82 FR 17311 - Options Clearing Corporation Self-Regulatory Organizations; the Notice of Filing and Immediate Effectiveness of Proposed Rule Change Concerning the Requirement for Clearing Members To Participate in Default Management Testing

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 67 (April 10, 2017)

[Federal Register Volume 82, Number 67 (Monday, April 10, 2017)]
[Notices]
[Pages 17311-17314]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-07047]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80372; File No. SR-OCC-2017-003]


Options Clearing Corporation Self-Regulatory Organizations; the 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Concerning the Requirement for Clearing Members To Participate in 
Default Management Testing

April 4, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 29, 2017, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below; Items I 
and II have been prepared by OCC. OCC filed the proposed rule change 
pursuant to Section 19(b)(3)(A)(iii) \3\ of the Act and Rule 19b-
4(f)(6) \4\ thereunder so that the proposal was effective upon filing 
with the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    This proposed rule change by OCC codifies the requirement for 
Clearing Members to participate in default management testing.

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

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. OCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements. All terms with initial capitalization that are not 
otherwise defined herein have the same meaning as set forth in the OCC 
By-Laws and Rules.\5\
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    \5\ OCC's By-Laws and Rules can be found on OCC's public Web 
site: http://optionsclearing.com/about/publications/bylaws.jsp.

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[[Page 17312]]

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

1. Purpose
Background
    On September 28, 2016 the Commission adopted amendments to Rule 
17Ad-22 \6\ and added new Rule 17Ad-22(e)(13) \7\ pursuant to Section 
17A of the Securities Exchange Act of 1934 \8\ and the Payment, 
Clearing, and Settlement Supervision Act of 2010 (``Payment, Clearing 
and Settlement Supervision Act'') \9\ to require that a ``covered 
clearing agency,'' as defined by Rule 17Ad-22(a)(5),\10\ has the 
authority and operational capacity, among other things, to require that 
participants, and other stakeholders when practicable, participate in 
the review and testing of the covered clearing agency's default 
procedures (collectively, the new and amended rules are herein referred 
to as ``CCA'' rules). Specifically, Rule 17Ad-22(e)(13) requires that a 
covered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to:
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    \6\ 17 CFR 240.17Ad-22.
    \7\ 17 CFR 240.17Ad-22(e)(13).
    \8\ 15 U.S.C. 78q-1.
    \9\ 12 U.S.C. 5461 et. seq.
    \10\ 17 CFR 240.17Ad-22(a)(5).

    Ensure the covered clearing agency has the authority and 
operational capacity to take timely action to contain losses and 
liquidity demands and continue to meet its obligations by, at a 
minimum, requiring the covered clearing agency's participants and, 
when practicable, other stakeholders to participate in the testing 
and review of its default procedures, including any close-out 
procedure, at least annually and following material changes 
thereto.\11\
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    \11\ 17 CFR 240.17Ad-22(e)(13).

