82 FR 28207 - Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change Concerning the Adoption of a New Stock Options and Futures Settlement Agreement Between The Options Clearing Corporation and the National Securities Clearing Corporation

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 117 (June 20, 2017)

Page Range		28207-28215
FR Document		2017-12891
Federal Register, Volume 82 Issue 117 (Tuesday, June 20, 2017)
[Federal Register Volume 82, Number 117 (Tuesday, June 20, 2017)]
[Notices]
[Pages 28207-28215]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-12891]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80941; File No. SR-OCC-2017-013]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Concerning the Adoption of a 
New Stock Options and Futures Settlement Agreement Between The Options 
Clearing Corporation and the National Securities Clearing Corporation

June 15, 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 June 1, 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, which Items have 
been prepared by OCC. 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.
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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 is filed in connection with 
proposed changes relating to a new Stock Options and Futures Settlement 
Agreement (``New Accord'') between OCC and the National Securities 
Clearing Corporation (``NSCC,'' collectively NSCC and OCC may be 
referred to herein as the ``clearing agencies'') and amendments to 
OCC's By-Laws and Rules to accommodate the proposed provisions of the 
New Accord.
    The proposed changes to OCC's By-Laws and Rules and the proposed 
New Accord were attached as Exhibits 5A-5C of the filing, 
respectively.\3\ The proposed changes are described in detail in Item 3 
below. All terms with initial capitalization not defined herein have 
the same meaning as set forth in OCC's By-Laws and Rules.\4\
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    \3\ OCC has filed an advance notice with the Commission in 
connection with the New Accord. See SR-OCC-2017-804. NSCC also has 
filed proposed rule change and advance notice filings with the 
Commission in connection with the New Accord. See NSCC filings SR-
NSCC-2017-007 and SR-NSCC-2017-803, respectively.
    \4\ OCC's By-Laws and Rules can be found on OCC's public Web 
site: http://optionsclearing.com/about/publications/bylaws.jsp. 
Other terms not defined herein or in the OCC By-Laws and Rules can 
be found in the Rules & Procedures of NSCC (``NSCC Rules''), 
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf, as the context implies.
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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.

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

1. Purpose
Background
    OCC issues and clears U.S.-listed options and futures on a number 
of underlying financial assets including common stocks, currencies and 
stock indices. OCC's Rules, however, provide that delivery of, and 
payment for, securities underlying certain physically settled stock 
options and single stock futures cleared by OCC are effected through 
the facilities of a correspondent clearing corporation (i.e., NSCC) and 
are not settled through the facilities OCC. OCC and NSCC are parties to 
a Third Amended and Restated Options Exercise Settlement Agreement, 
dated February 16, 1995, as amended (``Existing Accord''),\5\ which 
governs the delivery and receipt of stock in the settlement of put and 
call options issued by OCC (``Stock Options'') that are eligible for 
settlement through NSCC's Continuous Net Settlement (``CNS'') 
Accounting Operation and are designated to settle on the third business 
day following the date the related exercise or assignment was accepted 
by NSCC (``Options E&A''). All OCC Clearing Members that intend to 
engage in Stock Options transactions are required to also be Members of 
NSCC or to have appointed or nominated an NSCC Member to act on its 
behalf.\6\
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    \5\ The Existing Accord and the proposed changes thereunder were 
previously approved by the Commission. See Securities Exchange Act 
Release No. 37731 (September 26, 1996), 61 FR 51731 (October 3, 
1996) (SR-OCC-96-04 and SR-NSCC-96-11) (Order Approving Proposed 
Rule Change Related to an Amended and Restated Options Exercise 
Settlement Agreement Between the Options Clearing Corporation and 
the National Securities Clearing Corporation); Securities Exchange 
Act Release No. 43837 (January 12, 2001), 66 FR 6726 (January 22, 
2001) (SR-OCC-00-12) (Order Granting Accelerated Approval of a 
Proposed Rule Change Relating to the Creation of a Program to 
Relieve Strains on Clearing Members' Liquidity in Connection With 
Exercise Settlements); and Securities Exchange Act Release No. 58988 
(November 20, 2008), 73 FR 72098 (November 26, 2008) (SR-OCC-2008-18 
and SR-NSCC-2008-09) (Notice of Filing and Order Granting 
Accelerated Approval of Proposed Rule Changes Relating to Amendment 
No. 2 to the Third Amended and Restated Options Exercise Settlement 
Agreement).
    \6\ A firm that is both an OCC Clearing Member and an NSCC 
Member, or is an OCC Clearing Member that has designated an NSCC 
Member to act on its behalf is referred to herein as a ``Common 
Member.''
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    OCC proposes to adopt a New Accord with NSCC, which would provide 
for the settlement of certain Stock Options and delivery obligations 
arising from certain matured physically-settled stock futures contracts 
cleared by OCC (``Stock Futures''). Specifically, the New Accord would, 
among other things: (1) Expand the category of securities that are 
eligible for settlement and guaranty under the agreement to certain 
securities (including stocks, exchange-traded funds and exchange-traded 
notes) that (i) are required to be delivered in the exercise and 
assignment of Stock Options and are eligible to be settled through 
NSCC's Balance Order Accounting Operation (in addition to its CNS 
Accounting Operation) or (ii) are delivery obligations arising from 
Stock Futures that have reached maturity and are

[[Page 28208]]

