81 FR 72138 - Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection to Advance Notice Filing Concerning The Options Clearing Corporation's Escrow Deposit Program

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 202 (October 19, 2016)

Page Range		72138-72141
FR Document		2016-25233
Federal Register, Volume 81 Issue 202 (Wednesday, October 19, 2016)
[Federal Register Volume 81, Number 202 (Wednesday, October 19, 2016)]
[Notices]
[Pages 72138-72141]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-25233]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79096; File No. SR-OCC-2016-802]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of No Objection to Advance Notice Filing Concerning The Options 
Clearing Corporation's Escrow Deposit Program

October 13, 2016.
    The Options Clearing Corporation (``OCC'') filed on August 15, 2016 
with the Securities and Exchange Commission (``Commission'') advance 
notice SR-OCC-2016-802 (``Advance Notice'') 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) \2\ under the Securities Exchange Act of 1934 
(``Exchange Act'') to implement changes to its escrow deposit program. 
The Advance Notice was published for comment in the Federal Register on 
September 20, 2016.\3\ The Commission did not receive any comments on 
the Advance Notice. This publication serves as notice of no objection 
to 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 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\ See Securities Exchange Act Release No. 78834 (September 14, 
2016), 81 FR 64536 (September 20, 2016) (File No. SR-OCC-2016-802). 
OCC also filed a proposed rule change with the Commission pursuant 
to Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder, 
seeking approval of changes to its Rules necessary to implement the 
Advance Notice. 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, 
respectively. This proposed rule change was published in the Federal 
Register on August 31, 2016. Securities Exchange Act Release No. 
78675 (August 25, 2016), 81 FR 60108 (August 31, 2016) (SR-OCC-2016-
009).
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I. Description of the Advance Notice

    OCC is the sole clearing agency for the U.S. listed options markets 
and a systemically important financial market utility. OCC seeks to 
manage risks that could cause a financial loss or settlement disruption 
and, therefore, threaten the stability of the U.S. financial system. 
One way OCC manages such risks is by collecting collateral to protect 
against potential losses stemming from the default of a clearing member 
or its customers. OCC obtains this collateral by collecting margin from 
its clearing members, or from deposits in lieu of margin of clearing 
members' customers through OCC's escrow deposit program. OCC states 
that the users of its escrow deposit program are customers of clearing 
members who, through the escrow deposit program, are permitted to 
collateralize eligible positions directly with OCC (instead of with the 
relevant clearing member who would, in turn, deposit margin at OCC). 
OCC states that when a customer of a clearing member makes a deposit in 
lieu of margin through OCC's escrow deposit program, the relevant 
positions are excluded from the clearing member's margin requirement at 
OCC. OCC believes that the escrow deposit program therefore provides 
users of OCC's services with a means to more efficiently use cash or 
securities they may have available.
    As described by OCC in the Advance Notice, the purpose of the 
proposed change is to improve the resiliency of OCC's escrow deposit 
program (``EDP''). First, OCC states that the changes would increase 
OCC's visibility into and control over collateral deposits made under 
the escrow deposit program. As described in the Advance Notice, 
currently, securities deposits in the EDP (``specific deposits'') are 
held at either the Depository Trust Company (``DTC'') or custodian 
banks, and cash deposits in the EDP (``escrow deposits'') are held at 
custodian banks. While OCC currently can verify the value of the 
securities deposited at DTC through DTC's systems, it lacks similar 
visibility into cash and securities held in custodian bank accounts, 
relying instead on the custodian banks to verify the value of such 
collateral. The proposed changes would require securities in the EDP to 
be held at DTC, providing OCC with increased visibility into the 
collateral, as OCC will be able to view, validate, and value the 
collateral in real time and perform the controls currently performed by 
custodian banks. As stated in the Advance Notice, a bank participating 
in the escrow deposit program (``Tri-Party Custodian Bank'') would also 
provide OCC with online view access to each customer's cash account 
designated for the escrow deposit program, allowing visibility into

[[Page 72139]]

