Notice2022-03824
Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection to Advance Notice Concerning The Options Clearing Corporation's Cash and Investment Management
Primary source
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Published
February 23, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 36 (Wednesday, February 23, 2022)</title>
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[Federal Register Volume 87, Number 36 (Wednesday, February 23, 2022)]
[Notices]
[Pages 10262-10265]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-03824]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94270; File No. SR-OCC-2021-803]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of No Objection to Advance Notice Concerning The Options
Clearing Corporation's Cash and Investment Management
February 17, 2022.
I. Introduction
On December 23, 2021, the Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'')
advance notice SR-OCC-2021-803 (``Advance Notice'') pursuant to Section
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, entitled Payment, Clearing and Settlement
Supervision Act of 2010 (``Clearing Supervision Act'') \1\ and Rule
19b-4(n)(1)(i) \2\ under the Securities Exchange Act of 1934
(``Exchange Act'') \3\ to (i) adopt OCC's policy regarding cash and
related investments to its rules, and (ii) amend OCC's Rules governing
the use of Clearing Fund contributions to ensure access in the event of
the failure of an investment counterparty with whom OCC has invested
cash collateral.\4\ The Advance Notice was published for public comment
in the Federal Register on January 12, 2022,\5\ and the Commission has
received no comments regarding the substance of the changes proposed in
the Advance Notice.\6\ The Commission is hereby providing notice of no
objection to the Advance Notice.
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\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ 15 U.S.C. 78a et seq.
\4\ See Notice of Filing infra note 5, at 87 FR 1814.
\5\ Securities Exchange Act Release No. 93915 (Jan. 6, 2022), 87
FR1814 (Jan. 12, 2022) (File No. SR-OCC-2021-803) (``Notice of
Filing''). On December 23, 2021, OCC also filed a related proposed
rule change (SR-OCC-2021-014) with the Commission pursuant to
Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder
(``Proposed Rule Change''). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-
4, respectively. In the Proposed Rule Change, which was published in
the Federal Register on January 12, 2022, OCC seeks approval of
proposed changes to its rules necessary to implement the Advance
Notice. Securities Exchange Act Release No. 93916 (Jan. 6, 2022), 87
FR 1819 (Jan. 12, 2022) (File No. SR-OCC-2021-014). The comment
period for the related Proposed Rule Change filing closed on
February 2, 2022.
\6\ A comment letter addressed market conduct generally;
however, additional discussion is unnecessary because the substance
of the letter does not bear on the basis for the Commission's
decision not to object to the proposal. Comments on the Advance
Notice are available at <a href="https://www.sec.gov/comments/sr-occ-2021-803/srocc2021803.htm">https://www.sec.gov/comments/sr-occ-2021-803/srocc2021803.htm</a>. Since the proposal contained in the Advance
Notice was also filed as a proposed rule change, all public comments
received on the proposal are considered regardless of whether the
comments are submitted on the Proposed Rule Change or the Advance
Notice.
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II. Background \7\
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\7\ Capitalized terms used but not defined herein have the
meanings specified in OCC's Rules and By-Laws, available at <a href="https://www.theocc.com/about/publications/bylaws.jsp">https://www.theocc.com/about/publications/bylaws.jsp</a>.
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OCC is proposing to adopt a policy governing OCC's cash and
investment practices (the ``Cash and Investment Management Policy'' or
``Policy'') and amend its rules regarding access to Clearing Fund
contributions to address the failure of an investment counterparty to
return Clearing Member cash collateral, which would also allow OCC to
use such collateral to access its revolving credit facility.
A. Policy Regarding Cash and Related Investments
OCC's current rules include provisions governing the management and
investment of OCC's own funds and cash deposited by Clearing Members.
Pursuant to its rules, OCC's Board of Directors (``Board'') may invest
funds in excess of the amount needed as working capital in Government
securities or such other securities or financial instruments.\8\
Further, OCC's Rules allow for the investment of cash deposited in
respect of a Clearing Member's margin requirements or Clearing Fund
contributions by OCC for its account in Government securities.\9\ OCC
proposes to add its Cash and Investment Management Policy to its
current investment related rules.\10\
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\8\ See By-Law Art. IX, Sec. 1.
\9\ See OCC Rule 604(a); Rule 1006(c).
\10\ See Notice of Filing, 87 FRat 1815.
