83 FR 3244 - Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Advance Notice Concerning Enhanced and New Tools for Recovery Scenarios
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 83, Issue 15 (January 23, 2018)
Federal Register Volume 83, Issue 15 (January 23, 2018)
| Page Range | 3244-3253 | |
| FR Document | 2018-01070 |
[Federal Register Volume 83, Number 15 (Tuesday, January 23, 2018)] [Notices] [Pages 3244-3253] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-01070] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-82513; File No. SR-OCC-2017-809] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Advance Notice Concerning Enhanced and New Tools for Recovery Scenarios January 17, 2018. Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, entitled Payment, Clearing and Settlement Supervision Act of 2010 (``Clearing Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) under the Securities Exchange Act of 1934 (``Act''),\2\ notice is hereby given that on December 8, 2017, The Options Clearing Corporation (``OCC'') filed with the Securities and Exchange Commission (``Commission'') an advance notice 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 advance notice from interested persons. --------------------------------------------------------------------------- \1\ 12 U.S.C. 5465(e)(1). \2\ 17 CFR 240.19b-4(n)(1)(i). --------------------------------------------------------------------------- I. Clearing Agency's Statement of the Terms of Substance of the Advance Notice This advance notice is filed in connection with a proposed change to 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. The proposed changes to OCC's By-Laws and Rules were submitted as Exhibits 5A and 5B of the filing, and proposed changes to OCC's Default Management Policy were submitted as confidential Exhibit 5C of the filing.\3\ The proposed change is described in detail in Item II below. All terms with initial capitalization not defined herein have the same meaning as set forth in OCC's By-Laws and Rules.\4\ --------------------------------------------------------------------------- \3\ OCC has filed a proposed rule change with the Commission in connection with the proposed change. See SR-OCC-2017-017. \4\ OCC's By-Laws and Rules can be found on OCC's public website: http://optionsclearing.com/about/publications/bylaws.jsp. --------------------------------------------------------------------------- [[Page 3245]] II. Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Advance Notice In its filing with the Commission, OCC included statements concerning the purpose of and basis for the advance notice and discussed any comments it received on the advance notice. 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 and B below, of the most significant aspects of these statements. (A) Clearing Agency's Statement on Comments on the Advance Notice Received From Members, Participants or Others Written comments were not and are not intended to be solicited with respect to the proposed rule change and none have been received. OCC will notify the Commission of any written comments received by OCC. (B) Advance Notices Filed Pursuant to Section 806(e) of the Payment, Clearing, and Settlement Supervision Act Purpose of the Proposed Change 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 Rule 17Ad-22 \5\ 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) \6\ pursuant to Section 17A of the Securities Exchange Act of 1934 \7\ and the Payment, Clearing, and Settlement Supervision Act of 2010 (``Payment, Clearing and Settlement Supervision Act'').\8\ In relevant part, these new rules collectively require a covered clearing agency (``CCA''), as defined by Rule 17Ad-22(a)(5),\9\ 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: --------------------------------------------------------------------------- \5\ 17 CFR 240.17Ad-22. \6\ 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). \7\ 15 U.S.C. 78q-1. \8\ 12 U.S.C. 5461 et seq. \9\ 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.'' \10\ --------------------------------------------------------------------------- \10\ 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.'' \11\ --------------------------------------------------------------------------- \11\ 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.'' \12\ --------------------------------------------------------------------------- \12\ 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.'' \13\ --------------------------------------------------------------------------- \13\ 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 . . .'' \14\ --------------------------------------------------------------------------- \14\ 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.'' \15\ --------------------------------------------------------------------------- \15\ 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 [[Page 3246]] participating in the covered clearing agency.'' \16\ --------------------------------------------------------------------------- \16\ 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).\17\ --------------------------------------------------------------------------- \17\ 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 (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).\18\ 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. --------------------------------------------------------------------------- \18\ 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 [[Page 3247]] 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.\19\ --------------------------------------------------------------------------- \19\ 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 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.\20\ 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. --------------------------------------------------------------------------- \20\ 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,\21\ 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). --------------------------------------------------------------------------- \21\ 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 [[Page 3248]] scope of each voluntary tear-up.\22\ 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. --------------------------------------------------------------------------- \22\ 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.\23\ 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. --------------------------------------------------------------------------- \23\ 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.\24\ 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.\25\ --------------------------------------------------------------------------- \24\ 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). \25\ 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.\26\ 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. --------------------------------------------------------------------------- \26\ 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 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.\27\ 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 [[Page 3249]] 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.\28\ --------------------------------------------------------------------------- \27\ 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. \28\ 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 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.\29\ --------------------------------------------------------------------------- \29\ 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 Rule 1111 shall constitute a default by OCC. Expected Effect on and Management of Risk OCC believes that the proposed changes would reduce the nature and level of risk presented to OCC in three primary ways: (i) By providing greater certainty regarding what financial resources will be available to OCC after a proportionate charge is assessed; (ii) by providing additional tools by which to allocate credit losses in excess of OCC's available financial resources; and (iii) by enhancing OCC's ability to re-establish a matched book. First, OCC believes the imposition of a 200% cap on OCC's assessment powers during any cooling-off period provides Clearing Members with 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 risks, and to the extent applicable, regulatory capital considerations. Further, OCC believes that extending the window for Clearing Member withdrawal following a proportionate charge to be equivalent with the cooling-off period would afford a Clearing Member a more reasonable period in which to evaluate whether the withdrawal from clearing membership would be necessary to cap its liability for proportionate charges at 200% of its then-required Clearing Fund contributions. With this change, OCC believes the increased predictability would help it to more reliably understand the amount of Clearing Fund contributions that will likely be available to it after a proportionate charge is assessed. Second, the introduction of rules to allow for voluntary payments, Voluntary Tear-Ups and Partial Tear-Ups 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. Finally, in the event that OCC believes its obligations and liabilities arising from remaining positions in the portfolio of a defaulted Clearing Member may exceed its remaining available financial resources, the proposed changes ultimately would enable OCC to extinguish those positions, thereby re- establishing a matched book. The risks of a Partial Tear-Up are extremely remote; nonetheless, OCC believes that the express authority to conduct a Partial Tear-Up may be viewed as increasing Clearing Members' and customers' exposure to an extreme stress scenario. As explained above, the proposed Partial Tear-Up authority is consistent with regulatory requirements, as well as with the expectations of CCPs of various international organizations. OCC further believes that its proposed Partial Tear-Up authority strikes an appropriate balance between seeking to protect the interests of Clearing Members and customers and the need to have appropriate tools to stabilize a systemically important financial market utility and minimize the risk of disruption to the broader financial system. To address the potential impact of a Partial Tear-Up on Clearing Members and customers, OCC has proposed two tools that would enable it to equitably re-allocate the losses, costs and fees imposed upon holders of torn-up positions. Consistency With the Clearing Supervision Act The stated purpose of the Clearing Supervision Act is to mitigate systemic risk in the financial system and promote financial stability by, among other [[Page 3250]] things, promoting uniform risk management standards for systemically important financial market utilities and strengthening the liquidity of systemically important financial market utilities.