80 FR 79114 - Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of an Advance Notice, as Modified by Amendment Nos. 1, 2 and 3, Concerning The Options Clearing Corporation's Non-Bank Liquidity Facility

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 243 (December 18, 2015)

[Federal Register Volume 80, Number 243 (Friday, December 18, 2015)]
[Notices]
[Pages 79114-79117]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-31818]



[[Page 79114]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76641; File No. SR-OCC-2015-805]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of an Advance Notice, as Modified by Amendment Nos. 1, 
2 and 3, Concerning The Options Clearing Corporation's Non-Bank 
Liquidity Facility

December 14, 2015.
    Pursuant to section 806(e)(1) of title VIII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act entitled the Payment, 
Clearing, and Settlement Supervision Act of 2010 (``Payment, Clearing 
and Settlement Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) under the 
Securities Exchange Act of 1934 (``Act''),\2\ notice is hereby given 
that on November 5, 2015, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') an 
advance notice described in Items I and II below, which Items have been 
prepared by OCC. On November 11, 2015, OCC filed Amendment No.1 to the 
advance notice, which amended and replaced in its entirety the advance 
notice as originally submitted on November 5, 2015. On November 17, 
2005, OCC filed Amendment No. 2 to the advance notice, which partially 
amended the advance notice as submitted on November 11, 2015. On 
November 24, 2015, OCC filed Amendment No. 3 to the advance notice, 
which amends and replaces in its entirety the advance notice as 
submitted on November 11, 2015, and amended on November 17, 2015. The 
Commission is publishing this notice to solicit comments on the advance 
notice from interested persons.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
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I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    As discussed in more detail below, this advance notice is filed by 
OCC in connection with a proposed change to: (i) Extend the existing 
confirmation (``Existing Confirmation'') \3\ for one year under the 
Master Repurchase Agreement (``MRA'') with the same terms and 
conditions; (ii) enter into a second confirmation (``Second 
Confirmation,'' and collectively with the Existing Confirmation, 
``Confirmations'') under the MRA also on the same terms and conditions 
except with an expiration date in June 2016; and (iii) maintain, 
between the Existing Confirmation and Second Confirmation, an aggregate 
commitment amount of no less than $1 billion and no greater than $1.5 
billion under the non-bank liquidity facility (``Non-Bank Liquidity 
Facility'') with the existing institutional investor (``Counterparty'') 
and its agent.\4\
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    \3\ The Existing Confirmation is the original $1 billion Master 
Confirmation executed under the Master Repurchase Agreement as 
described in Securities Exchange Act Release No. 73979 (January 2, 
2015), 80 FR 1062 (January 8, 2015) (SR-OCC-2014-809).
    \4\ OCC intends the commitment amount of the Second Confirmation 
to be $500 million and the commitment amount of the extended 
Existing Confirmation to be $500 million. OCC would have the 
flexibility to change the commitment amount of each Confirmation at 
each renewal provided that at all times OCC would maintain the 
aggregate commitment level between the two Confirmations under the 
Non-Bank Liquidity Facility at no less than $1 billion and no 
greater than $1.5 billion. The MRA and any effective Confirmation(s) 
constitute the Non-Bank Liquidity Facility.
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    By this notice, OCC requests that the Commission not object to the 
foregoing proposed changes for renewing, in the future, the Existing 
Confirmation and the Second Confirmation on the same terms and 
conditions \5\ with the same Counterparty without filing an advance 
notice concerning the renewal, provided that there has been no negative 
change to the Counterparty's credit profile or the Counterparty has not 
experienced a material adverse change (as defined below) since entering 
into the Confirmations or the latest renewal of the either 
Confirmation, whichever is later.
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    \5\ For the purposes of clarity, OCC would not consider changes 
to the costs of entering into a Confirmation, or the rate of a 
transaction permitted under a Confirmation, a change to a term or 
condition that would require the filing of a subsequent advance 
notice filing provide that such costs or rate is at the then 
prevailing market rate.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the advance notice and 
discussed any comments it received on the advance notice. 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 and B below, 
of the most significant aspects of these statements.