transactional activity and account balances without having to rely upon 
a third party to value or warrant the existence of the collateral.
    Second, OCC states that the proposed changes provide more 
specificity concerning the manner in which OCC would take possession of 
collateral in OCC's escrow deposit program in the event of a clearing 
member or custodian bank default. As described in the Advance Notice, 
proposed Rules 610A(b), 610B(f), 610C(q), and 610C(r) would provide 
that in the event of a clearing member or custodian bank default, OCC 
would have the right to direct DTC to deliver the securities included 
in a member specific deposit, third-party specific deposit or escrow 
deposit to OCC's DTC participant account for the purpose of satisfying 
the obligations of the clearing member or reimbursing itself for losses 
incurred as a result of the failure. Similarly, pursuant to proposed 
Rules 610C(q) and 610C(r), OCC would have the right in the event of a 
Tri-Party Custodian Bank default to take possession of cash included 
within an escrow deposit for the same purposes. Further, Rule 
1106(b)(2) would be amended to provide that OCC may close out a short 
position of a suspended clearing member covered by a member specific, 
third-party specific or escrow deposit, subject to the ability of the 
suspended clearing member or its representative to transfer the short 
position to another clearing member under certain circumstances.
    Third, OCC states the proposed changes would clarify clearing 
members' rights to collateral in the EDP in the event of a customer 
default to the clearing member. According to the Advance Notice, 
Proposed Rules 610B(c) and 610C(f) would provide for the grant of a 
security interest by the customer to the clearing member with respect 
to any given third-party specific deposit and escrow deposit, as 
applicable, with the clearing member's right subordinate to OCC's 
interest. Proposed Rules 610C(d), 610C(o), 610C(p) and 610C(s), 
relating to escrow deposits, and proposed Rules 610B(d) and 610B(e), 
relating to third-party specific deposits, would provide that, in the 
event of a customer default to a clearing member, the clearing member 
would have the right to request a ``hold'' on a deposit, which would 
prevent the withdrawal of deposited securities or cash by a custodian 
bank or the release of a deposit that would otherwise occur in the 
ordinary course. OCC states that placing the ``hold'' instruction gives 
a clearing member the right to request that OCC direct delivery of the 
deposit to the clearing member through DTC's systems, in the case of 
securities, or an instruction to the Tri-Party Custodian Bank in the 
case of cash. OCC believes that providing clearing members with 
transparent instructions regarding how to place a hold instruction on 
and direct delivery of a deposit in the escrow deposit program would be 
a significant enhancement to the current escrow deposit program.
    Fourth, OCC states the changes would improve the readability of the 
rules governing OCC's escrow deposit program by consolidating all such 
rules into a single location in OCC's Rulebook. Upon implementation of 
the proposed change, all securities collateral in OCC's escrow deposit 
program would be held at DTC, and custodian banks would only be allowed 
to hold cash collateral.

Rule Consolidation and Terminology Changes

    OCC's current rules concerning its escrow deposit program are 
located in OCC Rules 503, 610, 613 and 1801. Additionally, OCC and 
custodian banks participating in OCC's escrow deposit program enter 
into an Escrow Deposit Agreement (``EDA''), which also contains 
substantive provisions governing the program. OCC proposes to 
consolidate all of the rules concerning the escrow deposit program, 
including the provisions of the EDA relevant to the revised escrow 
deposit program, into proposed Rules 610, 610A, 610B and 610C. OCC 
states that consolidating the many rules governing the escrow deposit 
program into a single location would significantly enhance the 
understandability and transparency of the rules concerning the escrow 
deposit program for current users of the program as well as any persons 
that may be interested in using the program in the future.
    OCC proposes to rename the types of escrow deposits available 
within the escrow deposit program, as well as rename the term 
``approved depository'' to ``approved custodian.'' Specific deposits, 
which are equity securities deposited by clearing members at DTC at the 
direction of their customers, would now be called ``member specific 
deposits''; third-party escrow deposits, which are equity securities 
deposited by custodian banks at DTC at the direction of their 
customers, would now be called ``third-party specific deposits''; and 
escrow program deposits, which are either cash deposits held at a 
custodian bank for the benefit of OCC, or Government securities 
deposited at DTC by custodian banks at the direction of their 
customers, would now be called ``escrow deposits''. The term ``approved 
depository'' would also be changed to ``approved custodian'' to 
eliminate any potential confusion with the term ``Depository,'' which 
is defined in the Rules to mean DTC.

New Rule Organization

    With respect to the rules governing the escrow deposit program, OCC 
states that proposed Rule 610 would set forth general terms and 
conditions common to all types of deposits permitted under the escrow 
deposit program. Specifically, proposed Rule 610: (1) Sets forth the 
different types of eligible positions for which a deposit in lieu of 
margin may be used, (2) sets forth operational aspects of the escrow 
deposit program such as the days and the times during which a deposit 
in lieu of margin may be made and where the different types of deposits 
in lieu of margin must be maintained (either DTC or a custodian bank), 
(3) provides the conditions under which OCC may take possession of a 
deposit in lieu of margin (from DTC or a custodian bank), and (4) 
describes OCC's security interest in deposits in lieu of margin.\4\ 
Proposed Rule 610 is supplemented by: (1) Proposed Rule 610A for member 
specific deposits, (2) proposed Rule 610B for third-party specific 
deposits, and (3) proposed Rule 610C for escrow deposits.
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    \4\ OCC would continue to maintain a perfected security interest 
in deposits in the escrow deposit program under the proposed Rules 
notwithstanding changes to the location of the rules that perfect 
such security interest. OCC's security interest in securities 
deposits in the escrow deposit program, which are held at DTC, is 
perfected by operation of DTC's rules. OCC's security interest in 
cash deposits in the escrow deposit program is perfected under 
proposed Rules 610C(i), 610C(j) and 610C(k), which replace Sections 
3.3, 3.4, 4.3, 4.4, 5.3, 5.4 and 21 of the EDA. Proposed Rule 610(g) 
also concerns OCC's security interest in deposits in escrow deposit 
program.
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Agreements Concerning the Escrow Deposit Program

