81 FR 3208 - Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection to Advance Notice Filing, 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 81, Issue 12 (January 20, 2016)

Page Range		3208-3210
FR Document		2016-00976

Federal Register, Volume 81 Issue 12 (Wednesday, January 20, 2016)

[Federal Register Volume 81, Number 12 (Wednesday, January 20, 2016)]
[Notices]
[Pages 3208-3210]
From the Federal Register Online [www.thefederalregister.org]
[FR Doc No: 2016-00976]

[[Page 3208]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76821; File No. SR-OCC-2015-805]

Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of No Objection to Advance Notice Filing, as Modified by
Amendment Nos. 1, 2 and 3, Concerning The Options Clearing
Corporation's Non-Bank Liquidity Facility

January 4, 2016.
On November 5, 2015, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') the
advance notice SR-OCC-2015-805 pursuant to Section 806(e)(1) of 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 (``Exchange Act'').\2\ 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 advance notice was
published for comment in the Federal Register on December 18, 2015.\3\
The Commission did not receive any comments on the advance notice
publication. This publication serves as a notice that the Commission
does not object to the changes set forth in the advance notice.
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\1\ 12 U.S.C. 5465(e)(1). The Financial Stability Oversight
Council designated OCC a systemically important financial market
utility (``FMU'') on July 18, 2012. See Financial Stability
Oversight Council 2012 Annual Report, Appendix A, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, OCC is required to comply
with the Payment, Clearing, and Settlement Supervision Act and file
advance notices with the Commission. See 12 U.S.C. 5465(e).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ Securities Exchange Act Release No. 76641 (December 14,
2015), 80 FR 79114 (December 18, 2015) (SR-OCC-2015-805).
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I. Description of the Advance Notice

OCC filed this advance notice to renew its non-bank liquidity
facility (``Non-Bank Liquidity Facility'') with certain proposed
changes. Specifically, OCC is proposing to: (i) Extend the existing
confirmation (``Existing Confirmation'') \4\ 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 a June 2016 expiration date; and (iii) maintain, between
the Confirmations, 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 institutional investor (``Counterparty'')
and its agent.\5\ According to OCC, 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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\4\ 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).
\5\ OCC represents that it intends for the commitment amount of
the extended Existing Confirmation to be $500 million and the
commitment amount of the Second Confirmation to be $500 million. OCC
states that it will 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. According to OCC,
the MRA and any effective Confirmation(s) constitute the Non-Bank
Liquidity Facility.
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OCC also has requested that the Commission not object to its
proposal to renew the Existing Confirmation and the Second Confirmation
annually on the same terms and conditions \6\ with the same
Counterparty without filing an advance notice, 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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\6\ For the purposes of clarity, OCC states that it will not
consider changes to the costs of entering into a Confirmation, or
the rate of a transaction permitted under a Confirmation, to be a
change to a term or condition that will 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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Background

OCC's overall liquidity plan includes 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. OCC states that the Non-Bank Liquidity Facility is designed
to reduce the concentration of OCC's counterparty exposure in 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 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) purchases from OCC, from time to time, United
States government securities (``Eligible Securities'').\8\
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\8\ OCC states that it will use United States 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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Under the arrangement, OCC, as the seller, transfers Eligible
Securities to the buyer in exchange for a payment by the buyer to OCC
in immediately available funds (``Purchase Price''). The buyer will
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. OCC provides that, by
entering into the Confirmation, the Counterparty is obligated to enter
repurchase transactions even if OCC experiences a material adverse
change,\9\ to make funds available to OCC within 60 minutes of OCC's
delivery of eligible securities, and to not rehypothecate purchased
securities.\10\ The Confirmations also set

[[Page 3209]]

forth the terms and maximum dollar amounts of the transaction permitted
under the MRA.
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\9\ OCC represents that, in this context, a ``material adverse
change'' is 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

