80_FR_17871 80 FR 17808 - Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of a Proposed Rule Change To Establish Procedures Regarding the Monthly Resizing of its Clearing Fund and the Addition of Financial Resources

80 FR 17808 - Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of a Proposed Rule Change To Establish Procedures Regarding the Monthly Resizing of its Clearing Fund and the Addition of Financial Resources

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 63 (April 2, 2015)

Page Range17808-17812
FR Document2015-07523

Federal Register, Volume 80 Issue 63 (Thursday, April 2, 2015)
[Federal Register Volume 80, Number 63 (Thursday, April 2, 2015)]
[Notices]
[Pages 17808-17812]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-07523]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74603; File No. SR-OCC-2015-009]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change To Establish Procedures 
Regarding the Monthly Resizing of its Clearing Fund and the Addition of 
Financial Resources

March 27, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 13, 2015, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by OCC.\3\ The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On March 13, 2015, OCC formally withdrew the proposed rule 
change filed as SR-OCC-2014-22, as modified by Amendment No. 1 and 
Amendment No. 2 thereto, the substance of which OCC has refiled as 
SR-OCC-2015-009.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    OCC proposes to establish procedures regarding the monthly resizing 
of its Clearing Fund and the addition of financial resources through 
intra-day margin calls and/or an intra-month increase of the Clearing 
Fund to ensure that it maintains adequate financial resources in the 
event of a default of a Clearing Member or group of affiliated Clearing 
Members presenting the largest exposure to OCC.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. OCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    The proposed rule change is intended to describe the situations in 
which OCC would exercise authority under its Rules to ensure that it 
maintains adequate Financial Resources \4\ in the event that stress 
tests reveal a default of the Clearing Member or Clearing Member Group 
\5\ presenting the largest exposure would threaten the then-current 
Financial Resources. This proposed rule change would establish 
procedures governing: (i) OCC's resizing of the Clearing Fund on a 
monthly basis pursuant to Rule 1001(a) (the ``Monthly Clearing Fund 
Sizing Procedure''); and (ii) the addition of Financial Resources 
through an intra-day margin call on one or more Clearing Members under 
Rule 609 and, if necessary, an intra-month increase of the Clearing 
Fund pursuant to Rule 1001(a) (the ``Financial Resource Monitoring and 
Call Procedure'').\6\ The Monthly Clearing Fund Sizing Procedure would 
permit OCC to determine the size of the Clearing Fund by relying on a 
broader range of sound risk management practices than those 
historically used under Rule 1001(a).\7\ The Financial Resource 
Monitoring and Call Procedure would require OCC to collect additional 
Financial Resources in certain circumstances, establish how OCC 
calculates and collects such resources and provide the timing by which 
such resources would be required to be deposited by Clearing Members.
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    \4\ ``Financial Resources'' means, with respect to a projected 
loss attributable to a particular Clearing Member or Clearing Member 
Group, as defined below, the sum of the margin deposits (less any 
excess margin a Clearing Member or Clearing Member Group may have on 
deposit at OCC) and deposits in lieu of margin in respect of such 
Clearing Members' or Clearing Member Groups' accounts, and the value 
of OCC's Clearing Fund, including both the Base Amount, as defined 
below, and the prudential margin of safety, as discussed below.
    \5\ ``Clearing Member Group'' means a Clearing Member and any 
affiliated entities that control, are controlled by or are under 
common control with such Clearing Member. See OCC By-Laws, Article 
I, Sections 1.C.(15) and 1.M(11).
    \6\ This proposed rule filing has also been filed as an advance 
notice filing (SR-OCC-2014-811).
    \7\ The procedures described herein would be in effect until the 
development of a new standard Clearing Fund sizing methodology. 
Following such development, which will include a quantitative 
approach to calculating the ``prudential margin of safety,'' as 
discussed below, OCC will file a separate rule change and advance 
notice with the Commission that will include a description of the 
new methodology as well as a revised Monthly Clearing Fund Sizing 
Procedure.
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Background

    OCC monitors the sufficiency of the Clearing Fund on a daily basis 
but, prior to emergency action taken on October 16, 2014,\8\ OCC had no 
express authority to increase the size of the Clearing Fund on an 
intra-month basis.\9\ During ordinary course daily monitoring on 
October 15, 2014, and as a result of increased volatility in the 
financial markets in October 2014, OCC determined that the Financial 
Resources needed to cover the potential loss associated with a default 
of the Clearing Member or Clearing Member Group presenting the largest 
exposure could have exceeded the Financial Resources then available to 
apply to such a default.
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    \8\ On October 16, 2014, OCC filed an emergency notice with the 
Commission to suspend the effectiveness of the second sentence of 
Rule 1001(a). See Securities Exchange Act Release No. 73579 
(November 12, 2014), 79 FR 68747 (November 18, 2014) (SR-OCC-2014-
807). On November 13, 2014, OCC filed SR-OCC-2014-21 with the 
Commission to delete the second sentence of Rule 1001(a), preserving 
the suspended effectiveness of that sentence until such time as the 
Commission approves or disapproves SR-OCC-2014-21. See Securities 
Exchange Act Release No. 73685 (November 25, 2014) 79 FR 71479 
(December 2, 2014) (SR-OCC-2014-21).
    \9\ See Rule 1001(a).
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    To permit OCC to increase the size of its Clearing Fund prior to 
the next monthly resizing that was scheduled to take place on the first 
business day of November 2014, OCC's Executive Chairman, on October 16, 
2014, exercised certain emergency powers as set forth in Article IX, 
Section 14 of OCC's By-Laws \10\ to waive the effectiveness of the 
second sentence of Rule 1001(a), which states that OCC will

[[Page 17809]]

adjust the size of the Clearing Fund monthly and that any resizing will 
be based on data from the preceding month. OCC then filed an emergency 
notice with the Commission pursuant to Section 806(e)(2) of the 
Payment, Clearing and Settlement Supervision Act of 2010 \11\ and 
increased the Clearing Fund size for the remainder of October 2014 as 
otherwise provided for in the first sentence of Rule 1001(a).\12\
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    \10\ OCC also has submitted an advance notice that would provide 
greater detail concerning conditions under which OCC would increase 
the size of the Clearing Fund intra-month. The change would permit 
an intra-month increase in the event that the five-day rolling 
average of projected draws are 150% or more of the Clearing Fund's 
then current size. See Securities Exchange Act Release No. 72804 
(August 11, 2014), 79 FR 48276 (August 15, 2014) (SR-OCC-2014-804).
    \11\ 12 U.S.C. 5465(e)(2).
    \12\ See supra, note 8.
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    Clearing Members were informed of the action taken by the Executive 
Chairman \13\ and the amount of their additional Clearing Fund 
requirements, which were met without incident. As a result of these 
actions, OCC's Clearing Fund for October 2014 was increased by $1.8 
billion. In continued reliance on the emergency rule waiver and in 
accordance with the first sentence of Rule 1001(a), OCC set the 
November 2014 Clearing Fund size at $7.8 billion, which included an 
amount determined by OCC to be sufficient to protect OCC against loss 
under simulated default scenarios (i.e., $6 billion), plus a prudential 
margin of safety (the additional $1.8 billion collected in 
October).\14\ All required contributions to the November 2014 Clearing 
Fund were met by affected Clearing Members.
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    \13\ See Information Memorandum #35397, dated October 16, 2014, 
available on OCC's Web site, http://www.theocc.com/clearing/clearing-infomemos/infomemos1.jsp. Clearing members also were 
informed that a prudential margin of safety of $1.8 billion would be 
retained until a new Clearing Fund sizing formula has been approved 
and implemented.
    \14\ See Information Memorandum # 35507, dated October 31, 2014, 
available on OCC's Web site, http://www.theocc.com/clearing/clearing-infomemos/infomemos1.jsp.
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    Under Article IX, Section 14(c), absent the submission of a 
proposed rule change to the Commission seeking approval of OCC's waiver 
of the provisions of the second sentence of Rule 1001(a), such waiver 
would not be permitted to continue for more than thirty calendar days 
from the date thereof.\15\ Accordingly, on November 13, 2014, OCC 
submitted SR-OCC-2014-21 to delete the second sentence of Rule 1001(a) 
and, by the terms of Article IX, Section 14(c), preserve the suspended 
effectiveness of the second sentence of Rule 1001(a) beyond thirty 
calendar days.\16\
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    \15\ See OCC By-Laws, Article IX, Section 14(c).
    \16\ See supra, note 8. OCC also submitted this proposed rule 
change to the Commodity Futures Trading Commission.
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    SR-OCC-2014-21 was submitted in part to permit OCC to determine the 
size of its Clearing Fund by relying on a broader range of sound risk 
management practices than considered in basing such size on the average 
daily calculations under Rule 1001(a) that are performed during the 
preceding calendar month. The Monthly Clearing Fund Sizing Procedure, 
as described below, is based on such broader risk management practices 
and establishes the procedures OCC would use to determine the size of 
the Clearing Fund on a monthly basis. Similarly, SR-OCC-2014-21 was 
submitted in part to permit OCC to resize the Clearing Fund more 
frequently than monthly when the circumstances warrant an increase of 
the Clearing Fund. The Financial Resource Monitoring and Call 
Procedure, as described below, establishes the procedures that OCC 
would use to add Financial Resources through an intra-day margin call 
on one or more Clearing Members under Rule 609 and, if necessary, an 
intra-month increase of the Clearing Fund pursuant to Rule 1001(a).\17\
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    \17\ As noted in SR-OCC-2014-21, OCC would use its intra-month 
resizing authority only to increase the size of the Clearing Fund 
where appropriate, not to decrease the size of the Clearing Fund.
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Monthly Clearing Fund Sizing Procedure

