Notice2022-19413
Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection to Advance Notice Related to a Master Repurchase Agreement as Part of The Options Clearing Corporation's Overall Liquidity Plan
Primary source
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Published
September 8, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 173 (Thursday, September 8, 2022)</title>
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[Federal Register Volume 87, Number 173 (Thursday, September 8, 2022)]
[Notices]
[Pages 55064-55068]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-19413]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95669; File No. SR-OCC-2022-802]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of No Objection to Advance Notice Related to a Master Repurchase
Agreement as Part of The Options Clearing Corporation's Overall
Liquidity Plan
September 2, 2022.
I. Introduction
On July 7, 2022, the Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') advance
notice SR-OCC-2022-802 (``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\ in connection with a proposed master repurchase
agreement with a bank counterparty.\4\ The Advance Notice was published
for public comment in the Federal Register on July 26, 2022.\5\ The
Commission has received comments regarding 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 44457.
\5\ Exchange Act Release No. 95326 (Jul. 20, 2022), 87 FR 44457
(Jul. 26, 2022) (File No. SR-OCC-2022-802) (``Notice of Filing'').
\6\ Comments on the Advance Notice are available at <a href="https://www.sec.gov/comments/sr-occ-2022-802/srocc2022802.htm">https://www.sec.gov/comments/sr-occ-2022-802/srocc2022802.htm</a>.
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II. Background <SUP>7</SUP>
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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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As the sole clearing agency for standardized U.S. securities
options listed on national securities exchanges registered with the
Commission (``listed options''), OCC is obligated to make certain
payments. In the event of a Clearing Member default, OCC would be
obligated to make payments, on time, related to that member's clearing
transactions. To meet such payment obligations, OCC maintains access to
cash from a variety of sources, including a requirement for members to
pledge cash collateral to OCC and various agreements with banks and
other counterparties (``liquidity facilities'') to provide OCC with
cash in exchange for collateral, such as U.S. Government securities.
OCC routinely considers potential market stress scenarios that could
affect such payment obligations. Based on such considerations, OCC now
believes that it should seek to expand its liquidity facilities to
increase OCC's access to cash to manage a member default.\8\
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\8\ See Notice of Filing, 87 FR at 44458.
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OCC is proposing to expand its liquidity facilities to include a
new arrangement with a bank to provide access to cash for OCC. As
described in more detail below, OCC is proposing to execute a master
repurchase agreement (``MRA'') with a bank counterparty as part of
OCC's overall liquidity plan. OCC is not requiring its members or other
market participants to provide additional or different collateral to
OCC. Rather, the proposed MRA would provide OCC with another vehicle
for accessing cash to meet its payment obligations, including in the
event that one of its members fails to meet its payment obligations to
OCC.\9\
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\9\ See OCC Rule 1006(f)(1)(A). OCC may also use the Clearing
Fund to address liquidity shortfalls arising from the failure of any
bank, securities or commodities clearing organization, or investment
counterparty to perform any obligation to OCC when due. See OCC Rule
1006(f)(1)(C); Exchange Act Release No. 94304 (Feb. 24, 2022), 87 FR
11776 (Mar. 2, 2022) (File No. SR-OCC-2021-014).
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OCC's liquidity plan already provides access to a diverse set of
funding sources, including banks (i.e., OCC's syndicated credit
facility),\10\ the Non-Bank Liquidity Facility program,\11\ and
Clearing Members' Clearing Fund Cash Requirement.\12\ OCC currently
maintains $8 billion in qualifying liquid resources,\13\ consisting of
$5 billion of required Clearing Fund cash contributions, $2 billion in
the syndicated bank credit facility, and $1 billion in the Non-Bank
Liquidity Facility. OCC intends to increase such resources by $2.5
billion to a new total of $10.5 billion. OCC's proposed expansion of
its liquidity plan includes several components: (1) creating a new
committed repurchase facility with a commercial bank counterparty
(``Bank Repo Facility''); \14\ (2) expanding OCC's existing Non-Bank
Liquidity Facility program; \15\ (3) expanding OCC's existing
syndicated credit facility; \16\ and (4) establishing a target for the
aggregate amount of all external liquidity resources (i.e., the
syndicated credit facility, Bank Repo Facility and Non-Bank Liquidity
Facility).\17\ The Advance Notice concerns the first component
described above, namely, a change to OCC's operations to execute an MRA
with a commercial bank counterparty.\18\
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\10\ See Exchange Act Release No. 88971 (May 28, 2020), 85 FR
34257 (June 3, 2020) (File No. SR-OCC-2020-804).
