Notice2024-20329
Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change, as Modified by Partial Amendment No. 1, by The Options Clearing Corporation Concerning Its Stock Loan Programs
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
September 10, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 175 (Tuesday, September 10, 2024)</title>
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[Federal Register Volume 89, Number 175 (Tuesday, September 10, 2024)]
[Notices]
[Pages 73466-73485]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-20329]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100930; File No. SR-OCC-2024-011]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change, as Modified by Partial
Amendment No. 1, by The Options Clearing Corporation Concerning Its
Stock Loan Programs
September 4, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on August 22, 2024, The Options Clearing
Corporation (``OCC'' or ``Corporation'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
primarily by OCC. On September 3, 2024, OCC filed a partial amendment
(``Partial Amendment No. 1'') to the proposed rule change.\3\ The
Commission is publishing this notice to solicit comments on the
proposed rule change, as modified by Partial Amendment No. 1 (hereafter
``the proposed rule change''), from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Partial Amendment No. 1, OCC corrected an error in
Exhibit 5A to SR-OCC-2024-011 without changing the substance of the
proposed rule change. Partial Amendment No. 1 does not materially
alter the substance of the proposed rule change or raise any novel
regulatory issues.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
This proposed rule change would address limitations in the
structure of OCC's Stock Loan/Hedge (``Hedge'') Program and Market Loan
Program (together, the ``Stock Loan Programs'') by creating the
framework for a single, enhanced program designed to support current
and future needs. The proposed enhancements would, among other things,
(i) combine into the Market Loan Program favorable aspects of both
Stock Loan Programs, including the submission of bilaterally negotiated
transactions; (ii) conform the terms of stock loans submitted under the
Market Loan Program (``Market Loans'') more closely to the provisions
most commonly included in stock loan transactions executed under
standard loan market documents; (iii) provide a uniform guaranty of
terms across Market Loans, regardless of how those Market Loans are
initiated under the enhanced program; (iv) support transactions under
both Stock Loan Programs through OCC's new clearance and settlement
system; and (v) reorganize, restate, and consolidate provisions of
OCC's By-Laws and Rules governing the Stock Loan Programs.
The proposed amendments to OCC's Rules and By-Laws can be found in
Exhibit 5A and Exhibit 5B to File No. SR-OCC-2024-011, respectively.
Proposed conforming changes to OCC's internal Margin Policy and
Recovery and Wind-Down (``RWD'') Plan, which can be found in
confidential Exhibits 5C and 5D to File No. SR-OCC-2024-011,
respectively. Material proposed to be added is marked by underlining
and material proposed to be deleted is marked with strikethrough text.
For ease of presentation and to distinguish between changes to rule
text versus relocation of existing rule text, Exhibits 5A and 5B to
File No. OCC-2024-011 contain bracketed text to indicate when existing
text has been relocated from the By-Laws to the Rules with changes as
marked. That bracketed text describes changes that would be performed
upon implementation of File No. SR-OCC-2024-011, but it is not intended
to be rule text. All terms with initial capitalization that are not
otherwise defined herein have the same meaning as set forth in the By-
Laws and Rules.\4\
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\4\ OCC's By-Laws and Rules can be found on OCC's public
website: <a href="https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules">https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules</a>.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. OCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its capacity as a central counterparty registered with the
Commission, OCC currently operates two programs through which it clears
stock loan transactions: the Hedge Program and the Market Loan Program.
Under both Stock Loan Programs, OCC becomes the lender to the borrower
and the borrower to the lender, thereby guaranteeing the return of the
full value of cash collateral to the Borrowing Clearing Member and the
return of the Loaned Stock (or value of that Loaned Stock) to the
Lending Clearing Member. Under the Market Loan Program, OCC also offers
certain additional guarantees, discussed in more detail below, with
respect to other payment obligations arising from the stock loan
transactions (e.g., dividend equivalent payments and rebate payments).
As a result of OCC's novation of cleared stock loan transactions, the
rights and obligations of the Borrowing and Lending Clearing Members
are thereafter governed by OCC's By-Laws and Rules.\5\ OCC's By-Laws
and Rules also provide for, among other things, how Clearing Members
initiate Stock Loans at OCC, how those Stock Loans are recorded in
OCC's books and records, how returns and recalls are processed, and
risk management procedures specific to Stock Loans in the event that
OCC suspends one of the Clearing Member counterparties.
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\5\ Terms provided under a Master Stock Lending Agreement
(``MSLA'') between the parties to a Stock Loan may remain in effect
as between the parties to the extent they are not inconsistent with
the By-Laws and Rules, but do not impose any obligation on OCC. See
OCC Rule 2202(b).
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As announced in 2022, OCC intends to replace its current clearance
and settlement system (ENCORE) with a streamlined operational framework
for clearance and settlement (Ovation).\6\ The move to Ovation gives
OCC the opportunity to address limitations in the structure of OCC's
Stock Loan Programs and enhance OCC's stock loan services to support
current and future needs.\7\ OCC proposes a number of amendments to its
By-Laws and Rules designed to,
[[Page 73467]]
among other things, (i) combine into the Market Loan Program favorable
aspects of both Stock Loan Programs, including the submission of
bilaterally negotiated transactions; (ii) conform the terms of Market
Loans cleared by OCC more closely to the provisions most commonly
included in stock loan transactions executed under standard loan market
documents; (iii) provide a uniform guaranty of terms across Market
Loans, regardless of how those Market Loans are initiated under the
enhanced program; (iv) support transactions under both Stock Loan
Programs through OCC's new clearance and settlement system; and (v)
reorganize, restate, and consolidate provisions of OCC's By-Laws and
Rules governing the Stock Loan Programs.
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\6\ See OCC Announces New Platform Name and Launches Enhanced
Transformation website (May 10, 2022), <a href="https://www.theocc.com/newsroom/views/2022/05-10-occ-announces-new-platform-name-and-launches-enhanced-transformation-website">https://www.theocc.com/newsroom/views/2022/05-10-occ-announces-new-platform-name-and-launches-enhanced-transformation-website</a>.
\7\ As discussed in more detail below, OCC's current programs
are limited by certain inefficient legacy practices including, for
example: (1) position-based recordkeeping that does not align with
the contract-level accounting that is common throughout the stock
loan industry, which adds complexity to the process of ensuring that
all parties are in alignment on the state of their stock loans; (2)
workflows that involve settlement of delivery versus payment
obligations at the Depository prior to clearance or settlement at
OCC, which adds further complexity to the reconciliation process and
can lead to position breaks; and (3) payment flows common to stock
loans that are not guaranteed under OCC's Hedge Loan program and
must currently be settled as between the parties away from OCC.
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OCC believes these changes will address certain pain points that
OCC's members have raised and enhance the overall process. In
particular, the proposed changes would allow members who currently
participate in the Hedge Loan Program to submit transactions through an
improved workflow to the Market Loan Program, under which the
counterparties will benefit from OCC's enhanced guaranty and the
efficiency of allowing OCC's systems to handle certain post-trade
transactions that Hedge Loan Program participants must currently
address bilaterally with each of their counterparties, away from OCC.
In addition, the proposed changes would align how OCC records stock
loan transactions in its books and records with an industry-standard,
contract-level approach, which is expected to alleviate operational
burdens on members that must currently reconcile their internal records
with OCC's position-based records on a daily basis.
These enhancements would also serve as a foundation for
consolidating OCC's Hedge Loan and Market Loan Programs. As discussed
more fully below, OCC intends to eventually decommission the Hedge
Program, after which the Market Loan Program would become OCC's single
Stock Loan Program. OCC would take a phased approach to decommissioning
the Hedge Program and would commence its Hedge Program phase-out plan
only after conferring with Clearing Members that they are prepared for
the transition.
(1) Purpose
Background
Stock Loan Initiation
In the Hedge Program, OCC acts as the principal counterparty for
stock loans that are executed bilaterally between Clearing Members and
sent to OCC for clearance and settlement. Prospective Lending and
Borrowing Clearing Members identify each other (independent of OCC),
agree to bilaterally negotiated terms of the Hedge Loan, and then send
the details of the stock loan to the Depository, the Depository Trust
Company (``DTC''), with a certain ``reason code,'' \8\ which designates
the stock loan as a Hedge Loan for guarantee and clearance at OCC. The
Lending Clearing Member then instructs DTC to transfer a specified
number of shares of Eligible Stock to the account of the Borrowing
Clearing Member versus transfer of the appropriate amount of cash
collateral to the account of the Lending Clearing Member. This current
process, in which settlement at DTC occurs before clearance at OCC,
adds complexity to balancing and reconciliation under the current Hedge
Program.
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\8\ Unique reason codes were created by DTC for Clearing Members
to designate stock loan transactions intended to be sent to OCC for
novation and guarantee.
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In the Market Loan Program, stock loans are initiated through the
matching of bids and offers that are agreed upon by the Market Loan
Clearing Members or otherwise matched through a Loan Market. A Loan
Market is an electronic platform that supports securities lending and
borrowing transactions in the Market Loan Program by matching lenders
and borrowers based on loan terms that each party is willing to
accept.\9\ In order to initiate a Market Loan, the Loan Market sends a
matched transaction to OCC, which in turn sends two separate but linked
settlement instructions to DTC to effect the movement of Eligible Stock
and cash collateral between the accounts of the Market Loan Clearing
Members through OCC's account at DTC.
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\9\ Currently, one Loan Market operates within OCC's Market Loan
Program--Automated Equity Finance Markets, Inc. (``AQS''), a
subsidiary of Equilend Holdings LLC (``Equilend'').
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Scope of OCC's Guaranty
Regardless of whether a transaction is initiated under the Hedge
Program or Market Loan Program, OCC novates the transaction and becomes
the lender to the Borrowing Clearing Member and the borrower to the
Lending Clearing Member.\10\ As the principal counterparty to the
Borrowing and Lending Clearing Members, OCC guarantees the return of
the full value of cash collateral to a Borrowing Clearing Member and
guarantees the return of the Loaned Stock (or value of that Loaned
Stock) to the Lending Clearing Member. Under the Market Loan Program,
OCC also provides a limited guaranty of substitute dividend \11\ and
rebate payments,\12\ in each case limited to the amount OCC has
collected in margins from the responsible Market Loan Clearing Member
based upon instructions received by the Loan Market prior to the
payment date. Under the Hedge Program, OCC does not currently offer a
guaranty of dividends or distributions, which must be resolved
bilaterally between the Borrowing and Lending Clearing Members.
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\10\ See OCC Rules 2202(b) and 2202A(b).
\11\ The terms ``substitute dividend'' or ``dividend equivalent
payment'' in respect of a stock loan transaction means a payment
made by the Borrowing Clearing Member to the Lending Clearing Member
to reflect any cash dividend or distribution made with respect to
the Loaned Stock during the term of the stock loan.
\12\ In respect of a stock loan transaction, a rebate is
typically a fee payable from the Lending Clearing Member to the
Borrowing Clearing Member, expressed as a rate based on the amount
of cash Collateral held by the Lending Clearing Member (``Positive
Rebate''). However, if the rebate rate is negative (``Negative
Rebate''), the fee is payable from the Borrowing Clearing Member to
the Lending Clearing Member.
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Mark-to-Market Payments
After novation, as part of the guaranty, OCC processes mark-to-
market payments for all cleared stock loans on a daily basis to
collateralize all loans to the negotiated levels. Mark-to-market
payments are based on the value of the loaned securities and made
between Clearing Members using OCC's cash settlement system. In the
Hedge Program, the percentage of the value of the loaned securities,
either 100% or 102%, and the preferred mark-to-market rounding are
dependent upon the terms of the Master Securities Loan Agreement
(``MSLA'') between the two Clearing Member parties to the transaction.
Currently, members may select between several default rates to which
the mark price would be rounded to the nearest interval (1.00, .05,
0.25, 0.10, 0.05, and 0.01). In the Market Loan Program, all Market
Loans are collateralized based on the rate and rounding convention
established by the Loan Market--currently 102% with rounding to the
nearest dollar.
In both Stock Loan Programs, daily mark-to-market of cash
collateral typically are settled in the firm lien account or combined
Market-Makers' account of the Clearing Member.\13\ Settlements
generally are combined and netted against other OCC settlement
obligations in a Clearing Member's account, including trade premiums
and margin deficits. Clearing Member open positions in the Stock Loan
Programs are factored into the Clearing Member's
[[Page 73468]]
overall margin \14\ and Clearing Fund contribution requirements.\15\
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\13\ See OCC Rule 2201(a)(iii); Rule 2201A(a)(iii).
\14\ See OCC Rules 601, 2203 & 2203A.
\15\ See OCC Rule 1001.
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Position Aggregation
OCC aggregates all stock loan positions and stock borrow positions
of a Clearing Member relating to the same Eligible Stock for reporting
and margin calculation purposes. OCC separately identifies stock loan
and stock borrow positions resulting from each of the Stock Loan
Programs, and such positions are not fungible with positions resulting
from the other program. Position aggregation in both Stock Loan
Programs is a legacy practice and does not follow industry-standard
book-keeping practices. Because of position aggregation, certain
industry standard post-trade activity must be performed bilaterally
away from OCC, such as re-rate transactions that change the rebate rate
on an individual loan.
Dividends and Distributions
Dividend equivalent payments for the Market Loan Program are
ordinarily effected through DTC's Dividend Service. If a Loan Market
has advised OCC that the dividend or distribution for such Market Loan
is not tracked by DTC's Dividend Service, or if OCC determines, in its
discretion, to remove a Market Loan from the Dividend Service, OCC Rule
2206A(a)(ii) currently provides that dividend equivalent payments are
effected through OCC's cash settlement system the day following the
expected dividend or distribution payment date. OCC Rule 2206A(a)(ii)
further provides that the calculation of the margin in respect of
dividend equivalent payments shall be solely based on calculations
provided by the Loan Market, and OCC shall have no responsibility to
verify the accuracy of the Loan Market's calculation. In addition, OCC
Rule 2206A(a)(iii) provides that with respect to non-cash dividends and
distributions, a Loan Market may determine in its discretion to fix a
cash settlement value for which the Loan Market may instruct OCC to
effect collection and payment. In the event of a Borrowing Clearing
Member's default, OCC guarantees dividend equivalent payments to the
extent that OCC has collected margin equal to such dividend equivalent
according to the instructions provided by the Loan Market.
Termination of Stock Loans
Hedge Loans are typically terminated when either (i) a Borrowing
Clearing Member instructs DTC to transfer a specified quantity of the
Loaned Stock to the Lending Clearing Member against payment of the
settlement price by the Lending Clearing Member to the Borrowing
Clearing Member, after which DTC notifies OCC of the transaction with
special codes after the transaction has settled; or (ii) the Lending
Clearing Member gives notice to the Borrowing Clearing Member that the
Lending Clearing Member is terminating the Stock Loan, or a portion
thereof and specifies the number of shares of the Loaned Stock in
respect of which the Lending Clearing Member is terminating the Stock
Loan.\16\ The current process of initiating return transactions for the
Hedge Program through DTC can lead to position breaks if the return
transactions are not properly coded. Market Loans are typically
terminated by a Market Loan Clearing Member giving notice to the
relevant Loan Market calling for the recall or return of a specified
quantity of the Loaned Stock.\17\ The Loan Market then sends details of
the matched return/recall transaction to OCC, which validates the
transaction and sends a pair of delivery orders to DTC in connection
with the recall/return.
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\16\ See OCC Rule 2209(a).
\17\ See OCC Rule 2209A(a).
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However, in certain circumstances when a Clearing Member under
either Stock Loan Program fails to return the specified quantity of
Loaned Stock or to pay the applicable settlement price for a Loaned
Stock, the counterparty Clearing Member may choose to execute a ``buy-
in'' or ``sell-out'' of the Loaned Stock on its own.\18\ The Clearing
Member executing a buy-in or sell-out is then required to provide
notice to OCC and its counterparty, in the case of a Hedge Loan,\19\ or
the Loan Market, in the case of a Market Loan,\20\ of the buy-in or
sell-out after execution is complete. Termination is not complete until
the records of OCC, which are the official record of open and closed
stock loan transactions, reflect the termination of the Stock Loan, and
Clearing Members remain liable for all obligations related to open
stock loan positions as reflected in the records of OCC.