    Under the Monthly Clearing Fund Sizing Procedure, OCC would 
continue to calculate the size of the Clearing Fund based on its daily 
stress test exposures under simulated default scenarios as described in 
the first sentence of Rule 1001(a) and resize the Clearing Fund on the 
first business day of each month. However, instead of resizing the 
Clearing Fund based on the average of the daily calculations during the 
preceding calendar month, as stated in the suspended second sentence of 
Rule 1001, OCC would resize the Clearing Fund so that it is the sum of: 
(i) An amount equal to the peak five-day rolling average of Clearing 
Fund draws observed over the preceding three calendar months of daily 
idiosyncratic default and minor systemic default scenario calculations 
based on OCC's daily Monte Carlo simulations (``Base Amount'') and (ii) 
a prudential margin of safety determined by OCC and currently set at 
$1.8 billion.\18\
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    \18\ On a daily basis, OCC computes its exposure under the 
idiosyncratic and minor systemic events. The greater of these two 
exposures is that day's ``peak exposure.'' To calculate the 
``rolling five day average'' OCC computes the average of the peak 
exposure for each consecutive five-day period observed over the 
prior three-month period. To determine the Base Amount, OCC would 
use the largest five-day rolling average observed over the past 
three-months. This methodology was used to determine the Base Amount 
of the Clearing Fund for November 2014 and December 2014.
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    OCC believes that the proposed Monthly Clearing Fund Sizing 
Procedure provides a sound and prudent approach to ensure that the 
Financial Resources are adequate to protect against the largest risk of 
loss presented by the default of a Clearing Member or Clearing Member 
Group. By virtue of using only the peak five-day rolling average and by 
extending the look-back period, the proposed Monthly Clearing Fund 
Sizing Procedure is both more responsive to sudden increases in 
exposure and less susceptible to recently observed decreases in 
exposure that would reduce the overall sizing of the Clearing Fund, 
thus mitigating procyclicality.\19\ Furthermore, the prudential margin 
of safety provides an additional buffer to absorb potential future 
exposures not previously observed during the look-back period. The 
proposed Monthly Clearing Fund Sizing Procedure would be supplemented 
by the Financial Resource Monitoring and Call Procedure, described 
below, to provide further assurance that the Financial Resources are 
adequate to protect against such risk of loss.
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    \19\ Considering only the peak exposures is a more conservative 
methodology that gives greater weighting to sudden increases in 
exposure experienced by Clearing Members, thus enhancing the 
responsiveness of the procedure to such sudden increases. By using a 
longer look-back period, the methodology would respond more slowly 
to recently observed decreases in peak exposures.
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Financial Resource Monitoring and Call Procedure

    Under the Financial Resource Monitoring and Call Procedure, OCC 
would use the same daily idiosyncratic default calculation as under the 
Monthly Clearing Fund Sizing Procedure to monitor daily the adequacy of 
the Financial Resources to withstand a default by the Clearing Member 
or Clearing Member Group presenting the largest exposure under extreme 
but plausible market conditions.\20\ If such a daily idiosyncratic 
default calculation projected a draw on the Clearing Fund (a 
``Projected Draw'') that is at least 75% of the Clearing Fund 
maintained by OCC, OCC would be required to issue an intra-day margin 
call pursuant to Rule 609 against the Clearing Member or Clearing 
Member Group that caused such a draw (``Margin Call Event'').\21\

[[Page 17810]]

Subject to a limitation described below, the amount of the margin call 
would be the difference between the Projected Draw and the Base 
Clearing Fund (``Exceedance Above Base Amount''). In the case of a 
Clearing Member Group that causes the Exceedance Above Base Amount, the 
Exceedance Above Base Amount would be pro-rated among the individual 
Clearing Members that compose the Clearing Member Group based on each 
individual Clearing Member's proportionate share of the ``total risk'' 
for such Clearing Member Group as defined in Rule 1001(b), i.e., the 
margin requirement with respect to all accounts of the Clearing Member 
Group exclusive of the net asset value of the positions in such 
accounts aggregated across all such accounts. However, in the case of 
an individual Clearing Member or a Clearing Member Group, the margin 
call would be subject to a limitation under which it could not exceed 
the lower \22\ of: (a) $500 million, or (b) 100% of a Clearing Member's 
net capital. Such limitation would be measured in aggregate with any 
funds remaining on deposit with OCC deposited by the same Clearing 
Member pursuant to a Margin Call Event within the same monthly period, 
as applicable until collection of all funds to satisfy the next regular 
monthly Clearing Fund resizing (the ``500/100 Limitation'').\23\
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    \20\ Since the minor systemic default scenario contemplates two 
Clearing Members' simultaneously defaulting and OCC maintains 
Financial Resources sufficient to cover a default by a Clearing 
Member or Clearing Member Group representing the greatest exposure 
to OCC, OCC does not use the minor systemic default scenario to 
determine the adequacy of the Financial Resources under the 
Financial Resource Monitoring and Call Procedure.
    \21\ Rule 609 authorizes OCC to require the deposit of 
additional margin in any account at any time during any business day 
by any Clearing Member for, inter alia, the protection of OCC, other 
Clearing Members or the general public. Clearing Members must meet a 
required deposit of intra-day margin in immediately available funds 
at a time prescribed by OCC or within one hour of OCC's issuance of 
debit settlement instructions against the bank account(s) of the 
applicable Clearing Member(s), thereby ensuring the prompt deposit 
of additional Financial Resources.
    \22\ ``Capping'' the intra-day margin call avoids placing a 
``liquidity squeeze'' on the subject Clearing Member(s) based on 
exposures presented by a hypothetical stress test, which would have 
the potential for causing a default on the intra-day margin call. 
Back testing results determined that such calls would have been made 
against Clearing Members that are large, well-capitalized firms, 
with more than sufficient resources to satisfy the call for 
additional margin with the proposed limitations.
    \23\ The Risk Committee would be notified, and could take action 
to address potential Financial Resource deficiencies, in the event 
that a Projected Draw resulted in a Margin Call Event and as a 
result of the 500/100 Limitation the margin call was less than the 
Exceedance Above Base Amount, but the Projected Draw was not so 
large as to result in an increase in the Clearing Fund as discussed 
below.
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    Upon satisfaction of the margin call, OCC would use its authority 
under Rule 608 to preclude the withdrawal of such additional margin 
amount until it collects all of the funds determined by the next 
Monthly Clearing Fund Sizing Procedure. Based on three years of back 
testing data, OCC determined that it would have had Margin Call Events 
in 10 of the months during this time period. For each of these months, 
the maximum call amount would have been equal to $500 million, with one 
exception in which the maximum call amount for the month was $7.7 
million.\24\ After giving effect to the intra-day margin calls, i.e., 
by increasing the Financial Resources by $500 million, there was only 
one Margin Call Event where there was an observed stress test 
exceedance of the Financial Resources.
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    \24\ The back testing analysis performed assumed a single 
Clearing Member caused the exceedance.
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    To address this one observed instance, the Financial Resource 
Monitoring and Call Procedure also would require OCC to increase the 
size of the Clearing Fund (``Clearing Fund Intra-month Increase 
Event'') if a Projected Draw exceeds 90% of the Clearing Fund, after 
applying any funds then on deposit with OCC from the applicable 
Clearing Member or Clearing Member Group pursuant to a Margin Call 
Event. The amount of such increase (``Clearing Fund Increase'') would 
be the greater of: (a) $1 billion; or (b) 125% of the difference 
between (i) the Projected Draw, as reduced by the deposits resulting 
from the Margin Call Event and (ii) the Clearing Fund. Each Clearing 
Member's proportionate share of the Clearing Fund Increase would equal 
its proportionate share of the variable portion of the Clearing Fund 
for the month in question as calculated pursuant to Rule 1001(b).
    OCC would notify the Risk Committee of the Board of Directors (the 
``Risk Committee''), Clearing Members and appropriate regulatory 
authorities of the Clearing Fund Increase on the business day on which 
the Clearing Fund Intra-month Increase Event occurred. This ensures 
that OCC management maintains authority to address any potential 
Financial Resource deficiencies when compared to its Projected Draw 
estimates. The Risk Committee would then determine whether the Clearing 
Fund Increase was sufficient, and would retain authority to increase 
the Clearing Fund Increase or the margin call made pursuant to a Margin 
Call Event in its discretion. Clearing Members would be required to 
meet the call for additional Clearing Fund assets by 9:00 a.m. CT on 
the second business day following the Clearing Fund Intra-Month 
Increase Event. OCC believes that this collection process ensures 
additional Clearing Fund assets are promptly deposited by Clearing 
Members following notice of a Clearing Fund Increase, while also 
providing Clearing Members with a reasonable period of time to source 
such assets. Based on OCC's back testing results, after giving effect 
to the intra-day margin call in response to a Margin Call Event plus 
the prudential margin of safety, the Financial Resources would have 
been sufficient upon implementing the one instance of a Clearing Fund 
Intra-month Increase Event.
    OCC believes the Financial Resource Monitoring and Call Procedure 
strikes a prudent balance between mutualizing the burden of requiring 
additional Financial Resources and requiring the Clearing Member or 
Clearing Member Group causing the increased exposure to bear such 
burden. As noted above, in the event of a Margin Call Event, OCC limits 
the margin call until collection of all funds to satisfy the next 
regular monthly resizing to an aggregate of $500 million, or 100% of a 
Clearing Member's net capital in order to avoid putting an undue 
liquidity strain on any one Clearing Member. However, where a Projected 
Draw exceeds 90% of OCC's Clearing Fund, OCC must act to ensure that it 
has sufficient Financial Resources, and determined that it should 
mutualize the burden of the additional Financial Resources at this 
threshold through a Clearing Fund Increase. OCC believes that this 
balance would provide OCC with sufficient Financial Resources without 
increasing the likelihood that its procedures would, based solely on 
stress testing results, cause a liquidity strain on any on Clearing 
Member that could result in such member's default.
    The following examples illustrate the manner in which the Financial 
Resource Monitoring and Call Procedure would be applied. All assume 
that the Clearing Fund size is $7.8 billion, $6 billion of which is the 
Base Amount and $1.8 billion of which is the prudential margin of 
safety. The 75% threshold in these examples is $5.85 billion.

