Notice2024-14971
Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change by The Options Clearing Corporation Concerning Amendments to Its Rules and Comprehensive Stress Testing & Clearing Fund Methodology, and Liquidity Risk Management Description
Primary source
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Published
July 9, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 131 (Tuesday, July 9, 2024)</title>
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[Federal Register Volume 89, Number 131 (Tuesday, July 9, 2024)]
[Notices]
[Pages 56452-56456]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-14971]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100455; File No. SR-OCC-2024-006]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving Proposed Rule Change by The Options Clearing
Corporation Concerning Amendments to Its Rules and Comprehensive Stress
Testing & Clearing Fund Methodology, and Liquidity Risk Management
Description
July 2, 2024.
I. Introduction
On May 2, 2024, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission''), pursuant
to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change (the
``Proposed Rule Change'') to amend its Comprehensive Stress Testing &
Clearing Fund Methodology, and Liquidity Risk Management Description
(``Methodology Description'') to incorporate additional stress
scenarios into OCC's financial resource sufficiency monitoring and its
Rules to clarify OCC's practice of collecting additional collateral
from its members based on such monitoring. The Proposed Rule Change was
published for comment in the Federal Register on May 21, 2024.\3\ The
Commission has not received any comments on the Proposed Rule Change.
For the reasons discussed below, the Commission is approving the
Proposed Rule Change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 100147 (May 15, 2024),
89 FR 44752 (May 21, 2024) (File No. SR-OCC-2024-006) (``Notice'').
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II. Description of the Proposed Rule Change
As a clearing agency, OCC faces a number of risks including credit
and
[[Page 56453]]
liquidity risk.\4\ OCC manages its credit and liquidity risk, in part,
by performing daily stress testing \5\ that covers a wide range of
scenarios.\6\
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\4\ Credit Risk is the risk that a counterparty will be unable
to meet fully its financial obligations when due, or at any time in
the future. Liquidity Risk is the risk that a counterparty will have
insufficient funds to meet its financial obligations as and when
expected, although it may be able to do so in the future. Bank for
International Settlements & International Organization of Securities
Commissions, Principles for Financial Market Infrastructures,
<a href="https://www.bis.org/cpmi/publ/d101a.pdf">https://www.bis.org/cpmi/publ/d101a.pdf</a>.
\5\ Stress testing is the estimation of credit or liquidity
exposures that would result from the realization of potential stress
scenarios, such as extreme price changes, multiple defaults, or
changes in other valuation inputs and assumptions. 17 CFR 240.17Ad-
22(a).
\6\ Notice, 89 FR at 44753; see OCC Rule 609, OCC Rule 1001.
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OCC groups its stress testing scenarios into different categories,
including Sufficiency Scenarios and Informational Scenarios.\7\
Sufficiency Scenarios are designed to measure the potential exposures
that a Clearing Member Group's portfolios present relative to OCC's
credit and liquidity resources so that OCC can determine the potential
need to call for additional collateral, either as margin or as Clearing
Fund collateral, or adjust the forms of collateral on deposit.\8\
Specifically, depending on Sufficiency Scenario results, OCC Rules 609
or 1001 may allow or require OCC to call for additional margin or
Clearing Fund resources from a Clearing Member.\9\ Moreover, under OCC
Rules 601 and 609, OCC could require that a Clearing Member provide
additional resources in the form of cash.\10\ In contrast, OCC uses
Informational Scenarios to monitor and assess the size of OCC's
prefunded financial resources against a wide range of stress scenarios
for informational and risk monitoring purposes.\11\ These scenarios are
not used to determine the size of OCC's financial resources; however,
OCC's Risk Committee may approve adjustments with respect to how OCC
categorizes these scenarios.\12\ For example, OCC's Risk Committee
could approve the recategorization of an Informational Scenario as a
Sufficiency Scenario.\13\
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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>.
\8\ Notice, 89 FR at 44753.
\9\ Id.
\10\ Id. at 44754 n.20.
\11\ Id. at 44753.
\12\ Id.
\13\ Id.