    In addition to the above-described Rule changes, many provisions of 
the EDA would be moved in to the Rules. OCC proposes to eliminate the 
EDA and replace it with a streamlined agreement entitled the 
``Participating Escrow Bank Agreement.'' OCC states that the 
Participating Escrow Bank Agreement would provide that custodian banks 
are subject to all terms of the Rules governing the revised escrow 
deposit program, as they may be amended from time to time.\5\ OCC 
states that the

[[Page 72140]]

Participating Escrow Bank Agreement would contain eligibility 
requirements for custodian banks, including representations regarding 
the custodian bank's Tier 1 Capital, and provide OCC with express 
representations concerning the bank's authority to enter into the 
Participating Escrow Bank Agreement.
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    \5\ Under the Participating Escrow Bank Agreement, however, OCC 
will agree to provide custodian banks with advance notice of 
material amendments to the Rules relating to deposits in lieu of 
margin and custodian banks will have the opportunity to withdraw 
from the escrow deposit program if they object to the amendments. As 
a general matter, the Participating Escrow Bank Agreement will not 
be negotiable, although OCC may determine to vary certain non-
material terms in limited circumstances.
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    OCC is also proposing, under Proposed Rule 610C(b), to require 
customers wishing to deposit cash collateral and custodian banks 
holding escrow deposits comprised of cash to enter into a tri-party 
agreement involving OCC, the customer and the applicable custodian 
bank. While cash collateral pledged in the escrow deposit program will 
continue to be facilitated through existing interfaces, OCC states that 
pledges would be required to be made in the customer's account at the 
Tri-Party Custodian Bank. OCC states that the Tri-Party Agreement would 
govern the customer's use of cash in the program, confirm the grant of 
a security interest in the customer's account to OCC and the relevant 
clearing member (as set forth in proposed Rule 610C(f)), and cause 
customers of clearing members to be subject to all terms of the Rules 
governing the revised escrow deposit program. Each custodian bank 
entering into the Tri-Party Agreement would also agree to follow the 
directions of OCC with respect to cash escrow deposits without further 
consent by the customer.

II. Discussion and Commission Findings

    Although the Payment, Clearing and Settlement Supervision Act does 
not specify a standard of review for an advance notice, the Commission 
believes that the stated purpose of the Payment, Clearing and 
Settlement Supervision Act is instructive.\6\ The stated purpose of the 
Payment, Clearing and Settlement Supervision Act 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 financial market utilities and strengthening the 
liquidity of systemically important financial market utilities.\7\
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    \6\ See 12 U.S.C. 5461(b).
    \7\ Id.
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    Section 805(a)(2) of the Payment, Clearing and Settlement 
Supervision Act \8\ 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 \9\ states that the objectives 
and principles for the risk management standards prescribed under 
Section 805(a) shall be to:
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    \8\ 12 U.S.C. 5464(a)(2).
    \9\ 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 
(``Clearing Agency Standards'') and the Exchange Act.\10\ The Clearing 
Agency Standards became effective on January 2, 2013, and 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. As such, 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.\11\
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    \10\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No. 
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11).
    \11\ 12 U.S.C. 5464(b).
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    The Commission believes the proposed change is consistent with the 
objectives and principles described in Section 805(b) of the Payment, 
Clearing and Settlement Supervision Act,\12\ and the Clearing Agency 
Standards, in particular, Rule 17Ad-22(d)(1),\13\ Rule 17Ad-
22(d)(3),\14\ and Rule 17Ad-22(d)(11) \15\ under the Exchange Act, as 
described in detail below.
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    \12\ Id.
    \13\ 17 CFR 240.17Ad-22(d)(1).
    \14\ 17 CFR 240.17Ad-22(d)(3).
    \15\ 17 CFR 240.17Ad-22(d)(11).
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A. Consistency With Section 805(b)(1) of the Act

