Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 ( printed page 57184) (“Exchange Act” or “Act”),^[1] and Rule 19b-4 thereunder,^[2] notice is hereby given that on August 19, 2026, The Options Clearing Corporation (“OCC” or “Corporation”) filed with the Securities and Exchange Commission (“Commission” or “SEC”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared primarily by OCC. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

I. Clearing Agency's Statement of the Terms of Substance of the Proposed Rule Change

This proposed rule change would amend its clearing membership standards as outlined in OCC's Rules. The proposed changes to OCC's Rules are contained in Exhibit 5 to File No. SR-OCC-2026-009. Material proposed to be added is marked by underlining and material proposed to be deleted is marked with strikethrough text. All terms with initial capitalization that are not otherwise defined herein have the same meaning as set forth in the OCC By-Laws and Rules.^[3]

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, OCC included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. OCC has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of these statements.

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

Background

OCC acts as the central counterparty clearing house (“CCP”) for all U.S. options exchanges and certain U.S. futures exchanges. OCC provides clearing services for options on equities, indices, Exchange Traded Funds (“ETFs”) and for certain transactions in futures and options on futures. Organizations become OCC Clearing Members to facilitate the clearing and settlement of their customer transactions or proprietary transactions through OCC. OCC also provides certain Clearing Members with the ability to submit stock loan transactions for novation, after which, OCC becomes the counterparty to both sides of the transactions, guaranteeing that these obligations will be fulfilled. In 2012, OCC was designated as a systemically important financial market utility (“SIFMU”) by the Financial Stability Oversight Council pursuant to Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”). With this designation came heightened regulatory expectations around financial, operational, and systems/data obligations. To keep pace with those expectations and ensure OCC continues to maintain a high level of market stability, OCC completed a review of its By-Laws and Rules in conjunction with changes in regulations and Clearing Member risk practices and processes. From this review, OCC modified its membership standards in a proposed rule filing approved by the Commission in 2023.^[4] The modifications, among other things, (i) expanded OCC membership to new entity types and in additional jurisdictions and updated its membership requirements and associated processes, including on-boarding and off-boarding procedures, (ii) amended the financial responsibility standards by increasing the minimum capital requirements for Clearing Members, (iii) amended operational requirements for Clearing Members, and (iv) changed rules governing disciplinary actions. The proposed rule filing also reorganized and consolidated certain Clearing Member requirements to improve existing practices.

To build on the enhancements made to OCC's membership standards in 2023 and continue to align with industry best practices ^[5] and evolving technology,^[6] OCC recently conducted an in-depth review of its membership standards with a strategic focus on mitigating counterparty credit risk introduced by Clearing Members. From this review, OCC determined it was necessary to further enhance certain Clearing Member requirements to improve OCC's risk mitigation processes and practices. OCC's proposed changes to its clearing membership standards address, in part, (i) new onboarding requirements for eligible applicants for clearing membership at OCC (“applicants”), (ii) risk mitigation requirements for existing Clearing Members and specifically for Clearing Members that OCC determines may present a heightened risk profile, (iii) factors or circumstances that may result in an applicant's denial of membership or a Clearing Member's suspension of membership, (iv) the expansion of delegated authority to the designated delegates or agents of the Risk Committee as it pertains to the approval or denial of applicants on a risk-based approach, and (v) the expansion of the use of protective measures that OCC may impose on an applicant or Clearing Member.

OCC's proposed changes will enhance OCC's risk mitigation processes and practices by requiring, in part, that applicants: (i) maintain a minimum operating history, (ii) maintain a physical office facility to conduct business with OCC, and (iii) provide, upon request by OCC, a business plan, assessed by an independent third-party, that demonstrates the applicant can meet and sustain financial and operational responsibility standards and financial obligations. Among other things, OCC's proposed changes also broaden the scope of required disclosures that applicants must provide during the onboarding process, such as information related to internal stress tests, credit agreements or audited financial statements. By proposing these changes, OCC is strengthening its holistic approach to reviewing and analyzing applicants that may present a heightened risk profile, which further mitigates counterparty credit risk. Additionally, OCC believes its proposed change that delegates certain authority to the designated delegates or agents of the Risk Committee will streamline the decision process and allow for applications and business expansion requests to be reviewed and acted upon in a shorter amount of time, providing a substantial benefit to the industry. OCC's proposed changes also clarify and expand upon the basis for denial of an ( printed page 57185) applicant and the suspension of an existing Clearing Member, providing enhanced transparency to the industry. OCC's proposed changes address updated financial responsibility obligations for existing Clearing Members, which is intended to mitigate risk to OCC through the establishment of enhanced risk-based capital levels. Furthermore, OCC's proposed changes expand upon the use of protective measures, which will allow more assurance that OCC is able to protect itself and its members from emerging counterparty risks.

Overall, OCC believes these proposed changes will strengthen OCC's onboarding requirements and provide OCC with the appropriate resources to ensure that applicants onboarded as Clearing Members present an acceptable risk profile such that they are likely to continue to meet OCC's membership standards in the future. The proposed changes will also allow OCC to more effectively risk manage existing Clearing Members that may pose a heightened risk profile and take measures to reduce that risk.

While the membership standards that OCC proposes to change are described in further detail below, generally, they consist of the following:

• Amending eligibility standards by requiring applicants to maintain a minimum operating history of one year; ^[7]
• Amending admission procedures and conditions to admission to expand the delegation of authority to the Risk Committee's designated delegates or agents; ^[8]
• Amending admission procedures to codify the processes that OCC would undertake in hearings before the Risk Committee for appeals of certain protective measures, or in hearings on denials of Clearing Member applications or reapplications; ^[9]
• Adopting requirements for applicants and Clearing Members related to confidential treatment of non-public information; ^[10]
• Amending the conditions to admission to, among other things:^[11]
  • Clarify and expand upon the basis for OCC's denial of membership;
  • Require more robust notification requirements from applicants that are subject to a formal investigation by a regulatory organization;
  • Restrict applicants that have been denied membership from reapplying for membership until the applicant has demonstrated, to OCC's satisfaction, that they have addressed the specific reason(s) for their denial;
  • Require certain applicants to provide OCC with a business plan demonstrating the applicant has a viable plan to meet and sustain financial and operational responsibility standards and financial obligations at OCC;
  • Incorporate a probationary period for certain applicants approved by OCC with contingencies to membership;
• Amending requirements such that applicants and Clearing Members are required to maintain a physical office facility to conduct business with OCC, unless an applicant or Clearing Member utilizes a remote office model that OCC determines does not present heightened risk to OCC; ^[12]
• Amending reporting requirements such that, upon OCC's request, an applicant or Clearing Member must furnish their parent or affiliate's audited financial statements to OCC; ^[13]
• Amending financial responsibility requirements by establishing risk-based minimum capital levels; ^[14]
• Amending operational capability obligations related to a Clearing Member's books and records; ^[15]
• Amending financial, operations, and risk management personnel requirements related to a Clearing Member's employment of individuals; ^[16]
• Amending event-based reporting requirements specific to Early Warning Notices; ^[17]
• Amending requirements related to OCC's ability to impose protective measures on Clearing Members or applicants; ^[18] and
• Clarifying and expanding upon the basis for OCC's suspension of an existing Clearing Member.^[19]

The proposed rule change generally would reflect each of these changes in the Rules by modifying the provisions currently set forth in Chapter I, II, III XI and XII of the Rules. OCC's proposed changes also include various clarifying, non-substantive updates to its Rules, including formatting and grammatical changes, and updates to section numbering as necessary to reflect proposed rules. OCC's proposed changes are described in more detail below under the section headers reflecting the proposed new Rules.

1. Purpose

The purpose of this proposed rule change by OCC is to modify its existing Rules to implement changes that are designed to strengthen its onboarding process for applicants and enhance its monitoring of current Clearing Members through updated financial, operational, and reporting requirements. OCC believes these proposed changes will help to mitigate counterparty credit risk and improve OCC's risk mitigation processes and practices.

Chapter I—Definitions

Proposed Rule 101—Definitions

OCC proposes to adopt a definition for the term “anti-money laundering (“AML”)” as it is utilized in proposed Rule 204(e) ^[20] and proposed Rule 307C.^[21] In Rule 101, OCC defines “AML” to mean, when used in respect of an applicant or Clearing Member's AML controls, compliance with anti-money laundering requirements imposed under U.S. law or comparable requirements in the Clearing Member's home jurisdiction.

OCC also proposes to adopt a key person clause by defining the term “Key Person” as it is utilized in proposed Rule 204(c) ^[22] and proposed Rule 307C.^[23] The definition would provide that “Key Person” means any person associated with a Clearing Member or applicant that the Corporation deems is critical to the Clearing Member or applicant's operations or risk management, including, but not limited to, the Clearing Member's President, Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), Chief Risk Officer (“CRO”), and Chief Compliance Officer (“CCO”), or equivalent positions, or a major shareholder or partner of the Clearing Member. The purpose of adopting a definition for Key Person is to promote resiliency for OCC in the event an individual deemed to be a Key Person is unable to fulfill their position within a Clearing Member or applicant's management team. OCC's proposed definition of Key Person incorporates the provision “any person associated with a Clearing Member or applicant” to consider Clearing Members or applicants with legal structures that encompass multiple legal entities. The purpose of including the ( printed page 57186) phrase “associated with” is to encompass positions beyond direct employment or control of the Clearing Member or applicant. For example, a director or partner level position may not be a direct employee of a Clearing Member or applicant, however, they may constitute a critical part of such Clearing Member or applicant's operations or risk management functions. As such, OCC believes it is necessary that the definition of Key Person extend to such individuals outside of direct employment, but who are still associated with the Clearing Member or applicant. As described in more detail in proposed Rule 307C,^[24] if a Key Person's departure has a material impact on the Clearing Member's operations or financial profile, OCC believes it is necessary to maintain the ability to impose restrictions on the impacted Clearing Member. For example, a Key Person may control the day-to-day decisions, maintain key client relationships, or have extensive knowledge of the company such that their position is critical to the operation of the business. If that person's inability to fulfill such position would likely impact the business's operations or profitability, it could pose additional risk to OCC. Therefore, OCC believes that adopting a definition for Key Person will strengthen its risk mitigation practices and promote resiliency for OCC.

To align with OCC's proposed rules concerning the protection of OCC's non-public information,^[25] OCC proposes to add a definition of the term “OCC Confidential Information” to Rule 101. The definition would provide that “OCC Confidential Information” means all non-public information provided by OCC that (i) is marked or otherwise identified in writing prior to disclosure to the recipient as “confidential” or “business sensitive,” ^[26] (ii) is designated by the Corporation as confidential, or (iii) the recipient knows or under the circumstances surrounding disclosure, ought to reasonably know is confidential.

OCC's proposed rules incorporate a reference to the term “OFAC” as it relates to an applicant's or Clearing Member's compliance with OFAC. For clarification, OCC proposes to define the term “OFAC” to mean the United States Department of the Treasury's Office of Foreign Assets Control as defined in Title 31, Chapter V of the Federal Regulations.^[27]

Lastly, OCC proposes to update the rule reference in the definition of the term “Office” in Rule 101. OCC proposes to eliminate reference to Rule 201 within the description and replace it with reference to Rule 302. OCC believes this proposed change aligns more closely with the new proposed edits to Rule 302 as it relates to requirements around maintaining a physical office space.

Chapter II—Clearing Membership

Proposed Rule 201—Eligibility

OCC proposes to modify its eligibility standards for applicants to ensure that, in OCC's discretion, such applicants reflect a sound financial and operational profile. Specifically, OCC proposes to adopt a new subsection (b) to current OCC Rule 201 ^[28] that would provide that Clearing Members must maintain a minimum operating history of one year in the same or substantially same business activities as being applied for, or in the alternative, must maintain senior personnel with sufficient financial, risk, and operational background and experience, in the sole opinion of OCC, to conduct the business of the Clearing Member.

The proposed change requiring a minimum operating history of one year is designed to ensure that there is sufficient information for OCC to formulate a holistic view of the applicant's background to help determine, based on the applicant's history, whether the applicant could meet OCC's existing membership standards and whether the applicant is likely to continue to meet OCC's membership standards for the foreseeable future. The proposed change also provides OCC with flexibility to, in the event the applicant does not maintain an operating history of one year, evaluate the applicant's senior personnel to determine whether such personnel have sufficient background experience to conduct the business of the Clearing Member. By requiring a minimum operating history of one year, OCC believes this proposed change will allow applicants to demonstrate their continued capacity to operate their business. OCC believes this information will strengthen its onboarding process by eliminating at an early-stage applicants that do not maintain a sufficient operating history or sufficient personnel, in OCC's discretion, therefore mitigating potential risk to OCC.

Proposed Rule 203—Admission Procedures

OCC proposes to make substantive and organizational changes to proposed Rule 203—Admission Procedures. OCC's proposed changes would reorganize Rule 203 into six separate subsections, outlined in proposed subsections (a) through (f) of proposed Rule 203. OCC also proposes adding titles that label each subsection, enhancing clarity and ease of readability throughout the document. OCC's proposed changes adopt new rule text in its entirety in proposed subsections (b)(4) through (b)(6), (b)(8), (e) and (f) of proposed Rule 203, while proposed subsections (a), (b)(1) through (b)(3), (b)(7), (c), and (d) reorganize existing text and incorporate new text. The purpose of each substantive change is discussed below.

i. Proposed Rule 203(a)

OCC's proposed changes would reorganize existing Rule 203(a) into proposed Rules 203(a) and 203(b)(1) through (b)(3). The first sentence of current Rule 203(a) provides that applicants for clearing membership must be in such form and contain such information as OCC will from time to time require. Proposed Rule 203(a) would be titled “Form of Application.” In addition, Proposed Rule 203(a) would extend this provision to include reapplications under Rule 309. As described in more detail in below with respect to proposed Rule 309, OCC may determine that a Clearing Member must reapply for membership due to an event described in Rule 306A(b)(1) that causes a material impact on the Clearing Member's operational condition. If OCC makes such determination, the Clearing Member would be required to reapply for membership pursuant to the admission procedures described in Rule 203, and the reapplying Clearing Member would be afforded the same rights under Rule 203 as any new applicant of OCC.

ii. Proposed Rule 203(b)

OCC's proposed Rule 203(b) would be titled “Review by the Risk Committee or its Delegates” and would be organized into eight subparts, as outlined in proposed Rule 203(b)(1) through (b)(8). OCC's proposed changes reorganize rule text from existing Rule 203(a) into new proposed Rules 203(b)(1) through (b)(3) while also proposing additional provisions in those subsections. Proposed Rule 203(b)(7) contains certain ( printed page 57187) text that was relocated from existing Rule 203(a) while also proposing new rule text. Lastly, OCC proposes to adopt Rule 203(b)(4) through (b)(6), and (b)(8) as entirely new rule text.

a. Proposed Rule 203(b)(1)

OCC proposes to modify its admission procedures to expand the delegation authority of the Risk Committee, specifically in their decision to approve or deny an applicant. OCC's existing Rule 203(a) provides, in part, that the Risk Committee must approve or deny an applicant for clearing membership, and that the Risk Committee may also approve, under certain circumstances, an applicant on an expedited basis.^[29] OCC proposes to expand the Risk Committee's authority such that the Risk Committee may delegate, to its designated delegates or agents, the ability to approve or deny new applications or reapplications, and approve an applicant on an expedited basis. Specifically, proposed Rule 203(b)(1) would provide that the Risk Committee, or its designated delegates or agents, determine whether to approve or deny applications or reapplications for clearing membership. OCC proposes to reflect this change on the delegation of authority from the Risk Committee to its designated delegates or agents throughout Rule 203 and Rule 204, as described in further detail below.

