Notice2021-28327
Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Update The Options Clearing Corporation's Operational Loss Fee Pursuant to Its Capital Management Policy
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Published
December 29, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 247 (Wednesday, December 29, 2021)</title>
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[Federal Register Volume 86, Number 247 (Wednesday, December 29, 2021)]
[Notices]
[Pages 74153-74156]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-28327]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93867; File No. SR-OCC-2021-013]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Update The Options Clearing Corporation's Operational Loss Fee Pursuant
to Its Capital Management Policy
December 23, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on December 17, 2021, The Options Clearing
Corporation (``OCC'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared primarily by
OCC. OCC filed the proposed rule change pursuant to Section
19(b)(3)(A)(ii) \3\ of the Act and Rule 19b-4(f)(2) \4\ thereunder so
that the proposal was effective upon filing with the Commission. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(ii).
\4\ 17 CFR 240.19b-4(f)(2).
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change would revise OCC's schedule of fees,
effective January 1, 2022, to update the maximum contingent Operational
Loss Fee listed in OCC's schedule of fees in accordance with OCC's
Capital Management Policy. Proposed changes to OCC's schedule of fees
are included as Exhibit 5 to File Number SR-OCC-2021-013. Material
proposed to be added to OCC's schedule of fees as currently in effect
is underlined and material proposed to be deleted is marked in
strikethrough text. All capitalized terms not defined herein have the
same meaning as set forth in the OCC By-Laws and Rules.\5\
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\5\ OCC's By-Laws and Rules can be found on OCC's public
website: <a href="https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules">https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules</a>.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, Uthe 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
(1) Purpose
The purpose of this proposed rule change is to revise OCC's
schedule of fees, effective January 1, 2022, to update the maximum
aggregate Operational Loss Fee that OCC would charge Clearing Members
in equal shares in the unlikely event that OCC's shareholders'' equity
(``Equity'') falls below certain thresholds defined in OCC's Capital
Management Policy. The proposed fee change is designed to enable OCC to
replenish capital to comply with Rule 17Ad-22(e)(15) under the Exchange
Act, which requires OCC, in pertinent part, to ``hold[ ] liquid net
assets funded by equity to the greater of either (x) six months . . .
current operating expenses, or (y) the amount determined by the board
of directors to be sufficient to ensure a recovery or orderly wind-down
of critical operations and service'' \6\ and ``[m]aintain[ ] a viable
plan, approved by the board of directors and updated at least annually,
for raising additional equity should its equity fall close to or below
the amount required.'' \7\
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\6\ See 17 CFR 240.17Ad-22(e)(15)(ii).
\7\ See 17 CFR 240.17Ad-22(e)(15)(iii).
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OCC's Capital Management Policy includes OCC's replenishment
plan.\8\ Pursuant to the Capital Management Policy, OCC would charge an
Operational Loss Fee in equal shares to Clearing Members to raise
additional capital should OCC's Equity, less the Minimum Corporate
Contribution,\9\ fall
[[Page 74154]]
below certain defined thresholds relative to OCC's Target Capital
Requirement (i.e. , a ``Trigger Event''), after first applying the
unvested balance held in respect of OCC's Executive Deferred
Compensation Program.\10\ Based on the Board-approved Target Capital
Requirement for 2022 of $268 million, a Trigger Event would occur if
OCC's Equity less the Minimum Corporate Contribution falls below $241.2
million at any time or below $268 million for a period of 90
consecutive calendar days.
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\8\ See Exchange Act Release No. 88029 (Jan. 24, 2020), 85 FR
5500 (Jan. 30, 2020) (File No. SR-OCC-2019-007) (``Order Approving
OCC's Capital Management Policy'').
\9\ The Minimum Corporate Contribution is defined in the Capital
Management Policy as the minimum level of OCC's own funds maintained
exclusively to cover credit losses or liquidity shortfalls, the
level of which the OCC's Board of Directors (``Board'') shall
determine from time to time. See Exchange Act Release No. 92038 (May
27, 2021), 86 FR 29861, 29862 (June 3, 2021) (File No. SR-OCC-2021-
003). For 2022, the Board has approved a Minimum Corporate
Contribution of $59 million. When combined with the unvested funds
held in respect of OCC's Executive Deferred Compensation Plan
contributed after January 1, 2020 (the ``EDCP Unvested Balance,'' as
defined in OCC's Rules), OCC's persistent minimum level of skin-in-
the-game for 2022 would be $67 million, or 25% of OCC's Target
Capital Requirement. In addition to this minimum level, OCC would
also contribute liquid net assets funded by equity greater than 110%
of the Target Capital Requirement. See OCC Rule 1006(e).