    The objectives and principles of Section 805(b) of the Payment, 
Clearing and Settlement Supervision Act are to promote robust risk 
management, promote safety and soundness, reduce systemic risks, and 
support the stability of the broader financial system.\16\ The proposed 
change is consistent with the objectives and principles described in 
Section 805(b)(1) of the Act, including consistency with promoting 
robust risk management.\17\ OCC collects margin and deposits in lieu of 
margin to protect OCC and market participants from risks resulting from 
the default of a clearing member. The proposed change will enhance 
OCC's ability to validate and value EDP deposits in real time and 
enhance its ability to expeditiously take possession of such deposits 
in the event of a default. These enhancements will enable OCC to better 
ensure that it monitors and maintains adequate financial resources in 
the event of a clearing member default and thereby promote robust risk 
management. As such, the Commission believes that the proposed change 
is consistent with the promotion of robust risk management.
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    \16\ 12 U.S.C. 5464(b).
    \17\ 12 U.S.C. 5464(b)(1).
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B. Consistency With Exchange Act Rule 17Ad-22(d)

    Rule 17Ad-22(d)(1) under the Exchange Act requires OCC to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide a well-founded, transparent, 
and enforceable legal framework for each aspect of its activities in 
all relevant jurisdictions.\18\ Through the proposed change, OCC will 
provide clarity to clearing members, their customers, and potential 
users of OCC's escrow deposit program regarding the operations of the 
escrow deposit program and the manner in which OCC would risk manage a 
clearing member or customer default using the escrow deposit program. 
For example, the proposed change would better codify OCC's and clearing 
members' rights to EDP collateral in the event of a clearing member or 
customer default and provide greater transparency regarding the 
operational steps involved in taking possession of such collateral. 
Moreover, consolidating the rules governing the EDP and terms 
previously located in the EDA into a single location will enhance the 
transparency of the applicable EDP rules. As such, the Commission 
believes the proposed change is consistent with Exchange Act Rule 17Ad-
22(d)(1).\19\
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    \18\ 17 CFR 240.17Ad-22(d)(1).
    \19\ Id.
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    In addition, the Commission believes that the proposed change is 
consistent with Exchange Act Rule 17Ad-22(d)(3).\20\ Rule 17Ad-22(d)(3) 
requires OCC to, among other things, establish,

[[Page 72141]]

implement, maintain and enforce written policies and procedures 
reasonably designed to hold assets in a manner that minimizes risk of 
loss or delay or in its access to them.\21\ Under the proposed change, 
all non-cash collateral in the EDP would be held at DTC, which will 
allow OCC to validate and value collateral in real time and quickly 
obtain possession of deposited securities in an event of default 
without involving custodian banks by issuing a transfer instruction 
through DTC's systems. With respect to cash collateral, the proposed 
change would codify OCC's right to take possession of cash within an 
escrow account upon a clearing member or custodian bank default and 
provide OCC with online view access to each customer's cash account at 
the custodian bank. Together, these changes would allow OCC monitor the 
adequacy of collateral in the EDP and be able to more quickly take 
possession of collateral in the EDP in the event of a clearing member 
default, which would, thereby, reduce potential losses to OCC, other 
clearing members and market participants.
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    \20\ 17 CFR 240.17Ad-22(d)(3).
    \21\ Id.
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    Finally, the Commission believes that the proposed change is 
consistent with Exchange Act Rule 17Ad-22(d)(11), which requires OCC 
to, among other things, establish, implement, maintain and enforce 
written policies and procedures reasonably designed to make key aspects 
of their default procedures publicly available.\22\ The Commission 
believes that the proposed change is consistent with Rule 17Ad-
22(d)(11) because it would incorporate the substantive terms of the 
EDP, and specifically the rules concerning default management, into 
OCC's Rules, which are publicly available on OCC's Web site, rather 
than in private agreements.
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    \22\ 17 CFR 240.17Ad-22(d)(11).
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III. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Payment, Clearing and Settlement Supervision Act,\23\ that the 
Commission does not object to Advance Notice (SR-OCC-2016-802) and that 
OCC is authorized to implement the proposed change.
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    \23\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-25233 Filed 10-18-16; 8:45 am]
 BILLING CODE 8011-01-P
72138 Federal Register / Vol. 81, No. 202 / Wednesday, October 19, 2016 / Notices

