83 FR 37839 - Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Amendments No. 1 and 2 to Proposed Rule Change Concerning Enhanced and New Tools for Recovery Scenarios
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 83, Issue 149 (August 2, 2018)
Federal Register Volume 83, Issue 149 (August 2, 2018)
| Page Range | 37839-37849 | |
| FR Document | 2018-16535 |
[Federal Register Volume 83, Number 149 (Thursday, August 2, 2018)] [Notices] [Pages 37839-37849] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-16535] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-83725; File No. SR-OCC-2017-020] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Amendments No. 1 and 2 to Proposed Rule Change Concerning Enhanced and New Tools for Recovery Scenarios July 27, 2018. On December 18, 2017, The Options Clearing Corporation (``OCC'') filed with the Securities and Exchange Commission (``Commission'') proposed rule change SR-OCC-2017-020 (``Proposed Rule Change'') pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ concerning enhanced and new tools for recovery scenarios.\3\ The Proposed Rule Change was published for comment in the Federal Register on December 26, 2017.\4\ On March 22, 2018, the Commission instituted proceedings under Section 19(b)(2)(B)(i) of the Act \5\ to determine whether to approve or [[Page 37840]] disapprove the Proposed Rule Change.\6\ On June 20, 2018 the Commission designated a longer period for Commission action on proceedings to determine whether to approve or disapprove the Proposed Rule Change.\7\ On July 11, 2018, OCC filed Amendment No. 1 to the Proposed Rule Change. On July 12, 2018, OCC filed Amendment No. 2 to the Proposed Rule Change to supersede and replace Amendment No. 1 in its entirety, due to technical defects in Amendment No. 1. Therefore, the Initial Filing, as modified by Amendment No. 2, reflects the changes proposed. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ On December 8, 2017, OCC also filed this proposal as an advance notice SR-OCC-2017-809 (``Advance Notice'') with the Commission pursuant to Section 806(e)(1) of Title VIII of the Dodd- Frank Wall Street Reform and Consumer Protection Act, entitled the Payment, Clearing, and Settlement Supervision Act of 2010 (12 U.S.C. 5465(e)(1)) and Rule 19b-4(n)(1)(i) of the Act (17 CFR 240.19b- 4(n)(1)(i)). Notice of filing of the Advance Notice was published for comment in the Federal Register on January 23, 2018. Securities Exchange Act Release No. 82513 (Jan. 17, 2018), 83 FR 3244 (Jan. 23, 2018) (SR-OCC-2017-809). \4\ Securities Exchange Act Release No. 82531 (Dec. 19, 2017), 82 FR 61107 (Dec. 26, 2017) (SR-OCC-2017-020) (``Initial Filing''). \5\ 15 U.S.C. 78s(b)(2)(B)(i). \6\ See Securities Exchange Act Release No. 82926 (Mar. 22, 2018), 83 FR 13171 (Mar. 27, 2018) (SR-OCC-2018-020). \7\ See Securities Exchange Act Release No. 83484 (Jun. 20, 2018), 83 FR 29846 (Jun. 26, 2018) (SR-OCC-2017-020). --------------------------------------------------------------------------- Pursuant to Section 19(b)(1) of the Act \8\ and Rule 19b-4 thereunder \9\ the Commission is publishing notice of these Amendments No. 1 and 2 to the Proposed Rule Change as described in Items I, II and III below, which Items have been prepared by OCC. The Commission is publishing this notice to solicit comments on the Proposed Rule Change, as modified by Amendments No. 1 and 2, from interested persons. --------------------------------------------------------------------------- \8\ 15 U.S.C. 78s(b)(1). \9\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Clearing Agency's Statement of the Terms of Substance of the Proposed Rule Change This proposed rule change by the OCC would make certain revisions to OCC's Rules and By-Laws to enhance OCC's existing tools to address the risks of liquidity shortfalls and credit losses and to establish new tools by which OCC could re-establish a matched book following a default. Each of the tools proposed herein is contemplated to be deployed by OCC in an extreme stress event that has placed OCC into a recovery or orderly wind-down scenario. II. Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, OCC included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. OCC has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of these statements. Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Background The purpose of this proposed rule change is to make certain revisions to OCC's Rules and By-Laws Laws that are designed to enhance OCC's existing tools to address the risks of liquidity shortfalls and credit losses and to establish tools by which OCC could re-establish a matched book following a default. Each of the tools proposed herein is contemplated to be deployed by OCC in an extreme stress event that has placed OCC into a recovery or orderly wind-down scenario. Each of the proposed revisions also is designed to further OCC's compliance, in whole or in part, with the provisions of the Commission's rules identified immediately below. On September 28, 2016, the Commission adopted amendments to Rule 17Ad-22\10\ 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) \11\ pursuant to Section 17A of the Securities Exchange Act of 1934 \12\ and the Payment, Clearing, and Settlement Supervision Act of 2010 (``Payment, Clearing and Settlement Supervision Act'').\13\ In relevant part, these new rules collectively require a covered clearing agency (``CCA''), as defined by Rule 17Ad-22(a)(5),\14\ 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: --------------------------------------------------------------------------- \10\ 17 CFR 240.17Ad-22. \11\ 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). \12\ 15 U.S.C. 78q-1. \13\ 12 U.S.C. 5461 et seq. \14\ 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.'' \15\ --------------------------------------------------------------------------- \15\ 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.'' \16\ --------------------------------------------------------------------------- \16\ 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.'' \17\ --------------------------------------------------------------------------- \17\ 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 [[Page 37841]] 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.'' \18\ --------------------------------------------------------------------------- \18\ 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. . .'' \19\ --------------------------------------------------------------------------- \19\ 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.'' \20\ --------------------------------------------------------------------------- \20\ 17 CFR 240.17Ad-22(e)(23)(i). --------------------------------------------------------------------------- Rule 17Ad-22(e)(23)(ii) requires that each CCA ``establish, implement, maintain and enforce written policies and procedures reasonably designed to. . . [p]rovid[e] sufficient information to enable participants to identify and evaluate the risks, fees, and other material costs they incur by participating in the covered clearing agency.'' \21\ --------------------------------------------------------------------------- \21\ 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).\22\ --------------------------------------------------------------------------- \22\ 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 1011 \23\ 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.\24\ Rule 1011 also would establish that OCC would prioritize compensation of Clearing Members that made voluntary payments from any amounts recovered from the defaulted Clearing Members. --------------------------------------------------------------------------- \23\ OCC is amending the Initial Filing to renumber proposed Rule 1009 to proposed Rule 1011 and updated related cross references in Rule 1111 to reflect this renumbering. OCC is also amending the Default Management Policy as submitted in the Initial Filing to update similar cross references. \24\ Under the Initial Filing, OCC's authority to conduct Partial Tear-Ups, as well as call for voluntary payments or to conduct Voluntary Tear-Ups, would be conditioned in part on OCC having determined that, notwithstanding the availability of any remaining resources, OCC may not have sufficient resources to satisfy its obligations and liabilities resulting from such default. Under the Initial Filing, the proposed text of Rules 1009(a), 1111(a) and 1111(b) incorrectly transcribed this condition to require that OCC determine that, notwithstanding the availability of any remaining resources, OCC does not have sufficient resources to satisfy its obligations and liabilities resulting from such default (emphasis added). In each such instance, OCC is amending the proposed text of Rules 1009(a) (which is being renumbered as Rule 1011(a)), 1111(a) and 1111(b) in Exhibit 5B of the Initial Filing to delete the word ``does'' and insert in its place the word ``may.'' --------------------------------------------------------------------------- (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 [[Page 37842]] charge or otherwise).\25\ 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. --------------------------------------------------------------------------- \25\ 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 revise Section 6 of Article VIII of OCC's By-Laws to make three primary modifications regarding its existing authority to assess proportionate charges against Clearing Members' contributions to the Clearing Fund. First, the proposal introduces an automatic minimum fifteen calendar day ``cooling-off'' period that begins when a proportionate charge is assessed by OCC against Clearing Members' Clearing Fund contributions. While the cooling-off period will continue for a minimum of fifteen consecutive calendar days, if one or more of the events described in clauses (i) through (iv) of Article VIII, Section 5(a) of OCC's By-Laws occur(s) during that fifteen calendar day period and result in one or more proportionate charges against the Clearing Fund, the cooling-off period shall be extended through either (i) the fifteenth calendar day from the date of the most recent proportionate charge resulting from the subsequent event, or (ii) the twentieth day from the date of the proportionate charge that initiated the cooling-off period, whichever is sooner. During a cooling-off period, each Clearing Member would have its aggregate liability to replenish the Clearing Fund capped at 200% of the Clearing Member's then-required contribution to the Clearing Fund. Once the cooling-off period ends each remaining Clearing Member would be required to replenish the Clearing Fund in the amount necessary to meet its then-required contribution. Once the cooling-off period ends, any remaining losses or expenses suffered by OCC as a result of any event described in clauses (i) through (iv) of Article VIII, Section 5(a) of OCC's By-Laws that occurred during such cooling-off period could not be charged against the amounts Clearing Members have contributed to replenish the Clearing Fund upon the expiration of the cooling-off period.\26\ --------------------------------------------------------------------------- \26\ 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.\27\ 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. --------------------------------------------------------------------------- \27\ 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 1011, 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,\28\ OCC may not have sufficient resources to satisfy its obligations and liabilities resulting from such default. Under new Rule 1011, OCC will initiate a call for voluntary payments by issuing [[Page 37843]] 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 1011 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). --------------------------------------------------------------------------- \28\ Rule 707 addresses the treatment of funds in a Clearing Member's X-M accounts. Rule 1001 addresses the size of OCC's Clearing Fund and the amount of a Clearing Member's contribution. Rules 1104 through 1107 concern the treatment of the portfolio of a defaulted Clearing Member. Rules 2210 and 2211 concern the treatment of Stock Loan positions of a defaulted Clearing Member. --------------------------------------------------------------------------- Proposed Addition of Ability To Conduct Voluntary Tear-Ups OCC proposes to add new Rule 1111, which, in relevant part, will establish a framework by which non-defaulting Clearing Members and non- defaulting customers of Clearing Members could be given an opportunity to voluntarily extinguish (i.e., voluntarily tear-up) their open positions at OCC in a circumstance where a Clearing Member has defaulted and OCC has determined that, notwithstanding the availability of any remaining resources under OCC Rules 707, 1001, 1104 through 1107, 2210 and 2211, OCC may not have sufficient resources to satisfy its obligations and liabilities resulting from such default. While Risk Committee approval is not needed to commence a voluntary tear-up, the Risk Committee would be responsible for determining the appropriate scope of each voluntary tear-up. To ensure OCC retains sufficient flexibility to effectively deploy this tool in an extreme stress event, proposed Rule 1111(c) is drafted to provide the Risk Committee with discretion to determine the appropriate scope of each voluntary tear-up.\29\ 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. --------------------------------------------------------------------------- \29\ 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.