Notice2024-22412
Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change by The Options Clearing Corporation Concerning Modifications to its By-Laws and Rules Primarily To Discontinue Certain Outmoded or Unused Products and Services
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
October 1, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 190 (Tuesday, October 1, 2024)</title>
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[Federal Register Volume 89, Number 190 (Tuesday, October 1, 2024)]
[Notices]
[Pages 79978-79984]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-22412]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101189; File No. SR-OCC-2024-013]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change by The Options Clearing
Corporation Concerning Modifications to its By-Laws and Rules Primarily
To Discontinue Certain Outmoded or Unused Products and Services
September 25, 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 September 13, 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. The Commission is publishing this notice to solicit
comments on 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.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
This proposed rule change would make modifications to its By-Laws
and Rules primarily to discontinue certain outmoded or unused products
and services.
Proposed changes to OCC's By-Laws are contained in Exhibit 5A [sic]
that OCC provided as part of File No. SR-OCC-2024-013. Proposed changes
to OCC's Rules are contained in Exhibit 5B [sic] that OCC provided as
part of File No. SR-OCC-2024-013. Material proposed to be added is
underlined and material proposed to be deleted is marked in
strikethrough text.
All terms with initial capitalization that are not defined herein
have the same meaning as set forth in the OCC By-Laws and Rules.\3\
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\3\ 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
OCC is the sole clearing agency for standardized equity options
listed on national securities exchanges registered with the Commission.
OCC also clears certain stock loan and futures transactions. In its
role as a clearing agency, OCC acts as a central counterparty (``CCP'')
guarantying all contracts it clears, meaning OCC becomes the buyer to
every seller and the seller to every buyer (or the lender to every
borrower and the borrower to every lender, in the case of stock loan
transactions). As a CCP, OCC maintains a platform called ENCORE
consisting of OCC's core clearing, risk management, and data management
applications launched in 2000. Among other functions, ENCORE serves as
OCC's real-time processing engine, receiving trade and post-trade data
from a variety of sources on a transaction-by-transaction basis to
facilitate OCC's clearance and settlement operations. OCC intends to
retire ENCORE and implement a new, updated clearance and settlement
system, known as ``Ovation,'' that will leverage more current
technology and enhanced security features. Ovation is designed to
provide a more robust solution to meet market participants' needs and
OCC's responsibilities, including in OCC's role as a systemically
important financial market utility. As part of the transition to the
Ovation system, OCC is considering which features of ENCORE should be
carried over to Ovation and
[[Page 79979]]
which should be retired, as well as other updates to its By-Laws and
Rules to conform to current capability and support future requirements.
1. Purpose
This proposed change by OCC would modify the By-Laws and Rules to
address certain outmoded or unused functions or products that OCC
proposes to discontinue. OCC also proposes certain miscellaneous
changes to provide greater clarity to its By-Laws and Rules.\4\
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\4\ OCC is also proposing these changes, with a view toward its
planned transition to a new core clearing system, which OCC calls
Ovation.
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First, OCC proposes to no longer facilitate the settlement of
commissions and fees owed between Clearing Members that are party to a
Clearing Member Trade Assignment (``CMTA'') arrangement. OCC members
have not used or expressed an interest in having OCC facilitate such
settlement of commissions and fees. Second, OCC proposes to delete
provisions related to OTC option products because these OTC option
products are not currently traded.
Third, OCC proposes to no longer require that Clearing Members
maintain records of both parties to a trade because trade counterparty
information is not necessary for OCC's clearing and settlement
purposes. Accordingly, OCC has not developed Ovation to aggregate such
information and provide it to Clearing Members for purposes of
compliance with this rule. Implementing this non-clearing data element
in Ovation would require significant investment of resources to develop
functionality that could impact Ovation's release timeline.
Fourth, OCC proposes to amend its Rules to provide that when a
Clearing Member wants to ``give-up'' one or more positions in cleared
contracts that are futures or futures options to another Clearing
Member, it need not designate the specific account of the Given-Up
Clearing Member to which such positions must be allocated. Rather, the
Given-Up Clearing Member will be able to indicate the account to which
it wishes the futures or futures options positions to be allocated in
order to provide more flexibility to Clearing Members and better
facilitate give-up allocations to the appropriate account.