investors, or otherwise in furtherance of For the Commission, by the Division of could cause a financial loss or
the purposes of the Act. Trading and Markets, pursuant to delegated settlement disruption and, therefore,
authority.19 threaten the stability of the U.S.
IV. Solicitation of Comments Robert W. Errett, financial system. One way OCC
Interested persons are invited to Deputy Secretary. manages such risks is by collecting
submit written data, views, and [FR Doc. 2016–25237 Filed 10–18–16; 8:45 am] collateral to protect against potential
arguments concerning the foregoing, BILLING CODE 8011–01–P losses stemming from the default of a
including whether the proposed rule clearing member or its customers. OCC
change is consistent with the Act. obtains this collateral by collecting
Comments may be submitted by any of SECURITIES AND EXCHANGE margin from its clearing members, or
the following methods: COMMISSION from deposits in lieu of margin of
[Release No. 34–79096; File No. SR–OCC– clearing members’ customers through
Electronic Comments: 2016–802] OCC’s escrow deposit program. OCC
• Use the Commission’s Internet states that the users of its escrow
Self-Regulatory Organizations; The deposit program are customers of
comment form (http://www.sec.gov/
Options Clearing Corporation; Notice clearing members who, through the
rules/sro.shtml); or
of No Objection to Advance Notice escrow deposit program, are permitted
• Send an email to rule-comments@ Filing Concerning The Options to collateralize eligible positions
sec.gov. Please include File Number SR– Clearing Corporation’s Escrow Deposit directly with OCC (instead of with the
BatsEDGX–2016–55 on the subject line. Program relevant clearing member who would, in
Paper Comments October 13, 2016.
turn, deposit margin at OCC). OCC
states that when a customer of a clearing
• Send paper comments in triplicate The Options Clearing Corporation
(‘‘OCC’’) filed on August 15, 2016 with member makes a deposit in lieu of
to Secretary, Securities and Exchange margin through OCC’s escrow deposit
Commission, 100 F Street NE., the Securities and Exchange
Commission (‘‘Commission’’) advance program, the relevant positions are
Washington, DC 20549–1090. excluded from the clearing member’s
notice SR–OCC–2016–802 (‘‘Advance
All submissions should refer to File Notice’’) pursuant to Section 806(e)(1) of margin requirement at OCC. OCC
Number SR–BatsEDGX–2016–55. This the Payment, Clearing, and Settlement believes that the escrow deposit
file number should be included on the Supervision Act of 2010 (‘‘Payment, program therefore provides users of
subject line if email is used. To help the Clearing and Settlement Supervision OCC’s services with a means to more
Commission process and review your Act’’) 1 and Rule 19b–4(n)(1)(i) 2 under efficiently use cash or securities they
comments more efficiently, please use the Securities Exchange Act of 1934 may have available.
only one method. The Commission will (‘‘Exchange Act’’) to implement changes As described by OCC in the Advance
post all comments on the Commission’s to its escrow deposit program. The Notice, the purpose of the proposed
Internet Web site (http://www.sec.gov/ Advance Notice was published for change is to improve the resiliency of
rules/sro.shtml). Copies of the comment in the Federal Register on OCC’s escrow deposit program (‘‘EDP’’).
submission, all subsequent September 20, 2016.3 The Commission First, OCC states that the changes would
amendments, all written statements did not receive any comments on the increase OCC’s visibility into and
with respect to the proposed rule Advance Notice. This publication serves control over collateral deposits made
change that are filed with the as notice of no objection to the Advance under the escrow deposit program. As
Commission, and all written Notice. described in the Advance Notice,
communications relating to the currently, securities deposits in the EDP
proposed rule change between the I. Description of the Advance Notice
(‘‘specific deposits’’) are held at either
Commission and any person, other than OCC is the sole clearing agency for the the Depository Trust Company (‘‘DTC’’)
those that may be withheld from the U.S. listed options markets and a or custodian banks, and cash deposits in
public in accordance with the systemically important financial market the EDP (‘‘escrow deposits’’) are held at
provisions of 5 U.S.C. 552, will be utility. OCC seeks to manage risks that custodian banks. While OCC currently
available for Web site viewing and can verify the value of the securities
printing in the Commission’s Public 1 12 U.S.C. 5465(e)(1). The Financial Stability
deposited at DTC through DTC’s
Reference Room, 100 F Street NE., Oversight Council designated OCC a systemically
important financial market utility on July 18, 2012.
systems, it lacks similar visibility into
Washington, DC 20549, on official See Financial Stability Oversight Council 2012 cash and securities held in custodian
business days between the hours of Annual Report, Appendix A, http:// bank accounts, relying instead on the
10:00 a.m. and 3:00 p.m. Copies of the www.treasury.gov/initiatives/fsoc/Documents/ custodian banks to verify the value of
2012%20Annual%20Report.pdf. Therefore, OCC is
filing also will be available for required to comply with the Payment, Clearing and such collateral. The proposed changes
inspection and copying at the principal Settlement Supervision Act and file advance would require securities in the EDP to
office of the Exchange. All comments notices with the Commission. See 12 U.S.C. be held at DTC, providing OCC with
received will be posted without change; 5465(e). increased visibility into the collateral, as
2 17 CFR 240.19b–4(n)(1)(i).
the Commission does not edit personal 3 See Securities Exchange Act Release No. 78834
OCC will be able to view, validate, and
identifying information from (September 14, 2016), 81 FR 64536 (September 20, value the collateral in real time and
submissions. You should submit only 2016) (File No. SR–OCC–2016–802). OCC also filed perform the controls currently
information that you wish to make a proposed rule change with the Commission performed by custodian banks. As stated
sradovich on DSK3GMQ082PROD with NOTICES