\30\ 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. --------------------------------------------------------------------------- \30\ 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.\31\ 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.\32\ --------------------------------------------------------------------------- \31\ 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). \32\ 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 of unpaid value of such positions. OCC is amending the Initial Filing to clarify that while OCC does not intend, in the first instance, for its tear-up process to serve as a means of loss allocation, circumstances may arise such that, despite best efforts, OCC has inadequate remaining financial resources to extinguish torn-up positions at their assigned Tear-Up Price without forcing a reduction in the amount of unpaid value of such positions (e.g., despite best efforts, market movements not accounted for by monitoring, additional Clearing Member defaults occur immediately preceding a tear-up). In such circumstances, despite best efforts, OCC would use its partial tear-up process as a means of loss allocation.\33\ --------------------------------------------------------------------------- \33\ This change does not impact the statutory basis for the proposed rule change. --------------------------------------------------------------------------- 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.\34\ If the amount recovered is less than the aggregate amount of Voluntary Tear-Up, [[Page 37844]] 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. --------------------------------------------------------------------------- \34\ 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.\35\ With regard to the date and time of a Partial Tear-Up, Rule 1111(d) specifies that the Risk Committee shall set the date and time. With regard to the Partial Tear- Up Price, OCC anticipates that it is likely to use the last established end-of-day settlement price, in accordance with its existing practices concerning pricing and valuation. However, given that it is not possible to know in advance the precise circumstances that would cause OCC to conduct a tear-up, Rule 1111(f) has been drafted to allow OCC to exercise reasonable discretion, if necessary, in establishing the Partial Tear-Up Price by some means other than its existing practices concerning pricing and valuation.\36\ 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.\37\ --------------------------------------------------------------------------- \35\ 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. \36\ For example, OCC has observed certain rare circumstances in which a closing price for an underlying security of an option may be stale or unavailable. A stale or unavailable closing price could be the result of a halt on trading in the underlying security, or a corporate action resulting in a cash-out or conversion of the underlying security (but that has not yet been finalized), or the result of an ADR whose underlying security is being impacted by certain provisions under foreign laws. OCC would consider the presence of these factors on its end-of-day prices in determining whether use of the discretion that would be afforded under proposed Rule 1111(f) might be warranted. \37\ 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).\38\ 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.\39\ 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 their customers.\40\ --------------------------------------------------------------------------- \38\ OCC is amending the Initial Filing to reflect that after further evaluation of its proposed recovery tools and the proposed tear-up process, OCC does not believe there would be a need to assign or transfer any hedging transactions established with relation to tear-up positions. OCC is therefore amending the Initial Filing to remove text in proposed Rule 1111(e) concerning proposed authority for OCC to offer to assign or transfer any hedging transactions related to Remaining Open Positions with related Tear- Up Positions. This change does not impact the statutory basis for the proposed rule change. \39\ Since, as stated in the Initial Filing, the objective of Partial Tear-Ups is to extinguish the Remaining Open Positions cleared by the defaulted Clearing Member(s) or customer of such defaulted Clearing Member(s) (emphasis added), OCC does not believe there would be a need to designate Tear-Up Positions to the non- defaulted customers of a defaulted Clearing Member. OCC is therefore amending the Initial Filing to remove references to non-defaulted customers of defaulted Clearing Members. \40\ OCC is amending the Initial Filing to clarify that a non- defaulted Clearing Member would be required to allocate the assigned Tear-Up Positions on a pro rata basis across those customers that have open positions in such Cleared Contract or Cleared Security in such account, and for any listed option positions being extinguished, allocation across customer accounts should occur in accordance with such Clearing Member's procedures for allocating exercises and assignments. This change does not impact the statutory basis for the proposed rule change. --------------------------------------------------------------------------- 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 [[Page 37845]] 1111(e)(iii) further provides that the corresponding open position shall be deemed terminated at the Partial Tear-Up Price.\41\ --------------------------------------------------------------------------- \41\ OCC is amending the Initial Filing and the proposed text of Rule 1111(e)(iii) to clarify that if, in certain circumstances discussed above (see fn. 27 and associated text), OCC, in its discretion, determines that its remaining resources are inadequate to pay the applicable Partial Tear-Up Price for each position being extinguished in the Partial Tear-Up, OCC shall be obligated to pay each relevant Clearing Member a pro rata amount of the applicable Partial Tear-Up Price based on OCC's remaining resources, and the relevant Clearing Member shall have a claim against the Corporation for the value of the difference between the pro rata amount received and the Partial Tear-Up Price. This change does not impact the statutory basis for the proposed rule change. --------------------------------------------------------------------------- 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.\42\ --------------------------------------------------------------------------- \42\ 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. 2. Statutory Basis Section 17A(b)(3)(F) of the Securities Exchange Act of 1934 (``Act''),\43\ requires, among other things, that the rules of a clearing agency be designed to foster cooperation and coordination with persons engaged in the clearance and settlement of securities transactions, to remove impediments to and perfect the mechanism of a national system for the prompt and accurate clearance and settlement of securities transactions, and, in general, to protect investors and the public interest. OCC believes that the proposed rule change is consistent with the requirements of Section 17A(b)(3)(F) of the Act \44\ and the rules thereunder applicable to OCC for the reasons set forth below. --------------------------------------------------------------------------- \43\ 15 U.S.C. 78q-1(b)(3)(F). \44\ Id. --------------------------------------------------------------------------- As stated above, each of the changes is designed to provide OCC with tools to address the risks OCC might confront in a recovery and orderly wind-down scenario. In this regard, the proposed changes are designed to further address the risks of liquidity shortfalls and credit losses resulting from a Clearing Member default or certain other loss events and to establish tools to enable OCC to re-establish a matched book and limit OCC's potential exposure to losses from a Clearing Member default, in each case as might result from an unprecedented loss scenario that exceeds OCC's standard risk management and default management procedures. OCC's process in crafting the proposed changes was informed by published guidance from OCC's primary regulators (the Commission and the Commodity Futures Trading Commission), the publications of key international organizations (including the Bank for International Settlements, the International Organization of Securities Commissions and the Financial Stability Board) and the publications of key industry trade organizations. OCC's proposal was further informed by conversations with, among others, OCC's Board, OCC's Risk Committee, Clearing Members and market participants. Informed by these perspectives, OCC has crafted the proposed changes with the aim of enhancing its ability to address an unprecedented loss event but also, to the extent possible, providing a reasonable amount of certainty to Clearing Members, customers and other stakeholders about the potential consequences of such an event and the resources and tools that would be expected to be available to OCC in support of its clearing operations.\45\ Accordingly, the proposed changes should leave Clearing Members, customers and other stakeholders in a position to better evaluate the risks and benefits of clearing in order to facilitate their own risk management, and to the extent applicable, their own regulatory and capital considerations. The proposed changes also seek to avoid a result that would force only particular clearing participants to shoulder certain losses in an extreme stress scenario (i.e., holders of positions extinguished in Partial Tear-Ups),\46\ and instead leaves OCC and its Board with discretionary tools that could provide a more equitable method of allocating the losses from such an event more broadly, consistent with the general principle of mutualized loss that upon which central clearing rests. In this regard, OCC believes the proposed changes foster cooperation and coordination with participants in the clearing system, consistent with Section 17A(b)(3)(F) of the Act.\47\ --------------------------------------------------------------------------- \45\ OCC notes that the very nature of an extreme stress and unprecedented loss event means that its impact is difficult to predict and quantify in advance. \46\ Absent a means of re-allocating the potential losses, costs and fees imposed upon holders of positions extinguished during tear- ups, the holders of such positions would be left to individually address such losses, costs and fees. \47\ 15 U.S.C. 78q-1(b)(3)(F). --------------------------------------------------------------------------- As stated above, the proposed changes are designed to enable OCC to further address the risks of liquidity shortfalls and credit losses resulting from a Clearing Member default or certain other loss events and to re-establish a matched book and limit OCC's potential exposure to losses from a Clearing Member default, in each case as might result from an unprecedented loss scenario that exceeds OCC's standard risk management and default management procedures. OCC believes that the proposed changes will facilitate its ability to fully allocate, and ultimately extinguish, the loss so that it has a better opportunity of withstanding an extreme stress scenario without sacrificing its viability as a going concern or its ability to continue to provide its critical clearing services. In this regard, OCC believes that the proposed changes remove impediments to and perfect the mechanism of a national system for the prompt and accurate clearance and settlement of securities transactions, consistent with Section 17A(b)(3)(F) of the Act.\48\ --------------------------------------------------------------------------- \48\ Id. --------------------------------------------------------------------------- The proposed changes are designed to enhance the stability of the clearing system generally and are aimed at ensuring that OCC has adequate tools and resources to better protect market participants from the risks of extreme stress scenarios and unprecedented loss events. In this regard, OCC believes that the proposed changes are reasonably designed to protect investors and the public interest, consistent with Section 17A(b)(3)(F) of the Act.\49\ --------------------------------------------------------------------------- \49\ Id. --------------------------------------------------------------------------- The proposed changes also are designed to further OCC's compliance, in whole or in part, with the provisions of the Commission's rules discussed immediately below: Recovery and Orderly Wind-Down In relevant part, Rule 17Ad-22(e)(3)(ii) requires that each CCA ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . plan[] for the recovery and orderly wind-down of the [CCA] necessitated by credit losses, liquidity shortfalls, losses from general [[Page 37846]] business risk, or any other losses.'' \50\ 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.\51\ 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.\52\ 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.