\30\ Section 805(a)(2) of the Clearing Supervision Act \31\ also authorizes the Commission to prescribe risk management standards for the payment, clearing and settlement activities of designated clearing entities, like OCC, for which the Commission is the supervisory agency. Section 805(b) of the Clearing Supervision Act \32\ states that the objectives and principles for risk management standards prescribed under Section 805(a) shall be to: --------------------------------------------------------------------------- \30\ 12 U.S.C. 5461(b). \31\ 12 U.S.C. 5464(a)(2). \32\ 12 U.S.C. 5464(b). --------------------------------------------------------------------------- Promote robust risk management; promote safety and soundness; reduce systemic risks; and support the stability of the broader financial system. The Commission has adopted risk management standards under Section 805(a)(2) of the Clearing Supervision Act and the Act in furtherance of these objectives and principles, including those standards adopted pursuant to the Commission rules cited below.\33\ For the reasons set forth below, OCC believes that the proposed change is consistent with the risk management standards promulgated under Section 805(a) of the Clearing Supervision Act.\34\ --------------------------------------------------------------------------- \33\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release Nos. 68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7- 08-11) (``Clearing Agency Standards''); 78961 (September 28, 2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (``Standards for Covered Clearing Agencies''). The Standards for Covered Clearing Agencies became effective on December 12, 2016. OCC is a ``covered clearing agency'' as defined in Rule 17Ad-22(a)(5) and therefore is subject to section (e) of Rule 17Ad-22. \34\ 12 U.S.C. 5464(b)(1) and (4). --------------------------------------------------------------------------- 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.'' \35\ 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.\36\ 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.\37\ 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.\38\ --------------------------------------------------------------------------- \35\ 17 CFR 240.17Ad-22(e)(3)(ii). \36\ 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. \37\ 17 CFR 240.17Ad-22(e)(3)(ii). \38\ 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 . . .'' \39\ 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,\40\ 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.\41\ 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).\42\ --------------------------------------------------------------------------- \39\ 17 CFR 240.17Ad-22(e)(v)(viii). \40\ 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. \41\ 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. \42\ 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.'' \43\ 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. --------------------------------------------------------------------------- \43\ 17 CFR 240.17Ad-22(e)(4)(ix). --------------------------------------------------------------------------- OCC believes that the proposed approach improves predictability for [[Page 3251]] 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.\44\ --------------------------------------------------------------------------- \44\ 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 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.\45\ 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. --------------------------------------------------------------------------- \45\ 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.\46\ --------------------------------------------------------------------------- \46\ 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).\47\ --------------------------------------------------------------------------- \47\ 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.'' \48\ 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).\49\ --------------------------------------------------------------------------- \48\ 17 CFR 240.17Ad-22(e)(7)(ix). \49\ 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 . . .'' \50\ The proposed changes would provide OCC with the authority to call for Voluntary Tear-Ups and OCC's Board [[Page 3252]] 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).\51\ --------------------------------------------------------------------------- \50\ 17 CFR 240.17Ad-22(e)(13). \51\ 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.'' \52\ As 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).\53\ --------------------------------------------------------------------------- \52\ 17 CFR 240.17Ad-22(e)(23)(i). \53\ 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.'' \54\ 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).\55\ --------------------------------------------------------------------------- \54\ 17 CFR 240.17Ad-22(e)(23)(ii). \55\ 17 CFR 240.17Ad-22(e)(23)(ii). --------------------------------------------------------------------------- III. Date of Effectiveness of the Advance Notice and Timing for Commission Action The proposed change may be implemented if the Commission does not object to the proposed change within 60 days of the later of (i) the date the proposed change was filed with the Commission or (ii) the date any additional information requested by the Commission is received. OCC shall not implement the proposed change if the Commission has any objection to the proposed change. The Commission may extend the period for review by an additional 60 days if the proposed change raises novel or complex issues, subject to the Commission providing the clearing agency with prompt written notice of the extension. A proposed change may be implemented in less than 60 days from the date the advance notice is filed, or the date further information requested by the Commission is received, if the Commission notifies the clearing agency in writing that it does not object to the proposed change and authorizes the clearing agency to implement the proposed change on an earlier date, subject to any conditions imposed by the Commission. OCC shall post notice on its website of proposed changes that are implemented. The proposal shall not take effect until all regulatory actions required with respect to the proposal are completed. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the advance notice is consistent with the Clearing Supervision Act. Comments may be submitted by any of the following methods: Electronic Comments Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to rule-comments@sec.gov. Please include File Number SR-OCC-2017-809 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. All submissions should refer to File Number SR-OCC-2017-809. 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 [[Page 3253]] with respect to the advance notice that are filed with the Commission, and all written communications relating to the advance notice 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 the 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_809.pdf. 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 Number SR-OCC-2017-809 and should be submitted on or before February 13, 2018. By the Commission. Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018-01070 Filed 1-22-18; 8:45 am] BILLING CODE 8011-01-P
![3244 Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices
subparagraph (f)(6) of Rule 19b–4 Paper Comments SECURITIES AND EXCHANGE
thereunder.10 In addition, Rule 19b– COMMISSION
4(f)(6) requires a self-regulatory • Send paper comments in triplicate
organization to give the Commission to Secretary, Securities and Exchange
[Release No. 34–82513; File No. SR–OCC–
written notice of its intent to file the Commission, 100 F Street NE,
2017–809]
proposed rule change, along with a brief Washington, DC 20549–1090.
description and text of the proposed All submissions should refer to File Self-Regulatory Organizations; The
rule change, at least five business days Number CboeBZX–2018–003. This file Options Clearing Corporation; Notice
prior to the date of filing of the number should be included on the of Filing of Advance Notice
proposed rule change, or such shorter subject line if email is used. To help the Concerning Enhanced and New Tools
time as designated by the Commission. Commission process and review your for Recovery Scenarios
The Exchange has satisfied this comments more efficiently, please use
requirement. January 17, 2018.