Fifth, OCC proposes to clarify that, when an opening or closing
indicator is not included on a trade for an options or a futures
contract, OCC will default the trade to an opening position for all
account types, including market makers. Defaulting to an open position
when there is no indicator will help ensure that an existing position
is not inadvertently closed out.
Sixth, OCC proposes to amend its Rules to reflect that when a
particular class of exercised options is subject to broker-to-broker
settlement, the settlement obligation will not be considered discharged
until both the Delivering and Receiving Clearing Member submit matching
notices as to the number of units of the underlying security delivered
(received). This change will better reflect the manner in which OCC
currently handles broker-to-broker settlements.
Seventh, OCC also proposes to delete the ``associated Market
Maker'' account subtype, which is not currently used by Clearing
Members.
Proposed Rule Changes
As noted, this proposed change by OCC is primarily designed to
modify the By-Laws and Rules to address certain outmoded or unused
functions or products that OCC proposes to discontinue, particularly as
OCC works toward its transition to a new core clearing system. ENCORE
is OCC's existing clearing system, and it was launched in 2000. Since
then, it has operated as OCC's real-time processing engine to receive
trade and post-trade data from a variety of sources on a transaction-
by-transaction basis, maintain clearing member positions, calculate
margin and clearing fund requirements, and provide reporting to OCC
staff, regulators, and Clearing Members. As stated in the Commission's
notice of no objection to OCC's advance notice filing related to
adoption of cloud infrastructure for new clearing, risk management and
data management applications,\5\ OCC's objective is the eventual
retirement of ENCORE and its replacement with a resilient successor
clearing system, which OCC calls Ovation. In connection with this
transition by OCC to a successor clearing system and the related
development work to design the successor system to support an
appropriate scope of operations, OCC plans to discontinue certain
existing functions or products that are outmoded or unused, as
described in more detail below.
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\5\ See Securities Exchange Act Release No. 96113 (Oct. 20,
2022), 87 FR 64824 (Oct. 26, 2022) (File No. SR-OCC-2021-802).
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The proposed rule change would amend the By-Laws and Rules to: (i)
discontinue OCC's facilitation of the settlement of commissions and
fees owed between Clearing Members that are party to a CMTA
arrangement; (ii) remove provisions related to OTC option products that
are inoperative; (iii) no longer require that Clearing Members must
maintain records of both parties to a trade; (iv) provide that a
Giving-Up Clearing Member in connection with futures and futures
options is not required to provide instructions that identify the
designated account of the Given-Up Clearing member; (v) clarify and
make uniform across all account types the default treatment of
confirmed trades in futures and options as opening transactions; (vi)
clarify its rules about the discharge of settlement obligations when
OCC directs that exercise and assignment activity for a specific class
of options will be subject to broker-to-broker settlement; and (vii)
delete the Associated Market-Maker account type.
OCC to No Longer Facilitate Settlement of Commissions and Fees Between
CMTA Clearing Members
OCC's Rules 407 and 504 currently provide for a voluntary service
at the election of Clearing Members that are parties to a CMTA
arrangement whereby OCC will facilitate the settlement of fees and
commissions between such Clearing Members, subject to certain
conditions. OCC amended its Rules in 2010 to provide for this
service.\6\ The service has not been used by Clearing Members since
2016, and Clearing Members have not expressed an interest in using the
settlement of commissions and fees service provided by OCC in the
future. As a result of the lack of Clearing Member interest in this
service, OCC proposes to decommission it such that it will also not
need to be supported in OCC's successor clearing system. All other
aspects of OCC's Rules related to CMTA arrangements would remain
unchanged.
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\6\ See Securities Exchange Act Release No. 63120 (Oct. 15,
2010), 75 FR 65538 (Oct. 25, 2010) (File No. SR-OCC-2010-017).