\53\ --------------------------------------------------------------------------- \50\ 17 CFR 240.17Ad-22(e)(3)(ii). \51\ 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 Securities Exchange Act Release No. 82352 (December 19, 2017), 82 FR 61072 (December 26, 2017) (SR-OCC-2017- 021). On March 22, 2018, the Commission instituted proceedings to determine whether to approve or disapprove the proposed rule change. See Securities Exchange Act Release No. 82927 (March 22, 2018), 83 FR 13176 (March 27, 2018) (SR-OCC-2017-021). \52\ 17 CFR 240.17Ad-22(e)(3)(ii). \53\ 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 . . .'' \54\ 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 1011 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,\55\ 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.\56\ 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).\57\ --------------------------------------------------------------------------- \54\ 17 CFR 240.17Ad-22(e)(v)(viii). \55\ 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. \56\ 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. \57\ 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.'' \58\ 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. --------------------------------------------------------------------------- \58\ 17 CFR 240.17Ad-22(e)(4)(ix). --------------------------------------------------------------------------- OCC believes that the proposed approach improves predictability for OCC and for Clearing Members regarding the size of Clearing Fund contributions that are likely to be subject to assessments for proportionate charges. Additionally, replacing the five business day withdrawal period with the withdrawal period commensurate with the cooling-off period (which, as proposed would be a minimum of fifteen calendar days) would give Clearing Members a more reasonable period in which to meet the wind-down and termination requirements necessary to cap their liability. OCC believes that this would afford them greater certainty regarding their maximum liability with respect to the Clearing Fund during extreme stress events, which in turn, facilitates Clearing Members' management of their own risk management, and to the extent applicable, regulatory capital considerations. And OCC believes this increased predictability would also be beneficial to OCC by helping it to more reliably understand the amount of Clearing Fund contributions that will likely be available to it after a proportionate charge is assessed.\59\ --------------------------------------------------------------------------- \59\ 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) [[Page 37847]] 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.\60\ 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. --------------------------------------------------------------------------- \60\ 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.\61\ --------------------------------------------------------------------------- \61\ 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).\62\ --------------------------------------------------------------------------- \62\ 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.'' \63\ 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).\64\ --------------------------------------------------------------------------- \63\ 17 CFR 240.17Ad-22(e)(7)(ix). \64\ 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 . . .'' \65\ The proposed changes would provide OCC with the authority to call for Voluntary Tear-Ups and OCC's Board with the discretion to impose Partial Tear-Ups, which would provide OCC with authority necessary to extinguish certain losses (and attendant liquidity demands) thereby potentially enabling OCC to continue to meet its remaining obligations to participants. As designed, Voluntary Tear-Ups and Partial Tear-Ups would be initiated on a date sufficiently in advance of the exhaustion of OCC's financial resources such that OCC is expected to have adequate resources remaining to cover the amount it must pay to extinguish the positions of Clearing Members and customers without haircutting gains. Accordingly, OCC believes that its authority and capacity to conduct a Partial Tear-Up should be timely, relative to the adequacy of OCC's remaining financial resources. Finally, OCC believes it has the operational and systems capacity sufficient to support the proposed changes, and OCC's policies and procedures will be updated accordingly to reflect the existence of these new tools. As a result, OCC believes that the proposed changes conform to the relevant requirements in Rule 17Ad-22(e)(13).\66\ --------------------------------------------------------------------------- \65\ 17 CFR 240.17Ad-22(e)(13). \66\ 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.'' \67\ 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 [[Page 37848]] 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).\68\ --------------------------------------------------------------------------- \67\ 17 CFR 240.17Ad-22(e)(23)(i). \68\ 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.'' \69\ 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 1011 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 1011(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).\70\ --------------------------------------------------------------------------- \69\ 17 CFR 240.17Ad-22(e)(23)(ii). \70\ 17 CFR 240.17Ad-22(e)(23)(ii). --------------------------------------------------------------------------- (B) Clearing Agency's Statement on Burden on Competition Section 17A(b)(3)(I) of the Act \71\ requires that the rules of a clearing agency not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. OCC does not believe the proposed rule change would have any impact or impose any burden on competition. The primary purpose of the proposed changes is to make certain revisions to OCC's Rules and By-Laws Laws that are designed to enhance OCC's existing tools to address the risks of liquidity shortfalls and credit losses and to establish tools by which OCC could re-establish a matched book following a default. As explained above, each of the tools proposed herein is contemplated to be deployed by OCC in an extreme stress event that has placed OCC into a recovery or orderly wind-down scenario. The proposed rule change is intended to provide Clearing Members, market participants and other stakeholders with greater certainty as to their liabilities and potential exposure to OCC in the event of an unprecedented loss scenario. OCC does not believe that the proposed changes would discriminatorily impact any Clearing Member's access to OCC's services or unnecessarily disadvantage or favor any particular user in relationship to another user. OCC recognizes that the nature of a Partial Tear-Up means that only particular Clearing Members and market participants holding certain positions may be impacted; however, the risk of Partial Tear- Ups is extremely remote, and even then, the proposed changes seek to provide means of equitably re-allocating the losses, costs and fees imposed by Voluntary Tear-Up or Partial Tear-Up. Therefore, OCC believes that the proposed changes would not have any impact or impose any burden on competition. --------------------------------------------------------------------------- \71\ 15 U.S.C. 78q-1(b)(3)(I). --------------------------------------------------------------------------- (C) Clearing Agency's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments were not and are not intended to be solicited with respect to the proposed rule change, and none have been received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments Use the Commissions internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to [email protected]. Please include File Number SR-OCC-2017-020 on the subject line. Paper Comments Send paper comments in triplicate to Brent Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. All submissions should refer to File Number SR-OCC-2017-020. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the [[Page 37849]] 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 Section, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of OCC and on OCC's website at https://www.theocc.com/about/publications/bylaws.jsp. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal or identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-OCC-2017-020 and should be submitted on or before August 17, 2018. For the Commission by the Division of Trading and Markets, pursuant to delegated authority.\72\ --------------------------------------------------------------------------- \72\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Robert W. Errett, Deputy Secretary. [FR Doc. 2018-16535 Filed 8-1-18; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 83, No. 149 / Thursday, August 2, 2018 / Notices 37839
below, the Commission seeks and any request for an opportunity to make personal identifying information from
encourages interested persons to an oral presentation.29 comment submissions. You should
provide comments on the proposed rule Interested persons are invited to submit only information that you wish
change. submit written data, views, and to make available publicly. All
Pursuant to Section 19(b)(2)(B) of the arguments regarding whether the submissions should refer to File
Exchange Act,26 the Commission is proposal should be approved or Number SR–NYSEArca-2018–25 and
providing notice of the grounds for disapproved by August 23, 2018. Any should be submitted on or before
disapproval under consideration. The person who wishes to file a rebuttal to August 23, 2018. Rebuttal comments
Commission is instituting proceedings any other person’s submission must file should be submitted by September 6,
to allow for additional analysis of the that rebuttal by September 6, 2018. 2018.
proposal’s consistency with Section Comments may be submitted by any
For the Commission, by the Division of
6(b)(5) of the Exchange Act, which of the following methods:
Trading and Markets, pursuant to delegated
requires, among other things, that the Electronic Comments authority.30
rules of a national securities exchange
be designed to prevent fraudulent and • Use the Commission’s internet Robert W. Errett,
comment form (http://www.sec.gov/ Deputy Secretary.
manipulative acts and practices, to
promote just and equitable principles of rules/sro.shtml); or [FR Doc. 2018–16536 Filed 8–1–18; 8:45 am]
trade, and to protect investors and the • Send an email to rule-comments@ BILLING CODE 8011–01–P
public interest.27 In light of the sec.gov. Please include File Number SR–
portfolio’s potential exposure to the NYSEArca–2018–25 on the subject line.
permitted investments identified above SECURITIES AND EXCHANGE
Paper Comments
(including junior loans, ABS, MBS, and COMMISSION
• Send paper comments in triplicate
interests in investment pools in
to Secretary, Securities and Exchange
particular), the Commission seeks [Release No. 34–83725; File No. SR–OCC–
Commission, 100 F Street NE, 2017–020]
commenters’ views on the sufficiency of
Washington, DC 20549–1090.
the information provided in the
proposed rule change to support a All submissions should refer to File Self-Regulatory Organizations; The
determination that the listing and Number SR–NYSEArca–2018–25. This Options Clearing Corporation; Notice
trading of the Shares would be file number should be included on the of Filing of Amendments No. 1 and 2
consistent with Section 6(b)(5) of the subject line if email is used. To help the to Proposed Rule Change Concerning
Exchange Act as modified by Commission process and review your Enhanced and New Tools for Recovery
Amendment No. 1. The Commission comments more efficiently, please use Scenarios
notes that the Exchange proposes to only one method. The Commission will
post all comments on the Commission’s July 27, 2018.
exempt equity interests in investment
pools from all of the requirements of internet website (http://www.sec.gov/ On December 18, 2017, The Options
Commentary .01(a)(1) to NYSE Arca rules/sro.shtml). Copies of the Clearing Corporation (‘‘OCC’’) filed with
Rule 8.600–E.In light of the portfolio’s submission, all subsequent the Securities and Exchange
potential exposure to the permitted amendments, all written statements Commission (‘‘Commission’’) proposed
investments identified above, the with respect to the proposed rule rule change SR–OCC–2017–020
Commission seeks commenters’ views change that are filed with the (‘‘Proposed Rule Change’’) pursuant to
on the sufficiency of the information Commission, and all written Section 19(b)(1) of the Securities
provided in the proposed rule change to communications relating to the Exchange Act of 1934 (‘‘Act’’),1 and
support a determination that the listing proposed rule change between the Rule 19b–4 thereunder,2 concerning
and trading of the Shares would be Commission and any person, other than enhanced and new tools for recovery
consistent with Section 6(b)(5) of the those that may be withheld from the scenarios.3 The Proposed Rule Change
Exchange Act as modified by public in accordance with the was published for comment in the
Amendment No. 1. provisions of 5 U.S.C. 552, will be Federal Register on December 26,
available for website viewing and 2017.4 On March 22, 2018, the
IV. Procedure: Request for Written printing in the Commission’s Public Commission instituted proceedings
Comments Reference Room, 100 F Street NE, under Section 19(b)(2)(B)(i) of the Act 5
Interested persons are invited to Washington, DC 20549 on official to determine whether to approve or
submit written views, data, and business days between the hours of
arguments concerning the foregoing, 10:00 a.m. and 3:00 p.m. Copies of the 30 17 CFR 200.30–3(a)(57).
including whether the proposed rule filing also will be available for 1 15 U.S.C. 78s(b)(1).
change as modified by Amendment No. inspection and copying at the principal 2 17 CFR 240.19b–4.
