Notice2022-19417
Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection to Advance Notice Related to an Expansion of The Options Clearing Corporation's Non-Bank Liquidity Facility Program as Part of Its 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 55048-55053]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-19417]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95670; File No. SR-OCC-2022-803]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of No Objection to Advance Notice Related to an Expansion of The
Options Clearing Corporation's Non-Bank Liquidity Facility Program as
Part of Its 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-2022-803 (``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\ in connection with a proposed change to its
operations to expand capacity under OCC's program for accessing
additional committed sources of liquidity that do not increase the
concentration of OCC's counterparty exposure (``Non-Bank Liquidity
Facility'') as part of OCC's overall liquidity plan.\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 44477.
\5\ See Exchange Act Release No. 95327 (Jul. 20, 2022), 87 FR
44477 (Jul. 26, 2022) (File No. SR-OCC-2022-803) (``Notice of
Filing'').
\6\ Comments on the Advance Notice are available at <a href="https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm">https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.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,
[[Page 55049]]
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 44477.
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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),\9\ the Non-Bank Liquidity Facility program (defined
above),\10\ and Clearing Members' Clearing Fund Cash Requirement.\11\
OCC currently maintains $8 billion in qualifying liquid resources,\12\
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''); \13\ (2) expanding OCC's
existing Non-Bank Liquidity Facility program; \14\ (3) expanding OCC's
existing syndicated credit facility; and (4) establishing a target for
the aggregate amount of all external liquidity resources (i.e., the
syndicated credit facility, Bank Repo Facility and the Non-Bank
Liquidity Facility).\15\ The Advance Notice concerns the second
component described above, namely, a change to OCC's operations to
expand its Non-Bank Liquidity Facility program.\16\
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\9\ See Exchange Act Release No. 88971 (May 28, 2020), 85 FR
34257 (Jun. 3, 2020) (File No. SR-OCC-2020-804).
\10\ See Exchange Act Release No. 89039 (Jun. 10, 2020), 85 FR
36444 (Jun. 16, 2020) (File No. SR-OCC-2020-803) (``Notice of No
Objection to 2020 Advance Notice''); Exchange Act Release No. 76821
(Jan. 4, 2016), 81 FR 3208 (Jan. 20, 2016) (File No. SR-OCC-2015-
805) (``Notice of No Objection to 2015 Advance Notice''); Exchange
Act Release No. 73979 (Jan. 2, 2015), 80 FR 1062 (Jan. 8, 2015)
(File No. SR-OCC-2014-809) (``Notice of No Objection to 2014 Advance
Notice'').
\11\ See OCC Rule 1002.
\12\ See 17 CFR 240.17Ad-22(a)(14) (defining qualifying liquid
resources).
\13\ In a separate advance notice, OCC is proposing to enter a
new MRA with a commercial bank counterparty. See Exchange Act
Release No. 95326 (Jul. 20, 2022), 87 FR 44457 (Jul. 26, 2022) (File
No. SR-OCC-2022-802).
\14\ See Notice of Filing, 87 FR at 44477.
\15\ As discussed below, OCC would be required to file an
advance notice with the Commission if it were to seek to reduce the
commitments under the Non-Bank Liquidity Facility so as to reduce
external liquidity below the $3 billion target.
\16\ The third and fourth components of OCC's proposed expansion
of its liquidity plan are briefly discussed below.
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Under OCC's existing Non-Bank Liquidity Facility program, OCC
maintains a series of arrangements to access cash in exchange for
Government securities (``Eligible Securities'') deposited by Clearing
Members in respect of their Clearing Fund requirements to meet OCC's
settlement obligations. Currently, the aggregate amount OCC may seek
through the Non-Bank Liquidity Facility program is limited to $1
billion.\17\ Through this Advance Notice, OCC is proposing to remove
the $1 billion funding limit and increase the capacity of its Non-Bank
Liquidity Facility to an amount to be determined by OCC's Board from
time to time, based on OCC's liquidity needs at the time and a number
of other factors.\18\ Instead of retaining the $1 billion funding limit
for the Non-Bank Liquidity Facility program, OCC proposes to establish
a target across all external liquidity resources of at least $3
billion, which is the current aggregate amount of external
liquidity.\19\ OCC is not, as part of this Advance Notice, requiring
its members or other market participants to provide additional or
different collateral to OCC. Rather, the purpose of the proposal is to
provide OCC with increased capacity 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.\20\
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\17\ In 2020, OCC set the aggregate amount it may seek through
the Non-Bank Liquidity Facility program to an amount up to $1
billion. See Notice of No Objection to 2020 Advance Notice, 85 FR at
36446. $1 billion is the same as the aggregate value established at
the inception of the Non-Bank Liquidity Facility program. See Notice
of No Objection to 2014 Advance Notice, 80 FR at 1064 & n.11. In
2015, OCC filed an advance notice that set an aggregate value of at
least $1 billion and up to $1.5 billion. See Notice of No Objection
to 2015 Advance Notice, 81 FR at 3208.