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Accordingly, OCC proposes to renumber paragraph (a)(1) to (a) and
to delete paragraph (a)(2) from Rule 407, which provides that Clearing
Members that are parties to a CMTA arrangement may elect to authorize
OCC to settle fees and commissions owed by the Carrying Clearing Member
to the Executing Clearing Member in respect of transfers effected
pursuant to that arrangement.\7\ OCC also proposes to delete paragraph
(e) of Rule 504, which corresponds to current Rule 407(a)(2), generally
[[Page 79980]]
providing that OCC, as agent, is authorized to effect non-guaranteed
settlement of fees and commissions owed by a Carrying Clearing Member
to an Executing Clearing Member for transfers effected pursuant to
their registered CMTA arrangement, provided that the CMTA registration
authorizes OCC to effect such settlements.\8\ OCC proposes to mark
paragraph (e) of Rule 504 as reserved. In addition, OCC proposes to
delete the final sentence of Rule 504(g), which provides that OCC shall
have no obligation to effect settlement of fees and commissions as
provided in Rule 407 if either the Executing Clearing Member or the
Carrying Clearing Member has been suspended by OCC.
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\7\ Rule 407(a)(2) further provides, among other things, that
Clearing Members making such election shall specifically register
that aspect of their CMTA arrangement with OCC, sets forth the
authority granted to OCC for Clearing Members making such an
election, and specifies that any such election becomes effective
once accepted by OCC's systems.
\8\ Rule 504(e) further provides, among other things, that
aggregate amounts to be settled are calculated based on entries made
by the Executing Clearing Member, that settlements of the fees/
commissions will be effected on the business days first succeeding
the business day on which the Executing Clearing Member entered the
information into OCC's systems.
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Over-the-Counter (``OTC'') Options Provisions To Be Removed
OCC's By-Laws and Rules currently permit it to clear and settle
certain OTC options products, specifically OTC index options on the S&P
500 index.\9\ In connection with this service, OCC's By-Laws and Rules
were modified in various places to provide for the clearance and
settlement of such OTC index options. Although OCC has only ever
cleared OTC index options on the S&P 500 index, OCC's By-Laws and Rules
were designed to support the clearance and settlement of additional OTC
options using the same legal and operational framework. However, OCC
has not cleared and settled an OTC option since 2014 and there is no
open interest in OTC options. Clearing Members have also not expressed
interest in the OTC option clearance settlement services.
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\9\ See Securities Exchange Act Release No. 68434 (December 14,
2012), 77 FR 75243 (December 19, 2012) (SR-OCC-2012-14).
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As a result, OCC proposes to remove all provisions from its By-Laws
and Rules \10\ related to the clearance and settlement of OTC options.
These changes include the deletion of the entire definitions and
references to the terms ``OTC options,'' ``OTC index option,'' ``OTC
Trade Source,'' ``OTC Trade Source Rules'', ``Backloaded OTC option,''
and ``OTC Option Auction,'' as well as text accompanying these terms
that describe OCC's role in the clearance and settlement of OTC options
in the following By-Law and Rule provisions: (i) Article I of the By-
Laws (Definitions); \11\ (ii) Article VI of the By-Laws, Section 1,
Interpretation and Policies .01(a), the entirety of Section 3,
Interpretations and Policies .09, Section 10(b) and (g), and Section
27(a) and (b); (iii) Article XVII of the By-Laws, Introduction, Section
1 (Definitions),\12\ Section 3(h) and Interpretation and Policies .01
(deleted entirely), Section 4(a)(2), Section 5(a), and the entirety of
Section 6 (relating to OTC Index options); (iv) Rule 201(b)(6) (deleted
entirely); (v) Rules 401(a), (a)(1)(i), (b), (d), (e), (f) and (g);
(vi) Rule 405; (vii) Rule 406; (viii) Rule 407(l) (deleted entirely);
(ix) Rule 408(a); (x) Rule 611(a), (b), and (d) (deleted entirely);
(xi) Rule 801(b); (xii) Rule 803 Interpretation and Policy .01; (xiii)
Rule 804; (xiv) Rule 1003 Interpretation and Policy .02 (deleted
entirely); (xv) Rule 1104 Interpretation and Policy .03 (deleted
entirely); (xvi) Rule 1105; (xvii) Rule 1106(e)(2) (deleted entirely),
and Interpretation and Policy .01; (xviii) Chapter XVIII of the Rules,
Introduction; (xix) Rule 1804(b), (c),\13\ and Interpretation and
Policy .03 (deleted entirely). OCC is not proposing changes to these
provisions (unless otherwise described in this proposed rule change)
other than the removal of provisions that relate to OTC options. For
example, OCC proposes to modify the definition of the term ``confirmed
trade'' in the By-Laws only to delete the provision relating to OTC
options.\14\
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\10\ OCC notes that it is not proposing in this proposed rule
change to eliminate the reference to OTC options in Rule 805
(Expiration Exercise Procedure) because it is proposing to delete
such reference in another rule filing with the Commission.