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The proposed Cash and Investment Management Policy (i) outlines the
safeguarding standards for cash and related investments managed by OCC
to minimize credit and liquidity risk, and (2) provides guidelines for
investments permitted by OCC's rules as described above. With regard to
safeguarding cash, the Policy would allow OCC to hold OCC Cash \11\ and
Clearing Member Cash \12\ in demand deposit accounts with commercial
banks or in accounts at a Federal Reserve Bank. Consistent with OCC's
current rules, the Policy would require OCC to move all margin and
Clearing Fund cash related to a suspended Clearing Member into a
liquidating settlement account for use in meeting the obligations of
the Clearing Member.\13\ The Policy would also require that OCC employ
a bank account structure that segregates customer funds per applicable
regulatory
[[Page 10263]]
requirements \14\ and OCC's By-Laws and Rules.\15\
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\11\ Under the proposed Policy, OCC Cash would include working
capital related to future operating costs, inclusive of financial
resources held to meet liquidity and resiliency requirements,
proceeds from lines of credit, if any, maintained to support OCC's
working capital, and investments made with OCC Cash. OCC Cash would
also include OCC's Minimum Corporate Contribution. See Securities
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).
OCC Cash would not include cash held in respect of OCC's pension
plan, post-retirement welfare plan, or other deferred compensation
plans.
\12\ Under the proposed Policy, Clearing Member Cash would
include cash collateral deposited as margin or Clearing Fund
contributions, cash held in liquidating settlement accounts for
suspended Clearing Members pursuant to OCC's Rule 1104, and
investments made with Clearing Member Cash. Clearing Member Cash
would also include proceeds from OCC's syndicated credit facility
and liquidity facilities. See Securities Exchange Act Release No.
88971 (May 28, 2020), 85 FR 34257 (Jun. 3, 2020) (File No. SR-OCC-
2020-804) (discussing OCC's revolving credit facility); Securities
Exchange Act Release No. 89039 (Jun. 10, 2020), 85 FR 36444 (Jun.
16, 2020) (File No. SR-OCC-2020-803) (discussing OCC's non-bank
liquidity facility).
\13\ See OCC Rule 1104.
\14\ See 17 CFR 39.15 (requiring a derivatives clearing
organization to comply with the segregation requirements section 4d
of the Commodity Exchange Act).
\15\ See OCC By-Laws Art. VI, Sec. 3(f) (providing for
maintenance of segregated futures accounts).
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With regard to investments, the Policy would provide that OCC's
investment strategy is to preserve principal and maintain adequate
liquidity. OCC outlines its specific investment in internal procedures,
but will publish its investment strategy in its Qualitative Disclosures
posted to OCC's public website.\16\ Under the proposed Policy, OCC will
invest only with counterparties that meet the financial and operational
standards outlined in OCC's procedures concerning its banking
relationships.\17\
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\16\ OCC's Qualitative Disclosures are available at <a href="https://www.theocc.com/Risk-Management/PFMI-Disclosures">https://www.theocc.com/Risk-Management/PFMI-Disclosures</a>.
\17\ Additionally, OCC's Third-Party Risk Management Framework
describes the basis for evaluating financial institutions based on
financial resources and operational capacity, such as whether a
relationship is structured to allow prompt access to assets and
whether a custodian is a supervised and regulated institution that
adheres to generally accepted accounting practices, maintains
safekeeping procedures, and has controls that fully protect these
assets. See Securities Exchange Act Release No. 90797 (Dec. 23,
2021), 85 FR 86592, 86593 (Dec. 30, 2021) (File No. SR-OCC-2020-
014).
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The Policy would affirm OCC's current practice of not investing
Clearing Fund cash, which is instead maintained in accounts at a
Federal Reserve Bank or a commercial bank. The Policy would also limit
the investment of margin cash to instruments that provide liquidity to
OCC by the following business day. In contrast, the Policy would not
limit the investment of OCC cash in excess of 110 percent of its Target
Capital Requirement \18\ to overnight transactions. Further, the Policy
would require procedures to ensure that end-of-day margin cash balances
remain above the aggregate level of any Required Cash Deposits to
support OCC's management of liquidity risk.\19\ Under the Policy,
interest or gain received on investments will belong to OCC except as
otherwise provided for in OCC's rules.\20\
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\18\ OCC's Target Capital Requirement is the amount of
shareholders' equity recommended by OCC management and approved by
the Board to ensure compliance under both the Commission and
Commodity Futures Trading Commission rules and to keep such
additional amount the Board may approve for capital expenditures.