eligible to be settled through NSCC's CNS Accounting Operation or 
Balance Order Accounting Operation; (2) modify the time of the transfer 
of responsibilities from OCC to NSCC and, specifically, when OCC's 
guarantee obligations under OCC's By-Laws and Rules with respect to 
such transactions (``OCC's Guaranty'') end and NSCC's obligations under 
Addendum K of the NSCC Rules with respect to such transactions 
(``NSCC's Guaranty'') begin (such transfer being the ``Guaranty 
Substitution''); and (3) put additional arrangements into place 
concerning the procedures, information sharing, and overall governance 
processes under the agreement. Furthermore, OCC proposes to make 
certain clarifying and conforming changes to the OCC By-Laws and Rules 
as necessary to implement the New Accord.
    The primary purpose of the proposed changes is to (1) provide 
consistent treatment across all expiries for products with ``regular 
way'' \7\ settlement cycle specifications; (2) reduce the operational 
complexities of the Existing Accord by eliminating the cross-guaranty 
between OCC and NSCC and the bifurcated risk management of exercised 
and assigned transactions between the two clearing agencies by 
delineating a single point in time at which OCC's Guaranty ceases and 
NSCC's Guaranty begins; (3) further solidify the roles and 
responsibilities of OCC and NSCC in the event of a default of a Common 
Member at either or both clearing agencies; and (4) improve procedures, 
information sharing, and overall governance under the agreement.
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    \7\ Under the New Accord, ``regular way settlement'' shall have 
a meaning agreed to by the clearing agencies. Generally, regular way 
settlement is understood to be the financial services industry's 
standard settlement cycle. Currently, regular way settlement of 
Stock Options or Stock Futures transactions are those transactions 
designated to settle on the third business day following the date 
the related exercise, assignment or delivery obligation was accepted 
by NSCC. NSCC has proposed to change the NSCC Rules with respect to 
the meaning of regular way settlement in order to be consistent with 
the anticipated industry-wide move to a shorter standard settlement 
cycle of two business days after trade date. See Securities Exchange 
Act Release No. 79734 (January 4, 2017), 82 FR 3030 (January 10, 
2017) (SR-NSCC-2016-007). See also Securities Exchange Act Release 
No. 78962 (September 28, 2016), 81 FR 69240 (October 5, 2016) (S7-
22-16) (Amendment to Securities Transaction Settlement Cycle).
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    The New Accord would become effective, and wholly replace the 
Existing Accord, at a date specified in a service level agreement to be 
entered into between NSCC and OCC.\8\
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    \8\ Such effective date would be a date following approval of 
all required regulatory submissions to be filed by OCC and NSCC with 
the appropriate regulatory authorities, including this proposed rule 
change. See supra note 1.
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The Existing Accord
Key Terms of the Existing Accord
    Under the Existing Accord, the settlement of Options E&A generally 
proceeds according to the following sequence of events. NSCC maintains 
and delivers to OCC a list (``CNS Eligibility Master File'') that 
enumerates all CNS Securities, which are defined in NSCC's Rule 1 and 
generally include securities that have been designated by NSCC as 
eligible for processing through NSCC's CNS Accounting Operation and 
eligible for book entry delivery at NSCC's affiliate, The Depository 
Trust Company (for purposes of this proposed rule change, such 
securities are referred to as ``CNS Eligible Securities'').\9\ OCC, in 
turn, uses this file to make a final determination of which securities 
NSCC would not accept and therefore would need to be settled on a 
broker-to-broker basis. OCC then sends to NSCC a transactions file,\10\ 
listing the specific securities that are to be delivered and received 
in settlement of an Options E&A that have not previously been reported 
to NSCC and for which settlement is to be made through NSCC (``OCC 
Transactions File'').\11\ With respect to each Options E&A, the OCC 
Transactions File includes the CUSIP number of the security to be 
delivered, the identities of the delivering and receiving Common 
Members, the quantity to be delivered, the total value of the quantity 
to be delivered based on the exercise price of the option for which 
such security is the underlying security, and the exercise settlement 
date. After receiving the OCC Transactions File, NSCC then has until 
11:00 a.m. Central Time on the following business day to reject any 
transaction listed in the OCC Transactions File. NSCC can reject a 
transaction if the security to be delivered has not been listed as a 
CNS Eligible Security in the CNS Eligible Master File or if information 
provided in the OCC Transactions File is incomplete. Otherwise, if NSCC 
does not so notify OCC of its rejection of an Options E&A by the time 
required under the Existing Accord, NSCC will become unconditionally 
obligated to effect settlement of the Options E&A.
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    \9\ See supra note 2.
    \10\ Delivery of the OCC Transactions File with respect to an 
Options E&A typically happens on the date of the option's exercise 
or expiration, though this is not expressly stated in the Existing 
Accord. In theory, however, an Options E&A could, due to an error or 
delay, be reported later than the date of the option's exercise or 
expiration.
    \11\ This process would be substantially the same under the New 
Accord with the exception that the CNS Eligibility Master File and 
OCC Transactions File would be renamed and would be expanded in 
scope to include additional securities that would be eligible for 
guaranty and settlement under the New Accord, as discussed in 
further detail below.
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    Under the Existing Accord, even after NSCC's trade guarantee has 
come into effect,\12\ OCC is not released from its guarantee with 
respect to the Options E&A until certain deadlines \13\ have passed on 
the first business day following the scheduled settlement date without 
NSCC notifying OCC that the relevant Common Member has failed to meet 
an obligation to NSCC or NSCC has ceased to act for such Common Member 
pursuant to the NSCC Rules.\14\ As a result, there is a period of time 
when NSCC's trade guarantee overlaps with OCC's guarantee and where 
both clearing agencies are holding margin against the same Options E&A 
position.
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    \12\ Pursuant to Addendum K of the NSCC Rules, NSCC guarantees 
the completion of CNS transactions and balance order transactions 
that have reached the point at which, for bi-lateral submissions by 
Members, such trades have been validated and compared by NSCC, and 
for locked-in submission, such trades have been validated by NSCC, 
as described in the NSCC Rules. Transactions that are covered by the 
Existing Accord, and that would be covered by the New Accord, are 
expressly excluded from the timeframes described in Addendum K. See 
supra note 2.
    \13\ The deadline is 6:00 a.m. Central Time for NSCC notifying 
OCC of a Common Member failure and, if NSCC does not immediately 
cease to act for such defaulting Common Member, 4:00 p.m. Central 
Time for notifying OCC that it has ceased to act.
    \14\ See NSCC Rule 46 (Rule 46 (Restrictions on Access to 
Services). See supra note 2.
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    In the event that NSCC or OCC ceases to act on behalf of or 
suspends a Common Member, that Common Member becomes a ``defaulting 
member.'' Once a Common Member becomes a defaulting member, the 
Existing Accord provides that NSCC will make a payment to OCC equal to 
the lesser of OCC's loss or the positive mark-to-market amount relating 
to the defaulting member's Options E&A and that OCC will make a payment 
to NSCC equal to the lesser of NSCC's loss or the negative mark-to-
market amount relating to the defaulting member's Options E&A to 
compensate for potential losses incurred in connection with the 
default. A clearing agency must request the transfer of any such 
payments by the close of business on the tenth business day following 
the day of default and, after a request is made, the other clearing 
agency is required to make payment within five business days of the 
request.
The New Accord
Overview
    As noted above, NSCC proposes to adopt a New Accord with OCC, which 
would provide for the settlement of certain Stock Options and Stock 
Futures

[[Page 28209]]

