Notice2024-05368
Self-Regulatory Organizations; The Options Clearing Corporation; Order Granting Proposed Rule Change Concerning Amendments to The Options Clearing Corporation's Rules, By-Laws, and Certain Clearing Member Documents
Primary source
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Published
March 14, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 51 (Thursday, March 14, 2024)</title>
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[Federal Register Volume 89, Number 51 (Thursday, March 14, 2024)]
[Notices]
[Pages 18685-18687]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-05368]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99701; File No. SR-OCC-2024-002]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Granting Proposed Rule Change Concerning Amendments to The
Options Clearing Corporation's Rules, By-Laws, and Certain Clearing
Member Documents
March 8, 2024.
I. Introduction
On January 10, 2024, the Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2024-002 pursuant to Section 19(b) of the
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
\2\ thereunder. The proposed rule change would amend the OCC Rules, By-
Laws, and certain Clearing Member documents \3\ in connection with the
recent amendments adopted by the Commission to Rule 15c6-1(a) \4\ under
the Exchange Act. The proposed rule change was published for public
comment in the Federal Register on January 25, 2024.\5\ The Commission
has received no comments regarding the proposed rule change. This order
approves the proposed rule change (hereinafter defined as ``Proposed
Rule Change'').
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The Clearing Member documents consist of contracts and
forms, that in conjunction with OCC's By-Laws and Rules, establish
and govern the relationship between OCC and each Clearing Member.
See Exchange Act Release No. 73577 (Nov. 12, 2014), 79 FR 68733
(Nov. 18, 2014) (File No. SR-OCC-2014-020).
\4\ 17 CFR 240.15c6-1(a).
\5\ Securities Exchange Act Release No. 34-99392 (January 25,
2024), 89 FR 5069 (Jan. 19, 2024) (File No. SR-OCC-2024-002)
(``Notice of Filing'').
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II. Background
OCC is the sole clearing agency for standardized equity options
listed on national securities exchanges registered with the Commission,
including options that contemplate the physical delivery of equities
cleared by the National Securities Clearing Corporation (``NSCC'') in
exchange for cash (``physically settled'' options).\6\ The standard
settlement cycle for most such equities is two business days after the
trade date (T+2). On February 15, 2023, the Commission adopted
amendments to Rule 15c6-1(a) to shorten the standard settlement cycle
for most broker-dealer transactions to one business day after the trade
date (T+1).\7\ OCC proposes three categories of changes in connection
with the shortening of the settlement cycle, all of which OCC intends
to implement on May 28, 2024, which is the compliance date regarding
the amendments to Rule 15c6-1(a). First, OCC is proposing timing
changes to certain internal processes to ensure those processes are
completed in a timeframe that will accommodate a T+1 standard
settlement cycle. Where necessary, OCC also is making conforming
changes to its internal documentation for these and other processes to
ensure that they too reflect and are consistent with a T+1 standard
settlement cycle. Second, OCC is proposing to amend its rules to
eliminate the possibility of late exercise. This is because the
relevant processing and other timelines necessary to accommodate a T+1
standard settlement cycle are too compressed to allow OCC to
accommodate late exercise.
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\6\ The term ``physically-settled'' as used throughout the OCC
Rulebook refers to cleared contracts that settle into their
underlying interest (i.e., options or futures contracts that are not
cash-settled). When a contract settles into its underlying interest,
shares of stock are sent (i.e., delivered) to contract holders who
have the right to receive the shares from contract holders who are
obligated to deliver the shares at the time of exercise/assignment
in the case of an option and maturity in the case of a future.
\7\ See Securities Exchange Act Release No. 96930 (Feb. 15,
2023), 88 FR 13872 (Mar. 6, 2023) (File No. S7-05-22).
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A. Timeframe Changes
OCC proposes changes regarding settlement timing both through NSCC
and on a broker-to-broker basis as well as in OCC's stock loan
programs. Regarding transactions settling through NSCC, for example,
OCC proposes to limit the authority of its officers to extend or
postpone settlement to no more than one business day (as opposed to two
business days) under OCC's Rule 901. For transaction settling on a
broker-to-broker basis, OCC proposes changing the delivery date for
physically-settled options under OCC Rule 903 from the ``second'' to
the ``first'' business day following exercise.\8\ OCC also proposes
similar changes to the rules governing its stock loan programs.\9\
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\8\ OCC proposes similar changes related to the timing of
settlement for other relevant contracts, such as futures contracts
and stock loan transactions.
\9\ Such changes would update the timing termination (under
Article XXI, Section 2(c) of OCC's By-Laws as well as OCC Rule
2209A(d)) and the failure of a recall transaction (under OCC Rule
2209A(a)(3).
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Separately, OCC proposes changes regarding Clearing Member
appointments, escrow deposits, and Treasuries. OCC proposes to change
the timing of appointments that must occur following execution, but
prior to settlement, such as when a Canadian Clearing Member
appointments CDS Clearing and Depository Services Inc. to act on the
member's behalf with respect to the settlement of exercised or matured
cleared securities in its accounts through NSCC.\10\ OCC also proposes
streamlining changes, such as replacing references to the specific
business day for release of certain escrows deposits with a reference
to OCC's Operations Manual.\11\ Finally, OCC proposes to revise Rule
1302 concerning the delivery of underlying securities and Rule 1302B
concerning the delivery of underlying Treasury securities.
