Notice2022-00378
Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change Concerning the Options Clearing Corporation's Cash and Investment Management
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 12, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 8 (Wednesday, January 12, 2022)</title>
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[Federal Register Volume 87, Number 8 (Wednesday, January 12, 2022)]
[Notices]
[Pages 1819-1825]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-00378]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93916; File No. SR-OCC-2021-014]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change Concerning the Options
Clearing Corporation's Cash and Investment Management
January 6, 2022.
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 23, 2021, the Options Clearing
Corporation (``OCC'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by OCC. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
This proposed rule change would (1) formalize OCC's policy for
safeguarding cash and related investments and (2) amend OCC's Rules
governing use of the Clearing Fund in the event of the failure of a
bank to meet a settlement obligation with OCC to ensure such access
extends to the failure of an investment counterparty with whom OCC has
invested cash deposited by Clearing Members in respect of margin or
Clearing Fund requirements under the conditions identified in OCC Rule
1006(c) and (f), regardless of whether the investment counterparty is a
bank. The Cash and Investment Management Policy is included in
confidential Exhibit 5a of File Number SR-OCC-2021-014. Proposed
amendments to OCC's Rules are included in Exhibit 5b of File Number SR-
OCC-2021-014. 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\
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\3\ OCC's By-Laws and Rules can be found on OCC's 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, the Proposed Rule Change
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the
[[Page 1820]]
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
OCC is proposing to enhance its cash and investment management
practices by: (1) Formalizing OCC's policy for safeguarding cash and
related investments, and (2) amending OCC's Rules to ensure access to
the Clearing Fund if a non-bank investment counterparty fails to return
Clearing Member cash deposited in respect of margin or Clearing Fund
requirements under the conditions identified in OCC Rule 1006(c) and
(f).
Background
OCC's By-Laws and Rules govern the management and investment of
OCC's own funds and cash deposited by Clearing Members. With respect to
OCC's own funds (other than Clearing Fund deposits), Article IX,
Section 1 of OCC's By-Laws provides that funds in excess of the amount
needed as working capital may be invested by the Board in Government
securities or such other securities or financial instruments as the
Board or a Board-level committee may from time to time approve.\4\ With
respect to cash deposited by Clearing Members, OCC Rules 604(a) and
1002(c) provide that cash deposited in respect of a Clearing Member's
margin requirements or Clearing Fund contributions may from time to
time be partially or wholly invested by OCC for its account in
Government securities.\5\ OCC does not propose to amend these By-Laws
or Rules by this proposed rule change.
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\4\ See By-Law Art. IX, Sec. 1.
\5\ See OCC Rule 604(a); Rule 1006(c).
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OCC's investments historically have been limited to overnight
transactions under deliver-versus-payment (``DVP'') reverse repurchase
agreements. As collateral, the investment counterparty deliveries
Government securities equal to 102% of the cash invested at the time
the investment is made. Such investments reduce OCC's investment risks
by permitting quick liquidation with little adverse price effect and
controlling the movement of OCC's assets via a custodian bank. To
minimize counterparty risk, OCC restricts its potential counterparties
to financial institutions that meet certain standards of size, capital
adequacy, product offering and operational capacity.
In the event of a failure or disruption of an investment
counterparty that is a bank, OCC's Rules provide OCC with authority to
access the Clearing Fund to address liquidity shortfalls, including
shortfalls arising from the investment of Clearing Member cash in
Government securities. Specifically, OCC Rule 1006(f) authorizes OCC to
take possession of cash or securities deposited by Clearing Members in
respect of the Clearing Fund when OCC reasonably believes it necessary
to meet its liquidity needs for same-day settlement as a result of the
failure of any bank to achieve daily settlement with OCC.\6\ In the
extremely unlikely event that a bank investment counterparty failed to
return the cash versus return of the Government securities to unwind a
transaction under a reverse repurchase agreement--e.g., because of a
systems disruption, operational outage, or otherwise--OCC could
exercise authority under Rule 1006(f) to borrow from the Clearing Fund
to the extent required for OCC to meet its settlement obligations with
Clearing Members.\7\
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\6\ See OCC Rule 1006(f). As discussed, infra, this proposed
rule change would amend this clause to apply when OCC reasonably
believes it necessary to meet its liquidity needs for ``daily
settlement'' as a result of the failure of any bank ``to perform any
obligation to the Corporation when due.''