transactions. The New Accord is primarily designed to, among other 
things, expand the category of securities that are eligible for 
settlement and guaranty under the agreement; simplify the time of the 
transfer of responsibilities from OCC to NSCC (specifically, the 
transfer of guarantee obligations); and put additional arrangements 
into place concerning the procedures, information sharing, and overall 
governance processes under the agreement. The material provisions of 
the New Accord are described in detail below.
Key Elements of the New Accord
Expanded Scope of Eligible Securities
    Pursuant to the proposed New Accord, on each day that both OCC and 
NSCC are open for accepting trades for clearing (``Activity Date''), 
NSCC would deliver to OCC an ``Eligibility Master File,'' which would 
identify the securities, including stocks, exchange-traded funds and 
exchange-traded notes, that are (1) eligible to settle through NSCC's 
CNS Accounting Operation (as is currently the case under the Existing 
Accord) or NSCC's Balance Order Accounting Operation (which is a 
feature of the New Accord) and (2) to be delivered in settlement of (i) 
exercises and assignments of Stock Options (as is currently the case 
under the Existing Accord) or (ii) delivery obligations arising from 
maturing physically settled Stock Futures (which is a feature of the 
New Accord) (all such securities collectively being ``Eligible 
Securities''). OCC, in turn, would deliver to NSCC its file of E&A/
Delivery Transactions \15\ that list the Eligible Securities to be 
delivered, or received, and for which settlement is proposed to be made 
through NSCC on that Activity Date. Guaranty Substitution (discussed 
further below) would not occur with respect to an E&A/Delivery 
Transaction that is not submitted in the proper format or that involves 
a security that is not identified as an Eligible Security on the then-
current Eligibility Master File. This process is similar to the current 
process under the Existing Accord with the exception of the expanded 
scope of Eligible Securities (and additional fields necessary to 
accommodate such securities) that would be listed on the Eligibility 
Master File and the E&A/Delivery Transactions file.
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    \15\ ``E&A/Delivery Transactions'' are transactions involving 
the settlement of Stock Options and Stock Futures under the New 
Accord. The delivery of E&A/Delivery Transactions to NSCC would 
replace the delivery of the ``OCC Transactions File'' from the 
Existing Accord. The actual information delivered by OCC to NSCC 
would be the same as is currently provided on the OCC Transactions 
File, but certain additional terms would be included to accommodate 
the inclusion of Stock Futures, along with information regarding the 
date that the instruction to NSCC was originally created and the 
E&A/Delivery Transaction's designated settlement date.
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    Like the Existing Accord, the proposed New Accord would continue to 
facilitate the processes by which Common Members deliver and receive 
stock in the settlement of Stock Options that are eligible to settle 
through NSCC's CNS Accounting Operation and are designated to settle 
regular way. The New Accord would also expand the category of 
securities eligible for settlement under the agreement. In particular, 
the New Accord would facilitate the processes by which Common Members 
deliver and receive stock in settlement of Stock Futures that are 
eligible to settle through NSCC's CNS Accounting Operation and are 
designated to settle regular way. It would also provide for the 
settlement of both Stock Options and Stock Futures that are eligible to 
settle through NSCC's Balance Order Accounting Operation on a regular 
way basis. The primary purpose of expanding the category of securities 
that are eligible for settlement and guaranty under the agreement is to 
provide consistent treatment across all expiries for products with 
regular way settlement cycle specifications and simplify the settlement 
process for these additional securities transactions.
    The New Accord would not apply to Stock Options or Stock Futures 
that are designated to settle on a shorter timeframe than the regular 
way settlement timeframe. These Stock Options would continue to be 
processed and settled as they would be today, outside of the New 
Accord. The New Accord also would not apply to any Stock Options or 
Stock Futures that are neither CNS Securities nor Balance Order 
Securities.\16\ Transactions in these securities are, and would 
continue to be, processed on a trade-for-trade basis away from NSCC's 
facilities. Such transactions may utilize other NSCC services for which 
they are eligible, but would not be subject to the New Accord.\17\
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    \16\ Balance Order Securities are defined in NSCC Rule 1, and 
are generally securities, other than foreign securities, that are 
eligible to be cleared at NSCC but are not eligible for processing 
through the CNS Accounting Operation. See supra note 2.
    \17\ OCC will continue to guarantee settlement until settlement 
actually occurs with respect to these Stock Options and Stock 
Futures.
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Proposed Changes Related to Guaranty Substitution
    The New Accord would adopt a fundamentally different approach to 
the delineation of the rights and responsibilities of OCC and NSCC with 
respect to E&A/Delivery Transactions. The purpose of the proposed 
changes related to the Guaranty Substitution, defined below, is to 
reduce the operational complexities of the Existing Accord by 
eliminating the cross-guaranty between OCC and NSCC and the bifurcated 
risk management of exercised and assigned transactions between the two 
clearing agencies and delineating a single point in time at which OCC's 
Guaranty ceases and NSCC's Guaranty begins. Moreover, the proposed 
changes would solidify the roles and responsibilities of OCC and NSCC 
in the event of a default of a Common Member at either or both clearing 
agencies.
    As described above, the Existing Accord provides that NSCC will 
make a payment to OCC following the default of a Common Member in an 
amount equal to the lesser of OCC's loss or the positive mark-to-market 
amount relating to the Common Member's Options E&A, and provides that 
OCC will make a payment to NSCC following the default of a Common 
Member equal to the lesser of NSCC's loss or the negative mark-to-
market amount relating to the Common Member's Options E&A to compensate 
for potential losses incurred in connection with the Common Member's 
default. The proposed New Accord, in contrast, would focus on the 
transfer of responsibilities from OCC to NSCC and, specifically, the 
point at which OCC's Guaranty ends and NSCC's Guaranty begins (i.e., 
the Guaranty Substitution) with respect to E&A/Delivery Transactions. 
By focusing on the timing of the Guaranty Substitution, rather than 
payment from one clearing agency to the other, the New Accord would 
simplify the agreement and the procedures for situations involving the 
default of a Common Member. The New Accord additionally would minimize 
``double-margining'' situations when a Common Member may simultaneously 
owe margin to both NSCC and OCC with respect to the same E&A/Delivery 
Transaction.
    After NSCC has received an E&A/Delivery Transaction, the Guaranty 
Substitution would normally occur when NSCC has received all Required 
Deposits to its Clearing Fund, calculated taking into account such E&A/
Delivery Transaction, of Common Members (``Guaranty Substitution 
Time'').\18\ At the Guaranty Substitution Time, NSCC's Guaranty takes 
effect, and OCC does not

[[Page 28210]]

retain any settlement obligations with respect to such E&A/Delivery 
Transactions. The Guaranty Substitution would not occur, however, with 
respect to any E&A/Delivery Transaction if NSCC has rejected such E&A/
Delivery Transaction due to an improper submission, as described above, 
or if, during the time after NSCC's receipt of the E&A/Delivery 
Transaction but prior to the Guaranty Substitution Time, a Common 
Member involved in the E&A/Delivery Transaction has defaulted on its 
obligations to NSCC by failing to meet its Clearing Fund obligations, 
or NSCC has otherwise ceased to act for such Common Member pursuant to 
the NSCC Rules (in either case, such Common Member becomes a 
``Defaulting NSCC Member'').
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    \18\ Procedure XV of the NSCC Rules provides that all Clearing 
Fund requirements and other deposits must be made within one hour of 
demand, unless NSCC determines otherwise. See supra note 2.
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    NSCC would be required to promptly notify OCC if a Common Member 
becomes a Defaulting NSCC Member, as described above. Upon receiving 
such a notice, OCC would not submit to NSCC any further E&A/Delivery 
Transactions involving the Defaulting NSCC Member for settlement, 
unless authorized representatives of both OCC and NSCC otherwise 
consent. OCC would, however, deliver to NSCC a list of all E&A/Delivery 
Transactions that have already been submitted to NSCC and that involve 
the Defaulting NSCC Member (``Defaulted NSCC Member Transactions''). 
The Guaranty Substitution ordinarily would not occur with respect to 
any Defaulted NSCC Member Transactions, unless both clearing agencies 
agree otherwise. As such, NSCC would have no obligation to guaranty 
such Defaulted NSCC Member Transactions, and OCC would continue to be 
responsible for effecting the settlement of such Defaulted NSCC Member 
Transactions pursuant to OCC's By-Laws and Rules. Once NSCC has 
confirmed the list of Defaulted NSCC Member Transactions, Guaranty 
Substitution would occur for all E&A/Delivery Transactions for that 
Activity Date that are not included on such list. NSCC would be 
required to promptly notify OCC upon the occurrence of the Guaranty 
Substitution Time on each Activity Date.
    If OCC suspends a Common Member after NSCC has received the E&A/
Delivery Transactions but before the Guaranty Substitution has 
occurred, and that Common Member has not become a Defaulting NSCC 
Member, the Guaranty Substitution would proceed at the Guaranty 
Substitution Time. In such a scenario, OCC would continue to be 
responsible for guaranteeing the settlement of the E&A/Delivery 
Transactions in question until the Guaranty Substitution Time, at which 
time the responsibility would transfer to NSCC. If, however, the 
suspended Common Member also becomes a Defaulting NSCC Member after 
NSCC has received the E&A/Delivery Transactions but before the Guaranty 
Substitution has occurred, Guaranty Substitution would not occur, and 
OCC would continue to be responsible for effecting the settlement of 
such Defaulted NSCC Member Transactions pursuant to OCC's By-Laws and 
Rules (unless both clearing agencies agree otherwise).
    Finally, the New Accord also would provide for the consistent 
treatment of all exercise and assignment activity under the agreement. 
Under the Existing Accord, ``standard'' \19\ option contracts become 
guaranteed by NSCC when the Common Member meets its morning Clearing 
Fund Required Deposit at NSCC while ``non-standard'' exercise and 
assignment activity becomes guaranteed by NSCC at midnight of the day 
after trade date (T+1). Under the New Accord, all exercise and 
assignment activity for Eligible Securities would be guaranteed by NSCC 
as of the Guaranty Substitution Time, under the circumstances described 
above, further simplifying the framework for the settlement of such 
contracts.
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    \19\ Option contracts with ``standard'' expirations expire on 
the third Friday of the specified expiration month, while ``non-
standard'' contracts expire on other days of the expiration month.
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Other Terms of the New Accord
    The New Accord also would include a number of other provisions 
intended to either generally maintain certain terms of the Existing 
Accord or improve the procedures, information sharing, and overall 
governance process under the new agreement. Many of these terms are 
additions to or improvements upon the terms of the Existing Accord.
    Under the proposed New Accord, OCC and NSCC would agree to address 
the specifics regarding the time, form and manner of various required 
notifications and actions in a separate service level agreement which 
the parties would be able to revisit as their operational needs evolve. 
The service level agreement would also specify an effective date for 
the New Accord, which, as mentioned above, would occur on a date 
following approval and effectiveness of all required regulatory 
submissions to be filed by OCC and NSCC with the appropriate regulatory 
authorities. Similar to the Existing Accord, the proposed New Accord 
would remain in effect (a) until it is terminated by the mutual written 
agreement of OCC and NSCC, (b) until it is unilaterally terminated by 
either clearing agency upon one year's written notice (as opposed to 
six months under the Existing Accord), or (c) until it is terminated by 
either NSCC or OCC upon the bankruptcy or insolvency of the other, 
provided that the election to terminate is communicated to the other 
party within three business days by written notice.
    Under the proposed New Accord, NSCC would agree to notify OCC if 
NSCC ceases to act for a Common Member pursuant to the NSCC Rules no 
later than the earlier of NSCC's provision of notice of such action to 
the governmental authorities or notice to other NSCC Members. 
Furthermore, if an NSCC Member for which NSCC has not yet ceased to act 
fails to satisfy its Clearing Fund obligations to NSCC, NSCC would be 
required to notify OCC promptly after discovery of the failure. 
Likewise, OCC would be required to notify NSCC of the suspension of a 
Common Member no later than the earlier of OCC's provision of notice to 
the governmental authorities or other OCC Clearing Members.
    Under the Existing Accord, NSCC and OCC agree to share certain 
reports and information regarding settlement activity and obligations 
under the agreement. The New Accord would enhance this information 
sharing between the clearing agencies. Specifically, NSCC and OCC would 
agree to share certain information, including general risk management 
due diligence regarding Common Members, lists of Common Members, and 
information regarding the amounts of Common Members' margin and 
settlement obligations at OCC or Clearing Fund Required Deposits at 
NSCC. NSCC and OCC would also be required to provide the other clearing 
agency with any other information that the other reasonably requests in 
connection with the performance of its obligations under the New 
Accord. All such information would be required to be kept confidential, 
using the same care and discretion that each clearing agency uses for 
the safekeeping of its own members' confidential information. NSCC and 
OCC would each be required to act in good faith to resolve and notify 
the other of any errors, discrepancies or delays in the information it 
provides.
    The New Accord also would include new terms to provide that, to the 
extent one party is unable to perform any obligation as a result of the 
failure of the other party to perform its responsibilities on a timely 
basis, the time for the non-failing party's performance would be 
extended, its