1 is consistent with Section 6(b)(5) or office of the Exchange. All comments 3 On December 8, 2017, OCC also filed this
received will be posted without change. proposal as an advance notice SR–OCC–2017–809
any other provision of the Exchange (‘‘Advance Notice’’) with the Commission pursuant
Act, or the rules and regulations Persons submitting comments are to Section 806(e)(1) of Title VIII of the Dodd-Frank
thereunder. Although there do not cautioned that we do not redact or edit Wall Street Reform and Consumer Protection Act,
appear to be any issues relevant to entitled the Payment, Clearing, and Settlement
29 Section 19(b)(2) of the Exchange Act, as Supervision Act of 2010 (12 U.S.C. 5465(e)(1)) and
approval or disapproval that would be Rule 19b–4(n)(1)(i) of the Act (17 CFR 240.19b–
amended by the Securities Acts Amendments of
facilitated by an oral presentation of
daltland on DSKBBV9HB2PROD with NOTICES
1975, Pub. L. 94–29 (June 4, 1975), grants the 4(n)(1)(i)). Notice of filing of the Advance Notice
views, data, and arguments, the Commission flexibility to determine what type of was published for comment in the Federal Register
Commission will consider, pursuant to proceeding—either oral or notice and opportunity on January 23, 2018. Securities Exchange Act
for written comments—is appropriate for Release No. 82513 (Jan. 17, 2018), 83 FR 3244 (Jan.
Rule 19b–4 under the Exchange Act,28 23, 2018) (SR–OCC–2017–809).
consideration of a particular proposal by a self-
4 Securities Exchange Act Release No. 82531 (Dec.
regulatory organization. See Securities Acts
26 Id.
Amendments of 1975, Senate Comm. on Banking, 19, 2017), 82 FR 61107 (Dec. 26, 2017) (SR–OCC–
27 15 U.S.C. 78f(b)(5). 2017–020) (‘‘Initial Filing’’).
Housing & Urban Affairs, S. Rep. No. 75, 94th
28 17 CFR 240.19b–4. Cong., 1st Sess. 30 (1975). 5 15 U.S.C. 78s(b)(2)(B)(i).
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![37840 Federal Register / Vol. 83, No. 149 / Thursday, August 2, 2018 / Notices
disapprove the Proposed Rule Change.6 Clearing Agency’s Statement of the risks that arises or is borne by the CCA
On June 20, 2018 the Commission Purpose of, and Statutory Basis for, the by, at a minimum, describing the
designated a longer period for Proposed Rule Change process for replenishing any liquid
Commission action on proceedings to resource that a CCA may employ during
1. Purpose
determine whether to approve or a stress event, (5) ensure it has the
disapprove the Proposed Rule Change.7 Background authority and operational capacity to
On July 11, 2018, OCC filed The purpose of this proposed rule take timely action to contain losses and
Amendment No. 1 to the Proposed Rule change is to make certain revisions to liquidity demands and continue to meet
Change. On July 12, 2018, OCC filed OCC’s Rules and By-Laws Laws that are its obligations, (6) publicly disclose
Amendment No. 2 to the Proposed Rule designed to enhance OCC’s existing relevant rules and material procedures,
Change to supersede and replace tools to address the risks of liquidity including key aspects of its default rules
Amendment No. 1 in its entirety, due to shortfalls and credit losses and to and procedures, and (7) provide
technical defects in Amendment No. 1. establish tools by which OCC could re- sufficient information to enable
Therefore, the Initial Filing, as modified establish a matched book following a participants to identify and evaluate the
by Amendment No. 2, reflects the default. Each of the tools proposed risks, fees, and other material costs they
changes proposed. herein is contemplated to be deployed incur by participating in the CCA. The
by OCC in an extreme stress event that relevant portions of each of these new
Pursuant to Section 19(b)(1) of the requirements is restated below:
Act 8 and Rule 19b–4 thereunder 9 the has placed OCC into a recovery or
orderly wind-down scenario. Each of • Rule 17Ad–22(e)(3)(ii) requires that
Commission is publishing notice of each CCA ‘‘establish, implement,
the proposed revisions also is designed
these Amendments No. 1 and 2 to the maintain and enforce written policies
to further OCC’s compliance, in whole
Proposed Rule Change as described in and procedures reasonably designed to
or in part, with the provisions of the
Items I, II and III below, which Items . . . [m]aintain a sound risk
Commission’s rules identified
have been prepared by OCC. The management framework for
immediately below.
Commission is publishing this notice to On September 28, 2016, the comprehensively managing legal, credit,
solicit comments on the Proposed Rule Commission adopted amendments to liquidity, operational, general business,
Change, as modified by Amendments Rule 17Ad–2210 and added new Rules investment, custody, and other risks
No. 1 and 2, from interested persons. 17Ad–22(e)(3)(ii), (e)(4)(viii), (e)(4)(ix), that arise in or are borne by the [CCA],
(e)(7)(ix), (e)(13), (e)(23)(i) and which . . . [i]ncludes plans for the
I. Clearing Agency’s Statement of the
(e)(23)(ii) 11 pursuant to Section 17A of recovery and orderly wind-down of the
Terms of Substance of the Proposed
the Securities Exchange Act of 1934 12 [CCA] necessitated by credit losses,
Rule Change
and the Payment, Clearing, and liquidity shortfalls, losses from general
This proposed rule change by the Settlement Supervision Act of 2010 business risk, or any other losses.’’ 15
OCC would make certain revisions to (‘‘Payment, Clearing and Settlement • Rule 17Ad–22(e)(4)(viii) requires
OCC’s Rules and By-Laws to enhance Supervision Act’’).13 In relevant part, that each CCA ‘‘establish, implement,
OCC’s existing tools to address the risks these new rules collectively require a maintain and enforce written policies
of liquidity shortfalls and credit losses covered clearing agency (‘‘CCA’’), as and procedures reasonably designed to
and to establish new tools by which defined by Rule 17Ad–22(a)(5),14 to . . . [e]ffectively identify, measure,
OCC could re-establish a matched book establish, implement, maintain and monitor, and manage its credit
following a default. Each of the tools enforce written policies and procedures exposures to participants and those
proposed herein is contemplated to be reasonably designed to: (1) Maintain a arising from its payment, clearing, and
deployed by OCC in an extreme stress risk management framework including settlement processes, including by . . .
event that has placed OCC into a plans for recovery and orderly wind- [a]ddressing allocation of credit losses
recovery or orderly wind-down down necessitated by credit losses, the [CCA] may face if its collateral and
scenario. liquidity shortfalls, general business risk other resources are insufficient to fully
losses or any other losses, (2) effectively cover its credit exposures, including the
II. Clearing Agency’s Statement of the identify, measure, monitor and manage repayment of any funds the [CCA] may
Purpose of, and Statutory Basis for, the its credit exposures to participants and borrow from liquidity providers.’’ 16
Proposed Rule Change those arising from its payment, clearing • Rule 17Ad–22(e)(4)(ix) requires that
and settlement processes, including by each CCA ‘‘establish, implement,
In its filing with the Commission, maintain and enforce written policies
OCC included statements concerning addressing the allocation of credit losses
a CCA might face if its collateral and and procedures reasonably designed to
the purpose of and basis for the . . . [e]ffectively identify, measure,
proposed rule change and discussed any other resources are insufficient to fully
cover its credit exposures, (3) effectively monitor, and manage its credit
comments it received on the proposed exposures to participants and those
rule change. The text of these statements identify, measure, monitor and manage
credit exposures, including by arising from its payment, clearing, and
may be examined at the places specified settlement processes, including by . . .
in Item IV below. OCC has prepared describing the process to replenish any
financial resource that a CCA may use [d]escribing the [CCA’s] process to
summaries, set forth in sections (A), (B), replenish any financial resources it may
and (C) below, of the most significant following a default event or other event
in which use of such resource is use following a default or other event in
aspects of these statements. which use of such resources is
contemplated, (4) effectively identify,
contemplated.’’ 17
daltland on DSKBBV9HB2PROD with NOTICES
measure, monitor and manage liquidity
6 See Securities Exchange Act Release No. 82926
• Rule 17Ad-22(e)(7)(ix) requires that
(Mar. 22, 2018), 83 FR 13171 (Mar. 27, 2018) (SR–
OCC–2018–020). 10 17 CFR 240.17Ad–22. each CCA ‘‘establish, implement,
7 See Securities Exchange Act Release No. 83484 11 17 CFR 240.17Ad–22(e)(3)(ii), (e)(4)(viii), maintain and enforce written policies
(Jun. 20, 2018), 83 FR 29846 (Jun. 26, 2018) (SR– (e)(4)(ix), (e)(7)(ix), (e)(13), (e)(23)(i) and (e)(23)(ii).
OCC–2017–020). 12 15 U.S.C. 78q–1. 15 17 CFR 240.17Ad–22(e)(3)(ii).
8 15 U.S.C. 78s(b)(1). 13 12 U.S.C. 5461 et seq. 16 17 CFR 240.17Ad–22(e)(v)(viii).