\7\ OCC amended its Rules in 2018 to extend access to the
Clearing Fund in the extraordinary event that OCC faces a liquidity
need in order to complete same-day settlement for reasons other than
a bank or clearing organization's bankruptcy, insolvency,
receivership, suspension of operations, or any similar event. See
Securities Exchange Act (``Exchange Act'') Release No. 82309 (Dec.
13, 2017), 82 FR 60262 (Dec. 19, 2017) (File No. SR-OCC-2017-017).
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In the unlikely event that any part of the borrowing under Rule
1006(f) is outstanding after 30 calendar days, or if OCC determines
that some or all of the amount borrowed constituted an actual loss, OCC
would charge the loss to the Clearing Fund.\8\ In the unlikely event
that OCC incurred an investment loss resulting from a bank's failure to
return the invested cash because of bankruptcy, insolvency,
receivership, suspension of operations or other similar event, OCC may,
at its discretion, charge the loss to the Clearing Fund.\9\ OCC may
also, at its discretion, apply skin-in-the-game to a loss resulting
from a borrowing or bank failure in the form of liquid net assets
funded by equity \10\ in excess of 110% of OCC's Target Capital
Requirement.\11\
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\8\ See OCC Rule 1006(c)(ii).
\9\ See OCC Rule 1006(c)(i).
\10\ OCC's Capital Management Policy defines ``liquid net assets
funded by equity'' to be the level of cash or cash equivalents, no
greater than OCC's shareholders' equity, less any approved
adjustments (e.g., agency-related liabilities such as Section 31
fees held by OCC and the Minimum Corporate Contribution). See
Exchange Act Release No. 91199 (Feb. 24, 2021), 86 FR 12237, 12241
(Mar. 2, 2021) (File No. SR-OCC-2021-003).
\11\ See OCC Rule 1006(e)(ii).
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Proposed Changes
Cash and Investment Management Policy
OCC proposes to file its Cash and Investment Management Policy (or
``Policy'') as a proposed rule of the clearing agency within the
meaning of Section 19(b)(1) of the Exchange Act \12\ and SEC Rule 19b-
4.\13\ The Policy would include statements of purpose, applicability
and scope, safeguarding standards for maintaining cash and related
investments to minimize credit and liquidity risk, and guidelines for
investing OCC Cash and Clearing Member Cash, as defined below.
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\12\ 15 U.S.C. 78s(b)(1).
\13\ 17 CFR 240.19b-4.
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Purpose, Applicability and Scope
The Policy would include statements of the Policy's purpose,
applicability, and scope. The purpose of the Policy would be to (1)
outline the safeguarding standards for cash and related investments
managed by OCC to minimize credit and liquidity risk, and (2) provide
guidelines for investments permitted by OCC's By-Laws and Rules. The
Policy principally would apply to OCC's Treasury department
(``Treasury''), which has responsibility for managing cash on behalf of
OCC. The Policy's scope would include the safeguarding standards and
investment activities specific to OCC's own cash (``OCC Cash'') and
cash from OCC's Clearing Members (``Clearing Member Cash'').
The Policy would define OCC Cash to include working capital related
to future operating costs, inclusive of financial resource held to meet
liquidity and resiliency requirements,\14\ proceeds from lines of
credit, if any, maintained to support OCC's working capital,\15\ the
[[Page 1821]]
Minimum Corporate Contribution,\16\ and investments made with OCC Cash.
The Policy would not apply to cash held in respect of OCC's pension
plan, post-retirement welfare plan, or other deferred compensation
plans. The Policy would define Clearing Member Cash to include Clearing
Fund cash deposits; cash deposited by Clearing Members in respect of
margin requirements; cash held in liquidating settlement accounts for
suspended Clearing Members,\17\ proceeds from OCC's syndicated credit
facility and liquidity facilities,\18\ and investments made with
Clearing Member Cash.\19\ The Policy would not apply to non-cash
collateral deposited by Clearing Members to satisfy margin or Clearing
Fund requirements.