\18\ OCC's Board has authorized OCC to seek up to an additional
$2.5 billion in external liquidity.
\19\ See Notice of Filing, 87 FR at 44479.
\20\ 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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With respect to OCC's overall liquidity plan, the Non-Bank
Liquidity Facility program reduces the concentration of OCC's
counterparty exposure by diversifying its base of liquidity providers
among banks and non-bank, non-Clearing Member institutional investors,
such as pension funds or insurance companies.
The currently approved Non-Bank Liquidity Facility consists of two
parts: a Master Repurchase Agreement (``MRA''), and confirmations with
one or more institutional investors, which contain certain
individualized terms and conditions of transactions executed between
OCC, the institutional investors, and their agents. The MRA is
structured so that the buyer (i.e., the institutional investor) would
purchase Eligible Securities from OCC from time to time.\21\ OCC, the
seller, would transfer Eligible Securities to the buyer in 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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\21\ OCC would use Eligible Securities that are included in
Clearing Fund contributions by Clearing Members and margin deposits
of any Clearing Member that has been suspended by OCC for the
repurchase arrangements. 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 Executive Chairman, Chief
Executive Officer, and Chief Operating Officer.
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The confirmations establish tailored provisions of repurchase
transactions permitted under the Non-Bank Liquidity Facility that are
designed to reduce concentration risk and promote certainty of funding
and operational effectiveness based on the specific needs of a party.
For example, OCC would only enter into confirmations with an
institutional investor that is not a Clearing Member or affiliated
bank, such as a pension fund or an insurance company, in order to allow
OCC to access stable and reliable sources of funding without increasing
the concentration of its exposure to counterparties that are affiliated
banks, broker-dealers, or futures commission merchants. In addition,
any such institutional investor is obligated to enter repurchase
transactions even if OCC experiences a material adverse
[[Page 55050]]
change,\22\ funds must be made available to OCC within 60 minutes of
OCC's delivering Eligible Securities, and the institutional investor is
not permitted to rehypothecate purchased securities.\23\ Additionally,
the confirmations set forth the term and maximum dollar amounts of the
transaction permitted under the MRA.
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\22\ 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.
\23\ See Notice of No Objection to 2014 Advance Notice, 80 FR at
1064.
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In 2020, OCC set the aggregate amount it may seek through the Non-
Bank Liquidity Facility program to an amount of up to $1 billion.\24\
OCC has since secured commitments from multiple pension funds in an
aggregate amount of $1 billion. Since setting and securing commitments
up to that aggregate commitment limit, OCC has experienced an increase
in its stressed liquidity demands. Under OCC's Liquidity Risk
Management Framework (``LRMF''), OCC performs daily liquidity stress
testing to assess its Base Liquidity Resources \25\ and Available
Liquidity Resources \26\ against OCC's liquidity risk tolerance
(``Adequacy Scenarios''). Based in part on the results of this stress
testing, OCC has periodically adjusted Clearing Member's Clearing Fund
Cash Requirement to ensure that OCC maintains sufficient liquidity
resources to cover its liquidity risk exposures at all times.\27\
Through this Advance Notice OCC proposes a change to its Non-Bank
Liquidity Facility program to give OCC greater capacity to source
liquidity from its non-bank liquidity providers as needed.