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The Proposed Rule Change would make three groups of changes related
to OCC's Sufficiency Scenarios. First, it would recategorize two
Informational Scenarios as Sufficiency Scenarios by making changes to
the Methodology Description.\14\ As a result, the two recategorized
scenarios would be used to determine potential calls for additional
collateral. Second, the Proposed Rule Change would add detail to OCC's
Rules outlining circumstances under which OCC could require Clearing
Members to contribute additional collateral due to the results of
Sufficiency Scenarios. Third, the Proposed Rule Change would make minor
formatting and grammatical changes to the Methodology Description and
the Rules.
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\14\ The Methodology Description describes the Comprehensive
Stress Testing and Clearing Fund Methodology, and Liquidity Risk
Management Description that OCC uses to analyze the adequacy of its
financial resources and to challenge its risk management framework.
Id. at 44573 n.5.
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A. Recategorization of Scenarios
OCC's Methodology Description lists a subset of the Sufficiency
Scenarios that have been implemented in OCC's stress testing system.
The Sufficiency Scenarios on this list are historical scenarios that
replicate historical events under current market conditions. For
example, among the listed Sufficiency Scenarios are scenarios that
replicate the largest rally/decline in 2008.
To replicate historical events in its current Sufficiency
Scenarios, OCC applies one of three price shocks to risk factors in a
predetermined order, also referred to as a waterfall.\15\ As its first
choice for a price shock, OCC uses the returns of the risk factor
observed during the historical event. If such returns do not exist, or
are otherwise unavailable, OCC uses the market return from the risk
factor's corresponding sector as the price shock. If neither the risk
factor return nor the market sector return is available, OCC uses a
beta approach to set the price shock.\16\ Currently, OCC applies this
waterfall to determine price shocks for the 2008 largest rally/decline
Sufficiency Scenarios.
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\15\ Risk factors are products or attributes whose historical
data are used to estimate and simulate the risk for an associated
product. Id. at 44574 n.12.
\16\ Beta is the sensitivity of a security with respect to its
corresponding risk driver. Id. at 44754 n.14. Examples of risk
drivers include price and volatility with respect to equity
securities. Different categories of products--for example,
collateral positions in U.S. Government Securities versus Canadian
Government Securities--have different risk drivers. Id. at 44754
n.15. The risk driver shock is the return of a risk driver from a
historical event. Id. at 44754. The beta approach is the application
of the shock of a risk driver to the beta of the related risk
factor, which generates a ``risk driver beta derived price shock.''
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Some of OCC's Informational Scenarios use a different approach to
determine the price shock applied to risk factors than the existing
Sufficiency Scenarios use, which yields different outcomes. For
example, some existing Informational Scenarios are variations of the
2008 largest rally/decline Sufficiency Scenarios that directly apply
the risk driver beta-derived price shock as the price shock instead of
using the waterfall approach. As part of the regular review of the
output of its stress scenarios, OCC found that the variations of the
2008 largest rally/decline Informational Scenarios described above
yielded exposures that were consistently higher than those generated by
the corresponding Sufficiency Scenarios.\17\ To enhance its ability to
manage risks, OCC proposes recategorizing such variations of the 2008
largest rally/decline scenarios from Informational Scenarios to
Sufficiency Scenarios by adding them to the Sufficiency Scenarios
listed in OCC's Methodology Description.\18\ This would allow the
newly-recategorized Sufficiency Scenarios to be used to drive the size
of the Clearing Fund and calls for additional margin, which is not the
case while they remain categorized as Informational Scenarios.\19\
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\17\ Id. at 44753.
\18\ Id.
\19\ Id.
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B. Changes to the Rules Related to Intra-Day Margin and the Clearing
Fund
OCC also proposes changes to its Rules to clarify OCC's practice of
collecting additional collateral from its members based on stress
scenario monitoring. Specifically, OCC proposes changes to Rule 609,
which governs intra-day margin, and Rule 1001(c), which governs intra-
month clearing fund sizing adjustments. OCC proposes these changes to
align the Rules with OCC's current practices and procedures.\20\
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\20\ Id. at 44754-55.