9 17 CFR 240.19b–4. 14 17 CFR 240.17Ad–22(a)(5). 17 17 CFR 240.17Ad–22(e)(4)(ix).
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![Federal Register / Vol. 83, No. 149 / Thursday, August 2, 2018 / Notices 37841
and procedures reasonably designed payment of a proportionate charge amounts recovered from the defaulted
to. . . [e]ffectively measure, monitor, against the Clearing Fund (‘‘triggering Clearing Members.
and manage the liquidity risk that arises proportionate charge’’), during which (3) Adopt a new Rule 1111 that would
in or is borne by the [CCA], including period the aggregate liability of a provide authority to:
measuring, monitoring, and managing Clearing Member to replenish the
its settlement and funding flows on an Clearing Fund (inclusive of (a) Allow OCC to call for voluntary
ongoing and timely basis, and its use of assessments) would be 200% of the tear-ups (‘‘Voluntary Tear-Up,’’ as
intraday liquidity by, at a minimum, Clearing Member’s required defined below) of non-defaulting
doing the following . . . [d]escribing the contribution as of the time immediately Clearing Member and/or customer
[CCA’s] process to replenish any liquid preceding the triggering proportionate positions at any time following the
resources that the clearing agency may charge; suspension or default of a Clearing
employ during a stress event.’’ 18 (b) Clarify that a Clearing Member that Member, with the scope of any such
• Rule 17Ad–22(e)(13) requires that chooses to terminate its membership Voluntary Tear-Ups being determined
each CCA ‘‘establish, implement, status during a cooling-off period will by the Risk Committee of OCC’s Board
maintain and enforce written policies not be liable for replenishment of the (‘‘Risk Committee’’);
and procedures reasonably designed to Clearing Fund immediately following (b) Allow OCC’s Board to vote to tear-
. . . [e]nsure the covered clearing the expiration of such cooling-off up the ‘‘Remaining Open Positions’’
agency has the authority and period, provided that the withdrawing (defined below) of a defaulted Clearing
operational capacity to take timely Clearing Member satisfies enumerated Member, as well as any ‘‘Related Open
action to contain losses and liquidity criteria, including providing notice of Positions’’ (defined below) in a
demands and continue to meet its such termination by no later than the circumstance where OCC has attempted
obligations. . .’’ 19 end of the cooling-off period and by one or more auctions of such defaulted
• Rule 17Ad–22(e)(23)(i) requires that closing-out and/or transferring of all its Clearing Member’s remaining open
each CCA ‘‘establish, implement, open positions with OCC by no later positions and OCC has determined that
maintain and enforce written policies than the last day of the cooling-off it may not have sufficient resources to
and procedures reasonably designed to period; and satisfy its obligations and liabilities
. . . [p]ublicly disclos[e] all relevant (c) Delineate between the obligation of resulting from such default with the
rules and material procedures, a Clearing Member to replenish its scope of any such tear-up (‘‘Partial Tear-
including key aspects of its default rules contributions to the Clearing Fund and Up’’) being determined by the Risk
and procedures.’’ 20 its obligations to meet additional Committee; and
• Rule 17Ad–22(e)(23)(ii) requires ‘‘assessments’’ that may be levied
that each CCA ‘‘establish, implement, (c) Allow OCC’s Board to vote to re-
following a proportionate charge to the
maintain and enforce written policies allocate losses, costs and fees imposed
Clearing Fund.
and procedures reasonably designed upon holders of positions extinguished
(2) Adopt a new Rule 1011 23 that
to. . . [p]rovid[e] sufficient information would provide OCC with discretionary in a Partial Tear-Up through a special
to enable participants to identify and authority to call for voluntary payments charge levied against remaining non-
evaluate the risks, fees, and other from non-defaulting Clearing Members defaulting Clearing Members.
material costs they incur by in a circumstance where one or more (4) Revise the descriptions and
participating in the covered clearing Clearing Members has already defaulted authorizations in Article VIII of OCC’s
agency.’’ 21 and OCC has determined that it may not By-Laws concerning the use of the
OCC meets the definition of a CCA have sufficient resources to satisfy its Clearing Fund to reflect the discretion of
and is therefore subject to the obligations and liabilities resulting from OCC to use remaining Clearing Fund
requirements of the CCA rules, such default.24 Rule 1011 also would contributions to re-allocate losses
including new Rules 17Ad–22(e)(3)(ii), establish that OCC would prioritize imposed on non-defaulting Clearing
(e)(4)(viii), (e)(4)(ix), (e)(7)(ix), (e)(13), compensation of Clearing Members that Members and customers from a
(e)(23)(i) and (e)(23)(ii).22 made voluntary payments from any Voluntary Tear-Up or a mandatory tear-
Proposed Changes up (‘‘Partial Tear-Up,’’ as defined
23 OCC is amending the Initial Filing to renumber below).
Summary of Proposed Changes proposed Rule 1009 to proposed Rule 1011 and
In order to enhance OCC’s existing updated related cross references in Rule 1111 to Discussion of Proposed Changes
reflect this renumbering. OCC is also amending the
tools to address the risks of liquidity Default Management Policy as submitted in the Each of the proposed revisions to
shortfalls and credit losses and to Initial Filing to update similar cross references. OCC’s Rules and By-Laws is described
establish new tools by which OCC could 24 Under the Initial Filing, OCC’s authority to
in more detail in the following sub-
re-establish a matched book following a conduct Partial Tear-Ups, as well as call for
voluntary payments or to conduct Voluntary Tear- sections:
default, OCC is proposing to make the Ups, would be conditioned in part on OCC having
following revisions to its Rules and By- determined that, notwithstanding the availability of 1. Proposed Changes to OCC’s
Laws: any remaining resources, OCC may not have Assessment Powers
(1) Revise the existing assessment sufficient resources to satisfy its obligations and
liabilities resulting from such default. Under the a. Current Assessment Powers
powers in Section 6 of Article VIII of
Initial Filing, the proposed text of Rules 1009(a),
OCC’s By-Laws, specifically to: 1111(a) and 1111(b) incorrectly transcribed this OCC’s current assessment powers are
(a) Establish a rolling ‘‘cooling-off condition to require that OCC determine that, described in Section 6 of Article VIII of
daltland on DSKBBV9HB2PROD with NOTICES
period’’ that would be triggered by the notwithstanding the availability of any remaining OCC’s By-Laws. Section 6 establishes a
resources, OCC does not have sufficient resources
to satisfy its obligations and liabilities resulting general requirement for each Clearing
18 17 CFR 240.17Ad–22(e)(7)(ix).
19 17
from such default (emphasis added). In each such Member to promptly make good any
CFR 240.17Ad–22(e)(13). instance, OCC is amending the proposed text of
20 17 CFR 240.17Ad–22(e)(23)(i).
deficiency in its required contribution
Rules 1009(a) (which is being renumbered as Rule
21 17 CFR 240.17Ad–22(e)(23)(ii).
1011(a)), 1111(a) and 1111(b) in Exhibit 5B of the
to the Clearing Fund whenever an
22 17 CFR 240.17Ad–22(e)(3)(ii), (e)(4)(viii), Initial Filing to delete the word ‘‘does’’ and insert amount is paid out of its Clearing Fund
(e)(4)(ix) and (e)(7)(ix). in its place the word ‘‘may.’’ contribution (whether by proportionate
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1111(e)(iii) further provides that the in a recovery and orderly wind-down from such an event more broadly,
corresponding open position shall be scenario. In this regard, the proposed consistent with the general principle of
deemed terminated at the Partial Tear- changes are designed to further address mutualized loss that upon which central
Up Price.41 the risks of liquidity shortfalls and clearing rests. In this regard, OCC
Rule 1111(g) provides that to the credit losses resulting from a Clearing believes the proposed changes foster
extent losses imposed upon non- Member default or certain other loss cooperation and coordination with
defaulting Clearing Members and non- events and to establish tools to enable participants in the clearing system,
defaulting customers resulting from a OCC to re-establish a matched book and consistent with Section 17A(b)(3)(F) of
Partial Tear-Up can reasonably be limit OCC’s potential exposure to losses the Act.47
determined, the Board may elect to re- from a Clearing Member default, in each As stated above, the proposed changes
allocate such losses among all non- case as might result from an are designed to enable OCC to further
defaulting Clearing Members through a unprecedented loss scenario that address the risks of liquidity shortfalls
special charge to all non-defaulting exceeds OCC’s standard risk and credit losses resulting from a
Clearing Members in an amount management and default management Clearing Member default or certain
corresponding to each such non- procedures. OCC’s process in crafting other loss events and to re-establish a
defaulting Clearing Member’s the proposed changes was informed by matched book and limit OCC’s potential
proportionate share of the variable published guidance from OCC’s primary exposure to losses from a Clearing
amount of the Clearing Fund at the time regulators (the Commission and the Member default, in each case as might
such Partial Tear-Up is conducted.42 Commodity Futures Trading result from an unprecedented loss
With respect to Partial Tear-Ups, new Commission), the publications of key scenario that exceeds OCC’s standard
Rule 1111(h) would clarify that no international organizations (including risk management and default
action or omission by OCC pursuant to the Bank for International Settlements, management procedures. OCC believes
and in accordance Rule 1111 shall the International Organization of that the proposed changes will facilitate
constitute a default by OCC. Securities Commissions and the its ability to fully allocate, and
Financial Stability Board) and the ultimately extinguish, the loss so that it
2. Statutory Basis publications of key industry trade has a better opportunity of withstanding
Section 17A(b)(3)(F) of the Securities organizations. OCC’s proposal was an extreme stress scenario without
Exchange Act of 1934 (‘‘Act’’),43 further informed by conversations with, sacrificing its viability as a going
requires, among other things, that the among others, OCC’s Board, OCC’s Risk concern or its ability to continue to
rules of a clearing agency be designed to Committee, Clearing Members and provide its critical clearing services. In
foster cooperation and coordination market participants. this regard, OCC believes that the
with persons engaged in the clearance Informed by these perspectives, OCC proposed changes remove impediments
and settlement of securities has crafted the proposed changes with to and perfect the mechanism of a
transactions, to remove impediments to the aim of enhancing its ability to national system for the prompt and
and perfect the mechanism of a national address an unprecedented loss event but accurate clearance and settlement of
system for the prompt and accurate also, to the extent possible, providing a securities transactions, consistent with
clearance and settlement of securities reasonable amount of certainty to Section 17A(b)(3)(F) of the Act.48
transactions, and, in general, to protect Clearing Members, customers and other
The proposed changes are designed to
investors and the public interest. OCC stakeholders about the potential
enhance the stability of the clearing
believes that the proposed rule change consequences of such an event and the
system generally and are aimed at
is consistent with the requirements of resources and tools that would be
ensuring that OCC has adequate tools
Section 17A(b)(3)(F) of the Act 44 and expected to be available to OCC in
and resources to better protect market
the rules thereunder applicable to OCC support of its clearing operations.45
participants from the risks of extreme
for the reasons set forth below. Accordingly, the proposed changes stress scenarios and unprecedented loss
As stated above, each of the changes should leave Clearing Members, events. In this regard, OCC believes that
is designed to provide OCC with tools customers and other stakeholders in a the proposed changes are reasonably
to address the risks OCC might confront position to better evaluate the risks and designed to protect investors and the
benefits of clearing in order to facilitate public interest, consistent with Section
41 OCC is amending the Initial Filing and the
their own risk management, and to the 17A(b)(3)(F) of the Act.49
proposed text of Rule 1111(e)(iii) to clarify that if, extent applicable, their own regulatory
in certain circumstances discussed above (see fn. 27
and capital considerations. The The proposed changes also are
and associated text), OCC, in its discretion, designed to further OCC’s compliance,
determines that its remaining resources are proposed changes also seek to avoid a
inadequate to pay the applicable Partial Tear-Up result that would force only particular in whole or in part, with the provisions
Price for each position being extinguished in the clearing participants to shoulder certain of the Commission’s rules discussed
Partial Tear-Up, OCC shall be obligated to pay each
losses in an extreme stress scenario (i.e., immediately below:
relevant Clearing Member a pro rata amount of the
applicable Partial Tear-Up Price based on OCC’s holders of positions extinguished in Recovery and Orderly Wind-Down
remaining resources, and the relevant Clearing Partial Tear-Ups),46 and instead leaves
Member shall have a claim against the Corporation OCC and its Board with discretionary In relevant part, Rule 17Ad–
for the value of the difference between the pro rata
tools that could provide a more 22(e)(3)(ii) requires that each CCA
amount received and the Partial Tear-Up Price. This ‘‘establish, implement, maintain and
change does not impact the statutory basis for the equitable method of allocating the losses
proposed rule change.