available publicly. All submissions pursuant to Section 19(b)(1) of the Exchange Act
and Rule 19b–4 thereunder, seeking approval of
in the Advance Notice, a bank
should refer to File Number SR– changes to its Rules necessary to implement the participating in the escrow deposit
BatsEDGX–2016–55, and should be Advance Notice. 15 U.S.C. 78s(b)(1) and 17 CFR program (‘‘Tri-Party Custodian Bank’’)
submitted on or before November 9, 240.19b–4, respectively. This proposed rule change would also provide OCC with online
2016. was published in the Federal Register on August
31, 2016. Securities Exchange Act Release No.
view access to each customer’s cash
78675 (August 25, 2016), 81 FR 60108 (August 31, account designated for the escrow
19 17 CFR 200.30–3(a)(12). 2016) (SR–OCC–2016–009). deposit program, allowing visibility into

VerDate Sep<11>2014 17:39 Oct 18, 2016 Jkt 241001 PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 E:\FR\FM\19OCN1.SGM 19OCN1
72140 Federal Register / Vol. 81, No. 202 / Wednesday, October 19, 2016 / Notices

Participating Escrow Bank Agreement Act 8 authorizes the Commission to of the broader financial system.16 The
would contain eligibility requirements prescribe risk management standards for proposed change is consistent with the
for custodian banks, including the payment, clearing, and settlement objectives and principles described in
representations regarding the custodian activities of designated clearing entities Section 805(b)(1) of the Act, including
bank’s Tier 1 Capital, and provide OCC and financial institutions engaged in consistency with promoting robust risk
with express representations concerning designated activities for which it is the management.17 OCC collects margin and
the bank’s authority to enter into the supervisory agency or the appropriate deposits in lieu of margin to protect
Participating Escrow Bank Agreement. financial regulator. Section 805(b) of the OCC and market participants from risks
OCC is also proposing, under Payment, Clearing and Settlement resulting from the default of a clearing
Proposed Rule 610C(b), to require Supervision Act 9 states that the member. The proposed change will
customers wishing to deposit cash objectives and principles for the risk enhance OCC’s ability to validate and
collateral and custodian banks holding management standards prescribed under value EDP deposits in real time and
escrow deposits comprised of cash to Section 805(a) shall be to: enhance its ability to expeditiously take
enter into a tri-party agreement • promote robust risk management; possession of such deposits in the event
involving OCC, the customer and the • promote safety and soundness; of a default. These enhancements will
applicable custodian bank. While cash • reduce systemic risks; and enable OCC to better ensure that it
collateral pledged in the escrow deposit • support the stability of the broader monitors and maintains adequate
program will continue to be facilitated financial system. financial resources in the event of a
through existing interfaces, OCC states The Commission has adopted risk clearing member default and thereby
that pledges would be required to be management standards under Section promote robust risk management. As
made in the customer’s account at the 805(a)(2) of the Payment, Clearing and such, the Commission believes that the
Tri-Party Custodian Bank. OCC states Settlement Supervision Act (‘‘Clearing proposed change is consistent with the
that the Tri-Party Agreement would Agency Standards’’) and the Exchange promotion of robust risk management.
govern the customer’s use of cash in the Act.10 The Clearing Agency Standards B. Consistency With Exchange Act Rule
program, confirm the grant of a security became effective on January 2, 2013, 17Ad–22(d)
interest in the customer’s account to and require registered clearing agencies
Rule 17Ad–22(d)(1) under the
OCC and the relevant clearing member to establish, implement, maintain, and
Exchange Act requires OCC to establish,
(as set forth in proposed Rule 610C(f)), enforce written policies and procedures
implement, maintain and enforce
and cause customers of clearing that are reasonably designed to meet
written policies and procedures
members to be subject to all terms of the certain minimum requirements for their
reasonably designed to provide a well-
Rules governing the revised escrow operations and risk management
founded, transparent, and enforceable
deposit program. Each custodian bank practices on an ongoing basis. As such,
legal framework for each aspect of its
entering into the Tri-Party Agreement it is appropriate for the Commission to
activities in all relevant jurisdictions.18
would also agree to follow the review advance notices against these
Through the proposed change, OCC will
directions of OCC with respect to cash Clearing Agency Standards, and the
provide clarity to clearing members,
escrow deposits without further consent objectives and principles of these risk
their customers, and potential users of
by the customer. management standards as described in
OCC’s escrow deposit program
Section 805(b) of the Payment, Clearing
II. Discussion and Commission regarding the operations of the escrow
and Settlement Supervision Act.11
Findings deposit program and the manner in
The Commission believes the
which OCC would risk manage a
Although the Payment, Clearing and proposed change is consistent with the
clearing member or customer default
Settlement Supervision Act does not objectives and principles described in
using the escrow deposit program. For
specify a standard of review for an Section 805(b) of the Payment, Clearing
example, the proposed change would
advance notice, the Commission and Settlement Supervision Act,12 and
better codify OCC’s and clearing
believes that the stated purpose of the the Clearing Agency Standards, in
members’ rights to EDP collateral in the
Payment, Clearing and Settlement particular, Rule 17Ad–22(d)(1),13 Rule
event of a clearing member or customer
Supervision Act is instructive.6 The 17Ad–22(d)(3),14 and Rule 17Ad–
default and provide greater transparency
stated purpose of the Payment, Clearing 22(d)(11) 15 under the Exchange Act, as
regarding the operational steps involved
and Settlement Supervision Act is to described in detail below.
in taking possession of such collateral.
mitigate systemic risk in the financial Moreover, consolidating the rules
A. Consistency With Section 805(b)(1) of
system and promote financial stability governing the EDP and terms previously
the Act
by, among other things, promoting located in the EDA into a single location
uniform risk management standards for The objectives and principles of
will enhance the transparency of the
systemically important financial market Section 805(b) of the Payment, Clearing
applicable EDP rules. As such, the
utilities and strengthening the liquidity and Settlement Supervision Act are to
Commission believes the proposed
of systemically important financial promote robust risk management,
change is consistent with Exchange Act
market utilities.7 promote safety and soundness, reduce
Rule 17Ad–22(d)(1).19
Section 805(a)(2) of the Payment, systemic risks, and support the stability
In addition, the Commission believes
Clearing and Settlement Supervision that the proposed change is consistent
8 12 U.S.C. 5464(a)(2).
with Exchange Act Rule 17Ad–
sradovich on DSK3GMQ082PROD with NOTICES