only one method. The Commission will
In its filing, the Exchange requested post all comments on the Commission’s Pursuant to Section 806(e)(1) of Title
that the Commission waive the 30-day internet website (http://www.sec.gov/ VIII of the Dodd-Frank Wall Street
operative delay in order to enable the rules/sro.shtml). Copies of the Reform and Consumer Protection Act,
Exchange to immediately ensure submission, all subsequent entitled Payment, Clearing and
consistent use of terms amongst the amendments, all written statements Settlement Supervision Act of 2010
Exchange and its affiliates, thereby with respect to the proposed rule (‘‘Clearing Supervision Act’’) 1 and Rule
reducing the potential for confusion 19b–4(n)(1)(i) under the Securities
change that are filed with the
amongst market data subscribers Exchange Act of 1934 (‘‘Act’’),2 notice is
Commission, and all written
regarding the type of User they may be hereby given that on December 8, 2017,
communications relating to the
considered by the Exchange. The The Options Clearing Corporation
proposed rule change between the (‘‘OCC’’) filed with the Securities and
Commission believes that such waiver is Commission and any person, other than
consistent with the protection of Exchange Commission (‘‘Commission’’)
those that may be withheld from the an advance notice as described in Items
investors and the public interest.
public in accordance with the I, II and III below, which Items have
Therefore, the Commission designates
provisions of 5 U.S.C. 552, will be been prepared by OCC. The Commission
the proposed rule change to be operative
available for website viewing and is publishing this notice to solicit
upon filing. For purposes only of
printing in the Commission’s Public comments on the advance notice from
waiving the 30-day operative delay, the
Commission has also considered the Reference Room, 100 F Street NE, interested persons.
proposed rule’s impact on efficiency, Washington, DC 20549 on official
business days between the hours of I. Clearing Agency’s Statement of the
competition, and capital formation.11 Terms of Substance of the Advance
10:00 a.m. and 3:00 p.m. Copies of the
At any time within 60 days of the filing also will be available for Notice
filing of the proposed rule change, the inspection and copying at the principal
Commission summarily may This advance notice is filed in
office of the Exchange. All comments connection with a proposed change to
temporarily suspend such rule change if
received will be posted without change. make certain revisions to OCC’s Rules
it appears to the Commission that such
Persons submitting comments are and By-Laws to enhance OCC’s existing
action is: (i) Necessary or appropriate in
cautioned that we do not redact or edit tools to address the risks of liquidity
the public interest; (ii) for the protection
of investors; or (iii) otherwise in personal identifying information from shortfalls and credit losses and to
furtherance of the purposes of the Act. comment submissions. You should establish new tools by which OCC could
If the Commission takes such action, the submit only information that you wish re-establish a matched book following a
Commission shall institute proceedings to make available publicly. All default. Each of the tools proposed
to determine whether the proposed rule submissions should refer to File herein is contemplated to be deployed
should be approved or disapproved. Number CboeBZX–2018–003 and by OCC in an extreme stress event that
should be submitted on or before has placed OCC into a recovery or
IV. Solicitation of Comments February 13, 2018. orderly wind-down scenario.
Interested persons are invited to For the Commission, by the Division of The proposed changes to OCC’s By-
submit written data, views, and Trading and Markets, pursuant to delegated Laws and Rules were submitted as
arguments concerning the foregoing, authority.12 Exhibits 5A and 5B of the filing, and
including whether the proposed rule Eduardo A. Aleman, proposed changes to OCC’s Default
change is consistent with the Act. Management Policy were submitted as
Assistant Secretary.
Comments may be submitted by any of confidential Exhibit 5C of the filing.3
[FR Doc. 2018–01088 Filed 1–22–18; 8:45 am]
the following methods: The proposed change is described in
BILLING CODE 8011–01–P detail in Item II below. All terms with
Electronic Comments initial capitalization not defined herein
have the same meaning as set forth in
• Use the Commission’s internet OCC’s By-Laws and Rules.4
comment form (http://www.sec.gov/
sradovich on DSK3GMQ082PROD with NOTICES
rules/sro.shtml); or 1 12U.S.C. 5465(e)(1).
• Send an email to rule-comments@ 2 17CFR 240.19b–4(n)(1)(i).
sec.gov. Please include File Number SR– 3 OCC has filed a proposed rule change with the
CboeBZX–2018–003 on the subject line. Commission in connection with the proposed
change. See SR–OCC–2017–017.
4 OCC’s By-Laws and Rules can be found on
10 17 CFR 240.19b–4(f)(6). OCC’s public website: http://optionsclearing.com/
11 See 15 U.S.C. 78c(f). 12 17 CFR 200.30–3(a)(12). about/publications/bylaws.jsp.
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II. Clearing Agency’s Statement of the defined by Rule 17Ad–22(a)(5),9 to settlement processes, including by . . .
Purpose of, and Statutory Basis for, the establish, implement, maintain and [a]ddressing allocation of credit losses
Advance Notice enforce written policies and procedures the [CCA] may face if its collateral and
reasonably designed to: (1) Maintain a other resources are insufficient to fully
In its filing with the Commission, risk management framework including cover its credit exposures, including the
OCC included statements concerning plans for recovery and orderly wind- repayment of any funds the [CCA] may
the purpose of and basis for the advance down necessitated by credit losses, borrow from liquidity providers.’’ 11
notice and discussed any comments it
received on the advance notice. The text
liquidity shortfalls, general business risk • Rule 17Ad–22(e)(4)(ix) requires that
losses or any other losses, (2) effectively each CCA ‘‘establish, implement,
of these statements may be examined at identify, measure, monitor and manage
the places specified in Item IV below. maintain and enforce written policies
its credit exposures to participants and and procedures reasonably designed to
OCC has prepared summaries, set forth those arising from its payment, clearing
in sections A and B below, of the most . . . [e]ffectively identify, measure,
and settlement processes, including by monitor, and manage its credit
significant aspects of these statements. addressing the allocation of credit losses exposures to participants and those
(A) Clearing Agency’s Statement on a CCA might face if its collateral and arising from its payment, clearing, and
Comments on the Advance Notice other resources are insufficient to fully settlement processes, including by . . .