    OCC meets the definition of a covered clearing agency and is 
therefore subject to the requirements of the CCA rules, including Rule 
17Ad-22(e)(13).\12\
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    \12\ Id.
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Current Practice
    As a matter of current practice, OCC already involves certain of 
its Clearing Members in testing of OCC's default management procedures. 
Article V of OCC's By-Laws sets forth OCC's initial membership 
requirements. Pursuant to Interpretation and Policy .02(b) of Article 
V, Section 1 of OCC's By-Laws, an applicant must demonstrate that it is 
operationally capable of, among other things, participating in 
applicable default management activities as required by OCC and in 
accordance with applicable laws and regulations.\13\
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    \13\ See OCC By-Laws Article V, Section 1, Interpretation and 
Policy .02(b).
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    Once an applicant becomes a Clearing Member, Chapter II of OCC's 
Rules also sets forth operational requirements that address default 
management procedure testing. In particular, OCC Rule 214(d) requires 
Clearing Members to maintain certain operational capabilities as a 
continuing obligation of participating in OCC as a Clearing Member. 
This includes ``the ability to participate in default management 
activities, including auctions, as may be required by the Corporation 
and in accordance with applicable laws and regulations.'' \14\
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    \14\ See OCC Rule 214(d).
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    As contemplated by Interpretation and Policy .02(b) of Article V, 
Section 1 and Rule 214(d), OCC already conducts periodic default 
management testing, which includes the participation of certain 
Clearing Members.
Proposed Rules 218(c) and (d)
    To comply with certain requirements in Rule 17Ad-22(e)(13) that the 
Commission recently adopted as part of the CCA rules, OCC is proposing 
to implement Rules 218(c) and (d) to establish a requirement that 
Clearing Members participate periodically in testing of OCC's default 
procedures, including any close-out procedures. Proposed Rules 218(c) 
and (d) would make clear, consistent with the CCA rules, OCC's right to 
designate Clearing Members that are required to participate in default 
procedure testing and require designated Clearing Members to comply 
with the default procedure testing within specified timeframes.
    OCC maintains a Default Management Policy (``Policy'') that also 
addresses its default procedure testing requirements. Specifically, the 
Policy notes, among other things, that OCC's default management testing 
will occur on at least an annual basis, or more frequently if a 
material change is made to OCC's default management procedures or as 
may be deemed necessary by OCC's internal ``Default Management Working 
Group.'' \15\ In addition, the Policy provides that certain Clearing 
Members would be required to participate in OCC's default management 
testing, consistent with proposed Rules 218(c) and (d).
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    \15\ The ``Default Management Working Group'' is a staff-level 
working group chaired by the Vice President of Default Management 
and composed of staff from other OCC departments involved in default 
management testing.
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    Proposed Rules 218(c) and (d) would establish flexible and 
transparent key factors that OCC would use to determine which Clearing 
Members are required to participate in default management testing. 
Proposed Rules 218(c) and (d) would require OCC to use the key factors 
to select Clearing Members that, taken as a whole, OCC determines are 
the minimum necessary for the maintenance of fair and orderly markets, 
the promotion of robust risk management, the support of stability of 
the broader financial system and the protection investors and the 
public interest. OCC's key factors in determining which Clearing 
Members will be selected for testing in any given testing event would 
include but not be limited to: (i) Suitability of business activities 
and anticipated impact on resources; \16\ (ii) historical open interest 
and volume in asset classes, where appropriate; \17\ and (iii) 
participation in previous tests. In adopting the CCA rules, the 
Commission provided guidance that clarifies that ``[a] covered clearing 
agency may designate in its policies and procedures that certain 
participants, or certain categories of participants, be designated for 
participation in certain tests.'' \18\ OCC's key factors to determine 
which Clearing Members are selected for participation in a given test 
of a default procedure are designed to provide flexibility to OCC while 
also ensuring that the appropriate Clearing Members participate in 
tests relevant to their business activities as relevant to OCC. Any 
Clearing Members designated to participate in a test of OCC's default 
procedures would be notified in advance and provided details concerning 
the nature of such testing as the particular test plans are determined.
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    \16\ OCC's Clearing Members vary in their size, capacity, and 
participation in OCC's services from large, active members to 
smaller members that may not participate in certain services or may 
have less resources, personnel, or capacity to engage in default 
procedure testing at a given time. Consequently, OCC needs to 
preserve reasonable flexibility in considering the suitability of 
business activities and anticipated impact on resources of a 
Clearing Member considered for participation in a particular default 
management testing exercise. OCC notes, however, that this in no way 
abrogates a Clearing Member's obligations to maintain the minimal 
operational capabilities, including the ability to participate in 
default management activities, as required by OCC's rules. See e.g., 
OCC Rule 214(d).
    \17\ See, e.g., OCC Rule 1104.02(d), noting that in a default 
scenario OCC will pre-qualify certain potential bidders in an 
auction based on, among other things, demonstrated activity in the 
products being auctioned and qualification to clear transactions in 
the asset class in which the Clearing Member proposes to submit bids 
before inviting a bidder to participate in the auction.
    \18\ Securities Exchange Act Release No. 78961 (September 28, 
2016), 81 FR 70786, 70830 (October 13, 2016).
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    As stated above, OCC already conducts periodic default management

[[Page 17313]]

testing and includes certain Clearing Members in such testing under 
Rule 214(d). Accordingly, OCC believes the proposed rule would have 
comparatively little impact on its Clearing Members relative to OCC's 
existing practice. As previously noted, the proposed rule is intended 
to establish clear authority in accordance with Rule 17Ad-22(e)(13) 
\19\ for OCC to require Clearing Member participation in default 
procedure testing.
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    \19\ 17 CFR 240.17Ad-22(e)(13).
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2. Statutory Basis
    OCC believes that the proposed rule change is consistent with 
Section 17A(b)(3)(F) of the Act \20\ because the proposed change would 
foster cooperation and coordination with persons engaged in the 
clearance and settlement of securities transactions by expressly 
establishing in OCC's Rules that Clearing Members must participate in 
default procedure testing, which, in turn, would help to ensure that if 
OCC's default procedures are activated, they would function as 
intended. OCC believes that the proposed rule change is also consistent 
with Rule 17Ad-22(e)(13) \21\ because it would require Clearing Members 
to participate in the testing of OCC's default procedures, including 
any close-out procedures, which testing would occur at least annually 
and following any material changes to OCC's default management 
procedures.
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    \20\ 15 U.S.C. 78q-1(b)(3)(F).
    \21\ 17 CFR 240.17Ad-22(e)(13).
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    OCC also believes that Clearing Members will benefit by having 
proposed Rules 218(c) and (d) clearly state their obligation to 
participate in default procedure testing if designated, as required 
under the CCA rules. Moreover, OCC believes that this legal framework 
would promote consistency with Rule 17Ad-22(e)(1) \22\ by ensuring that 
OCC has a well-founded, clear, transparent and enforceable legal basis 
regarding default management procedure testing.
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    \22\ 17 CFR 240.17Ad-22(e)(1).
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    The proposed rule change is not inconsistent with the existing 
rules of OCC, including any other rules proposed to be amended.

