80 FR 15845 - Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change, as Modified by Amendment 1 Thereto, To Expand the Officers Who May Declare That a Clearing Member Is Summarily Suspended

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 57 (March 25, 2015)

Page Range		15845-15846
FR Document		2015-06715
Federal Register, Volume 80 Issue 57 (Wednesday, March 25, 2015)
[Federal Register Volume 80, Number 57 (Wednesday, March 25, 2015)]
[Notices]
[Pages 15845-15846]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-06715]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74537; File No. SR-OCC-2015-04]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change, as Modified by Amendment 1 
Thereto, To Expand the Officers Who May Declare That a Clearing Member 
Is Summarily Suspended

March 19, 2015.
    On January 23, 2015, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2015-04 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal Register on February 11, 2015.\3\ The Commission did not 
receive any comments on the proposed rule change. This order approves 
the proposed rule change, as modified by Amendment 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 74212 (February 5, 
2015), 80 FR 7668 (February 11, 2015) (SR-OCC-2015-04).
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I. Description

    OCC is amending its Rules to permit OCC to expand the officers who 
may declare that a clearing member is summarily suspended from OCC. 
Currently, OCC Rule 1102 provides that only OCC's Board of Directors 
(``Board'') and its Executive Chairman may summarily suspend a clearing 
member. OCC believes that, given the time sensitive nature of managing 
a clearing member default, it is prudent risk management to expand the 
number of officers with the authority to summarily suspend a clearing 
member so that OCC may begin its default management process and, in 
turn, take protective action as soon as possible.
    Pursuant to OCC Rule 1102, OCC's Board and Executive Chairman have 
the authority to summarily suspend a clearing member. As set forth in 
Interpretation and Policy .01 of Rule 1102, such action constitutes a 
``default'' with respect to the clearing member. OCC's ability to 
timely and effectively begin its clearing member default management 
process serves a key role in protecting OCC, non-defaulting clearing 
members and the public from potential consequential damage(s) that may 
be caused by the default of a clearing member. In order to provide OCC 
with the necessary tools to manage a clearing member default, Chapter 
XI of OCC's Rules provides OCC with the authority to take certain 
protective action(s) once a clearing member has been summarily 
suspended (and declared to be in default).\4\ While OCC believes that 
the authority provided to it in Chapter XI of its Rules is sufficiently 
robust to manage a clearing member default, OCC may not exercise such 
authority unless and until a clearing member has been summarily 
suspended by either the Board or the Executive Chairman.
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    \4\ For example, OCC Rule 1106(a) provides OCC with significant 
flexibility with respect actions it may take in order to close out a 
defaulting clearing member's open long positions.
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    In order to provide greater assurance that OCC will be able to 
timely and effectively manage a clearing member default, pursuant to 
its proposal as approved, OCC is amending Rule 1102 to expand the list 
of officers who may summarily suspend a clearing member to include 
OCC's President or a designee of the Executive Chairman \5\ or 
President of the rank of Senior Vice President or higher (each a 
``Designed Officer'').\6\ OCC believes that the change will provide it 
with additional operational flexibility because more individuals will 
be able to timely summarily suspend a clearing member and thereby allow 
OCC to exercise its authority to manage a clearing member default. 
OCC's clearing member default management process is designed to protect 
OCC, non-defaulting clearing members and the public from the defaulting 
clearing member without materially impacting financial markets.\7\ By 
providing additional officers with the authority to summarily suspend a 
clearing member, and thereby allow OCC to begin its default management 
processes, there will be greater assurance that OCC will timely take 
action(s) necessary to protect itself, non-defaulting clearing members, 
and the public from a defaulting clearing member. OCC also is amending 
Rule 1102 to require notification to the Board as soon as practicable 
should a Designated Officer summarily suspend a clearing member.\8\ The 
addition of such a requirement will ensure that the Board is timely 
informed of such suspensions.
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    \5\ OCC filed Amendment No. 1 in order to correct an inadvertent 
grammatical error. Specifically, a comma after the word ``Executive 
Chairman'' was removed because it caused the description of the 
proposed rule change to not be consistent with the text of the 
proposed rule change.
    \6\ OCC's proposal is similar to the summary suspension process 
employed by the National Securities Clearing Corporation (``NSCC''). 
See NSCC Rule 46, Section 3.
    \7\ A description of OCC's default management process is located 
at: http://www.theocc.com/risk-management/default-rules/>
    \8\ OCC staff will notify the Board within two hours of the 
summary suspension.
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    Furthermore, pursuant to this rule change as approved, OCC is 
making conforming amendments consistent with the above to Article VI, 
Section 25 of its By-Laws and OCC Rule 707, which concern the summary 
suspension of clearing members that participate in OCC's cross-
margining programs. Specifically, Article VI, Section of OCC's By-Laws 
and OCC Rule 707 will explicitly state that the Board of Directors or a 
Designated Officer may summarily suspend a clearing member based on a 
cross-margining related default.
    Except for the changes described above, no other changes are 
proposed to OCC's suspension or default management processes as set 
forth in the Rules, including a clearing member's right to appeal a 
summary suspension in accordance with OCC Rule 1110.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \9\ directs 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 such 
organization.
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    \9\ 15 U.S.C. 78s(b)(2)(C).
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    The Commission finds that the proposed rule change is consistent 
with Section 17A(b)(3)(F) of the Act, which requires, among other 
things, that the rules of a clearing agency are designed to assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible.\10\ By 
expanding the list of officers with the authority to summarily suspend 
a clearing member, OCC will be better able to ensure that has the 
ability to timely begin the clearing member default management 
processes. In turn, timely beginning the