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\18\ See OCC Rule 2209(b), (f); Rules 2209A(b), (c).
\19\ See OCC Rule 2209A(b), (f).
\20\ See OCC Rule 2209A(b)(1), (c)(1).
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Offset and Re-Matching of Matched-Book Positions
A portion of the activity in OCC's Hedge Program relates to what is
often referred to as matched-book activity, when a Hedge Clearing
Member maintains in an account a stock loan position for a specified
number of shares of an Eligible Stock reflecting a stock lending
transaction with one Hedge Clearing Member (the Borrowing Clearing
Member) and also maintains in that same account a stock borrow position
for the same number, or lesser number, of shares of the same Eligible
Stock with another Hedge Clearing Member (the Lending Clearing Member)
(such positions being ``Matched-Book Positions''). In the event of a
Clearing Member suspension, OCC has authority to re-match Matched-Book
Positions of the defaulting Clearing Member in the Hedge Loan
Program.\21\ Such re-matching in suspension eliminates risk associated
with price dislocation if OCC were required to instruct the surviving
lender to buy-in and the surviving borrower to sell-out the same
quantity of Loaned Stock in order to unwind the Matched-Book Positions.
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\21\ See OCC Rule 2212.
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Canadian Clearing Members
OCC expanded the Hedge Program to accommodate Canadian Hedge
Clearing Members in 2013.\22\ To be eligible for the Hedge Program, a
Canadian Clearing Member must appoint CDS Clearing and Depository
Services Inc. (``CDS''), Canada's national securities depository, to
act as its agent through CDS's arrangements with DTC and the National
Securities Clearing Corporation (``NSCC'') to provide cross-border
service to clear and settle trades with U.S. counterparties.\23\
Currently, Canadian Clearing Members are not eligible for the Market
Loan Program.
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\22\ See Exchange Act Release No. 69534 (May 8, 2013), 78 FR
28267 (May 14, 2013) (File No. SR-OCC-2013-03).
\23\ See OCC Rule 302(e), (f)(1).
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Canadian Clearing Members are also subject to additional
requirements intended to allow OCC to perform its clearance and
settlement services free from tax withholding obligations with respect
to payments to such members. Specifically, OCC has established rules to
address the application of Section 871(m) of the Internal Revenue Code
of 1986, as amended (``I.R.C.'') \24\ to listed options transactions
effective on January 1, 2017.\25\ Section 871(m) imposes a 30%
withholding tax on ``dividend equivalent'' payments that are made or
[[Page 73469]]
deemed to be made to non-U.S. persons with respect to certain
derivatives that reference equity of a U.S. issuer. OCC Rule 202
provides that Clearing Members that are non-U.S. entities for U.S.
federal tax purposes (``FFI Clearing Members'') must establish to the
OCC's satisfaction that the member's conduct of transactions or
activities with or through OCC will not result in the imposition of
taxes or withholding or reporting obligations with respect to amounts
paid or received by OCC (other than U.S. federal and State income taxes
imposed on OCC's net income).\26\ When taxes or obligations would be
imposed but for the qualification of a member for a special U.S. or
foreign tax status, ongoing membership of such members is conditioned
on the member to qualify for, maintain, and document such status to
OCC's satisfaction.\27\ In addition, an FFI Clearing Member is
prohibited from conducting transactions with or through OCC that would
result in the imposition of taxes or withholding or reporting
obligations with respect to amounts paid or received by OCC (other than
U.S. federal and State income taxes imposed on OCC's net income).\28\
Notwithstanding these requirements, which OCC implemented to facilitate
the clearance and settlement of listed options transactions, OCC has no
current tax withholding or reporting obligations for Canadian Hedge
Clearing Members' transactions under the Hedge Program because
substitute dividend payments are handled bilaterally between Hedge
Clearing Members, away from OCC.
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\24\ 26 U.S.C. 871(m).
\25\ In September 2015, the Treasury Department adopted final
regulations based on a proposal issued in December 2013 expanding
the types of derivatives to which Section 871(m) applies to include
certain listed options transactions with an effective date of
January 1, 2017. See T.D. 9734, 80 FR 56866 (Sept. 18, 2015). The
Treasury Department adopted final regulations providing additional
guidance on section 871(m) in January 2017. See T.D. 9815, 82 FR
8144 (Jan. 24, 2017).
\26\ OCC Rule 202(a).
\27\ See OCC Rule 202. FFI Clearing Members satisfy this
requirement by (1) entering into a ``qualified intermediary
agreement'' with the Internal Revenue Service (``IRS'') under which
the Clearing Member assumes primary withholding responsibility (such
member being a ``Qualified Intermediary Assuming Primary Withholding
Responsibility'') and qualifies under IRS procedures for exemption
from withholding under the Foreign Account Tax Compliance Act
(``FATCA''), 26 U.S.C. 1471-1474, such that OCC is not required to
withhold any amount with respect to any payment or deemed payment to
such FFI Clearing Member under FATCA or Chapter 3 of subtitle A of
the I.R.C. (``Chapter 3''), 26 U.S.C. 1441-1446, for transactions in
the FFI Clearing Member's customer accounts; and (2) entering into
an agreement with the IRS that permits OCC to make dividend
equivalent payments or deemed payments to such FFI Clearing Member
free from U.S. withholding tax for transactions or activity in the
FFI Clearing Member's capacity as principal through its firm account
(such member being a ``Qualified Derivatives Dealer'').
\28\ See OCC Rule 202(b)(1).
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Proposed Changes
OCC is proposing a number of amendments to enhance the structure
and operation of the Stock Loan Programs discussed above and provide a
framework for combining those programs into a single Stock Loan
Program. First, OCC proposes to make several changes to the rules
governing its Market Loan Program. Specifically, the proposed rule
change would enhance OCC's Market Loan Program by:
(a) expanding the Market Loan Program to include bilaterally
negotiated stock loans submitted by Clearing Members directly to
OCC, for which the original counterparties shall remain paired in
OCC's system for purposes of post-trade activity, including
modifications, recalls, and returns;
(b) allowing for and recognizing supplementary or additional
terms under an MSLA between the counterparties to such bilaterally
negotiated transactions submitted under the Market Loan Program, as
OCC's Rules currently recognize under the Hedge Loan Program;
(c) fixing cash collateral delivered and returned versus a
bilaterally negotiated Market Loan submitted directly to OCC at
102%, as is the current practice for Market Loans submitted through
a Loan Market, and allowing Clearing Members to select a default
rate at which mark-to-market payments would be rounded to the
nearest level for Market Loans submitted directly to OCC, as is the
current practice for Hedge Loans;
(d) allowing for Clearing Members to cancel pending transactions
by sending instructions directly to OCC as opposed to through a Loan
Market;
(e) establishing rules for affirmation of Market Loan
transactions submitted by Clearing Members directly to OCC, as
opposed to through a Loan Market;
(f) allowing OCC's clearance and settlement system to calculate
and handle cash distributions, including substitute dividends and
rebates;
(g) allowing OCC's clearance and settlement system to accept and
handle contract modifications agreed to by the parties to
bilaterally negotiated contracts submitted through the Market Loan
Program, including modifications to rebate rate, interest rate
benchmark, and loan terms;
(h) implementing additional OCC controls over the buy-in process
in the case of the Borrowing Clearing Member's failure to deliver
the Loaned Stock following a recall by the Lending Clearing Member
in situations other than the suspension of the Borrowing Clearing
Member under Chapter XI of the Rules;
(i) supporting Canadian Clearing Members in the Market Loan
Program while preventing certain transactions that could otherwise
introduce tax withholding obligations; and
(j) providing that in lieu of being a participant at the
Depository for purposes of delivering or receiving Eligible Stock in
connection with the initiation and termination of Market Loans, an
Appointing Clearing Member may appoint an Appointed Clearing Member
who is a member of the Depository to deliver or receive Eligible
Stock, in the same way as how the Rules currently allow for
Appointed Clearing Members to deliver or receive underlying
securities arising from the exercise or maturity of an Appointing
Clearing Member's physically-settled equity options or stock
futures.
As discussed in more detail below, OCC intends that with these
enhancements to the Market Loan Program, OCC would eventually
decommission the Hedge Program, after which the Market Loan Program
would become OCC's single stock loan program. In the interim, however,
and in addition to enhancements (a) through (j) to the Market Loan
Program, the proposed rule changes would apply amendments to both Stock
Loan Programs for the transition to OCC's new clearance and settlement
system by:
(k) replacing OCC's current practice of aggregating new stock
loan positions and stock borrow positions for the same Clearing
Member in the same Eligible Stock with contract-level accounting,
consistent with industry-standard bookkeeping practices;
(l) aligning settlement of daily mark-to-market of cash
collateral through the account in which the stock borrow or stock
loan position sits, rather than requiring that mark-to-market
settlement occur in a Clearing Member's firm lien account or
combined Market-Makers' account;
(m) simplifying the mark-to-market calculation to focus on the
change to the contract value of a Clearing Member's Stock Loans; and
(n) allowing for re-matching of Matched-Book Positions across
OCC's Stock Loan Programs in the event of a Clearing Member default.
In conjunction with these changes to the Stock Loan Programs, OCC
would also make certain other clarifying, conforming, and
organizational changes to OCC's By-Laws and Rules, and rule-filed
policies that reference those By-Laws or Rules. In particular, OCC
would reorganize, restate, and consolidate provisions of OCC's By-Laws
governing the Stock Loan Programs into Chapter XXII (Hedge Loan
Program) and Chapter XXIIA (Market Loan Program) of OCC's Rules, as
amended by this proposed rule change. As part of these changes, OCC
would preserve the governance requirements concerning amendments to the
stock loan-related By-Laws migrated to the Rules by amending Article
XI, Section 2 of the OCC By-Laws.
Plan To Consolidate OCC's Stock Loan Programs
OCC plans to consolidate its Stock Loan Programs into a single,
enhanced stock loan program. OCC intends to achieve this consolidation
in three phases. The first phase, which is described in this proposed
rule change, would enhance the Market Loan Program in a way that would
allow that
[[Page 73470]]
program to eventually become OCC's single, enhanced stock loan program.
The first phase will also involve certain enhancements to both the
Hedge and Market Loan Programs in connection with the implementation of
OCC's new system for clearance and settlement. After OCC implements the
enhancements and the new clearance and settlement system becomes OCC's
system of record, OCC will begin authorizing and encouraging Hedge
Clearing Members to begin submitting bilateral transactions through the
enhanced Market Loan Program. While OCC would require Hedge Clearing
Members to provide the appropriate documentation and certifications
required of Market Loan Clearing Members and submit to certification
testing prior to utilizing the enhanced program, OCC does not plan to
require business expansions for Hedge Clearing Members migrating to the
Market Loan Program because they are already approved for stock loan
activity.\29\ Currently, the business expansion for Market Loan Program
participation serves mainly to ensure that the Clearing Member is
properly subscribed through a Loan Market, which will no longer be
necessary to participate in the Market Loan Program.
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\29\ Currently, a Clearing Member that participates in the Hedge
Loan Program that desires to expand its participation into the
Market Loan Program is subject to a business expansion review under
OCC's Third-Party Risk Management Framework. See Third-Party Risk
Management Framework, available at <a href="https://www.theocc.com/risk-management/risk-management-framework">https://www.theocc.com/risk-management/risk-management-framework</a> (providing for assessments for
Clearing Member onboarding, including with respect to expanded
relationships).
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During the second phase, which also is covered by this proposed
rule change, OCC would encourage Clearing Members to transition to the
Market Loan Program and would monitor the movement of activity from the
Hedge Program to the enhanced Market Loan Program. Based on interest
expressed by Clearing Members,\30\ OCC anticipates that Clearing
Members will be motivated to migrate activity to the Market Loan
Program because of OCC's expanded guarantee under that program and the
operational enhancements under this proposed rule change. Once
transition plans for each Clearing Member are understood, OCC would
announce that on a future date, OCC will no longer accept new loans
through the Hedge Program, but would continue to support existing Hedge
Loans. The decision to make this announcement will be made by OCC's
Chief Executive Officer or Chief Operating Officer based upon factors
including, but not limited to, the number of participants that are able
to conduct business under the enhanced Market Loan Program, the amount
of transactions flowing through the enhanced Market Loan Program, the
proportion of loan balances between the two Stock Loan Programs, and
feedback from members about when they expect to be ready to migrate
fully to the enhanced Market Loan Program. OCC's goal is to transition
all Hedge Program participants to the enhanced Market Loan Program
within a year after implementing the enhanced program. Beginning on the
announced date, existing Hedge Loans will naturally terminate through
return or recall instructions until none are left. OCC does not expect
that this period will last more than six months from the announced date
given the average term for stock loans.
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\30\ OCC has provided results of a survey and other informal
discussions with Clearing Members concerning the enhancements to the
OCC's Stock Loan Programs in confidential Exhibit 3B to SR-OCC-2024-
011. Members have expressed interest in the enhancements such as
having the rebate amounts calculated, settled, and guaranteed by
OCC. The migration from Hedge to the Market Loan Program is
necessary for such expansion to OCC's services.
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This second phase would be reflected in proposed Rule 2213(e)(2),
which would address the termination of the Hedge Loan Program. Section
2(c) of OCC By-Law Article XXI, which would become OCC Rule 2213(e)(1)
as part of the reorganization of the Stock Loan By-Laws and Rules,
already provides OCC authority, upon two business days' notice to
Clearing Members, to terminate the outstanding Hedge Loans relating to
one or more particular Eligible Stock at its sole discretion for
certain enumerated reasons, including the impending termination of that
business on the part of OCC. OCC Rule 2213(e)(2) would allow OCC to
take a phased approach to terminating the Hedge Loan Program by first,
upon approval by the Chief Executive Officer or Chief Operating
Officer, announcing that OCC will cease to accept the initiation of new
Hedge Loans. OCC Rule 2213(e)(2) also would provide that the
determination to terminate the Hedge Loan Program will be made based
upon factors including, but not limited to, the number of participants
that are able to conduct business under the Market Loan Program, the
amount of transactions flowing through the Market Loan Program, the
proportion of loan balances between the two Stock Loan/Hedge Programs
and the Market Loan Program, and feedback from members about when they
expect to be ready to migrate fully to the Market Loan Program. During
this phasing out, Clearing Members would be allowed to maintain open
positions in Hedge Loans until termination of those positions through
returns and recalls initiated by the Clearing Members.
The third phase, which is not covered by this proposed rule change,
would be the ultimate decommission of the Hedge Program Rules. Once all
Hedge Loans terminate through return or recall, OCC intends to file
another proposed rule change that would remove the Hedge Program from
OCC's By-Laws and Rules. Thereafter, the Market Loan Program would then
become OCC's single ``Stock Loan Program.'' Until then, OCC is
proposing to amend its Rules to avoid ambiguity by using ``Hedge Loan''
instead of ``Stock Loan'' when referring to Stock Loans under the Hedge
Program unless in reference to Stock Loans under either of the Stock
Loan Programs, consistent with the current definition of that term in
Article I of the By-Laws.
Market Loan Program Enhancements
OCC proposes enhancements to the Market Loan Program that would (a)
expand the Market Loan Program to allow for submission of Market Loans
bilaterally negotiated by Clearing Members; (b) recognize MSLAs under
the Market Loan Program; (c) fix the value of cash collateral delivered
and returned versus the Loaned Stock at 102% of the value of the Loaned
Stock, as Market Loans are currently collateralized, and allow for
flexible pricing, as under the current Hedge Loan Program; (d) provide
for the cancellation of pending transactions that have not yet been
accepted by OCC; (e) establish rules for affirmation of Market Loan
transactions submitted by Clearing Members directly to OCC; (f)
facilitate the calculation and processing of cash distributions,
including substitute dividends and rebate payments, by OCC's new
clearance and settlement system, rather than by a Loan Market; (g)
provide for modification of Market Loan terms agreed to by Market Loan
Clearing Members; (h) implement additional OCC controls over the buy-in
process in the case of a Borrowing Clearing Member's failure to deliver
after the Lending Clearing Member initiated a recall, as well as to
prepare those controls and OCC's other Market Loan and Hedge Loan Rules
for the shortening of the standard settlement cycle for securities
transactions; (i) support Canadian Clearing Members in the Market Loan
Program while preventing certain transactions that could introduce tax
withholding obligations; and (j) provide a framework for allow an
Appointing Clearing Member to settle its Market Loan
[[Page 73471]]
activity through an Appointed Clearing Member in lieu of maintaining
membership at a Depository.