(B) Clearing Agency's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.\23\ Proposed Rules 
218(c) and (d) would expressly establish OCC's authority to require 
Clearing Members to participate in particular default management 
procedure testing exercises. However, OCC does not believe that such a 
requirement--which is minimally necessary for compliance with Rule 
17Ad-22(e)(13) \24\--imposes any burden on competition among Clearing 
Members, let alone any burden greater than necessary or appropriate in 
furtherance of the purposes of the Act. To begin, proposed Rules 218(c) 
and (d) would not impose disparate operational requirements on Clearing 
Members because all Clearing Members are required to have sufficient 
minimum capabilities to participate in OCC's default management 
procedure testing process. Further, the process for selecting Clearing 
Member participants would be designed to ensure that Clearing Members 
would participate in tests that are relevant to their business 
activities, consistent with OCC's current practice. Finally, OCC 
believes that the limited, periodic use of Clearing Member resources in 
default management testing exercises would not affect the ability of a 
selected Clearing Member to continue to operate its business as it 
otherwise would. Accordingly, OCC believes the responsibilities 
associated with testing participation would be equitably distributed 
such that no Clearing Member(s) would face any burden on competition 
more than is necessary or appropriate in furtherance of the purposes of 
the Act and that the proposed rule change is therefore consistent with 
the requirements of the Act applicable to clearing agencies.
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    \23\ 15 U.S.C. 78q-1(b)(3)(I).
    \24\ 17 CFR 240.17Ad-22(e)(13).
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

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

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

    Pursuant to Section 19(b)(3)(A) of the Act,\25\ and Rule 19b-
4(f)(6) \26\ thereunder, the proposed rule change is filed for 
immediate effectiveness because it does not: (i) Significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) by its terms would not 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate. Additionally, OCC 
provided the Commission with written notice of its intent to file the 
proposed rule change, along with a brief description and text of the 
proposed rule change, at least five business days prior to the date of 
filing of the proposed rule change or such shorter time as designated 
by the Commission.
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    \25\ 15 U.S.C. 78s(b)(3)(A).
    \26\ 17 CFR 240.19b-4(f)(6).
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    OCC stated that the proposed rule change would not significantly 
affect the protection of investors or the public interest because, as 
described above, OCC already conducts periodic default management 
testing and includes certain Clearing Members in such testing, in 
accordance with Interpretation and Policy .02(b) of Article V, Section 
1 of OCC's By-Laws and Rule 214(d). OCC stated further that proposed 
Rules 218(c) and (d) would only modify OCC's rules to clearly 
articulate the requirement that Clearing Members must participate 
periodically in testing of OCC's default management procedures. OCC 
believes that the proposed rule change would not impose any significant 
burden on competition because, as described above, OCC believes the 
responsibilities associated with testing participation would be nominal 
and infrequent and would be equitably distributed among Clearing 
Members by OCC using certain key factors, including but not limited to 
participation in previous tests.
    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of filing. However, 
Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter 
time if such action is consistent with the protection of investors and 
the public interest. OCC has requested that the Commission waive the 
30-day operative delay contained in Rule 19b-4(f)(6)(iii) so that the 
proposal may become operative immediately upon filing. According to 
OCC, the proposed rule change does not present any novel or 
controversial issues. OCC stated that this proposed rule change would 
require Clearing Members to participate in the testing of OCC's default 
procedures consistent with 17Ad-22(e)(13). In its proposal, OCC stated 
that the proposed rule change is not intended to substantively alter 
OCC's default management testing procedures, but is instead intended to 
amend OCC's rules to clearly articulate the requirement that Clearing 
Members must participate in the testing of OCC's default management 
procedures. Therefore, the Commission designates

[[Page 17314]]

the proposed rule change to be operative upon filing.\27\
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    \27\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.\28\
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    \28\ Notwithstanding its immediate effectiveness, implementation 
of this rule change will be delayed until this change is deemed 
certified under CFTC Regulation Sec.  40.6.
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-OCC-2017-003 on the subject line.

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-2017-003. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of OCC and on OCC's 
Web site at http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_17_003.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-2017-003 and 
should be submitted on or before May 1, 2017.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-07047 Filed 4-7-17; 8:45 am]
 BILLING CODE 8011-01-P