82 FR 20645 - Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection To Advance Notice Filing Concerning the Options Clearing Corporation's Enhancements to OCC's Stock Loan Programs
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 84 (May 3, 2017)
Federal Register Volume 82, Issue 84 (May 3, 2017)
| Page Range | 20645-20648 | |
| FR Document | 2017-08892 |
[Federal Register Volume 82, Number 84 (Wednesday, May 3, 2017)] [Notices] [Pages 20645-20648] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-08892] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80537; File No. SR-OCC-2017-802] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection To Advance Notice Filing Concerning the Options Clearing Corporation's Enhancements to OCC's Stock Loan Programs April 27, 2017. The Options Clearing Corporation (``OCC'') filed on February 28, 2017 with the Securities and Exchange Commission (``Commission'') advance notice SR-OCC-2017-802 (``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) under the Securities Exchange Act of 1934 \2\ (``Exchange Act'') to propose a number of enhancements to its Stock Loan/Hedge Program (``Hedge Program'') and Market Loan Program (collectively, the ``Stock Loan Programs''). The proposed changes would supplement OCC's risk management framework for the Stock Loan Programs to provide greater certainty concerning each participant's stock loan exposures and to mitigate risks that may arise in the event of a clearing member suspension. The Advance Notice was published for comment in the Federal Register on April 3, 2017.\3\ The Commission has not received any comments on the Advance Notice to date. This publication serves as notice of no objection to the Advance Notice. --------------------------------------------------------------------------- \1\ 12 U.S.C. 5465(e)(1). The Financial Stability Oversight Council designated OCC a systemically important financial market utility (``SIFMU'') 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. \2\ 17 CFR 240.19b-4(n)(1)(i). \3\ See Securities Exchange Act Release No. 34-80323 (March 28, 2017), 82 FR 16260 (April 3, 2017) (File No. SR-OCC-2017-802) (``Notice of Filing of Advance Notice''). OCC also filed a proposed rule change with the Commission pursuant to Section 19(b)(1) of the Securities Exchange Act (``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. The Commission published notice of the proposed rule change in the Federal Register and has not received any comments on the proposal to date. See Securities Exchange Act Release No. 34-80323 (March 8, 2017), 82 FR 13690 (March 14, 2017) (File No. SR-OCC-2017-002). --------------------------------------------------------------------------- I. Background OCC operates two Stock Loan Programs--the Hedge Program and Market Loan Program--in which a participating clearing member can lend an agreed-upon number of shares of eligible stock \4\ to another clearing member in exchange for an agreed-upon value of U.S. dollar cash collateral and then novate the loan to OCC for clearing.\5\ The Hedge Program permits clearing members to bilaterally execute stock loans and negotiate collateralization and other terms before submitting such stock loans to OCC for novation and clearing.\6\ The Market Loan Program is operationally similar to the Hedge Program, but it permits clearing members to execute stock loans through a multilateral loan market.\7\ In each case, upon completion of the novation process, OCC, in its capacity as a central counterparty, guarantees return of (i) loaned stock, or that stock's value, to the lending clearing member, and (ii) the value of cash collateral to the borrowing clearing member.\8\ In addition, OCC makes mark-to-market margin payments on a daily basis to ensure stock loans remain fully collateralized. --------------------------------------------------------------------------- \4\ See OCC Rules 2202 and 2202A (providing that stock loans under the Hedge Program and the Market Loan Program, respectively, must effect transfer only of ``Eligible Stock,'' as defined in Article I of OCC's By-laws). OCC permits clearing members to execute stock loans involving 6,191 eligible securities as March 29, 2017, available at https://www.theocc.com/webapps/stock loan-eligible- securities. \5\ The Hedge Program is governed by Article XXI of OCC's By- Laws and Chapter XXII of OCC's Rules. The Market Loan Program is governed by Article XXIA of OCC's By-Laws and Chapter XXIIA of OCC's Rules. The Commission understands that OCC cleared approximately 10- 15% of the overall U.S.-equities stock loan market through the two programs, as of November 2015. \6\ The Commission understands that the Hedge Program accounts for approximately 95% of cleared stock loan volume at OCC, as of November 2015. \7\ Automated Equity Finance Markets, Inc. is the sole loan market through which clearing members can execute stock loans in the Market Loan Program. \8\ See OCC Rules 2202(b) and 2202A(b). --------------------------------------------------------------------------- II. Description of the Advance Notice OCC's Advance Notice proposes a number of changes to the Stock Loan Programs and its Rules governing those Programs.