(A) Clearing Agency's Statement on Comments on the Advance Notice 
Received From Members, Participants, or Others

    Written comments were not and are not intended to be solicited with 
respect to the advance notice and none have been received.

(B) Advance Notice Filed Pursuant to Section 806(e) of the Payment, 
Clearing and Settlement Supervision Act

    This Amendment No. 3 to SR-OCC-2015-805 (``Filing'') amends and 
replaces in its entirety the Filing as originally submitted on November 
5, 2015, and amended on November 11, 2015 and November 17, 2015. The 
purpose of this Amendment No. 3 to the Filing is to clarify the 
conditions under which OCC would be permitted to renew either of the 
Confirmations without filing a subsequent advance notice filing.
Description of Change
    This advance notice is filed by OCC in connection with a proposed 
change to: (i) Extend the Existing Confirmation, for one year under the 
MRA, with the same terms and conditions, for a commitment amount of 
$500 million; (ii) enter into a Second Confirmation under the MRA, also 
on the same terms and conditions, except with an expiration date in 
June 2016, for a commitment amount of $500 million; and, (iii) 
maintain, between the Existing Confirmation and Second Confirmation, an 
aggregate commitment amount of no less than $1 billion and no greater 
than $1.5 billion under the Non-Bank Liquidity Facility with the 
existing Counterparty and its agent.\6\ The Second Confirmation has the 
same terms, conditions, operations, and mechanics as the Existing 
Confirmation, except for the expiration date and commitment amount.
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    \6\ The substantive terms regarding each additional transaction 
are set forth in the OCC Committed Repo Program Summary of 
Indicative Terms, which are attached hereto as Exhibits 3A and 3B. 
Such exhibits are non-public documents for which OCC has submitted a 
request for confidential treatment to the Commission.
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Background
    OCC's overall liquidity plan provides it with access to a diverse 
set of liquidity funding sources, which include bank borrowing 
arrangements (i.e., OCC's syndicated credit facility \7\) and the Non-
Bank Liquidity Facility. The Non-Bank Liquidity Facility is designed to 
reduce the concentration of OCC's counterparty exposure with respect to 
its overall liquidity plan by diversifying its lender base among banks 
and non-bank, non-clearing member institutional investors, such as 
pension funds or insurance companies.
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    \7\ See Securities Exchange Act Release No. 76062 (October 1, 
2015), 80 FR 64028 (October 22, 2015) (SR-OCC-2015-803).
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    The currently approved Non-Bank Liquidity Facility is comprised of 
two parts: The MRA and the Existing

[[Page 79115]]