[[Page 15846]]

default management process will further the safeguarding of securities 
and funds which are in the custody or control of OCC, or for which it 
is responsible.
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \11\ and the 
rules and regulations thereunder.
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    \11\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-OCC-2015-04), as modified by 
Amendment 1, be, and it hereby is, approved.
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    \12\ 15 U.S.C. 78s(b)(2).
    \13\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
Brent J. Fields,
Secretary.
[FR Doc. 2015-06715 Filed 3-24-15; 8:45 am]
 BILLING CODE 8011-01-P
15846 Federal Register / Vol. 80, No. 57 / Wednesday, March 25, 2015 / Notices

default management process will further minimum capital requirements for Capital is the primary component of a
the safeguarding of securities and funds banks approved to issue letters of credit bank’s total regulatory capital.5 Tier 1
which are in the custody or control of that may be deposited by clearing Capital is a more conservative measure
OCC, or for which it is responsible. members as a form of margin asset. of a bank’s financial health as it ignores
subordinated debt, intermediate-term
III. Conclusion II. Clearing Agency’s Statement of the
preferred stock, cumulative and long-
On the basis of the foregoing, the Purpose of, and Statutory Basis for, the term preferred stock and a portion of a
Commission finds that the proposal is Proposed Rule Change bank’s allowance for loan and lease
consistent with the requirements of the In its filing with the Commission, losses. In light of the more universal
Act and in particular with the OCC included statements concerning acceptance of Tier 1 Capital for bank
requirements of Section 17A of the the purpose of and basis for the financial reporting standards, OCC is
Act 11 and the rules and regulations proposed rule change and discussed any now proposing to amend OCC Rule 604
thereunder. comments it received on the proposed Interpretation and Policy .01 to
It is therefore ordered, pursuant to rule change. The text of these statements substitute Tier 1 Capital for
Section 19(b)(2) of the Act,12 that the may be examined at the places specified shareholders’ equity.
proposed rule change (SR–OCC–2015– OCC believes that by measuring a
in Item IV below. OCC has prepared
04), as modified by Amendment 1, be, bank’s financial health based on Tier 1
summaries, set forth in sections (A), (B),
and it hereby is, approved. Capital, instead of shareholders’ equity,
and (C) below, of the most significant
For the Commission, by the Division of aspects of these statements. OCC will reduce its credit risk to banks
Trading and Markets, pursuant to delegated issuing letters of credit deposited by
authority.13 (A) Clearing Agency’s Statement of the clearing members as a form of margin
Brent J. Fields, Purpose of, and Statutory Basis for, the asset. As stated above, Tier 1 Capital is
Secretary. Proposed Rule Change a more conservative measure of a bank’s
[FR Doc. 2015–06715 Filed 3–24–15; 8:45 am] 1. Purpose financial health. Therefore, after
BILLING CODE 8011–01–P implementation of the proposed rule
The purpose of this proposed rule change, should OCC need to demand
change is to enhance the measurement payment on a letter of credit deposited
SECURITIES AND EXCHANGE used by OCC to establish minimum by a clearing member as a margin asset,
COMMISSION capital requirements for banks approved such as in the case of a clearing member
to issue letters of credit that may be default, it is less likely that the bank
[Release No. 34–74536; File No. SR–OCC–
deposited by clearing members as a issuing such letter of credit would not
2015–007]
form of margin asset. Currently, OCC perform upon its payment commitment
Self-Regulatory Organizations; The Rule 604 Interpretation and Policy .01 because the bank would be required to
Options Clearing Corporation; Notice requires U.S. banks to have hold a greater amount of capital in order
of Filing of Proposed Rule Change To $100,000,000 or more in shareholders’ to be an OCC letter of credit bank. In