OCC believes the proposed change to delegate certain authority of the Risk Committee to its delegates or agents will streamline and accelerate the decision-making process and approval, while continuing to utilize a risk-based decision-making approach within OCC. New Clearing Member applicants are currently reviewed and decided upon by the Risk Committee at the regular Risk Committee meetings, which are scheduled approximately every quarter. OCC believes this delegation of authority will also benefit applicants that may require a more urgent response based on their business activity, because such applicants would not need to wait for a regularly scheduled Risk Committee meeting for their application to be presented to the Risk Committee and approved or denied by the Risk Committee. Given various dependencies in the application review process, such as receiving documentation from applicants and working through the required internal approvals, it can be challenging from a timing perspective to align such dependencies with the regularly scheduled Risk Committee meeting date. By expanding the potential delegation of authority to approve or deny applications outside of the regular scheduled Risk Committee meetings, OCC believes this will accelerate the decision-making process and reduce delays for applicants.

OCC's proposed changes in proposed Rule 203(b)(1) also incorporate “reapplications” into this provision to align with proposed Rule 309. As described in proposed Rule 309 and outlined in the description of proposed Rule 203(a) above, if OCC determines that a Clearing Member must reapply for membership, the process for reapplication would follow the same admission procedures for new applicants described in Rule 203. As such, the reapplying Clearing Member would be afforded the same rights as new applicants under existing Rule 203, and the Risk Committee, or its designated delegates or agents, would determine whether to approve or deny the reapplications, as it would for new applicants.

Furthermore, OCC also proposes to update existing language in proposed Rule 203(b)(1) to promote clarity and consistency on the Risk Committee's responsibility related to approval or denial of an applicant. OCC's existing Rule 203(a), which is reorganized, in part, to proposed Rule 203(b)(1), provides that the Risk Committee must review and approve or disapprove such applicants for clearing membership.^[30] OCC's proposed changes in proposed Rule 203(b)(1) update this language to state that the Risk Committee, or its designated delegates or agents, “determine whether to approve or deny” applications or reapplications for clearing membership. OCC believes the proposed language “determine whether to approve or deny” provides a more precise description of the Risk Committee's responsibilities, intended to promote transparency for Clearing Members and the general public.

b. Proposed Rule 203(b)(2)

Proposed Rule 203(b)(2) consists entirely of text relocated from the third sentence of existing Rule 203(a), with no substantive changes. Specifically, the sentence provides that the Risk Committee, or its designated delegates or agents, may examine the books and papers of any applicant, take such evidence as they may deem necessary or employ such other means as they may deem desirable or appropriate to ascertain relevant facts bearing upon the applicant's qualifications. OCC believes relocating this information from existing Rule 203(a) into proposed Rule 203(b)(2) enhances organizational efficiency in the document.

c. Proposed Rule 203(b)(3)

OCC's proposed changes reorganize and restate the fourth sentence of existing Rule 203(a) into proposed Rule 203(b)(3). That sentence currently provides that if the Risk Committee proposes to disapprove an application for clearing membership, it must first furnish the applicant with a written statement of its proposed recommendation and the specific grounds therefor, and afford the applicant an opportunity to be heard and to present evidence on its own behalf. Proposed Rule 203(b)(3) would incorporate the proposed expansion of the delegation authority of the Risk Committee in their decision to approve or deny an applicant by extending this obligation to the Risk Committee's designated delegates or agents. Proposed Rule 203(b)(3) would also incorporate “reapplications” of Clearing Members to align with proposed Rule 309, as described below. Proposed Rule 203(b)(3) would provide that the written statement informing the applicant or Clearing Member of the specific grounds of the proposed denial would be furnished by OCC's Corporate Secretary. As such, proposed Rule 203(b)(3) would provide clarity regarding whose responsibility it would be to transmit the written statement, clarifying it would be OCC's Corporate Secretary, not the Risk Committee. In addition, this change would provide transparency concerning the point at which the proposed process for Risk Committee review of such proposed denial would begin, as discussed below with respect to proposed Rule 203(b)(4) through (8). Proposed Rule 203(b)(3) would also use the terms “deny” or “denial,” instead of “disapprove” and “recommendation,” respectively, to align with the changes to Proposed Rule 203(a).

d. Proposed Rules 203(b)(4)-(b)(6)

OCC proposes to adopt subsections (b)(4) through (b)(6) of proposed Rule 203 as new rule text. The purpose in adopting subsections (b)(4) through (b)(6) is to codify within OCC's rules the processes that OCC would undertake in hearings before the Risk Committee on denials of Clearing Member applications or reapplications.^[31] OCC believes this detailed process set forth in (b)(4) through (b)6) of proposed Rule 203 will promote greater transparency for Clearing Members and applicants with ( printed page 57188) respect to denial of participation and the procedures afforded to them.

First, proposed Rule 203(b)(4) establishes the process by which a Clearing Member or applicant may request a hearing, and the notice requirements OCC must provide before that hearing takes place. Specifically, proposed Rule 203(b)(4) would provide that a Clearing Member or applicant may request a hearing by filing with the Secretary of OCC within five (5) business days from the date on which the Secretary of OCC furnished the applicant with a written statement under paragraph (b)(3) setting forth the name of the representative of the Clearing Member or applicant who may be contacted with respect to the hearing. Furthermore, the proposed change would provide that the Secretary of OCC will give the Clearing Member or applicant not less than ten (10) business days' prior written notice of the place and time of the hearing.

Next, proposed Rule 203(b)(5) outlines the requirements that a Clearing Member or applicant must fulfill after requesting a hearing, including submitting a detailed written statement of objections and indicating their intent to attend the hearing and whether they will have legal representation. Specifically, proposed Rule 203(b)(5) would provide that within seven (7) business days after the Clearing Member or applicant files such written request with OCC, the Clearing Member or applicant must submit to the Secretary of OCC a clear and concise statement setting forth with particularity the basis for its objection to the denial, whether the Clearing Member or applicant intends to attend the hearing, and whether the Clearing Member or applicant chooses to be represented by counsel at the hearing. Additionally, proposed Rule 203(b)(5) would include that the Secretary of OCC may extend a Clearing Member's time for submitting a written request for review or a written statement for good cause shown.

Finally, proposed Rule 203(b)(6) establishes the formal procedures governing how a hearing before the Risk Committee would be conducted, covering attendance, representation, recordkeeping, evidence submission and objections, hearing order, and post-hearing follow-up. OCC had previously developed and the Risk Committee had deployed these procedures for challenges to limitations on membership under OCC Rule 307B. OCC now proposes to codify them in Rule 203(b)(6) for transparency. Specifically, proposed Rule 203(b)(6) would provide that a hearing will proceed before the Risk Committee pursuant to the procedures set forth in (A) through (I) of proposed Rule 203(b)(6). Sections (A) through (I) of proposed Rule 203(b)(6) would establish the below procedures:^[32]

• • If the applicant fails to appear at the hearing, it may be deemed to have waived the right to review.
  • The Clearing Member or applicant may be represented by counsel, but such representation is not required.
  • OCC will keep a verbatim record of the hearing, which shall be the official record of the hearing. The applicant must refrain from making audio or video recordings or transmission of the hearing. The verbatim record of the hearing shall constitute OCC Confidential Information.
  • OCC and the Clearing Member or applicant (each a “Party”) may offer evidence through documentary evidence entered as exhibits in the proceeding.
  • Parties must provide copies of any documents or other materials that they plan to use at the hearing as evidence. Such evidence must be exchanged no later than the date established by the Risk Committee.
  • The formal rules of evidence, including the Federal Rules of Evidence, do not apply to hearings held under this Rule. Parties may argue that any documentary evidence presented by the opposing party should not be considered by the Risk Committee by objecting orally at the hearing on the basis that the evidence is irrelevant, immaterial, unduly repetitious, or unduly prejudicial. After considering the objecting party's reasons for excluding the evidence, the Risk Committee members will determine if the document will be admitted into evidence and into the record.
  • Following the presentation of each document, members of the Risk Committee may pose questions to the presenter of the document about the evidence offered.
  • Subject to the Risk Committee's authority to change the order, the hearing will be conducted in the following order: (i) open of record; (ii) presentation of the facts of the case, including documents, by an Officer of the Corporation, or an Officer's delegate or the Corporation's counsel; (iii) the applicant's presentation of facts of the case, including documents; (iv) rebuttal by an Officer of the Corporation, or an Officer's delegate or the Corporation's counsel; (v) the applicant's rebuttal; and (vi) the close of record.
  • Following the hearing, if necessary, the Risk Committee may submit questions in writing to either Party, with copies of all communication provided to each Party.

e. Proposed Rule 203(b)(7)

Proposed Rule 203(b)(7) establishes the notice requirements and finality of the Risk Committee's decision to deny an application or reapplication. From an organizational standpoint, proposed Rule 203(b)(7) incorporates certain rule text that was relocated from existing Rule 203(a) into proposed Rule 203(b)(7), while also introducing new rule text.

Specifically, proposed Rule 203(b)(7) provides that if the Risk Committee, or its designated delegates or agents, denies an application or reapplication, OCC will provide the applicant or Clearing Member a written notice of the decision, accompanied by a statement of the specific grounds on which the denial is based. Furthermore, the proposed changes would state that any decision made under this Rule will be final upon the date OCC's Corporate Secretary provides a copy of the written notice of the decision to the Party. Proposed Rule 203(b)(7) would incorporate the concept of reapplication as described under proposed Rule 309 such that Clearing Members would be afforded the same rights under proposed Rule 203 as new applicants. OCC's proposed changes also replace the word “disapproves” with “denies” to remain consistent with the word choice in proposed Rule 203(b)(1) through (b)(3). In addition, OCC's proposed changes eliminate existing rule text that requires the decision must be “mailed or delivered to the applicant.” OCC proposes this change for efficiency and will amend its processes accordingly if the change is approved. Finally, proposed Rule 203(b)(7) would make other non-substantive changes, such as (i) replacing “its” with “the” in reference to the Risk Committee's written notice of decision, and (ii) eliminating the word “therefore” because this was relocated text that OCC believes it is no longer necessary.

f. Proposed Rule 203(b)(8)

Proposed Rule 203(b)(8) establishes that a final denial of a Clearing Member's reapplication, pursuant to proposed Rule 309, will constitute grounds for summary suspension under Rule 1102. Specifically, proposed Rule 203(b)(8) would provide that a final decision to deny a reapplication of a Clearing Member pursuant to Rule 309 and this Rule will constitute a suspension or expulsion from a self- ( printed page 57189) regulatory organization and therefore grounds for summary suspension under Rule 1102. Proposed Rule 203(b)(8) mirrors existing Interpretation and Policy .01 to Rule 1201 ( i.e., proposed Rule 1201(b)), which provides the same with respect to a suspension or expulsion following disciplinary proceedings. In effect, these proposed rules provide that following a determination to expel a member—whether upon a denial of a reapplication under proposed Rule 309 after affording the Clearing Member the process described above or as a sanction for a violation of OCC's By-Laws and Rules under existing Chapter XII of the Rules—suspension of the Clearing Member may proceed in accordance with Chapter XI of the Rules (Suspension of a Clearing Member).

iii. Proposed Rule 203(c)

OCC's proposed changes reorganize existing Rule 203(b) to become proposed Rule 203(c), and add the title “Expediated Approvals.” OCC believes these proposed changes will help to improve readability and ease of navigation throughout OCC's rules. OCC's proposed changes also incorporate the expansion of the delegation authority of the Risk Committee in their decision to approve or deny an applicant on an expediated basis, as discussed above in the description of proposed Rule 203(b)(1). Specifically, OCC's proposed changes provide that the Risk Committee, “or its designated delegates or agents,” may approve an applicant on an expedited basis if approval of such applicant is appropriate for the protection of investors and the public interest.

iv. Proposed Rule 203(d)

OCC's proposed changes would also modify the provisions applicable to Clearing Members seeking to engage in clearing activities beyond the scope of their current authorizations. Specifically, OCC's proposed changes would reorganize existing Rule 203(c) to become new Rule 203(d)—“Business Expansion Requests.” OCC believes the proposed addition of a title will improve readability and ease of navigation throughout OCC's rules. Proposed Rule 203(d) would provide that Clearing Members' business expansion requests may be reviewed and approved or disapproved “by the Risk Committee, or its designated delegates or agents” pursuant to the procedures of OCC.