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\24\ See Notice of No Objection to 2020 Advance Notice, 85 FR at
36446. $1 billion is the same as the aggregate value established at
the inception of the Non-Bank Liquidity Facility program. See Notice
of No Objection to 2014 Advance Notice, 80 FR at 1064 & n.11. In
2015, OCC filed an advance notice that set an aggregate value of at
least $1 billion and up to $1.5 billion. See Notice of No Objection
to 2015 Advance Notice, 81 FR at 3208.
\25\ The LRMF defines ``Base Liquidity Resources'' to mean the
amount of committed liquidity resources maintained at all times by
OCC to meet its Cover 1 liquidity resource requirements under the
applicable regulations. Base Liquidity Resources are comprised of
qualifying liquid resources in the form of Clearing Fund cash
deposited in respect of the Clearing Fund Cash Requirement and
assets that are readily available and convertible into cash (i.e.,
U.S. Government securities) through prearranged funding
arrangements, such as the Non-Bank Liquidity Facility.
\26\ The LRMF defines ``Available Liquidity Resources'' to
include Base Liquidity Resources plus allowable Clearing Fund cash
deposited in excess of the Clearing Fund Cash Requirement. Any
Clearing Member request to substitute U.S. Government securities for
cash deposits in excess of such Clearing Member's proportionate
share of the Clearing Fund Cash Requirement is subject to a two-day
notice period. See OCC Rule 1002(a)(iv).
\27\ In response to increased stressed liquidity demands in
2021, OCC exercised authority under OCC Rule 1002(a) to increase the
Clearing Fund Cash Requirement from $3.5 billion to $4 billion in
July 2021, and from $4 billion to $5 billion in October 2021.
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The Proposed Change
In order to give OCC greater capacity to source liquidity from
external liquidity providers as needed, OCC would modify the Non-Bank
Liquidity Facility program to remove the aggregate commitment limit of
$1 billion, identified in the 2020 advance notice.\28\ OCC proposes
that its Board of Directors (``Board'') set, by resolution and from
time to time, the level of aggregate commitments under the program to
ensure that OCC maintains sufficient liquidity resources to cover its
liquidity risk exposures at all times.\29\
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\28\ See Notice of No Objection to 2020 Advance Notice, 85 FR at
36446.
\29\ In setting the level of aggregate commitments for the Non-
Bank Liquidity Facility, the Board would consider factors including,
but not limited to: (1) the size and make-up of the Clearing Fund;
(2) the aggregate amount of OCC's other liquidity sources; and (3)
changing market and business conditions.
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OCC's Board has authorized OCC to seek up to an additional $2.5
billion in external liquidity, including through the Non-Bank Liquidity
Facility, which would give OCC access to a total of $5.5 billion in
external liquidity.\30\ For the additional $2.5 billion, OCC expects
that it will source $1.5 billion from bank counterparties and $1
billion under the Non-Bank Liquidity Facility. In the event that OCC is
unable to obtain the full $1.5 billion from its bank counterparties,
however, OCC would source the full $2.5 billion under the Non-Bank
Liquidity Facility program.\31\
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\30\ OCC performs daily liquidity stress testing to assess its
liquidity resources. See Notice of Filing, 87 FR at 44478. Based on
the results of such stress testing, OCC increased Clearing Fund
requirements twice in 2021. Id. OCC management recommended that OCC
increase the capacity of its Non-Bank Liquidity Facility, which
would provide OCC flexibility in how it increases liquidity
resources in response to stress testing. See Confidential Exhibit 3
to File No. SR-OCC-2022-803.
\31\ See Notice of Filing, 87 FR at 44479.
