82 FR 61107 - Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of a Proposed Rule Change Concerning Enhanced and New Tools for Recovery Scenarios
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 246 (December 26, 2017)
Federal Register Volume 82, Issue 246 (December 26, 2017)
| Page Range | 61107-61116 | |
| FR Document | 2017-27691 |
[Federal Register Volume 82, Number 246 (Tuesday, December 26, 2017)] [Notices] [Pages 61107-61116] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-27691] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-82351; File No. SR-OCC-2017-020] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of a Proposed Rule Change Concerning Enhanced and New Tools for Recovery Scenarios December 19, 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 December 18, 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. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Clearing Agency's Statement of the Terms of Substance of the Proposed Rule Change This proposed rule change by the OCC would make certain revisions to OCC's Rules and By-Laws to enhance OCC's existing tools to address the risks of liquidity shortfalls and credit losses and to establish new tools by which OCC could re-establish a matched book following a default. Each of the tools proposed herein is contemplated to be deployed by OCC in an extreme stress event that has placed OCC into a recovery or orderly wind-down scenario. II. Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, OCC included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. OCC has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of these statements. All terms with initial capitalization not defined here have the same meaning set forth in OCC's By-Laws and Rules.\3\ --------------------------------------------------------------------------- \3\ OCC's By-Laws and Rules can be found on OCC's public website: http://optionsclearing.com/about/publications/bylaws.jsp. --------------------------------------------------------------------------- (A) Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Background The purpose of this proposed rule change is to make certain revisions to OCC's Rules and By-Laws Laws that are designed to enhance OCC's existing tools to address the risks of liquidity shortfalls and credit losses and to establish tools by which OCC could re-establish a matched book following a default. Each of the tools proposed herein is contemplated to be deployed by OCC in an extreme stress event that has placed OCC into a recovery or orderly wind-down scenario. Each of the proposed revisions also is designed to further OCC's compliance, in whole or in part, with the provisions of the Commission's rules identified immediately below. On September 28, 2016, the Commission adopted amendments to [[Page 61108]] Rule 17Ad-22 \4\ and added new Rules 17Ad-22(e)(3)(ii), (e)(4)(viii), (e)(4)(ix), (e)(7)(ix), (e)(13), (e)(23)(i) and (e)(23)(ii) \5\ pursuant to Section 17A of the Securities Exchange Act of 1934 \6\ and the Payment, Clearing, and Settlement Supervision Act of 2010 (``Payment, Clearing and Settlement Supervision Act'').\7\ In relevant part, these new rules collectively require a covered clearing agency (``CCA''), as defined by Rule 17Ad-22(a)(5),\8\ to establish, implement, maintain and enforce written policies and procedures reasonably designed to: (1) Maintain a risk management framework including plans for recovery and orderly wind-down necessitated by credit losses, liquidity shortfalls, general business risk losses or any other losses, (2) effectively identify, measure, monitor and manage its credit exposures to participants and those arising from its payment, clearing and settlement processes, including by addressing the allocation of credit losses a CCA might face if its collateral and other resources are insufficient to fully cover its credit exposures, (3) effectively identify, measure, monitor and manage credit exposures, including by describing the process to replenish any financial resource that a CCA may use following a default event or other event in which use of such resource is contemplated, (4) effectively identify, measure, monitor and manage liquidity risks that arises or is borne by the CCA by, at a minimum, describing the process for replenishing any liquid resource that a CCA may employ during a stress event, (5) ensure it has the authority and operational capacity to take timely action to contain losses and liquidity demands and continue to meet its obligations, (6) publicly disclose relevant rules and material procedures, including key aspects of its default rules and procedures, and (7) provide sufficient information to enable participants to identify and evaluate the risks, fees, and other material costs they incur by participating in the CCA. The relevant portions of each of these new requirements is restated below: --------------------------------------------------------------------------- \4\ 17 CFR 240.17Ad-22. \5\ 17 CFR 240.17Ad-22(e)(3)(ii), (e)(4)(viii), (e)(4)(ix), (e)(7)(ix), (e)(13), (e)(23)(i) and (e)(23)(ii). \6\ 15 U.S.C. 78q-1. \7\ 12 U.S.C. 5461 et. seq. \8\ 17 CFR 240.17Ad-22(a)(5). ---------------------------------------------------------------------------Rule 17Ad-22(e)(3)(ii) requires that each CCA ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . [m]aintain a sound risk management framework for comprehensively managing legal, credit, liquidity, operational, general business, investment, custody, and other risks that arise in or are borne by the [CCA], which . . . [i]ncludes plans for the recovery and orderly wind-down of the [CCA] necessitated by credit losses, liquidity shortfalls, losses from general business risk, or any other losses.'' \9\ --------------------------------------------------------------------------- \9\ 17 CFR 240.17Ad-22(e)(3)(ii). --------------------------------------------------------------------------- Rule 17Ad-22(e)(4)(viii) requires that each CCA ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . [e]ffectively identify, measure, monitor, and manage its credit exposures to participants and those arising from its payment, clearing, and settlement processes, including by . . . [a]ddressing allocation of credit losses the [CCA] may face if its collateral and other resources are insufficient to fully cover its credit exposures, including the repayment of any funds the [CCA] may borrow from liquidity providers.'' \10\ --------------------------------------------------------------------------- \10\ 17 CFR 240.17Ad-22(e)(v)(viii). --------------------------------------------------------------------------- Rule 17Ad-22(e)(4)(ix) requires that each CCA ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . [e]ffectively identify, measure, monitor, and manage its credit exposures to participants and those arising from its payment, clearing, and settlement processes, including by . . . [d]escribing the [CCA's] process to replenish any financial resources it may use following a default or other event in which use of such resources is contemplated.'' \11\ --------------------------------------------------------------------------- \11\ 17 CFR 240.17Ad-22(e)(4)(ix). --------------------------------------------------------------------------- Rule 17Ad-22(e)(7)(ix) requires that each CCA ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . [e]ffectively measure, monitor, and manage the liquidity risk that arises in or is borne by the [CCA], including measuring, monitoring, and managing its settlement and funding flows on an ongoing and timely basis, and its use of intraday liquidity by, at a minimum, doing the following . . . [d]escribing the [CCA's] process to replenish any liquid resources that the clearing agency may employ during a stress event.'' \12\ --------------------------------------------------------------------------- \12\ 17 CFR 240.17Ad-22(e)(7)(ix). --------------------------------------------------------------------------- Rule 17Ad-22(e)(13) requires that each CCA ``establish, implement, maintain and enforce written policies and procedures reasonably designed to. . . [e]nsure the covered clearing agency has the authority and operational capacity to take timely action to contain losses and liquidity demands and continue to meet its obligations . . .'' \13\ --------------------------------------------------------------------------- \13\ 17 CFR 240.17Ad-22(e)(13). --------------------------------------------------------------------------- Rule 17Ad-22(e)(23)(i) requires that each CCA ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . [p]ublicly disclos[e] all relevant rules and material procedures, including key aspects of its default rules and procedures.'' \14\ --------------------------------------------------------------------------- \14\ 17 CFR 240.17Ad-22(e)(23)(i). --------------------------------------------------------------------------- Rule 17Ad-22(e)(23)(ii) requires that each CCA ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . [p]rovid[e] sufficient information to enable participants to identify and evaluate the risks, fees, and other material costs they incur by participating in the covered clearing agency.'' \15\ --------------------------------------------------------------------------- \15\ 17 CFR 240.17Ad-22(e)(23)(ii). --------------------------------------------------------------------------- OCC meets the definition of a CCA and is therefore subject to the requirements of the CCA rules, including new Rules 17Ad-22(e)(3)(ii), (e)(4)(viii), (e)(4)(ix), (e)(7)(ix), (e)(13), (e)(23)(i) and (e)(23)(ii).\16\ --------------------------------------------------------------------------- \16\ 17 CFR 240.17Ad-22(e)(3)(ii), (e)(4)(viii), (e)(4)(ix) and (e)(7)(ix). --------------------------------------------------------------------------- Proposed Changes Summary of Proposed Changes In order to enhance OCC's existing tools to address the risks of liquidity shortfalls and credit losses and to establish new tools by which OCC could re-establish a matched book following a default, OCC is proposing to make the following revisions to its Rules and By-Laws: (1) Revise the existing assessment powers in Section 6 of Article VIII of OCC's By-Laws, specifically to: (a) Establish a rolling ``cooling-off period'' that would be triggered by the payment of a proportionate charge against the Clearing Fund (``triggering proportionate charge''), during which period the aggregate liability of a Clearing Member to replenish the Clearing Fund (inclusive of assessments) would be 200% of the Clearing Member's required contribution as of the time immediately preceding the triggering proportionate charge; (b) Clarify that a Clearing Member that chooses to terminate its membership status during a cooling-off period will not be liable for replenishment of the Clearing Fund immediately following the expiration of such cooling-off period, provided that the withdrawing Clearing Member satisfies enumerated criteria, including providing notice of such termination by no later than the end of the cooling-off period and by closing-out and/or transferring of all its open positions with OCC by no later than the last day of the cooling-off period; and [[Page 61109]] (c) Delineate between the obligation of a Clearing Member to replenish its contributions to the Clearing Fund and its obligations to meet additional ``assessments'' that may be levied following a proportionate charge to the Clearing Fund. (2) Adopt a new Rule 1009 that would provide OCC with discretionary authority to call for voluntary payments from non-defaulting Clearing Members in a circumstance where one or more Clearing Members has already defaulted and OCC has determined that it may not have sufficient resources to satisfy its obligations and liabilities resulting from such default. Rule 1009 also would establish that OCC would prioritize compensation of Clearing Members that made voluntary payments from any amounts recovered from the defaulted Clearing Members. (3) Adopt a new Rule 1111 that would provide authority to: (a) Allow OCC to call for voluntary tear-ups (``Voluntary Tear- Up,'' as defined below) of non-defaulting Clearing Member and/or customer positions at any time following the suspension or default of a Clearing Member, with the scope of any such Voluntary Tear-Ups being determined by the Risk Committee of OCC's Board (``Risk Committee''); (b) Allow OCC's Board to vote to tear-up the ``Remaining Open Positions'' (defined below) of a defaulted Clearing Member, as well as any ``Related Open Positions'' (defined below) in a circumstance where OCC has attempted one or more auctions of such defaulted Clearing Member's remaining open positions and OCC has determined that it may not have sufficient resources to satisfy its obligations and liabilities resulting from such default with the scope of any such tear-up (``Partial Tear-Up'') being determined by the Risk Committee; and (c) Allow OCC's Board to vote to re-allocate losses, costs and fees imposed upon holders of positions extinguished in a Partial Tear-Up through a special charge levied against remaining non-defaulting Clearing Members. (4) Revise the descriptions and authorizations in Article VIII of OCC's By-Laws concerning the use of the Clearing Fund to reflect the discretion of OCC to use remaining Clearing Fund contributions to re- allocate losses imposed on non-defaulting Clearing Members and customers from a Voluntary Tear-Up or a mandatory tear-up (``Partial Tear-Up,'' as defined below). Discussion of Proposed Changes Each of the proposed revisions to OCC's Rules and By-Laws is described in more detail in the following sub-sections: 1. Proposed Changes to OCC's Assessment Powers a. Current Assessment Powers OCC's current assessment powers are described in Section 6 of Article VIII of OCC's By-Laws. Section 6 establishes a general requirement for each Clearing Member to promptly make good any deficiency in its required contribution to the Clearing Fund whenever an amount is paid out of its Clearing Fund contribution (whether by proportionate charge or otherwise).