, if there is not a registered allocation agreement
on file with OCC or the Given-Up Clearing Member has rejected or not
timely provided OCC with notice of its affirmative acceptance of an
allocation, the relevant position will remain in the account of the
Giving-Up Clearing Member. As noted above, registration of an
allocation agreement is functionally the same as notice of affirmative
acceptance of an allocation. Thus, referring to allocation
[[Page 91829]]
agreements in addition to acceptance of allocation instructions is
duplicative. As such, OCC proposes removing references to allocation
agreements in Rule 408(d).\42\
---------------------------------------------------------------------------
\41\ Notice, 89 FR at 79981.
\42\ Notice, 89 FR at 79981.
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ii. Default Treatment for Certain Confirmed Transactions
OCC currently accepts and novates confirmed transactions in
options, sent to OCC by an options exchange, irrespective of whether
there is an indication that the transaction is either an opening or
closing transaction. In practice, if the transaction is not identified
as either an opening or closing transaction, then OCC treats it as an
opening transaction.
OCC proposes to reflect this current practice in its rules.\43\
Rule 401, Interpretation and Policy .01 already provides that, in the
case of futures, trade information submitted by an Exchange need not
identify a transaction as opening or closing. It also indicates that if
trade information submitted by an Exchange for a futures trade does not
identify a transaction as opening or closing, OCC will treat all
purchase and sale transactions in futures in accounts other than Market
Maker accounts as opening transactions. OCC proposes to broaden the
application of Rule 401, Interpretation and Policy .01 to encompass
options as well as futures.
---------------------------------------------------------------------------
\43\ Id.
---------------------------------------------------------------------------
OCC also proposes to broaden the scope of Rule 401, Interpretation
and Policy .01 to apply to Market-Maker accounts. Currently, Rule 401,
Interpretation and Policy .01 does not apply to purchase and sale
transactions in futures and options in Market Maker accounts. OCC
proposes removing this limitation because it believes that the practice
of treating unidentified trades as opening transactions is
operationally safer because it helps avoid the unintentional closure of
existing positions, irrespective of whether the specific unidentified
trade is in a Market Maker account or not.\44\
---------------------------------------------------------------------------
\44\ Id. at 79982.
---------------------------------------------------------------------------
iii. Broker-Broker Settlement Obligations
OCC proposes two changes related to its broker-to-broker settlement
obligations to align its rules with its practices. Ordinarily,
settlement of exercise and assignment activity occurs through OCC's
correspondent clearing corporation, the National Securities Clearing
Corporation (``NSCC'') pursuant to OCC's Rule 901.\45\ In certain
circumstances, such as when an underlying security is not CCC-
eligible,\46\ OCC directs that settlement will occur on a broker-to-
broker basis pursuant to Rules 903-912. Under OCC Rule 909, when
settlement is not made through the correspondent clearing corporation,
for example when broker-broker settlement is directed, the Delivering
Clearing Member and the Receiving Clearing Member must send notices to
OCC as to the number of units of the underlying security delivered and
the amount received. Under OCC Rule 909(d), when a Delivering or
Receiving Clearing Member submits to OCC notice of a delivery, payment,
or receipt of delivery or payment, and the contra Clearing Member does
not respond to such notice within two business days, the contraparty's
failure to respond constitutes acknowledgement to OCC that the
obligation has been settled as indicated in the submitting Clearing
Member's notice, provided that the designated delivery date has
occurred. However, OCC's current practice differs from this provision
in Rule 909. Rather, when OCC directs broker-broker settlement it also
indicates that, if it is not possible for the Delivering Clearing
Member to effect delivery of the underlying shares on the designated
settlement date, then the settlement obligations of both Delivering and
Receiving Clearing Members will be delayed until OCC designates a new
exercise settlement date, settlement method, and/or settlement
value.\47\
---------------------------------------------------------------------------
\45\ See Interpretation and Policy .02 to OCC Rule 901.
\46\ Id. The term CCC-eligible means that securities contracts
in the underlying security arising from the exercise or maturity of
a cleared security are eligible for settlement through the
Continuous Net Settlement Accounting Operation of NSCC. OCC By-Laws,
Article I, Section C.6.
\47\ Taking such action is allowed under Article VI, Section 19
of the By-Laws.
---------------------------------------------------------------------------
The Proposed Rule Change would amend Rule 909 to align the Rule
with current practice. Specifically, OCC would amend Rule 909(d) to
provide that OCC will construe a contraparty's failure to respond to
indicate that the obligation is unsettled until such time as either (i)
both Delivering and Receiving Clearing Members mutually agree to settle
the obligation and notify OCC; or (ii) OCC settles the obligation on
behalf of both Delivering and Receiving Clearing Members pursuant to
OCC's policies and procedures.