See OCC Rule 101(T)(1).
\19\ Under its Liquidity Risk Management Framework, OCC may
require a Clearing Member Group to post cash collateral to
supplement OCC's Available Liquidity Resources 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 (Jun. 4, 2020), 85 FR 35446, 35449
(Jun. 10, 2020) (File No. SR-OCC-2020-003).
\20\ See e.g., Securities Exchange Act Release No. 82502 (Jan.
12, 2018), 82 FR 2825, 2826 (Jan. 19, 2018) (File No. SR-OCC-2017-
009) (stating that OCC would pass interest income earned on Clearing
Fund cash deposited at a Federal Reserve Bank through to its
Clearing Members).
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B. Access to Clearing Fund Contributions
OCC's current Rules define the conditions under which OCC may use
Clearing Fund assets to make good losses or expenses suffered by OCC or
by the Clearing Fund with regard to borrowings made by OCC.\21\ OCC's
rules also define the conditions under which OCC may borrow Clearing
Fund assets.\22\ OCC's Rules address OCC's authority to access Clearing
Fund assets related to the failure of a bank or clearing organization
to perform its obligations to OCC, but not the failure of an investment
counterparty. OCC proposes a series of changes to its Rules, described
below, to broaden OCC's authority to access Clearing Fund assets to
address the potential failure of an investment counterparty to meet its
obligations to OCC. Such changes would also align with modifications to
OCC's revolving credit facility.\23\
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\21\ See OCC Rule 1006(a) and (c).
\22\ See OCC Rule 1006(f).
\23\ See Notice of Filing, 87 Fed. Reg at1817. In anticipation
of the proposed changes, OCC modified the permitted uses set forth
in the credit agreement, implemented on June 21, 2021, to align with
the proposed changes to OCC Rule 1006. Id. OCC provided a summary of
the terms and conditions for the 2021 credit agreement in a
confidential Exhibit 3 to the Advance Notice. Id.
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OCC proposes to amend its Rules 1006(a) and (c) to add ``investment
counterparty'' to the list of counterparties whose failure to perform
any obligation to OCC when due because of its bankruptcy, insolvency,
receivership, suspension of operations, or any similar event that
causes OCC to sustain a loss. OCC also proposes to amend its Rule
1006(f) to authorize OCC to take possession of cash or securities
deposited by Clearing Members as contributions to the Clearing Fund and
securities in which OCC has invested Clearing Fund cash contributions
if OCC reasonably believes it necessary to borrow to meet its liquidity
needs for same day settlement as a result of the failure of an
investment counterparty. The proposed changes to Rules 1006(a), (c),
and (f) would limit access, however, to failures with respect to cash
invested under OCC's Rules 604(a) and 1002(c), which deal with margin
cash and Clearing Fund cash contributions, respectively.
OCC is also proposing to restate and reorganize Rule 1006(f), which
currently consists of a single paragraph, into four subparagraphs with
the following headings: (1) Conditions; (2) Uses; (3) Term; Clearing
Fund Charge; and (4) Substitution Requests. To eliminate a potential
inconsistency with Rule 1006(c), OCC would revise the condition
triggering OCC's access to the Clearing Fund from failure ``to achieve
daily settlement'' to failure ``to perform any obligation to the
Corporation when due.'' The proposed changes to 1006(f) also include
the removal of a gendered pronoun and other administrative changes.
III. Discussion and Notice of No Objection
Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, the stated purpose of the Clearing
Supervision Act is instructive: To mitigate systemic risk in the
financial system and promote financial stability by, among other
things, promoting uniform risk management standards for SIFMUs and
strengthening the liquidity of SIFMUs.\24\
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\24\ See 12 U.S.C. 5461(b).
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Section 805(a)(2) of the Clearing Supervision Act authorizes the
Commission to prescribe regulations containing risk management
standards for the payment, clearing, and settlement activities of
designated clearing entities engaged in designated activities for which
the Commission is the supervisory agency.\25\ Section 805(b) of the
Clearing Supervision Act provides the following objectives and
principles for the Commission's risk management standards prescribed
under Section 805(a): \26\
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\25\ 12 U.S.C. 5464(a)(2).
\26\ 12 U.S.C. 5464(b).