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\14\ See Exchange Act Release No. 88029 (Jan. 24, 2020), 85 FR
5500, 5501-02 (Jan. 30, 2020) (File No. SR-OCC-2019-007) (discussing
the determination of Target Capital Requirement under OCC's Capital
Management Policy).
\15\ Working capital lines of credit, if any, are separate from
the syndicated credit facility and liquidity facilities that OCC
maintains to cover default losses or liquidity shortfalls. See
Exchange Act Release No. 88971 (May 28, 2020), 85 FR 34257 (June 3,
2020) (File No. SR-OCC-2020-804) (discussing OCC's revolving credit
facility); Exchange Act Release No. 89039 (June 10, 2020), 85 FR
36444 (June 16, 2020) (File No. SR-OCC-2020-803) (discussing OCC's
non-bank liquidity facility).
\16\ See Exchange Act Release No. 92038 (May 27, 2021), 86 FR
29861 (Jun. 3, 2021) (File No. SR-OCC-2021-003) (establishing a
persistent minimum level of OCC's own capital that it would
contribute to default losses or liquidity shortfalls prior to
allocating a default loss to the Clearing Fund contributions of non-
defaulting Clearing Members).
\17\ See OCC Rule 1104.
\18\ See supra note 17 (citing SEC notices of no-objection to
advance notices concerning OCC's credit and liquidity facilities).
\19\ See supra note 7 and accompanying text.
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Safeguarding Standards
The Policy would address the safeguarding standards for managing
OCC Cash and Clearing Member Cash, which OCC would either hold in a
demand deposit or Federal Reserve Bank accounts or invest in accordance
with OCC's By-Laws and investment strategy, as discussed below.
OCC Cash
Unless invested, OCC Cash would be held in demand deposit accounts
or at a Federal Reserve Bank. Demand deposit accounts would be limited
to commercial financial institutions that meet initial and ongoing
standards for depository banks outlined in OCC's procedures concerning
its banking relationships.
Treasury would be responsible for maintaining appropriate levels of
liquidity in OCC's operating accounts to meet general business
obligations and regulatory requirements. To fulfill this
responsibility, the Policy would provide that OCC may maintain bank
lines of credit for working capital purposes. The source of such credit
line would need to meet the standards for credit facility banks
outlined in OCC's procedures concerning its banking relationships.
Clearing Member Cash
The Policy would provide that unless invested, Clearing Member Cash
would be held in a demand deposit account or in accounts at a Federal
Reserve Bank. With respect to commercial banks, Clearing Member Cash
would only be held in financial institutions that meet the initial and
ongoing standards for depository banks as provided in in OCC's
procedures concerning banking relationships. The Policy would provide
that Clearing Member Cash collected at OCC's settlement banks may be
transferred to other depository banks, including to and from OCC's bank
accounts for settlement, investment, and cash management purposes. Upon
the suspension of a Clearing Member, OCC would promptly move all margin
and Clearing Fund cash related to the Clearing Member into a
liquidating settlement account for use in meeting the obligations of
the Clearing Member, as provided under OCC's Rules.\20\ Treasury would
be responsible for ensuring accounts are appropriately funded to meet
financial obligations. Interest earned on Clearing Fund cash deposits
held at a Federal Reserve Bank would accrue to the benefit of Clearing
Members, less a cash management fee.
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\20\ See OCC Rule 1104.
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The Policy would also provide that OCC would employ a bank account
structure that segregates customer funds per applicable regulatory
requirements \21\ and OCC's By-Laws and Rules.\22\ Futures customer
segregated cash would be held in segregated fund accounts pursuant to
applicable Commodity and Futures Trading Commission (``CFTC'')
regulations, including that OCC ensures that it receives proper written
acknowledgment from the depository for each new segregated funds
account that the account has been established to hold segregated cash
generated from futures customers.\23\ The Policy would further provide
that if OCC sustains an investment loss with respect to invested margin
cash OCC will not pass on the loss to a futures customer segregated
account.