\9\ First, to improve trade certainty and transparency concerning clearing member exposures, OCC proposes amendments to its rules governing the Stock Loan Programs to do the following: (1) Require clearing members to have policies and procedures to reconcile stock loan positions each business day; (2) state explicitly that the controlling record for stock loan positions for margin and other purposes is OCC's ``golden'' record; and (3) provide that stock loan positions remain in effect until OCC's records reflect stock loan terminations. Second, to mitigate risks that may arise in the event of a clearing member suspension, OCC proposes amendments to its rules governing the Stock Loan Programs to do the following: (1) Provide a two-day trading window in which clearing members must execute close-out transactions, also known as ``buy-in'' or ``sell-out'' transactions; (2) provide broad authority for OCC to use reasonable prices to settle close-out transactions; and (3) permit OCC to close out and re-establish the matched-book stock loan positions of a suspended Hedge Program clearing member through termination by offset and ``re-matching'' with other clearing members. Each of these proposals is discussed in more detail below. --------------------------------------------------------------------------- \9\ For a more detailed description of the specific rule changes OCC is proposing, see Notice of Filing of Advance Notice, supra note 3. --------------------------------------------------------------------------- A. Proposed Measures To Improve Trade Certainty and Transparency OCC's Advance Notice proposes three amendments to the rules governing its Stock Loan Programs that are intended to improve trade certainty and transparency for clearing members and OCC. 1. Daily Reconciliation of Stock Loan Positions Clearing members that participate in the Hedge Program and the Market Loan Program execute and terminate stock loans on a bilateral basis. Following execution or termination of stock loans, OCC requires clearing members to promptly report stock loans directly to OCC, or to facilitate such reporting to OCC through the Depository Trust Corporation (``DTC''), ensuring OCC accepts stock loans for clearing and records the novation or termination for margin and other purposes. Under the current trade-reporting process, clearing members may fail to report (or to have DTC report) stock loans to OCC in a timely manner, increasing uncertainty in the novation process and decreasing transparency with respect to OCC's stock loan positions and obligations as a central counterparty and guarantor. The current process thereby presents risk management risks both to OCC and clearing members. [[Page 20646]] To address these risk management risks, OCC proposes to require each clearing member to have adequate policies and procedures to perform daily reconciliations of stock loan positions against OCC's records and to resolve stock loan discrepancies, if any, by 9:30 a.m. Central Time the following business day.\10\ These proposed rule changes, according to OCC, would improve trade certainty and transparency for clearing members participating in the Hedge Program and the Market Loan Program and thereby reduce operational and other risks for OCC and clearing members. --------------------------------------------------------------------------- \10\ See Proposed Rule 2205 of the Hedge Program and Proposed Rule 2205A of the Market Loan Program. --------------------------------------------------------------------------- 2. Controlling Records for Open and Terminated Stock Loan Positions To support and supplement the proposed daily reconciliation requirements for clearing member participation in the Stock Loan Programs, OCC proposes to explicitly state in its rules that OCC's stock loan records constitute the controlling records for margin and other purposes. Specifically, the proposed rules would specify that OCC's records, which OCC refers to as the ``golden copy'' records, prevail in the event of a conflict with clearing member records and that clearing members must continue to perform on obligations relating to open stock loan positions identified in the golden copy records.\11\ The proposed rules, according to OCC, support trade certainty and transparency in the Hedge and Market Loan Programs. --------------------------------------------------------------------------- \11\ See Proposed Articles XXI and XXIA of OCC's By-Laws. --------------------------------------------------------------------------- 3. Termination Records for Stock Loan Positions Finally, to conform OCC's stock loan termination provisions to the proposed changes relating to controlling records described above, OCC proposes rule changes to clarify that stock loans would be considered terminated for margin and other purposes only when OCC's records reflect termination of the stock loan.\12\ OCC states that these conforming changes also would support trade certainty and transparency in the Stock Loan Programs by ensuring consistency among and within the different rules applicable to the Stock Loan Programs. --------------------------------------------------------------------------- \12\ See Proposed Rule 2209 in the Hedge Program and Proposed Rule 2209A in the Market Loan Program. --------------------------------------------------------------------------- B. Proposed Measures To Mitigate Stock Loan Risks in the Event of a Clearing Member Suspension In addition to the proposals intended to improve trade certainty and transparency, the Advance Notice also proposes three amendments to address certain risks that may arise in the event that OCC suspends a clearing member participant in the Stock Loan Programs. 1. Stock Loan Close-Out Timeframe in the Event of a Clearing Member Suspension Under current Stock Loan Program rules, OCC may seek to close out a suspended clearing member's stock loan positions by instructing non- suspended clearing member counterparties to execute close-out transactions within a reasonable period of time.