Received From Members, Participants or cover its credit exposures, (3) effectively [d]escribing the [CCA’s] process to
Others identify, measure, monitor and manage replenish any financial resources it may
credit exposures, including by use following a default or other event in
Written comments were not and are describing the process to replenish any which use of such resources is
not intended to be solicited with respect financial resource that a CCA may use contemplated.’’ 12
to the proposed rule change and none following a default event or other event
have been received. OCC will notify the • Rule 17Ad–22(e)(7)(ix) requires that
in which use of such resource is each CCA ‘‘establish, implement,
Commission of any written comments contemplated, (4) effectively identify,
received by OCC. maintain and enforce written policies
measure, monitor and manage liquidity and procedures reasonably designed to
(B) Advance Notices Filed Pursuant to risks that arises or is borne by the CCA . . . [e]ffectively measure, monitor, and
Section 806(e) of the Payment, Clearing, by, at a minimum, describing the
manage the liquidity risk that arises in
and Settlement Supervision Act process for replenishing any liquid
or is borne by the [CCA], including
resource that a CCA may employ during
Purpose of the Proposed Change measuring, monitoring, and managing
a stress event, (5) ensure it has the
its settlement and funding flows on an
Background authority and operational capacity to
ongoing and timely basis, and its use of
take timely action to contain losses and
The purpose of this proposed rule intraday liquidity by, at a minimum,
liquidity demands and continue to meet
change is to make certain revisions to doing the following...[d]escribing the
its obligations, (6) publicly disclose
OCC’s Rules and By-Laws Laws that are [CCA’s] process to replenish any liquid
relevant rules and material procedures,
designed to enhance OCC’s existing resources that the clearing agency may
including key aspects of its default rules
tools to address the risks of liquidity and procedures, and (7) provide employ during a stress event.’’ 13
shortfalls and credit losses and to sufficient information to enable • Rule 17Ad–22(e)(13) requires that
establish tools by which OCC could re- participants to identify and evaluate the each CCA ‘‘establish, implement,
establish a matched book following a risks, fees, and other material costs they maintain and enforce written policies
default. Each of the tools proposed incur by participating in the CCA. The and procedures reasonably designed to
herein is contemplated to be deployed relevant portions of each of these new . . . [e]nsure the covered clearing
by OCC in an extreme stress event that requirements is restated below: agency has the authority and
has placed OCC into a recovery or • Rule 17Ad–22(e)(3)(ii) requires that operational capacity to take timely
orderly wind-down scenario. Each of each CCA ‘‘establish, implement, action to contain losses and liquidity
the proposed revisions also is designed maintain and enforce written policies demands and continue to meet its
to further OCC’s compliance, in whole and procedures reasonably designed to obligations . . .’’ 14
or in part, with the provisions of the . . . [m]aintain a sound risk • Rule 17Ad–22(e)(23)(i) requires that
Commission’s rules identified management framework for each CCA ‘‘establish, implement,
immediately below. comprehensively managing legal, credit, maintain and enforce written policies
On September 28, 2016, the liquidity, operational, general business, and procedures reasonably designed to
Commission adopted amendments to investment, custody, and other risks . . . [p]ublicly disclos[e] all relevant
Rule 17Ad–22 5 and added new Rules that arise in or are borne by the [CCA], rules and material procedures,
17Ad–22(e)(3)(ii), (e)(4)(viii), (e)(4)(ix), which . . . [i]ncludes plans for the including key aspects of its default rules
(e)(7)(ix), (e)(13), (e)(23)(i) and recovery and orderly wind-down of the and procedures.’’ 15
(e)(23)(ii) 6 pursuant to Section 17A of [CCA] necessitated by credit losses, • Rule 17Ad–22(e)(23)(ii) requires
the Securities Exchange Act of 1934 7 liquidity shortfalls, losses from general that each CCA ‘‘establish, implement,
and the Payment, Clearing, and business risk, or any other losses.’’ 10 maintain and enforce written policies
Settlement Supervision Act of 2010 • Rule 17Ad–22(e)(4)(viii) requires and procedures reasonably designed to
(‘‘Payment, Clearing and Settlement that each CCA ‘‘establish, implement, . . . [p]rovid[e] sufficient information to
Supervision Act’’).8 In relevant part, maintain and enforce written policies enable participants to identify and
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these new rules collectively require a and procedures reasonably designed to evaluate the risks, fees, and other
covered clearing agency (‘‘CCA’’), as . . . [e]ffectively identify, measure, material costs they incur by
monitor, and manage its credit
5 17 CFR 240.17Ad–22. exposures to participants and those 11 17 CFR 240.17Ad–22(e)(v)(viii).
6 17 CFR 240.17Ad–22(e)(3)(ii), (e)(4)(viii), arising from its payment, clearing, and 12 17 CFR 240.17Ad–22(e)(4)(ix).
(e)(4)(ix), (e)(7)(ix), (e)(13), (e)(23)(i) and (e)(23)(ii). 13 17 CFR 240.17Ad–22(e)(7)(ix).
7 15 U.S.C. 78q–1. 9 17 CFR 240.17Ad–22(a)(5). 14 17 CFR 240.17Ad–22(e)(13).
8 12 U.S.C. 5461 et seq. 10 17 CFR 240.17Ad–22(e)(3)(ii). 15 17 CFR 240.17Ad–22(e)(23)(i).
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![3250 Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices
things, promoting uniform risk the requirements of Rule 17Ad– resources to satisfy its obligations and
management standards for systemically 22(e)(3)(ii), the proposed tools would liabilities resulting from such default.