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\21\ See 17 CFR 39.15 (requiring a derivatives clearing
organization to comply with the segregation requirements section 4d
of the Commodity Exchange Act).
\22\ See OCC By-Laws Art. VI, Sec. 3(f) (providing for
maintenance of segregated futures accounts).
\23\ See 17 CFR 1.20(g)(4).
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Investment Guidelines
The Policy would also provide guidelines for investments permitted
by OCC's By-Laws and Rules and approved by the Board or Compensation
and Performance Committee (``CPC''), including OCC's investment
strategy, investment governance principles, and guidelines for the
investment of OCC Cash and Clearing Member Cash.
Investment Strategy
The Policy would provide that OCC's investment strategy is to
preserve principal and maintain adequate liquidity. After principal and
liquidity requirements are satisfied, only then would Management seek
to optimize investment returns. OCC would disclose its investment
strategy through its public website on a periodic basis via its
qualitative disclosures to the Principles for Financial Market
Infrastructure Disclosures.\24\
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\24\ See Disclosure Framework, available at <a href="https://www.theocc.com/Risk-Management/PFMI-Disclosures">https://www.theocc.com/Risk-Management/PFMI-Disclosures</a>.
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Investment Governance Principles
The Policy would provide that OCC may invest OCC Cash and Clearing
Member Cash in permitted investments per applicable regulatory
requirements, OCC's By-Laws and Rules, the investment strategy and the
following governance principles. Current investment practices would be
outlined in procedures maintained by OCC. Investment counterparties
would need to be financial institutions or financial market utilities
that meet initial and on-going standards outlined in OCC's procedures
concerning its banking relationships, which consider the financial
institution's size, capital adequacy, product offering and operational
capabilities. Any interest or gain received on the investments would
belong to OCC except as may otherwise be provided in OCC's By-Laws,
Rules or Board-approved policies.\25\ OCC would not commingle
investments of OCC Cash with investments of Clearing Member Cash.
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\25\ As discussed, interest earned on Clearing Fund cash
deposits held at a Federal Reserve Bank would accrue to the benefit
of Clearing Members, less a cash management fee.
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Investment of OCC Cash
The Policy would provide that OCC Cash may be invested in
instruments that pose minimal credit and liquidity risk pursuant to
applicable regulatory requirements, OCC's By-Laws, the investment
strategy, and Board or CPC approved investments. Approved investments
other than in Government securities would continue to be subject to
Board or CPC approval, as required under Section 1 of Article IX of
OCC's By-Laws.\26\ In addition, investment of
[[Page 1822]]
working capital in excess of 110% of OCC's Target Capital Requirement
would not be limited to overnight transactions.\27\
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\26\ In addition to investments in Government securities through
overnight DVP transactions, the Board has approved investments of
OCC's own cash in U.S. government money market mutual funds.
\27\ With respect to OCC's liquid net assets funded by equity in
excess of 110% of the Target Capital Requirement, the Board has
initially approved investment of such funds in Government securities
through DVP transactions for terms no more than 30 days.
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Investment of Clearing Member Cash
The Policy would further provide that Clearing Member Cash may be
invested in Government securities by OCC in transactions that provide
next-day liquidity in accordance with applicable regulatory
requirements, OCC's Rules, and the investment strategy, subject to the
following guiding principles. First, the Policy would provide that
notwithstanding the authority to invest Clearing Fund cash under OCC
Rule 1002(c), it is OCC's policy not to invest Clearing Fund cash,
which is instead maintained in accounts at a Federal Reserve Bank or a
commercial bank. This policy would be subject to an exception approved
by the Chief Executive Officer or Chief Operating Officer in emergency
situations (such as a disruption at a Federal Reserve Bank) when
necessary or advisable for the protection of the Corporation or
otherwise in the public interest to continue to facilitate the prompt
and accurate clearance and settlement of confirmed trades or other
transactions and to provide OCC's services in a safe and sound manner.