\13\ Although non- suspended clearing members must be prepared to defend the timeliness of close-out transactions under current rules, clearing members are not required to execute close-out transactions based on OCC's instructions within a specific period of time. Accordingly, if non-suspended clearing members execute buy-in or sell-out transactions over an extended period of time following OCC's close-out instruction, OCC incurs a risk that close-out prices may vary significantly from the prices used to mark the stock loan positions to market for margin purposes. OCC's credit exposure, in part, depends on the significance of these price differences relative to the suspended clearing member's available margin resources. --------------------------------------------------------------------------- \13\ More specifically, Rules 2209(b) and (f) and 2211 of the Hedge Program, and Rules 2209A(b) and (c) and 2211A of the Market Loan Program require clearing members to execute close-out transactions in a ``commercially reasonable manner'' and to be prepared to defend the timing, prices, and costs of such transactions. --------------------------------------------------------------------------- To mitigate these risks, OCC proposes to require clearing members to execute close-out transactions within a fixed two-day trading window in the event of a clearing member suspension. More specifically, OCC proposes to require non-suspended clearing members to execute close-out transactions by the end of the business day following OCC's instruction to close out stock loans with the suspended clearing member. If a non- suspended clearing member is unable to execute the close-out transactions within that two-day timeframe, OCC itself would terminate the clearing member's relevant stock loans and effect settlement based on the market price of the underlying securities, as determined by OCC. According to OCC, the proposed changes are intended to ensure that non- suspended clearing members execute close-out transactions in a timeframe consistent with OCC' s two-day liquidation assumption for stock loan margin purposes, which should reduce OCC's credit exposure from significant differences between clearing member-effectuated close- out prices and the prices used to collect mark-to-market payments from the suspended clearing member. 2. Reasonable Prices for Stock Loan Close-Out Transactions in the Event of a Clearing Member Suspension Under current rules, OCC may seek to close out a suspended clearing member's stock loan positions by instructing non-suspended clearing member counterparties to execute buy-in or sell-out transactions. These close-out transactions must be executed in a ``commercially reasonable manner.'' \14\ If a borrowing clearing member is suspended and unable to return securities under a stock loan, OCC may instruct the lending clearing member to execute a ``buy-in'' transaction for the number of shares in the stock loan's underlying security that would be necessary to return the lending clearing member to its position prior to entering into the stock loan with the suspended clearing member. If the lending clearing member is suspended and unable to return the value of collateral, OCC similarly may instruct the borrowing clearing member to execute a ``sell-out'' transaction for the number of shares in the underlying security that would be necessary to return the borrowing clearing member to its position prior to entering into the stock loan. In each case, the non-suspended clearing member's stock loan position is terminated and settled based on the price reported for the close-out transaction. --------------------------------------------------------------------------- \14\ Id. --------------------------------------------------------------------------- To incentivize ``reasonable'' pricing of close-out transactions in the event of a clearing member suspension, OCC proposes to provide itself authority to withdraw from a clearing member's account the value of any difference between clearing member-reported prices and ``reasonable'' close-out transaction prices, as determined by OCC based on an assessment of market conditions at the time of execution.\15\ [[Page 20647]] This proposed price-substitution authority, according to OCC, would incentivize non-suspended clearing members to execute and report close- out transactions in a commercially reasonable manner.\16\ --------------------------------------------------------------------------- \15\ See Proposed Rule 2211. The proposal provides that a clearing member may demonstrate that a close-out transaction was executed at a ``reasonable'' price by providing evidence that the transaction fell within the underlying stock's trading range on the date of execution. Id. To the extent a clearing member impacts the market price of an underlying security through close-out transactions, OCC, in its discretion, may consider such impact in its assessment of market conditions at the time of execution. \16\ If the close-out transaction is not executed within the two-day period provided in Proposed Rule 2212, however, the stock loan would be terminated and settled based on OCC's marking price at the end of the period. --------------------------------------------------------------------------- 3. Re-Matching in the Event of a Hedge Clearing Member Suspension Under OCC's current rules, in the event of a clearing member suspension, OCC can fully unwind a suspended Hedge Clearing Member's matched-book positions \17\ only if it recalls all borrowed securities from specific borrowing clearing members and returns those securities to specific lending clearing members. Under current rules, this recall- and-return process is operationally complex because the nature of these unwinds would require OCC to (i) effect transfer of significant numbers of securities to significant numbers of non-suspended clearing members; and (ii) settle an equal number of payments against final settlement prices. Moreover, during this recall-and-return process, the non- suspended clearing members may experience unexpected imbalances in their overall stock loan positions, resulting in increased margin requirements or price risks relating to re-execution of the stock loans in a potentially distressed market.\18\ --------------------------------------------------------------------------- \17\ See definition of ``Matched-Book Positions'' in Article I of OCC's By-laws. A clearing member that maintains a ``matched book'' for stock loans generally borrows no more of a specific security than it lends to other clearing members in the program. See also Notice of Filing of the Advance Notice, supra note 3 at 9. \18\ OCC's present margin methodology nets matched-book stock loan positions prior to calculating clearing member exposures. Thus, a non-suspended clearing member's margin requirements may increase on account of the temporary stock loan imbalances resulting from a clearing member suspension. --------------------------------------------------------------------------- To address these operational complexities and the potential consequences for both OCC and its clearing members, OCC proposes new rules that would permit it to terminate a suspended Hedge Clearing Member's matched-book stock loans in the Hedge Program by offset and to ``re-match'' the positions of the non-suspended counterparties according to priorities established by OCC's matching algorithm.