\11\ See Exchange Act Release No. 89039 (Jun. 10, 2020), 85 FR
36444 (Jun. 16, 2020) (File No. SR-OCC-2020-803); Exchange Act
Release No. 76821 (Jan. 4, 2016), 81 FR 3208 (Jan. 20, 2016) (File
No. SR-OCC-2015-805); Exchange Act Release No. 73979 (Jan. 2, 2015),
80 FR 1062 (Jan. 8, 2015) (File No. SR-OCC-2014-809).
\12\ See OCC Rule 1002.
\13\ See 17 CFR 240.17Ad-22(a)(14) (defining qualifying liquid
resources).
\14\ The Bank Repo Facility would retain a funding limit and a
limit on adding new counterparties because OCC is proposing this
facility as a discrete MRA with a single counterparty. To the extent
OCC determines to add additional commitments or counterparties to
the Bank Repo Facility in the future, OCC would first file an
advance notice.
\15\ In a separate advance notice, OCC is proposing changes to
the Non-Bank Liquidity Facility program, including the elimination
of the current funding limit to that program in favor of an
established target for external liquidity across all sources. See
Exchange Act Release No. 95327 (Jul. 20, 2022), 87 FR 44477 (Jul.
26, 2022) (File No. SR-OCC-2022-803).
\16\ Id. at 44479.
\17\ Id.
\18\ The proposed Bank Repo Facility would have terms that
largely resemble those of an earlier Bank Repo Facility that OCC
executed with a bank counterparty in 2020 after obtaining a notice
of no objection from the Commission (``2020 Bank Repo Facility'').
See Exchange Act Release No. 88317 (Mar. 4, 2020), 85 FR 13681 (Mar.
9, 2020) (File No. SR-OCC-2020-801). However, in this case, the
committed amount would be up to $1 billion (as opposed to $500
million), and the bank counterparty would be one to which OCC has
minimal other credit exposure.
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Although the MRA would be based on the Securities Industry and
Financial Markets Association (``SIFMA'') standard form of master
repurchase agreement,\19\ OCC would require the MRA to contain certain
additional provisions tailored to help ensure certainty of funding and
operational effectiveness, as described in more detail below.
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\19\ The standard form master repurchase agreement is published
by SIFMA and is commonly used in the repurchase market by
institutional investors.
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A. MRA Standard Repurchase Agreement Terms
The MRA repurchase agreement terms would state that the buyer
(i.e., the bank counterparty) would purchase U.S. Government securities
(``Eligible Securities'') from OCC from time to time.\20\ OCC, the
seller, would transfer Eligible Securities to the buyer in
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exchange for a buyer payment to OCC in immediately available funds
(``Purchase Price''). The buyer would simultaneously agree to transfer
the purchased securities back to OCC at a specified later date
(``Repurchase Date''), or on OCC's demand against the transfer of funds
from OCC to the buyer, where the funds would be equal to the
outstanding Purchase Price plus the accrued and unpaid price
differential (together, ``Repurchase Price'').
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\20\ For the repurchase arrangements, OCC would use Eligible
Securities that are included in Clearing Fund contributions by
Clearing Members and margin deposits of any suspended Clearing
Member. OCC Rule 1006(f) and OCC Rule 1104(b) authorize OCC to use
these sources to obtain funds from third parties through securities
repurchases. The officers who may exercise this authority include
the Chairman, Chief Executive Officer, and Chief Operating Officer.
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At all times while a transaction is outstanding, OCC would be
required to maintain a specified amount of securities or cash margin
with the buyer.\21\ The market value of the securities supporting each
transaction would be determined daily, based on a price obtained from a
generally recognized pricing source. If the market value of the
purchased securities falls below OCC's required margin, OCC would be
required to satisfy its margin requirement by transferring sufficient
cash or additional securities reasonably acceptable to the buyer.\22\
If the market value of the purchased securities rises above OCC's
required margin, OCC would be permitted to require the buyer to return
excess purchased securities.
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\21\ OCC expects that it would be required to maintain margin
equal to 102% of the Repurchase Price, which is a standard rate for
arrangements involving Government securities.
\22\ OCC expects that it would use Clearing Fund securities and
securities posted as margin by defaulting Clearing Members.