Second, the Policy would provide that margin cash would only be
invested in instruments that provide liquidity to OCC by the following
business day. Third, the Policy would provide that OCC will implement
procedures to ensure that end-of-day margin cash balances remain above
the aggregate level of any Required Cash Deposits, as that term is
defined in OCC's Liquidity Risk Management Framework.\28\ The policy
with respect to investing Required Cash Deposits would be subject to
the same exception as for investment of Clearing Fund cash. Fourth, any
change regarding whether to investment futures customer segregated
funds would be approved by OCC's Chief Financial Officer in
consultation with OCC's Legal and Compliance departments.\29\
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\28\ The Liquidity Risk Management Framework defines ``Required
Cash Deposits'' (sometimes referred to as minimum cash requirements
or ``MCR'') as deposits of cash under OCC's Contingency Funding Plan
that supplement OCC's Base Liquidity Resources (i.e., the amount of
committed liquidity resources maintained at all times by OCC to meet
its minimum Cover 1 liquidity resource requirements under the
applicable regulations). Under that framework, OCC may require a
Clearing Member Group to post such additional cash collateral to
supplement OCC's Available Liquidity Resources (i.e., Base Liquidity
Resources plus allowed Clearing Fund cash deposits in excess of the
minimum required amount) when stressed liquidity demands for that
Clearing Member Group are above established thresholds or until the
settlement demand is met. See Exchange Act Release No. 89014 (June
4, 2020), 85 FR 35446, 35449 (June 10, 2020) (File No. SR-OCC-2020-
003).
\29\ Like Clearing Fund cash, OCC does not currently invest
futures customer segregated funds. If OCC determined to invest such
funds, such investments would be subject to CFTC regulations
regarding a derivatives clearing organization's investment of
futures customer funds. See 17 CFR 1.25.
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The Policy would also describe how OCC maintains liquidity
facilities for immediate access to liquidity in the event of a
suspension of a Clearing Member or a failure of a bank, securities or
commodity clearing organization, or investment counterparty (with
respect to the investment of Clearing Member Cash) to meet an
obligation owing to OCC, or in anticipation thereof, pursuant to OCC
Rules 1006(c) and (f), proposed amendments to which are discussed
below. The liquidity providers for these facilities would be approved
and monitored according to the OCC's Third-Party Risk Management
Framework and Liquidity Risk Management Framework.\30\
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\30\ See Exchange Act Release No. 90797 (Dec. 23, 2020), 85 FR
86592 (Dec. 30, 2020) (File No. SR-OCC-2020-014) (approving OCC's
framework for identifying, measuring, monitoring, and managing OCC's
exposures to its counterparties); Exchange Act Release No. 89014, 85
FR 35446 (approving OCC's approach to managing liquidity risk).
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Amendments to OCC Rule 1006
OCC proposes to amend OCC Rule 1006, which governs its ability to
access the Clearing Fund in the event of the failure (or anticipated
failure) of bank to meet a settlement obligation with OCC, to extend
such access to the failure of a non-bank investment counterparty to
meet settlement obligations with OCC under the conditions identified in
OCC Rule 1006(c) and (f). In addition, OCC proposes to restate OCC Rule
1006(f) for clarity.
To ensure that OCC may access the Clearing Fund in the event of a
failure or disruption of a non-bank counterparty with whom OCC has
invested Clearing Member Cash, OCC would amend OCC Rule 1006(f) to
include ``investment counterparty'' to the list of counterparties--
currently, any bank or securities or commodities clearing
organization--whose failure or disruption may result in a borrowing
under Rule 1006(f). Similarly, OCC would also amend OCC Rule 1006(a)
and (c) to add the same phrase to the list of counterparties whose
failure resulting from bankruptcy, insolvency, receivership, suspension
of operations, or any similar event may result in allocation of losses
to the Clearing Fund. Rule 1006(c) and (f) would be further amended to
provide that failure of an investment counterparty under those
paragraphs would be limited to a failure with respect to Clearing
Member Cash (i.e., cash invested under Rule 604(a) or Rule
1002(c)).\31\ Any investment loss resulting from investment of OCC Cash
would be treated as an operational loss that would be addressed under
OCC's Capital Management Policy, rather than a loss that would be
allocated to the Clearing Fund.\32\
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\31\ The same limitation would apply to Rule 1006(a), which
incorporates the reasons specified in Rule 1006(c) by reference.