\17\ In this regard, a Clearing Member's obligation to replenish the Clearing Fund is not currently subject to any pre-determined limit. Notwithstanding the foregoing, a Clearing Member can limit the amount of its liability for replenishing the Clearing Fund (at an additional 100% of the amount of its then- required Clearing Fund contribution) by winding-down its clearing activities and terminating its status as a Clearing Member. Any Clearing Member seeking to so limit its liability for replenishing the Clearing Fund must: (i) Notify OCC in writing not later than the fifth business day after the proportionate charge that it is terminating its status as a Clearing Member, (ii) not initiate any opening purchase or opening writing transaction, and, if the Clearing Member is a Market Loan Clearing Member or a Hedge Clearing Member, not initiate any Stock Loan transaction, through any of its accounts, and (iii) close out or transfer all of its open positions as promptly as practicable after giving notice to OCC. Thus, withdrawal from clearing membership is the only means by which a Clearing Member currently can limit its liability for replenishing the Clearing Fund. --------------------------------------------------------------------------- \17\ Under Article VIII, Section 6 of OCC's By-Laws, OCC currently has authority to assess proportionate charges against Clearing Members' contributions to the Clearing Fund in certain enumerated situations. For example, Section 6 generally provides that if the conditions regarding a Clearing Member default specified in subparagraphs (a)(i) through (vi) of Article VIII, Section 5 of OCC's By-Laws are satisfied, OCC will make good resulting losses or expenses that are suffered by OCC by applying the defaulting Clearing Member's Clearing Fund contribution after first applying other funds available to OCC in the accounts of the Clearing Member. If the sum of the obligations, however, exceeds the total Clearing Fund contribution and other funds of the defaulting Clearing Member available to OCC, then OCC will charge the amount of the remaining deficiency on a proportionate basis against all non-defaulting Clearing Members' required contributions to the Clearing Fund at the time. Section 5(b) of Article VIII of OCC's By-Laws similarly provides for proportionate charges against Clearing Members' contributions to the Clearing Fund when certain conditions are met that involve a failure by a bank or a securities or commodities clearing organization to perform obligations to OCC when they are due. --------------------------------------------------------------------------- b. Proposed Changes to Assessment Powers OCC proposes to amend Section 6 of Article VIII of OCC's By-Laws to make three primary modifications regarding its existing authority to assess proportionate charges against Clearing Members' contributions to the Clearing Fund. First, the proposal introduces an automatic minimum fifteen calendar day ``cooling-off'' period that begins when a proportionate charge is assessed by OCC against Clearing Members' Clearing Fund contributions. While the cooling-off period will continue for a minimum of fifteen consecutive calendar days, if one or more of the events described in clauses (i) through (iv) of Article VIII, Section 5(a) of OCC's By-Laws occur(s) during that fifteen calendar day period and result in one or more proportionate charges against the Clearing Fund, the cooling-off period shall be extended through either (i) the fifteenth calendar day from the date of the most recent proportionate charge resulting from the subsequent event, or (ii) the twentieth day from the date of the proportionate charge that initiated the cooling-off period, whichever is sooner. During a cooling-off period, each Clearing Member would have its aggregate liability to replenish the Clearing Fund capped at 200% of the Clearing Member's then-required contribution to the Clearing Fund. Once the cooling-off period ends each remaining Clearing Member would be required to replenish the Clearing Fund in the amount necessary to meet its then-required contribution. Once the cooling-off period ends, any remaining losses or expenses suffered by OCC as a result of any event described in clauses (i) through (iv) of Article VIII, Section 5(a) of OCC's By-Laws that occurred during such cooling-off period could not be charged against the amounts Clearing Members have contributed to replenish the Clearing Fund upon the expiration of the cooling-off period.\18\ --------------------------------------------------------------------------- \18\ After a cooling-off period has ended, the occurrence of any event described in clauses (i) through (iv) of Article VIII, Section 5(a) of OCC's By-Laws that results in a proportionate charge against the Clearing Fund would trigger a new cooling off period, and thusly, a cap of 200% of each Clearing Member's then-required contribution would again apply. --------------------------------------------------------------------------- Second, in connection with the cooling-off period, the proposal would [[Page 61110]] extend the time frame within which a Clearing Member may provide a termination notice to OCC to avoid liability for replenishment of the Clearing Fund after the cooling-off period and would modify the obligations of such a terminating Clearing Member for closing-out and transferring its remaining open positions. Specifically, to effectively terminate its status as a Clearing Member and not be liable for replenishing the Clearing Fund after the cooling-off period, a Clearing Member would be required to: (i) Notify OCC in writing of its intent to terminate not later than the last day of the cooling-off period, (ii) not initiate any opening purchase or opening writing transaction, and, if the Clearing Member is a Market Loan Clearing Member or a Hedge Clearing Member, not initiate any Stock Loan transaction, through any of its accounts, and (iii) close-out or transfer all of its open positions by no later than the last day of the cooling-off period. If a Clearing Member fails to satisfy all of these conditions by the end of a given cooling-off period, it would not have completed all of the requirements necessary to terminate its status as a Clearing Member under Article VIII, Section 6 of OCC's By-Laws and therefore it would remain subject to the obligation to replenish the Clearing Fund after the end of the cooling-off period. Third, the proposal would clarify the distinction between ``replenishment'' of the Clearing Fund and a Clearing Member's obligation to answer ``assessments.'' In this context, the term ``replenish'' (and its variations) shall to refer to a Clearing Member's standing duty, following any proportionate charge against the Clearing Fund, to return its Clearing Fund contribution to the amount required from such Clearing Member for the month in question.\19\ The term ``assessment'' (and its variations) shall refer to the amount, during any cooling-off period, that a Clearing Member would be required to contribute to the Clearing Fund in excess of the amount of the Clearing Member's pre-funded required Clearing Fund contribution. --------------------------------------------------------------------------- \19\ This assumes that the proportionate charge resulted in the Clearing Member's actual Clearing Fund contribution dropping below the amount of its required contribution (i.e., that the Clearing Member did not have excess above its required contribution that was sufficient to cover the amount of the proportionate charge allocated to such Clearing Member). --------------------------------------------------------------------------- Proposed Addition of Ability To Request Voluntary Payments OCC proposes to add new Rule 1009, which will provide a framework by which OCC could receive voluntary payments in a circumstance where a Clearing Member has defaulted and OCC has determined that, notwithstanding the availability of any remaining resources under OCC Rules 707, 1001, 1104 through 1107, 2210 and 2211,\20\ OCC may not have sufficient resources to satisfy its obligations and liabilities resulting from such default. Under new Rule 1009, OCC will initiate a call for voluntary payments by issuing a ``Voluntary Payment Notice'' inviting all non-defaulting Clearing Members to make payments to the Clearing Fund in addition to any amounts they are otherwise required to contribute pursuant to Rule 1001. The Voluntary Payment Notice would specify the terms applicable to any voluntary payment, including but not limited to, that any voluntary payment may not be withdrawn once made, that no Clearing Member shall be obligated to make a voluntary payment and that OCC shall retain full discretion to accept or reject any voluntary payment. Rule 1009 specifies that if OCC subsequently recovers from the defaulted Clearing Member or the estate(s) of the defaulted Clearing Member(s), OCC would seek to compensate first from such recovery all non-defaulting Clearing Members that made voluntary payments (and if the amount recovered from the defaulted Clearing Member(s) is less than the aggregate amount of voluntary payments, non- defaulting Clearing Members that made voluntary payments each would receive a percentage of the recovery that corresponds to that Clearing Member's percentage of the total amount of voluntary payments received). --------------------------------------------------------------------------- \20\ Rule 707 addresses the treatment of funds in a Clearing Member's X-M accounts. Rule 1001 addresses the size of OCC's Clearing Fund and the amount of a Clearing Member's contribution. Rules 1104 through 1107 concern the treatment of the portfolio of a defaulted Clearing Member. Rules 2210 and 2211 concern the treatment of Stock Loan positions of a defaulted Clearing Member. --------------------------------------------------------------------------- Proposed Addition of Ability To Conduct Voluntary Tear-Ups OCC proposes to add new Rule 1111, which, in relevant part, will establish a framework by which non-defaulting Clearing Members and non- defaulting customers of Clearing Members could be given an opportunity to voluntarily extinguish (i.e., voluntarily tear-up) their open positions at OCC in a circumstance where a Clearing Member has defaulted and OCC has determined that, notwithstanding the availability of any remaining resources under OCC Rules 707, 1001, 1104 through 1107, 2210 and 2211, OCC may not have sufficient resources to satisfy its obligations and liabilities resulting from such default. While Risk Committee approval is not needed to commence a voluntary tear-up, the Risk Committee would be responsible for determining the appropriate scope of each voluntary tear-up. To ensure OCC retains sufficient flexibility to effectively deploy this tool in an extreme stress event, proposed Rule 1111(c) is drafted to provide the Risk Committee with discretion to determine the appropriate scope of each voluntary tear-up.\21\ New Rule 1111(c) also would impose standards designed to circumscribe the Risk Committee's discretion, requiring that any determination regarding the scope of a voluntary tear-up shall (i) be based on then-existing facts and circumstances, (ii) be in furtherance of the integrity of OCC and the stability of the financial system, and (iii) take into consideration the legitimate interests of Clearing Members and market participants. --------------------------------------------------------------------------- \21\ Notwithstanding the discretion that would be afforded by the text of proposed Rule 1111(c), OCC anticipates that the scope of voluntary tear-ups likely would be dictated by the cleared contracts remaining in the portfolio(s) of the defaulted Clearing Member(s). --------------------------------------------------------------------------- Once the Risk Committee has determined the scope of the Voluntary Tear-Up, OCC will initiate the call for voluntary tear-ups by issuing a ``Voluntary Tear-Up Notice.'' The Voluntary Tear-Up Notice shall inform all non-defaulting Clearing Members of the opportunity to participate in a Voluntary Tear-Up.\22\ The Voluntary Tear-Up Notice would specify the terms applicable to any voluntary tear-up, including but not limited to, that no Clearing Member or customers of a Clearing Member shall be obligated to participate in a voluntary tear-up and that OCC shall retain full discretion to accept or reject any voluntary tear-up. --------------------------------------------------------------------------- \22\ Since OCC does not know the identities of Clearing Members' customers, OCC would depend on each Clearing Member to notify its customers with positions in scope of the Voluntary Tear-Up of the opportunity to participate in such tear-up. --------------------------------------------------------------------------- OCC is not proposing a tear-up process that would require the imposition of ``gains haircutting'' (i.e., the reduction of unpaid gains) on a portion of OCC's cleared contracts.\23\ [[Page 61111]] Instead, OCC has determined that its tear-up process--for both Voluntary Tear-Ups as well as Partial Tear-Ups--should be initiated on a date sufficiently in advance of the exhaustion of OCC's financial resources such that OCC would be expected to have adequate remaining resources to cover the amount it must pay to extinguish the positions of Clearing Members and customers without haircutting gains.