[[Page 28211]]

performance would be reduced to the extent of any such impairment, and 
it would not be liable for any failure to perform its obligations. 
Further, NSCC and OCC would agree that neither party would be liable to 
the other party in connection with its performance of its obligations 
under the proposed New Accord to the extent it has acted, or omitted or 
ceased to act, with the permission or at the direction of a 
governmental authority. Moreover, the proposed New Accord would provide 
that in no case would either clearing agency be liable to the other for 
punitive, incidental or consequential damages. The purpose of these new 
provisions is to provide clear and specific terms regarding each 
clearing agency's liability for non-performance under the agreement.
    The proposed New Accord would also contain the usual and customary 
representations and warranties for an agreement of this type, including 
representations as to the parties' good standing, corporate power and 
authority and operational capability, that the agreement complies with 
laws and all government documents and does not violate any agreements, 
and that all of the required regulatory notifications and filings would 
be obtained prior to the New Accord's effective date. It would also 
include representations that the proposed New Accord constitutes a 
legal, valid and binding obligation on each of OCC and NSCC and is 
enforceable against each, subject to standard exceptions. Furthermore, 
the proposed New Accord would contain a force majeure provision, under 
which NSCC and OCC would agree to notify the other no later than two 
hours upon learning that a force majeure event has occurred and both 
parties would be required to cooperate in good faith to mitigate the 
effects of any resulting inability to perform or delay in performing.
Proposed Amendments to OCC's By-Laws and Rules
    Given the key differences between the Existing Accord and the New 
Accord, as described above, OCC proposes certain changes to its By-Laws 
and Rules in order to accommodate the terms of the New Accord. The 
primary purpose of the proposed changes is to: (1) Reflect the expanded 
scope of the New Accord, (2) reflect changes related to the new 
Guaranty Substitution mechanics of the New Accord; and (3) make other 
changes necessary to conform to the terms of the New Accord or to 
otherwise provide additional clarity around the settlement and 
margining \20\ treatment of: (i) Eligible Securities under the New 
Accord, (ii) non-regular way securities settling through the facilities 
of NSCC but outside of the New Accord, and (iii) those securities 
settling outside of the New Accord and away from NSCC on a broker-to-
broker basis. These proposed changes are discussed in greater detail 
below.
---------------------------------------------------------------------------

    \20\ OCC notes that, while it is proposing changes to its Rules 
concerning margin requirements (e.g., which transactions would be 
included as part of OCC's margin calculation at a given point in 
time), OCC is not proposing any changes to its margin model (with 
the exception that OCC would no longer collect and hold margin for 
positions after NSCCs Guaranty has taken effect under the New 
Accord).
---------------------------------------------------------------------------

Changes Related to the Expanded Scope of the New Accord
    First, OCC proposes to amend and replace the defined term ``CNS-
eligible'' \21\ in order to reflect the expanded definition of Eligible 
Securities under the New Accord. The term ``CNS-eligible'' currently 
describes the securities underlying the physically-settled stock 
options that are eligible under the Existing Accord to be settled 
through NSCC's CNS Accounting Operation. Under the New Accord, however, 
the term Eligible Securities is more broadly defined to include 
securities (both Stock Options and Stock Futures) eligible for 
settlement via NSCC's CNS Accounting Operation and NSCC's Balance Order 
Accounting Operation. Accordingly, OCC proposes to use ``CCC,'' for 
``correspondent clearing corporation'' \22\ to describe the Eligible 
Securities. Thus, the term ``CCC-eligible'' would replace ``CNS-
eligible'' throughout OCC's By-Laws and Rules.
---------------------------------------------------------------------------

    \21\ See Article I, Section (C)(23) of OCC's By-Laws.
    \22\ Under Article I of OCC's By-Laws, the term ``correspondent 
clearing corporation'' means the National Securities Clearing 
Corporation or any successor thereto which, by agreement with the 
Corporation, provides facilities for settlements in respect of 
exercised option contracts or BOUNDs or in respect of delivery 
obligations arising from physically-settled stock futures.
---------------------------------------------------------------------------

    Next, because the New Accord would include the settlement of Stock 
Futures, OCC proposes to make several changes to its rules regarding 
Stock Futures to accommodate this expansion. More specifically, OCC 
proposes a conforming amendment to Rule 901 Interpretation and Policy 
(.02) to clarify that, under the New Accord, OCC will, subject to its 
discretion, cause the settlement of all matured Stock Futures to be 
made through the facilities of NSCC to the extent that the underlying 
securities are CCC-eligible as the term is currently proposed.
    OCC also proposes clarifying and conforming revisions to newly 
renumbered Rule 901(e) (currently Rule 901(d)) to specify that 
settlements made through the facilities of the correspondent clearing 
corporation are governed by Rule 901 and to clarify that, under the New 
Accord, specifications made in any Delivery Advice may be revoked up 
until the point at which NSCC's Guaranty has taken effect (the 
``obligation time'' as discussed below) and not the opening of business 
on the delivery date.
Changes Related to Guaranty Substitution
    OCC also proposes a series of amendments to its Rules to accurately 
reflect the process under which the Guaranty Substitution occurs under 
the New Accord. First, OCC proposes to amend Rule 901(c) so that the 
term ``obligation time''--the time that the correspondent clearing 
corporation becomes unconditionally obligated, in accordance with its 
rules, to effect settlement in respect thereof or to close out the 
securities contract arising therefrom--is synonymous with the Guaranty 
Substitution Time under the New Accord and (i.e., (i) settlement 
obligations are reported to and are not rejected by NSCC; (ii) NSCC has 
not notified OCC that it has ceased to act for the relevant Clearing 
Member; and (iii) the Clearing Fund requirements of the relevant 
Clearing Member are received by NSCC). Under the New Accord, if a 
default occurs prior to the Guaranty Substitution Time, the Guaranty 
Substitution will not occur for any E&A/Delivery Transactions involving 
the Defaulting NSCC Member, and OCC will continue to guarantee 
settlement for those Defaulted NSCC Member Transactions.
    Next, OCC proposes to amend language in newly renumbered Rule 
901(i) (currently Rule 901(h)) regarding the timing of the end of a 
Clearing Member's obligations to OCC with respect to securities to be 
settled through NSCC. Under the Existing Accord and OCC's existing 
Rules, a Clearing Member's obligations to OCC end only once settlement 
is completed. Under the New Accord, however, a Clearing Member's 
obligations to OCC will end when OCC's obligations with respect to 
guaranteeing settlement of the security would end (i.e., the Guaranty 
Substitution Time or ``obligation time''). OCC therefore proposes to 
amend newly renumbered Rule 901(i) to specify that a Clearing Member's 
obligations to OCC will be deemed completed and performed once the 
``obligation time'' has occurred.