Example 1: Single CM

    Under OCC's stress testing the Projected Draw attributable to 
Clearing Member ABC, a Clearing Member with no affiliated Clearing 
Members and net capital of $500 million, is $6.4 billion, or 82% of the 
Clearing Fund. OCC would make a margin call for $400 million, which 
represents the Exceedance Above Base Amount. In this case the 500/100 
Limitation would not be applicable because the Exceedance Above Base 
Amount is less than $500 million and 100% of the Clearing Member's net 
capital. The Clearing Member would be required to meet the $400 million 
call within one hour unless OCC prescribed a different time, and OCC 
would retain the $400 million until collection of all the funds to 
satisfy

[[Page 17811]]

the next monthly Clearing Fund sizing calculation.
    If, on a different day within the same month, CM ABC's Projected 
Draw minus the $400 million already deposited with OCC results in an 
Exceedance above Base Amount, another Margin Call Event would be 
triggered, with the amount currently deposited with OCC applying toward 
the 500/100 Limitation.

Example 2: Clearing Member Group

    Under OCC's stress testing the Projected Draw attributable to 
Clearing Member Group DEF, comprised of two Clearing Members each with 
net capital of $800 million, is $6.2 billion, or 79% of OCC's Clearing 
Fund. OCC would initiate a margin call on Clearing Member Group DEF for 
$200 million. The call would be allocated to the two Clearing Members 
that compose the Clearing Member Group based on each Clearing Member's 
risk margin allocation. In this case the 500/100 Limitation would not 
be applicable because the Exceedance Above Base Amount is less than 
$500 million and 100% of net capital. The margin call would be required 
to be met within one hour of the call unless OCC prescribed a different 
time. For example, in the case where one Clearing Member accounts for 
75% of the risk margin for the Clearing Member Group, that Clearing 
Member would be allocated $150 million of the call and the other 
Clearing Member, accounting for 25% of the risk margin for the Clearing 
Member Group, would be allocated $50 million of the call. The funds 
would remain deposited with OCC until collection of all the funds to 
satisfy the next monthly Clearing Fund sizing calculation.

Example 3: Clearing Member Group With $500 Million Cap

    Under OCC's stress testing the Projected Draw attributable to 
Clearing Member Group GHI, comprised of two Clearing Members each with 
net capital of $800 million, is $6.8 billion, or 87% of the Clearing 
Fund. The Exceedance Above Base Amount would be $800 million, allocated 
to the two Clearing Members that compose the Clearing Member Group 
based on each Clearing Member's risk margin allocation. Using the 75/25 
risk margin allocation from Example 2, one Clearing Member would be 
allocated $600 million and the other Clearing Member would be allocated 
$200 million. The first Clearing Member would be required to deposit 
$500 million with OCC, which is the lowest of $500 million, that 
member's net capital, or that member's share of the Exceedance Above 
Base Amount, and the other Clearing Member would be required to deposit 
$200 million with OCC. After collecting the additional margin, OCC 
would determine whether the Projected Draw would exceed 90% of the 
Clearing Fund after reducing the Projected Draw by the additional 
margin. This calculation would divide a Projected Draw of $6.1 billion, 
which is the original Projected Draw of $6.8 billion reduced by the 
additional margin, by the Clearing Fund of $7.8 billion. The resulting 
percentage of 78% would be below the 90% threshold, and accordingly 
there would not be a Clearing Fund Intra-month Increase Event.

Example 4: Margin Call and Increase in Size of Clearing Fund

    Under OCC's stress testing the Projected Draw attributable to 
Clearing Member JKL, a Clearing Member with no affiliated Clearing 
Members and net capital of $600 million, is $10.0 billion, or 128% of 
the Clearing Fund. OCC would make a margin call for $500 million, which 
represents the lowest of the Exceedance Above Base Amount, $500 million 
and 100% of net capital. The Clearing Member would be required to meet 
the $500 million call within one hour unless OCC prescribed a different 
time, and OCC would retain the $500 million until collection of all the 
funds to satisfy the next monthly Clearing Fund sizing calculation.
    After collecting the additional margin, OCC would determine whether 
the Projected Draw would exceed 90% of the Clearing Fund after reducing 
the Projected Draw by the additional margin. This calculation would 
divide a Projected Draw of $9.5 billion, which is the original 
Projected Draw of $10 billion reduced by the additional margin, by the 
Clearing Fund of $7.8 billion. The resulting percentage of 122%, while 
lower, would still exceed the 90% threshold, and accordingly OCC would 
declare a Clearing Fund Intra-month Increase Event. To calculate the 
Clearing Fund Increase, OCC would first determine the difference 
between the modified Projected Draw ($9.5 billion) and the Clearing 
Fund ($7.8 billion), which in this case would be $1.7 billion, OCC 
would then multiply this by 1.25, resulting in $2.125 billion. Because 
this amount is greater than $1 billion, the Clearing Fund Increase 
would be $2.125 billion and a modified Clearing Fund of OCC totaling 
$9.925 billion ($425 million in excess of the modified Projected Draw 
of $9.5 billion).
2. Statutory Basis
    OCC believes the proposed rule change is consistent with Section 
17A(b)(3)(F) of the Act,\25\ and the rules and regulations thereunder. 
By establishing sound procedures governing the monthly resizing of the 
Clearing Fund and how OCC would add Financial Resources in response to 
a Margin Call Event and a Clearing Fund Intra-month Increase Event, the 
proposed modifications would further ensure that OCC is capable of 
safeguarding securities and funds which are in the custody or control 
of OCC or for which it is responsible and protecting investors and the 
public interest. The development of the Monthly Clearing Fund Sizing 
Procedure and the Financial Resource Monitoring and Call Procedure also 
ensures that OCC has procedures designed to maintain sufficient 
financial resources to withstand, at a minimum, a default by the 
participant family to which it has the largest exposure in extreme but 
plausible market conditions, in compliance with Rule 17Ad-22(b)(3).\26\
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    \25\ 15 U.S.C. 78q-1(b)(3)(F).
    \26\ 17 CFR 240.17Ad-22(b)(3).
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(B) Clearing Agency's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would impose any 
burden on competition.\27\ OCC believes the proposed rule change would 
not unfairly inhibit access to OCC's services or disadvantage or favor 
any particular user in relationship to another user because OCC would 
establish the size of the Clearing Fund in accordance with the Monthly 
Clearing Fund Sizing Procedure and without regard to any particular 
user or Clearing Member that makes Clearing Fund contributions. 
Furthermore, OCC would respond to a Margin Call Event and Clearing Fund 
Intra-month Increase Event in accordance with the Financial Resource 
Monitoring and Call Procedure without regard to any particular user or 
Clearing Member.
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    \27\ 15 U.S.C. 78-q1(b)(3)(I).
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    For the foregoing reasons, OCC believes that the proposed rule 
change is in the public interest, would be consistent with the 
requirements of the Act applicable to clearing agencies, and would not 
impose a burden on competition.