\10\ See Exchange Act Release No. 91199 (Feb. 24, 2021), 86 FR
12237, 12241 (Mar. 2, 2021) (File No. SR-OCC-2021-003) (amending
OCC's replenishment plan, including the measurement for a Trigger
Event, to account for the establishment of OCC's persistent minimum
skin-in-the-game).
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In the unlikely event those thresholds are breached, OCC would
charge an Operational Loss Fee in an amount to raise Equity to 110% of
OCC's Target Capital Requirement, up to the maximum Operational Loss
Fee identified in OCC's schedule of fees less the amount of any
Operational Loss Fees previously charged and not refunded.\11\ OCC
calculates the maximum aggregate Operational Loss Fee based on the
amount determined by the Board to be sufficient for a recovery or
orderly wind-down of critical operations and services (``RWD
Amount''),\12\ which is determined based on the assumptions in OCC's
Recovery and Orderly Wind-Down Plan (``RWD Plan'').\13\ In order to
account for OCC's tax liability for retaining the Operational Loss Fee
as earnings, OCC may apply a tax gross-up to the RWD Amount (``Adjusted
RWD Amount'') depending on whether the operational loss that caused
OCC's Equity to fall below the Trigger Event thresholds is tax
deductible.\14\
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\11\ See Order Approving OCC's Capital Management Policy, 85 FR
at 5503.
\12\ Id.
\13\ The RWD Plan states OCC's basic assumptions concerning the
resolution process, including assumptions about the duration of the
resolution process, the cost of the resolution process, OCC's
capitalization through the resolution process, the maintenance of
Critical Services and Critical Support Functions, as defined by the
RWD Plan, and the retention of personnel and contractual
relationships. See Exchange Act Release No. 83918 (Aug. 23, 2018),
83 FR 44091, 44094 (Aug. 29, 2018) (File No. SR-OCC-2017-021).
\14\ See Order Approving OCC's Capital Management Policy, 85 FR
at 5503.
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The RWD Amount and, in turn, the Adjusted RWD Amount are determined
annually based on OCC's corporate budget, the assumptions articulated
in the RWD Plan, and OCC's projected effective tax rate.\15\ The
current Operational Loss Fee listed in OCC's schedule of fees is the
Adjusted RWD Amount calculated based on OCC's 2021 corporate budget.
Budgeted operating expenses in 2022 are higher than the 2021 budgeted
operating expenses. This proposed rule change would revise the maximum
Operational Loss Fee to reflect the Adjusted RWD Amount based on OCC's
2022 budget,\16\ as follows:
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\15\ See Order Approving OCC's Capital Management Policy, 85 FR
at 5501 n.20, 5503.
\16\ Confidential data and analysis evidencing the calculation
of the Adjusted RWD Amount based on OCC's 2022 corporate budget is
included in Exhibit 3 to File Number SR-OCC-2021-013.
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Current fee schedule Proposed fee schedule
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$143,066,667.00 less the aggregate $157,000,000 less the aggregate
amount of Operational Loss Fees amount of Operational Loss
previously charged and not refunded as Fees previously charged and
of the date calculated, divided by the not refunded as of the date
number of Clearing Members at the time calculated, divided by the
charge. number of Clearing Members at
the time charge.
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Since the allocation of the Operational Loss Fee is a function of
the number of Clearing Members at the time of the charge, the maximum
Operational Loss Fee per Clearing Member is subject to fluctuation
during the course of the year. However, if the proposed Operational
Loss Fee were charged to 107 Clearing Members, the number of Clearing
Members as of the date of this filing, the maximum Operational Loss Fee
per Clearing Member would be $1,467,290.
OCC would also update the schedule of fees to reflect the levels of
Equity at which OCC would charge the Operational Loss Fee according to
the thresholds defined in the Capital Management Policy, as well as the
level of Equity at which OCC would limit the Operational Loss Fee
charged, based on OCC's current Target Capital Requirement.\17\
Consistent with OCC's recently revised approach to its persistent
minimum skin-in-the-game, OCC would conform the threshold in the
schedule of fees to reflect that consistent with OCC's Capital
Management Policy, the Trigger Event threshold is measured against
Equity less the Minimum Corporate Contribution.
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\17\ OCC does not propose any change to the thresholds and
limits defined in the Capital Management Policy. This proposed
change merely conforms the disclosure in OCC's schedule of fees to
the current amounts based on the Board-approved Target Capital
Requirement of $268 million.
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OCC proposes to make the fee change effective January 1, 2022,
because the Board approved the Adjusted RWD Amount upon which the
Operational Loss Fee is based for 2022 and the time required to self-
certify the proposed change with the Commodity Futures Trading
Commission (``CFTC'').