Confirmation, which contains certain individualized terms and 
conditions of transactions executed between OCC, an institutional 
investor and its agent. The MRA is structured like a typical repurchase 
arrangement in which the buyer (i.e., the Counterparty) would purchase 
from OCC, from time to time, United States government securities 
(``Eligible Securities'').\8\
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    \8\ OCC would use U.S. government securities that are included 
in clearing fund contributions by clearing members and margin 
deposits of any clearing member that has been suspended by OCC for 
the repurchase arrangements. Article VIII, section 5(e) of OCC's By-
Laws and OCC Rule 1104(b) authorize OCC to obtain funds from third 
parties through securities repurchases using these sources. The 
officers who may exercise this authority include the Executive 
Chairman and the President.
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    OCC, as the seller, would transfer Eligible Securities to the buyer 
in exchange for a payment by the buyer to OCC in immediately available 
funds (``Purchase Price''). The buyer would simultaneously agree to 
transfer the purchased securities back to OCC at a specified later date 
(``Repurchase Date'') or on OCC's demand against the transfer of funds 
by OCC to the buyer in an amount equal to the outstanding Purchase 
Price plus the accrued and unpaid price differential (together, 
``Repurchase Price''), which is the interest component of the 
Repurchase Price.
    The Confirmations establish tailored provisions of the actual 
repurchase transactions permitted under the MRA. By entering into the 
Confirmation, the Counterparty is obligated to enter repurchase 
transactions even if OCC experiences a material adverse change,\9\ 
funds must be made available to OCC within 60 minutes of OCC's 
delivering eligible securities, and the institutional investor is not 
permitted to rehypothecate purchased securities.\10\ Additionally, the 
Confirmations set forth the terms and maximum dollar amounts of the 
transaction permitted under the MRA.
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    \9\ When included in a contract, a ``material adverse change'' 
is typically defined as a change that would have a materially 
adverse effect on the business or financial condition of a company.
    \10\ See Securities Exchange Act Release No. 73979 (January 2, 
2015), 80 FR 1062 (January 8, 2015) (SR-OCC-2014-809).
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Extension of the Existing Confirmation
    In order to provide continued access to liquidity resources, OCC is 
also proposing to extend the Existing Confirmation under the Non-Bank 
Liquidity Facility. The extended Existing Confirmation would have the 
same terms, conditions, operations, and mechanics as the Existing 
Confirmation entered into under the Non-Bank Liquidity Facility, but 
for the expiration date, which would be January 2017, and the 
commitment amount, which would be $500 million.\11\
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    \11\ See Securities Exchange Act Release No. 73979 (January 2, 
2015), 80 FR 1062 (January 8, 2015) (SR-OCC-2014-809).
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    The extended Existing Confirmation would, for example, continue to 
state that OCC is entitled to receive funds from the Non-Bank Liquidity 
Facility within 60 minutes of a request for such monies and delivery of 
eligible securities. The buyer would not be able to rehypothocate 
eligible securities sold to it in connection with a Non-Bank Liquidity 
Facility transaction, and OCC would be able to substitute eligible 
securities held by the buyer. Additionally, OCC would have early 
termination rights with respect to any transaction entered into under 
the Non-Bank Liquidity Facility as well as have additional remedies in 
the case of ``material adverse changes'' to OCC. For example, OCC would 
require that it would not be an event of default if OCC suffers a 