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Some of the proposed changes to Rule 609 clarify OCC's approach to
situations where a Clearing Member Group is subject to an intra-day
margin call under more than one Sufficiency Stress Test. Rule 609(a)(5)
currently provides that OCC may require the Clearing Member Group
responsible for a stress test exposure to deposit intra-day margin if a
Sufficiency Stress Test identifies an exposure that exceeds 75% of the
current Clearing Fund requirement less deficits.\21\ In the event of
such a margin call, OCC's current practice is to compare the margin
call amount to existing intra-day margin call amounts for the monthly
period under OCC Rule
[[Page 56454]]
609(a)(5). A new margin call is issued when the margin call amount is
greater than existing intra-day margin call amounts under Rule
609(a)(5). The updated margin call amount would remain in effect until
either the next monthly resizing of the Clearing Fund, or the amount is
superseded by a larger margin call amount.\22\ To reflect this current
practice,\23\ and consistent with the Clearing Fund Methodology
Policy,\24\ OCC proposes adding language to Rule 609(a)(5) noting that
if a Clearing Member Group is subject to intra-day margin calls under
more than one Sufficiency Stress Test, the largest call will be applied
and remain in effect until the next monthly resizing.\25\
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\21\ Id. at 44754; OCC Rule 609(a)(5).
\22\ Notice, 89 FR at 44754.
\23\ Id.
\24\ Securities Exchange Act Release No. 83406 (June 11, 2018),
83 FR 28018, 28025 (June 15, 2018) (File No. SR-OCC-2018-008).
\25\ While a margin call imposed as the result of a Sufficiency
Stress Test will remain in effect until the next monthly Clearing
Fund resizing, the imposition of such a margin call would not
preclude OCC from making additional margin calls driven by
subsequent Sufficiency Stress Tests prior to the monthly resizing.
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Separately, OCC proposes to conform Rule 609(a)(5) to OCC's
existing policies.\26\ As noted above, current Rule 609(a)(5) requires
the Clearing Member Group responsible for a stress test exposure to
deposit margin intra-day if a Sufficiency Stress Test identifies an
exposure that exceeds 75% of the current Clearing Fund requirement less
deficits. OCC's Clearing Fund Methodology Policy contains similar
language with a notable difference. Specifically, the Clearing Fund
Methodology Policy does not include the ``less deficits'' language,
while such language is in OCC Rule 609(a)(5).\27\ This language was
removed from the Clearing Fund Methodology Policy in an effort to
conform the Clearing Fund Methodology Policy to changes to OCC's Rules,
shortening the number of days a Clearing Member has to meet funding
obligations related to the Clearing Fund.\28\ Given the previous change
to its rules, OCC considers the ``less deficits'' language in each
document unnecessary.\29\ As such, OCC proposes removing the ``less
deficits'' language from Rule 609(a)(5) to promote consistency within
its rules.\30\
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\26\ Notice, 89 FR at 44755.
\27\ Id.
\28\ Securities Exchange Act Release No. 94950 (May 19, 2022),
87 FR 31916, 31918 (May 25, 2022) (File No. SR-OCC-2022-004). Prior
to approval of SR-OCC-2022-004, Clearing Members had two days to
deposit additional required Clearing Fund assets. In SR-OCC-2022-
004, OCC proposed to shorten this period. Id.; Notice, 89 FR at
44755.
\29\ Notice, 89 FR at 44755.
\30\ Id.
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OCC also proposes changes to Rule 1001(c) to reflect its current
practices.\31\ Rule 1001(c) currently indicates that, if at any time
between regular monthly calculations of the size of the Clearing Fund a
Sufficiency Stress Test identifies a breach that exceeds 90% of the
size of the Clearing Fund requirement (less any margin collected as a
result of a Sufficiency Stress Test breach pursuant to Rule 609), the
calculated size of the Clearing Fund shall be increased. As is
reflected in OCC's Clearing Fund Methodology Policy, OCC's current
practice is to include margin called, rather than only margin
collected, in the amount subtracted in the calculation from Rule
1001(c).\32\ To align the descriptions in OCC's Rules with OCC's
current practices, OCC proposes adding ``or to be collected'' to the
text or Rule 1001(c).\33\
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\31\ Id.
\32\ Id. at 44755 n.27.
\33\ Id. at 44755.
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C. Minor Formatting and Grammatical Changes
OCC also proposes several minor formatting and grammatical changes
to its rules. In the Methodology Description, OCC proposes minor edits
to correct the formatting of footnotes. Additionally, in the Rules, OCC
proposes replacing the words ``such that'' with ``from'' and adding the
word ``that'' to Rule 609(a)(5) so that it reads ``stress test
exposures from a Sufficiency Stress Test (as defined in Rule 1001(a))
that identifies an exposure'' instead of ``stress test exposures such
that a Sufficiency Stress Test (as defined in Rule 1001(a)) identifies
an exposure.''