important financial market utilities and enable OCC to better address the risks Finally, new Rule 1111 also would
strengthening the liquidity of of liquidity shortfalls and credit losses provide the Board with discretion to
systemically important financial market resulting from a Clearing Member mandatorily tear-up Remaining Open
utilities.30 Section 805(a)(2) of the default or certain other loss events and, Positions and Related Open Positions,
Clearing Supervision Act 31 also if necessary, to ultimately re-establish a in a circumstance where a Clearing
authorizes the Commission to prescribe matched book in a recovery or orderly Member has defaulted and OCC has
risk management standards for the wind-down scenario.37 In this context, determined that, notwithstanding the
payment, clearing and settlement the proposed changes serve as a critical availability of any remaining resources
activities of designated clearing entities, component of OCC’s recovery and under OCC Rules 707, 1001, 1104
like OCC, for which the Commission is orderly wind-down plan. As a result, in through 1107, 2210 and 2211, OCC may
the supervisory agency. Section 805(b) OCC’s view, the proposed changes are not have sufficient resources to satisfy
of the Clearing Supervision Act 32 states consistent with the requirements of Rule its obligations and liabilities resulting
that the objectives and principles for 17Ad–22(e)(3)(ii) as to the recovery and from such default.41 In OCC’s view,
risk management standards prescribed orderly wind-down plan.38 each of these tools could be deployed by
under Section 805(a) shall be to: Allocation of Credit Losses Above OCC, if necessary, to allocate credit
• Promote robust risk management; Available Resources losses in excess of the collateral and
• promote safety and soundness; other resources available to OCC, in
• reduce systemic risks; and In relevant part, Rule 17Ad– accordance with Rule 17Ad–
• support the stability of the broader 22(e)(4)(viii) requires that each CCA 22(e)(4)(viii).42
financial system. ‘‘establish, implement, maintain and
The Commission has adopted risk enforce written policies and procedures Replenishment of Financial Resources
management standards under Section reasonably designed to . . . [a]ddress[ ] Following a Default
805(a)(2) of the Clearing Supervision allocation of credit losses the [CCA] may In relevant part, Rule 17Ad–
Act and the Act in furtherance of these face if its collateral and other resources 22(e)(4)(ix) requires that each CCA
objectives and principles, including are insufficient to fully cover its credit ‘‘establish, implement, maintain and
those standards adopted pursuant to the exposures . . .’’ 39 The proposed enforce written policies and procedures
Commission rules cited below.33 For the changes would provide OCC with three reasonably designed to . . . [d]escrib[e]
reasons set forth below, OCC believes distinct tools that could be used to the [CCA’s] process to replenish any
that the proposed change is consistent allocate any credit losses OCC may face financial resources it may use following
with the risk management standards in excess of collateral and other a default or other event in which use of
promulgated under Section 805(a) of the resources available to OCC. First, new such resources is contemplated.’’ 43
Clearing Supervision Act.34 Rule 1009 would provide a framework OCC’s Clearing Members have a
by which OCC could receive voluntary standing obligation to replenish the
Recovery and Orderly Wind-Down payments in a circumstance where a Clearing Fund following any
In relevant part, Rule 17Ad– Clearing Member has defaulted and proportionate charge. The proposed
22(e)(3)(ii) requires that each CCA OCC has determined that, changes would establish a rolling
‘‘establish, implement, maintain and notwithstanding the availability of any cooling-off period, triggered by the
enforce written policies and procedures remaining resources under OCC Rules payment of a proportionate charge
reasonably designed to . . . plan[ ] for 707, 1001, 1104 through 1107, 2210 and against the Clearing Fund, during which
the recovery and orderly wind-down of 2211,40 OCC may not have sufficient period the aggregate liability of a
the [CCA] necessitated by credit losses, resources to satisfy its obligations and Clearing Member to replenish the
liquidity shortfalls, losses from general liabilities resulting from such default. Clearing Fund (inclusive of
business risk, or any other losses.’’ 35 As Second, new Rule 1111 would establish assessments) would be 200% of the
stated above, each of the proposed a framework by which non-defaulting Clearing Member’s required
changes is designed to provide OCC Clearing Members and non-defaulting contribution as of the time immediately
with tools to address the risks OCC customers of Clearing Members could be preceding the triggering proportionate
might confront in a recovery and orderly given an opportunity to participate in charge. Compared to the current
wind-down scenario.36 Consistent with Voluntarily Tear-Ups in a circumstance requirement under which a Clearing
where a Clearing Member has defaulted Member may cap its liability to
30 12 U.S.C. 5461(b). and OCC has determined that, proportionate charges at an additional
31 12 U.S.C. 5464(a)(2). notwithstanding the availability of any 100% of its then-required contribution,
32 12 U.S.C. 5464(b).
remaining resources under OCC Rules a Clearing Member would instead be
33 17 CFR 240.17Ad–22. See Securities Exchange
707, 1001, 1104 through 1107, 2210 and permitted to cap its liability for
Act Release Nos. 68080 (October 22, 2012), 77 FR
66220 (November 2, 2012) (S7–08–11) (‘‘Clearing
2211, OCC may not have sufficient proportionate charges at an additional
Agency Standards’’); 78961 (September 28, 2016), 200% of its then-required Clearing Fund
81 FR 70786 (October 13, 2016) (S7–03–14) ‘‘Recovery Tools.’’ OCC has filed a proposed rule contribution.
(‘‘Standards for Covered Clearing Agencies’’). The change with the Commission in connection with
Standards for Covered Clearing Agencies became this proposal. See SR–OCC–2017–021. OCC believes that the proposed
effective on December 12, 2016. OCC is a ‘‘covered 37 17 CFR 240.17Ad–22(e)(3)(ii). approach improves predictability for
clearing agency’’ as defined in Rule 17Ad–22(a)(5) 38 17 CFR 240.17Ad–22(e)(3)(ii).
sradovich on DSK3GMQ082PROD with NOTICES
and therefore is subject to section (e) of Rule 17Ad– 39 17 CFR 240.17Ad–22(e)(v)(viii). 41 Rule 1111(g), which would provide the Board
22. 40 Rule 707 addresses the treatment of funds in a authority to equitably re-allocate losses, costs and
34 12 U.S.C. 5464(b)(1) and (4). fees directly imposed as a result of a Partial Tear-
Clearing Member’s X–M accounts. Rule 1001
35 17 CFR 240.17Ad–22(e)(3)(ii).
addresses the size of OCC’s Clearing Fund and the Up among all non-defaulting Clearing Members
36 Indeed, the OCC’s separately filed recovery and amount of a Clearing Member’s contribution. Rules through a special charge, would serve as a
orderly wind-down plan identifies OCC’s 1104 through 1107 concern the treatment of the discretionary tool to redistribute the credit losses
assessment powers, ability to call for voluntary portfolio of a defaulted Clearing Member. Rules allocated through Partial Tear-Up.
42 17 CFR 240.17Ad–22(e)(v)(viii).
payments, ability to call for Voluntary Tear-Ups and 2210 and 2211 concern the treatment of Stock Loan
ability to impose Partial Tear-Ups among its positions of a defaulted Clearing Member. 43 17 CFR 240.17Ad–22(e)(4)(ix).