(a) Bilaterally Negotiated Market Loans
OCC is proposing to expand the Market Loan Program to include
bilaterally negotiated Market Loans submitted directly by Clearing
Members. Under the Market Loan Program, OCC currently accepts
electronic messages from the Loan Market for new loans and returns. OCC
would expand the Market Loan Program to accept submissions directly
from Clearing Members (or their third-party service providers).
Following the affirmation of a new loan or return, OCC would instruct
DTC to settle the transaction using the account of the lender, the
borrower, or the Appointed Clearing Members, or using OCC's DTC
account. While there would be two separate avenues for submitting loans
(i.e., through a Loan Market or direct submission of bilaterally
negotiated Loans to OCC), the scope of OCC's guaranty and post-trade
processing for all transactions would be uniform. By allowing for
automated submission of transactions to OCC prior to DTC settlement and
by controlling the settlement process, the enhanced program would help
reduce the burden and risks associated with the balancing and
reconciliation under the current Hedge Program.\31\ As under the
current Hedge Program, counterparties to bilaterally negotiated
contracts submitted through the Market Loan Program would remain paired
in OCC's system for purposes of recalls, returns, and contract
modifications.
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\31\ Surveys of stock loan industry participants indicate most
firms have a significant spend for stock loan post-trade and
reconciliation processing. Based on this industry feedback, OCC
believes that a service that can provide operational efficiencies
and further reduce manual processing and operational risk would be
well received. OCC's review of this feedback is provided in
confidential Exhibit 3B to SR-OCC-2024-011.
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Because certain proposed Rules would apply differently to Loans
matched anonymously through a Loan Market and those that would be
initiated bilaterally, whether through a Loan Market or with OCC
directly, OCC would add definitions of ``Anonymous Market Loan'' and
``Disclosed Market Loan'' to OCC Rule 101. Anonymous Market Loans would
be defined as those initiated through a Loan Market and for which the
identities of the Lending Clearing Member and Borrowing Clearing Member
are not disclosed to each other. Disclosed Market Loans would be
defined to include either those Market Loans (i) initiated through a
Loan Market and for which the identities of the Lending Clearing Member
and Borrowing Clearing Member are disclosed to each other, or (ii)
initiated directly between the Lending Clearing Member and Borrowing
Clearing Member away from a Loan Market such that the identities of the
Lending Clearing Member and Borrowing Clearing Member are disclosed to
each other. Paragraph (h) to proposed OCC Rule 2202A (Initiation of
Market Loans) would provide that a Market Loan may be either an
Anonymous Market Loan or a Disclosed Market Loan. Paragraph (a) to
proposed OCC Rule 2206A (Maintaining Stock Loan and Stock Borrow
Positions in Accounts) would provide that the identities of the Lending
Clearing Member and Borrowing Clearing Member would be elements
identified for stock loan positions and stock borrow positions
resulting from Disclosed Market Loans.
To expand the Market Loan Program to bilateral transactions, OCC
would amend OCC Rule 2202A. Specifically, the proposed rule change
would amend current OCC Rule 2202A(a)(i), which would be renumbered to
OCC Rule 2202A(a)(1) as part of the restatement of the Stock Loan
Program rules, to add that, in addition to initiation through a Loan
Market, a Market Loan may be initiated when a Lending Clearing Member
and Borrowing Clearing Member send details of a stock loan between the
two Clearing Members directly to OCC. To ensure that the original
counterparties to such a Disclosed Market Loan remain paired in OCC
system, notwithstanding OCC's novation, OCC would also amend current
Article XXIA, Section 5 of OCC's By-Laws (Maintaining Stock Loan and
Stock Borrow Positions in Accounts), which would become OCC Rule 2206A,
by adding a new sentence to the beginning of that provision that
introduces the concept of ``matched pairs,'' consistent with the OCC
By-Law's definition of Hedge Loans.\32\
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\32\ See By-Law Art. I, Sec. 1.H.(2).
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In addition to providing for the initiation of bilateral Market
Loans, OCC would also amend its Rules to accommodate direct submission
of other types of post-trade transactions for which the Rules currently
rely on actions taken by a Loan Market. Specifically, OCC would amend
the first paragraph of current OCC Rule 2209A(a) (Termination of Market
Loans), which would be numbered as OCC Rule 2216A(a) as part of the
broader reorganization of the Market Loan Program Rules, and new OCC
Rule 2214A (Modifications) by providing that termination or
modification of a Market Loan, respectively, may be initiated either
through a Loan Market or OCC, depending on the way in which the Loan
was initiated. Such instructions would be made through the Loan Market
for Anonymous Market Loans; through OCC for Disclosed Market Loans
initiated through OCC directly; and through either the Loan Market or
OCC for Disclosed Market Loans initiated through a Loan Market. OCC
would similarly amend the definitions of ``Recall'' and ``Return,'' as
migrated from the By-Laws to OCC Rule 101, to reflect the separate
channels for initiating such a transaction. OCC would also make other
conforming changes to the text of the Rules to reflect submission of
bilaterally negotiated loans directly to OCC:
<bullet> Throughout the rules governing the Market Loan Program,
OCC would also remove references to ``matching'' or ``matched''
transactions (i.e., matched through a Loan Market) to reflect that
Market Loan transactions could also be initiated bilaterally, either
through a Loan Market or directly with OCC.\33\
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\33\ See OCC By-Law Art. I, Sec. 1.L.(5) (defining ``Loan
Market'' as ``an electronic platform . . . that supports securities
lending and borrowing transactions by lenders and borrowers based on
loan terms that each party is willing to accept''); OCC Rules
2202A(a)(i) (``If the matched transaction passes [OCC]'s validation
process . . .''); 2202A(a)(ii) (``previously reported matched
transaction'' and ``related matched transaction''); 2202A(b) (``the
matched stock loan transaction submitted by the Loan Market'');
2209A(a)(1) (``matched return/recall transaction'').
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<bullet> The definition of ``Market Loan Program,'' as migrated
from Section 1 of Article I of the OCC By-Laws to OCC Rule 101, would
be amended to recognize that Market Loans may be initiated either
through a Loan Market or through direct submission of bilaterally
negotiated Loans to OCC.
(b) Recognizing MSLAs
Parties to a bilaterally negotiated stock loan transaction
typically execute an MSLA. Under current OCC Rule 2202(b), Hedge
Clearing Members are permitted to establish and maintain additional
terms under the MSLA that are not extinguished through OCC's novation
provided that the additional terms are not inconsistent with anything
in OCC's By-Laws or Rules. Examples of such additional or supplementary
terms include a term structure or fees for buy-in transactions. The
proposed rule change would add the same provision to the Market Loan
Program in proposed OCC Rule 2202A(b)(2)(E). As described below, the
recognition of MSLAs within the Market Loan Program would also
[[Page 73472]]
facilitate the re-matching of Matched Book Positions in suspension
because OCC would give priority to re-matching counterparties with
existing MSLAs, both when re-matching within and across the Stock Loan
Programs.
(c) Collateral and Mark-to-Market Pricing
To accommodate the submission of bilaterally negotiated Market
Loans directly to OCC, OCC proposes to establish rules that would fix
the collateral for Market Loans at 102%--the same rate at which Market
Loans submitted through a Loan Market are collateralized today.
Specifically, OCC would amend current OCC Rule 2204A (Mark-to-Market
Payments), which would become proposed OCC Rule 2209A per the
reorganization discussed below, to provide in proposed paragraph (b)
(Market-to-Market Payment Amount) that the collateralization rate for
all Market Loans would be 102%, regardless of whether initiated through
a Loan Market or submitted directly to OCC. Accordingly, OCC would
delete the current text in Rule 2204A and the definition of the term
``Collateral'' in Article XXIA of the OCC By-Laws, as migrated to OCC
Rule 101, that provides that the collateralization rate shall be set by
the relevant Loan Market. OCC believes that fixing collateral at 102%
would help to preserve the compatibility of OCC's cleared offering with
standard practices for over-the-counter (``OTC''), uncleared stock
loans while minimizing complexity in OCC's risk management processes.
OCC previously considered standardizing collateralization at 100%
because in a cleared transaction, OCC's guaranty replaces the
additional collateral in protecting Lenders from market risk in the
event of a counterparty default. In a survey OCC submitted to all
Clearing Members who participate in OCC's Stock Loan Programs, the vast
majority of respondents objected to a proposal to standardize
collateralization at 100%.\34\ The most common reasons cited for this
objection were (i) desire to align the collateral amount and mark-to-
market cashflows for members who commonly have uncleared positions at
the OTC-standard 102% and a matching position within clearing; and (ii)
loss of the additional 2% in collateral would materially reduce what
the income lenders earn by investing the cash collateral, which is one
of the reasons lenders choose to lend their shares. In response to this
feedback, OCC now proposes to fix collateral at 102%, which would align
OCC's offering with standard OTC practices and with OCC's current
practice within the Market Loan Program. Fixing the collateral at a
single rate--as under the current Market Loan Program--would also
minimize complexity in OCC's risk management of stock loan positions by
establishing a single rate across all Market Loans.
---------------------------------------------------------------------------
\34\ OCC has included a copy of the survey results in
confidential Exhibit 3B to SR-OCC-2024-011.
---------------------------------------------------------------------------
OCC also proposes to establish rules that would allow Clearing
Members submitting Market Loans directly to OCC to select the default
rate at which mark-to-market payments would be rounded up to the
nearest level, which is the current practice for Hedge Loans.
Specifically, OCC would amend OCC Rule 2201A (Instructions to the
Corporation), which would become proposed OCC Rule 2207A, to reflect
that the default rate is one of the standing instructions that Market
Loan Clearing Members must submit with respect to Market Loans
submitted directly to OCC. Rounding rates for Market Loans submitted
through a Loan Market would not change. If the default rate differs
between a Borrowing Clearing Member and a Lending Clearing Member, the
Lending Clearing Member's default rate would govern the Market Loan.
When surveyed, Clearing Members cited the same reasons for supporting
flexibility in pricing as they did in objecting to fixing collateral at
100%.\35\ OCC currently offers this flexibility in the Hedge Program
today. OCC believes that offering the same flexibility with respect to
bilaterally negotiated Market Loans submitted to OCC directly will aid
Clearing Members in aligning cash flows between cleared and OTC stock
loan transactions.
---------------------------------------------------------------------------
\35\ OCC has included a copy of the survey results in
confidential Exhibit 3B to SR-OCC-2024-011.
---------------------------------------------------------------------------
(d) Cancellation of Pending Transactions
To facilitate the acceptance of bilaterally negotiated contracts in
the Market Loan Program, OCC is proposing to modify its Rules that
concern the cancellation of pending transactions to accommodate the
submission of cancellation instructions by Clearing Members, in
addition to a Loan Market. Under current OCC Rule 2202A(a)(ii), a Loan
Market may instruct OCC to disregard a previously reported matched
transaction that is pending settlement at DTC, after which OCC
instructs DTC to cancel the previously issued delivery order. Upon
confirmation that DTC has processed such cancellation instructions, the
related matched transaction is deemed null and void and given no
effect. OCC has no obligation to any Market Loan Clearing Member in
acting pursuant to a Loan Market's instruction to disregard a
previously reported transaction. The proposed rule change would amend
OCC Rule 2202A(a)(ii), which would be renumbered as proposed OCC Rule
2202A(a)(2), to recognize the ability of a Market Loan Clearing Member
to submit an instruction to cancel a pending transaction directly to
OCC for bilaterally negotiated transactions submitted under the Market
Loan Program.
The proposed changes would also add a new OCC Rule 2215A
(Cancelation of Pending Instructions) to address the cancellation of
pending post-trade instructions other than cancellation of loan
initiation under Rule 2202A. For example, under OCC's current OCC Rule
2202A, Hedge Clearing Members currently have the capability to cancel
return instructions or recall instructions pending with DTC. Similarly,
Market Loan Clearing Members currently may cancel pending transactions
by issuing a cancellation instruction to the Loan Market, which may
then instruct OCC to disregard a previously reported transaction under
current OCC Rule 2202A(a)(ii). This new OCC Rule 2215A would preserve
that ability under the enhanced program by allowing members that submit
bilaterally negotiated Market Loans to issue cancellation instructions
directly to OCC, as they do now to DTC and the Loan Market.
(e) Transaction Affirmation
Currently, Market Loan Program transactions are presumed matched
when sent to OCC by a Loan Market. OCC would establish a transaction
affirmation process for loans submitted directly to OCC, rather than
through a Loan Market:
<bullet> New Loans: Counterparties to a new loan would be required
to affirm the transaction details prior to OCC submitting the new loan
to DTC for settlement. New loans that are not affirmed by the time that
OCC stops accepting instructions for the day would be rejected. This
affirmation process would be reflected in proposed OCC Rule
2202A(a)(1), which would provide that a Market Loan is initiated when
(i) the Loan Market sends details of a stock loan transaction to OCC or
(ii) a Lending Clearing Member and Borrowing Clearing Member send
details to OCC of a stock loan transaction between them and such
details, as applicable, are either matched by OCC or affirmed by the
Clearing Members.
<bullet> Returns: Provided that the Borrowing Clearing Member
initiated a
[[Page 73473]]
return within OCC's timeframe for submitting such instruction on a
stock loan business day, the Lending Clearing Member would have the
opportunity to affirm or reject the initiation of a return by a cut-off
time on the same business day.\36\ Any returns pending after that cut-
off time would be deemed affirmed and submitted to DTC for processing.
This auto-affirmation would be reflected in proposed OCC Rule
2216A(a)(2). Based on conversations with Clearing Members, OCC believes
this affirmation process balances Lending Clearing Members' desire to
have the opportunity to affirm or reject return instructions, while
also addressing Borrowing Clearing Members' concerns that delay in
affirmation or allowing the transaction to pend indefinitely could have
regulatory consequences for the Borrowing Clearing Member.\37\
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\36\ OCC anticipates that upon implementation of these proposed
changes, the cut-off for rejections will be 30 minutes prior to
DTC's standard settlement submission deadline.
\37\ OCC's settlement procedures for Stock Loan termination are
intended to facilitate its Clearing Member's compliance with
requirements under applicable rules of the Commission and self-
regulatory organizations, including the requirements imposed by
Regulation SHO. See Exchange Act Release No. 59294 (Jan. 23, 2009),
74 FR 5958 (Feb. 3, 2009) (SR-OCC-2008-20). However, the ultimate
responsibility for compliance with Regulation SHO rests with the
Clearing Member, and OCC has no liability for any Clearing Member's
failure to comply with its obligations. See, e.g., OCC Rules
2209A(g) (``[OCC] shall not be held liability for any Clearing
Member's failure to comply with its responsibilities and obligations
under the federal and state securities laws, including, but not
limited to, Regulation SHO, or any applicable rules of the relevant
Loan Market or any exchange or self-regulatory organization.'').
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<bullet> Recalls: Recalls would not need to be affirmed. Per
standard MSLA terms, a Borrowing Clearing Member will be deemed to have
affirmed the initiation of a recall provided that the Lending Clearing
Member requested the return of the specific quantity of Loaned Stock no
earlier than the standard settlement date that would apply to a
purchase or sale of the Loaned Stock in the principal market of such
Loaned Stock.\38\ This understanding would be added to proposed OCC
Rule 2216A(a)(3).
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\38\ The standard settlement cycle currently corresponds with
the one stock loan business day after submission of the recall. See
OCC Rule 2209A(a)(3).
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<bullet> Contract Modifications: Contract modifications to the
rebate rate, interest rate benchmark, or loan term submitted by either
a Borrowing Clearing Member or Lending Clearing Member, the proposed
Rule amendments for which are discussed below, would not become
effective until affirmed by both parties. This affirmation requirement
would be added to new OCC Rule 2214A(a).