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Removing the present $1 billion funding limit to the Non-Bank
Liquidity Facility program would remove one of the specified terms that
could require OCC to file an advance notice.\32\ Consistent with the
proposal to establish a target for external liquidity, and drawing from
applicable conditions for filing advance notices with respect to
renewals of OCC's syndicated credit facility and proposed Bank Repo
Facility, OCC would submit another advance notice to execute individual
commitments under the Non-Bank Liquidity Facility only if: (1) OCC
should seek to execute a commitment at a level that would have the
effect of reducing total external liquidity below the target of $3
billion; (2) OCC should seek to change the terms and conditions of the
MRA or commitments thereunder in a manner that materially affects the
nature or level of risk presented by OCC; \33\ or (3) OCC should seek
to execute a commitment with a counterparty that has experienced a
negative change to its credit profile or a material adverse change
since OCC last executed a commitment with that counterparty. Consistent
with another prior advance notice, OCC may consider changes to (1)
liquidity providers, provided that any new counterparty is subject to a
credit review under OCC's Third-Party Risk Management Framework; \34\
and (2) term lengths consistent with those approved by OCC's Board,
considering factors including, but not limited to, the initial
committed length of the term, market conditions, and OCC's liquidity
needs.\35\ OCC would not consider additional counterparties or
different commitment terms within these specified parameters as
materially altering the terms and conditions of MRAs or commitments
[[Page 55051]]
under the Non-Bank Liquidity Facility program.
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\32\ The facility is designed to allow OCC to seek individual
commitments from counterparties on specified terms. See e.g.,
Exchange Act Release No. 89039 (Jun. 10, 2020), 85 FR 36444, 36446
(Jun. 16, 2020) (File No. SR-OCC-2020-803) (stating that OCC may
negotiate individual commitments within an aggregate commitment
limit). In 2015, the Commission acknowledged that changes to
specified terms (e.g., funding levels) would require the further
submissions to the Commission for review. See Exchange Act Release
No. 76821 (Jan. 4, 2016), 81 FR 3208, 3209 (Jan. 20, 2016) (File No.
SR-OCC-2015-805). The terms of the current facility, which OCC
implemented the terms of its current facility in 2020 following
publication of a Notice of No Objection from the Commission, set an
aggregate commitment amount OCC may seek under the Non-Bank Repo
Facility program at $1 billion so that OCC may negotiate individual
commitment amounts, each less than $1 billion, with multiple
counterparties. See Exchange Act Release No. 89039 (Jun. 10, 2020),
85 FR 36444, 36446 (Jun. 16, 2020) (File No. SR-OCC-2020-803).
\33\ 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 provided that
pricing is at the then prevailing market rate and changes to such
other provisions are immaterial to OCC as the seller and do not
impair materially OCC's ability to draw against the facility.
\34\ See Third-Party Risk Management Framework, available at
Documents & Archives, <a href="https://www.theocc.com/Company-Information/Documents-and-Archives">https://www.theocc.com/Company-Information/Documents-and-Archives</a>. While credit monitoring of insurance
companies that may become liquidity providers would necessarily be
different than credit monitoring of existing pension fund
counterparties, any new liquidity would be subject to the same
credit review for counterparties of the same type.
\35\ See Notice of No Objection to 2020 Advance Notice, 85 FR at
36445-46.
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Provided that none of the conditions under which OCC would file a
subsequent advance notice are present, OCC would consider a new or
renewed commitment as being on substantially the same terms and
conditions as existing commitments under the Non-Bank Liquidity
Facility program, such that executing such commitments would not be
subject to the requirement to file an advance notice filing pursuant to
Section 806(e)(1) of the Clearing Supervision Act.\36\ Conversely, a
new commitment or renewal under different conditions would necessitate
OCC providing advance notice to the Commission for consideration.
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\36\ 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.\37\
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\37\ 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.\38\ 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): \39\
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\38\ 12 U.S.C. 5464(a)(2).
\39\ 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.\40\
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\40\ 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'').\41\ 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.\42\ 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,\43\ and in
the Clearing Agency Rules, in particular Rule 17Ad-22(e)(7).\44\
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\41\ 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).
\42\ 17 CFR 240.17Ad-22.
\43\ 12 U.S.C. 5464(b).
\44\ 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.\45\
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\45\ 12 U.S.C. 5464(b).