[[Page 28212]]

    As discussed above, the New Accord eliminates the provisions of the 
Existing Accord whereby OCC and NSCC guaranteed each other the 
performance of Common Members and made certain payments to the other 
upon the default of a Common Member. As such, OCC proposes to delete 
discussions of such guarantees and payments from newly renumbered Rule 
901(i) and Rule 1107.
    OCC also proposes amendments to Rules 910 and 911, which set forth 
procedures for handling failures to make or take delivery of securities 
in settlement of exercised or assigned Stock Options and matured 
physically-settled Stock Futures, to add language to both rules to 
clarify that the failure procedures set forth therein would not apply 
with respect to any delivery to be made through NSCC pursuant to Rule 
901. Under the New Accord, once the Guaranty Substitution Time with 
respect to a specific E&A/Delivery Transaction occurs, OCC's Guaranty 
ends and NSCC's Guaranty begins, leaving OCC with no involvement with 
or responsibility for the settlement of the securities underlying that 
transaction. Therefore, if there is a failure to make or take delivery 
with respect to that transaction after Guaranty Substitution has 
occurred, the NSCC Rules will govern that failure. With respect to 
deliveries made on a broker-to-broker basis under OCC Rules 903 through 
912 (including those that may utilize NSCC's Obligation Warehouse 
services), and which are not governed by Rule 901, Guaranty 
Substitution does not occur and OCC's failure procedures would apply.
Changes to OCC's Margin Rules
    Under the New Accord, OCC will no longer collect margin on a 
transaction once it is no longer guaranteeing settlement for that 
transaction. As such, OCC proposes to add language to Rule 601(f) to 
clarify that OCC's margin calculations will not include delivery 
obligations arising from any Stock Options or Stock Futures that are 
eligible for settlement through NSCC and for which OCC has no further 
settlement obligations because either (i) Guaranty Substitution has 
occurred for E&A/Delivery Transactions under the New Accord (as 
described in revised Rule 901(c)) or (ii) NSCC has otherwise accepted 
transactions for non-regular way settlement under the NSCC Rules (as 
describe in newly proposed Rule 901(d)).\23\ By not including these 
transactions as part of OCC's margin calculation, OCC is hoping to 
alleviate instances of ``double-margining'' for Common Members that may 
otherwise simultaneously owe margin to NSCC and OCC with respect to the 
same position.
---------------------------------------------------------------------------

    \23\ Related revisions to Rule 901(c) and newly proposed Rule 
901(d) are discussed in more detail below.
---------------------------------------------------------------------------

    OCC also proposes to delete Rule 608A in its entirety. The New 
Accord seeks to eliminate the situation under the Existing Accord where 
Common Members are effectively ``double-margined'' or required to 
simultaneously post margin with OCC and NSCC with respect to the same 
position. As the New Accord eliminates this double-margining scenario, 
Rule 608A, which provides procedures pursuant to which a Clearing 
Member could use the securities deposited as margin with OCC as 
collateral to secure a loan to pay its margin obligations to NSCC, is 
now unnecessary.
Other Clarifying Changes Not Related to the New Accord
    OCC also proposes to amend its Rules to make clarifying changes 
that are not directly required by the New Accord but would provide 
additional clarity in its Rules in light of other changes being made to 
accommodate the New Accord. Specifically, OCC proposes to revise Rule 
901 Interpretation and Policy (.02) to provide that transactions that 
involve the delivery of non-CCC eligible securities made on a broker-
to-broker basis (and away from NSCC) may nevertheless involve the use 
of certain services of NSCC (e.g., NSCC's Obligation Warehouse). For 
such transactions, because they are not covered by the New Accord and 
NSCC at no point guarantees settlement, OCC Rule 901 would not apply 
and delivery is governed by the broker-to-broker settlement procedures 
set forth in OCC Rules 903 through 912, as is the case currently today. 
Additionally, while OCC's existing Rules do not prohibit broker-to-
broker settlements from being facilitated through the services of a 
correspondent clearing corporation, they do not explicitly contemplate 
the possibility. OCC also proposes to make clarifying amendments to 
Rule 904(b) and 910A(a) to more clearly distinguish between settlements 
effected through NSCC's CNS Accounting Operation or Balance Order 
Accounting Operations in accordance with OCC Rule 901 and deliveries 
effected on a broker-to-broker basis utilizing services of NSCC under 
OCC Rules 903 through 912 and to clearly state which OCC Rules apply in 
each context.
    Further, OCC proposes to add a new paragraph (d) to Rule 901 to 
clarify that OCC still intends, at its discretion, to effect settlement 
of Stock Options and Stock Futures that are scheduled to be settled on 
the first business day after exercise or maturity through NSCC pursuant 
to Rule 901 and the relevant provisions of the NSCC Rules, even though 
such contracts are outside the scope of the New Accord. These contracts 
would continue to be settled as they are currently today.
    OCC also proposes clarifying and conforming changes to the 
introductory language of Chapter IX of the Rules. Specifically, OCC 
proposes conforming changes to the Rule to reflect the replacement of 
the defined term ``CNS-eligible'' with ``CCC-eligible'' as described 
above. The proposed changes would also clarify that OCC's broker-to-
broker settlement rules are contained in Rules 903-912, as Rule 902 
concerns Delivery Advices, which also may be applicable to settlements 
made through the correspondent clearing corporation pursuant to Rule 
901. In addition, the proposed changes to the introductory language of 
Chapter IX of the Rules would provide additional clarity around OCC's 
existing authority to alter a previous designation of a settlement 
method at any time prior to the designated delivery date by specifying 
that this authority would apply to both settlements to be made through 
the facilities of the correspondent clearing corporation pursuant to 
Rule 901 or settlements to be made on a broker-to-broker basis pursuant 
to Rules 903 through 912. Finally, OCC proposes a number of conforming 
changes to Rules 901 and 912 to reflect the renumbering of various Rule 
provisions due to the proposed amendments described above.
2. Statutory Basis
    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions, to assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible, and to 
foster cooperation and coordination with persons engaged in the 
clearance and settlement of securities transactions.\24\ OCC believes 
that the proposed rule change is consistent with the requirements of 
Section 17A(b)(3)(F) of the Act \25\ and the rules thereunder 
applicable to OCC for the reasons set forth below.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78q-1(b)(3)(F).
    \25\ Id.
---------------------------------------------------------------------------

    In connection with the proposal to enhance the timing of the 
Guaranty Substitution, the proposed New Accord, and related changes to 
OCC's By-Laws