<bullet> Buy-Ins & Sell-Outs: For Market Loans submitted directly
through the Corporation, the Borrowing Clearing Member and Lending
Clearing will be given the opportunity to affirm or reject a buy-in or
sell-out, respectively, by a cut-off time specified by OCC on the stock
loan business day the buy-in or sell-out transaction is received by
OCC. If the Clearing Member does not affirm or reject the buy-in or
sell-out by that time, OCC would deem the buy-in or sell-out to be
complete if OCC determines that the Buy-In or Sell-Out Costs for the
Loaned Stock initiated is more than the lowest market price and less
than the highest market price for the Loaned Stock on the stock loan
business day the buy-in or sell-out is submitted to OCC.\39\ Otherwise,
the buy-in or sell-out would be rejected. As with buy-ins and sell-outs
under the Hedge Program today,\40\ any objection that the contraparty
has with respect to the timeliness of the buy-in or sell-out or the
reasonableness of the Buy-In or Sell-Out Costs are matters that must be
resolved between the Lending Clearing Member and the Borrowing Clearing
Member, away from OCC. These understandings and processes would be
reflected in paragraphs (b)(2)(B) and (c)(2) of proposed OCC Rule
2216A.
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\39\ OCC would evaluate the price per share paid or received
against market prices on that stock loan business day, consistent
with the Clearing Member's obligation to immediately give OCC
written notice of the buy-in or sell-out. In making its
determination, OCC would account for transaction costs, fees or
interest paid or incurred in connection with the buy-in and sell-out
that may be included in the Buy-In and Sell-Out Costs provided by
the Clearing Member executing the buy-in or sell-out.
\40\ See OCC Rule 2209(b), (f).
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To support Clearing Members in making the affirmations required
under these rules, OCC's new stock loan system would support automatic
affirmation based on system settings that could be selected by the
Clearing Member.\41\ Through OCC's new clearance and settlement system,
Clearing Members will be able to create and manage standing
instructions for affirmation of their Market Loans based on variables
including the type of transaction, the counterparty, the amount, or the
rebate rate. For example, a member would be able to set instructions
to: (i) affirm every transaction; (ii) limit affirmation to a certain
set of counterparties; (iii) establish more granular rules, such as
affirming any transaction with a rebate rate less than 250 basis
points; or (iv) combine one or more of the above instructions. When new
loans are received, the system would check whether there is a standing
instruction that applies to the new loan. If no instruction is found,
then the new loan would be pended for affirmation, subject to the above
referenced Rules. If a standing instruction applies, then OCC would
follow that instruction as satisfaction of the affirmation requirement.
Authority to permit such standing instructions currently exists under
current OCC Rule 2201A (Instructions to the Corporation), the
applicable provision of which would be renumbered OCC Rule 2207A(a)(2).
---------------------------------------------------------------------------
\41\ Buy-ins and sell-outs under OCC Rule 2216A would require
manual affirmation, subject to automatic affirmation following a
cut-off time discussed above.
---------------------------------------------------------------------------
(f) Cash Distributions
The proposed changes would allow OCC to calculate and effect cash
entitlements through its new clearance and settlement system, including
dividends, distributions and rebates. OCC proposes to revise paragraphs
(a)(ii) and (a)(iii) of current OCC Rule 2206A (Dividends and
Distributions; Rebates), renumbered as proposed OCC Rule 2211A(b) and
(c), to reflect that under OCC's new clearance and settlement system,
OCC shall assume responsibility for calculating the margin add-on
collected with respect to dividend equivalent payments. While OCC shall
continue to effect dividend equivalent payments primarily through the
facilities of DTC using its dividend tracking service, OCC would effect
the payments through OCC's new clearance and settlement system if OCC
determines that the dividend or distribution for a Market Loan is not
tracked through DTC's dividend tracking service or if OCC has
determined to remove a Market Loan from the dividend tracking service,
as under OCC's current Rules. In addition, OCC would continue to add
non-cash dividends and distributions to the Loaned Stock if OCC
determines that such dividends and distributions are legally
transferable and the transfer can be effected through DTC. The
determination to fix a cash value for non-cash dividends and
distributions not added to the Loaned Stock would be OCC's under the
proposed changes, rather than the Loan Market. Because OCC will no
longer be reliant on the Loan Market for OCC's margin add-on process
and settlement of dividend equivalent payments, OCC proposes to
eliminate the limitations under the current Rule, including the current
provision that OCC's guaranty is limited by the amount of margin OCC
collected in reliance on the Loan Market's calculation. This change
would not have any effect on OCC's margin methodology. OCC would
continue to
[[Page 73474]]
collect a margin add-on for such cash distributions.
The proposed changes would also add paragraph (d) to proposed OCC
Rule 2211A to address the rights of a Lending Clearing Member with
respect to optional dividends (i.e., a dividend the shareholder can
elect to receive in cash, stock, or some combination of the two).
Proposed OCC Rule 2211A(d) would provide that a Lending Clearing Member
will have the right to elect an option only if it recalls the Loaned
Stock in time to make such election. If the Lending Clearing Member
does not recall the Loaned Stock, the Lending Clearing Member would be
entitled to receive the default option set by the issuer of the Loaned
Stock. OCC understands this proposed rule would match the Loan Market's
current process for optional dividends. Because optional dividends on
Market Loans are currently governed by the Loan Market's processes,
OCC's rules do not currently address the rights of a Lending Clearing
Member with respect to optional dividends.
OCC would also amend its rules to facilitate calculation,
collection, and payment of rebates under the new clearance and
settlement system. OCC Rule 2206A(b) currently provides that OCC
generally will collect and pay rebate payments on a monthly basis as
instructed by the Loan Market. As with dividend equivalent payments,
the Loan Market is currently responsible for calculation of the rebate
payments. OCC would amend OCC Rule 2206A(b), which would be renumbered
OCC Rule 2211A(e), to reflect that OCC shall assume responsibility for
calculating rebate payments under its new clearance and settlement
system. OCC also proposes to amend the Rule so that OCC will be
prepared if and when the stock loan industry transitions to daily,
rather than monthly, collection of rebate payments. Because OCC
anticipates that upon implementation of the new system, OCC will
continue to calculate and collect rebate on a monthly basis, proposed
OCC Rule 2211A(e) would provide that the calculation and collection of
rebate payments could also be made on such other basis, not to exceed
monthly.
(g) Market Loan Modifications
OCC is proposing to add a new rule to support contract
modifications to the Market Loan Program made possible by the change to
contract-level recordkeeping, discussed below. Modifications agreed to
by the Market Loan Clearing Members over the life of a Market Loan
would be accepted by OCC and handled by OCC's new clearance and
settlement system. Specifically, modifications would be permitted
regarding the (a) rebate rate; (b) interest rate benchmark; and (c)
loan term. Any modifications would be maintained in OCC's books and
records at the contract level. OCC's new clearance and settlement
system would allow, but not require, submission of these terms.\42\ The
channel through which modification requests would be processed would be
determined by the manner in which the loan was initiated. Clearing
Members would be required to submit post-trade transactions for
Anonymous Market Loans through the Loan Market on which the transaction
was initiated, consistent with current practice. Clearing Members may
submit post-trade transactions for Disclosed Market Loans to OCC
directly or, if the Disclosed Market Loan was submitted through a Loan
Market, Clearing Members would have the option of submitting the post-
trade transaction through the Loan Market.
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\42\ See infra item (k) (Contract-Level Recordkeeping).
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The proposed change would add a new rule, which would be numbered
OCC Rule 2214A as part of the broader proposed reorganization of
Chapter XXIIA. In addition to specifying the terms subject to
modification, proposed OCC Rule 2214A would provide that OCC shall
update the relevant terms in its books and records if, as applicable,
(1) the Loan Market notifies OCC that the parties agreed to the
modification, or, (2) with respect to Market Loans initiated directly
through OCC, the parties provided OCC with matching or affirmed
instructions, as discussed above. OCC would provide notice of the
modified terms in the daily reports that OCC is required to make
available to Market Loan Clearing Members under proposed OCC Rule
2210A.
(h) Buy-In Controls and Settlement Cycle
The proposed changes would also provide OCC with additional
controls over the buy-in process for the recall of a Market Loan
initiated by a Lending Clearing Member if the Borrowing Clearing Member
fails to return the Loaned Stock in situations other than suspension of
the Borrowing Clearing Member.\43\ Under current OCC Rule 2209A, a
Lending Clearing Member is entitled to initiate a buy-in if a recall
transaction fails to settle by the Settlement Time on the first stock
loan business day after submitting the recall.\44\ Under OCC's current
rules, the Borrowing Clearing Member may return the Loaned Stock up
until the time that the Lending Clearing Member that initiated the
return or recall provides written notice to the Loan Market that it has
executed the buy-in or sell-out. This process can lead to situations in
which the Borrowing Clearing Member may return the Loaned Stock during
the period between when buy-in becomes permissible, but before the
Lending Clearing Member executes the transaction and provides written
notice.
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\43\ As a practical matter, if the Borrowing Clearing Member
initiates a return, it would have the shares in its possession to
return. Accordingly, the proposed controls are limited to buy-ins
following failure to deliver initiated by a recall by the Lending
Clearing Member.
\44\ See OCC Rule 2209A(a)(3).
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OCC proposes to provide for enhanced controls over the buy-in
process by amending current OCC Rule 2209A(b), which would be
renumbered OCC Rule 2216A(b) as part of the reorganization of Chapter
XXIIA of OCC's Rules. Proposed OCC Rule 2216A(b) would be amended to
provide that upon timely notice from the Lending Clearing Member that
it intends to execute a buy-in after a Borrowing Clearing Member fails
to return the Loan Stock following a recall transaction, OCC would
prevent the Borrowing Clearing Member from returning the Loaned Stock
while the Lending Clearing Member executes the buy-in. Until such time
as the Lending Clearing Member provides such notice, OCC would
recognize the Borrowing Clearing Member's return of the Loaned Stock.
The stock loan and stock borrow positions would remain open until such
time as the Lending Clearing Member provides notice that the buy-in is
complete.
(i) Supporting Canadian Clearing Members
As described above, Canadian Clearing Members are currently limited
to participation in OCC's Hedge Program. The proposed changes would
support Canadian Clearing Members in the Market Loan Program while
preventing certain transactions that could give rise to tax withholding
obligations.
First, OCC would revise certain of OCC's current By-Laws and Rules
to recognize Canadian Clearing Members as potential participants in the
Market Loan Program and address certain unique operational capabilities
that will be required to support that participation:
<bullet> OCC would revise paragraph (f) of OCC Rule 302
(Operational Capability) to include Canadian Clearing Members as among
those members that qualify for participation in the Market Loan
[[Page 73475]]
Program, including by providing for such Canadian Clearing Members to
settle transactions through a CDS sub-account at the Depository, as
they do under the Hedge Program today.
<bullet> OCC would further revise and restate paragraph (f) to
consolidate the subparagraphs specific to the operational requirements
for participation in the Hedge Loan Program and the Market Loan
Program. The current division can be attributed to the evolution of
those programs, which led OCC to make approval for participation in the
Hedge Loan Program--OCC's initial Stock Loan Program--a condition for
participation in the Market Loan Program. The proposed changes would
consolidate the provisions so that the present division does not serve
as an impediment to the planned decommission of the Hedge Loan Program.
Requirements specific to a particular program, or a particular means of
initiating a Stock Loan through one of the Stock Loan Programs, would
be amended to delineate the scope of applicability.
<bullet> OCC would revise OCC Rule 306A (Event-Based Reporting) to
reflect that a Canadian Clearing Member's obligation to notify OCC if
CDS has or likely will cease to act for that Canadian Clearing Member
extends to such members that participate in both Stock Loan Programs.
<bullet> OCC would replicate OCC Rule 2201(c), which concerns a
Canadian Clearing Member's appointment of CDS for purposes of settling
Hedge Loan delivery-versus-payment transactions, as proposed OCC Rule
2207A(c). As such, the same requirements would apply to Canadian
Clearing Members that participate in the Market Loan Program.
In making its determination to extend the Market Loan Program to
Canadian Clearing Members, OCC has also considered OCC's ability to
offer that program's expanded guaranty to Canadian Clearing Members
without incurring tax or withholding obligations on the associated
payment obligations. Under the expanded Market Loan Program, OCC would
clear and settle the types of cash distributions, such as substitute
dividend and rebate payments, that OCC does not guarantee under the
Hedge Program and must be resolved bilaterally by Hedge Clearing
Members, away from OCC. OCC believes its current Rules already provide
the framework to allow Canadian Clearing Members to transact under the
Market Loan Program without imposing tax withholding obligations on
payments made or received by OCC. As discussed above, OCC currently
imposes obligations on Canadian Clearing Members intended to allow OCC
to clear listed options transactions free from tax withholding
obligations on dividend equivalent payments or deemed payments. Current
OCC Rule 202 generally would also allow OCC to make substitute dividend
payments to Canadian Clearing Members as Lending Clearing Members under
the enhanced Market Loan Program without imposing tax or withholding
obligations. While OCC understands that, subject to the conditions in
OCC Rule 202, OCC's payments of substitute dividends to Canadian
Clearing Members would not be subject to withholding, OCC would report
substitute dividend payments to the IRS using information provided by
the Canadian Clearing Members, as OCC currently does for dividend
equivalent payments or deemed payments to Canadian Clearing Members in
connection with listed options transactions. Pursuant to current OCC
Rule 202(b)(5), the Canadian Clearing Member is required to indemnify
OCC for any loss, liability or expense (including taxes and penalties)
it may sustain as a result of the member's failure to comply with
requirements of OCC Rule 202(b).
Current OCC Rule 202(b) also provides OCC with authority to
prohibit or limit specific transactions with respect to non-U.S.
members that may give rise to tax or withholding obligations. Pursuant
to that authority, OCC expects to impose certain limitations on the
Market Loan activity of Canadian Clearing Members to address specific
situations in which tax withholding obligations might otherwise arise,
including limitations on transactions involving (i) Canadian underlying
securities, (ii) Positive Rebate, and (iii) Negative Rebate.
(i) Canadian Securities
Pursuant to OCC Rule 202(b), OCC would preclude Canadian Clearing
Members from executing Market Loan transactions as a Borrowing Clearing
Member, whether on behalf of a customer or for its own account, for
which the Loaned Stock is issued by a Canadian issuer because of tax
withholding obligations under Canadian law for substitute dividend
payments that would be owed by the Canadian Clearing Member in its
capacity as the lender. OCC understands that under Canadian law, the
loan of a security issued by a Canadian company would be treated as a
loan of the underlying shares for Canadian tax purposes. The substitute
dividend paid by the Canadian Clearing Member as the Borrowing Clearing
Member to OCC, in its capacity as the lender, would be a payment made
by the Canadian Clearing Member, as a corporation, to OCC of a dividend
payable on the underlying securities under subparagraph 260(8)(a)(ii)
of the Income Tax Act (Canada), and the payment would be subject to
Canadian withholding tax under subsection 212(2) of that act.
Accordingly, a Borrowing Clearing Member would be precluded from
initiating a Market Loan in its capacity as a Borrowing Clearing Member
because the Canadian Clearing Member could not fulfil its obligation
under OCC's Rules to provide a substitute dividend payment free from
tax and withholding obligations. OCC understands that no similar tax
withholding obligation would exist for substitute dividend payments
with respect to a Canadian underlying security made by OCC, in its
capacity as the borrower, to a Canadian Clearing Member that was a
Lending Clearing Member.\45\
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\45\ OCC understands that dividends on Eligible Stock of issuers
that are not Canadian residents are exempt from taxation on
dividends under subsection 212(2.1) of the Income Tax Act (Canada)
when paid as part of a fully collateralized stock lending
arrangement pursuant to 2021 amendments thereto.
---------------------------------------------------------------------------
(ii) Positive Rebate
OCC believes that OCC Rule 202 also allows OCC to clear and settle
Positive Rebate payments to Canadian Clearing Members in connection
with Market Loans without introducing tax withholding obligations.