\32\ See Exchange Act Release No. 88029, 85 FR at 5502-03
(discussing OCC's plan for replenishing its capital in the event
that shareholders' equity falls below certain thresholds).
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OCC would also amend the condition that triggers borrowing
authority under Rule 1006(f)--currently clause (iii) of the first
sentence of Rule 1006(f)--which would be renumbered as Rule
1006(f)(1)(C). That condition would be amended to apply when the
Corporation reasonably believes it necessary to borrow to meet its
liquidity needs for ``daily settlement'' rather than ``same-day
settlement,'' as in the current text. OCC may reasonably believe that a
disruption at a bank, securities or commodities clearing organization,
or investment counterparty could last multiple days, resulting in
liquidity needs for daily settlement over more than one day. This
amendment would ensure that OCC has authority to initiate a borrowing
for the amount OCC believes necessary to meet its liquidity needs over
the timeframe OCC believes the disruption will affect OCC's ability to
meet daily settlement requirements with Clearing Members, rather than
only that amount that OCC believes it needs on a day-by-day basis.
OCC would further amend the condition in Rule 1006(f)(1)(C) to
apply when OCC reasonably believes such a liquidity need will arise
because of one of the identified counterparty's failure ``to perform
any obligation to the Corporation when due,'' rather than such a
counterparty's failure ``to achieve daily settlement.'' This change
aligns with the condition for allocation of losses under Rule 1006(c)
and eliminates any ambiguity that might arise concerning the settlement
obligations to which the current Rule refers. As under the current
Rule, use of funds obtained through such a
[[Page 1823]]
borrowing would continue to be limited to the purposes described in
Rule 1006(f)(1)(C), as amended, i.e., to meet OCC's liquidity needs for
daily settlement with Clearing Members.
In addition to the substantive changes discussed above, OCC would
also restate Rule 1006(f) for clarity. The current paragraph would be
divided into four subparagraphs with courtesy headings: (1) Conditions;
(2) Uses; (3) Term; Clearing Fund Charge; and (4) Substitution
Requests. The conditions in Rule 1006(f)(1) would begin with the first
sentence of current Rule 1006(f), less the conjoined clause beginning
with ``and use such assets,'' the substance of which would be moved to
paragraph (f)(2). The remaining clause before the conjunction would be
amended to describe OCC's investment of Clearing Fund cash
contributions in the active voice. The three conditions for a borrowing
identified in Rule 1006(f), currently numbered (i) through (iii), would
then follow after the conjunction as items (A) through (C). Item (A)
would be further amended to remove legalese and state the condition
more plainly. Item (C) would be amended substantively as discussed
above.
The prescribed uses for the borrowed funds described in several
places throughout current Rule 1006(f) would be aggregated in Rule
1006(f)(2). As currently found in the conjoined clause in the first
sentence of current Rule 1006(f), Rule 1006(f)(2)(A) would provide that
OCC may use funds it takes possession of under Rule 1006(f) to (i) meet
obligations, losses or liquidity needs; or (ii) borrow or otherwise
obtain funds through any means determined to be reasonable at the
discretion of the Chairman, Chief Executive Officer or the Chief
Operating Officer (including, without limitation, pledging such assets
as security for loans and/or using such assets to effect repurchase,
securities lending or other transactions). Proposed Rule 1006(f)(ii)
would also be restated to remove a gendered pronoun. Rule 1006(f)(2)(B)
would describe the limitations on use of funds borrowed under the
renumbered conditions in Rule 1006(f)(1)(A) and (C).
Rule 1006(f)(3) would contain the term for a borrowing, as well as
the conditions that would trigger a loss chargeable to the Clearing
Fund. The 30-day period before which OCC would be obligated to charge a
borrowed amount as a loss to the Clearing Fund would be located at Rule
1006(f)(3)(A), with certain non-substantive edits to the text. The
conditions that would trigger the loss allocation to the Clearing Fund
would be located at Rule 1006(f)(3)(B) and would be restated to move
the lengthy conditions after the main clause, among other non-
substantive revisions.