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OCC and for Clearing Members CCAs. In any such event, OCC’s existing OCC’s assessment powers, is likely to
regarding the size of Clearing Fund authority under Rule 603 would permit provide Clearing Members with an
contributions that are likely to be OCC to call on participants for adequate measure of stability and
subject to assessments for proportionate additional initial margin, which could predictability as to the potential use of
charges. Additionally, replacing the five ensure that OCC’s minimum financial Clearing Fund resources, which OCC
business day withdrawal period with resources remain in excess of applicable believes removes the existing incentive
the withdrawal period commensurate CCA requirements.45 OCC recognizes for Clearing Members to withdraw
with the cooling-off period (which, as that the imposition of increased margin following a proportionate charge.46
proposed would be a minimum of requirements could have an immediate In light of the foregoing, OCC believes
fifteen calendar days) would give pro-cyclical impact on participants (and that the proposed changes would
Clearing Members a more reasonable consequential impacts on the broader enhance and strengthen its process to
period in which to meet the wind-down financial system) that is potentially replenish the Clearing Fund following a
and termination requirements necessary greater than the impact of replenishing default or other event in which use of
to cap their liability. OCC believes that the Clearing Fund. These risks would be the Clearing Fund is contemplated, in
this would afford them greater certainty limited to a specific extreme stress event accordance with Rule 17Ad–
regarding their maximum liability with and could be mitigated by certain 22(e)(4)(ix).47
respect to the Clearing Fund during factors. First, OCC, in coordination with
Replenishment of Liquid Resources
extreme stress events, which in turn, its regulators, would carefully evaluate
facilitates Clearing Members’ any potential increase in the context of In relevant part, Rule 17Ad–
management of their own risk then-existing facts and circumstances. 22(e)(7)(ix) requires that each CCA
management, and to the extent Second, during the cooling-off period, ‘‘establish, implement, maintain and
applicable, regulatory capital Clearing Members and their customers enforce written policies and procedures
considerations. And OCC believes this will have the opportunity to reduce or reasonably designed to . . . [d]escrib[e]
increased predictability would also be rebalance their respective portfolios in the [CCA’s] process to replenish any
beneficial to OCC by helping it to more order to mitigate their exposures to liquid resources that the clearing agency
reliably understand the amount of stress losses and initial margin may employ during a stress event.’’ 48
Clearing Fund contributions that will increases. Finally, since initial margin is Since the use any part of the cash
likely be available to it after a not designed to be subject to mutualized portion of OCC’s Clearing Fund would
proportionate charge is assessed.44 loss, the risk of loss faced by Clearing constitute a depletion of one of OCC’s
OCC believes that the relative Members for amounts posted as liquid resources, OCC’s assessment
certainty provided by the proposed additional margin would be power, discussed above, is the primary
cooling-off period and 200% cap on substantially less than for means of replenishing the Clearing
assessments ultimately could reduce the replenishments of the Clearing Fund. Fund cash that OCC used to address the
risks of successive or ‘‘cascading’’ Given the products cleared by OCC stress event. For the same reasons stated
defaults, in which the financial and the composition of its clearing above, OCC believes that the proposed
demands on remaining non-defaulting membership, OCC has determined that changes enhance and strengthen its
Clearing Members to continually a minimum 15-calendar day cooling-off process to replenish the Clearing Fund,
replenish OCC’s Clearing Fund (and period, rolling up to a maximum of 20 as necessary, following a default or
similar guaranty funds at other CCPs to calendar days, is likely to be a sufficient other stress event in which the Clearing
which such Clearing Members might amount of time for OCC to manage the Fund is used, and therefore, OCC views
belong) have the effect of further ongoing default(s) and take necessary the proposed changes as consistent with
weakening such Clearing Members to steps in furtherance of stabilizing the Rule 17Ad–22(e)(7)(ix).49
the point of default. In this regard, the clearing system. Further, through
proposed changes are designed to conversations with Clearing Members, Timely Action To Contain Losses
provide OCC, Clearing Members and OCC believes that the proposed cooling- In relevant part, Rule 17Ad–22(e)(13)
other stakeholders with sufficient time off period is likely to be a sufficient requires that each CCA ‘‘establish,
to manage the ongoing default(s) amount for Clearing Members (and their implement, maintain and enforce
without further aggravating the extreme customers) to orderly reduce or written policies and procedures
stresses facing market participants. rebalance their positions, in an attempt reasonably designed to . . . [e]nsure the
OCC recognizes that the proposed to mitigate stress losses and exposure to [CCA] has the authority and operational
changes would limit the maximum potential initial margin increases as they capacity to take timely action to contain
amount of Clearing Fund resources that navigate the stress event. Through losses and liquidity demands and
could be available to OCC in an extreme conversations with Clearing Members, continue to meet its obligations . . .’’ 50
stress scenario, which introduces the OCC also believes that the proposed The proposed changes would provide
possibility, however remote, that the cooling-off period is likely to be a OCC with the authority to call for
proposed 200% cap ultimately could be sufficient amount for certain Clearing Voluntary Tear-Ups and OCC’s Board
reached. If during any cooling-off period Members to orderly close-out their
the amount of aggregate proportionate positions and transfer customer 46 OCC initially considered a fixed 15-calendar
charges against the Clearing Fund positions as they withdraw from day cooling-off period; however, OCC concluded
approaches the 200% cap, the amount that a fixed 15-calendar day cooling-off period may
clearing membership. OCC believes the increase the risks of successive or cascading
remaining in the Clearing Fund may no proposed cooling-off period, coupled Clearing Member defaults and may perversely
sradovich on DSK3GMQ082PROD with NOTICES
longer be sufficient to comply with the with the other proposed changes to incentivize Clearing Members to seek to withdraw
applicable minimum regulatory from clearing membership. Through conversations
financial resources requirements in the 45 Rule 603 provides that ‘‘[t]he Risk Committee with Clearing Members, OCC believes that these
potentially disruptive consequences are mitigated
may, from time to time, increase the amount of
by the proposed rolling cooling-off period.
44 Under the existing approach, it is less certain margin which may be required in respect of a 47 17 CFR 240.17Ad–22(e)(4)(ix).
from OCC’s standpoint regarding whether Clearing cleared contract, open short position or exercised
48 17 CFR 240.17Ad–22(e)(7)(ix).