Specifically, in these two rules, OCC proposes to update references
from the ``second'' business day to the ``first'' business day with
respect to applicable deadlines specified.
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\10\ Such changes include changes both to OCC's public rulebook
(e.g., OCC Rule 901(f)) as well as related documents, such as OCC's
``Appointment of CDS--Stock Settlement Form.''
\11\ The Operations Manual would state that this release of
collateral would occur on the next business day following the
expiration date.
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To align the rest of OCC's Rules, By-Laws, and Clearing Member
documents to the T+1 settlement cycle, OCC is
[[Page 18686]]
proposing to change the timeframes in its documents that are related to
the current T+2 standard settlement cycle by changing all references to
``T+2'' to ``T+1.'' As noted in the Notice of Filing, OCC proposes to
change various sections of its rule book that relate to the current T+2
settlement cycle.\12\
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\12\ See Notice of Filing, 89 FR at 5071 (listing the following
rules to be revised OCC Rule 901, OCC Rule 903, OCC Rule 1302, OCC
Rule 1302B, OCC Rule 1503, OCC Rule 2201, OCC Rule 2208, OCC Rule
2209A, OCC Rule 2502 as well as Article XXI of OCC's By-Laws).
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B. Provisions Related to Late Exercise
The underlying equity securities for physically-settled options and
futures cleared by OCC are cleared and settled by the National
Securities Clearing Corporation (``NSCC''). As a result, the exercise
and assignment of such physically-settled options and futures cleared
by OCC effectively results in stock settlement obligations to be
cleared by NSCC (``E&A Activity''). NSCC and OCC maintain a legal
agreement, generally referred to by the parties as the ``Accord,'' that
governs the processing of E&A Activity.\13\
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\13\ See Notice of Filing, 89 FR at 5071.
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OCC's current rules require Clearing Members to submit exercise
notices,\14\ but also provide a process for late exercise notices.\15\
The late exercise notice process does not support routine operations,
but instead is intended for extenuating circumstances.\16\ Such rules
set out deadlines by which late exercises must be received by OCC and
subject Clearing Members to, among other things, potential disciplinary
actions and liabilities for late filing fee.\17\
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\14\ See OCC Rules 801 and 805.
\15\ Id.
\16\ See Notice of Filing, 89 FR at 5071.
\17\ Id.
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As indicated by OCC in the Notice, reducing the standard settlement
time to T+1 will reduce the time available to OCC and NSCC to transmit
information and perform operational and risk management steps
associated with the processing of E&A Activity under the Accord.\18\
Further, although OCC's current rules contemplate the possibility that
a Clearing Member could submit a late exercise notice, the transition
to a T+1 settlement cycle would require settlement activity from a late
exercise to be sent to NSCC for same-day settlement, which would be
inconsistent with the Accord.\19\ As a result of these operational
challenges, OCC is proposing to no longer accommodate late exercises
after the move to T+1.\20\
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\18\ See Notice of Filing, 89 FR at 5071.
\19\ However, OCC would continue to maintain deadlines for
receiving exercise notices. See Notice of Filing, 89 FR at 5069.
\20\ More specifically, the timing of late-exercise activity
would not allow for the transfer of the settlement guaranty between
OCC and NSCC. Settlement activity resulting from a late exercise
would need to be sent to NSCC for same-day settlement; however,
same-day settlement is not supported by the Accord, which would
result in late-exercise activity not being guaranteed by NSCC.
Further changes to the Accord would be necessary to allow for same-
day settlement, which are not currently contemplated between OCC and
NSCC. See Securities Exchange Act Release No. 99426 (January 30,
2024), 89 FR 5974 (January 24, 2024) (File No. SR-OCC-2023-007).
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In connection with this change, OCC is proposing to remove language
in Rule 801 that requires a Clearing Member to prepare and preserve a
memorandum describing the error that gave rise to a late filing.
Similarly, in Rule 805, OCC is proposing to remove language that allows
Clearing Members to file late exercise notices subject to a final
deadline for submission. OCC would continue to allow members to correct
bona fide errors; however, under the proposed rules, such corrections
must be made prior to daily processing timelines.\21\
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\21\ See Notice of Filing, 89 FR at 5071 n.24.
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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\ Under the Commission's
Rules of Practice, the ``burden to demonstrate that a proposed rule
change is consistent with the Exchange Act and the rules and
regulations issued thereunder . . . is on the self-regulatory
organization [`SRO'] that proposed the rule change.'' \23\ The
description of a proposed rule change, its purpose and operation, its
effect, and a legal analysis of its consistency with applicable
requirements must all be sufficiently detailed and specific to support
an affirmative Commission finding,\24\ and any failure of an SRO to
provide this information may result in the Commission not having a
sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Exchange Act and the applicable rules and
regulations.\25\ Moreover, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\26\
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\22\ 15 U.S.C. 78s(b)(2)(C).