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A buyer would default if it fails to purchase securities on a
Purchase Date, fails to transfer purchased securities on any applicable
Repurchase Date, or fails to transfer any interest, dividends, or
distributions on purchased securities to OCC within a specified period
after receiving notice of such failure. OCC would default if it fails
to transfer purchased securities on a Purchase Date, or fails to
repurchase purchased securities on an applicable Repurchase Date. The
MRA would also provide for standard events of default for either party,
including a party's failure to maintain required margin or an
insolvency event with respect to either party. If one party defaults,
the non-defaulting party has the option to accelerate the Repurchase
Date of all outstanding transactions between the defaulting party and
the non-defaulting party, among other rights. If OCC or the buyer did
not timely perform, the non-defaulting party would be permitted to buy
or sell, or deem itself to have bought or sold, securities as needed to
be made whole, and the defaulting party would be required to pay the
costs related to any covering transactions. Additionally, if OCC were
required to obtain replacement securities to be made whole because of a
buyer default, the buyer would be required to pay the excess of the
price paid by OCC to obtain replacement securities over the Repurchase
Price.
B. Additional Provisions To Promote Funding Certainty
Commitment To Fund
The buyer would provide a funding commitment of up to $1 billion,
with the commitment extending for one year (plus or minus one day). The
buyer would be obligated to enter into transactions under the MRA up to
its committed amount, so long as no default had occurred and OCC
transferred sufficient Eligible Securities. The buyer would be
obligated to enter into transactions even if OCC had experienced a
material adverse change, such as the failure of a Clearing Member.
Funding Mechanics
OCC would receive the Purchase Price in immediately available funds
within 60 minutes of its request for funds and delivery of Eligible
Securities and, if needed, prior to OCC's regular daily settlement
time.\23\ These targeted funding mechanics would allow OCC to receive
needed liquidity in time to satisfy settlement obligations, even in the
event of a default by a Clearing Member or a market disruption. For
example, the funding mechanism may be delivery versus payment/receive
versus payment \24\ or another method acceptable to OCC that both
satisfies the objectives of the Bank Repo Facility and presents limited
operational risks.
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\23\ This would include OCC's regular daily settlement time and
any extended settlement time implemented by OCC in an emergency
situation under Rule 505.
\24\ Delivery versus payment/receive versus payment is a method
of settlement under which payment for securities must be made prior
to or simultaneously with delivery of the securities.
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Rehypothecation Not Permitted
The buyer would not be permitted to grant any third party an
interest in purchased securities, in order to reduce the risk that the
third party could interfere with the buyer's transfer of the purchased
securities on the Repurchase Date. The buyer would agree to provide OCC
with daily information about the account the buyer uses to hold the
purchased securities, which would allow OCC to act quickly in the event
the buyer violates any requirements.
Early Termination Rights
OCC would be able to terminate any transaction early upon providing
written notice to the buyer, but the buyer would only be able to
terminate a transaction upon an OCC default, as further described
below. A notice of termination by OCC would specify a new Repurchase
Date prior to the originally agreed-upon Repurchase Date. Upon the
early termination of a transaction, the buyer would be required to
return all purchased securities to OCC and OCC would be required to pay
the Repurchase Price.
Substitution
OCC would have the discretion to substitute any Eligible Securities
for purchased securities by a specified time, so long as the Eligible
Securities satisfy any applicable criteria contained in the MRA and the
transfer of the Eligible Securities would not create a margin deficit,
as described above.\25\
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\25\ In addition to its substitution rights, OCC could cause the
return of purchased securities by exercising its optional early
termination rights under the MRA. If OCC were to terminate the
transaction, the buyer would be required to return purchased
securities to OCC against payment of the corresponding Repurchase
Price.
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Default Events
Beyond standard default events (e.g., failure to purchase or
transfer securities on the applicable Purchase Date or Repurchase
Date), OCC would require the MRA to not contain any additional default
events that would restrict OCC's access to funding. Most importantly,
OCC would require that if OCC suffers a ``material adverse change,'' it
would not be a default event.\26\ This provision provides OCC with
funding certainty, even in difficult market conditions.
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\26\ A ``material adverse change'' is typically defined
contractually as a change that would have a materially adverse
effect on the business or financial condition of a company.
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If a default event were to occur, the non-defaulting party may
elect to take the actions specified in a ``mini close-out'' provision
of the MRA instead of declaring an event of default. For example, if
the buyer were to fail to transfer purchased securities on the
applicable Repurchase Date, OCC may choose to take one of the following
actions, instead of declaring an event of default: (1) If OCC has
already paid the Repurchase Price, OCC could require the buyer to repay
it; (2) If there is a margin excess, OCC could require the buyer to pay
cash or deliver purchased securities in an amount equal to the margin
excess; or (3) OCC could declare that the applicable transaction, and
only that transaction, will be immediately terminated, and apply
default remedies under the MRA to only that transaction. OCC would
therefore have remedies to mitigate risk with respect to a particular
[[Page 55066]]
transaction, without having to declare an event of default with respect
to all transactions under the MRA.