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<bullet> To promote robust risk management;
<bullet> to promote safety and soundness;
<bullet> to reduce systemic risks; and
<bullet> to support the stability of the broader financial system.
Section 805(c) provides, in addition, that the Commission's risk
management standards may address such areas as risk management and
default policies and procedures, among other areas.\27\
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\27\ 12 U.S.C. 5464(c).
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The Commission has adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act and Section 17A of the
Exchange Act (the ``Clearing Agency Rules'').\28\ The Clearing Agency
Rules require,
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among other things, each covered clearing agency to establish,
implement, maintain, and enforce written policies and procedures that
are reasonably designed to meet certain minimum requirements for its
operations and risk management practices on an ongoing basis.\29\ As
such, it is appropriate for the Commission to review advance notices
against the Clearing Agency Rules and the objectives and principles of
these risk management standards as described in Section 805(b) of the
Clearing Supervision Act. As discussed below, the Commission believes
the changes proposed in the Advance Notice are consistent with the
objectives and principles described in Section 805(b) of the Clearing
Supervision Act,\30\ and in the Clearing Agency Rules, in particular
Rules 17Ad-22(e)(13) and (16).\31\
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\28\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No.
68080 (Oct. 22, 2012), 77 FR 66220 (Nov. 2, 2012) (S7-08-11). See
also Covered Clearing Agency Standards, 81 FR 70786. OCC is a
``covered clearing agency'' as defined in Rule 17Ad-22(a)(5).
\29\ 17 CFR 240.17Ad-22.
\30\ 12 U.S.C. 5464(b).
\31\ 17 CFR 240.17Ad-22(e)(13) and 17 CFR 240.17Ad-22(e)(16).
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A. Consistency With Section 805(b) of the Clearing Supervision Act
The Commission believes that the proposal contained in OCC's
Advance Notice is consistent with the stated objectives and principles
of Section 805(b) of the Clearing Supervision Act. Specifically, as
discussed below, the Commission believes that the changes proposed in
the Advance Notice are consistent with promoting robust risk
management, promoting safety and soundness, reducing systemic risks,
and supporting the stability of the broader financial system.\32\
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\32\ 12 U.S.C. 5464(b).
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The Commission believes that the addition of the Cash and
Investment Management Policy to OCC's rules is consistent with the
promotion of robust risk management. As described above, the Policy
would build on OCC's current rules for managing cash and investments.
The Policy includes standards for safeguarding OCC Cash and Clearing
Fund Cash through the application of OCC's counterparty standards.
Further, the Policy includes limitations on the tenure of investments
to support OCC's liquidity risk management practices. The Commission
believes that adding the Policy to OCC's rules will support OCC's
management of risk with regard to the safeguarding of funds and
investments.
The Commission also believes that the proposed changes to broaden
OCC's authority to access Clearing Fund contributions are consistent
with the promotion of safety and soundness. Ensuring that OCC has the
authority to access Clearing Fund contributions to contain losses and
shortfalls would reduce the likelihood that OCC would have insufficient
financial resources to address such losses and shortfalls, which in
turn would enhance the safety and soundness of OCC. Further, the
Commission believes that, to the extent the proposed changes are
consistent with promoting OCC's safety and soundness, they are also
consistent with supporting the stability of the broader financial
system. OCC has been designated as a SIFMU, in part, because its
failure or disruption could increase the risk of significant liquidity
or credit problems spreading among financial institutions or
markets.\33\ As noted above, the Commission believes that the proposed
changes would support OCC's ability to continue providing services to
the options markets by addressing losses and shortfalls arising out of
the default of a Clearing Member. OCC's continued operations would, in
turn, help support the stability of the financial system by reducing
the risk of significant liquidity or credit problems spreading among
market participants that rely on OCC's central role in the options
market.
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\33\ See Financial Stability Oversight Council (``FSOC'') 2012
Annual Report, Appendix A, <a href="https://home.treasury.gov/system/files/261/here.pdf">https://home.treasury.gov/system/files/261/here.pdf</a> (last visited Feb. 17, 2022).
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Accordingly, and for the reasons stated above, the Commission
believes the changes proposed in the Advance Notice are consistent with
Section 805(b) of the Clearing Supervision Act.\34\
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\34\ 12 U.S.C. 5464(b).