material adverse change, such as the failure of a clearing member. This 
provision is important because it provides OCC with certainty of 
funding, even in adverse or difficult market conditions. This 
commitment to provide funding would be a key distinction from ordinary 
repurchase arrangements and a key requirement for OCC.
Second Confirmation
    OCC proposes to enter into the Second Confirmation that would 
permit transactions of up to $500 million and would expire in June 
2016. The proposed Second Confirmation would have the same terms, 
conditions, operations, and mechanics as the Existing Confirmation of 
the Non-Bank Liquidity Facility, but for the commitment amount and the 
term.
    The proposed Second Confirmation, with a June 2016 expiration date, 
would help ensure continued access to a minimum amount of liquidity to 
OCC by staggering the expiration of the committed liquidity funding 
sources. OCC's current committed liquidity funding sources, which are 
its syndicated credit facility \12\ and the Existing Confirmation, 
currently expire each year in October and January, respectively. 
Staggering the expiration dates of Confirmations under the Non-Bank 
Liquidity Facility in relationship to each other and in relationship to 
the other liquidity funding source in OCC's overall liquidity plan 
would mitigate the risk of a precipitous decrease in OCC's access to 
liquidity as a result of a an unsuccessful renewal of any one funding 
source.
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    \12\ See Securities Exchange Act Release No. 76062 (October 1, 
2015), 80 FR 64028 (October 22, 2015) (SR-OCC-2015-803).
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Aggregate Commitment Amount Under the Non-Bank Liquidity Facility
    OCC's current aggregate committed funding available under its Non-
Bank Liquidity Facility ($1.0 billion) and its bank syndicated credit 
facility ($2.0 billion) is $3.0 billion. OCC is proposing to maintain 
the aggregate commitment amount under the Non-Bank Liquidity Facility 
at no lower than $1.0 billion and no higher than $1.5 billion, so that 
the aggregate total funding available is between $3.0 billion and $3.5 
billion. This would provide OCC with the flexibility to: (i) React to 
shifting liquidity needs in a swift manner within funding parameters 
approved by the Commission, and (ii) reallocate the amount of funding 
available under the Confirmations at the time either of the 
Confirmations is to be renewed to manage liquidity needs and enhance 
its ability to ensure continual liquidity resources.
    OCC would continue to evaluate the aggregate commitment amount of 
the Non-Bank Liquidity Facility so that OCC's available liquidity 
resources remain properly calibrated to its activities and settlement 
obligations, and to the extent: (i) OCC determines its liquidity needs 
merit funding levels below the $1.0 billion or above the $1.5 billion 
thresholds for the Non-Bank Liquidity Facility, (ii) OCC should seek to 
change the terms and conditions of the Non-Bank Liquidity Facility, or 
(iii) the Counterparty has experienced a negative change to its credit 
profile or a material adverse change since entering into the 
Confirmations or the latest renewal of the either Confirmation, OCC 
would submit a proposal with the Commission for approval first.
Anticipated Effect on and Management of Risk
    Completing timely settlement is a key aspect of OCC's role as a 
clearing agency performing central counterparty services. The extension 
of the Existing Confirmation would continue to promote the reduction of 
risks to OCC, its clearing members and the options market in general 
because it would allow OCC to continue to obtain short-term funds from 
the Non-Bank Liquidity Facility to address liquidity demands arising 
out of the default or suspension of a clearing member, in anticipation 
of a potential default or suspension of clearing members, or the 
insolvency of a bank or another securities or commodities clearing 
organization.