Members would reasonably be able to cap their contract if, in its discretion, it determines that such
49 17 CFR 240.17Ad–22(e)(7)(ix).
liability to proportionate charges within five increase is advisable for the protection of [OCC], the
business days. Clearing Members or the general public.’’ 50 17 CFR 240.17Ad–22(e)(13).
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![3252 Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices
with the discretion to impose Partial risks, fees, and other material costs they within 60 days of the later of (i) the date
Tear-Ups, which would provide OCC incur by participating in the covered the proposed change was filed with the
with authority necessary to extinguish clearing agency.’’ 54 The proposed Commission or (ii) the date any
certain losses (and attendant liquidity changes would clearly explain to additional information requested by the
demands) thereby potentially enabling Clearing Members and market Commission is received. OCC shall not
OCC to continue to meet its remaining participants that an extreme stress implement the proposed change if the
obligations to participants. As designed, scenario could result in the use—and Commission has any objection to the
Voluntary Tear-Ups and Partial Tear- theoretically the exhaustion—of OCC’s proposed change.
Ups would be initiated on a date financial resources, inclusive of OCC’s The Commission may extend the
sufficiently in advance of the proposed assessment powers. Proposed period for review by an additional 60
exhaustion of OCC’s financial resources changes to Section 6, Article VIII of days if the proposed change raises novel
such that OCC is expected to have OCC’s By-Laws would explain Clearing or complex issues, subject to the
adequate resources remaining to cover Members’ replenishment obligation and Commission providing the clearing
the amount it must pay to extinguish the liability for assessments. The proposed agency with prompt written notice of
positions of Clearing Members and changes also would clearly explain, the extension. A proposed change may
customers without haircutting gains. through proposed Rules 1009 and 1111, be implemented in less than 60 days
Accordingly, OCC believes that its that as OCC nears the exhaustion of its from the date the advance notice is
authority and capacity to conduct a assessment powers, Clearing Members filed, or the date further information
Partial Tear-Up should be timely, may be asked for voluntary payments requested by the Commission is
relative to the adequacy of OCC’s and, if necessary, Clearing Members and received, if the Commission notifies the
remaining financial resources. Finally, customers may be asked to participate clearing agency in writing that it does
OCC believes it has the operational and in a Voluntary Tear-Up and/or subject to not object to the proposed change and
systems capacity sufficient to support a Partial Tear-Up. Proposed Rules authorizes the clearing agency to
the proposed changes, and OCC’s 1009(b) and 1111(a)(ii) also would make implement the proposed change on an
policies and procedures will be updated clear that Clearing Members that made earlier date, subject to any conditions
accordingly to reflect the existence of voluntary payments and Clearing imposed by the Commission.
these new tools. As a result, OCC Members and customers whose OCC shall post notice on its website
believes that the proposed changes tendered positions were extinguished in of proposed changes that are
conform to the relevant requirements in the Voluntary Tear-Up would be implemented.
Rule 17Ad–22(e)(13).51 prioritized in the distribution of any The proposal shall not take effect
recovery from the defaulted Clearing until all regulatory actions required
Public Disclosure of Key Aspects of Member(s). Proposed changes to Article with respect to the proposal are
Default Rules VIII would clarify that the Clearing completed.
In relevant part, Rule 17Ad– Fund contributions remaining after OCC
22(e)(23)(i) requires that each CCA has conducted a Voluntary Tear-Up or IV. Solicitation of Comments
‘‘establish, implement, maintain and Partial Tear-Up could be used to Interested persons are invited to
enforce written policies and procedures compensate the non-defaulting Clearing submit written data, views and
reasonably designed to . . . [p]ublicly Members and non-defaulting customers arguments concerning the foregoing,
disclos[e] all relevant rules and material for the losses, costs or fees imposed including whether the advance notice is
procedures, including key aspects of its upon them as a result of such Voluntary consistent with the Clearing
default rules and procedures.’’ 52 As Tear-Up or Partial Tear-Up. Proposed Supervision Act. Comments may be
stated above, each of the tools discussed Rule 1111(g) would make clear that, submitted by any of the following
herein are contemplated to be deployed following a Partial Tear-Up, OCC’s methods:
by OCC if an extreme stress event has Board may seek to equitably re-allocate
Electronic Comments
placed OCC into a recovery or orderly losses, costs and fees directly imposed
wind-down scenario, and therefore, the as a result of a Partial Tear-Up among • Use the Commission’s internet
tools discussed herein constitute key all non-defaulting Clearing Members comment form (http://www.sec.gov/
aspects of OCC’s default rules. By through a special charge. By rules/sro.shtml); or
incorporating the proposed changes into incorporating the proposed changes into • Send an email to rule-comments@
OCC’s Rules and By-Laws, as further OCC’s Rules and By-Laws, as further sec.gov. Please include File Number SR–
supplemented by the discussion in supplemented by the discussion in OCC–2017–809 on the subject line.
OCC’s public rule filing, OCC believes OCC’s public rule filing, OCC believes Paper Comments
that proposed changes would conform that is has provided sufficient
• Send paper comments in triplicate
to the relevant requirements in Rule information to enable participants to
to Brent J. Fields, Secretary, Securities
17Ad–22(e)(23)(i).53 identify and evaluate the risks, fees, and
and Exchange Commission, 100 F Street
other material costs they could incur by
Sufficient Information Regarding the NE, Washington, DC 20549.
participating OCC, consistent with the
Risks, Fees and Costs of Clearing requirements in Rule 17Ad– All submissions should refer to File
In relevant part, Rule 17Ad– 22(e)(23)(ii).55 Number SR–OCC–2017–809. This file
22(e)(23)(ii) requires that each CCA number should be included on the
‘‘establish, implement, maintain and III. Date of Effectiveness of the Advance subject line if email is used. To help the
Notice and Timing for Commission Commission process and review your
sradovich on DSK3GMQ082PROD with NOTICES
enforce written policies and procedures
reasonably designed to . . . [p]rovid[e] Action comments more efficiently, please use
sufficient information to enable The proposed change may be only one method. The Commission will
participants to identify and evaluate the implemented if the Commission does post all comments on the Commission’s
not object to the proposed change internet website (http://www.sec.gov/
51 17 CFR 240.17Ad–22(e)(13). rules/sro.shtml). Copies of the
52 17 CFR 240.17Ad–22(e)(23)(i). 54 17 CFR 240.17Ad–22(e)(23)(ii). submission, all subsequent
53 17 CFR 240.17Ad–22(e)(13). 55 17 CFR 240.17Ad–22(e)(23)(ii). amendments, all written statements
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![Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices 3253
with respect to the advance notice that Disbursement Center, 14925 Kingsport establishes a private-sector trade
are filed with the Commission, and all Road, Fort Worth, TX 76155. advisory system to ensure that U.S.
written communications relating to the FOR FURTHER INFORMATION CONTACT: A. trade policy and trade negotiation
advance notice between the Escobar, Office of Disaster Assistance, objectives adequately reflect U.S.