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B. Consistency With Rule 17Ad-22(e)(13) Under the Exchange Act
Rule 17Ad-22(e)(13) under the Exchange Act requires, among other
things, that a covered clearing agency establish, implement, maintain,
and enforce written policies and procedures reasonably designed to
ensure the covered clearing agency has the authority to take timely
action to contain losses and liquidity demands and continue to meet its
obligations.\35\
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\35\ 17 CFR 240.17Ad-22(e)(13).
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As the Commission has observed previously, OCC relies on the
resources in its Clearing Fund to manage the potential losses arising
out of the default of a Clearing Member under extreme but plausible
market conditions.\36\ Similarly, OCC relies on such resources to
manage potential liquidity shortfalls arising out of the default of a
Clearing Member under extreme but plausible market conditions.\37\ In
the event of a Clearing Member default, OCC's inability to access the
defaulter's cash collateral due to the failure of an investment
counterparty could inhibit OCC's ability to contain losses and
liquidity demands unless it has access to the Clearing Fund
contributions of non-defaulting Clearing Members. Further, the
Commission believes that the proposed changes to restate and reorganize
Rule 1006(f) would provide clarity to such authority. As described
above, the proposed changes would increase OCC's authority to access
Clearing Fund contributions to address losses or shortfalls arising out
of the failure of an investment counterparty to perform with regard to
investments of margin cash or Clearing Fund cash and such changes would
align with the terms of OCC's revolving credit agreement.
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\36\ See Securities Exchange Act Release No. 87717 (Dec. 11,
2019), 84 FR 68985, 68987 (Dec. 17, 2019) (File No. SR-OCC-2019-
009).
\37\ See Securities Exchange Act Release No. 89014 (Jun. 4,
2020), 85 FR 35446, 35450 (Jun. 10, 2020) (File No. SR-OCC-2020-003)
(stating that cash contributions to the Clearing fund serve as an
important source of liquidity and that non-cash contributions
provide a source of collateral necessary for OCC to access sources
of liquidity).
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The Commission believes, therefore, that the proposed changes to
broaden OCC's authority to access to Clearing Fund contributions are
consistent with Rule 17Ad-22(e)(13) under the Exchange Act.\38\
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\38\ 17 CFR 240.17Ad-22(e)(13).
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C. Consistency With Rule 17Ad-22(e)(16) Under the Exchange Act
Rule 17Ad-22(e)(16) under the Exchange Act requires that a covered
clearing agency establish, implement, maintain, and enforce written
policies and procedures reasonably designed to safeguard its 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.\39\ In adopting Rule 17Ad-
22(e)(16), the Commission provided guidance for consideration by
covered clearing agencies.\40\ Such guidance included the consideration
of whether a covered clearing agency's investment strategy is
consistent with its overall risk management strategy and fully
disclosed to participants.\41\
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\39\ 17 CFR 240.17Ad-22(e)(16).
\40\ Covered Clearing Agency Standards, 81 FR at 70837.
\41\ Id.
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The Commission believes that the proposed Cash and Investment
Management Policy would support and enhance OCC's current rules
regarding the investment of its and its participants' cash assets. As
described above, the Policy outlines safeguarding standards, such as
allowing OCC Cash and Clearing Member Cash to be
[[Page 10265]]
deposited only in a Federal Reserve Bank or in demand deposit accounts
with institutions that meet the standards set out in OCC's current risk
management strategy (e.g., OCC's Third Party Risk Management Framework)
to minimize the risk of loss or delay in access to such funds. The
Commission believes further that limiting the investment of cash to
Government Securities, and specifically limiting the investment of
Clearing Member Cash to instruments that provide liquidity to OCC by
the following business day, is consistent with investing in assets with
minimal credit, market and liquidity risks.\42\
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\42\ The Policy would allow OCC to invest its own cash in
longer-tenured instruments only where such cash is in excess of 110
percent of OCC's Target Capital Requirement.
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The Commission believes, therefore, that the addition of the Cash
and Investment Management Policy to OCC's rules is consistent with Rule
17Ad-22(e)(16) under the Exchange Act.\43\
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\43\ 17 CFR 240.17Ad-22(e)(16).
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IV. Conclusion
It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act, that the Commission does not object to
Advance Notice (SR-OCC-2021-803) and that OCC is authorized to
implement the proposed change as of the date of this notice or the date
of an order by the Commission approving proposed rule change SR-OCC-
2021-014, whichever is later.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-03824 Filed 2-22-22; 8:45 am]
BILLING CODE 8011-01-P
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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.