enforce written policies and procedures
reasonably designed to . . . plan[] for
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42 For the avoidance of doubt, the special charge 45 OCC notes that the very nature of an extreme
would be distinct and separate from a Clearing stress and unprecedented loss event means that its the recovery and orderly wind-down of
Member’s obligation to satisfy Clearing Fund impact is difficult to predict and quantify in the [CCA] necessitated by credit losses,
assessments, and therefore, would not be subject to advance. liquidity shortfalls, losses from general
the aforementioned assessment cap in the amount 46 Absent a means of re-allocating the potential
of 200% of a Clearing Member’s then-required losses, costs and fees imposed upon holders of
contribution to the Clearing Fund. positions extinguished during tear-ups, the holders
47 15 U.S.C. 78q–1(b)(3)(F).
43 15 U.S.C. 78q–1(b)(3)(F). 48 Id.
of such positions would be left to individually
44 Id. address such losses, costs and fees. 49 Id.
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![37846 Federal Register / Vol. 83, No. 149 / Thursday, August 2, 2018 / Notices
business risk, or any other losses.’’ 50 As resources to satisfy its obligations and assessments) would be 200% of the
stated above, each of the proposed liabilities resulting from such default. Clearing Member’s required
changes is designed to provide OCC Second, new Rule 1111 would establish contribution as of the time immediately
with tools to address the risks OCC a framework by which non-defaulting preceding the triggering proportionate
might confront in a recovery and orderly Clearing Members and non-defaulting charge. Compared to the current
wind-down scenario.51 Consistent with customers of Clearing Members could be requirement under which a Clearing
the requirements of Rule 17Ad– given an opportunity to participate in Member may cap its liability to
22(e)(3)(ii), the proposed tools would Voluntarily Tear-Ups in a circumstance proportionate charges at an additional
enable OCC to better address the risks where a Clearing Member has defaulted 100% of its then-required contribution,
of liquidity shortfalls and credit losses and OCC has determined that, a Clearing Member would instead be
resulting from a Clearing Member notwithstanding the availability of any permitted to cap its liability for
default or certain other loss events and, remaining resources under OCC Rules proportionate charges at an additional
if necessary, to ultimately re-establish a 707, 1001, 1104 through 1107, 2210 and 200% of its then-required Clearing Fund
matched book in a recovery or orderly 2211, OCC may not have sufficient contribution.
wind-down scenario.52 In this context, resources to satisfy its obligations and OCC believes that the proposed
the proposed changes serve as a critical liabilities resulting from such default. approach improves predictability for
component of OCC’s recovery and Finally, new Rule 1111 also would OCC and for Clearing Members
orderly wind-down plan. As a result, in provide the Board with discretion to regarding the size of Clearing Fund
OCC’s view, the proposed changes are mandatorily tear-up Remaining Open contributions that are likely to be
consistent with the requirements of Rule Positions and Related Open Positions, subject to assessments for proportionate
17Ad–22(e)(3)(ii) as to the recovery and in a circumstance where a Clearing charges. Additionally, replacing the five
orderly wind-down plan.53 Member has defaulted and OCC has business day withdrawal period with
determined that, notwithstanding the the withdrawal period commensurate
Allocation of Credit Losses Above
availability of any remaining resources with the cooling-off period (which, as
Available Resources
under OCC Rules 707, 1001, 1104 proposed would be a minimum of
In relevant part, Rule 17Ad– through 1107, 2210 and 2211, OCC may fifteen calendar days) would give
22(e)(4)(viii) requires that each CCA not have sufficient resources to satisfy Clearing Members a more reasonable
‘‘establish, implement, maintain and its obligations and liabilities resulting period in which to meet the wind-down
enforce written policies and procedures from such default.56 In OCC’s view, and termination requirements necessary
reasonably designed to . . . [a]ddress[ each of these tools could be deployed by to cap their liability. OCC believes that
] allocation of credit losses the [CCA] OCC, if necessary, to allocate credit this would afford them greater certainty
may face if its collateral and other losses in excess of the collateral and regarding their maximum liability with
resources are insufficient to fully cover other resources available to OCC, in respect to the Clearing Fund during
its credit exposures . . .’’ 54 The accordance with Rule 17Ad– extreme stress events, which in turn,
proposed changes would provide OCC 22(e)(4)(viii).57 facilitates Clearing Members’
with three distinct tools that could be
Replenishment of Financial Resources management of their own risk
used to allocate any credit losses OCC
Following a Default management, and to the extent
may face in excess of collateral and
applicable, regulatory capital
other resources available to OCC. First, In relevant part, Rule 17Ad–
new Rule 1011 would provide a 22(e)(4)(ix) requires that each CCA considerations. And OCC believes this
framework by which OCC could receive ‘‘establish, implement, maintain and increased predictability would also be
voluntary payments in a circumstance enforce written policies and procedures beneficial to OCC by helping it to more
where a Clearing Member has defaulted reasonably designed to . . . [d]escrib[e] reliably understand the amount of
and OCC has determined that, the [CCA’s] process to replenish any Clearing Fund contributions that will
notwithstanding the availability of any financial resources it may use following likely be available to it after a
remaining resources under OCC Rules a default or other event in which use of proportionate charge is assessed.59
707, 1001, 1104 through 1107, 2210 and such resources is contemplated.’’ 58 OCC believes that the relative
2211,55 OCC may not have sufficient OCC’s Clearing Members have a certainty provided by the proposed
standing obligation to replenish the cooling-off period and 200% cap on
50 17 CFR 240.17Ad–22(e)(3)(ii). Clearing Fund following any assessments ultimately could reduce the
51 Indeed, the OCC’s separately filed recovery and proportionate charge. The proposed risks of successive or ‘‘cascading’’
orderly wind-down plan identifies OCC’s changes would establish a rolling defaults, in which the financial
assessment powers, ability to call for voluntary demands on remaining non-defaulting
payments, ability to call for Voluntary Tear-Ups and cooling-off period, triggered by the
ability to impose Partial Tear-Ups among its payment of a proportionate charge Clearing Members to continually
‘‘Recovery Tools.’’ OCC has filed a proposed rule against the Clearing Fund, during which replenish OCC’s Clearing Fund (and
change with the Commission in connection with period the aggregate liability of a similar guaranty funds at other CCPs to
this proposal. See Securities Exchange Act Release which such Clearing Members might
No. 82352 (December 19, 2017), 82 FR 61072 Clearing Member to replenish the
(December 26, 2017) (SR–OCC–2017–021). On Clearing Fund (inclusive of belong) have the effect of further
March 22, 2018, the Commission instituted weakening such Clearing Members to
proceedings to determine whether to approve or portfolio of a defaulted Clearing Member. Rules the point of default. In this regard, the
disapprove the proposed rule change. See Securities 2210 and 2211 concern the treatment of Stock Loan proposed changes are designed to
Exchange Act Release No. 82927 (March 22, 2018), positions of a defaulted Clearing Member.