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The Commission believes that the proposed changes are consistent
with promoting robust risk management, in particular the management of
liquidity risk presented to OCC. As a central counterparty and a
SIFMU,\46\ it is imperative that OCC have adequate resources to be able
to satisfy liquidity needs arising from its settlement obligations,
including in the event of a Clearing Member default.\47\ To support
this objective, OCC proposes to remove the $1 billion aggregate
commitment limit it may seek through the Non-Bank Liquidity Facility
program, so that OCC's Board could adjust the level of aggregate
commitments under the program to ensure that OCC maintains sufficient
liquidity resources to cover its liquidity risk exposures.\48\ The
Commission believes that approving these changes would give OCC greater
flexibility to obtain additional liquidity resources in the form of
commitments under the Non-Bank Liquidity Facility. Therefore, the
Commission believes that the Advance Notice could increase OCC's access
to liquidity resources, which in turn would strengthen OCC's overall
ability to manage its liquidity risk exposures. As such, the Commission
believes that the proposal would promote robust liquidity risk
management at OCC consistent with Section 805(b) of the Clearing
Supervision Act.\49\
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\46\ 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>.
\47\ See Notice of No Objection to 2014 Advance Notice, 80 FR at
1065.
\48\ As proposed, the facility would not limit the total
aggregate commitments OCC may seek. As a practical matter, OCC
expressed its intent to source approximately $1 billion in
additional liquidity under the Non-Bank Liquidity Facility following
removal of the aggregate commitment limit. See Notice of Filing, 87
FR at 44479.
\49\ 12 U.S.C. 5464(b).
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The Commission also believes that the changes proposed in the
Advance Notice are consistent with promoting safety and soundness,
reducing systemic risks, and promoting the stability of the broader
financial system. By removing the $1 billion aggregate commitment
limit, OCC will be in a position to increase the aggregate commitments
of the Non-Bank Liquidity Facility program to $2 billion.\50\ Allowing
OCC to increase aggregate commitments under the facility would, in
turn, reduce the likelihood that OCC 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.\51\ The Commission believes that the proposed
changes would support OCC's ability to
[[Page 55052]]
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. As such, the Commission believes
the proposed changes are consistent with promoting safety and
soundness, reducing systemic risks, and promoting the stability of the
broader financial system.\52\
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\50\ As noted above, OCC intends to expand its aggregate
external liquidity by $2.5 billion. While OCC intends to seek $1
billion of that amount under the Non-Bank Liquidity Facility, the
removal of the commitment limit would allow OCC to seek additional
commitments if it is unable to obtain access to external liquidity
through other facilities.
\51\ 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).
\52\ 12 U.S.C. 5464(b).
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The Commission received comments asserting that the proposal would
put public retirement funds at risk to cover investing choices made by
Clearing Members.\53\ The Commission has carefully considered the risk
to investors' retirement funds relative to the benefits of expanding
the Non-Bank Liquidity Facility. Given that the Non-Bank Liquidity
Facility has included non-bank institutional investors such as pension
funds and insurance companies among its liquidity providers since its
implementation in 2015, and has retained substantially the same terms
throughout, the Commission does not believe that the proposed expansion
to the Non-Bank Liquidity Facility would introduce new risks to OCC's
counterparties.\54\ Further, the terms of the facility would require
OCC to provide Eligible Securities (e.g., Treasuries) subject to
haircuts negotiated by OCC and its counterparties to address the
potential credit risk to OCC's counterparties. Moreover, the terms of
the facility would require OCC to pay the costs of any covering
transactions required if OCC were to fail to perform its obligation. As
described above, the expansion of commitments in the Non-Bank Liquidity
Facility would reduce the likelihood that OCC would have insufficient
financial resources resulting from a Clearing Member default. Taken
together, the Commission believes that the terms of the agreement to
protect OCC and its counterparties, combined with the reduced
likelihood of OCC's failure to manage a default, would in fact promote
the safety and soundness of the U.S. markets.
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\53\ Comments on the Advance Notice are available at <a href="https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm">https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm</a>.
\54\ When OCC proposed the first iteration of the Non-Bank
Liquidity Facility, it acknowledged that, like any liquidity source,
it would involve certain risks. See Exchange Act Release No. 73726
(Dec. 3, 2014), 79 FR 73116, 73119 (Dec. 9, 2014) (File No. SR-OCC-
2014-809). Upon review of the terms of the facility, the Commission
stated its belief that the proposal should promote robust risk
management, promote safety and soundness in the marketplace, reduce
systemic risks, and support the stability of the broader financial
system by giving OCC access to additional committed liquidity that
will help OCC meet its settlement obligations in a timely manner,
while also limiting the exposure that OCC has to its counterparties.