OCC's proposed changes eliminate the specific reference to the CEO and COO ^[33] and eliminate the provision requiring that the Risk Committee must be given not less than ten business days from the date it is notified of any such approval/disapproval to determine whether the business expansion request should be reviewed by the Risk Committee. Because the parties seeking to engage in business expansion requests are existing Clearing Members that have already gone through enhanced due diligence in the application process, OCC believes it is not necessary that all business expansion requests be considered for review by the Risk Committee. Rather, OCC proposes a new risk-based framework pursuant to OCC's procedures such that only business expansion requests that have been escalated by OCC's CEO or COO (“OCEO”) would be subject to the review and approval of the Risk Committee. Furthermore, pursuant to OCC's Decision Authority Framework, it would be up to the discretion of the OCEO to determine, based on the specific business expansion request, whether it would be necessary to involve the Risk Committee in the decision-making process.^[34]

As mentioned above, OCC's current process for business expansion requests entails that business expansion requests are approved or disapproved by the CEO or COO, provided the Risk Committee will be given not less than ten business days from the date it is notified of such approval or disapproval to determine whether the business expansion request should be reviewed by the Risk Committee.^[35] OCC's current process allows the Risk Committee a 10-day negative consent period upon being notified of such approval or disapproval. If there is no objection from the Risk Committee during that timeframe, the business expansion request is approved or disapproved depending on the determination of the CEO or COO. Based on the information available to OCC at this time, OCC is not aware of a specific instance in which the Risk Committee exercised its authority to review or object to business expansion requests in the past. The purpose of proposed Rule 203(d) is to eliminate the requirement that every business expansion request be required to be reviewed by the Risk Committee. OCC believes the proposed change will streamline business expansion requests by eliminating the 10-day negative consent period and promoting a clear decision-making approach for either the Clearing and Liquidity Risk Working Group (“CLRWG”) or the OCEO.

v. Proposed Rule 203(e)

OCC proposes to adopt subsection (e) of proposed Rule 203 to codify within OCC's Rules its intent to inform the Risk Committee of all decisions related to applicants or business expansion requests. Specifically, Proposed Rule 203(e) would provide that OCC will provide notice to the Risk Committee of all decisions made by the Risk Committee's designated delegates or agents related to the approval or denial of any applicant or business expansion request. As described in more detail above, OCC proposes to expand the Risk Committee's authority so that the Risk Committee may delegate, to its designated delegates or agents, the authority to approve or deny new applicants and business expansion requests. The purpose of the proposed Rule 203(e) is to align with the proposed delegated authority framework and provide transparency to the Risk Committee of all decisions being made by the Risk Committee's designated delegates or agents as it relates to the approval or disapproval of applicants or business expansion requests.

vi. Proposed Rule 203(f)(1) Though (2)

OCC also proposes to establish rules related to the confidential treatment of non-public information and proposes to adopt Rule 203(f) “Confidential Information.” In its capacity as a self-regulatory organization, OCC collects non-public information from its applicants to assess whether each applicant meets OCC's membership standards. In addition, OCC collects non-public information from its Clearing Members as part of its ongoing monitoring of their continued adherence to those standards. Such non-public information includes, but is not limited to, information on the applicant or Clearing Members financial and operational condition, agreements with other counterparties, and written policies and procedures. OCC may also ( printed page 57190) provide non-public information to its Clearing Members and applicants to support its participants' risk management and operations with respect to their participation in OCC. Examples of non-public information OCC may share with participants include, but are not limited to, the detailed methodology descriptions for OCC's proprietary margin and stress testing methodologies,^[36] and operation manuals providing participants with detailed instructions about how to use OCC's clearance and settlement systems.

With respect to non-public information that an applicant shares with OCC, assurance of confidentiality would be provided through the addition of paragraph (f)(1) to OCC Rule 203. Proposed Rule 203(f)(1) provides, in part, that any non-public information furnished to OCC pursuant to this Chapter will be held in confidence as may be required under the laws, rules and regulations applicable to OCC that relate to the confidentiality of records. For the avoidance of doubt, the proposed change would also provide that nothing in this Rule would prevent OCC from releasing such non-public information, in its sole discretion, to (i) any governmental or regulatory authority ( e.g., the SEC of CFTC); or (ii) any regulatory organization to which the applicant is a member or participant ( e.g., Financial Industry Regulatory Authority (“FINRA”) with respect to a broker dealer, or other registered clearing agencies in which the applicant or Clearing Member is a common member).^[37]

OCC would also add a paragraph (2) to Rule 203(f), which would require that each applicant must maintain OCC Confidential Information in confidence to the same extent and using the same means it uses to protect its own confidential information, but no less than a reasonable standard of care, and that the applicant must not use OCC Confidential Information or disclose OCC Confidential Information to any third party except as necessary to perform such applicant's obligations under the By-Laws and Rules or as otherwise required by applicable law. Furthermore, proposed Rule 203(f)(2) would entitle OCC to seek any temporary or permanent injunction or other equitable relief in addition to any monetary damages related to the disclosure of OCC Confidential Information. Specifically, proposed Rule 203(f)(2) would state that each applicant acknowledges that breach of its confidentiality obligations under these Rules may result in serious and irreparable harm to OCC for which there is no adequate remedy at law, and in the event of such a breach by the applicant, OCC will be entitled to seek any temporary or permanent injunction or other equitable relief in addition to any monetary damages. In addition, by promulgating Rule 203(f)(2), OCC would be entitled to impose disciplinary proceedings for an applicant's violation of the confidentiality requirements, consistent with existing Chapter XII of OCC's Rules. Finally, proposed Rule 203(f)(2) would state that nothing in this Rule will prevent OCC or the applicant from providing such OCC Confidential Information to any governmental or regulatory authority subject to request for confidential treatment.

Proposed Rule 204—Conditions to Admission

OCC proposes to enhance its conditions to admission to provide OCC with the appropriate resources to thoroughly evaluate each applicant, based on specific conditions described in the Rules, to determine if such applicant currently meets OCC's membership standards and if such applicant is likely to continue to meet OCC's membership standards in the future. OCC's proposed modifications expand upon its basis for denial of an applicant and strengthen the financial and reporting requirements for applicants to ensure applicants reflect an acceptable risk profile, based on OCC's discretion.

i. Proposed Rules 204(a), 204(c), and 204(d)

Consistent with the proposed changes to proposed Rule 203 described above, OCC proposes to modify Rule 204 to expand the delegation of authority of the Risk Committee to the Risk Committee's designated delegates or agents. Specifically, OCC proposes to modify Rule 204(a) to provide that the Risk Committee, “or its designated delegates or agents, may approve any application for clearing membership if the applicant meets the membership requirements and standards set for in the Rules.” To eliminate ambiguity and promote more concise and direct language, OCC's proposed changes update the structure of the sentence to reflect the affirmative tone by replacing the phrase “will not” with “may,” and “fails to meet” with “meets.”

OCC also proposes to modify 204(c) and 204(d), respectively, to provide that: (i) the Risk Committee, “or its designated delegates or agents,” may disapprove the application for clearing membership of any applicant or person of the applicant who is subject to a Statutory Disqualification, and (ii) that the Risk Committee, “or its designated delegates or agents,” may disapprove an application for clearing membership if the applicant or any natural person associated with the applicant has engaged and there is a reasonable likelihood he will again engage in acts or practices inconsistent with just and equitable principles of trade. OCC believes the proposed changes to delegate certain authority to the Risk Committee's designated delegates or agents will streamline and accelerate the decision-making process using a risk-based decision-making approach.

ii. Proposed Rules 204(c), 204(c)(1), and 204(c)(2)

OCC proposes to expand the statutory disqualification provision in proposed Rules 204(c), 204(c)(1) and 204(c)(2) to include the statutory disqualification of a Key Person, as the term is defined in Rule 101. OCC's proposed changes to Rules 204(c) and 204(c)(1) also intended to clarify that the provision applies not only to applicants who are subject to a Statutory Disqualification at the time of application, but also to applicants who become subject to a Statutory Disqualification over the course of the application period itself.

Existing Rule 204(c) provides that the Risk Committee may disapprove the application for clearing membership of any applicant or person of the applicant who is subject to a Statutory Disqualification. To promote clear construction of the rule and strengthen OCC's grounds for denial of an applicant, OCC proposes to modify Rule 204(c) to state that the Risk Committee, or its designated delegates or agents, may disapprove “an” application for clearing membership if any applicant, or “Key Person” of the applicant, is “or becomes” subject to a Statutory Disqualification. The purpose of this proposed change is to strengthen OCC's basis for denial of an applicant if the applicant presents heightened risk to ( printed page 57191) OCC at the initial time of application, or over the course the application period itself. As mentioned above under proposed Rule 101, a Key Person is, in part, a person associated with a Clearing Member or applicant that OCC deems is critical to the Clearing Member or applicant's operations or risk management. For example, a Key Person may control the day-to-day decisions, maintain key client relationships, or have extensive knowledge of the company such that their position is critical to the operation of the business. OCC's proposed changes narrow the grounds from statutory disqualification of a “person” of the applicant to statutory disqualification of a “Key Person” of the applicant to focus on those individuals that maintain critical and supervisory responsibilities within the organization. In contrast to the more general reference to a “person” of the applicant, OCC believes that a “Key Person” of the applicant has a role within the organization that may have a stronger impact on the organization's operations and processes. If an applicant or a Key Person of the applicant is subject to a Statutory Disqualification at the time of application, or if an applicant or Key Person of the applicant becomes subject to a Statutory Disqualification over the course of the application period, OCC believes this may present heightened risk to OCC. Therefore, OCC proposes to expand authority to deny an applicant if such applicant or a Key Person of the applicant is or becomes subject to a Statutory Disqualification. OCC's proposed changes would also make other grammatical and conforming changes in proposed Rule 204(c).

For the same reasons described above, OCC proposes to revise Rule 204(c)(1) to incorporate the statutory disqualification of a Key Person. Proposed Rule 204(c)(1) would provide that in cases in which the SEC, by order, directs as appropriate in the public interest, the Corporation will disapprove an application for clearing membership by any applicant or “Key Person” of the applicant who is “or becomes” subject to a Statutory Disqualification.

OCC also proposes to modify Rule 204(c)(2) to expand upon the circumstances and specify the timeframe for which an applicant must provide notification to OCC. Specifically, OCC proposes to modify Rule 204(c)(2) to provide that every applicant must notify OCC in writing “within two business days” if the applicant “or a Key Person” is or becomes subject to a statutory disqualification in accordance with the requirements of Rule 306A(c), “or if the applicant learns that it or a Key Person is the subject of a formal investigation by a regulatory organization.”

Existing Rule 306A(c) provides, in part, that a Clearing Member or any applicant for clearing membership must notify OCC within 20 business days upon learning of becoming subject to a statutory disqualification.^[38] OCC believes the proposed change to shorten the notification timeframe requirement for applicants from 20 business days, as provided in 306A(c), to two business days, as provided in proposed Rule 204(c)(2), provides OCC with important information at an earlier stage in the decision-making process. By receiving such information from an applicant within two business days of the applicant becoming aware, rather than within 20 business days, OCC will be able to evaluate this information earlier in the applicant review process and take next steps to address how the Statutory Disqualification may impact the applicant. OCC believes this information may be a factor in determining whether the applicant, in OCC's discretion, presents an acceptable risk profile to OCC. Therefore, OCC believes the proposed change to shorten the notification period will promote efficiencies and help to accelerate the decision-making process.

In addition, proposed Rule 204(c)(2) requires that, if an applicant learns that it or a Key Person is the subject of a formal investigation by a regulatory organization, the applicant must notify OCC within two business days of learning of such investigation, so that OCC can evaluate the applicant, and the information provided, as soon as possible and in its entirety. OCC believes that such information may be a factor in determining whether the applicant may present an acceptable risk profile to OCC. OCC believes that if an applicant is the subject of a formal investigation by a regulatory organization, the applicant may, among other things, present a heightened risk profile. Therefore, it would be of concern to OCC if OCC learned of such investigation after approving the applicant for membership, rather than before approval. Furthermore, should OCC learn of such an investigation towards the end of the onboarding process, but before presenting the firm for approval, this may require a postponement of such presentation until OCC can complete its due diligence on that matter, thereby leading to a prolonged onboarding process and an inefficient approach to decision-making.

iii. Proposed Rule 204(e)

OCC's proposed Rule 204(e) expands upon the basis for OCC's denial of membership by providing examples of factors or circumstances, under OCC's existing authority, that articulate OCC's denial of membership. Proposed Rule 204(e) would provide that the Risk Committee, or its designated delegates or agents, may disapprove any application for clearing membership if OCC becomes aware of any factor or circumstance about the applicant, or a Key Person of the applicant, that may pose elevated risk to OCC or impact the suitability of the applicant as a Clearing Member. OCC proposes to include the reference to the Key Person of the applicant, as defined in Rule 101, to capture certain situations when, for example, a CEO steps down from the CEO role, but still represents a critical role in the Clearing Member's or applicant's management team. The proposed change would also provide that factors or circumstances that may pose elevated risk to OCC include, but are not limited to: (i) concerns relating to an applicant's liquidity profile; (ii) concerns with the results of an independent assessment, performed in the last 12-18 months,^[39] of an applicant's AML program's compliance with the Banking Secrecy Act requirements or OFAC Sanctions List and Sanctions list data; (iii) concerns relating to the amount or degree of financial leverage maintained or proposed to be maintained by the applicant; (iv) concerns relating to pending, adjudicated or settled regulatory or other legal actions involving the applicant or its management, including the applicant or a Key Person of the applicant being subject to a Statutory Disqualification, as such term is defined in Rule 101; (v) if an applicant does not conduct its business from a physical office facility such that OCC determines this represents an unacceptable level of operational risk to OCC, or (vi) concerns related to an applicant's profitability.

Although OCC does not specify in proposed Rule 204(e)(ii) who must perform an independent assessment of ( printed page 57192) an applicant's AML program's compliance with the Banking Secrecy Act requirements or OFAC Sanctions List and Sanctions list data, OCC would expect such assessment to be conducted by an applicant's internal audit department, consultants, or other qualified independent third parties to help to ensure the information is accurate and as unbiased as possible. OCC believes it is also reasonable to require that the assessment be conducted by an independent third-party to align with other self-regulatory organizations, such as FINRA and the National Futures Association (“NFA”), both of which also maintain provisions in their rules requiring independent testing of their AML compliance program.^[40]

OCC believes the provisions set forth in this proposed rule are necessary and appropriate for OCC to take into consideration when evaluating whether an applicant presents a heightened risk profile. OCC believes proposed Rule 204(e) will provide greater transparency to applicants and the general public at an earlier stage in the application process because the considerations listed in the proposed rule are part of OCC's existing application review process. Proposed Rule 204(e) is not intended to represent an exhaustive list of all circumstances in which OCC may disapprove an application, nor is proposed Rule 204(e) intended to seek new authority for OCC. Rather, proposed Rule 204(e) is intended to articulate OCC's current authority to deny an application based on certain circumstances that, in OCC's discretion, may reflect an unacceptable risk profile. Furthermore, OCC believes the proposed provision strengthens OCC's risk mitigation practices by articulating in OCC's Rules examples of circumstances that OCC may rely on to disapprove an applicant in the event an applicant presents a heightened risk profile.

iv. Proposed Rule 204(f)

OCC proposes to adopt Rule 204(f) to establish a requirement related to reapplication for those applicants that have been denied membership. Specifically, proposed Rule 204(f) provides that if an applicant is denied membership, the applicant is restricted from reapplying for membership until the applicant has demonstrated to the satisfaction of the Corporation that the applicant has adequately addressed the specific grounds upon which the applicant was denied. OCC believes this proposed rule would require applicants to make meaningful changes to their risk profile after being denied membership and demonstrate, based on their changes, that they have addressed the underlying reason for their denial. OCC believes this proposed rule would reduce the possibility that an applicant will immediately reapply for membership without taking action to adjust their risk profile and address the reason for denial, which would promote an effective use of OCC's and an applicant's time and resources.

v. Proposed Rule 204(g)

OCC's proposed new Rule 204(g) would outline OCC's requirements related to an applicant's office model. The proposed rule provides that every applicant must maintain physical office facilities for conducting business with OCC, unless the applicant utilizes a remote office model that OCC determines, in its sole discretion, does not present heightened risk to OCC.^[41] In addition, the proposed rule provides that every applicant may be subject to an on-site visit from OCC at the applicant's physical office facility as part of OCC's onboarding process. The proposed rule also states that applicants will be provided with no less than 24 hours' notice prior to OCC's on-site visit.