C. The Proposed Program: Annual Renewal
As discussed above, the MRA would be for an annual term. OCC
anticipates that it would renew the MRA with the same bank
counterparty, based on the same or substantially similar terms.
At each renewal, OCC would evaluate the commitment amount so that
OCC's available liquidity resources remain properly calibrated to its
activities and settlement obligations. OCC would submit another advance
notice with respect to such renewal for the same term only under one of
the following conditions: (1) OCC determines its liquidity needs merit
funding levels above the $1 billion; (2) OCC should seek to change the
terms and conditions of the MRA in a manner that materially affects the
nature or level of risk presented by OCC; \27\ (3) OCC should seek to
add counterparties or substitute the bank counterparty to the Bank Repo
Facility program; or (4) the bank counterparty has experienced a
negative change to its credit profile or a material adverse change
since the latest renewal of the MRA. Annual renewals for the Bank Repo
Facility would proceed in a similar manner to renewals of term
commitments under the existing Non-Bank Liquidity Facility.\28\
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\27\ For the purposes of clarity, OCC would not consider changes
to pricing or changes in representations, covenants, and terms of
events of default to be changes to a term or condition that would
require the filing of a subsequent advance notice. This would be
OCC's position so long as pricing is at the then-prevailing market
rate, and changes to such other provisions are immaterial to OCC as
the seller and do not materially impair OCC's ability to draw
against the facility.
\28\ See Exchange Act Release No. 76821, 81 FR at 3209
(describing OCC's proposal to submit an advance notice in connection
with a renewal of commitments under the Non-Bank Liquidity Facility
if: (i) OCC determined that its liquidity needs merited commitments
above or below certain levels; (ii) OCC should seek to change the
terms and conditions of the Non-Bank Liquidity Facility; and (iii)
the commitment counterparty experienced a negative change to its
credit profile or a material adverse change since entering the
commitment or the latest renewal of the commitment). OCC
subsequently submitted an advance notice pursuant to that commitment
to support its ability to onboard multiple liquidity providers below
the identified thresholds and with different term lengths to replace
expiring commitments, see Exchange Act Release No. 89039, 85 FR at
36445-46, and has, concurrent with the filing of File No. SR-OCC-
2022-802, submitted another advance notice to eliminate the current
funding limit to that program in favor of an established target for
external liquidity across all sources. See supra note 15.
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Absent one or more of the changes described above, OCC states that
it does not believe that renewal of the MRA would constitute a change
to OCC's operations that could materially affect the nature or level of
risks presented by OCC so as to require an advance notice under Section
806(e)(1) of the Clearing Supervision Act.\29\ OCC would consider such
a renewal to be on substantially the same terms and conditions.
Conversely, a new commitment or renewal under different conditions
would necessitate OCC providing advance notice to the Commission for
consideration.
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\29\ 12 U.S.C. 5465(e)(1).
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III. Commission Findings 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 systemically
important financial market utilities (``SIFMUs'') and strengthening the
liquidity of SIFMUs.\30\
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\30\ 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.\31\ 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): \32\
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\31\ 12 U.S.C. 5464(a)(2).
\32\ 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.\33\
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\33\ 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'').\34\ The Clearing Agency
Rules require, 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.\35\ 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,\36\ and in
the Clearing Agency Rules, in particular Rule 17Ad-22(e)(7).\37\
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\34\ 17 CFR 240.17Ad-22. See 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. The Commission
established an effective date of December 12, 2016 and a compliance
date of April 11, 2017 for the Covered Clearing Agency Standards.
OCC is a ``covered clearing agency'' as defined in Rule 17Ad-
22(a)(5).
\35\ 17 CFR 240.17Ad-22.
\36\ 12 U.S.C. 5464(b).
\37\ 17 CFR 240.17Ad-22(e)(7).
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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.\38\
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\38\ 12 U.S.C. 5464(b).