\24\ --------------------------------------------------------------------------- \23\ In general, forced gains haircutting is a tool that can be more easily applied to products whose gains are settled at least daily, like futures through an exchange of variation margin, and by central counterparties with comparatively large daily settlement flows. Listed options, which constitute the vast majority of the contracts cleared by OCC, do not have daily settlement flows and any attempt to reduce the ``unrealized gains'' of a listed options contract would require the reduction of the option premium that is embedded within the required margin (such a process would effectively require haircutting the listed option's initial margin). \24\ OCC anticipates that it would determine the date on which to initiate Partial Tear-Ups by monitoring its remaining financial resources against the potential exposure of the remaining unauctioned positions from the portfolio(s) of the defaulted Clearing Member(s). --------------------------------------------------------------------------- In OCC's proposed tear-up process, the holders of torn-up positions would be assigned a Tear-Up Price and OCC would draw on its remaining financial resources in order to extinguish the torn-up positions at the assigned Tear-Up Price without forcing a reduction in the amount unpaid gains on such positions. The proposed changes would provide OCC with two separate and non-exclusive means of equitably re-allocating the losses, costs or expenses imposed upon the holders of torn-up positions as a result of the tear-up(s). First, the proposed changes to Article VIII would provide OCC discretion to use remaining Clearing Fund contributions to re-allocate losses imposed on non-defaulting Clearing Members and customers from such tear-up(s). Second, Rule 1111(a) would provide that if OCC subsequently recovers from the defaulted Clearing Member or the estate(s) of the defaulted Clearing Member(s) and the amount of such recovery exceeds the amount OCC received in voluntary payments, then non-defaulting Clearing Members and non-defaulting customers that voluntarily tore-up open positions and incurred losses from such tear-ups would be repaid from the amount of the recovery in excess of the amount OCC received in voluntary payments.\25\ If the amount recovered is less than the aggregate amount of Voluntary Tear- Up, each non-defaulting Clearing Member and non-defaulting customer that incurred losses from voluntarily torn-up positions would be repaid in an amount proportionate to the percentage of its total amount of losses, costs and fees imposed on Clearing Members or customers as a result of the Voluntary Tear-Ups. --------------------------------------------------------------------------- \25\ In order to effect re-allocation of the losses, costs or expenses imposed upon the holders of torn-up positions, OCC expects that after it has completed its tear-up process and re-established a matched book, holders of both voluntarily torn-up and mandatorily torn-up positions would be provided with a limited opportunity to re-establish positions in the contracts that were voluntarily or mandatorily extinguished. After the expiration of such period, OCC would seek to collect the information on the losses, costs or expenses that had been imposed on the holders of torn-up positions. Based on the information collected, OCC would determine whether it can reasonably determine the losses, costs and expenses sufficiently to re-allocate such amounts. --------------------------------------------------------------------------- With respect to Voluntary Tear-Ups, new Rule 1111(h) would clarify that no action or omission by OCC pursuant to and in accordance with Rule 1111 shall constitute a default by OCC. Proposed Addition of Ability To Conduct Partial Tear-Ups OCC proposes to add new Rule 1111, which, in relevant part, will provide the Board with discretion to extinguish the remaining open positions of any defaulted Clearing Member or customer of such defaulted Clearing Member(s) (such positions, ``Remaining Open Positions''), as well as any related open positions as necessary to mitigate further disruptions to the markets affected by the Remaining Open Positions (such positions, ``Related Open Positions''), in a circumstance where a Clearing Member has defaulted and OCC has determined that, notwithstanding the availability of any remaining resources under OCC Rules 707, 1001, 1104 through 1107, 2210 and 2211, OCC may not have sufficient resources to satisfy its obligations and liabilities resulting from such default (such tear-ups hereinafter collectively referred to as ``Partial Tear-Ups''). Like the determination for Voluntary Tear-Ups, the Risk Committee shall determine the appropriate scope of each Partial Tear-Up and such determination shall (i) be based on then-existing facts and circumstances, (ii) be in furtherance of the integrity of OCC and the stability of the financial system, and (iii) take into consideration the legitimate interests of Clearing Members and market participants. Once the Risk Committee has determined the scope of the Partial Tear- Up, OCC will initiate the Partial Tear-Up process by issuing a ``Partial Tear-Up Notice.'' The Partial Tear-Up Notice shall (i) identify the Remaining Open Positions and Related Open Positions designated for tear-up, (ii) identify the open positions of non- defaulting Clearing Members and non-defaulting customers that will be subject to Partial Tear-Up (such positions, ``Tear-Up Positions''), (iii) specify the termination price (``Partial Tear-Up Price'') for each position to be torn-up, and (iv) list the date and time as of which the Partial Tear-Up will occur.\26\ With regard to the date and time of a Partial Tear-Up, Rule 1111(d) specifies that the Risk Committee shall set the date and time. With regard to the Partial Tear- Up Price, OCC anticipates that it is likely to use the last established end-of-day settlement price, in accordance with its existing practices concerning pricing and valuation. However, given that it is not possible to know in advance the precise circumstances that would cause OCC to conduct a tear-up, Rule 1111(f) has been drafted to allow OCC to exercise reasonable discretion, if necessary, in establishing the Partial Tear-Up Price by some means other than its existing practices concerning pricing and valuation. Specifically, Rule 1111(f) would require that OCC, in exercising any such discretion, would act in good faith and in a commercially reasonable manner to adopt methods of valuation expected to produce reasonably accurate substitutes for the values that would have been obtained from the relevant market if it were operating normally, including but not limited to the use of pricing models that use the market price of the underlying interest or the market prices of its components. Rule 1111(f) further specifies that OCC may consider the same information set forth in subpart (c) of Section 27, Article VI of OCC's By-Laws.\27\ --------------------------------------------------------------------------- \26\ Since OCC does not know the identities of Clearing Members' customers, OCC would depend on each Clearing Member to notify its customers with positions in scope of the Partial Tear-Up of the possibility of tear-up. \27\ In relevant part, subpart (c) reads as follows: ``In determining a close-out amount, the Corporation may consider any information that it deems relevant, including, but not limited to, any of the following: (1) Prices for underlying interests in recent transactions, as reported by the market or markets for such interests; (2) quotations from leading dealers in the underlying interest, setting forth the price (which may be a dealing price or an indicative price) that the quoting dealer would charge or pay for a specified quantity of the underlying interest; (3) relevant historical and current market data for the relevant market, provided by reputable outside sources or generated internally; and (4) values derived from theoretical pricing models using available prices for the underlying interest or a related interest and other relevant data. Amounts stated in a currency other than U.S. Dollars shall be converted to U.S. Dollars at the current rate of exchange, as determined by the Corporation. A position having a positive close- out value shall be an `asset position' and a position having a negative close-out value shall be a `liability position.' '' --------------------------------------------------------------------------- The scope of any Partial Tear-Up will be determined in accordance with Rule 1111(e). With respect to the extinguishment of Remaining Open Positions, OCC will designate Tear-Up Positions in identical Cleared Contracts and Cleared Securities on the opposite side of the market and in an aggregate amount equal to that of the Remaining [[Page 61112]] Open Positions. OCC will only designate Tear-Up Positions in the accounts of non-defaulting Clearing Members (inclusive of such Clearing Members' customer accounts) with an open position in the applicable Cleared Contract or Cleared Security and of non-defaulted customers of a defaulted Clearing Member. Tear-Up Positions shall be designated and applied by OCC on a pro rata basis across all the identical positions in Cleared Contracts and Cleared Securities on the opposite side of the market in the accounts of non-defaulted Clearing Members and non- defaulted customers (including the non-defaulted customers of defaulted Clearing Members). Rule 1111(e)(iii) provides that every Partial Tear-Up position is automatically terminated upon and with effect from the Partial Tear-Up Time, without the need for any further step by any party to such Cleared Contract or Cleared Security, and that upon termination, either OCC or the relevant Clearing Member (as the case may be) shall be obligated to pay the other the applicable Partial Tear-Up Price. Rule 1111(e)(iii) further provides that the corresponding open position shall be deemed terminated at the Partial Tear-Up Price. Rule 1111(g) provides that to the extent losses imposed upon non- defaulting Clearing Members and non-defaulting customers resulting from a Partial Tear-Up can reasonably be determined, the Board may elect to re-allocate such losses among all non-defaulting Clearing Members through a special charge to all non-defaulting Clearing Members in an amount corresponding to each such non-defaulting Clearing Member's proportionate share of the variable amount of the Clearing Fund at the time such Partial Tear-Up is conducted.\28\ --------------------------------------------------------------------------- \28\ For the avoidance of doubt, the special charge would be distinct and separate from a Clearing Member's obligation to satisfy Clearing Fund assessments, and therefore, would not be subject to the aforementioned assessment cap in the amount of 200% of a Clearing Member's then-required contribution to the Clearing Fund. --------------------------------------------------------------------------- With respect to Partial Tear-Ups, new Rule 1111(h) would clarify that no action or omission by OCC pursuant to and in accordance with Rule 1111 shall constitute a default by OCC. 2. Statutory Basis Section 17A(b)(3)(F) of the Securities Exchange Act of 1934 (``Act''),\29\ requires, among other things, that the rules of a clearing agency be designed to foster cooperation and coordination with persons engaged in the clearance and settlement of securities transactions, to remove impediments to and perfect the mechanism of a national system for the prompt and accurate clearance and settlement of securities transactions, and, in general, to protect investors and the public interest. OCC believes that the proposed rule change is consistent with the requirements of Section 17A(b)(3)(F) of the Act \30\ and the rules thereunder applicable to OCC for the reasons set forth below. --------------------------------------------------------------------------- \29\ 15 U.S.C. 78q-1(b)(3)(F). \30\ Id. --------------------------------------------------------------------------- As stated above, each of the changes is designed to provide OCC with tools to address the risks OCC might confront in a recovery and orderly wind-down scenario. In this regard, the proposed changes are designed to further address the risks of liquidity shortfalls and credit losses resulting from a Clearing Member default or certain other loss events and to establish tools to enable OCC to re-establish a matched book and limit OCC's potential exposure to losses from a Clearing Member default, in each case as might result from an unprecedented loss scenario that exceeds OCC's standard risk management and default management procedures. OCC's process in crafting the proposed changes was informed by published guidance from OCC's primary regulators (the Commission and the Commodity Futures Trading Commission), the publications of key international organizations (including the Bank for International Settlements, the International Organization of Securities Commissions and the Financial Stability Board) and the publications of key industry trade organizations. OCC's proposal was further informed by conversations with, among others, OCC's Board, OCC's Risk Committee, Clearing Members and market participants. Informed by these perspectives, OCC has crafted the proposed changes with the aim of enhancing its ability to address an unprecedented loss event but also, to the extent possible, providing a reasonable amount of certainty to Clearing Members, customers and other stakeholders about the potential consequences of such an event and the resources and tools that would be expected to be available to OCC in support of its clearing operations.\31\ Accordingly, the proposed changes should leave Clearing Members, customers and other stakeholders in a position to better evaluate the risks and benefits of clearing in order to facilitate their own risk management, and to the extent applicable, their own regulatory and capital considerations. The proposed changes also seek to avoid a result that would force only particular clearing participants to shoulder certain losses in an extreme stress scenario (i.e., holders of positions extinguished in Partial Tear-Ups),\32\ and instead leaves OCC and its Board with discretionary tools that could provide a more equitable method of allocating the losses from such an event more broadly, consistent with the general principle of mutualized loss upon which central clearing rests. In this regard, OCC believes the proposed changes foster cooperation and coordination with participants in the clearing system, consistent with Section 17A(b)(3)(F) of the Act.