Finally, Rule 1006(f)(4) would relocate OCC's authority to refuse
Clearing Member substitution requests regarding securities contributed
to the Clearing Fund that the Corporation has taken possession of under
Rule 1006(f). In addition to relocating that provision to the end of
Rule 1006(f), this proposed rule change would restate that provision to
reflect the reorganization of Rule 1006(f).
(2) Statutory Basis
Section 17A(b)(3)(F) of the Exchange Ac,\33\ requires, among other
things, that the rules of a clearing agency be designed to promote the
prompt and accurate clearance and settlement of securities
transactions, 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, to perfect the mechanism of a national system for the
prompt and accurate clearance and settlement of securities
transactions, and, in general, to protect investors and the public
interest. For the reasons discussed below, OCC believes the proposed
rule change is consistent with Section 17A(b)(3)(F) \34\ of the
Exchange Act and Rule 17Ad-22(e)(7)(viii),\35\ Rule 17Ad-22(e)(13),\36\
and Rule 17Ad-22(e)(16) \37\ thereunder.
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\33\ 15 U.S.C. 78q-1(b)(3)(F).
\34\ 15 U.S.C. 78q-1(b)(3)(F).
\35\ 17 CFR 240.17Ad-22(e)(7)(viii).
\36\ 17 CFR 240.17Ad-22(e)(13).
\37\ 17 CFR 240.17Ad-22(e)(16).
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Consistency With Section 17A(b)(3)(F) of the Exchange Act
The Cash and Investment Management Policy is designed to safeguard
cash and related investments within OCC's custody or control. The
Policy applies to, among other things, cash deposited by Clearing
Members in respect of margin and Clearing Fund requirements, any
Government securities in which OCC invests such cash, and the Minimum
Corporate Contribution, each of which are liquid resources available to
facilitate settlement and to cover potential losses in the event of a
Clearing Member default. The Policy also extends to OCC's own cash,
including cash OCC maintains to cover potential general business losses
so that OCC can continue operations and services as a going concern if
those losses materialize, in accordance with OCC's Capital Management
Policy. By providing safeguarding standards for managing such cash and
related investments, the Policy would help ensure those resources will
be available to facilitate settlement, cover potential default losses,
or cover potential general business losses, as applicable. Therefore,
OCC believes the Policy is designed to promote the prompt and accurate
clearance and settlement of securities transactions, 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, and, in
general, to protect investors and the public interest, consistent with
Section 17A(b)(3)(F) of the Exchange Act.\38\
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\38\ 15 U.S.C. 78q-1(b)(3)(F).
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The proposed rule change is also designed to ensure that OCC can
continue to promptly settle the securities and derivatives transactions
it clears by enhancing the existing tools OCC has to address potential
liquidity shortfalls. Specifically, the proposed rule change would
expand the existing borrowing authority in OCC's By-Laws to authorize
borrowing in the extraordinary event that OCC faces a liquidity need in
order to complete daily settlement with its Clearing Members resulting
from the failure or disruption of an investment counterparty with whom
OCC has invested Clearing Member Cash that is not a bank.
It is conceivable, though extremely unlikely, that an investment
counterparty may fail to return Clearing Member Cash that OCC has
invested in Government securities with the counterparty in a DVP
transaction as a result of a disruption or failure at that investment
counterparty. The proposed rule change would enable OCC to borrow
against the Clearing Fund in this scenario in order to avoid disrupting
OCC's ordinary settlement cycle. In the extremely unlikely event that
OCC incurs a loss resulting from the investment of Clearing Member
Cash, OCC would retain authority to allocate such loss to the Clearing
Fund, at OCC's discretion. Accordingly, OCC believes the proposed rule
change is designed to promote the prompt and accurate clearance and
settlement of securities transactions, in accordance with the
requirements of Section 17A(b)(3)(F) of the Exchange Act.\39\
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\39\ Id.