\19\ According to OCC, re-matching stock loans pursuant to an algorithm would facilitate orderly and efficient termination and re-establishment of stock loans involving a suspended Hedge Clearing Member, thereby mitigating operational and pricing risks that may arise for non- suspended clearing members during the recall-and-return process. --------------------------------------------------------------------------- \19\ OCC's matching algorithm would implement priorities in OCC's Proposed Rule 2212(d), which establishes an order of operations based on the size of stock loan positions and the existence of master securities lending agreements between the non- suspended clearing members. --------------------------------------------------------------------------- III. Discussion and Commission Findings Although the Payment, Clearing and Settlement Supervision Act does not specify a standard of review for an advance notice, the stated purpose of the Payment, Clearing and Settlement Supervision Act is instructive.\20\ 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 SIFMUs and strengthening the liquidity of SIFMUs.\21\ --------------------------------------------------------------------------- \20\ See 12 U.S.C. 5461(b). \21\ Id. --------------------------------------------------------------------------- Section 805(a)(2) of the Payment, Clearing and Settlement Supervision Act \22\ authorizes the Commission to prescribe regulations containing risk management standards for the payment, clearing, and settlement activities of designated clearing entities engaged in designated activities for which the Commission is the supervisory agency. Section 805(b) of the Payment, Clearing and Settlement Supervision Act \23\ provides the following objectives and principles for the Commission's risk management standards prescribed under Section 805(a): --------------------------------------------------------------------------- \22\ 12 U.S.C. 5464(a)(2). \23\ 12 U.S.C. 5464(b). ---------------------------------------------------------------------------To promote robust risk management; To promote safety and soundness; To reduce systemic risks; and To support the stability of the broader financial system. Section 805(c) provides, in addition, that the Commission's risk management standards may address such areas as risk management and default policies and procedures, among others areas.\24\ --------------------------------------------------------------------------- \24\ 12 U.S.C. 5464(c) --------------------------------------------------------------------------- The Commission has adopted risk management standards under Section 805(a)(2) of the Payment, Clearing and Settlement Supervision Act and the Exchange Act (the ``Clearing Agency Rules'').\25\ The Clearing Agency Rules require each covered clearing agency, among other things, to establish, implement, maintain, and enforce written policies and procedures that are reasonably designed to meet certain minimum requirements for operations and risk management practices on an ongoing basis. As such, it is appropriate for the Commission to review advance notices for consistency with the objectives and principles for risk management standards described in Section 805(b) of the Payment, Clearing and Settlement Supervision Act and the Clearing Agency Rules. --------------------------------------------------------------------------- \25\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No. 68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11). See also Securities Exchange Act Release No. 78961 (September 28, 2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing Agency Standards''). The Commission established an effective date of December 12, 2016, and a compliance date of April 11, 2017, for the Covered Clearing Agency Standards. On March 4, 2017, the Commission granted covered clearing agencies a temporary exemption from compliance with Rule 17Ad-22(e)(3)(ii) and certain requirements in Rules 17Ad-22(e)(15)(i) and (ii) until December 31, 2017, subject to certain conditions. OCC is a ``covered clearing agency'' as defined in Rule 17Ad-22(a)(5). --------------------------------------------------------------------------- A. Consistency With Section 805(b) of the Payment, Clearing and Settlement Supervision Act The Commission believes each proposal in OCC's Advance Notice is consistent with promoting robust risk management, promoting safety and soundness, reducing systemic risks, and supporting the stability of the broader financial system, the stated objectives and principles of Section 805(b) of the Payment, Clearing and Settlement Supervision Act.\26\ --------------------------------------------------------------------------- \26\ 12 U.S.C. 5464(b). --------------------------------------------------------------------------- First, the Commission believes that OCC's three proposals to improve trade certainty and transparency in the Stock Loan Programs are consistent with promoting robust risk management. The Commission agrees with OCC's analysis that its proposal to require clearing members to implement adequate policies and procedures to reconcile stock loan positions with OCC's records on a daily basis could promote robust risk management by reducing financial and other risks to OCC and clearing members. The Commission also believes that OCC's proposal to provide explicitly in its rulebook that its stock loan records would prevail in the event of a conflict with clearing member records, and that clearing members must continue to perform on all stock loan positions reflected in OCC's records also promotes robust risk