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The Commission believes that the addition of a Bank Repo Facility
to OCC's overall liquidity plan is consistent with the promotion of
robust risk management, in particular management of liquidity risk
presented to OCC. As a central counterparty and SIFMU,\39\ it is
imperative that OCC have adequate resources to be able to satisfy its
counterparty settlement obligations, including in the event of a
Clearing Member default.\40\ As described above, the Bank Repo Facility
program would provide an additional source of liquidity to OCC's
overall liquidity plan and increase the amount of OCC's qualifying
liquid resources. This would promote the reduction of risks to OCC, its
Clearing Members, and the options market in general, because it would
[[Page 55067]]
allow OCC to increase the amount and availability of short-term funds
to address liquidity demands arising out of the default or suspension
of a Clearing Member, or in anticipation of a potential default or
suspension of a Clearing Member. Moreover, adding another committed
source of liquidity resources would help OCC to manage the allocation
between its sources of liquidity by giving OCC more flexibility to
adjust the mix of liquidity resources based on market conditions,
availability, and shifting liquidity needs.
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\39\ See Financial Stability Oversight Council (``FSOC'') 2012
Annual Report, Appendix A, available at <a href="https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf">https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf</a>.
\40\ See Exchange Act Release No. 73979 (Jan. 2, 2015), 80 FR
1062, 1065 (Jan. 8, 2015) (File No. SR-OCC-2014-809).
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The Commission also believes that the proposed changes to add the
Bank Repo Facility are consistent with the promotion of safety and
soundness. By adding a liquidity resource of up to $1 billion, OCC is
reducing the likelihood that it would have insufficient financial
resources to address liquidity demands arising out of a Clearing Member
default. 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.\41\ 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 or a market disruption. 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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\41\ See 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 Mar. 17,
2021).
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The Commission received comments asserting that the proposal would
be harmful to U.S. markets, investors, and pension holders, and that
``changing the rules regarding advance notice'' (likely referring to
OCC not having to file an advance notice at renewal) has ``no value to
the public.'' \42\ As described above, an additional liquidity source
of $1 billion would reduce the likelihood that OCC would have
insufficient financial resources resulting from a Clearing Member
default, and would in fact promote the safety and soundness of the U.S.
markets. Moreover, the Commission has carefully considered the risk of
allowing renewals of the Bank Repo Facility without additional advance
notice filings. Given that such a renewal would only be permitted
without an advance notice if executed on substantially similar terms as
those of the Bank Repo Facility,\43\ to which the Commission does not
object, the Commission does not believe that future renewals would pose
any more risk than the proposal considered here. Any change to the
terms of the proposed Bank Repo Facility or a renewal thereof that
could materially affect the nature or level of risk posed by OCC would
necessitate an advance notice filing.
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\42\ Comments on the Advance Notice are available at <a href="https://www.sec.gov/comments/sr-occ-2022-802/srocc2022802.htm">https://www.sec.gov/comments/sr-occ-2022-802/srocc2022802.htm</a>.
\43\ OCC would submit another advance notice if: (1) OCC seeks
funding above $1 billion; (2) OCC seeks to change the terms and
conditions of the MRA in a manner that materially affects the nature
or level of risk presented by OCC; (3) OCC seeks to add or
substitute counterparties; or (4) the bank counterparty has
experienced a negative change to its credit profile or a material
adverse change since the latest renewal of the MRA.
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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.\44\
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\44\ 12 U.S.C. 5464(b).
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B. Consistency With Rule 17Ad-22(e)(7) Under the Exchange Act
Rule 17Ad-22(e)(7)(ii) under the Exchange Act requires that a
covered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to effectively
measure, monitor, and manage the liquidity risk that arises in or is
borne by the covered clearing agency, including measuring, monitoring,
and managing its settlement and funding flows on an ongoing and timely
basis, and its use of intraday liquidity by, at a minimum, holding
qualifying liquid resources sufficient to meet the minimum liquidity
resource requirement under Rule 17Ad-22(e)(7)(i) \45\ in each relevant
currency for which the covered clearing agency has payment obligations
owed to clearing members.\46\ For any covered clearing agency,
``qualifying liquid resources'' means assets that are readily available
and convertible into cash through prearranged funding arrangements,
such as, committed arrangements without material adverse change
provisions, including, among others, repurchase agreements.\47\
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\45\ Rule 17Ad-22(e)(7)(i) requires OCC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to effectively measure, monitor, and manage liquidity risk
that arises in or is borne by OCC, including measuring, monitoring,
and managing its settlement and funding flows on an ongoing and
timely basis, and its use of intraday liquidity by, at a minimum,
maintaining sufficient liquid resources at the minimum in all
relevant currencies to effect same-day settlement of payment
obligations with a high degree of confidence under a wide range of
foreseeable stress scenarios that includes, but is not limited to,
the default of the participant family that would generate the
largest aggregate payment of obligation for the covered clearing
agency in extreme but plausible conditions. 17 CFR 240.17Ad-
22(e)(7)(i).