\11\ OCC proposes to delete references to OTC options and
related terms throughout the definitions in Article I of the By-
Laws, including ``Backloaded OTC option,'' ``OTC Index Option
Clearing Member,'' ``origination date,'' ``OTC index option,'' ``OTC
option,'' ``OTC Trade Source,'' ``OTC Trade Source Rules.'' OCC also
proposes to delete text from the definitions of the terms ``Class'',
``Clearing Member'', ``Index Multiplier'', ``Index Value
Determinant'', ``Trade Date'', and ``Variable Terms'' that define
what those terms mean with respect to OTC options. In addition, OCC
proposes to delete text from Interpretation and Policies .01 to
Section C of Article I of the By-Laws providing that the term ``
`Exchange transaction' was removed from the By-Laws and Rules and
replaced with the term `confirmed trade' to reflect the expansion of
the Corporation's clearing activities into OTC options'' because
such sentence is no longer necessary given the removal of provisions
related to OTC options. OCC is not proposing to revert back to the
use of ``Exchange transaction'' in its By-Laws and Rules because OCC
believes that Clearing Members are familiar with the term
``confirmed trade.''
\12\ OCC proposes to delete OTC option related provisions in the
following definitions in Article XVII, Section 1: (i) ``class of
options,'' (ii) ``current underlying interest value,'' (iii)
``expiration date,'' (iv) ``expiration time'' (deleted entirely),
(v) ``reporting authority,'' and (vi) ``series of options.''
\13\ OCC proposes to delete Rule 1804(c)(1) in its entirety
because it relates solely to OTC options. OCC proposes to renumber
current Rule 1804(c)(2) and (3) as (c)(1) and (2).
\14\ Specifically, OCC proposes that the definition of
``confirmed trade'' would no longer include a cleared contract
affirmed through the facilities of an OTC Trade Source and submitted
to the OCC for clearance.
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To the extent OCC may plan to support the clearance and settlement
of OTC options again in the future based on Clearing Member demand for
such services, OCC would submit a proposed rule change with the
Commission pursuant to Section 19(b) of the Exchange Act to
reincorporate changes to its By-Laws or Rules as may be necessary for
that purpose.\15\
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\15\ 15 U.S.C. 78s(b).
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Records of Both Parties to a Transaction to No Longer Be Required
Rule 208 currently requires, among other things, that every
Clearing Member must keep records showing all confirmed trade data
required pursuant to the OCC's By-Laws and Rules, including confirmed
trade information reported to OCC under Rule 401. Rule 401(a)(1)(i)
requires that confirmed trade details include ``the identity of the
Purchasing Clearing Member and the Writing Clearing Member to the
transaction.'' As a result, Clearing Members are currently required to
maintain records of the identity of the Clearing Members who are
parties to a confirmed trade. Prior to the adoption of electronic
trading, these records were maintained to facilitate the efficient
clearing and settlement of confirmed trades and reconcile counterparty
settlement obligations to avoid settlement delays and disputes. OCC
currently provides such information through Encore for purposes of
compliance with this Rule.
However, with the widespread adoption of electronic trading and the
development of supporting market infrastructure, OCC's clearing
processes and capabilities have evolved to no longer require the
identities of the counterparty Clearing Members for the purposes of
clearing and settlement. Therefore, OCC would no longer require that
Clearing Members maintain such records in Ovation.\16\ Implementing
this non-clearing data element and developing this functionality would
require OCC to invest significant resources that could have an impact
on Ovation's release timeline. As a result, OCC proposes to modify Rule
208 to
[[Page 79981]]
provide, with respect to parties to a transaction, that a Clearing
Member must keep records showing all confirmed trade data required
pursuant to OCC's By-Laws and Rules, including confirmed trade
information reported to OCC under Rule 401 ``except for the identity of
the counterparty Clearing Member.'' This change would require Clearing
Members to only record trade information relevant for clearing and
settlement purposes. OCC notes that because all confirmed trades in
option contracts that are accepted by OCC are novated such that OCC
becomes the buyer to the seller and the seller to the buyer, it is not
necessary or relevant for clearance and settlement purposes to require
a Clearing Member to record the identity of another Clearing Member who
was originally counterparty to the transaction.