[[Page 28213]]

and Rules, would establish clear, transparent, and enforceable terms 
for the settlement of OCC's cleared Stock Options and Stock Futures 
through the facilities of NSCC. Specifically, the New Accord would 
continue to provide a sound framework for the settlement of certain 
Stock Options issued and cleared by OCC through the facilities of NSCC 
and would extend this framework to a clearly defined scope of 
additional Stock Options and Stock Futures transactions. In addition, 
the proposed rule change would simplify the settlement process for 
those Stock Options currently settled under the Existing Accord by 
clarifying the timing and mechanisms by which OCC's guaranty ends and 
NSCC's guaranty begins by focusing on the timing of the Guaranty 
Substitution, as described in detail above. By clarifying and 
simplifying the settlement process for these transactions, the New 
Accord would operate to minimize the risk of interruptions to clearing 
agency operations in the event of a Common Member default, and, in this 
way, would promote the prompt and accurate clearance and settlement of 
securities transactions.
    In addition, by eliminating any ambiguity regarding which clearing 
agency is responsible for guaranteeing settlement at any given moment, 
the proposal to enhance the timing of the Guaranty Substitution would 
provide greater certainty that in the event of a Common Member default, 
the default would be handled pursuant to the rules and procedures of 
the clearing agency whose guarantee is then in effect and the system 
for the clearance and settlement of Stock Options and Stock Futures 
would continue with minimal interruption. This greater certainty would 
strengthen OCC's and NSCC's ability to plan for and manage, and 
therefore would mitigate, the risk presented by Common Member defaults. 
It would also minimize the ``double margining'' issue that occurs under 
the Existing Accord so that Common Members would no longer be required 
to post margin at both clearing agencies to cover the same E&A/Delivery 
Transactions, thereby reducing their potential exposures across 
multiple clearing agencies for the same positions. In this way, the New 
Accord is designed to safeguard the securities and funds which are in 
the custody or control of OCC or for which it is responsible.
    The proposals to expand the category of securities eligible for 
settlement and guarantee and to apply uniform treatment to standard and 
non-standard options under the New Accord would provide consistent 
treatment across all expiries for products with regular way settlement 
cycle specifications, and would promote the prompt and accurate 
clearance and settlement of these additional securities transactions.
    In connection with the proposal to enhance the information sharing 
arrangement between NSCC and OCC, NSCC and OCC would agree to share 
certain information, including general risk management due diligence 
regarding Common Members, lists of Common Members, and information 
regarding the amounts of Common Members' margin and settlement 
obligations at OCC or Clearing Fund Required Deposits at NSCC. In this 
way, the New Accord would foster cooperation and coordination between 
OCC and NSCC in the settlement of securities transactions.
    Finally, other proposed changes to OCC's Rules would provide 
additional clarity, transparency, and certainty around the settlement 
and margining treatment of various securities transactions cleared by 
OCC (including those settled under the New Accord, those otherwise 
settled through the facilities of NSCC, and those that settle on a 
broker-to-broker basis away from NSCC). By providing its Clearing 
Members with this additional clarity, transparency, and certainty in 
OCC's Rules, the proposed rule change would promote the prompt and 
accurate clearance and settlement of securities transactions and the 
safeguarding of securities and funds which are in the custody or 
control of OCC or for which it is responsible.
    Therefore, for the reasons stated above, OCC believes that the 
proposed rule change is consistent with the requirements of Section 
17A(b)(3)(F) of the Act.\26\
---------------------------------------------------------------------------

    \26\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(1) under the Act requires that a covered clearing 
agency establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide for a well-founded, clear, 
transparent, and enforceable legal basis for each aspect of its 
activities in all relevant jurisdictions.\27\ The New Accord would 
constitute a legal, valid and binding obligation on each of OCC and 
NSCC, which is enforceable against each clearing agency. In connection 
with the proposal to enhance the timing of the Guaranty Substitution, 
the New Accord would establish clear, transparent, and enforceable 
terms for the settlement of OCC's cleared Stock Options and Stock 
Futures through the facilities of NSCC and would simplify the 
settlement process for those Stock Options currently settled under the 
Existing Accord. By clarifying the timing and mechanisms by which OCC's 
Guaranty ends and NSCC's Guaranty begins by focusing on the timing of 
the Guaranty Substitution, the new Accord, specifically the proposal to 
enhance the timing of the Guaranty Substitution, would provide a clear, 
transparent and enforceable legal basis for OCC's and NSCC's 
obligations during the event of a Common Member default. As a result, 
OCC believes that the proposal is consistent with the requirements of 
Rule 17Ad-22(e)(1).\28\
---------------------------------------------------------------------------

    \27\ 17 CFR 240.17Ad-22(e)(1).
    \28\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(20) under the Act requires, in part, that a covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to identify, monitor, and 
manage risks related to any link the covered clearing agency 
establishes with one or more other clearing agencies or financial 
market utilities.\29\
---------------------------------------------------------------------------

    \29\ 17 CFR 240.17Ad-22(e)(20).
---------------------------------------------------------------------------

    OCC is proposing to adopt the New Accord in order to address the 
risks it has identified related to its existing link with the NSCC 
within the Existing Accord. Specifically, under the terms of the 
Existing Accord, even after NSCC's guarantee has come into effect, OCC 
is not released from its guarantee with respect to the Options E&A 
until certain deadlines have passed on the first business day following 
the scheduled settlement date without NSCC notifying OCC that the 
relevant Common Member has failed to meet an obligation to NSCC and/or 
NSCC has ceased to act for such firm. This current process results in a 
period of time where NSCC's trade guarantee and OCC's guarantee both 
apply to the same positions, and, therefore, both clearing agencies are 
holding margin against the same Options E&A position. As a result, the 
Existing Accord provides for a more complicated framework for the 
settlement of certain Stock Options. These complications could give 
rise to inconsistencies with regard to the development and application 
of interdependent policies and procedures between OCC and NSCC, which 
could lead to unanticipated disruptions in OCC's or NSCC's clearing 
operations.
    In connection with the proposal to enhance the timing of the 
Guaranty Substitution, the New Accord would provide for a clearer, 
simpler framework for the settlement of certain Stock Options and Stock 
Futures by pinpointing a specific moment in time, the Guaranty 
Substitution Time, at

[[Page 28214]]

which guarantee obligations would transfer from OCC to NSCC. The New 
Accord would eliminate any ambiguity regarding which clearing agency is 
responsible for guaranteeing settlement at any given moment. 
Establishing a precise Guaranty Substitution Time would also provide 
greater certainty that in the event of a Common Member default, the 
default would be handled pursuant to the rules and procedures of the 
clearing agency whose guarantee is then in effect and the system for 
the clearance and settlement of Stock Options and Stock Futures would 
continue with minimal interruption. This greater certainty would 
strengthen OCC's and NSCC's ability to plan for and manage, and 
therefore would mitigate, the risk presented by Common Member defaults 
to OCC and NSCC, other members, and the markets the clearing agencies 
serve. Therefore, through the adoption of the proposal to enhance the 
timing of the Guaranty Substitution, OCC would more effectively manage 
its risks related to the operation of the New Accord.
    Moreover, in connection with the proposal to put additional 
arrangements into place concerning the procedures, information sharing, 
and overall governance processes under the New Accord, NSCC and OCC 
would agree to share certain information, including general 
surveillance information regarding their members, so that each clearing 
agency would be able to effectively identify, monitor, and manage risks 
that may be presented by certain Common Members. Accordingly, OCC 
believes the proposed changes are reasonably designed to identify, 
monitor, and manage risks related to the link established between OCC 
and NSCC for the settlement of certain Stock Options and Stock Futures 
in a manner consistent with Rule 17Ad-22(e)(20).\30\
---------------------------------------------------------------------------

    \30\ Id.
---------------------------------------------------------------------------