To provide continued access to liquidity resources, OCC proposes to
extend the Existing Confirmation under the Non-Bank Liquidity Facility.
OCC represents that the extended Existing Confirmation will 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 will be January 2017, and the commitment
amount, which will be $500 million.
According to OCC, the extended Existing Confirmation will continue
to state that OCC is entitled to receive funds from the Non-Bank
Liquidity Facility within 60 minutes of requesting such monies and
delivering eligible securities. OCC also states that the buyer will not
be able to rehypothocate eligible securities sold to it in a Non-Bank
Liquidity Facility transaction, and OCC will be able to substitute
eligible securities held by the buyer. Additionally, OCC represents
that it will have early termination rights for any transaction entered
into under the Non-Bank Liquidity Facility as well as have additional
protections in the case of ``material adverse changes'' to OCC. For
example, OCC states that it will require that material adverse changes
to OCC, such as the failure of a clearing member, will not be deemed a
default event. OCC believes this provision is important because it
provides OCC with certainty of funding, even in adverse or difficult
market conditions. According to OCC, this commitment to provide funding
will 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 will permit
transactions of up to $500 million and will expire in June 2016.
According to OCC, the Second Confirmation will 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.
OCC believes that the Second Confirmation, with a June 2016
expiration date, will 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 \11\ and the Existing
Confirmation, currently expire each year in October and January,
respectively. OCC believes that 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 will 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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\11\ 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 proposes 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. OCC believes that this will provide it 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 states that it will 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 will submit a proposal with the
Commission for approval first.

II. Discussion and Commission Findings

Although the Payment, Clearing and Settlement Supervision Act does
not specify a standard of review for an advance notice, its stated
purpose is instructive.\12\ The stated purpose is to mitigate systemic
risk in the financial system and promote financial stability by, among
other things, promoting uniform risk management standards for
systemically important FMUs and strengthening the liquidity of
systemically important FMUs.\13\ Section 805(a)(2) of the Payment,
Clearing and Settlement Supervision Act \14\ authorizes the Commission
to prescribe risk management standards for the payment, clearing, and
settlement activities of designated clearing entities and financial
institutions engaged in designated activities for which it is the
Supervisory Agency or the appropriate financial regulator. Section
805(b) of the Payment, Clearing and Settlement Supervision Act \15\
states that the objectives and principles for the risk management
standards prescribed under Section 805(a) shall be to:
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\12\ See 12 U.S.C. 5461(b).
\13\ Id.
\14\ 12 U.S.C. 5464(a)(2).
\15\ 12 U.S.C. 5464(b).
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Promote robust risk management;
promote safety and soundness;
reduce systemic risks; and
support the stability of the broader financial system.
The Commission has adopted risk management standards under Section
805(a)(2) of the Payment, Clearing and Settlement Supervision Act \16\
and the Exchange Act (``Clearing Agency Standards'').\17\ The Clearing
Agency Standards require registered clearing agencies to establish,
implement, maintain, and enforce written policies and procedures that
are reasonably designed to meet certain minimum requirements for their
operations and risk management practices on an ongoing basis.\18\
Therefore, it is appropriate for the Commission to review advance
notices against these Clearing Agency Standards and the objectives and
principles of these risk management standards as described in Section
805(b) of the Payment, Clearing and Settlement Supervision Act.\19\
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\16\ 12 U.S.C. 5464(a)(2).
\17\ See Exchange Act Rule 17Ad-22. 17 CFR 240.17Ad-22.
Securities Exchange Act Release No. 68080 (October 22, 2012), 77 FR
66220 (November 2, 2012) (S7-08-11).
\18\ Id.
\19\ 12 U.S.C. 5464(b).
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The Commission believes that the proposal in the advance notice is
consistent with the Clearing Agency Standards, in particular, Exchange
Act Rule 17Ad-22(d)(11).\20\ Exchange Act Rule 17Ad-22(d)(11) \21\
requires that

[[Page 3210]]