(2) Statutory Basis
OCC believes the proposed rule change is consistent with the Act
\18\ and the rules and regulations thereunder. In particular, OCC
believes that the proposed fee change is also consistent with Section
17A(b)(3)(D) of the Act,\19\ which requires that the rules of a
clearing agency provide for the equitable allocation of reasonable
dues, fees, and other charges among its participants. OCC believes that
the proposed fee change is reasonable because it is designed to
replenish OCC's Equity in the form of liquid net assets in the event
that OCC's Equity, less the Minimum Corporate Contribution reserved as
the primary portion of OCC's minimum persistent skin-in-the-game, falls
close to or below its Target Capital Requirement so that OCC can
continue to meet its obligations as a systemically important financial
market utility (``SIFMU'') to Clearing Members and the general public
should an operational losses materialize (including through a recovery
or orderly wind-down of
[[Page 74155]]
critical operations and services) and thereby facilitate compliance
with Rule 17Ad-22(e)(15)(iii).\20\ The maximum Operational Loss Fee is
sized to ensure that OCC maintains sufficient liquid net assets to
support its RWD Plan and imposes a contingent obligation on Clearing
Members that is approximately the same amount as a Clearing Member's
contingent obligation for Clearing Fund assessments for a Clearing
Member operating at the minimum Clearing Fund deposit.\21\ Therefore,
OCC believes the proposed maximum Operational Loss Fee sized to OCC's
Adjusted RWD Amount is reasonable.
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18\\ 15 U.S.C. 78a et seq.
\19\ 15 U.S.C. 78q-1(b)(3)(D).
\20\ 17 CFR 240.17Ad-22(e)(15)(iii).
\21\ A Clearing Member operating at the minimum Clearing Fund
deposit ($500,000) could be assessed up to an additional $1 million
(the minimum deposit, assessed up to two times), for a total
contingent obligation of $1.5 million. See OCC Rule 1006(h).
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OCC also believes that the proposed Operational Loss Fee would
result in an equitable allocation of fees among its participants
because it would be equally applicable to all Clearing Members. As the
Commission has recognized, OCC's designation as a SIFMU and its role as
the sole covered clearing agency for all listed options contracts in
the U.S. makes it an integral part of the national system for clearance
and settlement, through which ``Clearing Members, their customers,
investors, and the markets as a whole derive significant benefit . . .
regardless of their specific utilization of that system.'' \22\ Neither
the SEC nor OCC has observed any correlation between measures of
Clearing Member utilization or OCC's benefit to Clearing Members \23\
and its risk of operational loss.\24\ As a result, OCC believes that
the proposed change to OCC's fee schedule provides for the equitable
allocation of reasonable fees in accordance with Section 17A(b)(3)(D)
of the Act.\25\
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\22\ See Order Approving OCC's Capital Management Policy, 85 FR
at 5506.
\23\ Id. (``The Commission is not aware of evidence
demonstrating that those benefits are tied directly or positively
correlated to an individual Clearing Member's rate of utilization of
OCC's clearance and settlement services.'')
\24\ Id. (rejecting an objection to the equal allocation of the
proposed Operational Loss Fee based on the SEC's regulatory
experience and OCC's analyses of Clearing Member utilization (e.g.,
contract volume) or credit risk (e.g., Clearing Fund size) and the
various operational and general business risks that could trigger an
Operational Loss Fee). To date, OCC has observed no correlation
between Clearing Member utilization or credit risk and OCC's
potential risk of operational loss. See Confidential Exhibit 3.
\25\ 15 U.S.C. 78q-1(b)(3)(D).
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In addition, OCC believes that the proposed rule change is
consistent with Rule 17Ad-22(e)(15)(iii), which requires that OCC
establish, implement, maintain and enforce written policies and
procedures reasonably designed to identify, monitor, and manage OCC's
general business risk, including by maintaining a viable plan, approved
by the Board and updated at least annually, for raising additional
equity should its equity fall close to or below the amount required
under Rule 17Ad-22(e)(15)(ii).\26\ While Rule 17Ad-22(e)(15)(iii) does
not by its terms specify the amount of additional equity a clearing
agency's plan for replenishment capital must be designed to raise, the
SEC's adopting release states that ``a viable plan generally should
enable the covered clearing agency to hold sufficient liquid net assets
to achieve recovery or orderly wind-down.'' \27\ OCC sets the maximum
Operational Loss Fee at an amount sufficient to raise, on a post-tax
basis, the amount determined annually by the Board to be sufficient to
ensure recovery or orderly wind-down pursuant to the RWD Plan.\28\
Therefore, OCC believes the proposed change to OCC's schedule of fees
is consistent with Rule 17Ad-22(e)(15)(iii) and the guidance provided
by the SEC in the adopting release.