    Finally, Rule 17Ad-22(e)(21) under the Act requires that a covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to, among other things, be 
efficient and effective in meeting the requirements of its participants 
and the markets it serves.\31\ As noted above, under the Existing 
Accord, even after NSCC's guarantee has come into effect, OCC is not 
released from its guarantee with respect to the Options E&A until 
certain deadlines have passed on the first business day following the 
scheduled settlement date without NSCC notifying OCC that the relevant 
Common Member has failed to meet an obligation to NSCC and/or NSCC has 
ceased to act for such firm. This results in a period of time where 
NSCC's guarantee overlaps with OCC's guarantee and where both clearing 
agencies are holding margin against the same Options E&A positions. In 
connection with the proposal to enhance the timing of the Guaranty 
Substitution, the New Accord would minimize this ``double margining'' 
issue by introducing a new Guaranty Substitution Time, which would 
normally occur as soon as NSCC has received all Required Deposits to 
the Clearing Fund from Common Members, which have been calculated 
taking into account the relevant E&A/Delivery Transactions, rather than 
require reimbursement payments from one clearing agency to the other. 
As a result, Common Members would no longer be required to post margin 
at both clearing agencies to cover the same E&A/Delivery Transactions. 
OCC believes that, by simplifying the terms of the existing agreement 
in this way, the New Accord is designed to be efficient and effective 
in meeting the requirements of OCC's and NSCC's participants and the 
markets they serve.
---------------------------------------------------------------------------

    \31\ 17 CFR 240.17Ad-22(e)(21).
---------------------------------------------------------------------------

    Additionally, the proposal to put additional arrangements into 
place concerning the procedures, information sharing, and overall 
governance processes under the New Accord would create new efficiencies 
in the management of this important link between OCC and NSCC. The 
proposal to enhance information sharing between OCC and NSCC would 
allow the clearing agencies to more effectively identify, monitor, and 
manage risks that may be presented by certain Common Members, and would 
create new efficiencies in their general surveillance efforts with 
respect to these firms.
    In these ways, OCC believes the proposed New Accord is consistent 
with the requirements of Rule 17Ad-22(e)(21).\32\
---------------------------------------------------------------------------

    \32\ Id.
---------------------------------------------------------------------------

    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

    Section 17A(b)(3)(I) of the Act \33\ requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. OCC does not 
believe the proposed rule change would have any impact or impose any 
burden on competition. The primary purpose of the proposed rule change 
is to adopt a clearer, simpler framework for the settlement of Stock 
Options issued by OCC and settled through the facilities of NSCC 
through the introduction of a new Guaranty Substitution Time. The 
proposed New Accord would also extend this framework to both (1) Stock 
Options contracts in securities that are eligible to be settled through 
NSCC's Balance Order Accounting Operation and (2) certain delivery 
obligations arising from matured physically-settled Stock Futures 
contracts cleared by OCC that are eligible to be settled through NSCC's 
CNS Accounting Operation or Balance Order Accounting Operation. The New 
Accord would put additional arrangements into place concerning the 
procedures, information sharing, and overall governance processes under 
the agreement. OCC is also proposing to make certain clarifying and 
conforming changes to the OCC Rules as necessary to implement the New 
Accord or to otherwise provide more clarity in OCC's Rules. None of 
these proposed rule changes, either individually or together, would 
affect Common Members' access to OCC's services, nor would any of these 
proposed changes disadvantage or favor any particular user in 
relationship to another user. As such, OCC believes that the proposed 
changes would not have any impact or impose any burden on competition.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

(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. OCC 
will notify the Commission of any written comments received by OCC.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and

[[Page 28215]]

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-2017-013 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-2017-013. 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_013.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-2017-013 and 
should be submitted on or before July 11, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated Authority.\34\
---------------------------------------------------------------------------

    \34\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-12891 Filed 6-19-17; 8:45 am]
 BILLING CODE 8011-01-P
28212 Federal Register / Vol. 82, No. 117 / Tuesday, June 20, 2017 / Notices

As discussed above, the New Accord calculation, OCC is hoping to alleviate Stock Futures that are scheduled to be
eliminates the provisions of the Existing instances of ‘‘double-margining’’ for settled on the first business day after
Accord whereby OCC and NSCC Common Members that may otherwise exercise or maturity through NSCC
guaranteed each other the performance simultaneously owe margin to NSCC pursuant to Rule 901 and the relevant
of Common Members and made certain and OCC with respect to the same provisions of the NSCC Rules, even
payments to the other upon the default position. though such contracts are outside the
of a Common Member. As such, OCC OCC also proposes to delete Rule scope of the New Accord. These
proposes to delete discussions of such 608A in its entirety. The New Accord contracts would continue to be settled
guarantees and payments from newly seeks to eliminate the situation under as they are currently today.
renumbered Rule 901(i) and Rule 1107. the Existing Accord where Common OCC also proposes clarifying and
OCC also proposes amendments to Members are effectively ‘‘double- conforming changes to the introductory
Rules 910 and 911, which set forth margined’’ or required to language of Chapter IX of the Rules.
procedures for handling failures to make simultaneously post margin with OCC Specifically, OCC proposes conforming
or take delivery of securities in and NSCC with respect to the same changes to the Rule to reflect the
settlement of exercised or assigned position. As the New Accord eliminates replacement of the defined term ‘‘CNS-
Stock Options and matured physically- this double-margining scenario, Rule eligible’’ with ‘‘CCC-eligible’’ as
settled Stock Futures, to add language to 608A, which provides procedures described above. The proposed changes
both rules to clarify that the failure pursuant to which a Clearing Member would also clarify that OCC’s broker-to-
procedures set forth therein would not could use the securities deposited as broker settlement rules are contained in
apply with respect to any delivery to be margin with OCC as collateral to secure Rules 903–912, as Rule 902 concerns
made through NSCC pursuant to Rule a loan to pay its margin obligations to Delivery Advices, which also may be
901. Under the New Accord, once the NSCC, is now unnecessary. applicable to settlements made through
Guaranty Substitution Time with the correspondent clearing corporation
Other Clarifying Changes Not Related to
respect to a specific E&A/Delivery pursuant to Rule 901. In addition, the
the New Accord
Transaction occurs, OCC’s Guaranty proposed changes to the introductory
ends and NSCC’s Guaranty begins, OCC also proposes to amend its Rules language of Chapter IX of the Rules
leaving OCC with no involvement with to make clarifying changes that are not would provide additional clarity around
or responsibility for the settlement of directly required by the New Accord but OCC’s existing authority to alter a
the securities underlying that would provide additional clarity in its previous designation of a settlement
transaction. Therefore, if there is a Rules in light of other changes being method at any time prior to the
failure to make or take delivery with made to accommodate the New Accord. designated delivery date by specifying
respect to that transaction after Specifically, OCC proposes to revise that this authority would apply to both
Guaranty Substitution has occurred, the Rule 901 Interpretation and Policy (.02) settlements to be made through the
NSCC Rules will govern that failure. to provide that transactions that involve facilities of the correspondent clearing
With respect to deliveries made on a the delivery of non-CCC eligible corporation pursuant to Rule 901 or
broker-to-broker basis under OCC Rules securities made on a broker-to-broker settlements to be made on a broker-to-
903 through 912 (including those that basis (and away from NSCC) may broker basis pursuant to Rules 903
nevertheless involve the use of certain through 912. Finally, OCC proposes a
may utilize NSCC’s Obligation
services of NSCC (e.g., NSCC’s number of conforming changes to Rules
Warehouse services), and which are not
Obligation Warehouse). For such 901 and 912 to reflect the renumbering
governed by Rule 901, Guaranty
transactions, because they are not of various Rule provisions due to the
Substitution does not occur and OCC’s
covered by the New Accord and NSCC proposed amendments described above.
failure procedures would apply.
at no point guarantees settlement, OCC
Changes to OCC’s Margin Rules Rule 901 would not apply and delivery 2. Statutory Basis
Under the New Accord, OCC will no is governed by the broker-to-broker Section 17A(b)(3)(F) of the Act
longer collect margin on a transaction settlement procedures set forth in OCC requires, in part, that the rules of a
once it is no longer guaranteeing Rules 903 through 912, as is the case clearing agency be designed to promote
settlement for that transaction. As such, currently today. Additionally, while the prompt and accurate clearance and
OCC proposes to add language to Rule OCC’s existing Rules do not prohibit settlement of securities transactions, to
601(f) to clarify that OCC’s margin broker-to-broker settlements from being assure the safeguarding of securities and
calculations will not include delivery facilitated through the services of a funds which are in the custody or
obligations arising from any Stock correspondent clearing corporation, control of the clearing agency or for
Options or Stock Futures that are they do not explicitly contemplate the which it is responsible, and to foster
eligible for settlement through NSCC possibility. OCC also proposes to make cooperation and coordination with
and for which OCC has no further clarifying amendments to Rule 904(b) persons engaged in the clearance and
settlement obligations because either (i) and 910A(a) to more clearly distinguish settlement of securities transactions.24
Guaranty Substitution has occurred for between settlements effected through OCC believes that the proposed rule
E&A/Delivery Transactions under the NSCC’s CNS Accounting Operation or change is consistent with the
New Accord (as described in revised Balance Order Accounting Operations requirements of Section 17A(b)(3)(F) of
Rule 901(c)) or (ii) NSCC has otherwise in accordance with OCC Rule 901 and the Act 25 and the rules thereunder
accepted transactions for non-regular deliveries effected on a broker-to-broker applicable to OCC for the reasons set
sradovich on DSK3GMQ082PROD with NOTICES