registered clearing agencies ``establish, implement, maintain and
enforce written policies and procedures reasonably designed to, as
applicable . . . establish default procedures that ensure that the
clearing agency can take timely action to contain losses and liquidity
pressures and to continue meeting its obligations in the event of a
participant default.'' The proposal will allow OCC to obtain short-term
funds 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. The changes
should help OCC minimize losses in the event of such a default,
suspension, or insolvency, by allowing it to obtain funds on extremely
short notice to ensure clearance and settlement of transactions in
options and other contracts without interruption. Therefore, the
Commission believes that the proposal is consistent with Exchange Act
Rule 17Ad-22(d)(11).\22\
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\20\ 17 CFR 240.17Ad-22(d)(11).
\21\ Id.
\22\ Id.
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By ensuring that OCC has continued access to its Non-Bank Liquidity
Facility, the Commission believes the proposal contained in the Advance
Notice is consistent with the objectives and principles described in
Section 805(b) of the Act,\23\ including that it is consistent with
promoting robust risk management, and promoting safety and soundness.
The Commission believes that the proposal is consistent with promoting
robust risk management because it allows OCC to maintain access to a
committed liquidity resource to help meet its settlement obligations in
a manner that is timely and does not increase OCC's counterparty
exposure to clearing members or clearing member affiliated commercial
banking institutions. In addition, the proposal will provide OCC the
ability to adjust the aggregate commitment level of its Non-Bank
Liquidity Facility--to no lower than $1 billion and no greater than
$1.5 billion--to meet changing liquidity demands. The Commission also
believes that the proposal is consistent with promoting safety and
soundness of OCC. As stated above, the Non-Bank Liquidity Facility now
will include two Confirmations with staggered expiration dates, which
should mitigate the risk of a precipitous decrease in liquidity
resources in the event OCC is unable to renew any one of its committed
liquidity sources.
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\23\ 12 U.S.C. 5464(b).
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For these reasons, stated above, the Commission does not object to
the advance notice.

VI. Conclusion

It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Payment, Clearing and Settlement Supervision Act,\24\ that the
Commission DOES NOT OBJECT to the proposed change, and authorizes OCC
to implement the change in the advance notice (SR-OCC-2015-805) as of
the date of this notice.
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\24\ 12 U.S.C. 5465(e)(1)(I).

By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-00976 Filed 1-19-16; 8:45 am]
BILLING CODE 8011-01-P

3210 Federal Register / Vol. 81, No. 12 / Wednesday, January 20, 2016 / Notices

registered clearing agencies ‘‘establish, For these reasons, stated above, the II. Self-Regulatory Organization’s
implement, maintain and enforce Commission does not object to the Statement of the Purpose of, and
written policies and procedures advance notice. Statutory Basis for, the Proposed Rule
reasonably designed to, as applicable Change
VI. Conclusion
. . . establish default procedures that
ensure that the clearing agency can take In its filing with the Commission, the
It is therefore noticed, pursuant to
timely action to contain losses and Exchange included statements
Section 806(e)(1)(I) of the Payment,
liquidity pressures and to continue concerning the purpose of and basis for
Clearing and Settlement Supervision
meeting its obligations in the event of a the proposed rule change and discussed
Act,24 that the Commission DOES NOT
participant default.’’ The proposal will any comments it received on the
OBJECT to the proposed change, and
allow OCC to obtain short-term funds to proposed rule change. The text of these
authorizes OCC to implement the
address liquidity demands arising out of statements may be examined at the
change in the advance notice (SR–OCC–
the default or suspension of a clearing places specified in Item IV below. The
2015–805) as of the date of this notice.
member, in anticipation of a potential Exchange has prepared summaries, set
By the Commission. forth in sections A, B, and C below, of
default or suspension of clearing
members or the insolvency of a bank or
Robert W. Errett, the most significant aspects of such
Deputy Secretary. statements.
another securities or commodities
clearing organization. The changes [FR Doc. 2016–00976 Filed 1–19–16; 8:45 am]
A. Self-Regulatory Organization’s
should help OCC minimize losses in the BILLING CODE 8011–01–P Statement of the Purpose of, and
event of such a default, suspension, or Statutory Basis for, the Proposed Rule
insolvency, by allowing it to obtain Change
funds on extremely short notice to SECURITIES AND EXCHANGE
ensure clearance and settlement of COMMISSION 1. Purpose
transactions in options and other The purpose of the proposed rule
contracts without interruption. [Release No. 34–76888; File No. SR–CBOE–
change is to extend the contributor
Therefore, the Commission believes that 2015–122]
compensation structure of the
the proposal is consistent with Exchange’s COPS,5 specifically, the
Exchange Act Rule 17Ad–22(d)(11).22 Self-Regulatory Organizations;
Chicago Board Options Exchange, COPS data revenue-sharing plan. The
By ensuring that OCC has continued Incorporated; Notice of Filing and Exchange is not proposing to change the
access to its Non-Bank Liquidity Immediate Effectiveness of a Proposed fees for COPS data.
Facility, the Commission believes the Rule Change Relating to COPS Background
proposal contained in the Advance
Notice is consistent with the objectives January 13, 2016. COPS provides market participants
and principles described in Section Pursuant to Section 19(b)(1) of the with an ‘‘end-of-day’’ 6 file and
805(b) of the Act,23 including that it is Securities Exchange Act of 1934 (the ‘‘historical’’ 7 files of valuations for
consistent with promoting robust risk ‘‘Act’’),1 and Rule 19b–4 thereunder,2 Flexible Exchange (‘‘FLEX’’) 8 options
management, and promoting safety and notice is hereby given that on December and certain over-the-counter (‘‘OTC’’)
soundness. The Commission believes 31, 2015, Chicago Board Options options (collectively, ‘‘COPS Data’’).
that the proposal is consistent with Exchange, Incorporated (the ‘‘Exchange’’ Market Data Express, LLC (‘‘MDX’’), an
promoting robust risk management or ‘‘CBOE’’) filed with the Securities affiliate of CBOE, offers COPS Data for
because it allows OCC to maintain and Exchange Commission (the sale to all market participants. COPS
access to a committed liquidity resource ‘‘Commission’’) the proposed rule Data is available to ‘‘Subscribers’’ for
to help meet its settlement obligations change as described in Items I and II internal use and internal distribution
in a manner that is timely and does not below, which Items have been prepared only, and to ‘‘Customers’’ who, pursuant
increase OCC’s counterparty exposure to by the Exchange. The Exchange filed the to a written vendor agreement between
clearing members or clearing member proposal as a ‘‘non-controversial’’ MDX and a Customer, may distribute
affiliated commercial banking proposed rule change pursuant to the COPS Data externally (i.e., act as a
institutions. In addition, the proposal Section 19(b)(3)(A)(iii) of the Act 3 and
will provide OCC the ability to adjust Rule 19b–4(f)(6) thereunder.4 The 5 See Securities Exchange Act Release Nos. 34–