[[Page 17812]]

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    Written comments on the proposed rule change were not and are not 
intended to be solicited with respect to the proposed rule change and 
none have been received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self- regulatory organization consents, the Commission will:
    (A) by order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-OCC-2015-009 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2015-009. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of OCC and on OCC's 
Web site at http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_15_009.pdf. All comments received will be 
posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly.
    All submissions should refer to File Number SR-OCC-2015-009 and 
should be submitted on or before April 23, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
---------------------------------------------------------------------------

    \28\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Brent J. Fields,
Secretary.
[FR Doc. 2015-07523 Filed 4-1-15; 8:45 am]
BILLING CODE CODE 8011-01-P



                                              17808                          Federal Register / Vol. 80, No. 63 / Thursday, April 2, 2015 / Notices

                                              November 19, 2013. Urban AG’s                           resources in the event of a default of a                historically used under Rule 1001(a).7
                                              common stock (ticker ‘‘AQUM’’) is                       Clearing Member or group of affiliated                  The Financial Resource Monitoring and
                                              quoted on OTC Link (previously ‘‘Pink                   Clearing Members presenting the largest                 Call Procedure would require OCC to
                                              Sheets’’) operated by OTC Markets                       exposure to OCC.                                        collect additional Financial Resources
                                              Group, Inc.                                                                                                     in certain circumstances, establish how
                                                                                                      II. Clearing Agency’s Statement of the
                                                The Commission is of the opinion that                                                                         OCC calculates and collects such
                                                                                                      Purpose of, and Statutory Basis for, the
                                              the public interest and the protection of                                                                       resources and provide the timing by
                                                                                                      Proposed Rule Change
                                              investors require a suspension of trading                                                                       which such resources would be required
                                              in the securities of Urban AG.                            In its filing with the Commission,                    to be deposited by Clearing Members.
                                                Therefore, it is ordered, pursuant to                 OCC included statements concerning
                                                                                                                                                              Background
                                              Section 12(k) of the Securities Exchange                the purpose of and basis for the
                                              Act of 1934, that trading in the                        proposed rule change and discussed any                     OCC monitors the sufficiency of the
                                              securities of Urban AG is suspended for                 comments it received on the proposed                    Clearing Fund on a daily basis but, prior
                                              the period from 9:30 a.m. EDT on March                  rule change. The text of these statements               to emergency action taken on October
                                              31, 2015, through 11:59 p.m. EDT on                     may be examined at the places specified                 16, 2014,8 OCC had no express authority
                                              April 14, 2015.                                         in Item IV below. OCC has prepared                      to increase the size of the Clearing Fund
                                                                                                      summaries, set forth in sections (A), (B),              on an intra-month basis.9 During
                                                 By the Commission.
                                                                                                      and (C) below, of the most significant                  ordinary course daily monitoring on
                                              Jill M. Peterson,
                                                                                                      aspects of these statements.                            October 15, 2014, and as a result of
                                              Assistant Secretary.                                                                                            increased volatility in the financial
                                              [FR Doc. 2015–07672 Filed 3–31–15; 4:15 pm]             (A) Clearing Agency’s Statement of the                  markets in October 2014, OCC
                                              BILLING CODE CODE 8011–01–P                             Purpose of, and Statutory Basis for, the                determined that the Financial Resources
                                                                                                      Proposed Rule Change                                    needed to cover the potential loss
                                                                                                      1. Purpose                                              associated with a default of the Clearing
                                              SECURITIES AND EXCHANGE                                                                                         Member or Clearing Member Group
                                              COMMISSION                                                 The proposed rule change is intended                 presenting the largest exposure could
                                                                                                      to describe the situations in which OCC                 have exceeded the Financial Resources
                                              [Release No. 34–74603; File No. SR–OCC–
                                              2015–009]                                               would exercise authority under its Rules                then available to apply to such a default.
                                                                                                      to ensure that it maintains adequate                       To permit OCC to increase the size of
                                              Self-Regulatory Organizations; The                      Financial Resources 4 in the event that                 its Clearing Fund prior to the next
                                              Options Clearing Corporation; Notice                    stress tests reveal a default of the                    monthly resizing that was scheduled to
                                              of Filing of a Proposed Rule Change                     Clearing Member or Clearing Member                      take place on the first business day of
                                              To Establish Procedures Regarding                       Group 5 presenting the largest exposure                 November 2014, OCC’s Executive
                                              the Monthly Resizing of its Clearing                    would threaten the then-current                         Chairman, on October 16, 2014,
                                              Fund and the Addition of Financial                      Financial Resources. This proposed rule                 exercised certain emergency powers as
                                              Resources                                               change would establish procedures                       set forth in Article IX, Section 14 of
                                                                                                      governing: (i) OCC’s resizing of the                    OCC’s By-Laws 10 to waive the
                                              March 27, 2015.                                         Clearing Fund on a monthly basis                        effectiveness of the second sentence of
                                                 Pursuant to Section 19(b)(1) of the                  pursuant to Rule 1001(a) (the ‘‘Monthly                 Rule 1001(a), which states that OCC will
                                              Securities Exchange Act of 1934                         Clearing Fund Sizing Procedure’’); and
                                              (‘‘Act’’) 1 and Rule 19b–4 thereunder,2                 (ii) the addition of Financial Resources                   7 The procedures described herein would be in
                                              notice is hereby given that on March 13,                through an intra-day margin call on one                 effect until the development of a new standard
                                              2015, The Options Clearing Corporation                  or more Clearing Members under Rule                     Clearing Fund sizing methodology. Following such
                                              (‘‘OCC’’) filed with the Securities and                                                                         development, which will include a quantitative
                                                                                                      609 and, if necessary, an intra-month                   approach to calculating the ‘‘prudential margin of
                                              Exchange Commission (‘‘Commission’’)                    increase of the Clearing Fund pursuant                  safety,’’ as discussed below, OCC will file a separate
                                              the proposed rule change as described                   to Rule 1001(a) (the ‘‘Financial Resource               rule change and advance notice with the
                                              in Items I, II and III below, which Items               Monitoring and Call Procedure’’).6 The                  Commission that will include a description of the
                                              have been prepared by OCC.3 The                                                                                 new methodology as well as a revised Monthly
                                                                                                      Monthly Clearing Fund Sizing                            Clearing Fund Sizing Procedure.
                                              Commission is publishing this notice to                 Procedure would permit OCC to                              8 On October 16, 2014, OCC filed an emergency
                                              solicit comments on the proposed rule                   determine the size of the Clearing Fund                 notice with the Commission to suspend the
                                              change from interested persons.                         by relying on a broader range of sound                  effectiveness of the second sentence of Rule
                                                                                                      risk management practices than those                    1001(a). See Securities Exchange Act Release No.
                                              I. Clearing Agency’s Statement of the                                                                           73579 (November 12, 2014), 79 FR 68747
                                              Terms of Substance of the Proposed                                                                              (November 18, 2014) (SR–OCC–2014–807). On
                                                                                                         4 ‘‘Financial Resources’’ means, with respect to a   November 13, 2014, OCC filed SR–OCC–2014–21
                                              Rule Change
                                                                                                      projected loss attributable to a particular Clearing    with the Commission to delete the second sentence
                                                 OCC proposes to establish procedures                 Member or Clearing Member Group, as defined             of Rule 1001(a), preserving the suspended
                                              regarding the monthly resizing of its                   below, the sum of the margin deposits (less any         effectiveness of that sentence until such time as the
                                                                                                      excess margin a Clearing Member or Clearing             Commission approves or disapproves SR–OCC–
                                              Clearing Fund and the addition of                       Member Group may have on deposit at OCC) and            2014–21. See Securities Exchange Act Release No.
                                              financial resources through intra-day                   deposits in lieu of margin in respect of such           73685 (November 25, 2014) 79 FR 71479 (December
                                              margin calls and/or an intra-month                      Clearing Members’ or Clearing Member Groups’            2, 2014) (SR–OCC–2014–21).
                                              increase of the Clearing Fund to ensure                 accounts, and the value of OCC’s Clearing Fund,            9 See Rule 1001(a).
                                                                                                      including both the Base Amount, as defined below,          10 OCC also has submitted an advance notice that
                                              that it maintains adequate financial                    and the prudential margin of safety, as discussed       would provide greater detail concerning conditions
tkelley on DSK3SPTVN1PROD with NOTICES