\33\ --------------------------------------------------------------------------- \31\ OCC notes that the very nature of an extreme stress and unprecedented loss event means that its impact is difficult to predict and quantify in advance. \32\ Absent a means of re-allocating the potential losses, costs and fees imposed upon holders of positions extinguished during tear- ups, the holders of such positions would be left to individually address such losses, costs and fees. \33\ 15 U.S.C. 78q-1(b)(3)(F). --------------------------------------------------------------------------- As stated above, the proposed changes are designed to enable OCC to further address the risks of liquidity shortfalls and credit losses resulting from a Clearing Member default or certain other loss events and to re-establish a matched book and limit OCC's potential exposure to losses from a Clearing Member default, in each case as might result from an unprecedented loss scenario that exceeds OCC's standard risk management and default management procedures. OCC believes that the proposed changes will facilitate its ability to fully allocate, and ultimately extinguish, the loss so that it has a better opportunity of withstanding an extreme stress scenario without sacrificing its viability as a going concern or its ability to continue to provide its critical clearing services. In this regard, OCC believes that the proposed changes remove impediments to and perfect the mechanism of a national system for the prompt and accurate clearance and settlement of securities transactions, consistent with Section 17A(b)(3)(F) of the Act.\34\ --------------------------------------------------------------------------- \34\ Id. --------------------------------------------------------------------------- The proposed changes are designed to enhance the stability of the clearing system generally and are aimed at ensuring that OCC has adequate tools and resources to better protect market participants from the risks of extreme stress scenarios and unprecedented loss events. In this regard, OCC believes that the proposed changes are reasonably designed to protect investors and the public interest, consistent with Section 17A(b)(3)(F) of the Act.\35\ --------------------------------------------------------------------------- \35\ Id. --------------------------------------------------------------------------- [[Page 61113]] The proposed changes also are designed to further OCC's compliance, in whole or in part, with the provisions of the Commission's rules discussed immediately below: Recovery and Orderly Wind-Down In relevant part, Rule 17Ad-22(e)(3)(ii) requires that each CCA ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . plan[ ] for the recovery and orderly wind-down of the [CCA] necessitated by credit losses, liquidity shortfalls, losses from general business risk, or any other losses.'' \36\ As stated above, each of the proposed changes is designed to provide OCC with tools to address the risks OCC might confront in a recovery and orderly wind-down scenario.\37\ Consistent with the requirements of Rule 17Ad-22(e)(3)(ii), the proposed tools would enable OCC to better address the risks of liquidity shortfalls and credit losses resulting from a Clearing Member default or certain other loss events and, if necessary, to ultimately re-establish a matched book in a recovery or orderly wind-down scenario.\38\ In this context, the proposed changes serve as a critical component of OCC's recovery and orderly wind-down plan. As a result, in OCC's view, the proposed changes are consistent with the requirements of Rule 17Ad-22(e)(3)(ii) as to the recovery and orderly wind-down plan.\39\ --------------------------------------------------------------------------- \36\ 17 CFR 240.17Ad-22(e)(3)(ii). \37\ Indeed, the OCC's separately filed recovery and orderly wind-down plan identifies OCC's assessment powers, ability to call for voluntary payments, ability to call for Voluntary Tear-Ups and ability to impose Partial Tear-Ups among its ``Recovery Tools.'' OCC has filed a proposed rule change with the Commission in connection with this proposal. See SR-OCC-2017-021. \38\ 17 CFR 240.17Ad-22(e)(3)(ii). \39\ 17 CFR 240.17Ad-22(e)(3)(ii). --------------------------------------------------------------------------- Allocation of Credit Losses Above Available Resources In relevant part, Rule 17Ad-22(e)(4)(viii) requires that each CCA ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . [a]ddress[ ] allocation of credit losses the [CCA] may face if its collateral and other resources are insufficient to fully cover its credit exposures . . .'' \40\ The proposed changes would provide OCC with three distinct tools that could be used to allocate any credit losses OCC may face in excess of collateral and other resources available to OCC. First, new Rule 1009 would provide a framework by which OCC could receive voluntary payments in a circumstance where a Clearing Member has defaulted and OCC has determined that, notwithstanding the availability of any remaining resources under OCC Rules 707, 1001, 1104 through 1107, 2210 and 2211,\41\ OCC may not have sufficient resources to satisfy its obligations and liabilities resulting from such default. Second, new Rule 1111 would establish a framework by which non-defaulting Clearing Members and non-defaulting customers of Clearing Members could be given an opportunity to participate in Voluntarily Tear-Ups in a circumstance where a Clearing Member has defaulted and OCC has determined that, notwithstanding the availability of any remaining resources under OCC Rules 707, 1001, 1104 through 1107, 2210 and 2211, OCC may not have sufficient resources to satisfy its obligations and liabilities resulting from such default. Finally, new Rule 1111 also would provide the Board with discretion to mandatorily tear-up Remaining Open Positions and Related Open Positions, in a circumstance where a Clearing Member has defaulted and OCC has determined that, notwithstanding the availability of any remaining resources under OCC Rules 707, 1001, 1104 through 1107, 2210 and 2211, OCC may not have sufficient resources to satisfy its obligations and liabilities resulting from such default.\42\ In OCC's view, each of these tools could be deployed by OCC, if necessary, to allocate credit losses in excess of the collateral and other resources available to OCC, in accordance with Rule 17Ad-22(e)(4)(viii).\43\ --------------------------------------------------------------------------- \40\ 17 CFR 240.17Ad-22(e)(v)(viii). \41\ Rule 707 addresses the treatment of funds in a Clearing Member's X-M accounts. Rule 1001 addresses the size of OCC's Clearing Fund and the amount of a Clearing Member's contribution. Rules 1104 through 1107 concern the treatment of the portfolio of a defaulted Clearing Member. Rules 2210 and 2211 concern the treatment of Stock Loan positions of a defaulted Clearing Member. \42\ Rule 1111(g), which would provide the Board authority to equitably re-allocate losses, costs and fees directly imposed as a result of a Partial Tear-Up among all non-defaulting Clearing Members through a special charge, would serve as a discretionary tool to redistribute the credit losses allocated through Partial Tear-Up. \43\ 17 CFR 240.17Ad-22(e)(v)(viii). --------------------------------------------------------------------------- Replenishment of Financial Resources Following a Default In relevant part, Rule 17Ad-22(e)(4)(ix) requires that each CCA ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . [d]escrib[e] the [CCA's] process to replenish any financial resources it may use following a default or other event in which use of such resources is contemplated.'' \44\ OCC's Clearing Members have a standing obligation to replenish the Clearing Fund following any proportionate charge. The proposed changes would establish a rolling cooling-off period, triggered by the payment of a proportionate charge against the Clearing Fund, during which period the aggregate liability of a Clearing Member to replenish the Clearing Fund (inclusive of assessments) would be 200% of the Clearing Member's required contribution as of the time immediately preceding the triggering proportionate charge. Compared to the current requirement under which a Clearing Member may cap its liability to proportionate charges at an additional 100% of its then- required contribution, a Clearing Member would instead be permitted to cap its liability for proportionate charges at an additional 200% of its then-required Clearing Fund contribution. --------------------------------------------------------------------------- \44\ 17 CFR 240.17Ad-22(e)(4)(ix). --------------------------------------------------------------------------- OCC believes that the proposed approach improves predictability for OCC and for Clearing Members regarding the size of Clearing Fund contributions that are likely to be subject to assessments for proportionate charges. Additionally, replacing the five business day withdrawal period with the withdrawal period commensurate with the cooling-off period (which, as proposed would be a minimum of fifteen calendar days) would give Clearing Members a more reasonable period in which to meet the wind-down and termination requirements necessary to cap their liability. OCC believes that this would afford them greater certainty regarding their maximum liability with respect to the Clearing Fund during extreme stress events, which in turn, facilitates Clearing Members' management of their own risk management, and to the extent applicable, regulatory capital considerations. And OCC believes this increased predictability would also be beneficial to OCC by helping it to more reliably understand the amount of Clearing Fund contributions that will likely be available to it after a proportionate charge is assessed.\45\ --------------------------------------------------------------------------- \45\ Under the existing approach, it is less certain from OCC's standpoint regarding whether Clearing Members would reasonably be able to cap their liability to proportionate charges within five business days. --------------------------------------------------------------------------- OCC believes that the relative certainty provided by the proposed cooling-off period and 200% cap on assessments ultimately could reduce the risks of successive or ``cascading'' defaults, in which the financial demands on remaining non-defaulting Clearing Members to continually replenish OCC's Clearing Fund (and similar guaranty funds at other CCPs to [[Page 61114]] which such Clearing Members might belong) have the effect of further weakening such Clearing Members to the point of default. In this regard, the proposed changes are designed to provide OCC, Clearing Members and other stakeholders with sufficient time to manage the ongoing default(s) without further aggravating the extreme stresses facing market participants. OCC recognizes that the proposed changes would limit the maximum amount of Clearing Fund resources that could be available to OCC in an extreme stress scenario, which introduces the possibility, however remote, that the proposed 200% cap ultimately could be reached. If during any cooling-off period the amount of aggregate proportionate charges against the Clearing Fund approaches the 200% cap, the amount remaining in the Clearing Fund may no longer be sufficient to comply with the applicable minimum regulatory financial resources requirements in the CCAs. In any such event, OCC's existing authority under Rule 603 would permit OCC to call on participants for additional initial margin, which could ensure that OCC's minimum financial resources remain in excess of applicable CCA requirements.\46\ OCC recognizes that the imposition of increased margin requirements could have an immediate pro-cyclical impact on participants (and consequential impacts on the broader financial system) that is potentially greater than the impact of replenishing the Clearing Fund. These risks would be limited to a specific extreme stress event and could be mitigated by certain factors. First, OCC, in coordination with its regulators, would carefully evaluate any potential increase in the context of then- existing facts and circumstances. Second, during the cooling-off period, Clearing Members and their customers will have the opportunity to reduce or rebalance their respective portfolios in order to mitigate their exposures to stress losses and initial margin increases. Finally, since initial margin is not designed to be subject to mutualized loss, the risk of loss faced by Clearing Members for amounts posted as additional margin would be substantially less than for replenishments of the Clearing Fund. --------------------------------------------------------------------------- \46\ Rule 603 provides that ``[t]he Risk Committee may, from time to time, increase the amount of margin which may be required in respect of a cleared contract, open short position or exercised contract if, in its discretion, it determines that such increase is advisable for the protection of [OCC], the Clearing Members or the general public.'' --------------------------------------------------------------------------- Given the products cleared by OCC and the composition of its clearing membership, OCC has determined that a minimum 15-calendar day cooling-off period, rolling up to a maximum of 20 calendar days, is likely to be a sufficient amount of time for OCC to manage the ongoing default(s) and take necessary steps in furtherance of stabilizing the clearing system. Further, through conversations with Clearing Members, OCC believes that the proposed cooling-off period is likely to be a sufficient amount for Clearing Members (and their customers) to orderly reduce or rebalance their positions, in an attempt to mitigate stress losses and exposure to potential initial margin increases as they navigate the stress event. Through conversations with Clearing Members, OCC also believes that the proposed cooling-off period is likely to be a sufficient amount for certain Clearing Members to orderly close-out their positions and transfer customer positions as they withdraw from clearing membership. OCC believes the proposed cooling-off period, coupled with the other proposed changes to OCC's assessment powers, is likely to provide Clearing Members with an adequate measure of stability and predictability as to the potential use of Clearing Fund resources, which OCC believes removes the existing incentive for Clearing Members to withdraw following a proportionate charge.