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act requires the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
the Proposed Rule Change is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to the
organization.\34\ 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.'' \35\ 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,\36\ 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.\37\ 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.\38\
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\34\ 15 U.S.C. 78s(b)(2)(C).
\35\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\36\ Id.
\37\ Id.
\38\ 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 Proposed Rule Change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to OCC. More specifically, for the reasons given
below, the Commission finds that the Proposed Rule Change is consistent
with Section 17A(b)(3)(F) of the Act \39\ and Rule 17Ad-22(e)(4)
thereunder.\40\
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\39\ 15 U.S.C. 78q-1(b)(3)(F).
\40\ 17 CFR 240.17Ad-22(e)(4).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Under Section 17A(b)(3)(F) of the Act, OCC's rules, among other
things, must be ``designed to promote the prompt and accurate clearance
and settlement of securities transactions . . . derivative agreements,
contracts, and transactions . . . and to assure the safeguarding of
securities and funds which are in the custody or control of the
clearing agency or for which it is responsible.'' \41\ Based on its
review of the record, and for the reasons discussed below, OCC's
changes are consistent with Section 17A(b)(3)(F) of the Act \42\
because they decrease the likelihood of loss mutualization, may
increase, and cannot decrease, the amount of financial resources that
OCC collects to address credit losses that could arise from the default
of a Clearing Member, and support OCC's robust default management
system.
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\41\ 15 U.S.C. 78q-1(b)(3)(F).
\42\ Id.
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OCC's proposal to elevate Informational Scenarios to Sufficiency
Scenarios may decrease the likelihood of loss mutualization. As noted
above, OCC proposes to expand the scope of stress scenarios against
which OCC monitors its financial resources by elevating, from
Informational Scenarios to Sufficiency Scenarios, variations on their
2008 largest rally/decline scenarios, which first apply the risk driver
beta-derived price shock as the
[[Page 56455]]
price shock as opposed to using the waterfall approach. Once these
scenarios are elevated to Sufficiency Scenarios, they would be used to
determine whether it is necessary to call for additional margin intra-
day or an increase to the size of the Clearing Fund intra-month.\43\ By
elevating the Informational Scenarios to Sufficiency Scenarios, OCC
creates a wider range of stress scenarios. Having a wider range of
stress scenarios may, in turn, increase the likelihood that OCC will
have sufficient collateral on hand to address a default without
resorting to loss mutualization through the use of non-defaulting
Clearing Members' contributions to the Clearing Fund. Because it avoids
loss mutualization, the Proposed Rule Change is consistent with the
safeguarding of securities and funds which are in OCC's custody or
control.
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\43\ OCC Rule 609(a)(5); OCC Rule 1001(c).
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OCC's proposed changes to its Sufficiency Stress Tests also may
increase, and cannot decrease, the amount of financial resources that
OCC collects to address credit losses that could arise from the default
of a Clearing Member. Based on the impact analyses filed with this
Proposed Rule Change, the proposed change could result in OCC calling
for additional resources available for resolving a member default. The
data provided demonstrates that the proposed scenarios could produce
more conservative results relative to the current 2008 largest rally/
decline scenarios. Because OCC does not propose removing any of its
existing Sufficiency Scenarios, the proposed changes could not reduce
the resources OCC would collect. By maintaining, and potentially
increasing, the financial resources OCC collects to address credit
losses that could arise from the default of a Clearing Member, the
proposed change to OCC's stress tests would potentially help OCC
recover from the default of a Clearing Member and could make OCC's
default waterfall more robust. As such, it would increase the
likelihood that OCC would be able to provide clearing services during
and after a Clearing Member default, which is consistent with OCC's
ability to promptly and accurately clear and settle securities
transactions for participants in the options markets during periods of
market stress.