While neither the I.R.C. or IRS regulations specifically provide for
the treatment of rebate payments, OCC believes that Positive Rebate
would be treated as interest for U.S. federal tax purposes because
Positive Rebate compensates the Borrowing Clearing Member for the use
of the cash collateral by the Lending Clearing Member,\46\ and would
therefore constitute U.S.-source ``fixed or determinable annual or
periodic income,'' or ``FDAPI,'' under section 1442 of the I.R.C. While
U.S.-source FDAPI generally is subject to a 30% U.S. withholding tax
when paid to a foreign
[[Page 73476]]
corporation, exemptions from withholding apply to (i) payments to a
Qualified Intermediary in its capacity as an intermediary that has
accepted primary withholding responsibility, and (ii) interest paid to
a Canadian Clearing Member that qualifies for an exemption from
withholding on interest under Article XI of the Convention Between the
United States of America and Canada with Respect to Taxes on Income,
October 16, 1980, as amended by subsequent Protocols (the ``Canada
Treaty'').
---------------------------------------------------------------------------
\46\ The U.S. Supreme Court has characterized interest as
``compensation for the use or forbearance of money.'' See Deputy v.
du Pont, 308 U.S. 488, 498 (1940). Positive Rebate is a payment from
the Lending Clearing Member to the Borrowing Clearing Member equal
to the amount of cash collateral posted by the Borrowing Clearing
Member multiplied by a positive rebate rate. The Lending Clearing
Member has the right to use the cash collateral during the term of
the stock loan. Accordingly, Positive Rebate represents a payment by
the Lending Clearing Member to the Borrowing Clearing Member for the
right to use the cash collateral and therefore is properly
characterized as interest.
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A Qualified Intermediary that has accepted primary withholding
responsibility is exempt from U.S. federal withholding on payments from
a withholding agent, including U.S.-source interest, received in its
capacity as an intermediary.\47\ Accordingly, OCC understands that
rebate payments (whether Positive Rebate or Negative Rebate) to a
Canadian Clearing Member in its capacity as a Qualified Intermediary,
may be made by OCC free from withholding, consistent with treatment of
dividend equivalent payments in connection with listed options
transactions. As discussed above,\48\ Canadian Clearing Members are
required to be Qualified Intermediaries as a condition of membership
under OCC Rule 202. As with substitute dividends, OCC would add payment
of rebates for transactions in a Canadian Clearing Member's capacity as
a Qualified Intermediary to the current reporting OCC submits to the
IRS for dividend equivalent payments on listed options, based on
information to be received from the Canadian Clearing Member pursuant
to current OCC Rule 202(b)(3).
---------------------------------------------------------------------------
\47\ See Treas. Reg. 1.1441-1(e)(5)(iv) (``If a withholding
agent makes a payment of an amount subject to withholding under
chapter 3, a reportable payment (as defined in section 3406(b)), or
a withholdable payment to a qualified intermediary that represents
to the withholding agent that it has assumed primary withholding
responsibility for the payment, the withholding agent is not
required to withhold on the payment.'').
\48\ See supra note 27.
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With respect to Positive Rebate payments on Market Loans initiated
by a Canadian Clearing Member in its capacity as principal, OCC would
require Canadian Clearing Members to demonstrate, pursuant to OCC Rule
202, that such payments are subject to exemption from U.S. withholding
obligations under the Canada Treaty. Article XI(1) of the Canada Treaty
reduces the rate of withholding from 30% to zero for U.S.-source
interest beneficially owned by a resident of Canada entitled to treaty
benefits, provided that income is not attributable to a permanent
establishment, within the meaning of the Canada Treaty, or effectively
connected with a trade or business conducted in the United States.\49\
Under current OCC Rule 202(b)(2), an FFI Clearing Member must certify
annually to OCC that the member satisfies the requirements of OCC Rule
202 by submitting appropriate tax documentation. A Canadian Clearing
Member participating in the Market Loan Program may evidence its
entitlement to the benefits of the Canada Treaty with respect to
interest by providing OCC with a correct and complete IRS Form W-8 BEN-
E. Under OCC's current Rules, a FFI Clearing Member must promptly
inform OCC in writing if it undergoes a change in circumstances that
would affect its compliance with Rule 202(b) or otherwise knows or has
reason to know that it is not, or will not be, in compliance with OCC
Rule 202(b), in each case, within two days of knowledge thereof.\50\
---------------------------------------------------------------------------
\49\ See 26 U.S.C. 894; Canada Treaty, Art. XI(1).
\50\ See OCC Rule 202(b)(4).
---------------------------------------------------------------------------
(iii) Negative Rebate
Although exemptions for withholding requirements would apply to
payment of Negative Rebate to a Canadian Clearing Member acting as a
Qualified Intermediary with respect to customer transactions, OCC
understands that there is a risk that no exemption from U.S. tax
withholding would apply to the payment of Negative Rebate to a Canadian
Clearing Member outside its capacity as a Qualified Intermediary.
Therefore, pursuant to OCC Rule 202(b), OCC would limit Canadian
Clearing Members from initiating Market Loans with a Negative Rebate as
a Lending Clearing Member other than in its capacity as a Qualified
Intermediary. In addition, OCC would limit Canadian Clearing Members'
ability to modify the rebate on a Market Loan to a Negative Rebate as a
Lending Clearing Member other than in its capacity as a Qualified
Intermediary. OCC's new clearance and settlement system will prevent a
Canadian Clearing Member from initiating or modifying a Market Loan to
a Negative Rebate in its capacity as a Lending Clearing Member for its
firm account.
(j) Provide for Appointed and Appointing Clearing Members
Currently, OCC Rule 302 requires that all participants in the
Market Loan Program must be members of the Depository, DTC. As
discussed above, OCC would also extend the Market Loan Program to
Canadian Clearing Members by allowing for such members to settle Market
Loan transactions through a CDS sub-account maintained at DTC. However,
OCC recently filed and the Commission approved a proposed rule change
to allow OCC to expand its membership to other types of participants
who may or may not be members of the Depository, including bank members
and members of jurisdictions other than the U.S. and Canada.\51\
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\51\ See Exchange Act Release No. 97439 (May 5, 2023), 88 FR
30373, 30373 (May 11, 2023) (SR-OCC-2023-002).
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In order to build a framework for accommodating such new types of
members in the Market Loan Program, OCC proposes to revise OCC Rules
101, 302 and proposed OCC Rules 2202A, 2207A and 2216A to allow a
Clearing Member participating in the Market Loan Program (the
Appointing Clearing Member) to appoint an Appointed Clearing Member to
make settlement of obligations arising from the initiation or
termination of Market Loans, in a similar manner to how OCC Rule 901
currently allows for Appointed and Appointing Clearing Members with
respect to delivery or receipt of underlying securities arising from
the exercise of equity options and maturity of stock futures, or how
OCC Rule 2201 current allows Canadian Clearing Members to appoint CDS
as its agent for purposes of effective delivery orders for stock loan
and stock borrow transactions. In lieu of membership at the Depository,
establishing a relationship with an Appointed Clearing Member would be
a means by which Clearing Members could access the Market Loan Program.
Specifically, OCC would revise the current definitions in OCC Rule 101
for ``Appointed Clearing Member'' and ``Appointing Clearing Member'' to
reference the initiation and termination of Market Loans. The
definitions would also refer to proposed Rule 2207A (Instructions to
the Corporation), which like current OCC Rule 901(f) would contain a
paragraph providing the mechanism for such appointments. Proposed OCC
Rules 2202A and 2216A (Termination of Market Loans) would also provide
for OCC to submit delivery orders to the Depository's account for the
Appointed Clearing Member in connection with the initiation or
termination of a Market Loan, respectively.
Enhancements To Facilitate OCC's New Clearance and Settlement System
In addition to the enhancements (a) through (j) above, which are
specific to the Market Loan Program, except when
[[Page 73477]]
otherwise indicated, the proposed rule change would also implement
enhancements to both Stock Loan Programs to support the implementation
of OCC's new clearance and settlement system. Specifically, the
proposed changes would (k) replace the legacy practice of position
aggregation with contract-level recordkeeping; (l) align the settlement
of daily mark-to-market of cash collateral to accounts; (m) simplify
the mark-to-market calculation to focus on the change to the contract
value of a Clearing Member's Stock Loan; and (n) allow for re-matching
of Matched-Book Positions across both Stock Loan Programs in the event
of a Clearing Member default and suspension.
(k) Contract-Level Recordkeeping
OCC proposes to eliminate the legacy practice of aggregating stock
loan and stock borrow positions for the same Eligible Stock in favor of
contract-level accounting, consistent with industry-standard
bookkeeping practices. Under the new contract-based approach, each
Stock Loan (i.e., a stock loan position or stock borrow position) would
be a distinct contract and no aggregation would be done when positions
are recorded in accounts. Every new loan that is recorded will generate
a new stock borrow position and stock loan position for the number of
shares lent and borrowed. Contract-level recordkeeping would allow
Clearing Members to see more precisely the contracts with shares lent
by lender and borrower, which aligns to industry standard
recordkeeping. By maintaining stock loan positions and stock borrow
positions at the contract level, OCC would also be able to record
additional terms, including but not limited to: (a) rebate rate; (b)
whether the rebate rate is a fixed or a floating value (and if floating
the interest rate benchmark); and (c) end date if it is a term loan.
Clearing Member submission of these additional terms would not be
mandatory, and OCC would assume that no such terms exist unless
otherwise directed by its Clearing Members.\52\
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\52\ If these additional terms are not recorded on a Market Loan
submitted to OCC, OCC would not make any assumptions and the fields
would be left blank in OCC's system.
---------------------------------------------------------------------------
To implement contract-level recordkeeping, the proposed rule change
would amend Article XXI, Sections 2 (Hedge Program) and Article XXIA,
Section 5 (Market Loan Program) of OCC's By-Laws, retained portions of
which would migrate to become OCC Rules 2203 and 2206A, respectively.
Specifically, OCC would amend proposed Rule 2203(c)(1)-(2) and
2206A(b)(1)-(2) to delete the text providing for the aggregation of
positions, which OCC proposes to eliminate. In addition, OCC would
delete the last sentence of Article XXI, Section 2(b) and Article XXIA,
Section 5(b), as relocated to proposed OCC Rules 2203(d)(2)(B) and
2006A(a)(2), which provide that OCC shall identify stock loan and stock
borrow positions resulting from Hedge Loans separately from positions
resulting from Market Loans. Because OCC proposes to eliminate position
aggregation altogether, this prohibition against aggregating positions
across programs would no longer be relevant.
The proposed changes would also allow OCC to record additional
terms at the contract level. The By-Laws currently provide that upon
acceptance of a Hedge Loan or Market Loan, OCC creates a stock loan
position and stock borrow position in the account designated by the
Lending Clearing Member and Borrowing Clearing Member, respectively,
that identifies the Eligible Stock, the number of shares loaned, the
amount of Collateral received, and the identities of the Lending
Clearing Member or the Borrowing Clearing Member, as applicable.\53\
OCC proposes to amend proposed OCC Rules 2203(d)(2)(A) and 2206A(a)(1)
to provide that in addition to those terms, which are required for
OCC's acceptance of a Hedge Loan or Market Loan, OCC would record such
additional terms that the Clearing Members may provide at the contract
level. Such additional terms could include, but are not limited to,
rebate rate, interest rate benchmark and loan term. Pursuant to
proposed additions to proposed OCC Rules 2202(b)(2)(E) and
2202A(b)(2)(E), recording additional terms that are not associated with
OCC's guaranty (i.e., rebate rate and interest rate benchmark with
respect to Hedge Loans, and loan term with respect to both Hedge Loans
and Market Loans) would not impose any additional obligations on OCC.
Rather, they would be additional terms as between the parties that
survive OCC's novation and would be recorded in OCC's system for the
Clearing Members' convenience.
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\53\ See OCC By-Law Art. XXI, Sec. 2(b); Art. XXIA, Sec. 5(a).
---------------------------------------------------------------------------
In addition to the changes related to proposed OCC Rules 2203 and
2206A above, OCC would make conforming changes to other provisions to
reflect the change from position-level to contract-level record
keeping:
<bullet> Current Interpretation and Policy .01 to OCC Rules 2201
and 2201A (i.e., proposed OCC Rules 2206(b) and 2206A(d) per the
reorganization discussed below), which concern the transfer of stock
loan positions or stock borrow positions between Clearing Member
accounts, would be amended to delete the phrase ``all or any portion
of'' as it relates to stock loan or stock borrower positions, and the
text ``provided, that any such transfer will result in the transfer of
all shares related to the relevant stock loan position or stock borrow
position'' would be added. These changes reflect that stock loan
positions and stock borrow positions would be recorded at the contract
level and would not be aggregated. Accordingly, any transfer of a stock
loan position or stock borrow position (each representing an individual
contract) would be for all shares that are the subject of the contract.
<bullet> Current Interpretation and Policy .02 to OCC Rule 2201
(i.e., proposed OCC Rule 2206(c)(1) per the reorganization discussed
below), which concerns how OCC would apply Hedge Loan return
instructions received from DTC to a Clearing Member's default account,
would be modified to eliminate functionality in ENCORE for Clearing
Members to designate OCC accounts in DTC delivery orders that is not
currently utilized by Clearing Members participating in the Hedge Loan
Program and, accordingly, is not being built for the new clearance and
settlement system. To account for the shift to contract-level
recordkeeping, OCC would also add OCC Rule 2206(c)(2), which would
provide that returns will decrease the number of shares borrowed
beginning with the oldest Hedge Loan between the Borrowing Clearing
Member and the Lending Clearing Member on OCC's books and records. If
the return exhausts the oldest Hedge Loan, OCC would decrement the next
oldest, and so on and so forth.
<bullet> Current Interpretation and Policy .02 to OCC Rule 2201A
(i.e., proposed OCC Rule 2206A(e) per the reorganization discussed
below), which concerns how Market Loan return instructions would be
applied to a Clearing Member's accounts, would be amended to reflect
that if there are insufficient shares in the account designated by the
delivery order submitted to OCC, or in the default account if the
delivery order did not specify an account, OCC would reject the return
instruction rather than fulfill the return to the extent of the shares
in the designated or default account, as applicable. If an account was
designated in the delivery order, OCC would fulfill the return based
only on that account and would reject the return instruction
[[Page 73478]]
if sufficient shares were not available in that account rather than
applying shares in the default account to cover the excess.
<bullet> Current OCC Rule 2209A(a)(2) (i.e., proposed OCC Rule
2216A(a)(5) per the reorganization discussed below), which concerns the
termination of Market Loans upon receipt of end-of-day information from
DTC concerning return or recall delivery orders, would be amended to
delete the phrase ``and reduce the respective Clearing Members' open
stock loan and stock borrow positions accordingly.'' This phrase refers
to adjustments required for aggregated stock loan and stock borrow
positions, which would not be relevant under the contract-level
recordkeeping proposal. OCC would also remove the phrase ``the end of
the day'' with respect to the stock loan activity files it receives
from DTC because OCC receives and processes such information from DTC
throughout the business day.
(l) Aligning Mark-to-Market Settlement to Accounts
Under the proposed rules designed to facilitate OCC's new clearance
and settlement system, OCC would end the practice of limiting cash
settlement of daily mark-to-market of cash collateral to the Clearing
Member's firm account or combined Market-Makers' account. Instead, cash
settlement will occur in the account in which the stock loan or stock
borrow position is held. OCC implemented the current structure for
settlement of mark-to-market payments in 1997 and 1998.\54\ At that
time, OCC believed that settlement through a firm's lien account would
prevent premiums by option writers (which constitute customer funds)
from being netted against stock loan mark-to-market payments from a
clearing member (which do not constitute customer funds). The
assumption at the time appears to have been that stock loan
transactions would be limited to loans initiated by a Clearing Member
in its capacity as principal. However, fully paid for lending programs
have developed over the last two decades that allow customers to earn
returns on their portfolios by allowing their broker to lend their
shares.
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\54\ See Exchange Act Release No. 40083 (June 11, 1998), 63 FR
33424-01 (Jun 18, 1998) (File No. SR-OCC-98-03); Exchange Act
Release No. 39738 (Mar. 10, 1998), 63 FR 13082 (Mar. 17, 1998) (File
No. SR-OCC-97-11).