\47\ --------------------------------------------------------------------------- \47\ OCC initially considered a fixed 15-calendar day cooling- off period; however, OCC concluded that a fixed 15-calendar day cooling-off period may increase the risks of successive or cascading Clearing Member defaults and may perversely incentivize Clearing Members to seek to withdraw from clearing membership. Through conversations with Clearing Members, OCC believes that these potentially disruptive consequences are mitigated by the proposed rolling cooling-off period. --------------------------------------------------------------------------- In light of the foregoing, OCC believes that the proposed changes would enhance and strengthen its process to replenish the Clearing Fund following a default or other event in which use of the Clearing Fund is contemplated, in accordance with Rule 17Ad-22(e)(4)(ix).\48\ --------------------------------------------------------------------------- \48\ 17 CFR 240.17Ad-22(e)(4)(ix). --------------------------------------------------------------------------- Replenishment of Liquid Resources In relevant part, Rule 17Ad-22(e)(7)(ix) requires that each CCA ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . [d]escrib[e] the [CCA's] process to replenish any liquid resources that the clearing agency may employ during a stress event.'' \49\ Since the use any part of the cash portion of OCC's Clearing Fund would constitute a depletion of one of OCC's liquid resources, OCC's assessment power, discussed above, is the primary means of replenishing the Clearing Fund cash that OCC used to address the stress event. For the same reasons stated above, OCC believes that the proposed changes enhance and strengthen its process to replenish the Clearing Fund, as necessary, following a default or other stress event in which the Clearing Fund is used, and therefore, OCC views the proposed changes as consistent with Rule 17Ad- 22(e)(7)(ix).\50\ --------------------------------------------------------------------------- \49\ 17 CFR 240.17Ad-22(e)(7)(ix). \50\ 17 CFR 240.17Ad-22(e)(7)(ix). --------------------------------------------------------------------------- Timely Action To Contain Losses In relevant part, Rule 17Ad-22(e)(13) requires that each CCA ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . [e]nsure the [CCA] has the authority and operational capacity to take timely action to contain losses and liquidity demands and continue to meet its obligations . . .'' \51\ The proposed changes would provide OCC with the authority to call for Voluntary Tear-Ups and OCC's Board with the discretion to impose Partial Tear-Ups, which would provide OCC with authority necessary to extinguish certain losses (and attendant liquidity demands) thereby potentially enabling OCC to continue to meet its remaining obligations to participants. As designed, Voluntary Tear-Ups and Partial Tear-Ups would be initiated on a date sufficiently in advance of the exhaustion of OCC's financial resources such that OCC is expected to have adequate resources remaining to cover the amount it must pay to extinguish the positions of Clearing Members and customers without haircutting gains. Accordingly, OCC believes that its authority and capacity to conduct a Partial Tear-Up should be timely, relative to the adequacy of OCC's remaining financial resources. Finally, OCC believes it has the operational and systems capacity sufficient to support the proposed changes, and OCC's policies and procedures will be updated accordingly to reflect the existence of these new tools. As a result, OCC believes that the proposed changes conform to the relevant requirements in Rule 17Ad-22(e)(13).\52\ --------------------------------------------------------------------------- \51\ 17 CFR 240.17Ad-22(e)(13). \52\ 17 CFR 240.17Ad-22(e)(13). --------------------------------------------------------------------------- Public Disclosure of Key Aspects of Default Rules In relevant part, Rule 17Ad-22(e)(23)(i) requires that each CCA ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . [p]ublicly disclos[e] all relevant rules and material procedures, including key aspects of its default rules and procedures.'' \53\ As [[Page 61115]] stated above, each of the tools discussed herein are contemplated to be deployed by OCC if an extreme stress event has placed OCC into a recovery or orderly wind-down scenario, and therefore, the tools discussed herein constitute key aspects of OCC's default rules. By incorporating the proposed changes into OCC's Rules and By-Laws, as further supplemented by the discussion in OCC's public rule filing, OCC believes that proposed changes would conform to the relevant requirements in Rule 17Ad-22(e)(23)(i).\54\ --------------------------------------------------------------------------- \53\ 17 CFR 240.17Ad-22(e)(23)(i). \54\ 17 CFR 240.17Ad-22(e)(13). --------------------------------------------------------------------------- Sufficient Information Regarding the Risks, Fees and Costs of Clearing In relevant part, Rule 17Ad-22(e)(23)(ii) requires that each CCA ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . [p]rovid[e] sufficient information to enable participants to identify and evaluate the risks, fees, and other material costs they incur by participating in the covered clearing agency.'' \55\ The proposed changes would clearly explain to Clearing Members and market participants that an extreme stress scenario could result in the use--and theoretically the exhaustion--of OCC's financial resources, inclusive of OCC's proposed assessment powers. Proposed changes to Section 6, Article VIII of OCC's By-Laws would explain Clearing Members' replenishment obligation and liability for assessments. The proposed changes also would clearly explain, through proposed Rules 1009 and 1111, that as OCC nears the exhaustion of its assessment powers, Clearing Members may be asked for voluntary payments and, if necessary, Clearing Members and customers may be asked to participate in a Voluntary Tear-Up and/or subject to a Partial Tear-Up. Proposed Rules 1009(b) and 1111(a)(ii) also would make clear that Clearing Members that made voluntary payments and Clearing Members and customers whose tendered positions were extinguished in the Voluntary Tear-Up would be prioritized in the distribution of any recovery from the defaulted Clearing Member(s). Proposed changes to Article VIII would clarify that the Clearing Fund contributions remaining after OCC has conducted a Voluntary Tear-Up or Partial Tear- Up could be used to compensate the non-defaulting Clearing Members and non-defaulting customers for the losses, costs or fees imposed upon them as a result of such Voluntary Tear-Up or Partial Tear-Up. Proposed Rule 1111(g) would make clear that, following a Partial Tear-Up, OCC's Board may seek to equitably re-allocate losses, costs and fees directly imposed as a result of a Partial Tear-Up among all non-defaulting Clearing Members through a special charge. By incorporating the proposed changes into OCC's Rules and By-Laws, as further supplemented by the discussion in OCC's public rule filing, OCC believes that is has provided sufficient information to enable participants to identify and evaluate the risks, fees, and other material costs they could incur by participating OCC, consistent with the requirements in Rule 17Ad- 22(e)(23)(ii).\56\ --------------------------------------------------------------------------- \55\ 17 CFR 240.17Ad-22(e)(23)(ii). \56\ 17 CFR 240.17Ad-22(e)(23)(ii). --------------------------------------------------------------------------- (B) Clearing Agency's Statement on Burden on Competition Section 17A(b)(3)(I) of the Act \57\ 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 changes is to make certain revisions to OCC's Rules and By-Laws Laws that are designed to enhance OCC's existing tools to address the risks of liquidity shortfalls and credit losses and to establish tools by which OCC could re-establish a matched book following a default. As explained above, each of the tools proposed herein is contemplated to be deployed by OCC in an extreme stress event that has placed OCC into a recovery or orderly wind-down scenario. The proposed rule change is intended to provide Clearing Members, market participants and other stakeholders with greater certainty as to their liabilities and potential exposure to OCC in the event of an unprecedented loss scenario. OCC does not believe that the proposed changes would discriminatorily impact any Clearing Member's access to OCC's services or unnecessarily disadvantage or favor any particular user in relationship to another user. OCC recognizes that the nature of a Partial Tear-Up means that only particular Clearing Members and market participants holding certain positions may be impacted; however, the risk of Partial Tear- Ups is extremely remote, and even then, the proposed changes seek to provide means of equitably re-allocating the losses, costs and fees imposed by Voluntary Tear-Up or Partial Tear-Up. Therefore, OCC believes that the proposed changes would not have any impact or impose any burden on competition. --------------------------------------------------------------------------- \57\ 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. 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 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 Commissions internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to [email protected]. Please include File Number SR-OCC-2017-020 on the subject line. Paper Comments Send paper comments in triplicate to Brent Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. All submissions should refer to File Number SR-OCC-2017-020. 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 website (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 [[Page 61116]] 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 website 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 website at https://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_17_020.pdf. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal or identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-OCC-2017-020 and should be submitted on or before January 16, 2018. For the Commission by the Division of Trading and Markets, pursuant to delegated authority.\58\ --------------------------------------------------------------------------- \58\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-27691 Filed 12-22-17; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 82, No. 246 / Tuesday, December 26, 2017 / Notices 61107
any burden on competition that is not rules/sro.shtml). Copies of the proposed rule change from interested
necessary or appropriate in furtherance submission, all subsequent persons.
of the purpose of the Act. The Exchange amendments, all written statements
I. Clearing Agency’s Statement of the
notes that the proposed rule change will with respect to the proposed rule
Terms of Substance of the Proposed
facilitate the listing and trading of a new change that are filed with the
Commission, and all written Rule Change
type of Trust Issued Receipt based on
the price of Bitcoin Futures Contracts communications relating to the This proposed rule change by the
and that will enhance competition proposed rule change between the OCC would make certain revisions to
among market participants, to the Commission and any person, other than OCC’s Rules and By-Laws to enhance
benefit of investors and the marketplace. those that may be withheld from the OCC’s existing tools to address the risks
public in accordance with the of liquidity shortfalls and credit losses
C. Self-Regulatory Organization’s provisions of 5 U.S.C. 552, will be
Statement on Comments on the and to establish new tools by which
available for website viewing and OCC could re-establish a matched book
Proposed Rule Change Received From printing in the Commission’s Public
Members, Participants, or Others following a default. Each of the tools
Reference Room, 100 F Street NE, proposed herein is contemplated to be
No written comments were solicited Washington, DC 20549 on official deployed by OCC in an extreme stress
or received with respect to the proposed business days between the hours of event that has placed OCC into a
rule change. 10:00 a.m. and 3:00 p.m. Copies of the recovery or orderly wind-down
filing also will be available for scenario.
III. Date of Effectiveness of the
inspection and copying at the principal
Proposed Rule Change and Timing for II. Clearing Agency’s Statement of the
office of the Exchange. All comments
Commission Action received will be posted without change. Purpose of, and Statutory Basis for, the
Within 45 days of the date of Persons submitting comments are Proposed Rule Change
publication of this notice in the Federal cautioned that we do not redact or edit
Register or within such longer period In its filing with the Commission,
personal identifying information from
up to 90 days (i) as the Commission may OCC included statements concerning
comment submissions. You should
designate if it finds such longer period the purpose of and basis for the
submit only information that you wish
to be appropriate and publishes its proposed rule change and discussed any
to make available publicly. All
reasons for so finding or (ii) as to which comments it received on the proposed
submissions should refer to File
the self-regulatory organization Number SR–NYSEArca–2017–139 and rule change. The text of these statements
consents, the Commission will: should be submitted on or before may be examined at the places specified
A. By order approve or disapprove the January 16, 2018. in Item IV below. OCC has prepared
proposed rule change, or summaries, set forth in sections (A), (B),
For the Commission, by the Division of and (C) below, of the most significant
B. institute proceedings to determine Trading and Markets, pursuant to delegated
whether the proposed rule change aspects of these statements. All terms
authority.24
should be disapproved. with initial capitalization not defined
Eduardo A. Aleman,
here have the same meaning set forth in
IV. Solicitation of Comments Assistant Secretary. OCC’s By-Laws and Rules.3
[FR Doc. 2017–27690 Filed 12–22–17; 8:45 am]
Interested persons are invited to (A) Clearing Agency’s Statement of the
BILLING CODE 8011–01–P
submit written data, views, and Purpose of, and Statutory Basis for, the
arguments concerning the foregoing, Proposed Rule Change
including whether the proposed rule
SECURITIES AND EXCHANGE 1. Purpose
change is consistent with the Act.