the aggregate commitment level of its Commission is publishing this notice to 67813 (September 10, 2012), 77 FR 56903
Non-Bank Liquidity Facility—to no solicit comments on the proposed rule (September 14, 2012) (SR–CBOE–2012–083); 34–
67928 (September 26, 2012), 77 FR 60161 (October
lower than $1 billion and no greater change from interested persons. 2, 2012) (SR–CBOE–2012–090); 34–70705 (October
than $1.5 billion—to meet changing 17, 2013), 78 FR 63265 (October 23, 2013) (SR–
liquidity demands. The Commission I. Self-Regulatory Organization’s CBOE–2013–097); 34–70845 (November 12, 2013),
also believes that the proposal is Statement of the Terms of Substance of 78 FR 69168 (November 18, 2013) (SR–CBOE–
consistent with promoting safety and the Proposed Rule Change 2013–104); 34–72621 (July 16, 2014), 79 FR 42616
(July 22, 2014) (SR–CBOE–2014–057); 34–74159
soundness of OCC. As stated above, the The Exchange proposes to extend the (January 28, 2015), 80 FR 5863 (February 23, 2015)
Non-Bank Liquidity Facility now will contributor compensation structure of (SR–CBOE–2015–007); and 34–74937 (May 12,
include two Confirmations with 2015), 80 FR 28319 (May 18, 2015) (SR–CBOE–
the Customized Option Pricing Service 2015–046).
staggered expiration dates, which (‘‘COPS’’). There is no new proposed 6 ‘‘End of day’’ refers to data that is distributed
tkelley on DSK4VPTVN1PROD with NOTICES

should mitigate the risk of a precipitous rule text. prior to the opening of the next trading day.
decrease in liquidity resources in the 7 ‘‘Historical’’ COPS data consists of COPS data

event OCC is unable to renew any one 24 12 U.S.C. 5465(e)(1)(I).
that is over one month old (i.e., copies of the ‘‘end-
of its committed liquidity sources. of-day’’ COPS file that are over one month old).
1 15 U.S.C. 78s(b)(1). 8 FLEX options are exchange traded options that
2 17 CFR 240.19b–4.
provide investors with the ability to customize
22 Id. 3 15 U.S.C. 78s(b)(3)(A)(iii).
basic option features including size, expiration
23 12 U.S.C. 5464(b). 4 17 CFR 240.19b–4(f)(6). date, exercise style, and certain exercise prices.

VerDate Sep<11>2014 18:12 Jan 19, 2016 Jkt 238001 PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 E:\FR\FM\20JAN1.SGM 20JAN1

Document Created: 2016-01-19 23:43:44
Document Modified: 2016-01-19 23:43:44

Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		81 FR 3208