Separately, OCC Rule 909 currently requires Clearing Members to
submit notices indicating the number of units of the underlying
security delivered (received) and the amount received (paid) therefor
for transactions not settled via NSCC. In practice, however, the amount
received or paid is systematically determined at OCC rather than being
specified by the Clearing Members.\48\ Therefore, OCC proposes removing
``and the amount received (paid)'' from the text of Rule 909.
---------------------------------------------------------------------------
\48\ OCC states that the practice of systematically calculating
cash amounts helps OCC avoid processing notices entered by Clearing
Members that may be inaccurate. See Notice, 89 FR at 79982.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act requires the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
the proposed rule change is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to the
organization.\49\ Under the Commission's Rules of Practice, the
``burden to demonstrate that a proposed rule change is consistent with
the [Act] and the rules and regulations issued thereunder . . . is on
the self-regulatory organization [`SRO'] that proposed the rule
change.'' \50\ The description of a proposed rule change, its purpose
and operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\51\ and any failure of an
SRO to provide this information may result in the Commission not having
a sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Act and the applicable rules and
regulations.\52\ Moreover, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\53\
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\49\ 15 U.S.C. 78s(b)(2)(C).
\50\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\51\ Id.
\52\ Id.
\53\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
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After carefully considering the Proposed Rule Change, the
Commission finds that the Proposed Rule Change is consistent with
Section 17A(b)(3)(F) of the Act \54\ and Rule 17Ad-22(e)(21).\55\
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\54\ 15 U.S.C. 78q-1(b)(3)(F).
\55\ 17 CFR 240Ad-22(e)(21).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Under Section 17A(b)(3)(F) of the Act, OCC's rules, among other
things, must be ``designed to promote the prompt and accurate clearance
and settlement of securities transactions and, to the extent
applicable, derivative agreements,
[[Page 91830]]
contracts, and transactions.'' \56\ Based on the Commission's review of
the record, and for the reasons discussed below, OCC's proposed rule
change is consistent with Section 17A(b)(3)(F).
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\56\ 15 U.S.C. 78q-1(b)(3)(F).
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OCC proposes amending its rules to discontinue a number of existing
functions that are outmoded or unused. As described above, OCC would no
longer offer services through which it facilitates the settlement of
commissions and fees owed between Clearing Members that are party to a
CMTA arrangement because Clearing Members have neither expressed
interest in using this service nor, since 2016, have they used it.\57\
OCC would cease clearing and settlement services with respect to OTC
options because it has not cleared or settled an OTC option since 2014,
its Clearing Members have not expressed interest in OCC doing so in the
future, and it does not currently have any open interest in OTC
options.\58\ OCC's amendments would also discontinue the Associated
Market-Maker account subtype because its Clearing Members do not use
it.\59\ OCC also proposes to eliminate the requirement that Clearing
Members maintain records of both parties to a trade because the
original counterparty information in transactions is not relevant or
necessary in respect of OCC's clearance and settlement process.
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\57\ Notice, 89 FR at 79979.
\58\ Id. at 79980.
\59\ Id. at 79982.
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Discontinuing services no longer in use, and the rules related to
such services, removes unnecessary complexity from OCC's rules without
impeding the clearance or settlement of securities transactions.
Similarly, removing from its rules obligations on Clearing Members that
are no longer necessary to support OCC's ability to clear and settle
transactions, such as the obligation for Clearing Members to maintain
unnecessary records, reduces complexity without impeding OCC's
clearance and settlement activities. Reducing complexity would also
improve the clarity of OCC's rules.
As described above, OCC also proposes changes to improve the
accuracy of its clearance and settlement of transactions. Specifically,
OCC proposes requiring the Given-Up Clearing Member, rather than the
Giving-Up Clearing Member, to designate an account to which the
allocation in a give up transaction will be made. This proposed change
would provide a Given-Up Clearing Member with more control over its own
account and could help reduce the risk that such a Clearing Member
would receive positions it does not want.\60\ Separately, OCC proposes
to treat confirmed transactions in options and futures as opening
transactions where the trade information provided to OCC does not
indicate whether the transaction is an opening or closing transaction.
This would reduce the risk of an unintentional closure of existing
positions. By avoiding mistakenly closing existing positions and
reducing the risk that a transaction will be transferred to the wrong
account, OCC's proposed changes promote the accurate clearance and
settlement of securities transactions.
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\60\ As noted above, OCC also proposes to remove duplicative
provisions in the rules governing such transactions.