9 12 U.S.C. 5464(b).
of margin and custodian banks will have the 10 17 CFR 240.17Ad–22. See Securities Exchange
22(d)(3).20 Rule 17Ad–22(d)(3) requires
opportunity to withdraw from the escrow deposit OCC to, among other things, establish,
program if they object to the amendments. As a Act Release No. 68080 (October 22, 2012), 77 FR
general matter, the Participating Escrow Bank 66220 (November 2, 2012) (S7–08–11).
11 12 U.S.C. 5464(b). 16 12 U.S.C. 5464(b).
Agreement will not be negotiable, although OCC
12 Id. 17 12 U.S.C. 5464(b)(1).
may determine to vary certain non-material terms
in limited circumstances. 13 17 CFR 240.17Ad–22(d)(1). 18 17 CFR 240.17Ad–22(d)(1).
6 See 12 U.S.C. 5461(b). 14 17 CFR 240.17Ad–22(d)(3). 19 Id.
7 Id. 15 17 CFR 240.17Ad–22(d)(11). 20 17 CFR 240.17Ad–22(d)(3).

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Federal Register / Vol. 81, No. 202 / Wednesday, October 19, 2016 / Notices 72141

implement, maintain and enforce SECURITIES AND EXCHANGE disapproved. The 45th day after
written policies and procedures COMMISSION publication of the notice for this
reasonably designed to hold assets in a proposed rule change is October 14,
[Release No. 34–79092; File No. SR–
manner that minimizes risk of loss or BATSBZX–2016–48]
2016. The Commission is extending this
delay or in its access to them.21 Under 45-day time period.
the proposed change, all non-cash Self-Regulatory Organizations; Bats The Commission finds it appropriate
collateral in the EDP would be held at BZX Exchange, Inc.; Notice of to designate a longer period within
DTC, which will allow OCC to validate Designation of a Longer Period for which to take action on the proposed
and value collateral in real time and Commission Action on Proposed Rule rule change so that it has sufficient time
quickly obtain possession of deposited Change, as Modified by Amendment to consider this proposed rule change,
securities in an event of default without No. 1 Thereto, to List and Trade Shares as modified by Amendment No. 1.
involving custodian banks by issuing a of the iShares iBonds Dec 2023 Term Accordingly, the Commission, pursuant
Muni Bond ETF and iShares iBonds to Section 19(b)(2) of the Act,6
transfer instruction through DTC’s
Dec 2024 Term Muni Bond ETF of the designates November 28, 2016, as the
systems. With respect to cash collateral,
iShares U.S. ETF Trust date by which the Commission shall
the proposed change would codify either approve or disapprove, or
OCC’s right to take possession of cash October 13, 2016. institute proceedings to determine
within an escrow account upon a On August 9, 2016, Bats BZX whether to disapprove, the proposed
clearing member or custodian bank Exchange, Inc. (‘‘Exchange’’) filed with rule change (File No. SR–BATSBZX–
default and provide OCC with online the Securities and Exchange 2016–48) as modified by Amendment
view access to each customer’s cash Commission (‘‘Commission’’), pursuant No. 1.
account at the custodian bank. Together, to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule For the Commission, by the Division of
these changes would allow OCC Trading and Markets, pursuant to delegated
monitor the adequacy of collateral in the 19b–4 thereunder,2 a proposed rule
authority.7
EDP and be able to more quickly take change to list and trade Shares of the
Robert W. Errett,
possession of collateral in the EDP in iShares iBonds Dec 2023 Term Muni
Bond ETF and iShares iBonds Dec 2024 Deputy Secretary.
the event of a clearing member default, [FR Doc. 2016–25235 Filed 10–18–16; 8:45 am]
which would, thereby, reduce potential Term Muni Bond ETF (collectively,
‘‘Funds’’) pursuant to Exchange Rule BILLING CODE 8011–01–P
losses to OCC, other clearing members
14.11(c)(4). The proposed rule change
and market participants. was published for comment in the
Finally, the Commission believes that Federal Register on August 30, 2016.3 DEPARTMENT OF STATE