management by encouraging clearing members to understand, manage, and promptly report stock loan transactions. Finally, the Commission believes that OCC's proposal to provide that stock loan positions remain in effect until OCC's records reflect stock loan terminations promotes robust risk management by [[Page 20648]] emphasizing that OCC's records supersede the records of clearing members and further encouraging clearing members to understand, manage, and promptly report stock loan transactions. The Commission therefore believes these specific proposals are consistent with promoting robust risk management. Second, the Commission believes that OCC's three proposals to mitigate certain risks in the event of a clearing member suspension are consistent with promoting robust risk management. The proposal to provide a two-day trading window in which clearing members must execute close-out transactions, or opt for mandatory settlement, promotes robust risk management by requiring non-suspended clearing members to complete close-out transactions in a timeframe that is consistent with OCC's liquidation assumptions. The proposed alignment of the close-out period with OCC's liquidation assumptions reduces the risk that close- out prices vary too significantly from the prices used to mark the suspended clearing member's stock loans to market. OCC's proposed price-substitution authority also promotes robust risk management by further encouraging non-suspended clearing members to execute close-out transactions in a commercially reasonable manner, thereby reducing financial risk to OCC. Finally, the proposed rule changes in the Hedge Program to permit OCC to terminate and re-establish a suspended clearing member's positions through offset and ``re-match'' promotes robust risk management by facilitating orderly and efficient termination and re-establishment of stock loans involving a suspended clearing member, which mitigates operational and pricing risks that may arise for OCC and clearing members during the recall-and-return process. The Commission therefore believes that these aspects of the proposal are consistent with the promotion of robust risk management. Based on the conclusions discussed above, the Commission also believes that OCC's proposal is consistent with promoting the safety and soundness of both OCC and clearing members who participate in the Stock Loan Programs. Accordingly, because promoting the safety and soundness of both OCC and clearing members who participate in the Stock Loan Programs, in turn, both reduces systemic risks that may arise from clearing member participation in these programs and supports the stability of the broader financial system, the Commission also believes that the proposals contained in the Advance Notice are consistent with the stated objectives and principles of Section 805(b) of the Payment, Clearing and Settlement Supervision Act. B. Consistency With Rules 17Ad-22(e)(13) and (e)(23) Under the Exchange Act The Commission believes OCC's proposals in the Advance Notice are consistent with Covered Clearing Agency Standards, specifically Rules (e)(13) and (e)(23) under the Exchange Act.\27\ Rule 17Ad-22(e)(13) under the Exchange Act requires each covered clearing agency to establish, implement, maintain, and enforce policies and procedures reasonably designed to, among other things, ensure it has the authority and operational capacity to take timely action to contain losses and continue to meet its obligations in the event of a clearing member default.\28\ More generally, Rule 17Ad-22(e)(23) under the Exchange Act requires covered clearing agencies to establish, implement, maintain, and enforce policies and procedures reasonably designed to, among other things, provide for the public disclosure of all relevant rules and material procedures, including key aspects of default rules and procedures.\29\ --------------------------------------------------------------------------- \27\ 17 CFR 240.17Ad-22(e)(13), and 17 CFR 240.17Ad22(e)(23). \28\ 17 CFR 240.17Ad-22(e)(13). \29\ 17 CFR 240.17Ad-22(e)(23). --------------------------------------------------------------------------- The Commission believes the proposed changes relating to clearing member suspension in OCC's Advance Notice are consistent with Rule 17Ad-22(e)(13) under the Exchange Act. By proposing a fixed trading window in which clearing members must either execute close-out transactions relating to a clearing member suspension or opt for OCC- mandated settlements, OCC is seeking new authority that the Commission believes will better ensure that OCC can take timely actions to contain suspension-related losses and continue to meet stock loan-related obligations in the Stock Loan Programs. The Commission further believes that the proposed authority permitting OCC to withdraw the value of any difference between the clearing member-reported prices and OCC- determined close-out prices likewise better ensures that OCC can contain suspension-related losses, as clearing members would be further incentivized to execute timely close-out transactions at market prices. Finally, the Commission believes that the proposal relating to re- matching-in-suspension better ensures that OCC has authority and operational capacity to contain losses and meet obligations to clearing members in the Hedge Program, in particular through new rules and mechanisms that reduce the operational, credit, and re-execution risks attendant to the recall-and-return process. The Commission therefore believes OCC's proposal is consistent with Rule 17Ad-22(e)(13) under the Exchange Act. The Commission also believes that OCC's proposals are consistent with Rule 17Ad-22(e)(23) under the Exchange Act. Each aspect of OCC's Advance Notice is proposed to be disclosed publicly in OCC's rules governing the Stock Loan Programs, including the key suspension-related aspects of its rules providing for close-out transaction timeframes, new price-substitution authority, and termination and re-matching-in- suspension. The Commission therefore believes that OCC's proposal is consistent with Rules 17Ad-22(e)(23) under the Exchange Act. IV. Conclusion It is therefore noticed, pursuant to Section 806(e)(1)(G) of the Payment, Clearing and Settlement Supervision Act,\30\ that the Commission does not object to Advance Notice (SR-OCC-2017-802) and that OCC is authorized to implement the proposed change. --------------------------------------------------------------------------- \30\ 12 U.S.C. 5465(e)(1)(G). By the Commission. Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-08892 Filed 5-2-17; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 82, No. 84 / Wednesday, May 3, 2017 / Notices 20645