COMMISSION
Comments may be submitted by any of Background
the following methods: [Release No. 34–82351; File No. SR–OCC–
2017–020] The purpose of this proposed rule
Electronic Comments change is to make certain revisions to
• Use the Commission’s internet Self-Regulatory Organizations; The OCC’s Rules and By-Laws Laws that are
comment form (http://www.sec.gov/ Options Clearing Corporation; Notice designed to enhance OCC’s existing
rules/sro.shtml); or of Filing of a Proposed Rule Change tools to address the risks of liquidity
• Send an email to rule-comments@ Concerning Enhanced and New Tools shortfalls and credit losses and to
sec.gov. Please include File Number SR– for Recovery Scenarios establish tools by which OCC could re-
NYSEArca–2017–139 on the subject December 19, 2017. establish a matched book following a
line. Pursuant to Section 19(b)(1) of the default. Each of the tools proposed
Paper Comments Securities Exchange Act of 1934 herein is contemplated to be deployed
(‘‘Act’’) 1 and Rule 19b–4 thereunder 2 by OCC in an extreme stress event that
• Send paper comments in triplicate has placed OCC into a recovery or
notice is hereby given that on December
to Secretary, Securities and Exchange 18, 2017, The Options Clearing orderly wind-down scenario. Each of
Commission, 100 F Street NE, Corporation (‘‘OCC’’) filed with the the proposed revisions also is designed
Washington, DC 20549–1090. Securities and Exchange Commission to further OCC’s compliance, in whole
All submissions should refer to File (‘‘Commission’’) the proposed rule or in part, with the provisions of the
Number SR–NYSEArca–2017–139. This change as described in Items I, II and III Commission’s rules identified
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file number should be included on the below, which Items have been prepared immediately below.
subject line if email is used. To help the by OCC. The Commission is publishing On September 28, 2016, the
Commission process and review your this notice to solicit comments on the Commission adopted amendments to
comments more efficiently, please use
only one method. The Commission will 24 17 CFR 200.30–3(a)(12). 3 OCC’s By-Laws and Rules can be found on
post all comments on the Commission’s 1 15 U.S.C. 78s(b)(1). OCC’s public website: http://optionsclearing.com/
internet website (http://www.sec.gov/ 2 17 CFR 240.19b–4. about/publications/bylaws.jsp.
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Rule 17Ad–22 4 and added new Rules investment, custody, and other risks maintain and enforce written policies
17Ad–22(e)(3)(ii), (e)(4)(viii), (e)(4)(ix), that arise in or are borne by the [CCA], and procedures reasonably designed to
(e)(7)(ix), (e)(13), (e)(23)(i) and which . . . [i]ncludes plans for the . . . [p]ublicly disclos[e] all relevant
(e)(23)(ii) 5 pursuant to Section 17A of recovery and orderly wind-down of the rules and material procedures,
the Securities Exchange Act of 1934 6 [CCA] necessitated by credit losses, including key aspects of its default rules
and the Payment, Clearing, and liquidity shortfalls, losses from general and procedures.’’ 14
Settlement Supervision Act of 2010 business risk, or any other losses.’’ 9 • Rule 17Ad–22(e)(23)(ii) requires
(‘‘Payment, Clearing and Settlement • Rule 17Ad–22(e)(4)(viii) requires that each CCA ‘‘establish, implement,
Supervision Act’’).7 In relevant part, that each CCA ‘‘establish, implement, maintain and enforce written policies
these new rules collectively require a maintain and enforce written policies and procedures reasonably designed to
covered clearing agency (‘‘CCA’’), as and procedures reasonably designed to . . . [p]rovid[e] sufficient information to
defined by Rule 17Ad–22(a)(5),8 to . . . [e]ffectively identify, measure, enable participants to identify and
establish, implement, maintain and monitor, and manage its credit evaluate the risks, fees, and other
enforce written policies and procedures exposures to participants and those material costs they incur by
reasonably designed to: (1) Maintain a arising from its payment, clearing, and participating in the covered clearing
risk management framework including settlement processes, including by . . . agency.’’ 15
plans for recovery and orderly wind- [a]ddressing allocation of credit losses OCC meets the definition of a CCA
down necessitated by credit losses, the [CCA] may face if its collateral and and is therefore subject to the
liquidity shortfalls, general business risk other resources are insufficient to fully requirements of the CCA rules,
losses or any other losses, (2) effectively cover its credit exposures, including the including new Rules 17Ad–22(e)(3)(ii),
identify, measure, monitor and manage repayment of any funds the [CCA] may (e)(4)(viii), (e)(4)(ix), (e)(7)(ix), (e)(13),
its credit exposures to participants and borrow from liquidity providers.’’ 10 (e)(23)(i) and (e)(23)(ii).16
those arising from its payment, clearing • Rule 17Ad–22(e)(4)(ix) requires that Proposed Changes
and settlement processes, including by each CCA ‘‘establish, implement,
addressing the allocation of credit losses maintain and enforce written policies Summary of Proposed Changes
a CCA might face if its collateral and and procedures reasonably designed to In order to enhance OCC’s existing
other resources are insufficient to fully . . . [e]ffectively identify, measure, tools to address the risks of liquidity
cover its credit exposures, (3) effectively monitor, and manage its credit shortfalls and credit losses and to
identify, measure, monitor and manage exposures to participants and those establish new tools by which OCC could
credit exposures, including by arising from its payment, clearing, and re-establish a matched book following a
describing the process to replenish any settlement processes, including by . . . default, OCC is proposing to make the
financial resource that a CCA may use [d]escribing the [CCA’s] process to following revisions to its Rules and By-
following a default event or other event replenish any financial resources it may Laws:
in which use of such resource is use following a default or other event in (1) Revise the existing assessment
contemplated, (4) effectively identify, which use of such resources is powers in Section 6 of Article VIII of
measure, monitor and manage liquidity contemplated.’’ 11 OCC’s By-Laws, specifically to:
risks that arises or is borne by the CCA • Rule 17Ad–22(e)(7)(ix) requires that (a) Establish a rolling ‘‘cooling-off
by, at a minimum, describing the each CCA ‘‘establish, implement, period’’ that would be triggered by the
process for replenishing any liquid maintain and enforce written policies payment of a proportionate charge
resource that a CCA may employ during and procedures reasonably designed to against the Clearing Fund (‘‘triggering
a stress event, (5) ensure it has the . . . [e]ffectively measure, monitor, and proportionate charge’’), during which
authority and operational capacity to manage the liquidity risk that arises in period the aggregate liability of a
take timely action to contain losses and or is borne by the [CCA], including Clearing Member to replenish the
liquidity demands and continue to meet measuring, monitoring, and managing Clearing Fund (inclusive of
its obligations, (6) publicly disclose its settlement and funding flows on an assessments) would be 200% of the
relevant rules and material procedures, ongoing and timely basis, and its use of Clearing Member’s required
including key aspects of its default rules intraday liquidity by, at a minimum, contribution as of the time immediately
and procedures, and (7) provide doing the following . . . [d]escribing the preceding the triggering proportionate
sufficient information to enable [CCA’s] process to replenish any liquid charge;
participants to identify and evaluate the resources that the clearing agency may (b) Clarify that a Clearing Member that
risks, fees, and other material costs they employ during a stress event.’’ 12 chooses to terminate its membership
incur by participating in the CCA. The • Rule 17Ad–22(e)(13) requires that status during a cooling-off period will
relevant portions of each of these new each CCA ‘‘establish, implement, not be liable for replenishment of the
requirements is restated below: maintain and enforce written policies Clearing Fund immediately following
• Rule 17Ad–22(e)(3)(ii) requires that and procedures reasonably designed the expiration of such cooling-off
each CCA ‘‘establish, implement, to. . . [e]nsure the covered clearing period, provided that the withdrawing
maintain and enforce written policies agency has the authority and Clearing Member satisfies enumerated
and procedures reasonably designed to operational capacity to take timely criteria, including providing notice of
. . . [m]aintain a sound risk action to contain losses and liquidity such termination by no later than the
management framework for demands and continue to meet its end of the cooling-off period and by
comprehensively managing legal, credit, obligations . . .’’ 13 closing-out and/or transferring of all its
• Rule 17Ad–22(e)(23)(i) requires that
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liquidity, operational, general business, open positions with OCC by no later
each CCA ‘‘establish, implement, than the last day of the cooling-off
4 17 CFR 240.17Ad–22. period; and
5 17 9 17 CFR 240.17Ad–22(e)(3)(ii).
CFR 240.17Ad–22(e)(3)(ii), (e)(4)(viii),
(e)(4)(ix), (e)(7)(ix), (e)(13), (e)(23)(i) and (e)(23)(ii). 10 17 CFR 240.17Ad–22(e)(v)(viii). 14 17 CFR 240.17Ad–22(e)(23)(i).
6 15 U.S.C. 78q–1. 11 17 CFR 240.17Ad–22(e)(4)(ix). 15 17 CFR 240.17Ad–22(e)(23)(ii).
7 12 U.S.C. 5461 et. seq. 12 17 CFR 240.17Ad–22(e)(7)(ix). 16 17 CFR 240.17Ad–22(e)(3)(ii), (e)(4)(viii),
8 17 CFR 240.17Ad–22(a)(5). 13 17 CFR 240.17Ad–22(e)(13). (e)(4)(ix) and (e)(7)(ix).
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The proposed changes also are OCC has determined that, Clearing Fund following any
designed to further OCC’s compliance, notwithstanding the availability of any proportionate charge. The proposed
in whole or in part, with the provisions remaining resources under OCC Rules changes would establish a rolling
of the Commission’s rules discussed 707, 1001, 1104 through 1107, 2210 and cooling-off period, triggered by the
immediately below: 2211,41 OCC may not have sufficient payment of a proportionate charge
resources to satisfy its obligations and against the Clearing Fund, during which
Recovery and Orderly Wind-Down
liabilities resulting from such default. period the aggregate liability of a
In relevant part, Rule 17Ad– Second, new Rule 1111 would establish Clearing Member to replenish the
22(e)(3)(ii) requires that each CCA a framework by which non-defaulting Clearing Fund (inclusive of
‘‘establish, implement, maintain and Clearing Members and non-defaulting assessments) would be 200% of the
enforce written policies and procedures customers of Clearing Members could be Clearing Member’s required
reasonably designed to . . . plan[ ] for given an opportunity to participate in contribution as of the time immediately
the recovery and orderly wind-down of Voluntarily Tear-Ups in a circumstance preceding the triggering proportionate
the [CCA] necessitated by credit losses, where a Clearing Member has defaulted charge. Compared to the current
liquidity shortfalls, losses from general and OCC has determined that, requirement under which a Clearing
business risk, or any other losses.’’ 36 As notwithstanding the availability of any Member may cap its liability to
stated above, each of the proposed remaining resources under OCC Rules proportionate charges at an additional
changes is designed to provide OCC 707, 1001, 1104 through 1107, 2210 and 100% of its then-required contribution,
with tools to address the risks OCC 2211, OCC may not have sufficient a Clearing Member would instead be
might confront in a recovery and orderly resources to satisfy its obligations and permitted to cap its liability for
wind-down scenario.37 Consistent with liabilities resulting from such default. proportionate charges at an additional
the requirements of Rule 17Ad– Finally, new Rule 1111 also would 200% of its then-required Clearing Fund
22(e)(3)(ii), the proposed tools would provide the Board with discretion to contribution.
