83 FR 13171 - Self-Regulatory Organizations; The Options Clearing Corporation; Order Instituting Proceedings To Determine Whether To Approve or Disapprove the Proposed Rule Concerning Enhanced and New Tools for Recovery Scenarios

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 59 (March 27, 2018)

[Federal Register Volume 83, Number 59 (Tuesday, March 27, 2018)]
[Notices]
[Pages 13171-13173]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-06105]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82926; File No. SR-OCC-2017-020]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove the Proposed Rule Concerning Enhanced and New Tools for 
Recovery Scenarios

March 22, 2018.

I. Introduction

    On December 18, 2017, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2017-020 (``Proposed Rule Change''), 
pursuant to Section 19(b) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder.\2\ The Proposed Rule Change 
was published for comment in the Federal Register on December 26, 
2017.\3\ On January 25, 2018, the Comission designated a longer period 
within which to approve the Proposed Rule Change, disapprove the 
Proposed Rule Change, or institute proceedings to determine whether to 
approve or disapprove the Proposed Rule Change.\4\ To date,\5\ the 
Commission has received one comment letter to the Proposed Rule 
Change.\6\ The Commission is publishing this order pursuant to Section 
19(b)(2)(B) of the Act \7\ to institute proceedings to determine 
whether to approve or disapprove the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 82351 (Dec. 19, 2017), 
82 FR 61107 (Dec. 26, 2017) (SR-OCC-2017-020) (``Notice''). On 
December 8, 2017, OCC also filed a related advance notice (SR-OCC-
2017-809) with the Commission pursuant to Section 806(e)(1) of Title 
VIII of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act, entitled the Payment, Clearing, and Settlement Supervision Act 
of 2010 and Rule 19b-4(n)(1)(i) under the Act (``Advance Notice''). 
12 U.S.C. 5465(e)(1) and 17 CFR 240.19b-4(n)(1)(i), respectively. 
The Advance Notice was published in the Federal Register on January 
23, 2018. Securities Exchange Act Release No. 82513 (Jan. 17, 2018), 
83 FR 3244 (Jan. 23, 2018) (SR-OCC-2017-809).
    The Financial Stability Oversight Council designated OCC a 
systemically important financial market utility on July 18, 2012. 
See Financial Stability Oversight Council 2012 Annual Report, 
Appendix A, available at http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, OCC is required to 
comply with the Payment, Clearing and Settlement Supervision Act and 
file advance notices with the Commission. See 12 U.S.C. 5465(e).
    \4\ Securities Exchange Act Release No. 82585 (Jan. 25, 2018), 
83 FR 4526 (Jan. 31, 2018) (File No. SR-OCC-2017-020).
    \5\ The comment period closed on January 16, 2018. See Notice, 
supra note 3, 28 FR at 61116.
    \6\ See letter from Jacqueline H. Mesa, Senior Vice President of 
Global Policy, Futures Industry Association, dated January 16, 2018, 
to Brent J. Fields, Secretary, Commission (``FIA Letter''), 
available at https://www.sec.gov/comments/sr-occ-2017-020/occ2017020.htm.
    \7\ 15 U.S.C. 78s(b)(2)(B).
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    Institution of proceedings does not indicate that the Commission 
has reached any conclusions with respect to the Proposed Rule Change, 
nor does it mean that the Commission will ultimately disapprove the 
Proposed Rule Change. Rather, as discussed below, the Commission seeks 
additional input on the Proposed Rule Change and issues presented by 
the proposal.

II. Description of the Proposed Rule Change \8\
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    \8\ The description of the Proposed Rule Change is substantially 
excerpted from the Notice. See Notice, supra note 3, 82 FR at 61107-
61109.
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    The Proposed Rule Change would make certain revisions to OCC's 
Rules and By-Laws \9\ 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.\10\ Each of the proposed tools is contemplated to be deployed 
by OCC in an extreme stress event that has placed OCC into a recovery 
or orderly wind-down scenario.\11\
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    \9\ OCC's By-Laws and Rules can be found on OCC's public 
website: http://optionsclearing.com/about/publications/bylaws.jsp.
    \10\ Notice, supra note 3, 82 FR at 61107.
    \11\ Id.
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    OCC proposed to make four revisions to its Rules and By-Laws. 
First, OCC proposed to 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 
(i.e., a triggering proportionate charge), during which period the 
aggregate liability of a Clearing Member to replenish the Clearing Fund 
(inclusive of assessments) would be 200 percent of the Clearing 
Member's required contribution as of the time immediately preceding the 
triggering proportionate charge; \12\
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    \12\ Id. at 61108, 61109.
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    (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 or transferring all its open positions with OCC by no 
later than the last day of the cooling-off period; \13\ and
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    \13\ Id. at 61108, 61109-10.
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    (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.\14\
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    \14\ Id. at 61109, 6110.
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    Second, OCC proposed to adopt a new rule 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'').\15\ 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.\16\
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    \15\ Id.
    \16\ Id.
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    Third, OCC proposed to adopt a new rule that would provide the 
following authority (``Rule 1111''):

[[Page 13172]]