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Finally, OCC proposes to amend its rules to no longer construe a
Clearing Member's failure to act as acknowledgement of settlement in
broker-to-broker transactions. Rather, OCC would not construe such a
transaction to have settled until either it receives notice from both
Clearing Members of their mutual agreement to settle the obligation or
OCC settles the positions pursuant to its policies and procedures. This
could reduce potential inaccuracies in OCC's settlement of the
contracts it clears, and would also be consistent with current
practice.\61\
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\61\ As discussed above, other proposed changes that align the
rules with current practice include clarifying that give-up
transactions are only available for futures and options on futures;
removing the requirement to include certain information in notices;
and defaulting to an opening transaction when certain trade
information do not indicate that a transaction is either an opening
or closing transaction.
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By removing the duplicative portions of Rule 408, OCC would improve
the clarity of its Rules,\62\ which in turn increases the likelihood
that its participants understand the methods available to clear and
settle transactions and how those methods function. Similarly, ensuring
that the rules align with current practice, in the ways discussed
above, helps prevent confusion by OCC's Clearing Members as to the
methods available to clear and settle transactions and how those
methods function. By preventing such confusion, OCC makes it more
likely that participants are able to efficiently and accurately execute
their transactions. As such, the Proposed Rule Change promotes the
prompt and accurate clearance and settlement of securities
transactions.
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\62\ OCC also proposes correcting an inaccurate reference to
Section 3 of its By-Laws, Paragraph I. This too increases the
clarity of its rules.
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The Proposed Rule Change is, therefore, consistent with the
requirements of Section 17A(b)(3)(F) of the Act.\63\
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\63\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(21)
Rule 17Ad-22(e)(21) requires OCC to ``establish, implement,
maintain, and enforce written policies and procedures reasonably
designed to . . . be efficient and effective in meeting the
requirements of its participants and the markets it serves . . . .''
\64\ Based on its review of the record, and for the reasons discussed
below, OCC's Proposed Rule Change is consistent with Rule 17Ad-
22(e)(21). When clearing agencies establish policies and procedures
that address Rule 17Ad-22(e)(21), the Commission has indicated that
they should ask whether their policies' and procedures' design meets
the needs of its participants and the markets it serves, particularly
with respect to choice of a clearance and settlement arrangement,
operating structure, scope of products cleared, settled, or recorded,
and use of technology and procedures.\65\
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\64\ 17 CFR 240.17Ad-22(e)(21).
\65\ Securities Exchange Act Release No. 78961, 81 FR 70786,
70841 (Oct. 13, 2016) (File No. S7-03-14).
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OCC's policies and procedures would meet the needs of its
participants and the markets it serves after its proposed
discontinuation of products and services its Clearing Members no longer
use. OCC proposes discontinuing its facilitation of the settlement of
commissions and fees owed between Clearing Members that are party to a
CMTA arrangement because Clearing Members have neither expressed
interest in using this service nor, since 2016, have they used it.\66\
OCC plans on no longer offering clearing and settlement services with
respect to OTC options because it has not cleared and settled an OTC
option since 2014, its Clearing Members have not expressed interest in
OCC doing so in the future, and it does not currently have any open
interest in OTC options.\67\ OCC also would discontinue the Associated
Market-Maker account subtype because its Clearing Members do not use
it.\68\ OCC is not obligated to offer these products and services.
Further, its Clearing Members' lack of interest in these products and
services suggests that they do not need them. As such, OCC's proposed
discontinuation of these products and services is consistent with the
requirements of Rule 17Ad-22(e)(21).\69\
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\66\ Notice, 89 FR at 79979.
\67\ Id. at 79980.
\68\ Id. at 79982.
\69\ 17 CFR 240.17Ad-22(e)(21).
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[[Page 91831]]
The Proposed Rule Change is, therefore, consistent with the
requirements of Rule 17Ad-22(e)(21).\70\
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\70\ 17 CFR 240.17Ad-22(e)(21).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act,
and in particular, Section 17A(b)(3)(F) of the Act \71\ and Rule 17Ad-
22(e)(21).\72\
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\71\ 15 U.S.C. 78q-1(b)(3)(F).
\72\ 17 CFR 240.17Ad-22(e)(21).
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It is therefore Oodered pursuant to Section 19(b)(2) of the Act
that the proposed rule change (SR-OCC-2024-013) be, and hereby is,
approved.\73\
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\73\ In approving the proposed rule change, the Commission
considered the proposal's impacts on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\74\
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\74\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-27012 Filed 11-19-24; 8:45 am]
BILLING CODE 8011-01-P
