Notice2022-04330
Self-Regulatory Organizations; The Options Clearing Corporation; Order Granting Approval 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
March 2, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 87 Issue 41 (Wednesday, March 2, 2022)</title>
</head>
<body><pre>
[Federal Register Volume 87, Number 41 (Wednesday, March 2, 2022)]
[Notices]
[Pages 11776-11779]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-04330]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94304; File No. SR-OCC-2021-014)]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Granting Approval of Proposed Rule Change Concerning The Options
Clearing Corporation's Cash and Investment Management
February 24, 2022.
I. Introduction
On December 23, 2021, the Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2021-014 (``Proposed Rule Change'')
pursuant to Section 19(b) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to (i) add OCC's
existing 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.\3\
The Proposed Rule Change was published for public comment in the
Federal Register on January 12, 2022.\4\ The Commission has
[[Page 11777]]
received no comments regarding the substance of the Proposed Rule
Change.\5\ This order approves the Proposed Rule Change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Notice of Filing infra note 5, at 87 FR 1819.
\4\ Securities Exchange Act Release No. 93916 (Jan. 12, 2022),
87 FR 1819 (Jan. 12, 2022) (File No. SR-OCC-2021-014) (``Notice of
Filing''). OCC also filed a related advance notice (SR-OCC-2021-803)
(``Advance Notice'') with the Commission pursuant to Section
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, entitled the Payment, Clearing, and
Settlement Supervision Act of 2010 and Rule 19b-4(n)(1)(i) under the
Exchange Act. 12 U.S.C. 5465(e)(1). 15 U.S.C. 78s(b)(1) and 17 CFR
240.19b-4, respectively. The Advance Notice was published in the
Federal Register on January 12, 2022. Securities Exchange Act
Release No. 93915 (Jan. 6, 2022), 87 FR 1814 (Jan. 12, 2022) (File
No. SR-OCC-2021-803). A Notice of No Objection to the Advance Notice
was published in the Federal Register on February 23, 2022. See
Securities Exchange Act Release No. 94270 (Feb. 17, 2022), 87 FR
10262 (Feb. 23, 2022) (File No. SR-OCC-2021-803).
\5\ The Commission received no comments on the Proposed Rule
Change; however, since the Proposed Rule Change was also filed as an
advance notice, 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. The Commission received
a comment letter on the Advance Notice that 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 to approve the Proposed Rule Change. 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>.
---------------------------------------------------------------------------
II. Background \6\
---------------------------------------------------------------------------
\6\ 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>.
---------------------------------------------------------------------------
OCC is proposing to add to its Rules 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.
A. Policy Regarding Cash and Related Investments
OCC's current rules include provisions governing the management and
investment of both 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
as theBoard may from time to time approve.\7\ Further, OCC's rules
allow it to invest in Government securities cash that it receives and
holds from Clearing Members' margin requirements and Clearing Fund
contributions.\8\ OCC proposes to add its Cash and Investment
Management Policy to its current investment related rules.\9\
---------------------------------------------------------------------------
\7\ See By-Law Art. IX, Sec. 1.
\8\ See OCC Rule 604(a); Rule 1006(c).
\9\ See Notice of Filing, 87 FR 1820.
---------------------------------------------------------------------------
The proposed Cash and Investment Management Policy will build on
OCC's existing Rules by (i) outlining the safeguarding standards for
cash and related investments managed by OCC to minimize credit and
liquidity risk, and (2) providing 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 \10\ and Clearing Member
Cash \11\ 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.\12\ The Policy would also require that OCC employ a bank
account structure that segregates customer funds per applicable
regulatory requirements \13\ and OCC's By-Laws and Rules.\14\
---------------------------------------------------------------------------
\10\ 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.
\11\ 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).
\12\ See OCC Rule 1104.
\13\ See 17 CFR 39.15 (requiring a derivatives clearing
organization to comply with the segregation requirements section 4d
of the Commodity Exchange Act).
\14\ See OCC By-Laws Art. VI, Sec. 3(f) (providing for
maintenance of segregated futures accounts).
---------------------------------------------------------------------------
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 investments in internal
procedures, but will publish its investment strategy in its Qualitative
Disclosures posted to OCC's public website.\15\ 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.\16\
---------------------------------------------------------------------------
\15\ 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>.
\16\ 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).
---------------------------------------------------------------------------
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 \17\ 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.\18\ Under the Policy,
interest or gain received on investments will belong to OCC except as
otherwise provided for in OCC's Rules.\19\
---------------------------------------------------------------------------
\17\ 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).
\18\ 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).
\19\ 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).
---------------------------------------------------------------------------
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.\20\ OCC's
Rules also define the conditions under which OCC may borrow Clearing
Fund assets.\21\ 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,
[[Page 11778]]
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.
---------------------------------------------------------------------------
\20\ See OCC Rule 1006(a) and (c).
\21\ See OCC Rule 1006(f).