For the Commission, by the Division of received any comments on the Advance certainty and transparency concerning
Trading and Markets, pursuant to delegated Notice to date. This publication serves clearing member exposures, OCC
authority.12 as notice of no objection to the Advance proposes amendments to its rules
Eduardo A. Aleman, Notice. governing the Stock Loan Programs to
Assistant Secretary. do the following: (1) Require clearing
I. Background
[FR Doc. 2017–08901 Filed 5–2–17; 8:45 am] members to have policies and
BILLING CODE 8011–01–P OCC operates two Stock Loan procedures to reconcile stock loan
Programs—the Hedge Program and positions each business day; (2) state
Market Loan Program—in which a explicitly that the controlling record for
SECURITIES AND EXCHANGE participating clearing member can lend stock loan positions for margin and
COMMISSION an agreed-upon number of shares of other purposes is OCC’s ‘‘golden’’
eligible stock 4 to another clearing record; and (3) provide that stock loan
[Release No. 34–80537; File No. SR–OCC–
member in exchange for an agreed-upon positions remain in effect until OCC’s
2017–802]
value of U.S. dollar cash collateral and records reflect stock loan terminations.
Self-Regulatory Organizations; The then novate the loan to OCC for Second, to mitigate risks that may arise
Options Clearing Corporation; Notice clearing.5 The Hedge Program permits in the event of a clearing member
of No Objection To Advance Notice clearing members to bilaterally execute suspension, OCC proposes amendments
Filing Concerning the Options Clearing stock loans and negotiate to its rules governing the Stock Loan
Corporation’s Enhancements to OCC’s collateralization and other terms before Programs to do the following: (1)
Stock Loan Programs submitting such stock loans to OCC for Provide a two-day trading window in
novation and clearing.6 The Market which clearing members must execute
April 27, 2017. Loan Program is operationally similar to close-out transactions, also known as
The Options Clearing Corporation the Hedge Program, but it permits ‘‘buy-in’’ or ‘‘sell-out’’ transactions; (2)
(‘‘OCC’’) filed on February 28, 2017 with clearing members to execute stock loans provide broad authority for OCC to use
the Securities and Exchange through a multilateral loan market.7 In reasonable prices to settle close-out
Commission (‘‘Commission’’) advance each case, upon completion of the transactions; and (3) permit OCC to
notice SR–OCC–2017–802 (‘‘Advance novation process, OCC, in its capacity as close out and re-establish the matched-
Notice’’) pursuant to Section 806(e)(1) of a central counterparty, guarantees return book stock loan positions of a
the Payment, Clearing, and Settlement of (i) loaned stock, or that stock’s value, suspended Hedge Program clearing
Supervision Act of 2010 (‘‘Payment, to the lending clearing member, and (ii) member through termination by offset
Clearing and Settlement Supervision the value of cash collateral to the and ‘‘re-matching’’ with other clearing
Act’’) 1 and Rule 19b–4(n)(1)(i) under borrowing clearing member.8 In members. Each of these proposals is
the Securities Exchange Act of 1934 2 addition, OCC makes mark-to-market discussed in more detail below.
(‘‘Exchange Act’’) to propose a number margin payments on a daily basis to
of enhancements to its Stock Loan/ ensure stock loans remain fully A. Proposed Measures To Improve
Hedge Program (‘‘Hedge Program’’) and collateralized. Trade Certainty and Transparency
Market Loan Program (collectively, the OCC’s Advance Notice proposes three
II. Description of the Advance Notice
‘‘Stock Loan Programs’’). The proposed amendments to the rules governing its
changes would supplement OCC’s risk OCC’s Advance Notice proposes a Stock Loan Programs that are intended
management framework for the Stock number of changes to the Stock Loan to improve trade certainty and
Loan Programs to provide greater Programs and its Rules governing those transparency for clearing members and
certainty concerning each participant’s Programs.9 First, to improve trade OCC.
stock loan exposures and to mitigate 1. Daily Reconciliation of Stock Loan
and has not received any comments on the proposal
risks that may arise in the event of a to date. See Securities Exchange Act Release No. Positions
clearing member suspension. The 34–80323 (March 8, 2017), 82 FR 13690 (March 14,
Advance Notice was published for 2017) (File No. SR–OCC–2017–002). Clearing members that participate in
comment in the Federal Register on 4 See OCC Rules 2202 and 2202A (providing that the Hedge Program and the Market Loan
April 3, 2017.3 The Commission has not stock loans under the Hedge Program and the Program execute and terminate stock
Market Loan Program, respectively, must effect loans on a bilateral basis. Following
transfer only of ‘‘Eligible Stock,’’ as defined in
12 17 CFR 200.30–3(a)(12). Article I of OCC’s By-laws). OCC permits clearing execution or termination of stock loans,
1 12 U.S.C. 5465(e)(1). The Financial Stability members to execute stock loans involving 6,191 OCC requires clearing members to
Oversight Council designated OCC a systemically eligible securities as March 29, 2017, available at promptly report stock loans directly to
important financial market utility (‘‘SIFMU’’) on https://www.theocc.com/webapps/stock loan- OCC, or to facilitate such reporting to
July 18, 2012. See Financial Stability Oversight eligible-securities.