Evolving technology has introduced the ability for employees to work remotely outside of a traditional office space, and more organizations are allowing for the ability of remote work. OCC believes the use of a fully remote, non-hybrid, office model may introduce challenges for OCC to communicate with the applicant and perform an on-site examination of the applicant, therefore posing heightened risk to OCC. The purpose of proposed Rule 204(g) is to minimize risk for OCC, by providing for a more fixed location for communication and on-site examination performed by OCC. OCC believes that an applicant's lack of maintaining any physical office facility presents risks that would not exist in a hybrid office model where an applicant may have some form of physical office to allow for in-person communication. OCC believes the risks posed by an applicant that is fully remote include, but are not limited to, challenges in communication between the applicant's staff and OCC, and the lack of visibility that OCC may have into the applicant's operational stability that could be mitigated during an on-site visit or in-person meeting. OCC also proposes to adopt 204(g) and to align with FINRA's Rules related to designating a physical office space.^[42] For applicants that are also members of FINRA, OCC expects those applicants would already adhere to FINRA's Rules on designation of office facilities and supervision of such facilities, so OCC believes it is reasonable that such applicants must maintain a physical office facility under OCC's Rules. OCC intends to apply such standards of maintaining a physical office facility not just to all applicants, but to all existing Clearing Members as well, as described in proposed Rule 302(b). Although OCC is not aware of any current Clearing Member that utilizes a fully remote business model, OCC considers the use of a fully remote business model to be a part of OCC's operational risk management. OCC would consider, on a case-by-case basis, whether an applicant or Clearing Member's risk profile would be impacted if such applicant or Clearing Member utilized a remote business model. OCC believes this proposed requirement that applicants and Clearing Members maintain a physical office facility to conduct business with OCC, unless OCC determines that the use of a remote office model does not pose additional risk for OCC, would strengthen OCC's operational risk management.

vi. Proposed Rule 204(h) ^[43]

OCC proposes to renumber existing Rule 204(e) to Rule 204(h). Proposed Rule 204(h) describes the nine-month timeframe requirement in which an applicant must meet all conditions applicable to admission. In proposed Rule 204(h), OCC proposes to provide examples of such conditions that are applicable to an applicant's admission. OCC's proposed changes provide that such referenced conditions shall include, but are not limited to, clearing fund deposits and operational testing requirements. By providing illustrative examples of conditions that may be applicable to an applicant's admission, OCC believes this proposed change helps to promote transparency for applicants.

vii. Proposed Rule 204(j)

OCC proposes to adopt Rule 204(j), which provides that if an applicant fails to respond fully to OCC's requests for information after a period of 90 days from the inception of the application process, or for any subsequent 90-day period thereafter, OCC may deny the ( printed page 57193) applicant. This proposed change is intended to ensure applicants are engaged in the application process, to help streamline the process and promote productive business practices and processes for OCC. OCC believes it is an inefficient use of its time and resources to continue waiting for responsiveness or complete information longer than 90 days following an OCC request, or any subsequent 90-day period, as this time can be more efficiently allocated to processing other new applicants which have provided the information requested by OCC in a timely fashion.

viii. Proposed Rule 204(k)

OCC's proposed changes would adopt new Rule 204(k). In proposed Rule 204(k), OCC's proposed change specifies that OCC may share with such Designated Examining Authority or designated SRO any information provided by the applicant to OCC in connection with the application process. OCC believes this proposed change promotes enhanced transparency to other industry regulatory authorities.

ix. Proposed Rule 204(l)

OCC's proposed changes would renumber existing Rule 204(g) to proposed Rule 204(l). The proposed change also expands the delegation authority of the Risk Committee, as described in further detail above, and clarifies OCC's existing authority to impose additional requirements for clearing membership pursuant to Rule 307. Specifically, the proposed change provides, in part, that if the Risk Committee, “or its designated delegates or agents,” determines that an applicant's financial condition, operational capability, risk management capability or experience and competence, in relation to the business that the applicant is expected to transact with OCC, makes it necessary or advisable, for the protection of OCC, Clearing Members, or the general public, the Risk Committee may impose additional requirements for membership including, but not limited to, the imposition of protective measures pursuant to Rule 307. OCC proposes removing the term “temporary” before “requirements” to articulate that this provision was never intended to limit OCC's existing authority under Rule 307 to impose requirements on Clearing Members that may be permanent. For example, a permanent requirement that OCC may impose is the requirement that the new Clearing Member must hire personnel on a full-time basis to help demonstrate that such Clearing Member maintains sound risk management and operational controls. In this example, the requirement that the Clearing Member hire new personnel on a full-time basis, rather than on a part-time basis, is intended to be a permanent requirement. OCC believes the removal of the term “temporary” will align more closely with OCC's existing authority under Rule 307 and help strengthen OCC's resiliency in the event an applicant may present, in OCC's discretion, a heightened risk profile. For additional clarification, OCC's proposed change to proposed Rule 204(l) also includes the provision that states “any contingencies that the Risk Committee, or its designated delegates or agents, designates as temporary will remain in effect” until the heightened risk presented by the Clearing Member is sufficiently reduced, “based on the judgment of the Corporation, or if applicable, the maturity date of such contingency as specified by the Corporation.”

x. Proposed Rule 204(m)

OCC proposes to adopt new Rule 204(m), which provides, in part, that applicants, upon OCC's request, must provide OCC with a business plan, supported by financial projections and assumptions that includes the applicant's proposed use of OCC's services that demonstrates, to the satisfaction of OCC, that the applicant has a viable plan to meet and sustain the financial and operational responsibility standards and financial obligations under OCC's Rules. In addition, the proposed change states that the applicant must provide, upon OCC's request, an assessment of the applicant's business plan by an independent third-party consultant deemed acceptable by OCC, at the expense of the applicant, to evaluate the reasonableness and viability of the plan, including its assumptions and projections, and that failure to provide such a plan, when requested by OCC, may result in denial of the application.

This proposed change is intended to strengthen OCC's basis for determining whether to approve or deny an applicant. OCC believes this proposed change will provide OCC with accurate, relevant information to consider when evaluating an applicant's background, operational and business history, and future projections, to determine if the applicant presents an acceptable risk profile. In addition, OCC believes that requiring the applicant's business plan to be assessed by an independent third-party provides additional comfort to OCC that the information provided to OCC is as accurate and as unbiased as possible.

As the sole clearing agency for standardized equity options listed on national securities exchanges registered with the Commission, OCC holds a significant responsibility in managing risk to the U.S. listed-options marketplace. Therefore, OCC believes it is essential that when requested, applicants provide OCC with a business plan, vetted by an independent third-party consultant, to allow OCC to perform its due diligence and thoroughly evaluate each applicant in its entirety to determine whether such applicant presents an acceptable risk profile. Additionally, it is critical for OCC's review that the information received from an applicant is as accurate and as unbiased as possible. OCC expects that applicants will leverage their existing third-party relationships to undertake an independent review of the applicant's business plan. By leveraging existing relationships, OCC believes that an applicant can minimize additional costs and limit the risk of any potential confidentiality issues from sharing information because such relationships already exist and there is, presumably, a level of trust in existence with such relationships. OCC believes that the requirement to provide OCC, upon its request, with a business plan, assessed by an independent third-party consultant is appropriate to further strengthen OCC's risk management practices.

xi. Proposed Rule 204(n)

OCC proposes to adopt new Rule 204(n), which provides, in part, that if OCC determines to apply a limitation or restriction on an applicant in lieu of applying a membership standard, as OCC is currently authorized to do as outlined in Rule 307, such limitations and restrictions may also include contingencies. Furthermore, OCC's proposed changes explain that such limitations, restrictions, and contingencies may include, in addition to the examples already provided in Rule 307, increased or adjusted ongoing membership financial requirements or an ongoing requirement to provide additional information or reports to OCC. Proposed Rule 204(n) also provides that any such financial requirements will be risk-based.

This proposed change is intended to provide OCC with the flexibility to approve an applicant for Clearing Membership with contingencies attached to its membership. The proposed change articulates specific circumstances in which an applicant's ( printed page 57194) approval for membership may be contingent upon, such as the requirement for an applicant to provide ongoing reporting to OCC. OCC believes this proposed change to apply contingencies to an applicant's membership will equip OCC with the necessary tools and resources to address each individual applicant based on the specific scenario of the applicant, and apply, for example, adjusted financial or reporting requirements to a newly approved Clearing Member if OCC believes such applicant may present a heightened risk profile.

xii. Proposed Rule 204(o)

OCC proposes to adopt new Rule 204(o), which provides, in part, that if an applicant is approved by OCC with contingences attached to its membership, such applicant's membership will be deemed to be in a probationary period for twelve months following the date of the approval as a Clearing Member. In addition, the proposed rule provides that if a Clearing Member subject to a probationary period violates any contingency, or any OCC Rule, the Clearing Member is subject to suspension by OCC pursuant to Chapter XII of OCC's Rules. OCC believes this proposed change provides OCC with the necessary resources to manage an applicant that presents a heightened risk profile. The purpose of proposed Rule 204(o), in contrast to existing Rule 1201(a)(2), is to introduce a probationary period of twelve months for new Clearing Members that have been recently approved with contingencies attached to their membership due to their heightened risk profile as an applicant. The probationary period introduced in proposed Rule 204(o) applies to those Clearing Members that have been approved with certain contingencies attached to their membership. The probationary period is not intended to apply to existing Clearing Member that have been members at OCC for a period of time and do not have contingencies attached to their membership. Proposed Rule 204(o) broadens OCC's authority to suspend a newly approved Clearing Member that, but for the contingencies attached to their membership, OCC may not have approved their application for clearing membership.

xiii. Proposed Rule 204(p)

OCC proposes to adopt new Rule 204(p) which provides, in part, that upon OCC's request, the applicant must provide to OCC the annual audited financial statements of a parent or affiliate for the applicable fiscal year, certified by an independent certified public accountant and prepared in accordance with generally accepted accounting principles applicable to the parent or affiliate. The proposed change also provides that if the annual audited financial statements of the applicant's parent or affiliate are not available, the applicant must provide, upon OCC's request, unaudited financial statements, audited consolidated financial statements, or other financial information of the applicant's parent or affiliate, as applicable.

This proposed rule is intended to enhance OCC's reporting requirements, so that OCC has the necessary information available to fully review an applicant and address their risk profile. OCC believes it is necessary and appropriate to require, in certain circumstances, that an applicant, regardless of the applicant entity type, provide OCC with their parent or affiliate's audited financial statements for OCC's review so that OCC can take into consideration, from a broader perspective, the data that is provided and complete an extensive review to determine if the applicant presents an acceptable risk profile. In addition, by requiring, upon request, that an applicant provide OCC with their parent or affiliate's audited financial statements, OCC may gain a deeper understanding of the overall applicant's financial health and performance, which would assist OCC in determining the applicant's risk profile.

Proposed Rule 207—Submission to and Retrieval of Items to and From the Corporation

OCC describes in proposed Rule 203(f) the requirement for applicants to maintain OCC Confidential Information in confidence. Similarly, OCC proposes to apply the same standard of maintaining OCC Confidential information in confidence to existing Clearing Members. To clearly differentiate which proposed rules apply to applicants and which proposed rules apply to Clearing Members, OCC proposes to introduce Rule 207(d) to describe requirements as applicable to existing Clearing Members.

Proposed Rule 207(d) would require each Clearing Member to maintain OCC Confidential Information in confidence to the same extent and using the same means it uses to protect its own confidential information, but no less than a reasonable standard of care, and that the Clearing Member must not use OCC Confidential Information or disclose OCC Confidential Information to any third party except as necessary to perform such Clearing Member's obligations under the By-Laws and Rules or as otherwise required by applicable law. Furthermore, proposed Rule 207(d) would entitle OCC to seek any temporary or permanent injunction or other equitable relief in addition to any monetary damages related to the disclosure of OCC Confidential Information. Specifically, proposed Rule 207(d) would state that each Clearing Member acknowledges that breach of its confidentiality obligations under these Rules may result in serious and irreparable harm to OCC for which there is no adequate remedy at law, and in the event of such a breach by the Clearing Member, OCC will be entitled to seek any temporary or permanent injunction or other equitable relief in addition to any monetary damages. In addition, by promulgating Rule 307, OCC would be entitled to impose disciplinary proceedings for a Clearing Member's violation of the confidentiality requirements, consistent with existing Chapter XII of OCC's Rules. Finally, proposed Rule 207(d) would state that nothing in this Rule will prevent OCC or the Clearing Member from providing such OCC Confidential Information to any governmental or regulatory authority subject to request for confidential treatment.