way settlement under the NSCC Rules basis utilizing services of NSCC under forth below.
(as describe in newly proposed Rule OCC Rules 903 through 912 and to In connection with the proposal to
901(d)).23 By not including these clearly state which OCC Rules apply in enhance the timing of the Guaranty
transactions as part of OCC’s margin each context. Substitution, the proposed New Accord,
Further, OCC proposes to add a new and related changes to OCC’s By-Laws
23 Related revisions to Rule 901(c) and newly paragraph (d) to Rule 901 to clarify that
proposed Rule 901(d) are discussed in more detail OCC still intends, at its discretion, to 24 15 U.S.C. 78q–1(b)(3)(F).
below. effect settlement of Stock Options and 25 Id.

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Federal Register / Vol. 82, No. 117 / Tuesday, June 20, 2017 / Notices 28215

arguments concerning the foregoing, For the Commission, by the Division of respond to crises and pursue
including whether the proposed rule Trading and Markets, pursuant to delegated accountability, including where
change is consistent with the Act. Authority.34 country-specific sanctions programs
Comments may be submitted by any of Eduardo A. Aleman, may not exist or where the declaration
the following methods: Assistant Secretary. of a national emergency under the
[FR Doc. 2017–12891 Filed 6–19–17; 8:45 am] National Emergencies Act may not be
Electronic Comments BILLING CODE 8011–01–P appropriate. With the establishment of
the first dedicated global human rights
• Use the Commission’s Internet
and corruption sanctions program, the
comment form (http://www.sec.gov/ United States is uniquely positioned to
rules/sro.shtml); or DEPARTMENT OF STATE
lead the international community in
• Send an email to rule-comments@ [Public Notice: 10040] pursuing accountability abroad
sec.gov. Please include File Number SR– consistent with our values.
Global Magnitsky Human Rights
OCC–2017–013 on the subject line. Sanctions
Accountability Act Report
Paper Comments Although no financial sanctions were
AGENCY: Department of State.
imposed under the Act during the 120
• Send paper comments in triplicate ACTION: Notice.
days since its enactment, the United
to Secretary, Securities and Exchange States is actively seeking to identify
Commission, 100 F Street NE., SUMMARY: This notice contains the text
of the report, submitted by the persons to whom this Act may apply
Washington, DC 20549–1090. and collecting the necessary evidence to
President, that is required by the Global
All submissions should refer to File Magnitsky Human Rights impose sanctions.
Number SR–OCC–2017–013. This file Accountability Act. In addition, the Department of the
number should be included on the Treasury has issued a number of
FOR FURTHER INFORMATION CONTACT:
sanctions designations related to human
subject line if email is used. To help the Benjamin A. Kraut, Email: Krautb@ rights abuses and corruption under
Commission process and review your state.gov, Phone: (202) 647–9452. existing sanctions programs. Sanctions
comments more efficiently, please use SUPPLEMENTARY INFORMATION: On April programs that feature one or both of
only one method. The Commission will 21, 2017, the President approved the these designation criteria include
post all comments on the Commission’s following report under the Global programs related to Belarus, Burundi,
Internet Web site (http://www.sec.gov/ Magnitsky Human Rights the Central African Republic, the
rules/sro.shtml). Copies of the Accountability Act (Pub. L. 114–328, Democratic Republic of Congo, Iran,
submission, all subsequent Subtitle F). The text follows: Libya, North Korea, Russia, Somalia,
amendments, all written statements The Global Magnitsky Human Rights South Sudan, Syria, Ukraine,
with respect to the proposed rule Accountability Act (Pub. L. 114–328, Venezuela, and Zimbabwe, as well as
change that are filed with the Subtitle F) (the ‘‘Act’’), enacted on the Sergei Magnitsky Rule of Law
Commission, and all written December 23, 2016, authorizes the Accountability Act of 2012 (the
communications relating to the President to impose financial sanctions ‘‘Magnitsky Act’’).
proposed rule change between the and visa restrictions on foreign persons Examples of Treasury Department
Commission and any person, other than in response to certain human rights designations issued in recent years
those that may be withheld from the violations and acts of corruption. consistent with the human rights- and
public in accordance with the The President submits this report to corruption-related designation criteria
provisions of 5 U.S.C. 552, will be detail (1) U.S. government actions to of these programs are provided below.
administer the Act and (2) efforts to This is not an exhaustive list; rather, it
available for Web site viewing and
encourage the governments of other illustrates designations that align with
printing in the Commission’s Public
countries to impose sanctions that are the Act’s focus on human rights and
Reference Room, 100 F Street NE., similar to the sanctions authorized by corruption.
Washington, DC 20549, on official Section 1263 of the Act. Andrey Konstantinovich Lugovoy: On
business days between the hours of With the passage of the Act, the January 9, 2017, Russian national and
10:00 a.m. and 3:00 p.m. Copies of such United States now has a specific member of the Russian State Duma
filing also will be available for authority to identify and hold Andrey Konstantinovich Lugovoy was
inspection and copying at the principal accountable persons responsible for designated under the Magnitsky Act,
office of OCC and on OCC’s Web site at gross violations of human rights and which includes a provision targeting
http://www.theocc.com/components/ acts of significant corruption. The global persons responsible for extrajudicial
docs/legal/rules_and_bylaws/sr_occ_17_ reach of this authority, combined with killings, torture, or other gross human
013.pdf. a judicious selection of individuals and rights violations committed against
All comments received will be posted entities, will send a powerful signal that individuals seeking to expose illegal
without change; the Commission does the United States continues to seek an activity by Russian government officials.
not edit personal identifying end to impunity with respect to human Lugovoy was responsible for the 2006
information from submissions. You rights violations and corruption. The extrajudicial killing of whistleblower
should submit only information that Administration is committed to Alexander Litvinenko in London, with
sradovich on DSK3GMQ082PROD with NOTICES

implementing the Act to support efforts Dmitriy Kovtun (also sanctioned) acting
you wish to make available publicly.
to promote human rights and fight as his agent or on his behalf. Lugovoy
All submissions should refer to File corruption. By complementing current and Kovtun were two of five individuals
Number SR–OCC–2017–013 and should sanctions programs and diplomatic designated under the Magnitsky Act on
be submitted on or before July 11, 2017. outreach, the Act creates an additional January 9, 2017.
authority to allow the Administration to Evariste Boshab: On December 12,
2016, Evariste Boshab was designated
34 17 CFR 200.30–3(a)(12). under E.O. 13413 (‘‘Blocking Property of

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Document Created: 2017-06-20 02:20:50
Document Modified: 2017-06-20 02:20:50
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 28207