                                                                                                      below.                                                  under which OCC would increase the size of the
                                                1 15 U.S.C. 78s(b)(1).                                   5 ‘‘Clearing Member Group’’ means a Clearing
                                                                                                                                                              Clearing Fund intra-month. The change would
                                                2 17 CFR 240.19b–4.                                   Member and any affiliated entities that control, are    permit an intra-month increase in the event that the
                                                3 On March 13, 2015, OCC formally withdrew the        controlled by or are under common control with          five-day rolling average of projected draws are
                                              proposed rule change filed as SR–OCC–2014–22, as        such Clearing Member. See OCC By-Laws, Article          150% or more of the Clearing Fund’s then current
                                              modified by Amendment No. 1 and Amendment               I, Sections 1.C.(15) and 1.M(11).                       size. See Securities Exchange Act Release No. 72804
                                              No. 2 thereto, the substance of which OCC has              6 This proposed rule filing has also been filed as   (August 11, 2014), 79 FR 48276 (August 15, 2014)
                                              refiled as SR–OCC–2015–009.                             an advance notice filing (SR–OCC–2014–811).             (SR–OCC–2014–804).



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                                                                             Federal Register / Vol. 80, No. 63 / Thursday, April 2, 2015 / Notices                                                      17809

                                              adjust the size of the Clearing Fund                    size on the average daily calculations                   prudent approach to ensure that the
                                              monthly and that any resizing will be                   under Rule 1001(a) that are performed                    Financial Resources are adequate to
                                              based on data from the preceding                        during the preceding calendar month.                     protect against the largest risk of loss
                                              month. OCC then filed an emergency                      The Monthly Clearing Fund Sizing                         presented by the default of a Clearing
                                              notice with the Commission pursuant to                  Procedure, as described below, is based                  Member or Clearing Member Group. By
                                              Section 806(e)(2) of the Payment,                       on such broader risk management                          virtue of using only the peak five-day
                                              Clearing and Settlement Supervision                     practices and establishes the procedures                 rolling average and by extending the
                                              Act of 2010 11 and increased the                        OCC would use to determine the size of                   look-back period, the proposed Monthly
                                              Clearing Fund size for the remainder of                 the Clearing Fund on a monthly basis.                    Clearing Fund Sizing Procedure is both
                                              October 2014 as otherwise provided for                  Similarly, SR–OCC–2014–21 was                            more responsive to sudden increases in
                                              in the first sentence of Rule 1001(a).12                submitted in part to permit OCC to                       exposure and less susceptible to
                                                Clearing Members were informed of                     resize the Clearing Fund more                            recently observed decreases in exposure
                                              the action taken by the Executive                       frequently than monthly when the                         that would reduce the overall sizing of
                                              Chairman 13 and the amount of their                     circumstances warrant an increase of                     the Clearing Fund, thus mitigating
                                              additional Clearing Fund requirements,                  the Clearing Fund. The Financial                         procyclicality.19 Furthermore, the
                                              which were met without incident. As a                   Resource Monitoring and Call                             prudential margin of safety provides an
                                              result of these actions, OCC’s Clearing                 Procedure, as described below,                           additional buffer to absorb potential
                                              Fund for October 2014 was increased by                  establishes the procedures that OCC                      future exposures not previously
                                              $1.8 billion. In continued reliance on                  would use to add Financial Resources                     observed during the look-back period.
                                              the emergency rule waiver and in                        through an intra-day margin call on one                  The proposed Monthly Clearing Fund
                                              accordance with the first sentence of                   or more Clearing Members under Rule                      Sizing Procedure would be
                                              Rule 1001(a), OCC set the November                      609 and, if necessary, an intra-month                    supplemented by the Financial
                                              2014 Clearing Fund size at $7.8 billion,                increase of the Clearing Fund pursuant                   Resource Monitoring and Call
                                              which included an amount determined                     to Rule 1001(a).17                                       Procedure, described below, to provide
                                              by OCC to be sufficient to protect OCC                                                                           further assurance that the Financial
                                              against loss under simulated default                    Monthly Clearing Fund Sizing
                                                                                                                                                               Resources are adequate to protect
                                              scenarios (i.e., $6 billion), plus a                    Procedure
                                                                                                                                                               against such risk of loss.
                                              prudential margin of safety (the                           Under the Monthly Clearing Fund
                                              additional $1.8 billion collected in                    Sizing Procedure, OCC would continue                     Financial Resource Monitoring and Call
                                              October).14 All required contributions to               to calculate the size of the Clearing                    Procedure
                                              the November 2014 Clearing Fund were                    Fund based on its daily stress test                         Under the Financial Resource
                                              met by affected Clearing Members.                       exposures under simulated default                        Monitoring and Call Procedure, OCC
                                                Under Article IX, Section 14(c),                      scenarios as described in the first                      would use the same daily idiosyncratic
                                              absent the submission of a proposed                     sentence of Rule 1001(a) and resize the                  default calculation as under the
                                              rule change to the Commission seeking                   Clearing Fund on the first business day                  Monthly Clearing Fund Sizing
                                              approval of OCC’s waiver of the                         of each month. However, instead of                       Procedure to monitor daily the
                                              provisions of the second sentence of                    resizing the Clearing Fund based on the                  adequacy of the Financial Resources to
                                              Rule 1001(a), such waiver would not be                  average of the daily calculations during                 withstand a default by the Clearing
                                              permitted to continue for more than                     the preceding calendar month, as stated                  Member or Clearing Member Group
                                              thirty calendar days from the date                      in the suspended second sentence of                      presenting the largest exposure under
                                              thereof.15 Accordingly, on November                     Rule 1001, OCC would resize the                          extreme but plausible market
                                              13, 2014, OCC submitted SR–OCC–                         Clearing Fund so that it is the sum of:                  conditions.20 If such a daily
                                              2014–21 to delete the second sentence                   (i) An amount equal to the peak five-day                 idiosyncratic default calculation
                                              of Rule 1001(a) and, by the terms of                    rolling average of Clearing Fund draws                   projected a draw on the Clearing Fund
                                              Article IX, Section 14(c), preserve the                 observed over the preceding three                        (a ‘‘Projected Draw’’) that is at least 75%
                                              suspended effectiveness of the second                   calendar months of daily idiosyncratic                   of the Clearing Fund maintained by
                                              sentence of Rule 1001(a) beyond thirty                  default and minor systemic default                       OCC, OCC would be required to issue an
                                              calendar days.16                                        scenario calculations based on OCC’s                     intra-day margin call pursuant to Rule
                                                SR–OCC–2014–21 was submitted in                       daily Monte Carlo simulations (‘‘Base                    609 against the Clearing Member or
                                              part to permit OCC to determine the size                Amount’’) and (ii) a prudential margin                   Clearing Member Group that caused
                                              of its Clearing Fund by relying on a                    of safety determined by OCC and                          such a draw (‘‘Margin Call Event’’).21
                                              broader range of sound risk management                  currently set at $1.8 billion.18
                                              practices than considered in basing such                   OCC believes that the proposed                          19 Considering only the peak exposures is a more