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Consistency With Rule 17Ad-22(e)(16)
Rule 17Ad-22(e)(16) under the Exchange Act requires, in part, that
OCC establish, implement, maintain and enforce written policies and
procedures reasonably designed to safeguard OCC's
[[Page 1824]]
own and its participants' assets, minimize the risk of loss and delay
in access to these assets, and invest such assets in instruments with
minimal credit, market, and liquidity risks.\40\ As discussed above,
the Policy outlines safeguarding standards for cash and related
investments intended to minimize credit and liquidity risks. In
addition, the Policy sets forth OCC's conservative investment strategy,
according to which OCC's primary objective is to preserve principal and
maintain adequate liquidity. The Policy also requires cash and related
investments to be maintained with counterparties that have been
initially approved and routinely monitored in accordance with OCC's
Third Party Risk Management Policy and procedures governing banking
relationships. Accordingly, OCC believes that the Policy is consistent
with Rule 17Ad-22(e)(16).
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\40\ 17 CFR 240.17Ad-22(e)(16).
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Consistency With Rule 17Ad-22(e)(7)(viii)
Additionally, Rule 17Ad-22(e)(7)(viii) requires that OCC address
foreseeable liquidity shortfalls that would not be covered by OCC's
liquid resources and seek to avoid unwinding, revoking, or delaying the
settlement of payment obligations.\41\ As stated above, OCC believes
that it could be foreseeable, though extremely unlikely, that an
investment counterparty that is not a bank may fail to return Clearing
Member Cash as the result of the investment counterparty's disruption
or failure. An alternative available to OCC for addressing uncovered
liquidity shortfalls would be to exercise authority under Rule 505 to
extend the settlement window to the close of Fedwire.\42\ The proposed
rule change would improve OCC's ability to address such situations by
expanding OCC's borrowing authority to enable OCC to borrow against the
Clearing Fund to address a failure or disruption at a non-bank
investment counterparty rather than disrupting its ordinary settlement
cycle. Accordingly, OCC believes that proposed changes to OCC Rules are
consistent with Rule 17Ad-22(e)(7)(viii).
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\41\ 17 CFR 240.17Ad-22(e)(7)(viii).
\42\ See OCC Rule 505 (Extension of Settlements).
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Consistency With Rule 17Ad-22(e)(13)
Finally, Rule 17Ad-22(e)(13) requires, in part, that OCC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to ensure OCC has the authority to take timely
action to contain losses and liquidity demands and continue to meet its
obligations.\43\ As described above, this proposal would amend OCC's
Rules concerning loss allocation in the extremely unlikely event that
the failure or disruption of a non-bank investment counterparty results
in a loss to OCC arising from the investment of Clearing Member Cash.
The expansion of existing authority to allocate such losses
attributable to a non-bank investment counterparty helps establish a
more transparent and clear loss allocation process that ensures OCC's
authority to take action to contain losses and continue to meet its
clearance and settlement obligations. Accordingly, OCC believes the
proposed changes to OCC's Rules are consistent with Rule 17Ad-
22(e)(13).
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\43\ 17 CFR 240.17Ad-22(e)(13).
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(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Exchange Act \44\ 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 Exchange
Act. OCC does not believe the proposed rule change would have any
impact or impose any burden on competition. The primary purpose of the
proposed rule change is to formalize OCC's Cash and Investment
Management Policy and enhance OCC's access to the Clearing Fund by
expanding the existing authority concerning bank failures to also apply
in the case of failures by other investment counterparties. The
proposed rule change would not affect Clearing Members' access to OCC's
services or disadvantage or favor any particular user in relationship
to another user. As such, OCC believes that the proposed changes would
not have any impact or impose any burden on competition.
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\44\ 15 U.S.C. 78q-1(b)(3)(I).
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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.
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.
OCC shall post notice on its website of proposed changes that are
implemented. The proposal shall not take effect until all regulatory
actions required with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the 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="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#9eecebf2fbb3fdf1f3f3fbf0eaeddeedfbfdb0f9f1e8"><span class="__cf_email__" data-cfemail="e89a9d848dc58b8785858d869c9ba89b8d8bc68f879e">[email protected]</span></a>. Please include
File Number SR-OCC-2021-014 on the subject line.
Paper Comments
<bullet> 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-2021-014. 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="http://www.sec.gov/rules/sro.shtml">http://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
[[Page 1825]]
<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-2021-014 and
should be submitted on or before February 2, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\45\
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\45\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-00378 Filed 1-11-22; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on January 12, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.