CHAPTER III—Clearing Membership

Proposed Rule 301—Financial Responsibility

OCC proposes to modify its existing Rule 301(b) and 301(d) to strengthen financial responsibility obligations for existing Clearing Members.

i. Proposed Rule 301(b)

OCC proposes to modify Rule 301(b) to address OCC's ability to implement, in certain circumstances, risk-based minimum capital levels. Specifically, OCC's proposed changes provide that OCC, in its sole discretion, may, pursuant to Rule 307C(a), establish risk-based minimum capital levels, higher than those specified in Rule 301 to mitigate risk to OCC. The proposed change would state that examples of such risks giving rise to a higher capital requirement include, but are not limited to, Clearing Members that may, as determined by OCC, present: (i) a short operating history, (ii) an inadequate liquidity profile, (iii) a business strategy that is high risk, (iv) a profile that is highly leveraged, (v) weak internal risk controls, or (vi) insufficient personnel. This proposed change is intended to provide OCC with flexibility to implement different capital levels than the standard capital levels outlined in OCC's existing rules to address the various risk profiles presented by its ( printed page 57195) Clearing Members. OCC's bases for applying risk-based minimum capital levels would be detailed in OCC's Clearing Member On-Boarding and Off-Boarding Procedure.^[44] OCC believes this proposed change will help to further strengthen its risk mitigation practices by providing OCC with necessary tools to address Clearing Members that may present elevated risk to OCC and other Clearing Members.

ii. Proposed Rule 301(d)

OCC proposes to modify Rule 301(d) to clarify requirements related to a Clearing Member's contingency plans, and the obligation to provide information about such plans. Specifically, OCC's proposed changes to Rule 301(d) include the provision that every Clearing Member must furnish copies of such procedures related to its contingency planning upon the request of OCC. OCC believes this requirement will strengthen its ability to verify that Clearing Members maintain sufficient procedures to meet obligations arising from clearing membership in extreme but plausible market conditions, as determined by OCC.

Proposed Rule 302—Operational Capability

OCC proposes to enhance its operational capability standards for existing Clearing Members in proposed Rule 302(b) and 302(c).

Proposed Rule 302(b) would specify that every Clearing Member must maintain physical office facilities for conducting business with OCC, unless such Clearing Member utilizes a remote office model that OCC determines, in its sole discretion, does not present heightened risk to OCC. OCC also proposes to include the provision that every Clearing Member may be subject to an on-site visit from OCC at the Clearing Member's physical office facility as part of OCC's ongoing monitoring and due diligence of Clearing Members. In addition, OCC proposes that Clearing Members will be provided with no less than 24 hours notice prior to such on-site visit from OCC. As described in proposed Rule 204(g), OCC proposes to apply the same standard to applicants and existing Clearing Members as it relates to the requirement to maintain a physical office facility to conduct business with OCC. To differentiate which proposed requirements apply to applicants and which requirements apply to existing Clearing Members, OCC incorporated this provision in proposed Rule 204(g) in reference to applicants, and proposed Rule 302(b) in reference to existing Clearing Members. OCC believes that Clearing Members that do not maintain any type of physical office facility to conduct business with OCC may present a heightened risk profile. OCC believes the risks posed by a Clearing Member that maintains a fully remote office model include, but are not limited to, challenges in communication between the Clearing Member's staff and OCC, and the lack of visibility that OCC may have into the Clearing Member's operational stability that could be mitigated during an on-site visit or in-person meeting. OCC will determine, in its sole discretion and on a case-by-case basis, if such Clearing Member presents a heightened risk profile based on its use of a remote office model. Through proposed Rule 302(b), OCC intends to strengthen its operational capability standards for Clearing Members to limit potential operational risk posed to OCC by Clearing Members that do not maintain a physical office facility.

To further strengthen its operational requirements and ensure Clearing Members meet and maintain an acceptable risk profile, OCC proposes to update Rule 302(c) to include the provision that every Clearing Member must make its books and records available for inspection by OCC upon request.

Lastly, OCC proposes to correct an error in Rule 302(f), which concerns operational requirements for Clearing Members participating in OCC's Stock Loan Programs. As the titles to the subparagraphs imply, paragraph (f)(1) concerns the Stock Loan/Hedge Program and paragraph (f)(2) was intended to concern the Market Loan Program. OCC proposes to correct an inadvertent reference to the Stock Loan/Hedge Program in paragraph (f)(2), which would instead refer to the Market Loan Program.

Proposed Rule 303—Financial, Operations, and Risk Management Personnel

OCC proposes to modify Rule 303(a) to establish specific requirements related to staffing of Clearing Member personnel. Proposed Rule 303(a) provides that every Clearing Member must employ individuals with relevant industry experience in senior management roles, or equivalent positions, including: President or Chief Executive Officer, Chief Financial Officer, Chief Risk Officer, and Chief Compliance Officer. The proposed change also provides that the Clearing Member must maintain a clear division of responsibility between each of the listed roles above, the purpose of which is to reduce conflicts of interest. The proposed change also states that the Clearing Member must maintain a minimum number of total full-time personnel, including a minimum number of four full-time risk management personnel. Lastly, the proposed change provides that a Clearing Member may, with the agreement of OCC, substitute for certain full-time personnel contractual arrangements with third-party service providers acceptable to OCC with substantial experience in clearing the kind of cleared contracts that the applicant or member proposes to clear. OCC's proposed additions to Rule 303(a) are intended to verify and support, from OCC's perspective, that Clearing Members maintain a sufficient level of staffing in risk management roles with sufficient industry experience to demonstrate that such Clearing Members are operationally reliable. OCC believes it is essential that Clearing Members maintain sufficient staffing of personnel to present an acceptable risk profile, in OCC's judgement.

Proposed Rule 305—Clearing Member Risk Management

OCC's existing Rule 305 requires, in part, that Clearing Members maintain written risk management policies and procedures that address the risks that Clearing Members pose to OCC.^[45] Existing Rule 305 also states that OCC will review the risk management policies, procedures, and practices of each Clearing Member on a periodic basis.^[46] OCC proposes to modify existing Rule 305 to add a clarifying provision that states “based on OCC's review of the policies, procedures and practices, OCC” may take appropriate action to address concerns identified in ( printed page 57196) such reviews, including but not limited to the imposition of protective measures pursuant to Rule 307. OCC believes this proposed change articulates more clearly the basis for OCC to take action to address concerns based on review of the Clearing Member's policies, procedures and practices.

Proposed Rule 306—Notification and Reporting Requirements

As described in further detail above in proposed Rule 203(f), OCC's proposed changes establish rules related to the confidential treatment of non-public information provided to and received from applicants and Clearing Members. Proposed Rule 203(f) concerns non-public information related to an applicant. To differentiate which proposed requirements apply to applicants and which proposed requirements apply to existing Clearing Members, OCC proposes to adopt Rule 203(f), with respect to applicants, and Rule 306(b) with respect to Clearing Members.

With respect to non-public information that a Clearing Member shares with OCC, assurance of confidentiality would be provided through the addition of paragraph (b) of Rule 306.^[47] Proposed Rule 306(b) provides, in part, that any non-public information furnished by a Clearing Member to OCC pursuant to Chapter 3 will be held in confidence as may be required under the laws, rules and regulations applicable to OCC that relate to the confidentiality of records. Furthermore, proposed Rule 306(b) provides that nothing in this Rule will prevent the Corporation from releasing such non-public information, in its sole discretion, to (i) any governmental or regulatory authority ( e.g., the SEC or CFTC); or (ii) any regulatory organization to which the applicant is a member or participant ( e.g., FINRA with respect to a broker dealer, or other registered clearing agencies in which the applicant or Clearing Member is a common member).^[48]

Proposed Rule 306A—Event-Based Reporting

OCC proposes to modify existing Rule 306A(a)(1). Existing Rule 306A(a)(1) requires, in part, that under the Early Warning Notices provision, a Clearing Member must notify OCC prior to 3:00 p.m. CT in writing if the Clearing Member receives notice from any regulatory organization (as defined in this paragraph) of any financial or operational difficulty affecting the Clearing Member or of any failure by the Clearing Member to be in compliance with the financial or operational responsibility rules or capital requirements of any regulatory organization. To align with OCC's definition of “regulatory organization” in existing Rule 101, OCC's proposed change revises the text in Rule 306A(a)(1) that references regulatory organization from “as defined in this paragraph” to “as defined in Rule 101.” OCC's proposed change incorporates additional language following this provision that states “to the extent that laws applicable to the Clearing Member do not prevent the disclosure of such notice to the Corporation.” OCC proposes to include this information to articulate that OCC acknowledges that Clearing Members may be subject to confidentiality provisions under certain laws of various regulatory organizations that would prohibit disclosure of such information to OCC.

Furthermore, in relation to the referenced term “regulatory organization” in existing Rule 306A(a)(1), OCC proposes to update the language from “any regulatory organization (as defined this paragraph)” to “any regulatory organization (as defined in Rule 101).” Because the term “regulatory organization” is defined in OCC Rule 101, OCC believes it is more appropriate to include the specific reference to Rule 101. For the same reasons, OCC also proposes to revise the text in Rule 306A(a)(2)(D) from “as defined below” to “as defined in Rule 101.”

OCC also proposes to update Rules 306A(a)(2)(A)(i) and 306A(a)(4)(B)(i). In the event OCC determines to implement risk-based minimum capital levels, as described in proposed Rule 301, OCC will adjust its event-based reporting requirements to account for such risk-based minimum capital levels. OCC's proposed change to Rules 306A(a)(2)(A)(i) and 306A(a)(4)(B)(i) provide that a Clearing Member must notify OCC when the Clearing Member's net capital is less than the greater of $12 million, “or amount equal to 20% above the applicable Clearing Member's minimum capital requirement.” OCC selected a 20% reporting threshold to account for potential instances where OCC may require that an applicant or Clearing Member maintain a minimum net capital requirement that is higher than the $10 million requirement outlined in Rule 301 or higher than the reporting threshold of $12 million in existing Rule 306A. For example, there may be an instance when OCC establishes a higher minimum net capital requirement for a Clearing Member, such as $15 million, instead of $10 million. In this example, the trigger for when a Clearing Member would be required to notify OCC would be set at a net capital below $18 million, which is $20% above $15 million. If OCC utilized the current $12 million threshold for all situations, it may not have an impact on Clearing Members with minimum net capital requirements greater than existing $10 million.

To promote parallel construction and coherent language for ease of readability throughout OCC's Rules, OCC proposes to update Rules 306A(a)(4)(C), 306A(a)(4)(D), 306A(a)(5)(C) and 306A(a)(5)(D) by incorporating the language “such Clearing Member receives” at the beginning of each referenced provision. OCC also proposes to make conforming changes to proposed Rules 306A(a)(4)(D) and 306A(a)(5)(D) by deleting the term “received.” Similar to proposed provision in Rule 306A(a)(1), OCC proposes to add language at the end of Rule 306A(a)(5)(D) that states “to the extent that laws applicable to the Clearing Member do not prevent the disclosure of such notice to the Corporation” to articulate that OCC acknowledges that Clearing Members may be prohibited from disclosing certain information to OCC based on laws of their regulatory agency.

OCC also proposes to update Rule 306A(b)(1) to promote clarity, strengthen its notification requirements for Clearing Members, and provide OCC with flexibility and tools to address Clearing Members with a heightened risk profile. OCC's proposed change updates proposed Rule 306A(b)(1) to clarify a specific timeframe in which Clearing Members must notify OCC of any material change in its form of organization. Specifically, OCC's proposed change provides that each Clearing Member must give OCC “a minimum of 30 days” prior written notice, “or prompt written notice where such decision is made less than 30 days prior to taking effect,” of any material change in its form of organization or ownership structure.^[49]

OCC's existing Rule 306A(c) provides, in part, that a Clearing Member, or applicant for clearing membership, that is or becomes subject to a statutory disqualification, must notify OCC in writing of the statutory disqualification within 20 business days.^[50] OCC proposes to apply the same standard to applicants and Clearing Members as it ( printed page 57197) relates to an applicant's or Clearing Member's responsibility to notify OCC upon learning of being subject to a statutory disqualification. To align with proposed Rule 204(c)(2) and promote consistency and transparency to applicants and Clearing Members, OCC proposes to modify Rule 306A(c) to incorporate statutory disqualification of a Key Person, and to reduce the notification requirement for Clearing Members from 20 business days to two business days upon learning of such statutory disqualification. OCC believes this change will allow OCC to better manage and more quickly address such Clearing Members who may present a heightened risk profile to OCC. Lastly, because Rules in Chapter III apply to existing Clearing Members, while Rules in Chapter II primarily concern applicants for clearing membership, OCC also proposes to remove the reference to applicants in proposed Rule 306A(c) by eliminating the phrase “or any applicant for clearing membership.” The purpose of this proposed change is to promote clarity and organizational consistency within the Rules.

Proposed Rule 306B—Periodic Reporting

i. Proposed Rule 306B(b)

OCC proposes to update Rule 306B(b) as it relates to reporting requirements for existing Clearing Members. Specifically, OCC proposes to require that upon OCC's request, the Clearing Member must provide to OCC the annual audited financial statements of a parent or affiliate for the applicable fiscal year, certified by an independent certified public accountant and prepared in accordance with generally accepted accounting principles applicable to the parent or affiliate. The proposed provision would also provide that if the annual audited financial statements of the Clearing Member's parent or affiliate are not available, the Clearing Member must provide, upon the Corporation's request, unaudited financial statements, audited consolidated financial statements, or other financial information of the Clearing Member's parent or affiliate, as applicable.

OCC proposes to apply the same reporting standard for Clearing Members and applicants, regardless of Clearing Member or applicant type, as it relates to requiring that the applicant or Clearing Member provide OCC with the annual audited financial statements from such an entity's parent or affiliate. To differentiate which proposed requirements apply to applicants and which requirements apply to existing Clearing Members, OCC incorporated the above provision in proposed Rule 204(p) in reference to applicants, and proposed Rule 306B(b) in reference to existing Clearing Members. The proposed change to Rule 306B(b) is intended to enhance OCC's reporting requirements, so that OCC has the necessary information available to fully review a Clearing Member and address their risk profile. OCC believes it is necessary and appropriate to require, in certain circumstances, that the Clearing Member provide to OCC their parent or affiliate's audited financial statements so that OCC can complete an extensive review to determine if the Clearing Member presents an acceptable risk profile. As mentioned above as it relates to applicants, OCC believes it is necessary and appropriate to require, in certain circumstances, that a Clearing Member provide their parent or affiliate's audited financial statements for OCC's review so that OCC can take into consideration, from a broader perspective, the data that is provided and complete an extensive review to determine if the Clearing Member presents an acceptable risk profile. In addition, by requiring, upon request, that a Clearing Member provide to OCC their parent or affiliate's audited financial statements, OCC may gain a deeper understanding of the overall Clearing Member's financial health and performance, which would assist OCC in determining the applicant's risk profile.

ii. Proposed Rule 306B(f)

OCC proposes to adopt Rule 306B(f) to strengthen its reporting requirements for Clearing Members. Proposed Rule 306B(f) would require that Clearing Members provide accurate, complete and timely responses to OCC's annual and periodic due diligence information requests, including any supplemental or follow-up requests thereto. This proposed change is intended to promote efficient and timely delivery of information to OCC. OCC's annual and periodic due diligence information requests include, but are not limited to, annual and periodic attestations requesting Clearing Members to confirm, for example, their current office address, back-up internet provider, and list of senior level leaders employed at the Clearing Member's organization. OCC believes this proposed provision requiring Clearing Members to provide accurate, complete and timely responses to OCC's requests is necessary to ensure successful ongoing monitoring of Clearing Members.