                                                                                                      Monthly Clearing Fund Sizing                             conservative methodology that gives greater
                                                                                                                                                               weighting to sudden increases in exposure
                                                11 12 U.S.C. 5465(e)(2).                              Procedure provides a sound and                           experienced by Clearing Members, thus enhancing
                                                12 See supra, note 8.                                                                                          the responsiveness of the procedure to such sudden
                                                13 See Information Memorandum #35397, dated              17 As noted in SR–OCC–2014–21, OCC would use          increases. By using a longer look-back period, the
                                              October 16, 2014, available on OCC’s Web site,          its intra-month resizing authority only to increase      methodology would respond more slowly to
                                              http://www.theocc.com/clearing/clearing-                the size of the Clearing Fund where appropriate, not     recently observed decreases in peak exposures.
                                              infomemos/infomemos1.jsp. Clearing members also         to decrease the size of the Clearing Fund.                 20 Since the minor systemic default scenario
                                              were informed that a prudential margin of safety of        18 On a daily basis, OCC computes its exposure        contemplates two Clearing Members’
                                              $1.8 billion would be retained until a new Clearing     under the idiosyncratic and minor systemic events.       simultaneously defaulting and OCC maintains
                                              Fund sizing formula has been approved and               The greater of these two exposures is that day’s         Financial Resources sufficient to cover a default by
                                              implemented.                                            ‘‘peak exposure.’’ To calculate the ‘‘rolling five day   a Clearing Member or Clearing Member Group
tkelley on DSK3SPTVN1PROD with NOTICES




                                                14 See Information Memorandum # 35507, dated
                                                                                                      average’’ OCC computes the average of the peak           representing the greatest exposure to OCC, OCC
                                              October 31, 2014, available on OCC’s Web site,          exposure for each consecutive five-day period            does not use the minor systemic default scenario to
                                              http://www.theocc.com/clearing/clearing-                observed over the prior three-month period. To           determine the adequacy of the Financial Resources
                                              infomemos/infomemos1.jsp.                               determine the Base Amount, OCC would use the             under the Financial Resource Monitoring and Call
                                                15 See OCC By-Laws, Article IX, Section 14(c).                                                                 Procedure.
                                                                                                      largest five-day rolling average observed over the
                                                16 See supra, note 8. OCC also submitted this         past three-months. This methodology was used to            21 Rule 609 authorizes OCC to require the deposit

                                              proposed rule change to the Commodity Futures           determine the Base Amount of the Clearing Fund           of additional margin in any account at any time
                                              Trading Commission.                                     for November 2014 and December 2014.                                                                Continued




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                                              17810                           Federal Register / Vol. 80, No. 63 / Thursday, April 2, 2015 / Notices

                                              Subject to a limitation described below,                 period. For each of these months, the                results, after giving effect to the intra-
                                              the amount of the margin call would be                   maximum call amount would have been                  day margin call in response to a Margin
                                              the difference between the Projected                     equal to $500 million, with one                      Call Event plus the prudential margin of
                                              Draw and the Base Clearing Fund                          exception in which the maximum call                  safety, the Financial Resources would
                                              (‘‘Exceedance Above Base Amount’’). In                   amount for the month was $7.7                        have been sufficient upon implementing
                                              the case of a Clearing Member Group                      million.24 After giving effect to the intra-         the one instance of a Clearing Fund
                                              that causes the Exceedance Above Base                    day margin calls, i.e., by increasing the            Intra-month Increase Event.
                                              Amount, the Exceedance Above Base                        Financial Resources by $500 million,                    OCC believes the Financial Resource
                                              Amount would be pro-rated among the                      there was only one Margin Call Event                 Monitoring and Call Procedure strikes a
                                              individual Clearing Members that                         where there was an observed stress test              prudent balance between mutualizing
                                              compose the Clearing Member Group                        exceedance of the Financial Resources.               the burden of requiring additional
                                              based on each individual Clearing                           To address this one observed                      Financial Resources and requiring the
                                              Member’s proportionate share of the                      instance, the Financial Resource                     Clearing Member or Clearing Member
                                              ‘‘total risk’’ for such Clearing Member                  Monitoring and Call Procedure also                   Group causing the increased exposure to
                                              Group as defined in Rule 1001(b), i.e.,                  would require OCC to increase the size               bear such burden. As noted above, in
                                              the margin requirement with respect to                   of the Clearing Fund (‘‘Clearing Fund                the event of a Margin Call Event, OCC
                                              all accounts of the Clearing Member                      Intra-month Increase Event’’) if a                   limits the margin call until collection of
                                              Group exclusive of the net asset value                   Projected Draw exceeds 90% of the                    all funds to satisfy the next regular
                                              of the positions in such accounts                        Clearing Fund, after applying any funds              monthly resizing to an aggregate of $500
                                              aggregated across all such accounts.                     then on deposit with OCC from the                    million, or 100% of a Clearing Member’s
                                              However, in the case of an individual                    applicable Clearing Member or Clearing               net capital in order to avoid putting an
                                              Clearing Member or a Clearing Member                     Member Group pursuant to a Margin                    undue liquidity strain on any one
                                              Group, the margin call would be subject                  Call Event. The amount of such increase              Clearing Member. However, where a
                                              to a limitation under which it could not                 (‘‘Clearing Fund Increase’’) would be the            Projected Draw exceeds 90% of OCC’s
                                              exceed the lower 22 of: (a) $500 million,                greater of: (a) $1 billion; or (b) 125% of           Clearing Fund, OCC must act to ensure
                                              or (b) 100% of a Clearing Member’s net                   the difference between (i) the Projected             that it has sufficient Financial
                                              capital. Such limitation would be                        Draw, as reduced by the deposits                     Resources, and determined that it
                                              measured in aggregate with any funds                     resulting from the Margin Call Event                 should mutualize the burden of the
                                              remaining on deposit with OCC                            and (ii) the Clearing Fund. Each                     additional Financial Resources at this
                                              deposited by the same Clearing Member                    Clearing Member’s proportionate share
                                                                                                                                                            threshold through a Clearing Fund
                                              pursuant to a Margin Call Event within                   of the Clearing Fund Increase would
                                                                                                                                                            Increase. OCC believes that this balance
                                              the same monthly period, as applicable                   equal its proportionate share of the
                                                                                                                                                            would provide OCC with sufficient
                                              until collection of all funds to satisfy the             variable portion of the Clearing Fund for
                                                                                                                                                            Financial Resources without increasing
                                              next regular monthly Clearing Fund                       the month in question as calculated
                                                                                                                                                            the likelihood that its procedures
                                              resizing (the ‘‘500/100 Limitation’’).23                 pursuant to Rule 1001(b).
                                                                                                          OCC would notify the Risk Committee               would, based solely on stress testing
                                                 Upon satisfaction of the margin call,
                                                                                                       of the Board of Directors (the ‘‘Risk                results, cause a liquidity strain on any
                                              OCC would use its authority under Rule
                                                                                                       Committee’’), Clearing Members and                   on Clearing Member that could result in
                                              608 to preclude the withdrawal of such
                                                                                                       appropriate regulatory authorities of the            such member’s default.
                                              additional margin amount until it
                                              collects all of the funds determined by                  Clearing Fund Increase on the business                  The following examples illustrate the
                                              the next Monthly Clearing Fund Sizing                    day on which the Clearing Fund Intra-                manner in which the Financial Resource
                                              Procedure. Based on three years of back                  month Increase Event occurred. This                  Monitoring and Call Procedure would
                                              testing data, OCC determined that it                     ensures that OCC management                          be applied. All assume that the Clearing
                                              would have had Margin Call Events in                     maintains authority to address any                   Fund size is $7.8 billion, $6 billion of
                                              10 of the months during this time                        potential Financial Resource                         which is the Base Amount and $1.8
                                                                                                       deficiencies when compared to its                    billion of which is the prudential
                                              during any business day by any Clearing Member           Projected Draw estimates. The Risk                   margin of safety. The 75% threshold in
                                              for, inter alia, the protection of OCC, other Clearing   Committee would then determine                       these examples is $5.85 billion.
                                              Members or the general public. Clearing Members
                                              must meet a required deposit of intra-day margin
                                                                                                       whether the Clearing Fund Increase was               Example 1: Single CM
                                              in immediately available funds at a time prescribed      sufficient, and would retain authority to
                                              by OCC or within one hour of OCC’s issuance of           increase the Clearing Fund Increase or                 Under OCC’s stress testing the
                                              debit settlement instructions against the bank           the margin call made pursuant to a                   Projected Draw attributable to Clearing
                                              account(s) of the applicable Clearing Member(s),                                                              Member ABC, a Clearing Member with
                                              thereby ensuring the prompt deposit of additional        Margin Call Event in its discretion.
                                              Financial Resources.                                     Clearing Members would be required to                no affiliated Clearing Members and net
                                                22 ‘‘Capping’’ the intra-day margin call avoids        meet the call for additional Clearing                capital of $500 million, is $6.4 billion,
                                              placing a ‘‘liquidity squeeze’’ on the subject           Fund assets by 9:00 a.m. CT on the                   or 82% of the Clearing Fund. OCC
                                              Clearing Member(s) based on exposures presented
                                                                                                       second business day following the                    would make a margin call for $400
                                              by a hypothetical stress test, which would have the                                                           million, which represents the
                                              potential for causing a default on the intra-day         Clearing Fund Intra-Month Increase
                                              margin call. Back testing results determined that        Event. OCC believes that this collection             Exceedance Above Base Amount. In this
                                              such calls would have been made against Clearing         process ensures additional Clearing                  case the 500/100 Limitation would not
                                              Members that are large, well-capitalized firms, with
                                                                                                       Fund assets are promptly deposited by                be applicable because the Exceedance
                                              more than sufficient resources to satisfy the call for                                                        Above Base Amount is less than $500
                                              additional margin with the proposed limitations.         Clearing Members following notice of a
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                                                23 The Risk Committee would be notified, and           Clearing Fund Increase, while also                   million and 100% of the Clearing
                                              could take action to address potential Financial         providing Clearing Members with a                    Member’s net capital. The Clearing
                                              Resource deficiencies, in the event that a Projected     reasonable period of time to source such             Member would be required to meet the
                                              Draw resulted in a Margin Call Event and as a result                                                          $400 million call within one hour
                                              of the 500/100 Limitation the margin call was less       assets. Based on OCC’s back testing
                                              than the Exceedance Above Base Amount, but the
                                                                                                                                                            unless OCC prescribed a different time,
                                              Projected Draw was not so large as to result in an         24 The back testing analysis performed assumed a   and OCC would retain the $400 million
                                              increase in the Clearing Fund as discussed below.        single Clearing Member caused the exceedance.        until collection of all the funds to satisfy