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The proposed change would align mark-to-market cash settlements
with positions by deleting current OCC Rules 2201(a)(iii) and
2201A(a)(iii), as relocated to proposed OCC Rules 2207(a)(1)(C) and
2207A(a)(1)(C), which require Clearing Members to provide OCC with
standing instructions identifying the Clearing Member's firm accounts
or combined Market-Makers' accounts from which mark-to-market payments
are to be made. No standing instruction would be needed because OCC
will simply settle the mark-to-market payments in whichever account the
stock loan or stock borrow position is held. In addition, OCC would
amend current OCC Rules 2204(a) and 2204A(a), the relevant portions of
which would be renumbered OCC Rules 2209(a) and 2209A(a), respectively,
to provide that any mark-to-market payment shall be made in the account
in which the Hedge Loan or Market Loan is held.
OCC would also delete the last clause to Interpretation and Policy
.04 to Rule 1104, which concerns the use of a Liquidating Settlement
Account to satisfy mark-to-market obligations arising from a suspended
Clearing Member's stock loan or borrow positions in customers'
accounts. That clause provides for use of the Liquidating Settlement
Account notwithstanding that such mark-to-market payments may settle in
another account under current Rules 2201(a) and 2201A(a). This
clarifying clause would no longer be relevant because of the alignment
of settlement with the accounts in which the positions are held.
(m) Simplifying Mark-to-Market Calculations
Because OCC proposes to end the practice of aggregating stock loan
and stock borrow positions, OCC also proposes to simplify the mark-to-
market calculation described in proposed OCC Rules 2209 and 2209A.
Currently, the mark-to-market calculation focuses on the value of the
loaned shares of stock.\55\ Specifically, it takes the quantity of
stock that is on loan each morning and marks it to a closing price each
night. Quantities of stock that correspond to new loans put on during
the day are also marked to the end-of-day closing price. As such, the
calculation was designed with the practice of aggregating stock loan
and stock borrow positions for the same Eligible Stock in mind. The
proposed mark-to-market calculation will instead focus on the change to
the contract value of a Clearing Member's stock loans. Specifically,
proposed OCC Rules 2209(b) and 2209A(b) would provide that the mark-to-
market payment will be the amount necessary to cause the amount of
Collateral to be equal to the Collateral requirement applicable to the
Stock Loan. For Hedge Loans, the Collateral requirement is either 100%
or 102% of the mark-to-market value of the Loaned Stock, depending on
which percentage the parties selected when initiating the Hedge Loan.
For Market Loans, as discussed above, the Collateral requirement would
be fixed at 102% of the value of the Loaned Stock, which is the
collateralization for all Market Loans currently. While this proposed
amendment would change the way OCC makes mark-to-market calculations,
the change would have no impact on the results of the calculation.
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\55\ See OCC Rules 2204(a); 2204A(a).
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(n) Re-Matching Matched Book Positions in Suspension Across Stock Loan
Programs
The proposed changes would also extend OCC's authority to close out
and re-establish the Matched-Book Positions of a suspended Clearing
Member to the Market Loan Program and would allow re-matching in
suspension across the Hedge and Market Loan Programs. Under the current
Hedge Program, OCC has authority to terminate Matched-Book Positions by
offset and re-matching with other Clearing Members.\56\ OCC's authority
to re-match Matched-Book Positions in suspension facilitates the
orderly and efficient termination and re-establishment of stock loans
involving suspended Clearing Members, thereby mitigating operational
and price dislocation risks that may arise for non-defaulting Clearing
Members if OCC were required to unwind positions by recalling all
borrowed securities from specific Borrowing Clearing Members and
returning those securities to specific Lending Clearing Members.
Extending such re-matching authority to the Market Loan Program and
allowing re-matching across OCC's two Stock Loan Programs would also
align OCC's close-out processes with how OCC already margins stock loan
and borrow positions. Specifically, stock loan and borrow positions
covering the same Eligible Stock in either program are treated under
OCC's margin methodology as fungible and are permitted to offset one
another in calculating a Clearing Member's margin requirement for the
relevant account.
---------------------------------------------------------------------------
\56\ See OCC Rule 2212.
---------------------------------------------------------------------------
OCC would extend re-matching authority and allow for re-matching
across programs by inserting a new OCC Rule 2219A to the Rules
governing the Market Loan Program. The new rule would be similar in
structure and content to current OCC Rule 2212, which concerns re-
matching in
[[Page 73479]]
suspension for the Hedge Program. Proposed OCC Rule 2219A(a) would
provide that, in the event that a suspended Clearing Member has
Matched-Book Positions within the Hedge or Market Loan Programs, OCC
will, upon notice to affected Clearing Members, close out the suspended
Clearing Member's Matched-Book Positions to the greatest extent
possible by (i) the termination by offset of stock loan and stock
borrow positions that are Matched-Book Positions in the suspended
Clearing Member's account(s) and (ii) OCC's re-matching in the order of
priority in paragraph (c) of stock borrow positions for the same number
of shares in the same Eligible Stock maintained in a designated account
of a Matched-Book Borrowing Clearing Member against a stock lending
position for the same number of shares in the same Eligible Stock
maintained in a designated account of a Matched-Book Lending Clearing
Member.
Under proposed OCC Rule 2219A(b), as under current OCC Rule
2212(b), the Matched-Book Borrowing Clearing Member and Matched-Book
Lending Clearing Member would not be required to issue instructions to
DTC to terminate the relevant stock loan and stock borrow positions or
to initiate new stock loan transactions to reestablish such positions,
as the affected positions would be re-matched without requiring the
transfer of securities against the payment of settlement prices.
Proposed OCC Rule 2219A(c), as under current OCC Rule 2212(c),
would provide that OCC shall make reasonable efforts to re-match
Matched-Book Borrowing Clearing Members with Matched-Book Lending
Clearing Members that maintain MSLAs executed between them, based upon
information provided by Clearing Members to OCC on an ongoing basis.
OCC would be entitled to rely on, and would have no responsibility to
verify, the MSLA records provided by Clearing Members and on record as
of the time of re-matching. As under current OCC Rule 2212(d), proposed
Rule OCC 2219A(c)(1) through (13) would require the termination by
offset and re-matching be done using a matching algorithm in which the
Matched-Book Positions of the suspended Clearing Member are first
terminated by offset and then affected Matched-Book Borrowing Clearing
Members and Matched-Book Lending Clearing Members are re-matched in
order of priority based first upon whether the re-matched Clearing
Members have an existing MSLA between them or, in the case of Anonymous
Market Loans, can be kept anonymous by re-matching with a Matched-Book
Position that is another Anonymous Market Loan initiated through the
same Loan Market. OCC believes prioritizing the re-matching of
Disclosed Market Loans between parties that have MSLAs and re-matching
that results in maintaining Anonymous Market Loans will limit the
number of returns that may be initiated for re-matching that results in
Disclosed Market Loans between parties who have not executed an MSLA.
Specifically, under the re-matching algorithm, OCC would select the
largest stock loan or stock borrow position in a given Eligible Stock
from the suspended Clearing Member's Matched-Book Positions within the
Hedge Program. The selected positions would then be re-matched with the
largest available stock borrow or stock loan positions within the Hedge
Program, as applicable, for the selected Eligible Stock for which a
MSLA exists between a Matched-Book Borrowing Clearing Member and a
Matched-Book Lending Clearing Member. OCC would repeat this process
until all potential re-matching between Matched-Book Borrowing Clearing
Members and Matched-Book Lending Clearing Members with MSLAs is
completed for positions within the Hedge Program. Simultaneously, OCC
would perform the same re-matching process within the Market Loan
Program for (i) Matched-Book Positions that are Disclosed Market Loans
for which a MSLA exists between a Matched-Book Borrowing Clearing
Member and a Matched-Book Lending Clearing Member, and (ii) Matched-
Book Positions that are Anonymous Market Loans initiated through the
same Loan Market. After re-matching to the extent possible within the
Market Loan Program based on manner of initiation and trade source, OCC
would proceed to re-match Matched-Book Positions within the Market Loan
Program for which an MSLA exists between a Matched-Book Borrowing
Clearing Member and a Matched-Book Lending Clearing Member, without
regards to whether Matched-Book Position was part of a Disclosed Market
Loan or Anonymous Market Loan.
After matching Matched-Book Positions to the extent possible
between borrowers and lenders with existing MSLAs within both the Hedge
Program and the Market Loan Program, OCC would then select the largest
remaining stock loan or stock borrow positions for a given Eligible
Stock regardless of whether the position is a Hedge Loan or a Market
Loan and re-match it with the largest available stock borrow or stock
loan position for the selected Eligible Stock in the other Stock Loan
Program for which an MSLA exists between the lenders and borrowers in
the other Stock Loan Program, regardless of whether the Market Loan
selected or matched is a Disclosed Market Loan or Anonymous Market
Loan. OCC would repeat this process until it has rematched all Matched-
Book Positions to the extent possible between parties to existing MSLAs
between the two Stock Loan Programs.
After re-matching among lenders and borrowers with existing MSLAs,
the process would then be repeated for all remaining Matched-Book
Positions for which MSLAs do not exist between the lenders and
borrowers. OCC would first complete such rematching to the extent
possible within each program. The re-matching process would then be
repeated for all remaining Matched-Book Positions across the Stock Loan
Programs for which MSLAs do not exist between the lenders and
borrowers. Remaining positions that are not able to be rematched either
within or across programs would then be closed-out pursuant to the
rules governing close-out of Hedge Loans or Market Loans, as
applicable.
Under proposed OCC Rule 2219A(d), as under current OCC Rule
2212(e), in the event Borrowing and Lending Clearing Members are re-
matched through this process, the re-matched positions would be
governed by the pre-defined terms and instructions established by the
Lending Clearing Member pursuant to renumbered OCC Rule 2207 (for Hedge
Loans) or Rule 2207A (for Market Loans). For Matched-Book Positions re-
matched across programs, the resulting re-matched loan would be a Hedge
Loan. If the re-matched positions were Anonymous Market Loans, the
resulting Loan would be an Anonymous Market Loan. However, if one of
the positions was a Disclosed Market Loan or the positions were
Anonymous Market Loans initiated through different Loan Markets, the
resulting loan would be a Disclosed Market Loan. Going forward, such a
Disclosed Market Loan would be deemed to have been initiated through
OCC, which would facilitate re-matching within the Market Loan Program
for parties who are not subscribers to a Loan Market. Pursuant to
proposed OCC Rule 2219A(j), the re-matched Clearing Members may choose
to execute an MSLA or close-out the re-matched positions in accordance
with proposed OCC Rules 2213 or 2216A, as applicable.
Under proposed OCC Rule 2219A(e), which corresponds to the second
sentence of current OCC Rule 2212(e),
[[Page 73480]]
any change in Collateral requirements arising from a change in the
terms of stock loan or stock borrow positions between a Lending
Clearing Member and Borrowing Clearing Member with re-matched positions
would be included in the calculation of the mark-to-market payment
obligations on the stock loan business day following the completion of
the positions adjustments as set forth in proposed OCC Rule 2219A(f).
Under proposed OCC Rule 2219A(f), as under current OCC Rule
2212(f), the termination by offset and re-matching of positions would
be complete upon OCC completing all position adjustments in the
accounts of the suspended Clearing Member and the Borrowing Clearing
Members and Lending Clearing Members with re-matched positions and the
applicable systems reports are produced and provided to the Clearing
Members reflecting the transactions.
Under proposed OCC Rules 2219A(g) through (i), from and after the
time OCC has completed the position adjustments as set forth in
proposed OCC Rule 2219A(f), the suspended Clearing Member would have no
further obligations under the By-Laws and Rules with respect to such
positions; however, a Borrowing Clearing Member with re-matched stock
borrow positions would remain obligated as a Borrowing Clearing Member
and a Lending Clearing Member with re-matched stock loan positions
would remain obligated as a Lending Clearing Member as specified in the
By-Laws and Rules applicable to the Stock Loan Programs. Furthermore,
upon notification that OCC has completed the termination by offset and
re-matching of stock loan and borrow positions, the suspended Clearing
Member and Borrowing Clearing Members and Lending Clearing Members with
re-matched positions would be required promptly to make any necessary
bookkeeping entries at DTC to ensure the accuracy and efficacy of those
stock loan terms not governed by OCC's By-Laws and Rules. Under
proposed OCC Rule 2219A(j), as under current OCC Rule 2212(j),
Borrowing Clearing Members and Lending Clearing Members that have been
re-matched would be required to work in good faith to either (i)
reestablish any terms, representations, warranties and covenants not
covered by the By-Laws and Rules (e.g., establish an MSLA) or (ii)
terminate the re-matched stock loan or borrow positions in the ordinary
course pursuant to OCC Rules 2213 or 2216A, as applicable, as soon as
reasonably practicable.
Because OCC has designed proposed OCC Rule 2219A to address the
process for re-matching in suspension in both Stock Loan Programs, OCC
further proposes to delete current OCC Rule 2212, which concerns re-
matching in suspension for the Hedge Program, and replace it, as
renumbered to proposed OCC Rule 2217, with a cross-reference to
proposed OCC Rule 2219A.
By-Laws and Rules Reorganization and Restatement
OCC would also make a number of other clarifying, conforming, and
organizational changes to OCC's By-Laws and Rules, and rule-filed
policies that reference the By-Law and Rules provisions governing the
Stock Loan Programs.
(a) Reorganization
OCC proposes to reorganize the provisions of OCC's By-Laws and
Rules relating to the Stock Loan Programs into newly revised Chapter
XXII (Hedge Loan Program) and Chapter XXIIA (Market Loan Program). This
consolidation of rules governing the Stock Loan Programs is similar to
changes OCC made to migrate By-Laws governing OCC's Clearing Fund and
membership standards to the Rules.\57\ As part of these changes, OCC
would preserve the governance requirements concerning amendments to the
stock loan-related By-Laws migrated to the Rules by amending Article
XI, Section 2 of the By-Laws.
---------------------------------------------------------------------------
\57\ See Exchange Act Release No. 97439, supra note 51, 88 FR at
30377 (membership standards); Exchange Act Release No. 83735 (July
27, 2018), 83 FR 37855, 36859 (File No. SR-OCC-2018-008) (Clearing
Fund).
---------------------------------------------------------------------------
The provisions governing the Stock Loan Programs are currently
found in Articles XXI and XXIA of OCC's By-Laws and Chapters XXII and
XXIIA of the OCC Rules. Because the proposed changes to the Stock Loan
Programs would substantially amend the relevant By-Law and Rule
provisions, OCC believes that this is an appropriate opportunity to
consolidate the primary provisions that address the Stock Loan Programs
into Chapters XXII and XXIIA of the Rules. As a result, the content of
Articles XXI and XXIA of the By-Laws would be consolidated into
Chapters XXII, XXIIA and, with respect to definitions, Chapter I of the
OCC Rules, subject to the proposed amendments described in this rule
filing. OCC would also migrate to the OCC Rules the definitions
currently located in Article I of the By-Laws that are specific to the
Stock Loan Programs.\58\ To account for migrated definitions of terms
that are used elsewhere in the By-Laws, OCC would revise the By-Law
definition to refer to the definition of that term in OCC Rule 101.\59\
OCC believes that consolidating the provisions governing the Stock Loan
Programs into one place would provide more clarity around, and enhance
the readability of, OCC's rules governing the Stock Loan Programs. OCC
has included a chart mapping the provisions moved from the By-Laws to
the Rules, and the resulting renumbering of existing Rules, in Exhibit
3A to File No. SR-OCC-2024-011.
---------------------------------------------------------------------------
\58\ See By-Law Art. I, Sec. 1.B.(4), E.(3), H.(1), L.(2),
L.(5), M.(3)-(4), M.(7)-(9), S. (19), (21)-(23). Rule 101 provides
that terms in the Rules have the meanings defined in the By-Laws or
as set forth in the Rules.
\59\ References to the definition of the terms ``stock borrow
position'' and ``stock loan position'' in proposed Rule 101 would be
retained in the By-Laws because these terms are referenced in
certain other definitions in the By-Laws, as well as Article VI,
Section 27 of the OCC By-Laws (Close-Out Netting).