Proposed Rule 307—Protective Measures

OCC proposes to update Rule 307 to provide enhanced transparency to Clearing Members, applicants, and the public on OCC's existing authority to impose protective measures. OCC's proposed changes renumber existing Rule 307 to Rule 307(a), and provide that OCC may impose protective measures on any Clearing Member or applicant for clearing membership that: (i) presents increased credit, “market” or liquidity risk to OCC, (ii) is “or will be, in the case of a new Clearing Member,” subject to enhanced monitoring and surveillance under OCC's watch level reporting process, or (iii) whose financial condition, operational capability, risk management capability, “regulatory or compliance risk profile” otherwise make it necessary or advisable, for the protection of OCC, other Clearing Members, or the general public. The purpose of these proposed changes in proposed Rule 307(a) is to articulate OCC's existing practices and provide clarifying language as a means of providing transparency to applicants, Clearing Members and the public.

OCC proposes to adopt Rule 307(b), which provides that OCC may impose protective measures on any Clearing Member or applicant regardless of whether the Clearing Member or applicant is subject to enhanced monitoring and surveillance under OCC's watch level reporting process. Furthermore, OCC proposes to adopt Rule 307(c), which provides that OCC determines protective measures on a case-by-case basis depending on factors such as the Clearing Member or applicant's financial and operational risk profile or the current or anticipated nature or level of the Clearing Member's or applicant's activity. The purpose of adopting proposed Rules 307(b) and 307(c) is to codify OCC's existing authority to impose protective measures within OCC's Rules. OCC believes it is important to articulate these provisions in its Rules to provide applicants, Clearing Members, and the public with readily available information on how OCC determines to impose protective measures to promote transparency and improve the clarity of its Rules.

Proposed Rule 307B—Restrictions on Certain Transactions, Positions and Activities

OCC's proposed changes to Rule 307B codify the processes that OCC would undertake in hearings before the Risk Committee for appeals of certain protective measures. The proposed ( printed page 57198) changes to Rule 307B mirror the provisions in proposed Rule 203 for the process OCC would undertake in hearings on denials of Clearing Member applications or reapplications. OCC's proposed changes revise Rule 307B(b) by introducing new rule text in proposed Rule 307B(b)(1) and (b)(3) and revising existing rule text in proposed Rule 307B(b)(2).

Section (b) of Rule 307B provides a Clearing Member with a formal process to appeal any action taken under section (a) of Rule 307B. OCC's proposed changes to Rule 307B(b) specify that the Clearing Member must submit a “written” request for review to the Secretary of OCC within five business days of the date such action is taken. The addition of the word “written” clarifies the form the request must take, which OCC believes will help to ensure there is a documented record of the submission. OCC also proposes to relocate the existing requirement that the Risk Committee schedule an early hearing, with not less than one day's notice to the Clearing Member, to proposed Rule 307B(b)(2). In doing so, OCC would clarify that the notice period is one business day.

Similar to proposed Rule 203(b)(5), proposed Rule 307B(b)(1) outlines the requirements that a Clearing Member must fulfill after requesting a hearing for appeals of certain protective measures, including submitting a detailed written statement of objections and indicating their intent to attend the hearing and whether they will have legal representation. Specifically, proposed Rule 307B(b)(1) would provide that within seven (7) business days after the Clearing Member files such written request with OCC, the Clearing Member must submit to the Secretary of OCC a clear and concise statement setting forth with particularity the basis for its objection to the action, whether the Clearing Member or applicant intends to attend the hearing, and whether the Clearing Member or applicant chooses to be represented by counsel at the hearing. Additionally, proposed Rule 307B(b)(1) would include that OCC may extend a Clearing Member's time for submitting a written request for review or a written statement for good cause shown.

The process OCC would undertake in hearings on denials of Clearing Member applications or reapplications would be the same process for hearings on appeals of certain protective measures. As such, the provisions in proposed Rule 307B(b)(2) outline the procedural requirements for the hearing before the Risk Committee on appeals of certain protective measures. Proposed Rule 307B(b)(2) ensures the Clearing Member receives at least one business day's notice of the hearing's time and place and establishes that the hearing will follow the procedures already set forth in Rule 203(b)(6), rather than restating those same procedures here. Specifically, OCC's changes to proposed Rule 307B(b)(2) would provide that the Clearing Member will be given not less than one “business” day's notice of the place and time of such hear. OCC proposes to include the addition of one “business” day to clarify that the notice period cannot fall on a weekend or holiday. OCC's proposed changes also provide that “the hearing before the Risk Committee will proceed pursuant to the procedures set forth in Rule 203(b)(6).” OCC's proposed changes eliminate the remaining rule text in proposed Rule 307B(b)(2). OCC believes the stricken text is no longer necessary as the procedures it previously outlined, including the conduct of the hearing, representation by counsel, record-keeping, and written notification of the outcome, are now covered by the provisions set forth in proposed Rule 203(b)(6), which governs the hearing process.

Lastly, OCC proposes to incorporate proposed Rule 307B(b)(3), which establishes when a decision made under this Rule becomes final and requires OCC to provide the Clearing Member with a written notice of decision stating the grounds for the decision. Proposed Rule 307B(b)(3) states that OCC will provide the Clearing Member a notice of decision setting forth the specific grounds upon which the decision is based. In addition, proposed Rule 307B(b)(3) would provide that any decision made under this Rule will be final (i) when the Clearing Member stipulates to the taking of such action by OCC, at which time OCC will furnish the Clearing Member with its notice of decision, or (ii) upon the expiration of the applicable time period provided in these Rules for the filing of a written request for a hearing or a written statement, at which time OCC will furnish the Clearing Member with its notice of decision, or (iii) if a hearing is held, the date the Secretary of OCC provides a copy of the written notice of the decision to the Clearing Member. OCC believes that codifying these processes in its Rules helps to ensure clarity and transparency to Clearing Members by providing a defined framework for when a decision is considered final.

Proposed Rule 307C—Additional Operational, Personnel, Financial Resource and Risk Management Requirements

OCC's proposed changes to Rule 307C include five additional examples of protective measures that OCC may impose on a Clearing Member or applicant. The purpose in highlighting these five specific examples within OCC's Rules is to provide transparency to applicants, Clearing Members and the public on protective measures that OCC most commonly uses, or that OCC anticipates may be used in the future.

OCC's proposed changes provide that OCC may impose protective measures in the form of additional operational, personnel, financial resource, or risk management requirements, including, but not limited to: (i) requiring a financial guaranty from a Clearing Member's parent company or affiliate (proposed Rule 307C(b)); (ii) imposing limitations on a Clearing Member's financial leverage ( e.g., gross or adjusted leverage caps) (proposed Rule 307C(c)); (iii) requiring Clearing Members to fill a key risk management or operation role created by the loss of a Key Person, as defined in Rule 101 (proposed Rule 307C(f)); (iv) requiring Clearing Members to implement or enhance certain internal controls, procedures or systems (proposed Rule 307C(i)); and (v) requiring Clearing Members provide OCC with an independent assessment of the Clearing Member's financial projections, operational capabilities, AML controls or compliance with OFAC (proposed Rule 307C(l)).^[51]

The protective measures described in proposed Rules 307C(b), 307C(c) and 307C(i) constitute OCC's current practices, and are already permissible pursuant to OCC's existing authority under Rule 307. OCC believes it is important to articulate its current practices in proposed Rule 307C to provide transparency to applicants, Clearing Members and the public. The proposed provisions in Rules 307C(f) and 307C(l) expand upon OCC's existing authority to impose protective measures. OCC believes these examples are consistent with the changes to Chapter II and III which enhance requirements for applicants and Clearing Members. Specifically, provision 307C(l) aligns with proposed Rule 204(e), which allows, in part, the Risk Committee, or its designated delegates or agents, to disapprove an ( printed page 57199) application for clearing membership if there are concerns with the results of an independent assessment, performed in the last 12-18 months, of an applicant's (a) AML program's compliance with the Banking Secrecy Act requirements or (b) OFAC Sanctions List and Sanctions list data. In addition, proposed provision 307C(f) introduces an example of protective measure related to a Key Person's departure from the Clearing Member. This provision aligns with proposed Rule 101 in defining the term Key Person in OCC's Rules.

OCC believes the proposed protective measures are necessary and appropriate to help ensure that OCC is able to address the various risks (including credit risk, liquidity risk, and operational risk) that may be presented by applicants or Clearing Members that do not comply, or who may be at risk of not complying in the future, with OCC's membership standards, present increased credit or liquidity risk to OCC, or are otherwise experiencing difficulties in their financial condition, operational capability, or risk management capability. By articulating the examples of protective measures that OCC believes it is already authorized to impose through proposed Rules 307C(b), 307C(c) and 307C(i), OCC is providing enhanced transparency to applicants and Clearing Members. For proposed Rules 307C(f) and 307C(l) that expand OCC's authority to impose a broader set of protective measures, OCC believes such expansion of authority is necessary and appropriate to equip OCC with necessary tools to mitigate risk introduced by applicants or Clearing Members that present a heightened risk profile. Based on OCC's crucial responsibility to provide financial stability and risk management to the U.S. listed-options marketplace, OCC believes it is prudent and reasonable to expand upon its ability to impose protective measures on applicants or Clearing Members that present a heightened risk profile. OCC believes the expansion of OCC's authority to impose such protective measures will provide OCC with the ability to better protect OCC, its Clearing Members, market participants and the public from emerging counterparty risks.

Proposed Rule 309—Reapplication for Membership

OCC's proposed change establishes new Rule 309 titled Reapplication for Membership. Proposed Rule 309(a) would provide that in connection with above events specified in Rule 306A(b)(1), OCC may: (i) require an existing Clearing Member to reapply for membership if OCC determines, in its sole discretion, that any such event has or is expected to have a material impact on the financial or operational condition or materially change the business strategy of such Clearing Member or (ii) apply protective measures necessary to address any new risks arising from any material change defined in sections A through E of Rule 306A(b)(1). In addition, proposed Rule 309(b) provides that if OCC determines that a Clearing Member must reapply for membership, the Clearing Member's access to OCC's services will remain active during the reapplication period; provided, however, that this Rule would not limit OCC's authority to impose protective measures under Rule 307 through 307C or suspend a Clearing Member pursuant to Rule 1102. Furthermore, proposed Rule 309(c) provides that any decision to suspend a Clearing Member following reapplication would be made pursuant to Rule 203.

The purpose of proposed Rule 309 is to strengthen OCC's risk mitigation tools by allowing OCC the ability to address Clearing Members' risk profiles that may have materially changed due to an event that occurred during their time of membership and that has impacted the Clearing Member in a material way. For example, if an existing Clearing Member is materially impacted financially or operationally by the sale of a large portion of its business such that the Clearing Member is unable to maintain the minimum capital requirements or the required number of risk management personnel, this may, in OCC's discretion, present a heightened risk profile. Therefore, OCC believes it would strengthen its risk mitigation practices to require, in certain circumstances, that the Clearing Member reapply for membership and allow OCC to re-examine whether the Clearing Member still meets OCC's membership standards based on the material change that has impacted the Clearing Member.

Under proposed Rule 309, the process for review of reapplications would align with the existing process for review of new applications, as described in proposed Rule 203, including the provisions for a hearing before the Risk Committee should the reapplying Clearing Member be denied. If OCC determines that a Clearing Member must reapply for membership, the requirement to reapply would not automatically result in restricting the Clearing Member's access to OCC's services. However, if, for example, a Clearing Member is required to reapply and the Clearing Member can no longer satisfy the minimum margin requirements during the reapplication process, OCC may determine to impose protective measures under Rules 307 through 307C or suspend the Clearing Member pursuant to 1102. In summary, the provisions in proposed Rule 309(a) through 309(c) would not impair OCC's authority to act under Rules 307 through 307C or 1102.

If OCC determines that a Clearing Member must reapply for membership under proposed Rule 309, the Clearing Member would follow the admission procedures for new applicants outlined in proposed Rule 203 and would be afforded the same rights under Rule 203 as any new applicant. As described above with respect to proposed Rule 203, the Risk Committee, or its designated delegates or agents, determines whether to approve or deny the reapplication and the Clearing Member would be given an opportunity to request a hearing before the Risk Committee and may be represented by counsel and present evidence on its behalf. OCC believes the Risk Committee is the appropriate governing body to hear and determine membership reapplication decisions because it is the Risk Committee that hears appeals of initial membership determinations under Rule 203 and limitations to membership under OCC Rule 307B, which present the same questions concerning the risks that an applicant or Clearing Member presents to OCC on a go-forward basis.^[52]

Chapter XI—Suspension of a Clearing Member

Proposed Rule 1101

OCC's existing Rule 1101 outlines, in part, a Clearing Member's obligation to notify OCC if a Clearing Member is unable to meet its obligations, is insolvent, or becomes the subject of a bankruptcy petition, receivership proceeding or the equivalent. OCC proposes to relocate existing Rule 1102(b) to become new Rule 1101(b), which would provide that any Non-U.S. Clearing Member which has been expelled or suspended by its Non-U.S. Regulatory Agency or any securities exchange of which it is a member shall immediately so notify OCC. OCC does not propose to change the language of the relocated provision. Because Rule 1101 focuses on a Clearing Member's requirement to notify OCC, OCC believes it is more efficient to structure ( printed page 57200) Rule 1101 to also include the notification requirement of a Non-U.S. Clearing Member. Therefore, OCC proposed changes relocate Rule 1102(b) to new Rule 1101(b) to include the requirement for Non-U.S. Clearing Member's to notify OCC. Subsequently, OCC's existing Rule 1101 would be new Rule 1101(a).