[[Page 79116]]

    The Second Confirmation and the ability to seek an aggregate 
commitment amount under the Non-Bank Liquidity Facility for no lower 
than $1.0 billion and no greater than $1.5 billion would also help OCC 
ensure the continued availability of its liquidity resources by 
embedding the staggered expiration of the committed liquidity funding 
sources and providing OCC with the flexibility to seek additional 
funding amounts at the same terms, conditions, operations, and 
mechanics of the Confirmations.
    The MRA, like any liquidity source, would involve certain risks, 
but OCC would continue to structure the Non-Bank Liquidity Facility to 
mitigate those risks. Most of these risks are standard in any master 
repurchase agreement. For example, a buyer could fail to deliver, or 
delay in delivering, purchased securities to OCC by the applicable 
Repurchase Date. OCC will address this risk by seeking a security 
interest from the buyer in that portion of the purchased securities 
representing the excess of the market value over the Repurchase Price, 
or by obtaining other comfort from the buyer that the purchased 
securities will be timely returned. Further, the purchased securities 
generally will not be ``on-the-run'' securities, i.e., the most 
recently issued Treasury securities. The demand in the marketplace for 
Treasury securities, for uses other than collateral, is much greater 
for on-the-run Treasury securities, and, therefore, OCC believes buyers 
will have little incentive to retain the securities transferred by OCC.
    The mechanics under the MRA would be structured so that OCC could 
avoid losses by paying the Repurchase Price. For example, OCC will have 
optional early termination rights in each Confirmation, under which OCC 
would be able to accelerate the Repurchase Date of any transaction by 
providing written notice to the buyer and paying the Repurchase Price. 
Through this mechanism, OCC can maintain the benefit of the MRA, while 
mitigating any risk associated with a particular transaction.
    The MRA would be structured to avoid potential third-party risks, 
which are typical of repurchase arrangements. The prohibition on buyer 
rehypothecation and use of purchased securities, along with OCC's 
visibility into the buyer's custody account, would reduce the risk to 
OCC of a buyer default.
    As with any repurchase arrangement, OCC is subject to the risk that 
it may have to terminate existing transactions and accelerate the 
applicable Repurchase Date with respect to a buyer due to changes in 
the financial health or performance of the buyer. Terminating 
transactions could negatively affect OCC's liquidity position. However, 
any negative effect is reduced by the fact that OCC maintains a number 
of different financing arrangements, and thus will have access to 
liquidity sources in the event the MRA is no longer a viable source.
    Under the MRA, OCC would be obligated to transfer additional cash 
or securities as margin in the event the market value of any purchased 
securities decreases. OCC seeks to ensure it can meet any such 
obligation by monitoring the value of the purchased securities and 
maintaining adequate cash resources to make any required payments. Such 
payments are expected to be small in comparison to the total amount of 
cash received for each transfer of purchased securities.
    The proposed change would help OCC minimize losses in the event of 
a default, suspension or insolvency, by allowing it to obtain funds 
from sources not connected to OCC's clearing members on extremely short 
notice to ensure clearance and settlement of transactions in options 
and other contracts without interruption. OCC believes that the reduced 
settlement risk presented by OCC resulting from the proposed change 
would correspondingly reduce systemic risk and promote the safety and 
soundness of the clearing system. The ability to borrow funds from the 
Non-Bank Liquidity Facility would allow OCC to avoid liquidating margin 
or clearing fund assets in what would likely be volatile market 
conditions, which would preserve funds available to cover any losses 
resulting from the failure of a clearing member, bank or other clearing 
organization.
    Because the proposed change preserves substantially the same terms 
and conditions as the MRA and the Existing Confirmation, OCC believes 
that the proposed change would not otherwise affect or alter the 
management of risk at OCC.
Consistency With the Payment, Clearing and Settlement Supervision Act
    OCC believes the proposed change is consistent with section 
805(b)(1) of the Payment, Clearing and Settlement Supervision Act.\13\ 
The objectives and principles of section 805(b)(1) of the Payment, 
Clearing and Settlement Supervision Act specify the promotion of robust 
risk management, promotion of safety and soundness, reduction of 
systemic risks, and support of the stability of the broader financial 
system.\14\ OCC believes that the proposed change would promote these 
objectives because the proposed Confirmations would provide OCC with an 
additional source of committed liquidity to meet its settlement 
obligations while at the same time being structured to mitigate certain 
operational risks, as described above, that arise in connection with 
this committed liquidity source.
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    \13\ 12 U.S.C. 5464(b)(1).
    \14\ Id.
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III. Date of Effectiveness of the Advance Notice, and Timing for 
Commission Action

    The proposed change may be implemented if the Commission does not 
object to the proposed change within 60 days of the later of (i) the 
date that the proposed change was filed with the Commission or (ii) the 
date that any additional information requested by the Commission is 
received. OCC shall not implement the proposed change if the Commission 
has any objection to the proposed change.
    The Commission may extend the period for review by an additional 60 
days if the proposed change raises novel or complex issues, subject to 
the Commission providing OCC with prompt written notice of the 
extension. The proposed change may be implemented in less than 60 days 
from the date the advance notice is filed, or the date further 
information requested by the Commission is received, if the Commission 
notifies OCC in writing that it does not object to the proposed change 
and authorizes OCC to implement the proposed change on an earlier date, 
subject to any conditions imposed by the Commission.
    OCC shall post notice on its Web site of proposed changes that are 
implemented.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. 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-2015-805 on the subject line.

[[Page 79117]]

Paper Comments

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

All submissions should refer to File Number SR-OCC-2015-805. 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 advance notice that are filed 
with the Commission, and all written communications relating to the 
advance notice 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 
(http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_15_805.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-2015-805 and should be submitted on or before January 4, 2016.

    By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-31818 Filed 12-17-15; 8:45 am]
 BILLING CODE 8011-01-P