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\26\ 17 CFR 240.17Ad-22(e)(15)(iii).
\27\ Standards for Covered Clearing Agencies, Exchange Act
Release No. 78961 (Sept. 28, 2016), 81 FR 70786, 70836 (Oct. 13,
2016) (File No. S7-03-14).
\28\ See Order Approving OCC's Capital Management Policy, 85 FR
at 5510 (``The Operational Loss Fee would be sized to the Adjusted
RWD Amount, and therefore would be designed to provide OCC with at
least enough capital either to continue as a going concern or to
wind-down in an orderly fashion.'')
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OCC also believes that the proposed fee change is consistent with
Section 19(g)(1) of the Act,\29\ which, among other things, requires
every self-regulatory organization to comply with its own rules. OCC
filed its Capital Management Policy as a ``proposed rule change''
within the meaning of Section 19(b) of the Act,\30\ and Rule 19b-4
under the Act.\31\ The Capital Management Policy specifies that the
maximum Operational Loss Fee shall be the Adjusted RWD Amount.\32\
Because the Adjusted RWD Amount will change annually based, in part, on
OCC's corporate budget, fee filings are necessary to ensure that the
maximum Operational Loss Fee in OCC's schedule of fees remains
consistent with the amount identified in the Capital Management Policy.
In addition, the amounts associated with the thresholds at which OCC
would charge the Operational Loss Fee and the limit to the amount would
change in accordance with the Capital Management Policy are determined
based upon the level at which the Board sets OCC's Target Capital
Requirement. Consequently, OCC seeks to amend the amounts identified in
the schedule of fees to reflect OCC's current Target Capital
Requirement and OCC's current Capital Management Policy, as recently
amended to reflect the establishment of the Minimum Corporate
Contribution.\33\ Therefore, OCC believes that the proposed change to
OCC's fee schedule is consistent with Section 19(g)(1) of the Act.
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\29\ 15 U.S.C. 78s(g)(1).
\30\ 15 U.S.C. 78s(b).
\31\ 17 CFR 240.19b-4.
\32\ Order Approving OCC's Capital Management Policy, 85 FR at
5503.
\33\ See supra notes 9 and 10, and accompanying text.
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(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \34\ 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 change would have any impact or impose a
burden on competition. Although the proposed Operational Loss Fee
affects Clearing Members, their customers, and the markets that OCC
serves, OCC believes that the proposed increase in the Operational Loss
Fee would not disadvantage or favor any particular user of OCC's
services in relationship to another user because the proposed
Operational Loss Fee would apply equally to all Clearing Members. In
addition, OCC does not believe that the proposed Operational Loss Fee
imposes a significant burden on smaller firms because the maximum
Operational Loss Fee imposes a contingent obligation on Clearing
Members that is approximately the same amount as a Clearing Member's
contingent obligation for Clearing Fund assessments for a Clearing
Member operating at the minimum Clearing Fund deposit.\35\ Accordingly,
OCC does not believe that the proposed rule change would have any
impact or impose a burden on competition.
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\34\ 15 U.S.C. 78q-1(b)(3)(I).
\35\ See note 21, supra.
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments on the proposed rule change were not and are not
intended to be solicited with respect to the proposed rule change and
none have been received.
[[Page 74156]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Pursuant to Section 19(b)(3)(A)(ii) \36\ of the Act, and Rule 19b-
4(f)(2) thereunder,\37\ the proposed rule change is filed for immediate
effectiveness as it constitutes a change in fees charged to OCC
Clearing Members. At any time within 60 days of the filing of the
proposed rule change, the Commission summarily may temporarily suspend
such rule change if it appears to the Commission that such action is
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Act. The
proposal shall not take effect until all regulatory actions required
with respect to the proposal are completed.\38\
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\36\ 15 U.S.C. 78s(b)(3)(A)(ii).
\37\ 17 CFR 240.19b-4(f)(2).
\38\ Notwithstanding its immediate effectiveness, implementation
of this rule change will be delayed until this change is deemed
certified under CFTC Regulation 40.6.
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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
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#4735322b226a24282a2a222933340734222469202831"><span class="__cf_email__" data-cfemail="394b4c555c145a5654545c574d4a794a5c5a175e564f">[email protected]</span></a>. Please include
File Number SR-OCC-2021-013 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Vanessa Countryman,
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2021-013. 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 (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of OCC and on OCC's
website at <a href="https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules">https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules</a>.
All comments received will be posted without change. Persons
submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly.
All submissions should refer to File Number SR-OCC-2021-013 and
should be submitted on or before January 19, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
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\39\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2021-28327 Filed 12-28-21; 8:45 am]
BILLING CODE 8011-01-P
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