Separately, the proposed changes to conform OCC's Rules 609 and
1001 to current practice would continue to support OCC's risk
management systems. As described above, the proposed changes would make
minor changes, remove unnecessary language, and acknowledge that, when
determining whether to call for additional collateral based on OCC's
Sufficiency Stress Tests, if a Clearing Member Group is subject to
intra-day margin calls under more than one Sufficiency Stress Test,
only the largest margin call will be applied and remain in effect until
the next monthly resizing. Further, OCC proposes that it account for
margin called as a result of a Sufficiency Stress Test breach under
Rule 609 when determining whether it must increase the size of the
Clearing Fund. Such changes would not reduce the total resources called
by OCC. Continuing to require that members contribute resources based
on the exposures they pose (as measured by the Sufficiency Scenarios)
would increase the likelihood that OCC would have sufficient resources
to manage its exposure to such a member in the event of a default. This
would increase the likelihood that OCC could promptly and accurately
clear transactions in the event of a default. Additionally, requiring
members to contribute resources based on the exposures they pose would
increase OCC's ability to manage a default with the defaulter's
resources and would reduce the risk that OCC would be required to use
the resources of other members to manage a default, consistent with
OCC's ability to safeguard the funds and securities of such non-
defaulting members.
Further, OCC's rules require that members meet such calls in a
timely manner.\44\ As a result, OCC's rules do not preclude OCC from
taking additional steps, such as suspending a member, if it does not
receive the required resources promptly. Thus, OCC's rules, both
current and as proposed, allow OCC to act quickly to mitigate potential
losses and liquidity shortfalls. Such authority reduces the risk that
OCC would be unable to continue providing clearance and settlement
services, which is consistent with the promotion of the prompt and
accurate settlement of securities for the markets OCC serves.
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\44\ See e.g., OCC Rule 609(a) (requiring that members meet
intra-day margin calls within one hour of issuance).
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Based on the foregoing, the Proposed Rule Change is consistent with
the requirements of Section 17A(b)(3)(F) of the Act.\45\
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\45\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(4) Under the Act
Rule 17Ad-22(e)(4) requires covered clearing agencies to establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to effectively identify, measure, monitor, and
manage its credit exposures to participants and those arising from its
payment, clearing, and settlement processes by testing the sufficiency
of its total financial resources available to meet the minimum
financial resource requirements under Rules 17Ad-22(e)(4)(i) through
(iii) under the Act.\46\ Under Rule 17Ad-22(e)(4)(vi)(A), OCC's
policies and procedures should provide that OCC conduct such stress
testing of its total financial resources once each day using standard
predetermined parameters and assumptions.\47\
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\46\ 17 CFR 240.17Ad-22(e)(4)(vi).
\47\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
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The Proposed Rule Change is consistent with Rule 17Ad-22(e)(4)(vi)
because it broadens the scope of stress scenarios that OCC conducts to
test its financial resources. Expanding the scope of stress scenarios
against which OCC monitors its financial resources would increase the
likelihood that OCC maintains sufficient financial resources at all
times.\48\ This Proposed Rule Change would expand the scope of stress
scenarios by elevating two Informational Scenarios to Sufficiency
Scenarios. This expansion could result in the collection of additional
resources available for resolving a member default, which, in turn,
would increase the likelihood that OCC maintains sufficient financial
resources at all times.\49\
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\48\ See Securities Exchange Act Release No. 90827 (Dec. 30,
2020), 86 FR 659, 661 (Jan. 6, 2021) (File No. SR-OCC-2020-015);
Securities Exchange Act Release No. 83735 (July 27, 2018), 83 FR
37855, 37863 (Aug. 2, 2018) (File No. SR-OCC-2018-008).
\49\ The Proposed Rule Change does not alter OCC's daily
implementation of its Sufficiency Stress Tests. Notice, 89 FR at
44753. Thus, the OCC's Sufficiency Stress Testing continues to be
consistent with Rule 17Ad-22(e)(4)(vi)(A)'s daily testing
requirements.
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Based on the foregoing, the Proposed Rule Change is consistent with
the requirements of Rule 17Ad-22(e)(4) under the Act.\50\
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\50\ 17 CFR 240.17Ad-22(e)(4).
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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 Act,
and in particular, Section 17A(b)(3)(F) of the Act \51\ and Rule 17Ad-
22(e)(4).\52\
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\51\ 15 U.S.C. 78q-1(b)(3)(F).
\52\ 17 CFR 240.17Ad-22(e)(4).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
that the
[[Page 56456]]
Proposed Rule Change (SR-OCC-2024-006) be, and hereby is, approved.\53\
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\53\ In approving the Proposed Rule Change, the Commission
considered the proposal's impacts on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\54\
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\54\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-14971 Filed 7-8-24; 8:45 am]
BILLING CODE 8011-01-P
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