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\16\ OCC notes that Clearing Members continue to debate whether
the counterparty information should be maintained given past trading
precedent when this information was required. Today, the trade
counterparty information is no longer required for clearing
purposes. However, OCC may reconsider providing this information in
the future.
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Discontinue the Requirement To Identify Designated Accounts of Given-Up
Clearing Members
Rule 408 provides that one or more positions in cleared contracts
may be allocated from the designated account of a Giving-Up Clearing
Member to the designated account of a Given-Up Clearing Member.
Currently, this system for allocation of positions is only available in
connection with positions in futures contracts and options on futures
contracts that are cleared and settled by OCC. These allocations are
post-trade instructions to OCC that are entered by one Clearing Member,
called the Giving-Up Clearing Member, to direct OCC that a position in
a cleared contract in one of the OCC accounts of that Giving-Up
Clearing Member should be moved to the designated account of the Given-
Up Clearing Member. Currently, the Rules allow the Giving-Up Clearing
Member to designate the account of the Given-Up Clearing Member to
which the position should be allocated.
OCC proposes to add rule text to the header for Rule 408 and
elsewhere in Rule 408(a) to make clear that this allocation of
positions functionality is only available for futures and options on
futures. Currently, Rule 408 states that the allocation functionality
is available for ``cleared contracts,'' which could be read to include
securities options contracts notwithstanding that the allocation
functionality is currently only available for futures and options on
futures, and OCC plans for the same to be true in connection with the
successor Ovation system.\17\
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\17\ OCC also proposes to make similar changes to Rule 408(e) to
make clear that the Rule only applies to futures and options on
futures contracts. This would be done by inserting the word
``futures'' before references to the word ``options'' in Rule
408(e).
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OCC also proposes to remove reference to the term ``designated
account'' within the provisions of Rule 408 (a) and (b) from certain
instances that refer to the Given-Up Clearing Member to clarify that
the Giving-Up Clearing Member would no longer be required to specify
the designated account of the Given-Up Clearing Member to which the
cleared contract position should be moved. OCC proposes to then add a
sentence in Rule 408(b) that would require the Given-Up Clearing Member
to designate an account to which the allocation will be made. OCC will
then process allocation instructions for Cleared contract positions
once the Given-Up Clearing Member has designated an account in which to
accept the allocations.
OCC proposes to also remove the last sentence of Rule 408(b) that
generally describes OCC's posture in the absence of an allocation
agreement,\18\ which OCC believes is already addressed as part of
paragraphs (b), and (d) of the Rule, and including the text would be
duplicative and unnecessary. An allocation instruction, whether direct
or provided through a confirmed trade, is a request by the Giving-Up
Clearing Members to allocate positions to a Given-Up Clearing Member.
Positions would remain in pending status awaiting the designation of an
allocation account by the Given-Up Clearing Member to complete
processing. Positions would move automatically if an account was
designated, and an allocation agreement existed between the Giving-Up
Clearing Member and the Given-Up Clearing Member. In all cases Rule 408
would provide that the Giving-Up Clearing Member would be required to
allocate the cleared futures or options on futures contract position to
a Given-Up Clearing Member. In turn, the Given-Up Clearing Member would
be responsible for affirmatively confirming the account to which the
cleared contract position should be transferred by OCC before the
position would be moved by OCC from the designated account of the
Giving-Up Clearing Member to the designated account of the Given-Up
Clearing Member.
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\18\ The last sentence of Rule 408(b) currently provides that If
the Giving-Up Clearing Member and the Given-Up Clearing Member are
not parties to an allocation agreement registered with the
Corporation, then the Corporation shall adjust the positions in the
respective designated accounts of the Giving-Up and Given-Up
Clearing Member in accordance with the allocation instruction only
upon receipt of notice from the Given-Up Clearing Member of its
affirmative acceptance of the allocation.