\46\ 17 CFR 240.17Ad-22(e)(7)(ii).
\47\ 17 CFR 240.17Ad-22(a)(14)(ii)(3).
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As described above, implementation of the Bank Repo Facility would
provide OCC with a committed funding arrangement that would give OCC
access to $1 billion of committed liquid resources through an MRA with
a bank counterparty. Under the terms of the MRA, OCC's bank
counterparty would be required to provide OCC with funding subject to a
number of conditions, including an obligation to fund regardless of any
material adverse change at OCC, such as the failure of a Clearing
Member. Taken together, the Commission believes that the Bank Repo
Facility provides OCC with $1 billion of ``qualifying liquid
resources'' as that term is defined in Rule 17Ad-22(e)(14) of the
Exchange Act,\48\ and therefore is consistent with the requirements of
Rule 17Ad-22(e)(7)(ii) under the Exchange Act.
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\48\ Id.
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The Commission received comments asserting that the proposal would
leave the investing public, rather than Clearing Members, accountable
for a Clearing Member default or a market disruption.\49\ As permitted
by the Clearing Agency Rules, OCC maintains a number of different
liquidity resources to manage liquidity risk, including a requirement
that Clearing Members provide a specified amount of their Clearing Fund
contributions in cash.\50\ As noted above, Rule 17Ad-22(a)(14) under
the Exchange Act defines qualifying liquid resources to include assets
that are readily available and convertible into cash through
prearranged funding arrangements, such as committed repurchase
agreements.\51\ OCC is proposing to arrange a facility for converting
assets pledged by its members into cash to ensure that OCC is able to
meet its payment obligations. Any cash provided to OCC under the
[[Page 55068]]
Bank Repo Facility would be in exchange for U.S. Government
Securities.\52\ Retail investors would not be directly exposed to any
potential risks arising out of the facility because the arrangement
would be between OCC and a bank counterparty.\53\ The Commission
believes, therefore, that the facility would not relieve Clearing
Members from collateralizing the risks they pose to OCC or
inappropriately shift such risks to the investing public.\54\
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\49\ Comments on the Advance Notice are available at <a href="https://www.sec.gov/comments/sr-occ-2022-802/srocc2022802.htm">https://www.sec.gov/comments/sr-occ-2022-802/srocc2022802.htm</a>.
\50\ See OCC Rule OCC 1002(a)(i). OCC increased the amount of
cash that Clearing Members are required to provide to address
liquidity exposures twice in 2021. See OCC Info Memo 48995 (Jul. 16,
2021), available at <a href="https://infomemo.theocc.com/infomemos?number=48995">https://infomemo.theocc.com/infomemos?number=48995</a> and OCC Info Memo 49316 (Sep. 28, 2021)
available at <a href="https://infomemo.theocc.com/infomemos?number=49316">https://infomemo.theocc.com/infomemos?number=49316</a>.
\51\ 17 CFR 240.17Ad-22(a)(14)(ii).
\52\ See Bank Repo Facility Notice of Filing, 87 FR at 44458.
\53\ Id. at 44457.
\54\ The Commission also received comments asserting that the
proposal would leave the investing public accountable for a Clearing
Member default, specifically because the OCC proposes to obtain
liquidity from pension funds. See comments on the Advance Notice at
<a href="https://www.sec.gov/comments/sr-occ-2022-802/srocc2022802.htm">https://www.sec.gov/comments/sr-occ-2022-802/srocc2022802.htm</a>. These
comments were likely intended for OCC's concurrent proposal to
expand its Non-Bank Liquidity Facility program, but were erroneously
submitted as comments for the Bank Repo Facility proposal. These
comments have been considered and addressed as part of the Non-Bank
Liquidity Facility proposal. See Exchange Act Release No. 95327
(Jul. 20, 2022), 87 FR 44477 (Jul. 26, 2022) (File No. SR-OCC-2022-
803).
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Accordingly, the Commission believes that the changes proposed in
the Advance Notice are consistent with Rule 17Ad-22(e)(7) under the
Exchange Act.\55\
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\55\ 17 CFR 240.17Ad-22(e)(7).
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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-2022-802) and that OCC is authorized to
implement the proposed change as of the date of this notice.
By the Commission.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-19413 Filed 9-7-22; 8:45 am]
BILLING CODE P
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