Commission and any person, other than U.S. Small Business Administration, commercial and economic interests.
those that may be withheld from the 409 3rd Street SW, Suite 6050, Section 135(c)(2) (19 U.S.C. 2155(c)(2))
public in accordance with the Washington, DC 20416, (202) 205–6734. directs the President to establish
provisions of 5 U.S.C. 552, will be SUPPLEMENTARY INFORMATION: The notice sectoral or functional trade advisory
available for website viewing and of an Administrative declaration for the committees as appropriate, comprised of
printing in the Commission’s Public State of ARIZONA, dated 08/03/2017, is representatives of all industry, labor,
Reference Room, 100 F Street NE, hereby amended to establish the agricultural, and services interests
Washington, DC 20549 on official incident closing date as 09/30/2017. (including small business interests) in
business days between the hours of All other information in the original the sector or functional area. These
10:00 a.m. and 3:00 p.m. Copies of the declaration remains unchanged. committees provide detailed policy and
filing also will be available for (Catalog of Federal Domestic Assistance technical advice, information, and
inspection and copying at the principal Number 59008) recommendations regarding trade
office of OCC and on OCC’s website at barriers, negotiation of trade
Dated: January 11, 2018.
https://www.theocc.com/components/ agreements, and implementation of
Linda E. McMahon,
docs/legal/rules_and_bylaws/sr_occ_17_ existing trade agreements affecting
809.pdf. Administrator. industry sectors, and perform other
All comments received will be posted [FR Doc. 2018–01163 Filed 1–22–18; 8:45 am] advisory functions relevant to U.S. trade
without change. Persons submitting BILLING CODE 8025–01–P policy matters as requested. In
comments are cautioned that we do not organizing such committees, the Trade
redact or edit personal identifying Representative and the relevant
information from comment submissions. OFFICE OF THE UNITED STATES Secretary are to consult with interested
You should submit only information TRADE REPRESENTATIVE private organizations and to consider
that you wish to make available ‘‘(i) patterns of actual or potential
publicly. Notice of Proposed Changes to the competition between United States
All submissions should refer to File Slate of Industry Trade Advisory industry and agriculture and foreign
Number SR–OCC–2017–809 and should Committees enterprise in international trade, (ii) the
be submitted on or before February 13, AGENCY: Office of the United States character of the nontariff barriers and
2018. Trade Representative. other distortions affecting such
By the Commission. ACTION: Notice and request for competition, (iii) the necessity for
Eduardo A. Aleman, comments. reasonable limits on the number of such
advisory committees, (iv) the necessity
Assistant Secretary.
SUMMARY: The United States Trade that each committee be reasonably
[FR Doc. 2018–01070 Filed 1–22–18; 8:45 am] Representative (Trade Representative) limited in size, and (v) in the case of
BILLING CODE 8011–01–P and the Secretary of Commerce each sectoral committee, that the
(Secretary) plan to establish a new four- product lines covered by each
year charter term for the Industry Trade committee be reasonably related.’’
SMALL BUSINESS ADMINISTRATION Advisory Committees (ITACs) beginning Pursuant to this authority, the
in February 2018. As part of the re- Secretary and the Trade Representative
[Disaster Declaration #15230 and #15231; chartering process, the Secretary and the
Arizona Disaster Number AZ–00050] established the ITACs to provide
Trade Representative are proposing detailed policy and technical advice,
Administrative Declaration changes to the current slate of ITACs information, and recommendations to
Amendment of Disaster for the State of and invite interested parties to submit the Secretary and the Trade
Arizona their view on these changes. Representative on trade policy matters
DATES: The deadline for submission of including: (1) Negotiating objectives and
AGENCY: U.S. Small Business written comments is February 5, 2018 at bargaining positions before entering into
Administration. midnight EST. trade agreements; (2) the impact of the
ACTION: Amendment 1. ADDRESSES: Submit comments implementation of trade agreements on
electronically via email to the relevant sector; (3) matters
SUMMARY: This is an amendment of the FRNCommentsITAC@trade.gov. concerning the operation of any trade
Administrative declaration of a disaster agreement once entered into; and (4)
FOR FURTHER INFORMATION CONTACT:
for the State of Arizona dated 08/03/ other matters arising in connection with
Gregory M. Walters, Assistant United
2017. the development, implementation, and
States Trade Representative for
Incident: Post-fire Flooding from administration of the trade policy of the
Intergovernmental Affairs and Public
Monsoon Storms. United States. The nonpartisan,
Engagement at Gregory.M.Walters@
Incident Period: 07/19/2017 through industry input provided by the ITACs is
ustr.eop.gov or (202) 395–2558. You can
09/30/2017. important in developing unified trade
find additional information about the
DATES: Issued on 01/11/2018. policy objectives and positions when
sradovich on DSK3GMQ082PROD with NOTICES
ITACs on the International Trade
Physical Loan Application Deadline Administration website at the United States negotiates and
Date: 10/02/2017. www.trade.gov/itac. implements trade agreements. The
Economic Injury (EIDL) Loan SUPPLEMENTARY INFORMATION: ITACs address market-access problems,
Application Deadline Date: 05/03/2018. trade barriers, tariffs, discriminatory
ADDRESSES: Submit completed loan I. Background foreign procurement practices, and
applications to: U.S. Small Business Section 135 of the Trade Act of 1974, information, marketing, and advocacy
Administration, Processing and as amended (19 U.S.C. 2155), needs of their industry sector. With
VerDate Sep<11>2014 17:59 Jan 22, 2018 Jkt 244001 PO 00000 Frm 00144 Fmt 4703 Sfmt 4703 E:\FR\FM\23JAN1.SGM 23JAN1](https://thefederalregister.org/doc/83_FR_3259/page/10.svg)
Document Created: 2018-01-23 01:08:30
Document Modified: 2018-01-23 01:08:30
| 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 | 83 FR 3244 |
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