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                                                                             Federal Register / Vol. 80, No. 63 / Thursday, April 2, 2015 / Notices                                          17811

                                              the next monthly Clearing Fund sizing                   the other Clearing Member would be                    2. Statutory Basis
                                              calculation.                                            required to deposit $200 million with
                                                 If, on a different day within the same               OCC. After collecting the additional                    OCC believes the proposed rule
                                              month, CM ABC’s Projected Draw                          margin, OCC would determine whether                   change is consistent with Section
                                              minus the $400 million already                          the Projected Draw would exceed 90%                   17A(b)(3)(F) of the Act,25 and the rules
                                              deposited with OCC results in an                        of the Clearing Fund after reducing the               and regulations thereunder. By
                                              Exceedance above Base Amount,                           Projected Draw by the additional                      establishing sound procedures
                                              another Margin Call Event would be                      margin. This calculation would divide a               governing the monthly resizing of the
                                              triggered, with the amount currently                    Projected Draw of $6.1 billion, which is              Clearing Fund and how OCC would add
                                              deposited with OCC applying toward                      the original Projected Draw of $6.8                   Financial Resources in response to a
                                              the 500/100 Limitation.                                                                                       Margin Call Event and a Clearing Fund
                                                                                                      billion reduced by the additional
                                              Example 2: Clearing Member Group                        margin, by the Clearing Fund of $7.8                  Intra-month Increase Event, the
                                                                                                      billion. The resulting percentage of 78%              proposed modifications would further
                                                 Under OCC’s stress testing the
                                                                                                      would be below the 90% threshold, and                 ensure that OCC is capable of
                                              Projected Draw attributable to Clearing
                                              Member Group DEF, comprised of two                      accordingly there would not be a                      safeguarding securities and funds which
                                              Clearing Members each with net capital                  Clearing Fund Intra-month Increase                    are in the custody or control of OCC or
                                              of $800 million, is $6.2 billion, or 79%                Event.                                                for which it is responsible and
                                              of OCC’s Clearing Fund. OCC would                                                                             protecting investors and the public
                                                                                                      Example 4: Margin Call and Increase in                interest. The development of the
                                              initiate a margin call on Clearing
                                                                                                      Size of Clearing Fund                                 Monthly Clearing Fund Sizing
                                              Member Group DEF for $200 million.
                                              The call would be allocated to the two                     Under OCC’s stress testing the                     Procedure and the Financial Resource
                                              Clearing Members that compose the                       Projected Draw attributable to Clearing               Monitoring and Call Procedure also
                                              Clearing Member Group based on each                     Member JKL, a Clearing Member with                    ensures that OCC has procedures
                                              Clearing Member’s risk margin                           no affiliated Clearing Members and net                designed to maintain sufficient financial
                                              allocation. In this case the 500/100                    capital of $600 million, is $10.0 billion,            resources to withstand, at a minimum,
                                              Limitation would not be applicable                      or 128% of the Clearing Fund. OCC                     a default by the participant family to
                                              because the Exceedance Above Base                                                                             which it has the largest exposure in
                                                                                                      would make a margin call for $500
                                              Amount is less than $500 million and                                                                          extreme but plausible market
                                                                                                      million, which represents the lowest of
                                              100% of net capital. The margin call                                                                          conditions, in compliance with Rule
                                              would be required to be met within one                  the Exceedance Above Base Amount,
                                                                                                      $500 million and 100% of net capital.                 17Ad-22(b)(3).26
                                              hour of the call unless OCC prescribed
                                              a different time. For example, in the                   The Clearing Member would be required                 (B) Clearing Agency’s Statement on
                                              case where one Clearing Member                          to meet the $500 million call within one              Burden on Competition
                                              accounts for 75% of the risk margin for                 hour unless OCC prescribed a different
                                              the Clearing Member Group, that                         time, and OCC would retain the $500                      OCC does not believe that the
                                              Clearing Member would be allocated                      million until collection of all the funds             proposed rule change would impose any
                                              $150 million of the call and the other                  to satisfy the next monthly Clearing                  burden on competition.27 OCC believes
                                              Clearing Member, accounting for 25% of                  Fund sizing calculation.                              the proposed rule change would not
                                              the risk margin for the Clearing Member                    After collecting the additional margin,            unfairly inhibit access to OCC’s services
                                              Group, would be allocated $50 million                   OCC would determine whether the                       or disadvantage or favor any particular
                                              of the call. The funds would remain                     Projected Draw would exceed 90% of                    user in relationship to another user
                                              deposited with OCC until collection of                  the Clearing Fund after reducing the                  because OCC would establish the size of
                                              all the funds to satisfy the next monthly               Projected Draw by the additional                      the Clearing Fund in accordance with
                                              Clearing Fund sizing calculation.                       margin. This calculation would divide a               the Monthly Clearing Fund Sizing
                                              Example 3: Clearing Member Group                        Projected Draw of $9.5 billion, which is              Procedure and without regard to any
                                              With $500 Million Cap                                   the original Projected Draw of $10                    particular user or Clearing Member that
                                                                                                      billion reduced by the additional                     makes Clearing Fund contributions.
                                                Under OCC’s stress testing the
                                                                                                      margin, by the Clearing Fund of $7.8                  Furthermore, OCC would respond to a
                                              Projected Draw attributable to Clearing
                                                                                                      billion. The resulting percentage of                  Margin Call Event and Clearing Fund
                                              Member Group GHI, comprised of two
                                                                                                      122%, while lower, would still exceed                 Intra-month Increase Event in
                                              Clearing Members each with net capital
                                              of $800 million, is $6.8 billion, or 87%                the 90% threshold, and accordingly                    accordance with the Financial Resource
                                              of the Clearing Fund. The Exceedance                    OCC would declare a Clearing Fund                     Monitoring and Call Procedure without
                                              Above Base Amount would be $800                         Intra-month Increase Event. To calculate              regard to any particular user or Clearing
                                              million, allocated to the two Clearing                  the Clearing Fund Increase, OCC would                 Member.
                                              Members that compose the Clearing                       first determine the difference between                   For the foregoing reasons, OCC
                                              Member Group based on each Clearing                     the modified Projected Draw ($9.5                     believes that the proposed rule change
                                              Member’s risk margin allocation. Using                  billion) and the Clearing Fund ($7.8                  is in the public interest, would be
                                              the 75/25 risk margin allocation from                   billion), which in this case would be                 consistent with the requirements of the
                                              Example 2, one Clearing Member would                    $1.7 billion, OCC would then multiply                 Act applicable to clearing agencies, and
                                              be allocated $600 million and the other                 this by 1.25, resulting in $2.125 billion.            would not impose a burden on
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                                              Clearing Member would be allocated                      Because this amount is greater than $1                competition.
                                              $200 million. The first Clearing Member                 billion, the Clearing Fund Increase
                                              would be required to deposit $500                       would be $2.125 billion and a modified
                                              million with OCC, which is the lowest                   Clearing Fund of OCC totaling $9.925
                                              of $500 million, that member’s net                      billion ($425 million in excess of the                  25 15 U.S.C. 78q-1(b)(3)(F).
                                              capital, or that member’s share of the                  modified Projected Draw of $9.5                         26 17 CFR 240.17Ad-22(b)(3).
                                              Exceedance Above Base Amount, and                       billion).                                               27 15 U.S.C. 78-q1(b)(3)(I).