Council 2012 Annual Report, Appendix A, http:// 5 The Hedge Program is governed by Article XXI OCC through the Depository Trust
www.treasury.gov/initiatives/fsoc/Documents/ of OCC’s By-Laws and Chapter XXII of OCC’s Rules. Corporation (‘‘DTC’’), ensuring OCC
2012%20Annual%20Report.pdf. Therefore, OCC is The Market Loan Program is governed by Article accepts stock loans for clearing and
required to comply with the Payment, Clearing and XXIA of OCC’s By-Laws and Chapter XXIIA of records the novation or termination for
Settlement Supervision Act and file advance OCC’s Rules. The Commission understands that
notices with the Commission. OCC cleared approximately 10–15% of the overall margin and other purposes. Under the
2 17 CFR 240.19b–4(n)(1)(i). U.S.-equities stock loan market through the two current trade-reporting process, clearing
3 See Securities Exchange Act Release No. 34– programs, as of November 2015. members may fail to report (or to have
6 The Commission understands that the Hedge
80323 (March 28, 2017), 82 FR 16260 (April 3, DTC report) stock loans to OCC in a
2017) (File No. SR–OCC–2017–802) (‘‘Notice of Program accounts for approximately 95% of cleared
timely manner, increasing uncertainty
nlaroche on DSK30NT082PROD with NOTICES
Filing of Advance Notice’’). OCC also filed a stock loan volume at OCC, as of November 2015.
proposed rule change with the Commission 7 Automated Equity Finance Markets, Inc. is the in the novation process and decreasing
pursuant to Section 19(b)(1) of the Securities sole loan market through which clearing members transparency with respect to OCC’s
Exchange Act (‘‘Exchange Act’’) and Rule 19b–4 can execute stock loans in the Market Loan stock loan positions and obligations as
thereunder, seeking approval of changes to its rules Program.
8 See OCC Rules 2202(b) and 2202A(b).
a central counterparty and guarantor.
necessary to implement the Advance Notice. 15
U.S.C. 78s(b)(1) and 17 CFR 240.19b–4, 9 For a more detailed description of the specific
The current process thereby presents
respectively. The Commission published notice of rule changes OCC is proposing, see Notice of Filing risk management risks both to OCC and
the proposed rule change in the Federal Register of Advance Notice, supra note 3. clearing members.
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![20648 Federal Register / Vol. 82, No. 84 / Wednesday, May 3, 2017 / Notices
emphasizing that OCC’s records objectives and principles of Section in particular through new rules and
supersede the records of clearing 805(b) of the Payment, Clearing and mechanisms that reduce the operational,
members and further encouraging Settlement Supervision Act. credit, and re-execution risks attendant
clearing members to understand, to the recall-and-return process. The
B. Consistency With Rules 17Ad–
manage, and promptly report stock loan Commission therefore believes OCC’s
22(e)(13) and (e)(23) Under the
transactions. The Commission therefore proposal is consistent with Rule 17Ad–
Exchange Act
believes these specific proposals are 22(e)(13) under the Exchange Act.
consistent with promoting robust risk The Commission believes OCC’s The Commission also believes that
management. proposals in the Advance Notice are OCC’s proposals are consistent with
Second, the Commission believes that consistent with Covered Clearing Rule 17Ad–22(e)(23) under the
OCC’s three proposals to mitigate Agency Standards, specifically Rules Exchange Act. Each aspect of OCC’s
certain risks in the event of a clearing (e)(13) and (e)(23) under the Exchange Advance Notice is proposed to be
member suspension are consistent with Act.27 Rule 17Ad–22(e)(13) under the disclosed publicly in OCC’s rules
promoting robust risk management. The Exchange Act requires each covered governing the Stock Loan Programs,
proposal to provide a two-day trading clearing agency to establish, implement, including the key suspension-related
window in which clearing members maintain, and enforce policies and aspects of its rules providing for close-
must execute close-out transactions, or procedures reasonably designed to, out transaction timeframes, new price-
opt for mandatory settlement, promotes among other things, ensure it has the substitution authority, and termination
robust risk management by requiring authority and operational capacity to and re-matching-in-suspension. The
non-suspended clearing members to take timely action to contain losses and Commission therefore believes that
complete close-out transactions in a continue to meet its obligations in the OCC’s proposal is consistent with Rules
timeframe that is consistent with OCC’s event of a clearing member default.28 17Ad–22(e)(23) under the Exchange Act.