Proposed Rule 1102

OCC proposes to modify Rule 1102 to reorganize the existing rule structure to improve clarity and promote efficiency within OCC's Rules. OCC's proposed modifications to Rule 1102 organize the rule text into three separate sections: (i) proposed Rule 1102(a) “Grounds for Suspension,” (ii) proposed Rule 1102(b) “Event of Default; Cease to Act,” and (iii) proposed Rule 1102(c) “Notice to the Board of Directors.” OCC's proposed modifications also include relocating, without substantive revision, the Interpretation and Policies section under existing Rule 1102 as rule text.

Under proposed Rule 1102(a), OCC's proposed changes include the description titled “Grounds for Suspension” and incorporate eight subsections in proposed Rule 1102(a)(1) through (8) that outline OCC's grounds for suspension of a Clearing Member. The text of five of the eight subsections remains unchanged, as shown in proposed Rule 1102(a)(1) through Rule 1102(a)(4) and Rule 1102(a)(6). OCC's proposed changes in Rule 1102(a)(v) (renumbered as proposed rule 1102(a)(5)) reflect a reorganization without substantive changes, and the proposed changes in what would become proposed Rule 1102(a)(7) reflect textual updates to align with OCC's existing Rules. Lastly OCC proposes to adopt one new ground for summary suspension in proposed Rule 1102(a)(8).

To promote clarity, ease of readability and enhanced transparency to Clearing Members, OCC's proposed changes adopt the provisions in Interpretation and Policy .02 as proposed Rule 1102(a)(5)(A) through proposed Rule 1102(a)(5)(C). OCC's proposed changes to proposed Rule 1102(a)(5) also include subsequent conforming changes and additional grammatical modifications, such as using acronyms for terms already defined in OCC's Rules. To promote consistency and align with existing language in Rule 707 and Article VI, Section 25 of the By-Laws, OCC's proposed changes adopt subsection seven of proposed Rule 1102(a). Proposed Rule 1102(a)(7) provides, in part, that the Board of Directors or a Designated Officer of the Corporation may suspend any Clearing Member which is “in default, or its affiliated CCO Clearing Member is in default, in the payment of funds or any other obligation in respect of sets of X-M accounts under Rule 707 or in respect of an internal non-proprietary cross-margining account under Article VI, Section 25 of the By-Laws.” Finally, OCC proposes to adopt subsection eight of proposed Rule 1102(a) to align with the proposed provisions governing suspension of a Clearing Member following reapplication pursuant to proposed Rule 309. As previously described above, if OCC determines that a Clearing Member does not meet OCC's membership standards following the reapplication process under proposed Rule 309, OCC may determine to deny the Clearing Member, and such decision to deny clearing membership following reapplication will be made pursuant to proposed Rule 203. OCC proposes to adopt Rule 1102(a)(8), which provides, in part, that a Clearing Member may be suspended if it does not meet OCC's membership standards following reapplication under Rule 309, as determined by OCC. The purpose of this proposed change is to codify that following a determination to expel a member—whether upon a denial of a reapplication under proposed Rule 309 after affording the Clearing Member the process described in proposed Rule 203 or as a sanction for a violation of OCC's By-Laws and Rules under existing Chapter XII of the Rules—suspension of the Clearing Member may proceed in accordance with Chapter XI of the Rules (Suspension of a Clearing Member).

OCC proposes to adopt Rule 1102(b), titled “Event of Default; Cease to Act.” Under proposed Rule 1102(b), OCC proposes to relocate the text of current Interpretation and Policy .01 to new Rule 1102(b)(1) without substantive change.^[53] Proposed Rule 1102(b)(1) provides, in part, that each event described in Rule 1102(a) constitutes an event of “default” with respect to a Clearing Member. OCC believes this proposed change is consistent with the proposed reorganization of the rule text and that such change will promote clarity and ease of readability. Furthermore, proposed Rule 1102(b)(2) reorganizes existing rule text and makes additional conforming changes so that Rule 1102(b)(2) provides, in part, that OCC shall cease to act for a suspended Clearing Member except as specified in this Chapter.

Lastly, OCC proposes to adopt Rule 1102(c), titled “Notice to the Corporation,” which relocates the existing rule text under 1102 to new Rule 1102(c).

OCC's changes to proposed Rule 1102(a) through 1102(c) also include other non-substantive, conforming changes that include formatting and grammatical modifications.

Chapter XII—Disciplinary Proceedings

Proposed Rule 1201

OCC proposes to update Rule 1201(a) to articulate certain specific examples to Clearing Members and the general public of events that may result in grounds for disciplinary proceedings at OCC. OCC's proposed changes also reorganize existing Rule 1201(a) to provide enhanced transparency and efficiency. OCC proposes to include new subsections two through five of Rule 1201(a) as examples of conduct that may embarrass the operations of OCC, as referenced in existing Rule 1201(a). OCC's proposed changes provide that such examples include but are not limited to: (i) the Clearing Member's failure to comply with a protective measure and failure to cure such failure to OCC's satisfaction within the cure period specified by OCC, (ii) the Clearing Member exhibits a pattern of providing late financial information or other information requested by OCC, (iii) the Clearing Member exhibits a pattern of providing OCC with false or misleading financial information such that, in the sole opinion of OCC, OCC can no longer fully assess or monitor the risk presented by the Clearing Member; or (iv) the Clearing Member or Key Person of the Clearing Member exhibits a pattern of regulatory or legal infraction such that, in the sole opinion of OCC, it creates a significant reputational risk for OCC. The purpose of including these specific examples of conduct that may lead OCC to censure, suspend, expel, fine or otherwise limit the activities, functions, or operations of the Clearing Member is to promote transparency with Clearing Members and to support a sound legal framework. OCC believes the proposed provisions will also foster accountability and promote clear communication with Clearing Members by articulating in OCC's Rules specific examples upon which OCC may rely to act. OCC believes the proposed modifications to Rule 1201(a) will strengthen its grounds for taking disciplinary action against a Clearing Member, improve its risk mitigation practices, and support its responsibility to promote financial stability and integrity to the marketplace. The examples provided in subsections one through five of proposed Rule 1201(a) ( printed page 57201) are not intended to be an exhaustive list of conduct that would violate OCC's By-Laws, Rules or procedures. Rather, OCC believes these referenced examples may be the most frequent violations, and therefore OCC believes it is appropriate to articulate such information.

OCC's proposed changes to Rule 1201(a) also reorganize the rule text to promote clarity and efficiency. OCC's proposed changes provide, in part, that OCC may censure, suspend, expel, “fine” or limit the activities, functions or operations of any Clearing Member for any violation of the By-Laws and Rules “or procedures of the Corporation.” OCC's proposed changes restructure the provision so that OCC's authority to fine a Clearing Member is more clearly described and is more consistent with the description of the other actions that OCC may take under Rule 1201(a). In reference to the provision that outlines OCC's ability to impose a disciplinary sanction on any Clearing Member for violation of OCC's By-Laws and Rules, OCC's proposed changes also encompass that such violation includes that of “other statutory rules of the Corporation” to align more closely with the text of the Exchange Act ^[54] and provide enhanced transparency to Clearing Members and the general public. The purpose of this change is to encompass a violation of OCC's statutory rules, as defined in OCC's By-Laws, rather than solely those rules memorialized in OCC's By-Laws and Rules. By reorganizing the introductory provision to include the reference to OCC's authority to fine a Clearing Member, OCC's proposed changes also eliminate the phrase that states “The Corporation may, in addition to or in lieu of such sanctions, impose a fine on any Clearing Member for any violation of the By-Laws or Rules or procedures of or its agreements with Corporation or the correspondent clearing corporation.” In addition, OCC's proposed changes reorganize the rule text so that subsection one under proposed Rule 1201(a) describes the example provided in existing Rule 1201(a) of a Clearing Member violation. Specifically, OCC's proposed changes adopt subsection one and provide, in part, that examples of conduct embarrassing the operations of OCC include, but are not limited to, the Clearing Member's failure to provide adequate personnel or facilities for its transactions with OCC or the correspondent clearing corporation. OCC's proposed changes to Rule 1201(a) also make other conforming, grammatical and non-substantive changes.

Finally, OCC's proposed changes eliminate the Interpretation and Policy .01 and adopt the same provision as Rule 1201(b) to promote clarity and consistency in Chapter XII. OCC believes it is more appropriate for the information in proposed Rule 1201(b) to be adopted as a separate rule under existing Rule 1201, rather than an interpretation to Rule 1201(a).

Proposed Rule 2212—Suspension of Clearing Member—Re-Matching in Suspension

OCC's existing Rule 2212 states that in the event a suspended Clearing Member has Matched-Book Positions, OCC will, upon notice to affected Clearing Members, close out the suspended Clearing Member's Matched-Book Positions to the greatest extent possible.^[55] To mitigate risk in this specific scenario, OCC proposes to incorporate a provision in proposed Rule 2212(c) which would require that all Clearing Members that are participants of the Stock Loan/Hedge program must register their existing Master Securities Loan Agreement (“MSLA”) relationship within OCC's clearing system.

Under OCC's existing Rule 2212,^[56] OCC already has the authority to rematch Stock Loan/Hedge positions in the event a defaulting member is borrowing shares from one Clearing Member and on-lending the same shares to another Clearing Member. OCC's rematching process gives priority to a pair of rematched Clearing Members who have registered with OCC an existing MSLA relationship. Once, and if, all registered MSLA relationships are exhausted in the rematching algorithm, OCC then rematches between a pair of Clearing Members who have not registered an existing MSLA relationship. Those pairings without an existing MSLA relationship recorded in OCC's clearing system are forced to promptly decide between executing a new MSLA (and conducting their processes to onboard a new counterparty) or closing out of the position under the current market conditions. The proposed revision to Rule 2212(c) would require Clearing Members to register their MSLAs with other OCC Clearing Members within OCC's clearing system, as opposed to the optional registration that exists currently, so that the rematching algorithm performs most optimally by pairing Clearing Members who already have existing relationships to mitigate these issues Clearing Members may face.

Lastly, throughout Rule 2212, OCC removed reference to “Hedge” Clearing Member as such term is no longer recognized as a defined term in OCC's Rules, pursuant to the Commission's prior approval.^[57]

2. Statutory Basis

OCC believes the proposed rule change is consistent with Section 17A of the Exchange Act ^[58] and the rules thereunder applicable to OCC, including Rule 17Ad-22(e)(18),^[59] Rule 17Ad-22(e)(2),^[60] and Rule 17Ad-22(e)(1) ^[61] thereunder.

Section 17A(b)(4)(B) of the Act ^[62] provides that a clearing agency may deny participation to, or condition the participation of, any person if such person does not meet such standards of financial responsibility, operational capability, experience, and competence as are prescribed by the rules of the clearing agency. Additionally, Section 17A(b)(4)(B) of the Act ^[63] also provides that a registered clearing agency may examine and verify the qualifications of an applicant to be a participant in accordance with procedures established by the rules of the clearing agency. As described in greater detail herein, OCC's proposed rule change primarily modifies Chapters II and III of its Rules to strengthen and expand upon its conditions to admission and membership requirements applicable to applicants and existing Clearing Members. OCC's proposed changes in Chapters II and III detail OCC's standards of financial responsibility, operational capability, experience, and competence applicable to applicants and Clearing Members. More specifically, OCC's proposed changes to Chapter II of its Rules address, in part: (i) enhanced membership eligibility standards in proposed Rule 201 by requiring applicants maintain a minimum operating history of one year, (ii) enhanced operational capability requirements by requiring applicants maintain a physical office facility in proposed Rule 204, unless OCC deems the use of a remote office facility does not present heightened risk to OCC, and (iii) expansion on basis for OCC's denial of membership in proposed Rule 204. Additionally, OCC's proposed changes to Chapter III of its Rules address, in ( printed page 57202) part, a Clearing Member's: (i) financial responsibilities related to requiring risk-based minimum capital levels in proposed Rule 301, (ii) operational capability obligations related to maintaining a physical office facility in proposed Rule 302, unless OCC deems the use of a remote office facility does not present heightened risk to OCC, (iii) responsibilities on employment of risk management personnel in proposed Rule 303 and (iv) notification and reporting requirements in proposed Rule 306. OCC's proposed changes to Chapters II and III are intended to assist OCC in reviewing, examining, verifying and ultimately approving or disapproving applications for clearing membership. Under the proposed rule change, OCC retains its authority to suspend, deny or otherwise condition the participation of any applicant or Clearing Member that does not meet the applicable membership standards. Therefore, OCC believes that the proposed rule change promotes the purposes of Section 17A(b)(4)(B) of the Act.^[64]

Section 17A(b)(3)(F) of the Act ^[65] requires, among other things, that the rules of a clearing agency be designed, in part, to promote the prompt and accurate clearance and settlement of securities transactions and to assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible. OCC believes its proposed changes to Chapters II and III are consistent with Section 17A(b)(3)(F) of the Act ^[66] as it relates to confidential treatment of non-public information and the obligations applicable to OCC and its participants. Proposed Rules 203(f) and 306(b) establish a standard relating to OCC's obligation to maintain the confidentiality of information it collects from participants to assess each participant's compliance with OCC's membership requirements. OCC believes the proposed change establishes a uniform standard that will help OCC meet its obligations and will also help each participant better understand OCC's obligations for maintaining the confidential information it shares with OCC. OCC believes this will better facilitate the sharing of such information and improve OCC's ability to evaluate its participants' eligibility to access OCC's clearing and settlement services. Additionally, proposed Rules 203(f) and 207(d) establish a standard relating to an applicant or Clearing Member's obligation to maintain OCC Confidential Information in confidence. By establishing uniform participant confidentiality requirements, OCC believes this will help each participant better understand its rights and obligations for maintaining the confidential information which will help to promote participant compliance. Therefore, OCC believes the proposed changes to establish OCC and participant confidentiality obligations are consistent with the prompt and accurate clearing and settlement of securities specified in Section 17A(b)(3)(F) of the Act.^[67]

OCC believes the proposed rule change is consistent with Section 17A(b)(5)(B) of the Act, which provides, in part, that in any proceeding by a registered clearing agency to determine whether a person shall be denied participation with respect to access to services offered by the clearing agency, the clearing agency must notify such person of, and give him an opportunity to be heard upon, the specific grounds for denial or prohibition or limitation under consideration and keep a record.^[68] Furthermore, Section 17A(b)(5)(B) of the Act provides, in part, that determination to deny participation must be supported by a statement setting forth the specific grounds on which the denial or prohibition or limitation is based.^[69] OCC believes the denial of a Clearing Member following reapplication, as described in proposed Rule 309(c), is consistent with Section 17A(b)(5)(B) of the Act. Proposed Rule 309(c) provides that any decision to deny clearing membership following reapplication will be made pursuant to Rule 203. The admission procedures described in Rule 203 already provide for the requirements outlined in Section 17A(b)(5)(B) of the Act, specifically in proposed Rules 203(b)(3) and (4). In the event the Risk Committee, or its designated delegates or agents, deny an application or reapplication for clearing membership, proposed Rule 203(b)(3) states that the Risk Committee must first furnish the applicant with a written statement of its proposed recommendation and the specific grounds therefore, and afford the applicant an opportunity to be heard and to present evidence on its own behalf. Furthermore, proposed Rules 203(b)(4) through (b)(6) codifies the specific processes that OCC would undertake in hearings before the Risk Committee for appeals of certain protective measures, or in hearings on denials of Clearing Member applications or reapplications. OCC believes this detailed process outlined in proposed Rule 203(b)(4) through (b)6) will promote greater transparency for Clearing Members and applicants with respect to denial of participation and the procedures afforded to them. As such, OCC believes proposed Rule 203 aligns with the requirements in Section 17A(b)(5)(B) of the Act. Furthermore, proposed Rule 203(b)(8) mirrors existing Interpretation and Policy .01 to Rule 1201 ( i.e., proposed Rule 1201(b)), which provides the same with respect to a suspension or expulsion following disciplinary proceedings in Chapter XII. Because OCC's proposed Rule 309(c) provision to deny a Clearing Member following reapplication will be made pursuant to Rule 203, OCC believes proposed Rule 309(c) is consistent with Section 17A(b)(5)(B) of the Act.