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                                              17812                          Federal Register / Vol. 80, No. 63 / Thursday, April 2, 2015 / Notices

                                              (C) Clearing Agency’s Statement on                      those that may be withheld from the                   filing with the Commission. The
                                              Comments on the Proposed Rule                           public in accordance with the                         Commission is publishing this notice to
                                              Change Received From Members,                           provisions of 5 U.S.C. 552, will be                   solicit comments on the proposed rule
                                              Participants, or Others                                 available for Web site viewing and                    change from interested persons.
                                                Written comments on the proposed                      printing in the Commission’s Public
                                                                                                      Reference Room, 100 F Street NE.,                     I. Self-Regulatory Organization’s
                                              rule change were not and are not                                                                              Statement of the Terms of Substance of
                                                                                                      Washington, DC 20549 on official
                                              intended to be solicited with respect to                                                                      the Proposed Rule Change
                                                                                                      business days between the hours of
                                              the proposed rule change and none have
                                                                                                      10:00 a.m. and 3:00 p.m. Copies of the                   The Exchange filed a proposal to
                                              been received.
                                                                                                      filing also will be available for                     amend the market data section of its fee
                                              III. Date of Effectiveness of the                       inspection and copying at the principal               schedule to: (i) Establish a Digital Media
                                              Proposed Rule Change and Timing for                     office of OCC and on OCC’s Web site at                Enterprise Fee for the BATS One Feed;
                                              Commission Action                                       http://www.theocc.com/components/                     and (ii) make a non-substantive change
                                                Within 45 days of the date of                         docs/legal/rules_and_bylaws/sr_occ_15_                to the description of the BATS One Feed
                                              publication of this notice in the Federal               009.pdf. All comments received will be                Enterprise fee.
                                                                                                      posted without change; the Commission                    The text of the proposed rule change
                                              Register or within such longer period
                                                                                                      does not edit personal identifying                    is available at the Exchange’s Web site
                                              up to 90 days (i) as the Commission may
                                                                                                      information from submissions. You                     at www.batstrading.com, at the
                                              designate if it finds such longer period
                                                                                                      should submit only information that                   principal office of the Exchange, and at
                                              to be appropriate and publishes its
                                                                                                      you wish to make available publicly.                  the Commission’s Public Reference
                                              reasons for so finding or (ii) as to which
                                                                                                         All submissions should refer to File               Room.
                                              the self- regulatory organization
                                                                                                      Number SR–OCC–2015–009 and should
                                              consents, the Commission will:                                                                                II. Self-Regulatory Organization’s
                                                                                                      be submitted on or before April 23,
                                                (A) by order approve or disapprove                                                                          Statement of the Purpose of, and
                                                                                                      2015.
                                              the proposed rule change, or                                                                                  Statutory Basis for, the Proposed Rule
                                                (B) institute proceedings to determine                  For the Commission, by the Division of
                                                                                                      Trading and Markets, pursuant to delegated
                                                                                                                                                            Change
                                              whether the proposed rule change
                                                                                                      authority.28                                            In its filing with the Commission, the
                                              should be disapproved.
                                                                                                      Brent J. Fields,                                      Exchange included statements
                                              IV. Solicitation of Comments                            Secretary.                                            concerning the purpose of and basis for
                                                Interested persons are invited to                     [FR Doc. 2015–07523 Filed 4–1–15; 8:45 am]            the proposed rule change and discussed
                                              submit written data, views and                          BILLING CODE CODE 8011–01–P                           any comments it received on the
                                              arguments concerning the foregoing,                                                                           proposed rule change. The text of these
                                              including whether the proposed rule                                                                           statements may be examined at the
                                              change is consistent with the Act.                      SECURITIES AND EXCHANGE                               places specified in Item IV below. The
                                              Comments may be submitted by any of                     COMMISSION                                            Exchange has prepared summaries, set
                                              the following methods:                                                                                        forth in Sections A, B, and C below, of
                                                                                                      [Release No. 34–74599; File No. SR–BYX–
                                                                                                      2015–19]                                              the most significant parts of such
                                              Electronic Comments                                                                                           statements.
                                                • Use the Commission’s Internet                       Self-Regulatory Organizations; BATS                   A. Self-Regulatory Organization’s
                                              comment form (http://www.sec.gov/                       Y-Exchange, Inc.; Notice of Filing and                Statement of the Purpose of, and
                                              rules/sro.shtml); or                                    Immediate Effectiveness of a Proposed                 Statutory Basis for, the Proposed Rule
                                                • Send an email to rule-comments@                     Rule Change To Amend the Fees for                     Change
                                              sec.gov. Please include File Number SR–                 the BATS One Market Data Product
                                              OCC–2015–009 on the subject line.                                                                             1. Purpose
                                                                                                      March 27, 2015.
                                              Paper Comments                                             Pursuant to Section 19(b)(1) of the                  The Exchange proposes to amend the
                                                                                                      Securities Exchange Act of 1934 (the                  market data section of its fee schedule
                                                • Send paper comments in triplicate                                                                         to: (i) Establish a Digital Media
                                              to Brent J. Fields, Secretary, Securities               ‘‘Act’’),1 and Rule 19b–4 thereunder,2
                                                                                                      notice is hereby given that on March 17,              Enterprise Fee for the BATS One Feed;
                                              and Exchange Commission, 100 F Street                                                                         and (ii) make a non-substantive change
                                              NE., Washington, DC 20549–1090.                         2015, BATS Y-Exchange, Inc. (the
                                                                                                      ‘‘Exchange’’ or ‘‘BYX’’) filed with the               to the description of the BATS One Feed
                                              All submissions should refer to File                                                                          Enterprise fee.5
                                                                                                      Securities and Exchange Commission
                                              Number SR–OCC–2015–009. This file                                                                               The Commission recently approved a
                                                                                                      (‘‘Commission’’) the proposed rule
                                              number should be included on the                                                                              proposed rule change by the Exchange
                                                                                                      change as described in Items I and II
                                              subject line if email is used. To help the                                                                    to establish a new market data product
                                                                                                      below, which Items have been prepared
                                              Commission process and review your                                                                            called the BATS One Feed 6 as well as
                                                                                                      by the Exchange. The Exchange has
                                              comments more efficiently, please use                                                                         published proposed rule changes to
                                                                                                      designated the proposed rule change as
                                              only one method. The Commission will
                                                                                                      one establishing or changing a member
                                              post all comments on the Commission’s                                                                           5 The Exchange notes that the date of the fee
                                                                                                      due, fee, or other charge imposed by the
                                              Internet Web site (http://www.sec.gov/                                                                        schedule was amended to March 17, 2015 in a
                                                                                                      Exchange under Section 19(b)(3)(A)(ii)
                                              rules/sro.shtml). Copies of the                                                                               previously filed proposed rule change. See SR–
                                                                                                      of the Act 3 and Rule 19b–4(f)(2)                     BYX–2015–18 (filed March 17, 2015).
                                              submission, all subsequent
                                                                                                      thereunder,4 which renders the                          6 See Securities Exchange Act Release No. 73918
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                                              amendments, all written statements
                                                                                                      proposed rule change effective upon                   (December 23, 2014), 79 FR 78920 (December 31,
                                              with respect to the proposed rule                                                                             2014) (File Nos. SR–EDGX–2014–25; SR–EDGA–
                                              change that are filed with the                            28 17 CFR 200.30–3(a)(12).
                                                                                                                                                            2014–25; SR–BATS–2014–055; SR–BYX–2014–030)
                                              Commission, and all written                               1 15
                                                                                                                                                            (Notice of Amendments No. 2 and Order Granting
                                                                                                             U.S.C. 78s(b)(1).                              Accelerated Approval to Proposed Rule Changes, as
                                              communications relating to the                            2 17 CFR 240.19b–4.
                                                                                                                                                            Modified by Amendments Nos. 1 and 2, to Establish
                                              proposed rule change between the                          3 15 U.S.C. 78s(b)(3)(A)(ii).
                                                                                                                                                            a New Market Data Product called the BATS One
                                              Commission and any person, other than                     4 17 CFR 240.19b–4(f)(2).                           Feed) (‘‘BATS One Approval Order’’).



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Document Created: 2018-02-21 10:03:49
Document Modified: 2018-02-21 10:03:49
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
FR Citation80 FR 17808 

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