liquidation assumptions. The proposed More generally, Rule 17Ad–22(e)(23)
IV. Conclusion
alignment of the close-out period with under the Exchange Act requires
OCC’s liquidation assumptions reduces covered clearing agencies to establish, It is therefore noticed, pursuant to
the risk that close-out prices vary too implement, maintain, and enforce Section 806(e)(1)(G) of the Payment,
significantly from the prices used to policies and procedures reasonably Clearing and Settlement Supervision
mark the suspended clearing member’s designed to, among other things, Act,30 that the Commission does not
stock loans to market. OCC’s proposed provide for the public disclosure of all object to Advance Notice (SR–OCC–
price-substitution authority also relevant rules and material procedures, 2017–802) and that OCC is authorized
promotes robust risk management by including key aspects of default rules to implement the proposed change.
further encouraging non-suspended and procedures.29 By the Commission.
clearing members to execute close-out The Commission believes the Eduardo A. Aleman,
transactions in a commercially proposed changes relating to clearing Assistant Secretary.
reasonable manner, thereby reducing member suspension in OCC’s Advance [FR Doc. 2017–08892 Filed 5–2–17; 8:45 am]
financial risk to OCC. Finally, the Notice are consistent with Rule 17Ad–
BILLING CODE 8011–01–P
proposed rule changes in the Hedge 22(e)(13) under the Exchange Act. By
Program to permit OCC to terminate and proposing a fixed trading window in
re-establish a suspended clearing which clearing members must either SECURITIES AND EXCHANGE
member’s positions through offset and execute close-out transactions relating COMMISSION
‘‘re-match’’ promotes robust risk to a clearing member suspension or opt
management by facilitating orderly and for OCC-mandated settlements, OCC is [Release No. 34–80545; File No. SR–IEX–
efficient termination and re- seeking new authority that the 2017–03]
establishment of stock loans involving a Commission believes will better ensure
suspended clearing member, which Self-Regulatory Organizations;
that OCC can take timely actions to Investors Exchange LLC; Notice of
mitigates operational and pricing risks contain suspension-related losses and
that may arise for OCC and clearing Filing of Amendment No. 1 and Order
continue to meet stock loan-related Granting Accelerated Approval of a
members during the recall-and-return obligations in the Stock Loan Programs.
process. The Commission therefore Proposed Rule Change, as Modified by
The Commission further believes that Amendment No. 1, To Amend IEX Rule
believes that these aspects of the the proposed authority permitting OCC
proposal are consistent with the 16.135 To Adopt Generic Listing
to withdraw the value of any difference Standards for Managed Fund Shares
promotion of robust risk management. between the clearing member-reported
Based on the conclusions discussed prices and OCC-determined close-out April 27, 2017.
above, the Commission also believes prices likewise better ensures that OCC
that OCC’s proposal is consistent with I. Introduction
can contain suspension-related losses,
promoting the safety and soundness of as clearing members would be further On January 19, 2017, Investors
both OCC and clearing members who incentivized to execute timely close-out Exchange LLC (‘‘IEX’’ or ‘‘Exchange’’)
participate in the Stock Loan Programs. transactions at market prices. Finally, filed with the Securities and Exchange
Accordingly, because promoting the the Commission believes that the Commission (‘‘Commission’’), pursuant
safety and soundness of both OCC and proposal relating to re-matching-in- to Section 19(b)(1) of the Securities
clearing members who participate in the suspension better ensures that OCC has Exchange Act of 1934 (‘‘Act’’) 1 and Rule
Stock Loan Programs, in turn, both authority and operational capacity to 19b–4 thereunder,2 a proposed rule
nlaroche on DSK30NT082PROD with NOTICES
reduces systemic risks that may arise contain losses and meet obligations to change to amend IEX Rule 16.135 to
from clearing member participation in clearing members in the Hedge Program, adopt generic listing standards for
these programs and supports the Managed Fund Shares. The proposed
stability of the broader financial system, 27 17 CFR 240.17Ad–22(e)(13), and 17 CFR
the Commission also believes that the 240.17Ad22(e)(23). 30 12 U.S.C. 5465(e)(1)(G).
proposals contained in the Advance 28 17 CFR 240.17Ad–22(e)(13). 1 15 U.S.C. 78s(b)(1).
Notice are consistent with the stated 29 17 CFR 240.17Ad–22(e)(23). 2 17 CFR 240.19b–4.
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Document Created: 2018-11-08 08:36:29
Document Modified: 2018-11-08 08:36:29
| 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 | 82 FR 20645 |
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