OCC believes the proposed rule change is also consistent with Section 17A(b)(3)(H) of the Act ^[70] and Section 17A(b)(5) of the Act.^[71] Section 17A(b)(3)(H) of the Act requires, in part, that the rules of a clearing agency, in general, provide a fair procedure with respect to denial of participation to any person seeking participation therein.^[72] Section 17A(b)(3)(H) of the Act also requires that the clearing agency's rules are in accordance with Section 17A(b)(5) of the Act, which outlines the procedures to be followed by a clearing agency in disciplining participants.^[73] The proposed rule change seeks to expand certain delegation of authority from the Risk Committee to the Risk Committee's designated delegates or agents in determining to approve or deny an applicant. OCC is not seeking to change its current appellate process for applicants that have been denied membership. In addition, OCC is not seeking to change the process for disciplining participants. Rather, OCC seeks to expand certain delegation of authority from the Risk Committee to the Risk Committee's designated delegates or agents in determining the approval or denial of an applicant. Specifically, proposed Rule 203(b) expands authority so that the Risk Committee, or its designated delegates or agents, must determine whether to approve or deny applications for clearing membership. If an applicant is denied membership, OCC's current practices under existing Rule 203(a) provides, in part, that the applicant, if denied by the Risk Committee, is given ( printed page 57203) a written statement with the specific grounds for denial, and the applicant has the opportunity to be heard by the Risk Committee and to present evidence on its own behalf.^[74] OCC is not seeking to change this process. If an applicant is denied membership by the Risk Committee's designated delegates or agents, as proposed Rule 203(b) authorizes the Risk Committee's designated delegates or agents to do so, the applicant would still be given the opportunity to be heard by the Risk Committee. OCC believes its current process provides for a fair procedure with respect to denial of participation. Because OCC is not seeking to change its current appellate process for applicants denied membership, OCC believes its proposed changes related to delegated authority process under this proposed rule change are consistent with Section 17A(b)(3)(H) of the Act and Section 17A(b)(5) of the Act. OCC believes the proposed rule change is also consistent with proceedings under Section 17A(b)(5)(B) of the Act,^[75] which requires, in part, that “in any proceeding by a registered clearing agency to determine whether a person shall be denied participation or prohibited or limited with respect to access to services offered by the clearing agency, the clearing agency shall notify such person of, and give him an opportunity to be heard upon, the specific grounds for denial.” OCC believes that proposed Rule 1201(a) is consistent with Section 17A(b)(5)(B) of the Act ^[76] because proposed Rule 1201(a) articulates explicit examples that may result in grounds for OCC's denial, prohibition or limitation on a Clearing Member's access under OCC's disciplinary proceedings. Proposed Rule 1201(a) describes specific examples, but does not provide an exhaustive list, of potential violations of OCC's By-Laws and Rules, which promotes transparency and specificity to Clearing Members and the general public on possible grounds for such disciplinary proceedings.

OCC believes the proposed rule change is consistent with Rule 17Ad-22(e)(18).^[77] Rule 17Ad-22(e)(18) ^[78] requires a clearing agency, in part, to “[e]stablish objective, risk-based, and publicly disclosed criteria for participation” that “permit fair and open access” and “require participants to have sufficient financial resources and robust operational capacity to meet obligations arising from participation in the clearing agency.” The primary purpose of the proposed rule change is to improve OCC's existing financial and operational membership standards and strengthen its reporting requirements to continue to permit fair and open access and to further mitigate counterparty credit risks introduced by Clearing Members. The proposed changes establish requirements to help ensure that applicants and Clearing Members maintain sufficient financial resources and robust operational capacity to meet obligations arising from participation at OCC. With respect to requiring that participants have sufficient financial resources, the proposed rule change establishes in proposed Rule 301 the ability for OCC to, in its sole discretion, implement risk-based minimum capital levels for Clearing Members that are higher than those already specified in OCC's Rules. As described in further detail above, the bases and processes for applying risk-based minimum capital levels would be detailed in the Procedure and such information would be publicly disclosed in OCC's pre-qualification form. The proposed rule change also clarifies and expands upon OCC's existing authority to deny an applicant for clearing membership in proposed Rule 204(e), including but not limited to, if such applicant poses elevated risk due to the amount or degree of financial leverage maintained by the applicant. With respect to requiring that participants maintain robust operational capability, the proposed rule change establishes eligibility criteria for Clearing Members to maintain a one-year minimum operating history in proposed Rule 201. The proposed rule change also establishes new provisions and modifies existing provisions set forth in proposed Rules 204(g), 302 and 303 as it relates to OCC's operational capability, experience, and competence standards and related resources for applicants and Clearing Members. This includes, among other things, the requirement for participants to maintain a minimum total number of personnel and risk management personnel, and the requirement to maintain physical office facilities utilized to conduct business with OCC, unless OCC deems such remote office facility does not pose heightened risk to OCC. OCC believes that an applicant or Clearing Member's use of a fully remote office model, as opposed to a hybrid model, may introduce communication challenges for OCC and the applicant or Clearing Member's staff as well as pose operational risk to OCC that could be mitigated through an in-person office visit or on-site exam. Therefore, OCC believes it is necessary to implement requirements surrounding physical office facilities to promote operational resiliency. OCC believes these proposed changes promote the purposes of Rule 17Ad-22(e)(18).^[79]

Rule 17Ad-22(e)(18) ^[80] also requires a clearing agency to monitor for compliance with its participation requirements on an ongoing basis. OCC believes the proposed rule change is consistent with this requirement because it enhances and otherwise clarifies OCC's ongoing monitoring of Clearing Member's participation requirements by strengthening its early warning notice and periodic reporting requirements for Clearing Members under proposed Rules 306A and 306B. Proposed Rule 309 strengthens OCC's ongoing monitoring of Clearing Members by providing OCC with the ability to require Clearing Members to reapply for membership or to apply protective measures necessary to address risks arising from any material change impacting the financial or operational condition of the Clearing Member. The proposed rule change expands upon OCC's reporting requirements for Clearing Members, including the obligation for Clearing Members, upon OCC's request, to provide OCC with their parent or affiliate's audited financial statements in proposed Rule 306B. Furthermore, the proposed rule change adopts additional protective measures under proposed Rule 307C, including but not limited to, restrictions on a Clearing Member related to the departure of a Key Person from their management team, and requirements to obtain an independent assessment of the Clearing Member or applicant's financial projections or operational capabilities. The proposed rule change subjects Clearing Members to each of these financial and operational membership standards in a non-discriminatory manner under OCC's Rules. As such, OCC believes that these enhanced financial, reporting, and operational membership standards promote the requirements of Rule 17Ad-22(e)(18).^[81]

OCC believes the proposed rule change is also consistent with Rule 17Ad-22(e)(2).^[82] Rule 17Ad-22(e)(2) requires, among other things, that OCC establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for ( printed page 57204) governance arrangements that are clear and transparent and specify clear and direct lines of responsibility.^[83] Proposed Rules 203 and 204 provide, in part, changes to expand certain delegation of authority from the Risk Committee to the Risk Committee's designated delegates or agents in the approval or denial of applications for clearing membership and business expansions requests at OCC. OCC believes the proposed rule change outlines in a clear, direct, and transparent manner the lines of responsibility in the approval or denial of membership applicants and business expansions. Proposed Rules 203 and 204 describe that new membership decisions and business expansion requests are not required to be presented to the Risk Committee at the regularly scheduled Risk Committee meetings. By vesting the authority to approve or deny certain applicants for clearing membership to the Risk Committee's designated delegates or agents, as described in proposed Rule 203(b), OCC will not subject all applicants for clearing membership to the regular meeting cycle of the Board or Risk Committee. This, in turn, will streamline the decision-making process by eliminating the need to wait until the next quarterly scheduled Risk Committee meeting to determine whether such applicant or business expansion is approved. Similarly, by modifying Rule 203 to provide that business expansion requests may be reviewed and approved or disapproved by the Risk Committee, or its designated delegates or agents, pursuant to the procedures of OCC, OCC believes this sets forth clear governance arrangements while also streamlining the decision process so that not every business expansion request will be required to be presented to the Risk Committee. As such, OCC believes the proposed change promotes the requirements of Rule 17Ad-22(e)(2).^[84]

OCC believes the proposed rule change is also consistent with Rule 17Ad-22(e)(1).^[85] Rule 17Ad-22(e)(1) requires, in part, that OCC establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for a well-founded, clear, transparent, and enforceable legal basis for each aspect of its activities in all relevant jurisdictions.^[86] As described in more detail above, the primary reason for the proposed rule change is to enhance OCC's onboarding requirements and surveillance of existing Clearing Members to reduce counterparty credit risk introduced by Clearing Members. In addition, the proposed rule change also makes certain organizational, administrative, and clarifying changes to its Rules to provide greater clarity and transparency, and to promote efficient administration of the Rules. For example, proposed Rule 204(e) articulates examples under OCC's existing authority to deny an applicant for membership if such applicant poses elevated risk to OCC. OCC believes that articulating examples in its Rules provides enhanced transparency to applicants and the general public. As such, OCC believes the proposed rule change promotes the purposes of Rule 17Ad-22(e)(1).^[87]

(B) Clearing Agency's Statement on Burden on Competition

Section 17A(b)(3)(I) of the Act ^[88] 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 that the proposed rule changes would impact or impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. The proposed rule change is generally intended to improve upon OCC's existing financial and operational membership standards to mitigate counterparty credit risk introduced by Clearing Members. With the exception of OCC's proposed change to implement risk-based minimum capital levels, OCC believes the proposed rule change imposes the enhanced financial and operational membership standards uniformly on all applicants and Clearing Members within a particular category of institution, and whenever possible, uniformly across all Clearing Members irrespective of category.

OCC's proposed Rule 301 provides, in part, that OCC may establish and impose risk-based minimum capital levels on Clearing Members to further mitigate risk to OCC. OCC acknowledges that this proposed change establishing the ability for OCC to implement risk-based minimum capital levels, higher than those already specified in its Rules, may present a burden on competition among certain Clearing Members. Specifically, smaller Clearing Members that maintain a smaller level of capital may be impacted more than larger Clearing Members that maintain larger capital pools. While OCC understands that establishing risk-based minimum capital levels may impact certain Clearing Members over others, OCC believes the establishment of risk-based minimum capital levels is necessary and appropriate in furtherance of the purposes of the Act. OCC's intention in establishing risk-based minimum capital levels is to strengthen its risk management practices. As the central counterparty for all listed options in the U.S., OCC has an obligation to address and manage risk, including counterparty credit risk introduced by its Clearing Members. OCC believes it is necessary to maintain the ability to impose risk-based minimum capital levels so that OCC can prevent financial risk from impacting other Clearing Members. If, for example, a Clearing Member presents, in OCC's discretion, a highly leveraged profile, short operating history, an inadequate liquidity profile, a business strategy that is high risk, weak profitability, weak internal risk controls, or insufficient personnel, OCC believes that such Clearing Member may present greater credit and liquidity risks to OCC that may impact OCC's ability to comply with the requirements of the Act applicable to clearing agencies. Therefore, OCC believes the burden imposed on certain Clearing Members that may be impacted by risk-based minimum capital levels is outweighed by the critical responsibility that OCC maintains in managing risk to OCC, its Clearing Members, and the U.S. listed options market.

OCC believes the proposed rule change would continue to provide for objective and risk-based standards that balance fair and open access with prudent qualification standards while ensuring its membership base is appropriately capitalized to support the prompt and accurate clearance and settlement of securities transactions and derivative agreements, contracts and transactions cleared by OCC, the safeguarding of securities and funds in the custody or control of OCC or for which it is responsible, and the protection of investors and the public interest in accordance with Section 17A(b)(3)(F) of the Act.^[89]

For the foregoing reasons, OCC believes that the proposed rule change is in the public interest, would be consistent with the requirements of the Act applicable to clearing agencies, and would not impact or impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Act. ( printed page 57205)

(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 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 such proposed rule change, or

(B) institute proceedings to determine whether the proposed rule change should be disapproved.

The proposal shall not take effect until all regulatory actions required with respect to the proposal are completed.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment form (www.sec.gov/​rules/​sro.shtml); or
• Send an email torule-comments@sec.gov. Please include file number SR-OCC-2026-009 on the subject line.

Paper Comments

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

All submissions should refer to file number SR-OCC-2026-009. 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 ( www.sec.gov/​rules/​sro.shtml). Copies of such filing will be available for inspection and copying at the principal office of OCC and on OCC's website at www.theocc.com/​Company-Information/​Documents-and-Archives/​By-Laws-and-Rules. Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright protection. All submissions should refer to File Number SR-OCC-2026-009 and should be submitted on or before September 29, 2026.