    (a) Allow OCC to call for voluntary tear-ups (``Voluntary Tear-
Up'') \17\ 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''); \18\
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    \17\ See id. at 61110 (defining Voluntary Tear-Up).
    \18\ Id. at 61109, 61110-11.
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    (b) Allow OCC's Board to vote to tear-up the Remaining Open 
Positions \19\ of a defaulted Clearing Member, as well as any Related 
Open Positions \20\ 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'') 
\21\ being determined by the Risk Committee; \22\ and
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    \19\ See id. at 61111 (defining Remaining Open Positions).
    \20\ See id. (defining Related Open Positions).
    \21\ See id. at 61109 (defining Partial Tear-Up).
    \22\ Id. at 61109, 61111-12.
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    (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.\23\
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    \23\ Id. at 61109, 61112.
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    Fourth and finally, OCC proposed to revise the descriptions and 
authorizations in Article VIII of OCC's By-Laws concerning the use of 
the Clearing Fund to reflect its discretion 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 Partial 
Tear-Up.\24\
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    \24\ Id.
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III. Summary of Comment Received

    On January 16, 2018, the Commission received a comment letter from 
the Futures Industry Association (``FIA'').\25\ In the comment letter, 
FIA stated that it had identified a number of areas where it did not 
support the approach that OCC proposed in the Proposed Rule Change, and 
it separated its response into two sections.\26\
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    \25\ See FIA Letter, supra note 4.
    \26\ FIA Letter at 1.
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    First, with respect to replenishment of the Clearing Fund, the FIA 
stated that OCC ``should provide an explanation as to how the cap level 
of 200% [regarding assessments in a cooling-off period] was determined 
and why [OCC] considers 200% appropriate, rather than a lower cap 
level.'' \27\ Second, with respect to Partial Tear-Up, the FIA 
generally supported its use as a position rebalancing tool.\28\ The FIA 
stated, however, that its belief that ``it is [not] reasonable nor 
analytically sound for tear-ups to result in incremental costs of 
undefined amounts being distributed through assessments, as it 
effectively enables the Board of OCC to engage in unlimited 
assessments.'' \29\ Additionally, the FIA stated that ``where a cleared 
trade is selected by the Board of OCC for Partial Tear-Up, the price of 
the trade should be determined objectively (either by marking to market 
or an objective best-estimate of market price), not on a discretionary 
basis.'' \30\ The FIA also stated that ``OCC should ensure that the 
design and application of Partial Tear-Ups do not dis-incentivize 
bidding in default management auctions.'' \31\
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    \27\ Id. at 2.
    \28\ Id.
    \29\ Id.
    \30\ Id.
    \31\ Id.
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IV. Proceedings To Determine Whether To Approve or Disapprove File No. 
SR-OCC-2017-020 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act to determine whether the Proposed Rule Change 
should be approved or disapproved.\32\ Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the Proposed Rule Change. As noted above, institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to provide additional comment on the 
Proposed Rule Change and provide arguments to support the Commission's 
analysis as to whether to approve or disapprove the Proposed Rule 
Change.
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    \32\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\33\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis, and input from, commenters with respect to the Proposed Rule 
Change's consistency with the Act and the rules thereunder, including 
the following:
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    \33\ Id.
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     Section 17A(b)(3)(F) of the Act,\34\ which requires, in 
part, that the rules of a clearing agency be designed to promote the 
prompt and accurate clearnance and settlement of securities 
transactions, assure the safeguarding of securities and funds which are 
in the custody or control of the clearing agency or for which it is 
responsible, and, in general, to protect investors and the public 
interest; and
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    \34\ 15 U.S.C. 78q-1(b)(3)(F).
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     Rule 17Ad-22(e)(3)(ii) of the Act,\35\ which requires a 
covered clearing agency to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to plan for the 
recovery and orderly wind-down of the covered clearing agency 
necessitated by credit losses, liquidity shortfalls, losses from 
general business risk, or any other losses.
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    \35\ 17 CFR 17Ad-22(e)(3)(ii).
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V. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
Proposed Rule Change with respect to the issues identified above, as 
well as any other concerns they may have with the Proposed Rule Change. 
In particular, the Commission invites the written views of interested 
persons concerning whether the Proposed Rule Change is consistent with 
Section 17A(b)(3)(F) and Rule 17Ad-22(e)(3)(ii) under the Act, cited 
above, or any other provision of the Act, rules, and regulations 
thereunder.
    Although there do not appear to be any issues relevant to approval 
or disapproval that would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4, any request for an opportunity to make an oral 
presentation.\36\
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    \36\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97 (1975), 
grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Acts Amendments of 
1975, Report of the Senate Committee on Banking, Housing and Urban 
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 
30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the Proposed Rule Change should be approved 
or disapproved by April 17, 2018. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
May 1, 2018.
    Comments may be submitted by any of the following methods:

[[Page 13173]]

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File No. SR-OCC-2017-020 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090.

All submissions should refer to File No. 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 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/about/publications/bylaws.jsp.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File No. SR-OCC-2017-020 and should 
be submitted on or before April 17, 2018. If comments are received, any 
rebuttal comments should be submitted on or before May 1, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
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    \37\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-06105 Filed 3-26-18; 8:45 am]
 BILLING CODE 8011-01-P