\23\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\24\ Id.
\25\ Id.
\26\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
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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)(F) of the Exchange Act,\27\ and Rule
17Ad-22(e)(1) \28\ thereunder as described in detail below.
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\27\ 15 U.S.C. 78q-1(b)(3)(F).
\28\ 17 CFR 240.17Ad-22(e)(1).
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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 a clearing agency's rules are designed to promote the
prompt and accurate clearance and settlement of securities transactions
and to foster cooperation and coordination between persons engaged in
the clearance and settlement of securities transactions.\29\ Based on
its review of the record, and for the reasons described below, the
changes described above are consistent with fostering cooperation and
coordination between with persons engaged in the clearance and
settlement of securities transactions.
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\29\ 15 U.S.C. 78q-1(b)(3)(F).
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OCC clears both securities options listed on Commission-registered
national securities exchanges as well as futures for which such
securities are the underliers. Such listed options and futures may
result in the physical delivery of equities. OCC's rules describe the
timing and process for effecting such settlement either through
facilities of NSCC or on a broker-to-broker basis. Similarly, OCC's
rules contemplate the clearance and settlement of stock loan
transactions, also involving the physical delivery of equities. As
described above, OCC proposes changes to its rules governing such
processes to align with the shortening of the settlement cycle for most
broker-dealer transactions. Further, as described in the Notice of
Filing, OCC proposes to implement such changes by May 28, 2024, which
is the compliance date regarding the amendments to Rule 15c6-1(a).\30\
Such changes would support coordination with industry participants
engaged in the clearance and settlement of securities transactions both
in terms of
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substance and timing of implementation.
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\30\ See Notice of Filing, 89 FR at 5073.
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As described above, OCC has asserted that the processes required to
effect settlement on a T+1 basis would also impact OCC's current late
exercise processes. Unlike the other changes, however, a T+1 settlement
cycle would provide insufficient time to accommodate OCC's late
exercise processes. To avoid operational challenges and inconsistencies
with the Accord, OCC proposes to remove the late exercise process
entirely from its rules while continuing to allow members to correct
bona fide errors within daily processing deadlines. Additionally, as
noted in the Notice of Filing, OCC's current late exercise processing
does not support routine operations, but rather, is intended only for
extenuating circumstances and may carry with it a fine.\31\ Removal of
the process for late exercise, therefore, would not disrupt OCC's
routine clearance and settlement processes. OCC's proposed removal of
its late exercise processes, as part of the move to a shortened
settlement cycle, would, therefore, promote the prompt and accurate
clearance and settlement of securities transactions by avoiding the
potential delays that would be caused by allowing late exercises.
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\31\ See Notice of Filing, 89 FR at 5071.
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Accordingly, the changes proposed to accommodate a shortened
settlement cycle are consistent with the requirements of Section
17A(b)(3)(F) of the Exchange Act.\32\
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\32\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(1) Under the Exchange Act
Rule 17Ad-22(e)(1) under the Exchange Act requires that a covered
clearing agency establish, implement, maintain, and enforce written
policies and procedures reasonably designed to provide for a well-
founded, clear, transparent, and enforceable legal basis for each
aspect of its activities in all relevant jurisdictions.\33\ In adopting
Rule 17Ad-22(e)(1), the Commission provided guidance that a covered
clearing agency generally should consider in establishing and
maintaining policies and procedures that address legal risk.\34\ The
Commission stated that a covered clearing agency should consider, inter
alia, whether its contracts are consistent with relevant laws and
regulations.\35\
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\33\ 17 CFR 240.17Ad-22(e)(1).
\34\ See Securities Exchange Act Release No. 78961 (Sept. 28,
2016), 81 FR 70786, 70802 (Oct. 13, 2016) (S7-03-14).
\35\ See id.
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On February 15, 2023, the Commission adopted a final rule to
shorten the standard settlement cycle for most broker-dealer
transactions from two business days after the trade date to one
business day after the trade date.\36\ As described above, the proposed
changes are designed to ensure that OCC's processes and Rules and other
documentation are both consistent with and accommodate a T+1 standard
settlement cycle. The proposed changes are, therefore, consistent with
the rules and regulations applicable to OCC, and, as a result, will
provide a well-founded legal basis for OCC's continued operations after
the transition to a T+1 standard settlement cycle. The proposed changes
are, accordingly, consistent with the requirements of Rule 17Ad-
22(e)(1) under the Exchange Act.\37\
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\36\ See Securities Exchange Act Release No. 96930 (Feb. 15,
2023), 88 FR 13872 (Mar. 6, 2023) (File No. S7-05-22).
\37\ 17 CFR 240.17Ad-22(e)(1).
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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 \38\ and the rules and regulations thereunder.
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\38\ 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).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\39\ that the proposed rule change (SR-OCC-2024-002),
hereby is, approved.
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\39\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\40\
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\40\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-05368 Filed 3-13-24; 8:45 am]
BILLING CODE 8011-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.