83 FR 13176 (March 27, 2018) (SR–OCC–2017–021).
provide OCC, Clearing Members and
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56 Rule 1111(g), which would provide the Board
52 17 CFR 240.17Ad–22(e)(3)(ii). other stakeholders with sufficient time
authority to equitably re-allocate losses, costs and
53 17 CFR 240.17Ad–22(e)(3)(ii).
fees directly imposed as a result of a Partial Tear- to manage the ongoing default(s)
54 17 CFR 240.17Ad–22(e)(v)(viii). Up among all non-defaulting Clearing Members
55 Rule 707 addresses the treatment of funds in a through a special charge, would serve as a 59 Under the existing approach, it is less certain
Clearing Member’s X–M accounts. Rule 1001 discretionary tool to redistribute the credit losses from OCC’s standpoint regarding whether Clearing
addresses the size of OCC’s Clearing Fund and the allocated through Partial Tear-Up. Members would reasonably be able to cap their
57 17 CFR 240.17Ad–22(e)(v)(viii).
amount of a Clearing Member’s contribution. Rules liability to proportionate charges within five
1104 through 1107 concern the treatment of the 58 17 CFR 240.17Ad–22(e)(4)(ix). business days.
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without further aggravating the extreme off period is likely to be a sufficient the proposed changes as consistent with
stresses facing market participants. amount for Clearing Members (and their Rule 17Ad–22(e)(7)(ix).64
OCC recognizes that the proposed customers) to orderly reduce or
changes would limit the maximum Timely Action to Contain Losses
rebalance their positions, in an attempt
amount of Clearing Fund resources that to mitigate stress losses and exposure to In relevant part, Rule 17Ad–22(e)(13)
could be available to OCC in an extreme potential initial margin increases as they requires that each CCA ‘‘establish,
stress scenario, which introduces the navigate the stress event. Through implement, maintain and enforce
possibility, however remote, that the conversations with Clearing Members, written policies and procedures
proposed 200% cap ultimately could be OCC also believes that the proposed reasonably designed to . . . [e]nsure the
reached. If during any cooling-off period cooling-off period is likely to be a [CCA] has the authority and operational
the amount of aggregate proportionate sufficient amount for certain Clearing capacity to take timely action to contain
charges against the Clearing Fund Members to orderly close-out their losses and liquidity demands and
approaches the 200% cap, the amount positions and transfer customer continue to meet its obligations . . .’’ 65
remaining in the Clearing Fund may no positions as they withdraw from The proposed changes would provide
longer be sufficient to comply with the clearing membership. OCC believes the OCC with the authority to call for
applicable minimum regulatory proposed cooling-off period, coupled Voluntary Tear-Ups and OCC’s Board
financial resources requirements in the with the other proposed changes to with the discretion to impose Partial
CCAs. In any such event, OCC’s existing OCC’s assessment powers, is likely to Tear-Ups, which would provide OCC
authority under Rule 603 would permit provide Clearing Members with an with authority necessary to extinguish
OCC to call on participants for adequate measure of stability and certain losses (and attendant liquidity
additional initial margin, which could predictability as to the potential use of demands) thereby potentially enabling
ensure that OCC’s minimum financial Clearing Fund resources, which OCC OCC to continue to meet its remaining
resources remain in excess of applicable believes removes the existing incentive obligations to participants. As designed,
CCA requirements.60 OCC recognizes for Clearing Members to withdraw Voluntary Tear-Ups and Partial Tear-
that the imposition of increased margin following a proportionate charge.61 Ups would be initiated on a date
requirements could have an immediate In light of the foregoing, OCC believes sufficiently in advance of the
pro-cyclical impact on participants (and that the proposed changes would exhaustion of OCC’s financial resources
consequential impacts on the broader enhance and strengthen its process to such that OCC is expected to have
financial system) that is potentially replenish the Clearing Fund following a adequate resources remaining to cover
greater than the impact of replenishing the amount it must pay to extinguish the
default or other event in which use of
the Clearing Fund. These risks would be positions of Clearing Members and
the Clearing Fund is contemplated, in
limited to a specific extreme stress event customers without haircutting gains.
accordance with Rule 17Ad–
and could be mitigated by certain Accordingly, OCC believes that its
22(e)(4)(ix).62
factors. First, OCC, in coordination with authority and capacity to conduct a
its regulators, would carefully evaluate Replenishment of Liquid Resources Partial Tear-Up should be timely,
any potential increase in the context of relative to the adequacy of OCC’s
In relevant part, Rule 17Ad–
then-existing facts and circumstances. remaining financial resources. Finally,
22(e)(7)(ix) requires that each CCA
Second, during the cooling-off period, OCC believes it has the operational and
Clearing Members and their customers ‘‘establish, implement, maintain and
enforce written policies and procedures systems capacity sufficient to support
will have the opportunity to reduce or the proposed changes, and OCC’s
rebalance their respective portfolios in reasonably designed to . . . [d]escrib[e]
the [CCA’s] process to replenish any policies and procedures will be updated
order to mitigate their exposures to accordingly to reflect the existence of
stress losses and initial margin liquid resources that the clearing agency
may employ during a stress event.’’ 63 these new tools. As a result, OCC
increases. Finally, since initial margin is believes that the proposed changes
not designed to be subject to mutualized Since the use any part of the cash
portion of OCC’s Clearing Fund would conform to the relevant requirements in
loss, the risk of loss faced by Clearing Rule 17Ad–22(e)(13).66
Members for amounts posted as constitute a depletion of one of OCC’s
additional margin would be liquid resources, OCC’s assessment Public Disclosure of Key Aspects of
substantially less than for power, discussed above, is the primary Default Rules
replenishments of the Clearing Fund. means of replenishing the Clearing
In relevant part, Rule 17Ad–
Given the products cleared by OCC Fund cash that OCC used to address the
22(e)(23)(i) requires that each CCA
and the composition of its clearing stress event. For the same reasons stated
‘‘establish, implement, maintain and
membership, OCC has determined that above, OCC believes that the proposed
enforce written policies and procedures
a minimum 15-calendar day cooling-off changes enhance and strengthen its
reasonably designed to . . . [p]ublicly
period, rolling up to a maximum of 20 process to replenish the Clearing Fund,
disclos[e] all relevant rules and material
calendar days, is likely to be a sufficient as necessary, following a default or
procedures, including key aspects of its
amount of time for OCC to manage the other stress event in which the Clearing
default rules and procedures.’’ 67 As
ongoing default(s) and take necessary Fund is used, and therefore, OCC views
stated above, each of the tools discussed
steps in furtherance of stabilizing the herein are contemplated to be deployed
61 OCC initially considered a fixed 15-calendar
clearing system. Further, through by OCC if an extreme stress event has
day cooling-off period; however, OCC concluded
conversations with Clearing Members, that a fixed 15-calendar day cooling-off period may placed OCC into a recovery or orderly
OCC believes that the proposed cooling- wind-down scenario, and therefore, the
daltland on DSKBBV9HB2PROD with NOTICES
increase the risks of successive or cascading
Clearing Member defaults and may perversely tools discussed herein constitute key
60 Rule 603 provides that ‘‘[t]he Risk Committee incentivize Clearing Members to seek to withdraw
from clearing membership. Through conversations
aspects of OCC’s default rules. By
may, from time to time, increase the amount of
margin which may be required in respect of a with Clearing Members, OCC believes that these
64 17 CFR 240.17Ad–22(e)(7)(ix).
cleared contract, open short position or exercised potentially disruptive consequences are mitigated
contract if, in its discretion, it determines that such by the proposed rolling cooling-off period. 65 17 CFR 240.17Ad–22(e)(13).
62 17 CFR 240.17Ad–22(e)(4)(ix). 66 17 CFR 240.17Ad–22(e)(13).
increase is advisable for the protection of [OCC], the
Clearing Members or the general public.’’ 63 17 CFR 240.17Ad–22(e)(7)(ix). 67 17 CFR 240.17Ad–22(e)(23)(i).
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incorporating the proposed changes into OCC’s Rules and By-Laws, as further (C) Clearing Agency’s Statement on
OCC’s Rules and By-Laws, as further supplemented by the discussion in Comments on the Proposed Rule
supplemented by the discussion in OCC’s public rule filing, OCC believes Change Received From Members,
OCC’s public rule filing, OCC believes that is has provided sufficient Participants or Others
that proposed changes would conform information to enable participants to Written comments were not and are
to the relevant requirements in Rule identify and evaluate the risks, fees, and not intended to be solicited with respect
17Ad–22(e)(23)(i).68 other material costs they could incur by to the proposed rule change, and none
Sufficient Information Regarding the participating OCC, consistent with the have been received.
Risks, Fees and Costs of Clearing requirements in Rule 17Ad–
III. Date of Effectiveness of the
In relevant part, Rule 17Ad– 22(e)(23)(ii).70
Proposed Rule Change and Timing for
22(e)(23)(ii) requires that each CCA (B) Clearing Agency’s Statement on Commission Action
‘‘establish, implement, maintain and Burden on Competition
enforce written policies and procedures Within 45 days of the date of
Section 17A(b)(3)(I) of the Act 71 publication of this notice in the Federal
reasonably designed to . . . [p]rovid[e] requires that the rules of a clearing
sufficient information to enable Register or within such longer period
agency not impose any burden on up to 90 days (i) as the Commission may
participants to identify and evaluate the
competition not necessary or designate if it finds such longer period
risks, fees, and other material costs they
appropriate in furtherance of the to be appropriate and publishes its
incur by participating in the covered
clearing agency.’’ 69 The proposed purposes of the Act. OCC does not reasons for so finding or (ii) as to which
changes would clearly explain to believe the proposed rule change would the self-regulatory organization
Clearing Members and market have any impact or impose any burden consents, the Commission will:
participants that an extreme stress on competition. The primary purpose of (A) By order approve or disapprove
scenario could result in the use—and the proposed changes is to make certain the proposed rule change, or
theoretically the exhaustion—of OCC’s revisions to OCC’s Rules and By-Laws (B) institute proceedings to determine
financial resources, inclusive of OCC’s Laws that are designed to enhance whether the proposed rule change
proposed assessment powers. Proposed OCC’s existing tools to address the risks should be disapproved.