---------------------------------------------------------------------------
To preserve the governance requirements for amendments to the By-
Law provisions that would be migrated to the Rules, OCC would also
amend Article XI of the By-Laws. Specifically, OCC would amend Article
XI, Section 2 of the By-Laws, which requires the affirmative vote of
two-thirds of the directors then in office (but not less than a
majority of the number of directors fixed by the By-Laws) to amend
certain enumerated provisions. Specifically, OCC would add Rule 2201,
Rule 2203, Rule 2204, Rule 2205, Rule 2206(a) and (d), Rule 2213(e)(1),
Rule 2214(e)(1), Rule 2201A, Rule 2203A, Rule 2204A, Rule 2205A and
Rule 2206A(a)-(c) and (f) to these enumerated provisions.
(b) Restatement
In addition to consolidating the By-Laws and Rules specific to the
Stock Loan Programs within the Rules, OCC proposes to restate those
provisions and make certain other changes for clarity and consistency.
The changes would include (i) global changes across the By-Laws and
Rules to add courtesy titles and standardize terms; (ii) integration of
Interpretations and Policies within the Stock Loan Program rules into
the body of the text of the Rules themselves; and (iii) certain other
administrative or technical changes to the rule text.
(i) Global Changes
Global changes to be applied across the By-Laws and Rules
concerning the Stock Loan Programs include:
<bullet> Adding courtesy titles to the beginning of paragraphs or
other subdivisions, where appropriate, to aid the reader in locating
provisions governing specific topics.
<bullet> Replacing references to ``Stock Loan'' that are specific
to the Hedge Program with ``Hedge Loan'' in order to
[[Page 73481]]
better differentiate between Hedge Loans and Market Loans while the
Hedge Program is still in place. Use of the defined term ``stock loan''
would be retained when referring to either a Hedge Loan or a Market
Loan or both as the context requires.\60\ Reference to the ``Stock
Loan/Hedge Program'' would remain unchanged.
---------------------------------------------------------------------------
\60\ See, e.g., Exhibit 5A to SR-OCC-2024-011, proposed OCC Rule
101.S.(6), (7), (9), (10); Rules 2201-2206; Rules 2209-2216.
---------------------------------------------------------------------------
<bullet> Replacing references to ``Hedge Clearing Member'' or
``Market Loan Clearing Member'' with ``Clearing Member,'' ``Borrowing
Clearing Member,'' or ``Lending Clearing Member,'' as applicable, to
simplify OCC's membership structure and reflect that Clearing Members
may be authorized to transact in either program.\61\
---------------------------------------------------------------------------
\61\ See, e.g., Exhibit 5A to SR-OCC-2024-011, proposed OCC Rule
1006(h)(C); Rule 2202; Rules 2206-2210; Rules 2213- 2214; Rule 2215-
17; Rule 2202A; Rules 2207A-2212A; Rules 2216A-2219A.
---------------------------------------------------------------------------
(ii) Interpretations and Policies
OCC would also relocate current Interpretations and Policies
(``I&P'') within Chapters XXI and XXIA of the Rules by moving those
provisions within the body of the applicable Rules, subject to any
further amendments discussed herein. The location of the text as
reorganized within the Rules is included in Exhibit 3A to SR-OCC-2024-
011 and noted in footnotes to the proposed rule text in Exhibit 5A to
SR-OCC-2024-011.\62\ OCC believes that consolidating the I&Ps, which
have no less legal effect than the text of the Rules themselves, would
provide more clarity around, and further enhance the readability of,
OCC's Rules governing the Stock Loan Programs.
---------------------------------------------------------------------------
\62\ See, e.g., Exhibit 5A to SR-OCC-2024-011, proposed OCC Rule
2206(b) (replacing Rule 2201, I&P .01); Rule 2206(c)(1) (replacing
Rule 2201 I&P .02); Rule 2206(d) (replacing By-Law Art. XXI Sec. 5,
I&P .01); Rule 2214(e)(1) (replacing By-Law Art. XXI Sec. 2,
I&P.01); Rule 2206A(d) (replacing Rule 2201A, I&P .01); Rule
2206A(e) (replacing Rule 2201A, I&P .02); Rule 2206A(f) (replacing
I&P By-Law Art. XXIA Sec. 5, I&P .01).
---------------------------------------------------------------------------
In certain instances, OCC is proposing to eliminate the existing
Interpretations and Policies altogether:
<bullet> Interpretations and Policies .01 to current OCC Rules 2202
and 2202A, which concern the position information OCC provides to
Clearing Members on an intraday basis, would be deleted because they
concern a topic covered by and more properly addressed in proposed OCC
Rules 2210 and 2210A (Daily Reports). The specific information
referenced in those Interpretations and Policies--i.e., new position,
transfer positions, returns and cancels--would be integrated into the
proposed Rules.
<bullet> I&P .01 to current OCC Rule 2210 (Suspension of Hedge
Clearing Members--Pending and Open Stock Loans) and OCC Rule 2210A
(Suspension of Market Loan Clearing Members--Pending and Open Market
Loans)--which refers the reader to Interpretation and Policy .02 of OCC
Rule 1104 for a description of OCC's private auction process--would be
deleted. In its place, a cross-reference to that description would be
added to paragraph (b) of that Rule, as renumbered to OCC Rule 2215 per
the reorganization discussed above.
(iii) Administrative Changes
OCC would also improve the clarity and readability of certain
Rules, including by:
<bullet> breaking certain lengthy Rule provisions into
subparagraphs with additional convenience headings to aid the reader in
navigating the requirements and obligations therein;
<bullet> numbering provisions with multiple paragraphs that are
currently unnumbered, in whole or in part, or with lengthy provisions
that can be split into multiple paragraphs, and adding convenience
headings to paragraphs, where such convenience headings would be
helpful to the reader.\63\
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\63\ See, e.g., Exhibit 5A to SR-OCC-2024-011, proposed OCC Rule
2202(b)(1)-(3); Rule 2203(b)(1)-(2), (c)(1)-(2), (d)(1)-(2); Rule
2204(a)-(b); Rule 2205(a)-(b); Rule 2207(a)(1)-(3); Rule 2213(b)(1)-
(2); Rule 2214(b)(1)-(6), (c)(1)-(4); Rule 2216(a)-(d); Rule
2202A(b)(1)-(3); Rule 2206A(a)(1)-(2); Rule 2207A(a)(1)-(3); Rule
2216A (d)(1)-(2); Rule 2218A(a)-(d).
---------------------------------------------------------------------------
<bullet> renumbering subdivisions in Chapters XXII and XXIIA based
on a consistent numbering convention for (a) paragraphs, (1)
subparagraphs, and (A) items.\64\
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\64\ See, e.g., Exhibit 5A to SR-OCC-2024-011, proposed Rule
2202(b)(2)(A)-(E).
---------------------------------------------------------------------------
<bullet> updating cross-references found throughout the By-Laws and
Rules based on the proposed reorganization and renumbering.
<bullet> improving consistency of the text between similar Hedge
Program and Market Loan Program rules; \65\
---------------------------------------------------------------------------
\65\ See, e.g., Exhibit 5A to SR-OCC-2024-011, proposed OCC Rule
101.C.(4), L.(2), M.(1), S.(2) (conforming language in definitions
specific to Hedge Loans and Market Loans); Rule 2213 (modifying
title to ``Termination of Hedge Loans'' based on a similar title for
current Market Loan Rule 2209A); Rule 2202A(b)(2)(E) (amending the
Rule for initiation of Market Loans to include novation provisions
governing Hedge Loans).
---------------------------------------------------------------------------
<bullet> deleting duplicative provisions of the Rules that merely
refer the reader to substantive rights and obligations located
elsewhere in the Rules; \66\
---------------------------------------------------------------------------
\66\ See, e.g., Exhibit 5A to SR-OCC-2024-011, proposed OCC Rule
2202(d) & I&P .01 (deleting duplicative Borrowing Clearing Member
obligations located in proposed OCC Rules 2209 and 2211); Rule
2202A(e) (deleting duplicative Borrowing Clearing Member obligations
located in proposed OCC Rules 2209A and 2211A).
---------------------------------------------------------------------------
OCC would also make conforming edits to OCC's Margin Policy and the
Recovery and Orderly Wind-Down Plan (``RWD Plan''). Specifically, OCC's
Margin Policy references OCC's default management practices under
current Rules 2211 and 2211A, which provide that OCC may instruct a
non-defaulting Clearing Member to buy-in or sell-out of positions. The
proposed rule change would renumber those references to Rules 2216 and
2218A, respectively. OCC would also amend the description of the margin
add-on in the Margin Policy to capture the full range of factors that
determine the margin add-on charge for stock loan activity (i.e.,
collateral rate, mark-to-market pricing, dividends and distributions
announced by an issuer, and rebate payments). Similarly, references in
the RWD Plan to Section 2(c) of Article XXI of the By-Laws and Rule
2209A(d), which refer to OCC's authority to terminate the Stock Loan
Programs, would be renumbered to proposed Rules 2213(e) and
2216A(d)(2), respectively, and the excerpted text of those Rules
appearing in the RWD Plan would be conformed with the text as amended
by this proposed rule change.
Implementation Timeframe
OCC will implement the proposed changes at the time Ovation becomes
OCC's system of record, which is planned to launch no earlier than July
of 2025.\67\ OCC will announce the implementation date of the proposed
change by Information Memorandum posted to its public website at least
four weeks prior to implementation. OCC plans to launch Ovation and
implement the proposed changes no later than December 31, 2025, and OCC
will announce another intended implementation date by Information
Memorandum posted to its public website if the changes will not be
implemented by that date.
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\67\ See <a href="https://www.theocc.com/Participant-Resources">https://www.theocc.com/Participant-Resources</a> (linking
to reference guides and timelines for the launch of Ovation).
---------------------------------------------------------------------------
(2) Statutory Basis
OCC believes the proposed rule change is consistent with Section
17A of the Exchange Act and the rules and regulations thereunder.
Section 17A(b)(3)(F) of the Exchange Act \68\ requires, among other
things, that the rules of a clearing agency (i) promote the prompt and
accurate clearance and
[[Page 73482]]
settlement of securities transactions and, to the extent applicable,
derivative agreements, contracts, and transactions; (ii) assure the
safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible; (iii) in
general, protect investors and the public interest; and (iv) are not
designed to permit unfair discrimination among participants in the use
of the clearing agency. OCC believes that the proposed rule change
would promote the prompt and accurate clearance and settlement of stock
loan transactions, assure the safeguarding of securities and funds at
OCC, protect investors and the public interest, and not unfairly
discriminate among Clearing Members for the reasons below.
---------------------------------------------------------------------------
\68\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
Enhancements To Facilitate OCC's New Clearance and Settlement System
As described above, the proposed changes would involve certain
changes to accommodate OCC's new clearance and settlement system,
including by transitioning away from the legacy practice of aggregating
positions in the same Eligible Stock into stock loan and stock borrow
positions to contract-level record keeping. Contract-level
recordkeeping would allow Clearing Members to see more precisely the
contracts with shares lent by lender and borrower, which aligns to the
record keeping industry standard. Allowing for terms to be recorded at
the contract level will allow OCC to record other terms at the contract
level, including terms related to OCC's guaranty of substitute dividend
and rebate payments. Eliminating position aggregation would also allow
OCC to simplify the calculation for mark-to-market payments in OCC's
Rules. And by aligning mark-to-market payments to the accounts in which
a stock loan position is held, OCC would end the practice of requiring
cash mark-to-market payments for stock loan or stock borrow positions
to settle in a Clearing Member's firm lien account or combined Market-
Makers' account. Aligning mark-to-market cash settlements with the
accounts in which the position is held simplifies OCC's processes and
reduces complexity. Accordingly, OCC believes that conforming its
practices for maintaining stock loan and stock borrow positions to
industry standards and simplifying its processes for marking those
positions to market helps to promote the prompt and accurate clearance
and settlement of stock loan transactions, and protect investors and
the public interest by reducing operational complexity that could cause
delay and impose costs on market participants.
The proposed changes to allow for re-matching of Matched-Book
Positions in suspension also promote the prompt and accurate clearance
and settlement of securities and derivatives transactions, the
safeguarding of securities and funds at OCC, and the protection of
securities investors and the public interest in accordance with Section
17A(b)(3)(F) of the Exchange Act \69\ and Rule 17Ad-22(e)(13) \70\ and
(e)(23) \71\ thereunder. Rule 17Ad-22(e)(13) requires covered clearing
agencies to establish, implement, maintain and enforce written policies
and procedures reasonably designed to, in part, ensure the covered
clearing agency has the authority and operational capacity to take
timely action to contain losses and liquidity demands and continue to
meet its obligations in the event of a Clearing Member default.\72\
Rule 17Ad-22(e)(23) requires covered clearing agencies to maintain
written policies and procedures reasonably designed to, among other
things, provide for publicly disclosing all relevant rules and material
procedures, including key aspects of its default rules and
procedures.\73\
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\69\ 15 U.S.C. 78q-1(b)(3)(F).
\70\ 17 CFR 240.17Ad-22(e)(13).
\71\ 17 CFR 240.17Ad-22(e)(23).
\72\ 17 CFR 240.17Ad-22(e)(13).
\73\ 17 CFR 240.17Ad-22(e)(23).
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As noted above, a significant portion of the activity in OCC's
Hedge Program relates to matched-book activity. Under the current Hedge
Program Rules, OCC has authority to perform an orderly close out of a
suspended Hedge Clearing Member's Matched-Book Positions through the
termination by offset and rematching of such positions without
requiring the transfer of securities against the payment of settlement
prices as currently required under OCC Rule 2211. As a result, the
Hedge Program rules minimize the potential for operational and
execution risks and eliminate any risk resulting from potential price
dislocation between recall and return transactions. Extending this
authority to the Market Loan Program would provide the same benefits.
In addition, by allowing re-matching across OCC's Stock Loan Programs,
the proposed rule change would more closely align OCC's close-out
process with the assumptions underlying OCC's margin methodology,
STANS. Specifically, STANS assumes stock loan and borrow positions
covering the same Eligible Stock in OCC's Stock Loan Programs are
fungible and are permitted to offset one another in calculating a
Clearing Member's margin requirement for the relevant account. Allowing
for re-matching across Stock Loan Programs is consistent with this
assumption. OCC believes the proposed rule change will strengthen the
risk management processes in place at OCC by mitigating the risks
involved in the buy-in/sell-out of Matched-Book Positions as well as
provide the overall marketplace with more stability with respect to the
Stock Loan Programs. OCC therefore believes the proposed rule change is
designed to promote the prompt and accurate clearance and settlement of
securities transactions, the safeguarding of securities and funds in
the custody or control of OCC or for which it is responsible and, in
general, to protect investors and the public interest in accordance
with Section 17A(b)(3)(F) of the Exchange Act,\74\ and would establish
default procedures for the Market Loan Program that ensure that OCC can
take timely action to contain losses and liquidity pressures and
continue meeting its obligations in the event of a participant default
in accordance with Rule 17Ad-22(e)(13).\75\
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\74\ 15 U.S.C. 78q-1(b)(3)(F).
\75\ 17 CFR 240.17Ad-22(e)(13).
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In addition, OCC would use a matching algorithm to re-match stock
loan and stock borrow positions in order of priority based on the
largest available stock borrow or stock loan positions, as applicable,
for the selected Eligible Stock for which a MSLA exists between the
Borrowing and Lending Clearing Members or for which both positions are
Anonymous Market Loans. In the event parties to a resulting Disclosed
Market Loan do not have existing securities lending relationships,
those members may choose to either work in good faith to reestablish
any terms, representations, warranties and covenants not governed by
the By-Laws and Rules (e.g., MSLA) or to terminate the re-matched stock
loan or borrow positions in the ordinary course pursuant to renumbered
OCC Rules 2213 and 2216A, as soon as reasonably practicable. The
proposed rule change therefore provides for an objective process for
re-matching stock loan and borrow positions and ensures that members
that initiated Anonymous Market Loans or that have existing securities
lending relationships are re-matched to the greatest extent possible
and would still allow for Clearing Members that are re-matched but that
do not have existing securities lending relationships to terminate such
positions in the ordinary course pursuant to renumbered OCC Rules
[[Page 73483]]
2213 and 2216A. As a result, OCC believes that the proposed rule change
is designed to not permit unfair discrimination among participants in
the use of the clearing agency in accordance with Section 17A(b)(3)(F)
of the Exchange Act.\76\ Furthermore, the proposed rule change would
make key aspects of OCC's default procedures with respect to the close
out of Matched-Book Positions in suspension public by amending OCC's
Rules, which are posted to OCC's website, consistent with Rule 17Ad-
22(e)(23).\77\
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\76\ 15 U.S.C. 78q-1(b)(3)(F).