---------------------------------------------------------------------------
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 the 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. However, the proposed changes to Rules
1006(a), (c), and (f) would limit access to failures with respect to
cash invested under 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 Commission Findings
Section 19(b)(2)(C) of the Exchange Act directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to such organization.\22\ After carefully
considering the Proposed Rule Change, the Commission finds that the
proposal is consistent with the requirements of the Exchange Act and
the rules and regulations thereunder applicable to OCC. More
specifically, the Commission finds that the proposal is consistent with
Section 17A(b)(3)(A) of the Exchange Act,\23\ and Rule 17Ad-22(e)(13)
\24\ and Rule 17Ad-22(e)(16) \25\ thereunder, as described in detail
below.
---------------------------------------------------------------------------
\22\ 15 U.S.C. 78s(b)(2)(C).
\23\ 15 U.S.C. 78q-1(b)(3)(A).
\24\ 17 CFR 240.17Ad-22(e)(13).
\25\ 17 CFR 240.17Ad-22(e)(16).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F) of the Exchange Act
Section 17A(b)(3)(F) of the Exchange Act 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
and, to the extent applicable, derivative agreements, contracts, and
transactions as well as to ensure the safeguarding of securities and
funds which are in the custody or control of the clearing agency.\26\
Based on its review of the record, and for the reasons described below,
the Commission finds the proposal is consistent with Section
17A(b)(3)(F) of the Exchange Act.
---------------------------------------------------------------------------
\26\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The Commission believes that the proposed adoption of the Cash and
Investment Management Policy would be consistent with the the
safeguarding of securities and funds because the proposed changes would
build on OCC's current Rules for managing cash and investments. The
Policy, which OCC proposes to add to its Rules, includes standards for
safeguarding OCC Cash and Clearing Member Cash through the application
of OCC's counterparty standards, such as allowing OCC Cash and Clearing
Member Cash to be 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 to minimize the risk of loss or
delay in access to such funds. Further, to support OCC's liquidity risk
management practices, the Policy includes limitations on the permitted
tenure of investments. The Commission believes, therefore, that adding
the Policy to OCC's Rules is consistent with the safeguarding of
securities and funds in OCC's custody or control.
The Commission believes that the proposed changes to broaden OCC's
authority to access Clearing Fund contributions are consistent with
promoting the prompt and accurate clearance and settlement of
securities transactions. The proposed changes will 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, margin cash or Clearing Fund cash.
In the event that a counterparty with whom OCC has invested Clearing
Member Cash has failed, the proposed rule change is designed to allow
OCC to access the Clearing Fund to meet OCC's payment obligations.
Ensuring that OCC is able to meet its payment obligations would, in
turn, reduce the likelihood of a disruption to the timely settlement of
derivates contracts and related transactions, such as the payment of
premiums or cash settlements arising out of exercise and assignment
activities. The Commission believes, therefore, that allowing OCC
access to the Clearing Fund contributions in the event of a failure of
an investment counterparty would promote the prompt and accurate
clearance and settlement of securities transactions and, to the extent
applicable, derivative agreements, contracts, and transactions.
The Commission believes, therefore, that the proposal to add OCC's
policy regarding cash and related investments to its Rules, and 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, is consistent with the
requirements of Section 17A(b)(3)(F) of the Exchange Act.\27\
---------------------------------------------------------------------------
\27\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
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.\28\
---------------------------------------------------------------------------
\28\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------
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.\29\ OCC also relies on such resources to manage
potential liquidity shortfalls arising out of the default of a Clearing
Member under extreme but plausible market conditions.\30\ In the event
of a Clearing
[[Page 11779]]
Member default, unless it has access to the Clearing Fund contributions
of non-defaulting Clearing Members, 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. The Commission also believes that the proposed
changes to restate and reorganize Rule 1006(f) would enhance the rule's
clarity, and therefore help ensure 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.
---------------------------------------------------------------------------
\29\ See Securities Exchange Act Release No. 87717 (Dec. 11,
2019), 84 FR 68985, 68987 (Dec. 17, 2019) (File No. SR-OCC-2019-
009).
\30\ 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).
---------------------------------------------------------------------------
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.\31\
---------------------------------------------------------------------------
\31\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------
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.\32\ In adopting Rule 17Ad-
22(e)(16), the Commission provided guidance for consideration by
covered clearing agencies.\33\ 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.\34\
---------------------------------------------------------------------------
\32\ 17 CFR 240.17Ad-22(e)(16).
\33\ Covered Clearing Agency Standards, 81 FR at 70837.
\34\ Id.
---------------------------------------------------------------------------
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 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.\35\
---------------------------------------------------------------------------
\35\ 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.
---------------------------------------------------------------------------
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.\36\
---------------------------------------------------------------------------
\36\ 17 CFR 240.17Ad-22(e)(16).
---------------------------------------------------------------------------
IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the
Exchange Act, and in particular, the requirements of Section 17A of the
Exchange Act \37\ and the rules and regulations thereunder.
---------------------------------------------------------------------------
\37\ In approving this Proposed Rule Change, the Commission has
considered the proposed rules' impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\38\ that the Proposed Rule Change (SR-OCC-2021-014) be,
and hereby is, approved.
---------------------------------------------------------------------------
\38\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
---------------------------------------------------------------------------
\39\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2022-04330 Filed 3-1-22; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on March 2, 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.