enable OCC to better address the risks mandatorily tear-up Remaining Open OCC believes that the proposed
of liquidity shortfalls and credit losses Positions and Related Open Positions, approach improves predictability for
resulting from a Clearing Member in a circumstance where a Clearing OCC and for Clearing Members
default or certain other loss events and, Member has defaulted and OCC has regarding the size of Clearing Fund
if necessary, to ultimately re-establish a determined that, notwithstanding the contributions that are likely to be
matched book in a recovery or orderly availability of any remaining resources subject to assessments for proportionate
wind-down scenario.38 In this context, under OCC Rules 707, 1001, 1104 charges. Additionally, replacing the five
the proposed changes serve as a critical through 1107, 2210 and 2211, OCC may business day withdrawal period with
component of OCC’s recovery and not have sufficient resources to satisfy the withdrawal period commensurate
orderly wind-down plan. As a result, in its obligations and liabilities resulting with the cooling-off period (which, as
OCC’s view, the proposed changes are from such default.42 In OCC’s view, proposed would be a minimum of
consistent with the requirements of Rule each of these tools could be deployed by fifteen calendar days) would give
17Ad–22(e)(3)(ii) as to the recovery and OCC, if necessary, to allocate credit Clearing Members a more reasonable
orderly wind-down plan.39 losses in excess of the collateral and period in which to meet the wind-down
Allocation of Credit Losses Above other resources available to OCC, in and termination requirements necessary
Available Resources accordance with Rule 17Ad– to cap their liability. OCC believes that
22(e)(4)(viii).43 this would afford them greater certainty
In relevant part, Rule 17Ad– regarding their maximum liability with
22(e)(4)(viii) requires that each CCA Replenishment of Financial Resources respect to the Clearing Fund during
‘‘establish, implement, maintain and Following a Default extreme stress events, which in turn,
enforce written policies and procedures In relevant part, Rule 17Ad– facilitates Clearing Members’
reasonably designed to . . . [a]ddress[ ] 22(e)(4)(ix) requires that each CCA management of their own risk
allocation of credit losses the [CCA] may ‘‘establish, implement, maintain and management, and to the extent
face if its collateral and other resources enforce written policies and procedures applicable, regulatory capital
are insufficient to fully cover its credit reasonably designed to . . . [d]escrib[e] considerations. And OCC believes this
exposures . . .’’ 40 The proposed the [CCA’s] process to replenish any increased predictability would also be
changes would provide OCC with three financial resources it may use following beneficial to OCC by helping it to more
distinct tools that could be used to a default or other event in which use of reliably understand the amount of
allocate any credit losses OCC may face such resources is contemplated.’’ 44 Clearing Fund contributions that will
in excess of collateral and other OCC’s Clearing Members have a likely be available to it after a
resources available to OCC. First, new standing obligation to replenish the proportionate charge is assessed.45
Rule 1009 would provide a framework OCC believes that the relative
by which OCC could receive voluntary 41 Rule 707 addresses the treatment of funds in a
certainty provided by the proposed
payments in a circumstance where a Clearing Member’s X–M accounts. Rule 1001 cooling-off period and 200% cap on
Clearing Member has defaulted and addresses the size of OCC’s Clearing Fund and the
amount of a Clearing Member’s contribution. Rules assessments ultimately could reduce the
1104 through 1107 concern the treatment of the risks of successive or ‘‘cascading’’
36 17 CFR 240.17Ad–22(e)(3)(ii). portfolio of a defaulted Clearing Member. Rules defaults, in which the financial
37 Indeed, the OCC’s separately filed recovery and 2210 and 2211 concern the treatment of Stock Loan demands on remaining non-defaulting
orderly wind-down plan identifies OCC’s positions of a defaulted Clearing Member.
Clearing Members to continually
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assessment powers, ability to call for voluntary 42 Rule 1111(g), which would provide the Board
payments, ability to call for Voluntary Tear-Ups and authority to equitably re-allocate losses, costs and replenish OCC’s Clearing Fund (and
ability to impose Partial Tear-Ups among its fees directly imposed as a result of a Partial Tear- similar guaranty funds at other CCPs to
‘‘Recovery Tools.’’ OCC has filed a proposed rule Up among all non-defaulting Clearing Members
change with the Commission in connection with through a special charge, would serve as a 45 Under the existing approach, it is less certain
this proposal. See SR–OCC–2017–021. discretionary tool to redistribute the credit losses from OCC’s standpoint regarding whether Clearing
38 17 CFR 240.17Ad–22(e)(3)(ii). allocated through Partial Tear-Up. Members would reasonably be able to cap their
39 17 CFR 240.17Ad–22(e)(3)(ii). 43 17 CFR 240.17Ad–22(e)(v)(viii).
liability to proportionate charges within five
40 17 CFR 240.17Ad–22(e)(v)(viii). 44 17 CFR 240.17Ad–22(e)(4)(ix). business days.
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which such Clearing Members might period, rolling up to a maximum of 20 stress event. For the same reasons stated
belong) have the effect of further calendar days, is likely to be a sufficient above, OCC believes that the proposed
weakening such Clearing Members to amount of time for OCC to manage the changes enhance and strengthen its
the point of default. In this regard, the ongoing default(s) and take necessary process to replenish the Clearing Fund,
proposed changes are designed to steps in furtherance of stabilizing the as necessary, following a default or
provide OCC, Clearing Members and clearing system. Further, through other stress event in which the Clearing
other stakeholders with sufficient time conversations with Clearing Members, Fund is used, and therefore, OCC views
to manage the ongoing default(s) OCC believes that the proposed cooling- the proposed changes as consistent with
without further aggravating the extreme off period is likely to be a sufficient Rule 17Ad–22(e)(7)(ix).50
stresses facing market participants. amount for Clearing Members (and their
OCC recognizes that the proposed Timely Action To Contain Losses
customers) to orderly reduce or
changes would limit the maximum rebalance their positions, in an attempt In relevant part, Rule 17Ad–22(e)(13)
amount of Clearing Fund resources that to mitigate stress losses and exposure to requires that each CCA ‘‘establish,
could be available to OCC in an extreme potential initial margin increases as they implement, maintain and enforce
stress scenario, which introduces the navigate the stress event. Through written policies and procedures
possibility, however remote, that the conversations with Clearing Members, reasonably designed to . . . [e]nsure the
proposed 200% cap ultimately could be OCC also believes that the proposed [CCA] has the authority and operational
reached. If during any cooling-off period cooling-off period is likely to be a capacity to take timely action to contain
the amount of aggregate proportionate sufficient amount for certain Clearing losses and liquidity demands and
charges against the Clearing Fund Members to orderly close-out their continue to meet its obligations . . .’’ 51
approaches the 200% cap, the amount positions and transfer customer The proposed changes would provide
remaining in the Clearing Fund may no positions as they withdraw from OCC with the authority to call for
longer be sufficient to comply with the clearing membership. OCC believes the Voluntary Tear-Ups and OCC’s Board
applicable minimum regulatory proposed cooling-off period, coupled with the discretion to impose Partial
financial resources requirements in the with the other proposed changes to Tear-Ups, which would provide OCC
CCAs. In any such event, OCC’s existing OCC’s assessment powers, is likely to with authority necessary to extinguish
authority under Rule 603 would permit provide Clearing Members with an certain losses (and attendant liquidity
OCC to call on participants for adequate measure of stability and demands) thereby potentially enabling
additional initial margin, which could predictability as to the potential use of OCC to continue to meet its remaining
ensure that OCC’s minimum financial Clearing Fund resources, which OCC obligations to participants. As designed,
resources remain in excess of applicable believes removes the existing incentive Voluntary Tear-Ups and Partial Tear-
CCA requirements.46 OCC recognizes for Clearing Members to withdraw Ups would be initiated on a date
that the imposition of increased margin following a proportionate charge.47 sufficiently in advance of the
requirements could have an immediate In light of the foregoing, OCC believes exhaustion of OCC’s financial resources
pro-cyclical impact on participants (and that the proposed changes would such that OCC is expected to have
consequential impacts on the broader enhance and strengthen its process to adequate resources remaining to cover
financial system) that is potentially replenish the Clearing Fund following a the amount it must pay to extinguish the
greater than the impact of replenishing default or other event in which use of positions of Clearing Members and
the Clearing Fund. These risks would be the Clearing Fund is contemplated, in customers without haircutting gains.
limited to a specific extreme stress event accordance with Rule 17Ad– Accordingly, OCC believes that its
and could be mitigated by certain 22(e)(4)(ix).48 authority and capacity to conduct a
factors. First, OCC, in coordination with Partial Tear-Up should be timely,
Replenishment of Liquid Resources
its regulators, would carefully evaluate relative to the adequacy of OCC’s
any potential increase in the context of In relevant part, Rule 17Ad– remaining financial resources. Finally,
then-existing facts and circumstances. 22(e)(7)(ix) requires that each CCA OCC believes it has the operational and
Second, during the cooling-off period, ‘‘establish, implement, maintain and systems capacity sufficient to support
Clearing Members and their customers enforce written policies and procedures the proposed changes, and OCC’s
will have the opportunity to reduce or reasonably designed to . . . [d]escrib[e]
policies and procedures will be updated
rebalance their respective portfolios in the [CCA’s] process to replenish any
accordingly to reflect the existence of
order to mitigate their exposures to liquid resources that the clearing agency
these new tools. As a result, OCC
stress losses and initial margin may employ during a stress event.’’ 49
believes that the proposed changes
increases. Finally, since initial margin is Since the use any part of the cash
conform to the relevant requirements in
not designed to be subject to mutualized portion of OCC’s Clearing Fund would
Rule 17Ad–22(e)(13).52
loss, the risk of loss faced by Clearing constitute a depletion of one of OCC’s
Members for amounts posted as liquid resources, OCC’s assessment Public Disclosure of Key Aspects of
additional margin would be power, discussed above, is the primary Default Rules
substantially less than for means of replenishing the Clearing In relevant part, Rule 17Ad–
replenishments of the Clearing Fund. Fund cash that OCC used to address the 22(e)(23)(i) requires that each CCA
Given the products cleared by OCC ‘‘establish, implement, maintain and
47 OCC initially considered a fixed 15-calendar
and the composition of its clearing enforce written policies and procedures
day cooling-off period; however, OCC concluded
membership, OCC has determined that that a fixed 15-calendar day cooling-off period may reasonably designed to . . . [p]ublicly
a minimum 15-calendar day cooling-off disclos[e] all relevant rules and material
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increase the risks of successive or cascading
Clearing Member defaults and may perversely procedures, including key aspects of its
46 Rule 603 provides that ‘‘[t]he Risk Committee incentivize Clearing Members to seek to withdraw
from clearing membership. Through conversations
default rules and procedures.’’ 53 As
may, from time to time, increase the amount of
margin which may be required in respect of a with Clearing Members, OCC believes that these
50 17 CFR 240.17Ad–22(e)(7)(ix).
cleared contract, open short position or exercised potentially disruptive consequences are mitigated
contract if, in its discretion, it determines that such by the proposed rolling cooling-off period. 51 17 CFR 240.17Ad–22(e)(13).
48 17 CFR 240.17Ad–22(e)(4)(ix). 52 17 CFR 240.17Ad–22(e)(13).
increase is advisable for the protection of [OCC], the
Clearing Members or the general public.’’ 49 17 CFR 240.17Ad–22(e)(7)(ix). 53 17 CFR 240.17Ad–22(e)(23)(i).