\77\ 17 CFR 240.17Ad-22(e)(23).
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Market Loan Program Enhancements
The proposed enhancements specific to the Market Loan Program would
also promote the prompt and accurate clearance and settlement of stock
loan transactions and, in general, protect investors and the public
interest. Allowing for bilaterally negotiated Stock Loans in the Market
Loan Program would allow OCC to expand its guaranty of cash
distributions, such as substitute dividend and rebate payments, to such
loans, limiting existing counterparty risks that remain for Hedge
Loans, in which such payments must be resolved by the counterparties
away from OCC. Transitioning bilaterally negotiated transactions to the
Market Loan Program would also reduce operational burden associated
with the reconciliation process and risk associated with errors that
currently occur under the Hedge Program because settlement at DTC
currently occurs prior to OCC's validation and acceptance of the
transaction. Under the enhanced Market Loan Program, such bilaterally
negotiated transactions would be submitted directly to OCC, which would
validate the trade before sending delivery instructions to DTC, thereby
helping to identify and resolve any errors prior to settlement
occurring. Accordingly, OCC believes that expanding the Market Loan
Program to include direct submission of bilaterally negotiated stock
loans would promote the prompt and accurate clearance and settlement of
stock loan transactions and protect investors and the public interest.
Allowing for the submission of bilateral transactions through the
Market Loan Program would also help simplify OCC's post-trade
processing of stock loan transactions. For instance, allowing Borrowing
Clearing Members to send return instructions directly to OCC for
bilaterally initiated Market Loans would help eliminate errors in the
Hedge Program that occur when notices of returns initiated through DTC
are not received by OCC with the correct reason codes, resulting in
position breaks. The proposed changes would disclose OCC's process for
affirming transactions related to bilaterally negotiated Market Loans
submitted directly to OCC, which would give members opportunities to
affirm or reject transactions within time-frames specified by OCC,
after which OCC would either reject the transaction if not affirmed
(i.e., new loans) or would be deemed affirmed and processed accordingly
(i.e., returns, buy-ins, sell-outs), thereby avoiding transactions that
would pend indefinitely. The proposed changes would also accommodate
modifications to certain terms, such as the rebate rate, interest rate
benchmark or the loan term, without the need for those loans to be
returned. The proposed changes would also improve OCC's control over
the buy-in process by giving OCC the authority to prevent situations in
which a Borrowing Clearing Member that failed to deliver the Loaned
Stock in response to a recall instruction then attempts to deliver the
Loaned Stock after the Lending Clearing Member may initiate a buy-in.
OCC's new clearance and settlement system would also assume certain
processes currently performed by a Loan Market, including calculation
of payments with respect to cash distributions for substitute dividend
and rebate payments. Consolidating such processing at OCC will help
ensure consistency across Market Loans, regardless of whether initiated
through a Loan Market or directly with OCC. Assuming the responsibility
to calculate such payments would also allow OCC to eliminate Rules
intended to limit OCC's guaranty for such payments to the margin OCC
collected in reliance on the Loan Market's determinations. OCC would
also modify the Market Loan rules concerning the collateralization rate
and mark-to-market pricing, which are currently set by the Loan Market.
Fixing collateral at the single rate of 102%, which is the Loan
Market's rate, would minimize complexity in the evaluation of a
member's Stock Loan portfolio for the purposes of liquidation in the
event of a default. Accordingly, OCC believes that these post-trade
processing enhancements to the Market Loan Program would promote the
prompt and accurate clearance and settlement of stock loan transactions
and protect investors and the public interest.
Finally, the proposed enhancements to support Canadian Clearing
Members in the Market Loan Program would also promote the prompt and
accurate clearance and settlement of stock loan transactions, assure
the safeguarding of securities and funds at OCC, and protect investors
and the public interest. The introduction of withholding
responsibilities would introduce new complications and risks into OCC's
clearance and settlement process and could create uncertainty around
the settlement of funds at OCC, as discussed in detail in connection
with OCC's proposed rule change to address the implementation of I.R.C.
Section 871(m) with respect to OCC's listed options transactions.\78\
The proposed rule change would implement prudent, preventive measures
to protect OCC against the obligation for any withholding (and any
resulting liability) by (a) applying similar conditions for the payment
of substitute dividends as those for dividend equivalent payments for
listed options; (b) preventing a Canadian Clearing Member from
executing Market Loans in its capacity as a Borrowing Clearing Member
for Canadian Securities, which may give rise to withholding obligations
under Canadian law; (c) clarifying Canadian Clearing Member membership
requirements such that Positive Rebate transactions would be subject to
exemptions from withholding under U.S. law; and (d) preventing a
Canadian Clearing Member from executing Market Loans with Negative
Rebate in its capacity as a Borrowing Clearing Member for its own
account, which may give rise to withholding obligations under U.S. Law.
OCC believes these steps are necessary to prevent tax withholding
obligations that OCC is not currently able to identify or collect.
Thus, OCC believes the proposed rule change is designed to promote the
prompt and accurate clearance and
[[Page 73484]]
settlement of securities and derivatives transactions, the safeguarding
of securities and funds at OCC, and the protection of securities
investors and the public interest in accordance with Section
17A(b)(3)(F) of the Exchange Act.\79\
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\78\ See Exchange Act Release No. 79435 (Nov. 30, 2016), 81 FR
87984 (Dec. 6, 2016) (File No. SR-OCC-2016-014). As the Commission
recognized, application of Section 871(m) to listed options
transactions would ``have significant implications for OCC and its
Clearing Members''--especially with respect to Non-U.S. Clearing
Members, for which OCC would be required ``to develop and maintain
systems (i) to identify transactions that are Section 871(m)
Transactions, (ii) to determine the amount of any dividend
equivalents, (iii) to effectuate withholding, and (iv) to remit the
withheld tax to the IRS.'' Id. at 87986. Treasury has yet to release
guidance on key aspects of Section 871(m) that would be needed to
build such systems. See IRS Notice 2024-44, Extension of the Phase-
in Period for the Enforcement and Administration of Section 871(m),
available at <a href="https://www.irs.gov/pub/irs-drop/n-24-44.pdf">https://www.irs.gov/pub/irs-drop/n-24-44.pdf</a>. Like the
changes implemented when Section 871(m) went into effect, this
proposed change would transfer the costs and liability associated
with tax withholding requirements to the Non-U.S. Clearing Members,
thereby eliminating the potential uncertainty and risks in the daily
settlement of funds at OCC that otherwise would be imposed if those
withholding obligations rested with OCC.
\79\ 15 U.S.C. 78q-1(b)(3)(F).
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Furthermore, while the proposed rule change would impose additional
requirements and restrictions on Canadian Clearing Members, the
proposed rules are intended to address specific issues and potential
risks to OCC arising from those Canadian Clearing Members whose
membership and participation in the Market Loan Program creates
potential withholding obligations for OCC. Because Canadian Clearing
Members are already subject to similar requirements to accommodate
dividend equivalent payments or deemed payments for listed options
transactions without imposing withholding obligations under Section
871(m), OCC believes that the additional conditions and requirements
with respect to participation in the Market Loan Program will not
impose a significant burden. In addition, the limitations on certain
transactions OCC proposes because of the heightened risk of withholding
obligations are narrowly tailored to address the specific risks based
on the Canadian Clearing Member's role in the transaction and whether
it is transacting in its capacity as principal or on behalf of a
customer. Therefore, OCC believes that the proposed rule change is not
unfairly discriminatory among participants in the use of the clearing
agency and is therefore consistent with Section 17A(b)(3)(F) of the
Exchange Act.\80\
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\80\ Id.
---------------------------------------------------------------------------
By-Laws and Rules Reorganization and Restatement
OCC believes that the proposed reorganization and restatement of
OCC's By-Laws and Rules specific to OCC's Stock Loan Programs is
consistent with Section 17A(b)(3)(F) of the Exchange Act \81\ and Rule
17Ad-22(e)(1),\82\ which requires OCC to, among other things, maintain
written policies and procedures reasonably designed to ensure a well-
founded, clear, transparent, and enforceable legal basis for each
aspect of OCC's activities. OCC believes that the proposed
reorganization improves the clarity and transparency of its By-Laws and
Rules by consolidating provisions governing the clearance and
settlement of stock loan transactions in the Rules, rather than split
across OCC's By-Laws and Rules. Similarly, OCC believes that
integrating Interpretations and Policies into the text of the Rules
helps enhance clarity and transparency by placing those provisions
closer to the text they interpret. In addition, the global changes and
administrative changes discussed above would apply consistent terms and
numbering conventions, improve consistency of the text between similar
Hedge Program and Market Loan Program rules, and remove duplicative
provisions. Accordingly, OCC believes the proposed changes help ensure
OCC's By-Laws and Rules, which form the legal basis for OCC's clearance
and settlement of stock loan transactions, are clear and transparent.
---------------------------------------------------------------------------
\81\ Id.
\82\ 17 CFR 240.17Ad-22(e)(1).
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(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Exchange Act requires that the rules of
a clearing agency not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act.\83\
With the exception of the Rules specific to Canadian Clearing Members,
addressed further below, the proposed changes are meant to enhance
OCC's Stock Loan Programs, and would apply equally to all Clearing
Members.
---------------------------------------------------------------------------
\83\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
The transition to the Market Loan Program is not expected to impose
a burden on competition or inhibit access for Clearing Members who
currently transact exclusively through the Hedge Loan Program because
the enhanced Market Loan Program would allow for the clearance of
bilaterally negated transactions submitted to OCC for clearance, as the
Hedge Loan Program does today. Accordingly, the changes do not require
any participant in the Hedge Loan Program to transact through a Loan
Market. In addition, OCC plans to authorize Clearing Members that
currently participate in the Hedge Loan Program to transact through the
Market Loan Program without requiring additional onboarding from a
membership perspective, subject to providing the necessary
authorizations required of all Market Loan Program participants,
thereby reducing the administrative burden of the transition. All
Clearing Members would be subject to training with respect to the new
ways of submitting transactions through the Market Loan Program. In
addition, the proposed changes would facilitate, rather than burden,
competition with respect to Canadian Clearing Members by allowing them,
for the first time, to participate in the Market Loan Program.
The proposed rule change could potentially impact or burden
competition by imposing upon Canadian Clearing Members certain
requirements and limitations with respect to participation in the
Market Loan Program. For example, Canadian Clearing Members would be
required to provide certain documentation to satisfy OCC that
participation will not impose tax or withholding obligations arising
from payments under the Market Loan Program, as well as to allow OCC to
satisfy its own tax reporting obligations. However, OCC does not
believe that conditioning Canadian Clearing Members' participation on
compliance with OCC Rule 202 would impose a significant burden on
competition. Canadian Clearing Members are already subject to ongoing
certification and reporting provisions of Rule 202 for derivative
equivalent payments made or deemed to be made to such members with
respect to options. As a matter of standard practice, Clearing Members
are required to inform OCC of material changes in, for example, their
formal organization, ownership structure, or financial condition \84\
and are subject to ongoing financial reporting requirements.\85\ OCC
believes the proposed rule change would impose reasonable reporting and
notification requirements with respect to Canadian Clearing Members'
tax compliance status similar to those rules referenced above.
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\84\ See, e.g., OCC Rules 201 and 303.
\85\ See OCC Rule 306.
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The proposed restrictions on certain Market Loan transactions with
Negative Rebate rates and transactions for which the Loaned Stock is a
Canadian Security are also narrowly tailored. These restrictions
address specific issues and potential risks to OCC arising from those
firms whose membership creates potential withholding obligations for
OCC. The proposed restriction on transactions with Negative Rebate for
a Canadian Clearing Member's own account in its capacity as a Lending
Clearing Member would eliminate the uncertainty in funds settlement
that would arise if OCC were subject to withholding or tax obligations
with respect to Negative Rebate payments owed to the Canadian Clearing
Member. Canadian Clearing Members would not be restricted from entering
into Market Loans with Negative Rebate as a Lending Clearing Member for
its customer accounts, for which OCC could make Negative Rebate
payments free from withholding obligations by virtue of the Canadian
Clearing Member's status as a Qualified
[[Page 73485]]
Intermediary, or as a Borrowing Clearing Member, either for its own
account or for its customer accounts.
The proposed restriction on transactions where the Loaned Stock is
a Canadian Security when the Canadian Clearing Member is the Borrowing
Clearing Member would similarly eliminate uncertainty in funds
settlement that would arise if OCC or the Canadian Clearing Member were
subject to tax withholding obligations with respect to substitute
dividends on the Canadian Security. Canadian Clearing Members would not
be restricted from executing Market Loan transactions on Canadian
Securities as a Lending Clearing Member. As discussed further above,
OCC believes that the proposed rule change is necessary to eliminate
potential complications and risk to its clearance and settlement
process that would be presented by OCC's potential withholding
responsibilities (and which would be a direct consequence of providing
its clearance and settlement services for these Canadian Clearing
Members). OCC believes the proposed rule change is necessary to promote
the prompt and accurate clearance and settlement of securities and
derivatives transactions, to assure the safeguarding of securities and
funds in the custody or control of OCC or for which it is responsible,
and in general, to protect investors and the public interest in
accordance with Section 17A(b)(3)(F) of the Exchange Act.\86\
Accordingly, OCC believes any burden on competition that this proposed
change could be regarded as imposing are necessary and appropriate to
promote the prompt and accurate clearance and settlement of stock loan
transactions as required by the Exchange Act. Furthermore, as stated
above, all of OCC's current Canadian Clearing Members are already
Qualified Intermediaries, FATCA Compliant, and Qualified Derivatives
Dealers. Therefore, applying the same requirements as conditions to
participate in the Market Loan Program would not impose any additional
burden on those members.
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\86\ 15 U.S.C. 78q-1(b)(3)(F).
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For the foregoing reasons, OCC believes that the proposed rule
change is in the public interest, would be consistent with the
requirements of the Exchange Act applicable to registered clearing
agencies, and would not impose a burden on competition that is
unnecessary or inappropriate in furtherance of the purposes of the
Exchange Act.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments were not and are not intended to be solicited with
respect to the proposed rule change and none have been received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rulesregulations/self-regulatory-organization-rulemaking">https://www.sec.gov/rulesregulations/self-regulatory-organization-rulemaking</a>);
or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#f587809990d8969a9898909b8186b5869096db929a83"><span class="__cf_email__" data-cfemail="6614130a034b05090b0b030812152615030548010910">[email protected]</span></a>. Please include
file number SR-OCC-2024-011 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Vanessa Countryman,
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090.
All submissions should refer to file number SR-OCC-2024-011. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rulesregulations/self-regulatory-organization-rulemaking">https://www.sec.gov/rulesregulations/self-regulatory-organization-rulemaking</a>). Copies of
the submission, all subsequent amendments, all written statements with
respect to the proposed rule change that are filed with the Commission,
and all written communications relating to the proposed rule change
between the Commission and any person, other than those that may be
withheld from the public in accordance with the provisions of 5 U.S.C.
552, will be available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Copies of such filing also will be available for inspection and
copying at the principal office of OCC and on OCC's website at <a href="https://www.theocc.com/CompanyInformation/Documents-and-Archives/By-Laws-and-Rules">https://www.theocc.com/CompanyInformation/Documents-and-Archives/By-Laws-and-Rules</a>.
Do not include personal identifiable information in submissions;
you should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to file number SR-OCC-2024-011 and
should be submitted on or before October 1, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\87\
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\87\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-20329 Filed 9-9-24; 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.