changes to Section 6, Article VIII of of liquidity shortfalls and credit losses IV. Solicitation of Comments
OCC’s By-Laws would explain Clearing and to establish tools by which OCC
Members’ replenishment obligation and Interested persons are invited to
could re-establish a matched book
liability for assessments. The proposed submit written data, views, and
following a default. As explained above,
changes also would clearly explain, arguments concerning the foregoing,
each of the tools proposed herein is
through proposed Rules 1011 and 1111, including whether the proposed rule
contemplated to be deployed by OCC in change is consistent with the Act.
that as OCC nears the exhaustion of its an extreme stress event that has placed
assessment powers, Clearing Members Comments may be submitted by any of
OCC into a recovery or orderly wind- the following methods:
may be asked for voluntary payments down scenario. The proposed rule
and, if necessary, Clearing Members and change is intended to provide Clearing Electronic Comments
customers may be asked to participate
in a Voluntary Tear-Up and/or subject to
Members, market participants and other • Use the Commissions internet
stakeholders with greater certainty as to comment form (http://www.sec.gov/
a Partial Tear-Up. Proposed Rules
1011(b) and 1111(a)(ii) also would make their liabilities and potential exposure rules/sro.shtml); or
clear that Clearing Members that made to OCC in the event of an • Send an email to rule-comments@
voluntary payments and Clearing unprecedented loss scenario. OCC does sec.gov. Please include File Number SR–
Members and customers whose not believe that the proposed changes OCC–2017–020 on the subject line.
tendered positions were extinguished in would discriminatorily impact any Paper Comments
the Voluntary Tear-Up would be Clearing Member’s access to OCC’s
prioritized in the distribution of any services or unnecessarily disadvantage • Send paper comments in triplicate
recovery from the defaulted Clearing or favor any particular user in to Brent Fields, Secretary, Securities
Member(s). Proposed changes to Article relationship to another user. OCC and Exchange Commission, 100 F Street
VIII would clarify that the Clearing recognizes that the nature of a Partial NE, Washington, DC 20549–1090.
Fund contributions remaining after OCC Tear-Up means that only particular All submissions should refer to File
has conducted a Voluntary Tear-Up or Clearing Members and market Number SR–OCC–2017–020. This file
Partial Tear-Up could be used to participants holding certain positions number should be included on the
compensate the non-defaulting Clearing may be impacted; however, the risk of subject line if email is used. To help the
Members and non-defaulting customers Partial Tear-Ups is extremely remote, Commission process and review your
for the losses, costs or fees imposed and even then, the proposed changes comments more efficiently, please use
upon them as a result of such Voluntary only one method. The Commission will
seek to provide means of equitably re-
Tear-Up or Partial Tear-Up. Proposed post all comments on the Commission’s
allocating the losses, costs and fees
Rule 1111(g) would make clear that, internet website (http://www.sec.gov/
imposed by Voluntary Tear-Up or rules/sro.shtml). Copies of the
following a Partial Tear-Up, OCC’s Partial Tear-Up. Therefore, OCC
Board may seek to equitably re-allocate submission, all subsequent
believes that the proposed changes amendments, all written statements
losses, costs and fees directly imposed
daltland on DSKBBV9HB2PROD with NOTICES
would not have any impact or impose with respect to the proposed rule
as a result of a Partial Tear-Up among
any burden on competition. change that are filed with the
all non-defaulting Clearing Members
through a special charge. By Commission, and all written
incorporating the proposed changes into communications relating to the
proposed rule change between the
68 17 CFR 240.17Ad–22(e)(13). 70 17 CFR 240.17Ad–22(e)(23)(ii). Commission and any person, other than
69 17 CFR 240.17Ad–22(e)(23)(ii). 71 15 U.S.C. 78q–1(b)(3)(I). those that may be withheld from the
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![Federal Register / Vol. 83, No. 149 / Thursday, August 2, 2018 / Notices 37849
public in accordance with the I. Self-Regulatory Organization’s trading in the System 5 and would
provisions of 5 U.S.C. 552, will be Statement of the Terms of Substance of communicate such determination to
available for website viewing and the Proposed Rule Change Members 6 via Regulatory Circular.7 The
printing in the Commission’s Public Exchange is now proposing to make
Reference Section, 100 F Street NE, The Exchange is filing a proposal to certain changes to its rule text, in
Washington, DC 20549, on official amend Exchange Rule 518, Complex connection with the upcoming launch
business days between the hours of Orders, to update its rule text regarding of such orders on the Exchange, which
10:00 a.m. and 3:00 p.m. Copies of such stock-option orders, in connection with is scheduled for the third quarter of
filing also will be available for the upcoming launch of such orders on 2018.
inspection and copying at the principal the Exchange. Currently, the Exchange provides
office of OCC and on OCC’s website at The text of the proposed rule change price protection for certain complex
https://www.theocc.com/about/ is available on the Exchange’s website at option trading strategies such as Vertical
publications/bylaws.jsp. http://www.miaxoptions.com/rule- Spreads 8 and Calendar Spreads 9 to
filings/ at MIAX Options’ principal prevent executions at potentially
All comments received will be posted
office, and at the Commission’s Public erroneous prices. Specifically, the
without change. Persons submitting
Reference Room. Exchange provides a Vertical Spread
comments are cautioned that we do not
redact or edit personal or identifying II. Self-Regulatory Organization’s Variance (‘‘VSV’’) price protection and a
information from comment submissions. Statement of the Purpose of, and Calendar Spread Variance (‘‘CSV’’) price
You should submit only information Statutory Basis for, the Proposed Rule protection. The VSV establishes
that you wish to make available Change minimum and maximum trading price
publicly. limits for Vertical Spreads.10 The CSV
In its filing with the Commission, the establishes a minimum trading price
All submissions should refer to File Exchange included statements limit for Calendar Spreads.11 If the
Number SR–OCC–2017–020 and should concerning the purpose of and basis for execution price of a complex order
be submitted on or before August 17, the proposed rule change and discussed would be outside of the limits
2018. any comments it received on the established for Vertical Spreads and
For the Commission by the Division of proposed rule change. The text of these Calendar Spreads, such complex order
Trading and Markets, pursuant to delegated statements may be examined at the will be placed on the Strategy Book and
authority.72 places specified in Item IV below. The will be managed to the appropriate
Robert W. Errett, Exchange has prepared summaries, set trading price limit as described in Rule
Deputy Secretary. forth in sections A, B, and C below, of 518(c)(4), Managed Interest Process for
[FR Doc. 2018–16535 Filed 8–1–18; 8:45 am] the most significant aspects of such Complex Orders. Orders to buy below
statements. the minimum trading price limit and
BILLING CODE 8011–01–P
orders to sell above the maximum
A. Self-Regulatory Organization’s
trading price limit (in the case of
Statement of the Purpose of, and
SECURITIES AND EXCHANGE Vertical Spreads) will be rejected by the
Statutory Basis for, the Proposed Rule
COMMISSION System.12
Change The Exchange now proposes to adopt
1. Purpose new subsection (g) in Rule 518,
[Release No. 34–83726; File No. SR–MIAX– Interpretations and Policies .01, to
2018–16] The Exchange proposes to amend provide a price protection feature for
Exchange Rule 518, Complex Orders, to certain stock-option strategies that have
Self-Regulatory Organizations; Miami update its rule text regarding stock-
International Securities Exchange LLC; a single option component tied to a
option orders, in connection with the stock component with a standard
Notice of Filing and Immediate upcoming launch of such orders on the
Effectiveness of a Proposed Rule deliverable.13 The proposed price
Exchange. In particular, the Exchange is protection feature, named ‘‘Parity Price
Change To Amend Exchange Rule 518, proposing to (i) adopt new rule text to
Complex Orders Protection,’’ will provide price
introduce a new price protection feature protection for strategies that consist of a
July 27, 2018. for certain stock-option strategies, (ii)
delete certain existing rule text to 5 The term ‘‘System’’ means the automated
Pursuant to the provisions of Section eliminate an unnecessary execution trading system used by the Exchange for the trading
19(b)(1) of the Securities Exchange Act price restriction for the stock of securities. See Exchange Rule 100.
of 1934 (‘‘Act’’) 1 and Rule 19b–4 component of a stock-option strategy,
6 The term ‘‘Member’’ means an individual or
thereunder,2 notice is hereby given that organization approved to exercise the trading rights
and (iii) make certain minor clarifying associated with a Trading Permit. Members are
on July 16, 2018, Miami International edits to existing rule text. deemed ‘‘members’’ under the Exchange Act. See
Securities Exchange, LLC (‘‘MIAX Exchange Rule 100.
Complex orders began trading on the
Options’’ or ‘‘Exchange’’) filed with the 7 See supra note 4.
Exchange on October 24, 2016.3 In its
Securities and Exchange Commission 8 A ‘‘Vertical Spread’’ is a complex strategy
rule filing to establish the trading of consisting of the purchase of one call (put) option
(‘‘Commission’’) a proposed rule change
complex orders, the Exchange adopted and the sale of another call (put) option overlying
as described in Items I and II below,
rules for handling stock-option orders.4 the same security that have the same expiration but
which Items have been prepared by the different strike prices. See Exchange Rule 518.05(a).
The Exchange also indicated that it
Exchange. The Commission is 9 A ‘‘Calendar Spread’’ is a complex strategy
daltland on DSKBBV9HB2PROD with NOTICES
would determine when stock-option
publishing this notice to solicit consisting of the purchase of one call (put) option
orders would be made available for and the sale of another call (put) option overlying
comments on the proposed rule change
the same security that have different expirations but
from interested persons. 3 See MIAX Regulatory Circular 2016–43, October the same strike price. See Exchange Rule 518.05(b).
10 See Exchange Rule 518.05(a).
20, 2016.
72 17 CFR 200.30–3(a)(12). 4 See Securities Exchange Act Release No. 79072 11 See Exchange Rule 518.05(b).
1 15 U.S.C. 78s(b)(1). 12 See Exchange Rule 518.05(c).
(October 7, 2016), 81 FR 71131 (October 14, 2016)
2 17 CFR 240.19b–4. (SR–MIAX–2016–26). 13 The standard stock deliverable is 100 shares.
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Document Created: 2018-08-02 01:29:07
Document Modified: 2018-08-02 01:29:07
| 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 37839 |
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