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stated above, each of the tools discussed following a Partial Tear-Up, OCC’s would not have any impact or impose
herein are contemplated to be deployed Board may seek to equitably re-allocate any burden on competition.
by OCC if an extreme stress event has losses, costs and fees directly imposed
(C) Clearing Agency’s Statement on
placed OCC into a recovery or orderly as a result of a Partial Tear-Up among
Comments on the Proposed Rule
wind-down scenario, and therefore, the all non-defaulting Clearing Members
Change Received From Members,
tools discussed herein constitute key through a special charge. By
aspects of OCC’s default rules. By incorporating the proposed changes into Participants or Others
incorporating the proposed changes into OCC’s Rules and By-Laws, as further Written comments were not and are
OCC’s Rules and By-Laws, as further supplemented by the discussion in not intended to be solicited with respect
supplemented by the discussion in OCC’s public rule filing, OCC believes to the proposed rule change, and none
OCC’s public rule filing, OCC believes that is has provided sufficient have been received.
that proposed changes would conform information to enable participants to III. Date of Effectiveness of the
to the relevant requirements in Rule identify and evaluate the risks, fees, and
Proposed Rule Change and Timing for
17Ad–22(e)(23)(i).54 other material costs they could incur by
Commission Action
participating OCC, consistent with the
Sufficient Information Regarding the Within 45 days of the date of
requirements in Rule 17Ad–
Risks, Fees and Costs of Clearing publication of this notice in the Federal
22(e)(23)(ii).56
In relevant part, Rule 17Ad– Register or within such longer period
22(e)(23)(ii) requires that each CCA (B) Clearing Agency’s Statement on up to 90 days (i) as the Commission may
‘‘establish, implement, maintain and Burden on Competition designate if it finds such longer period
enforce written policies and procedures Section 17A(b)(3)(I) of the Act 57 to be appropriate and publishes its
reasonably designed to . . . [p]rovid[e] requires that the rules of a clearing reasons for so finding or (ii) as to which
sufficient information to enable agency not impose any burden on the self-regulatory organization
participants to identify and evaluate the competition not necessary or consents, the Commission will:
risks, fees, and other material costs they appropriate in furtherance of the (A) By order approve or disapprove
incur by participating in the covered purposes of the Act. OCC does not the proposed rule change, or
clearing agency.’’ 55 The proposed believe the proposed rule change would (B) institute proceedings to determine
changes would clearly explain to have any impact or impose any burden whether the proposed rule change
Clearing Members and market on competition. The primary purpose of should be disapproved.
participants that an extreme stress the proposed changes is to make certain
IV. Solicitation of Comments
scenario could result in the use—and revisions to OCC’s Rules and By-Laws
theoretically the exhaustion—of OCC’s Laws that are designed to enhance Interested persons are invited to
financial resources, inclusive of OCC’s OCC’s existing tools to address the risks submit written data, views, and
proposed assessment powers. Proposed of liquidity shortfalls and credit losses arguments concerning the foregoing,
changes to Section 6, Article VIII of and to establish tools by which OCC including whether the proposed rule
OCC’s By-Laws would explain Clearing could re-establish a matched book change is consistent with the Act.
Members’ replenishment obligation and following a default. As explained above, Comments may be submitted by any of
liability for assessments. The proposed each of the tools proposed herein is the following methods:
changes also would clearly explain, contemplated to be deployed by OCC in Electronic Comments
through proposed Rules 1009 and 1111, an extreme stress event that has placed
that as OCC nears the exhaustion of its OCC into a recovery or orderly wind- • Use the Commissions internet
assessment powers, Clearing Members down scenario. The proposed rule comment form (http://www.sec.gov/
may be asked for voluntary payments change is intended to provide Clearing rules/sro.shtml); or
and, if necessary, Clearing Members and Members, market participants and other • Send an email to rule-comments@
customers may be asked to participate stakeholders with greater certainty as to sec.gov. Please include File Number SR–
in a Voluntary Tear-Up and/or subject to their liabilities and potential exposure OCC–2017–020 on the subject line.
a Partial Tear-Up. Proposed Rules to OCC in the event of an Paper Comments
1009(b) and 1111(a)(ii) also would make unprecedented loss scenario. OCC does
clear that Clearing Members that made not believe that the proposed changes • Send paper comments in triplicate
voluntary payments and Clearing would discriminatorily impact any to Brent Fields, Secretary, Securities
Members and customers whose Clearing Member’s access to OCC’s and Exchange Commission, 100 F Street
tendered positions were extinguished in services or unnecessarily disadvantage NE, Washington, DC 20549–1090.
the Voluntary Tear-Up would be or favor any particular user in All submissions should refer to File
prioritized in the distribution of any relationship to another user. OCC Number SR–OCC–2017–020. This file
recovery from the defaulted Clearing recognizes that the nature of a Partial number should be included on the
Member(s). Proposed changes to Article Tear-Up means that only particular subject line if email is used. To help the
VIII would clarify that the Clearing Clearing Members and market Commission process and review your
Fund contributions remaining after OCC participants holding certain positions comments more efficiently, please use
has conducted a Voluntary Tear-Up or may be impacted; however, the risk of only one method. The Commission will
Partial Tear-Up could be used to Partial Tear-Ups is extremely remote, post all comments on the Commission’s
compensate the non-defaulting Clearing and even then, the proposed changes internet website (http://www.sec.gov/
Members and non-defaulting customers seek to provide means of equitably re- rules/sro.shtml). Copies of the
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for the losses, costs or fees imposed allocating the losses, costs and fees submission, all subsequent
upon them as a result of such Voluntary imposed by Voluntary Tear-Up or amendments, all written statements
Tear-Up or Partial Tear-Up. Proposed Partial Tear-Up. Therefore, OCC with respect to the proposed rule
Rule 1111(g) would make clear that, believes that the proposed changes change that are filed with the
Commission, and all written
54 17 CFR 240.17Ad–22(e)(13). 56 17 CFR 240.17Ad–22(e)(23)(ii). communications relating to the
55 17 CFR 240.17Ad–22(e)(23)(ii). 57 15 U.S.C. 78q–1(b)(3)(I). proposed rule change between the
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![61116 Federal Register / Vol. 82, No. 246 / Tuesday, December 26, 2017 / Notices
Commission and any person, other than Submissions must be made in writing to sources are used, such as research
those that may be withheld from the the Office to Monitor and Combat studies, interviews, direct observations,
public in accordance with the Trafficking in Persons at the Department or other sources of quantitative or
provisions of 5 U.S.C. 552, will be of State by January 31, 2018. Please refer qualitative data, provide details on the
available for website viewing and to the Addresses, Scope of Interest, and research or data-gathering methodology.
printing in the Commission’s Public Information Sought sections of this The Department does not include in the
Reference Room, 100 F Street NE, Notice for additional instructions on TIP Report, and is therefore not seeking,
Washington, DC 20549, on official submission requirements. information on prostitution, migrant
business days between the hours of DATES: Submissions must be received by smuggling, visa fraud, or child abuse,
10:00 a.m. and 3:00 p.m. Copies of such 5 p.m. on January 31, 2018. unless such conduct occurs in the
filing also will be available for ADDRESSES: Written submissions and
context of trafficking in persons as
inspection and copying at the principal defined in the TVPA.
supporting documentation may be
office of OCC and on OCC’s website at Confidentiality: Please provide the
submitted by the following methods:
https://www.theocc.com/components/ name, phone number, and email address
Email (preferred): tipreport@state.gov
docs/legal/rules_and_bylaws/sr_occ_17_ of a single point of contact for any
for submissions related to foreign
020.pdf. submission. It is Department practice
governments and tipreportUS@state.gov
All comments received will be posted not to identify in the TIP Report
for submissions related to the United information concerning sources to
without change. Persons submitting States.
comments are cautioned that we do not safeguard those sources. Please note,
• Facsimile (fax): 202–312–9637.
redact or edit personal or identifying however, that any information
• Mail, Express Delivery, Hand
information from comment submissions. submitted to the Department may be
Delivery and Messenger Service: U.S.
You should submit only information releasable pursuant to the provisions of
Department of State, Office to Monitor the Freedom of Information Act or other
that you wish to make available and Combat Trafficking in Persons
publicly. applicable law. When applicable,
(J/TIP), 1800 G Street NW, Suite 2201, portions of submissions relevant to
All submissions should refer to File Washington, DC 20520. Please note that
Number SR–OCC–2017–020 and should efforts by other U.S. government
materials submitted by mail may be agencies will be shared with those
be submitted on or before January 16, delayed due to security screenings and
2018. agencies.
processing. Response: This is a request for
For the Commission by the Division of Scope of Interest: The Department information only; there will be no
Trading and Markets, pursuant to delegated requests information relevant to
authority.58
response to submissions.
assessing the United States’ and foreign SUPPLEMENTARY INFORMATION:
Eduardo A. Aleman, governments’ efforts to meet the
Assistant Secretary. minimum standards for the elimination I. Background
[FR Doc. 2017–27691 Filed 12–22–17; 8:45 am] of trafficking in persons during the The TIP Report: The TIP Report is the
BILLING CODE 8011–01–P reporting period (April 1, 2017–March most comprehensive worldwide report
31, 2018). The minimum standards are on governments’ efforts to combat
listed in the Background section. trafficking in persons. It represents an
DEPARTMENT OF STATE Submissions must include information annually updated, global look at the
relevant to efforts to meet the minimum nature and scope of trafficking in
[Public Notice: 10237] standards and should include, but need persons and the broad range of
not be limited to, answering the government actions to confront and
Request for Information for the 2018
questions in the Information Sought eliminate it. The U.S. government uses
Trafficking in Persons Report
section. Only those questions for which the Report to engage in diplomacy, to
SUMMARY: The Department of State (‘‘the the submitter has direct professional encourage partnership in creating and
Department’’) requests written experience should be answered and that implementing laws and policies to
information to assist in reporting on the experience should be noted. For any combat trafficking, and to target
degree to which the United States and critique or deficiency described, please resources on prevention, protection, and
foreign governments meet the minimum provide a recommendation to remedy it. prosecution programs. Worldwide, the
standards for the elimination of Note the country or countries that are Report is used by international
trafficking in persons (‘‘minimum the focus of the submission. organizations, foreign governments, and
standards’’) that are prescribed by the Submissions may include written nongovernmental organizations as a tool
Trafficking Victims Protection Act of narratives that answer the questions to examine where resources are most
2000, as amended (‘‘TVPA’’). This presented in this Notice, research, needed. Prosecuting traffickers,
information will assist in the studies, statistics, fieldwork, training protecting victims, and preventing
preparation of the Trafficking in Persons materials, evaluations, assessments, and trafficking are the ultimate goals of the
Report (‘‘TIP Report’’) that the other relevant evidence of local, state/ Report and of the U.S government’s
Department submits annually to the provincial, and federal/central anti-trafficking policy.
U.S. Congress on government efforts to government efforts. To the extent The Department prepares the TIP
meet the minimum standards. Foreign possible, precise dates and numbers of Report using information from across
governments that do not meet the officials or citizens affected should be the U.S. government, foreign
minimum standards and are not making included. government officials, nongovernmental
ethrower on DSK3G9T082PROD with NOTICES
significant efforts to do so may be Where applicable, written narratives and international organizations,
subject to restrictions on providing factual information should published reports, and research trips to
nonhumanitarian, nontrade-related provide citations of sources, and copies every region. The Report focuses on
foreign assistance from the United of the source material should be concrete actions that governments take
States, as defined by the TVPA. provided. If possible, send electronic to fight trafficking in persons, including
copies of the entire submission, prosecutions, convictions, and
58 17 CFR 200.30–3(a)(12). including source material. If primary sentences for traffickers, as well as
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Document Created: 2017-12-23 03:07:49
Document Modified: 2017-12-23 03:07:49
| 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 61107 |
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