Enhance the Measurement Used To equity, and non-U.S. banks to have turn, credit risk presented to OCC as a
Establish Minimum Capital $200,000,000 or more in shareholders’ result of accepting letters of credit as a
Requirements for Banks Approved To equity, in order to be approved as an form of margin asset is reduced.6
Issue Letters of Credit issuer of letters of credit that may In order to effect the proposed rule
deposited by clearing members to meet change, and in addition to amending
March 19, 2015. their margin obligation(s) at OCC. The OCC Rule 604 Interpretation and Policy
Pursuant to Section 19(b)(1) of the purpose of these minimum capital .01 as described above, OCC is
Securities Exchange Act of 1934 requirements is to ensure that issuers of proposing to add a paragraph ‘‘c’’ to
(‘‘Act’’) 1 and Rule 19b–4 thereunder 2 letters of credit whose letters of credit Interpretation and Policy .01 of OCC
notice is hereby given that on March 6, are deposited at OCC as a margin asset Rule 604 in order to adopt a definition
2015, The Options Clearing Corporation by clearing members have the ability to for Tier 1 Capital that leverages the
(‘‘OCC’’) filed with the Securities and honor a demand for payment by OCC definition of Tier 1 Capital employed by
Exchange Commission (‘‘Commission’’) under such letters of credit should a a bank’s regulatory agency. OCC
the proposed rule change as described need to do so arise, such as in the case believes that such a definition is
in Items I, II, and III below, which Items of a clearing member default. appropriate given that OCC accepts
have been prepared by OCC. The The financial requirements set forth letters of credit from banks regulated by
Commission is publishing this notice to in OCC Rule 604 Interpretation and different regulatory authorities.7 In
solicit comments on the proposed rule Policy .01 concerning issuers of letters addition, and for the reasons stated
change from interested persons. of credit have been in place for some
measures, Basel III, is located at: http://
I. Clearing Agency’s Statement of the time.3 In the years since OCC adopted www.bis.org/publ/bcbs189.pdf.
Terms of Substance of the Proposed OCC Rule 604 Interpretation and Policy 5 See https://www.kansascityfed.org/Publicat/

Rule Change .01, bank financial reporting standards BasicsforBankDirectors/
have evolved and now place a greater BasicsforBankDirectors.pdf.>
OCC proposes to amend its By-Laws 6 OCC does not anticipate that the proposed rule

and Rules in order to enhance the emphasis on Tier 1 Capital as opposed
change would impact any of the banks already
measurement used to establish shareholders’ equity.4 In fact, Tier 1 approved to issue letters of credit that may be
deposited by clearing members as a form of margin
rljohnson on DSK3VPTVN1PROD with NOTICES

3 See Securities and Exchange Act Release No. since all such banks maintain amounts of Tier 1
11 In approving this proposed rule change, the
19422 (January 12, 1983), SR–OCC–1982–08 [sic]. Capital that exceed, as applicable, $100 million for
Commission has considered the proposed rule’s 4 Tier 1 Capital is the measure used by the Basel U.S. banks or $200 million for Non-U.S. banks.
impact on efficiency, competition, and capital
Committee on Banking Supervision to measure the 7 See OCC Rule 604(c). For example, OCC accepts
formation. See 15 U.S.C. 78c(f).
12 15 U.S.C. 78s(b)(2).
financial health of a bank. The goal of the Basel letters of credit issued by banks regulated by The
Committee on Banking Supervision is to strengthen Federal Reserve Board, The Office of the
13 17 CFR 200.30–3(a)(12).
the regulation, supervision and risk management of Comptroller of the Currency, The Australian
1 15 U.S.C. 78s(b)(1).
the banking sector. The Basel Committee on Prudential Regulation Authority and The German
2 17 CFR 240.19b–4. Banking Supervision’s most recent set of reform Federal Financial Supervisory Authority.

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Document Created: 2018-02-21 09:49:14
Document Modified: 2018-02-21 09:49:14
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		80 FR 15845