the proposed change is consistent with On October 6, 2016, the Exchange filed
Exchange Act Rule 17Ad–22(d)(11), Amendment No. 1 to the proposed rule [Public Notice: 9764]
which requires OCC to, among other change, which amended and replaced in
things, establish, implement, maintain its entirety the proposal as originally Overseas Security Advisory Council
and enforce written policies and submitted.4 The Commission has not (OSAC) Renewal
procedures reasonably designed to make received any comments on the proposal.
Section 19(b)(2) of the Act 5 provides The Department of State has renewed
key aspects of their default procedures
that within 45 days of the publication of the Charter of the Overseas Security
publicly available.22 The Commission Advisory Council. This federal advisory
believes that the proposed change is notice of the filing of a proposed rule
change, or within such longer period up committee will continue to interact on
consistent with Rule 17Ad–22(d)(11) overseas security matters of mutual
because it would incorporate the to 90 days as the Commission may
designate if it finds such longer period interest between the U.S. Government
substantive terms of the EDP, and and the American private sector. The
to be appropriate and publishes its
specifically the rules concerning default Council’s initiatives and security
reasons for so finding, or as to which the
management, into OCC’s Rules, which self-regulatory organization consents, publications provide a unique
are publicly available on OCC’s Web the Commission shall either approve the contribution to protecting American
site, rather than in private agreements. proposed rule change, disapprove the private sector interests abroad. The
proposed rule change, or institute Under Secretary for Management
III. Conclusion
proceedings to determine whether the determined that renewal of the Charter
It is therefore noticed, pursuant to proposed rule change should be is necessary and in the public interest.
Section 806(e)(1)(I) of the Payment, The Council consists of
Clearing and Settlement Supervision 1 15 U.S.C. 78s(b)(1). representatives from three (3) U.S.
Act,23 that the Commission does not 2 17 CFR 240.19b–4. Government agencies and thirty-one
object to Advance Notice (SR–OCC–
3 See Securities Exchange Act Release No. 78666 (31) American private sector companies
(Aug. 24, 2016), 81 FR 59700. and organizations. The Council follows
2016–802) and that OCC is authorized 4 In Amendment No. 1, the Exchange: (1) Clarified

to implement the proposed change. the procedures prescribed by the
the amounts of certain municipal securities that the
Funds would hold; (2) represented that at least 90% Federal Advisory Committee Act
By the Commission. of the Funds’ net assets that are invested in listed (FACA) (Pub. L. 92–463). Meetings will
Robert W. Errett, derivatives would be invested in instruments that be open to the public unless a
trade in markets that are members or affiliates of determination is made in accordance
sradovich on DSK3GMQ082PROD with NOTICES

Deputy Secretary. members of the Intermarket Surveillance Group or
[FR Doc. 2016–25233 Filed 10–18–16; 8:45 am] are parties to a comprehensive surveillance sharing with Section 10(d) of the FACA and 5
BILLING CODE 8011–01–P
agreement with the Exchange; (3) provided greater U.S.C. 552b(c)(4), that a meeting or a
detail regarding the types of short-term instruments portion of the meeting should be closed
in which the Funds may invest; and (4) to the public. Notice of each meeting
supplemented the information provided regarding
21 Id.
the availability of price information for the Funds’
22 17 CFR 240.17Ad–22(d)(11). 6 Id.
permitted investments.
23 12 U.S.C. 5465(e)(1)(I). 5 15 U.S.C. 78s(b)(2). 7 17 CFR 200.30–3(a)(31).

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Document Created: 2016-10-19 02:11:52
Document Modified: 2016-10-19 02:11:52
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 72138