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 received comments asserting 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.'' \55\
The Commission has carefully considered the risk of allowing new or
renewed commitments under the terms of Non-Bank Liquidity Facility
without requiring additional advance notice filings from OCC. Given
that such additional commitments would only be permitted without an
advance notice if executed on substantially similar terms as the
current Non-Bank Liquidity Facility, to which the Commission has
previously not objected, the Commission does not believe that such
additional commitments would necessarily present a material change to
the risks that OCC presents. Any change to the Non-Bank Liquidity
Facility that could materially affect the nature or level of risk posed
by OCC would necessitate an advance notice filing.\56\
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\55\ Comments on the Advance Notice are available at <a href="https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm">https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm</a>.
\56\ OCC would submit another advance notice only if: (1) OCC
should seek to execute a commitment at a level that would have the
effect of reducing external liquidity below the target of $3
billion; (2) OCC seeks to change the terms and conditions of the
agreements underlying the facility or commitments thereunder in a
manner that materially affects the nature or level of risk presented
by OCC; or (3) OCC seeks to execute a commitment with a counterparty
that has experienced a negative change to its credit profile or a
material adverse change since OCC last executed a commitment with
that counterparty.
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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.\57\
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\57\ 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) \58\ in each relevant
currency for which the covered clearing agency has payment obligations
owed to clearing members.\59\ 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.\60\
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\58\ 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).
\59\ 17 CFR 240.17Ad-22(e)(7)(ii).
\60\ 17 CFR 240.17Ad-22(a)(14)(ii)(3).
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The Non-Bank Liquidity Facility provides OCC with prearranged
commitments to convert assets into cash even if OCC experiences a
material adverse change, and the Commission believes that the Non-Bank
Liquidity Facility provides OCC access to qualifying liquid resources
to the extent that OCC has sufficient collateral to access the
facility.\61\ The Commission believes, therefore, that the proposed
changes--to remove the existing aggregate commitment limit, and to
allow the OCC Board to increase the Non-Bank Liquidity Facility program
aggregate commitment levels as needed to maintain sufficient
liquidity--will further enhance OCC's ability to hold qualifying liquid
resources to meet its liquidity resource requirements, consistent with
the requirements of Rule 17Ad-22(e)(7)(ii) under the Exchange Act.\62\
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\61\ OCC would use Eligible Securities that are included in
Clearing Fund contributions by Clearing Members (separate from any
required cash contributions to the Clearing Fund) and margin
deposits of any Clearing Member that has been suspended by OCC for
the repurchase arrangements. See Notice of Filing, 85 FR at 31235
n.9.
\62\ 17 CFR 240.17Ad-22(e)(7)(ii).
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The Commission received comments raising concerns about the
inability of liquidity providers to deny funding in
[[Page 55053]]
the event of a material adverse change.\63\ As noted above, under Rule
17Ad-22(a)(14), committed arrangements, such as repurchase agreements,
are only qualifying liquid resources where such agreements do not
include material adverse change provisions.\64\ Moreover, the non-banks
are voluntarily participating in the facility. These liquidity
providers may consider the benefits and costs of participation,
including the adverse change provision, before determining that their
participation in the facility would be preferable to alternative
investments and would benefit their shareholders and beneficiaries.
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\63\ Comments on the Advance Notice are available at <a href="https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm">https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm</a>.
\64\ 17 CFR 240.17Ad-22(a)(14)(ii)(A).
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Commenters also raised concerns regarding the speed with which a
counterparty would be required to provide funding.\65\ As discussed
above, a fundamental attribute of liquidity resources is that OCC can
quickly access liquidity in the event of a Clearing Member default or
market disruption. By necessity, funds must be made available to OCC
within 60 minutes of OCC's delivering Eligible Securities, and the
institutional investor is not permitted to rehypothecate purchased
securities. Any requirement to allow liquidity providers to deny or
delay funding would potentially delay OCC's access to liquidity
resources, which could negatively affect the safety and soundness of
the U.S. markets.
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\65\ Comments on the Advance Notice are available at <a href="https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm">https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm</a>.
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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.\66\
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\66\ 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-2022-803) 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. 2022-19417 Filed 9-7-22; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on September 8, 2022.
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