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OCC proposes to also remove all references to ``allocation
agreement'' in the text of Rule 408(b), and (d). OCC believes removing
this text adds clarity to the rule because the text of Rule 408(c)
addresses the registration of allocation agreements with OCC and
declares that an allocation agreement would constitute notice of a pre-
agreed instruction to OCC by the Given-Up and the Giving-Up Clearing
Members for OCC to allocate positions to an account of the Given-Up
Clearing Member without further action. If the Given-Up Clearing Member
rejects the allocation or if it does not provide affirmative acceptance
by the cut-off time, Rule 408 would continue to provide, as it
currently does, that the positions will remain in the account of the
Giving-Up Clearing Member. This proposed approach puts each Clearing
Member, as applicable, in control of the account from which or to which
the position in the cleared futures or futures option contract should
be moved. OCC believes that this would help reduce the risk of
positions being transferred to an account of the Given-Up Clearing
Member that the Given-Up Clearing Member does not want to receive them.
Clarify the Default Treatment of Confirmed Trades in Options as Opening
Transactions
Rule 401 addresses information that is required to be or that may
be reported to OCC in connection with new confirmed trades in options,
futures and BOUNDs.\19\ For confirmed transactions in options that are
transmitted to OCC by an options exchange, OCC does not require as a
condition to OCC's acceptance and novation an indication of whether the
transaction is an opening or closing transaction. Such information may
be included in the confirmed trade information from the exchange, but
if it is not included OCC treats the confirmed trade as an opening
transaction--which has the effect of increasing the number of option
contracts in the option series in the relevant account of the Clearing
Member. To clarify this default treatment in Rule 401, OCC is proposing
to amend current Interpretation and Policy .01 to Rule 401, which
already states that this is the default treatment for confirmed trades
that OCC receives in futures for all Clearing Member accounts other
than market-maker
[[Page 79982]]
accounts. In revising Interpretation and Policy .01 to be applicable to
confirmed trades in both options and futures, OCC is also proposing to
delete the part of the provision that states that it applies the
opening transaction default treatment to all accounts other than
market-maker accounts. OCC believes that this revision is appropriate
in respect of options and futures in Clearing Member market-maker
accounts in addition to all other types of Clearing Member accounts
because defaulting a trade without an open or close indicator to
``open'' is operationally safer and more prudent and prevents such
trades from unintentionally closing an existing position. OCC believes
that defaulting to open when there is no open or close indicator should
also be consistent across all account types, including Market Makers.
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\19\ The term ``BOUND'' means a security issued by the
Corporation pursuant to Article XXIV of the By-Laws and Chapter XXV
of the Rules. See OCC By-Laws, Article 1.
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Discharge of Settlement Obligations Under Broker-to-Broker Settlement
Consistent with OCC Rule 901, settlement of exercise and assignment
activity in stock options is typically made through the facilities of a
correspondent clearing corporation, currently the National Securities
Clearing Corporation (``NSCC''). However, in certain situations,
including when a particular underlying security becomes ineligible at
NSCC, OCC directs that settlement will occur on a broker-to-broker
basis under Rule 903. Rule 909 then provides for the notices that the
Delivering Clearing Member and Receiving Member must submit to advise
OCC of the discharge of the settlement obligation.
Currently, Rule 909 provides that if one of the Clearing Members
submits a notice of delivery, payment, or receipt of delivery or
payment, and the contraparty fails to respond to such notice within two
business days, that failure to respond constitutes the contraparty's
acknowledgement that the obligation has been settled as indicated in
the submitting Clearing Member's notice, ``provided that the designated
delivery date has occurred.'' \20\ However, in practice, when OCC
directs broker-to-broker settlement, it also directs that if it is not
possible for the Delivering Clearing Member to effect delivery of the
underlying shares on the designated settlement date, then the
settlement obligations of both the Delivering and Receiving Clearing
Member will be delayed until such time as OCC designates a new exercise
settlement date, settlement method or settlement value,\21\ pursuant to
OCC's authority under Section 19 of Article VI of the By-Laws (Shortage
of Underlying Securities).\22\ This directive allows Delivering
Clearing Members the opportunity to effect settlement if they have the
underlying securities and are able to effect delivery, but delays the
settlement obligation when this is not possible. Under Article VI,
Section 19 of the By-Laws, such settlement obligation remains delayed
until either (i) OCC determines that a sufficient supply of the
underlying security has become available to warrant the termination of
such action and fixes a new delivery date for the contracts effected by
the suspension,\23\ or (ii) OCC determines that there is no reasonable
likelihood that a sufficient supply of the underlying security will
become available within the foreseeable future to permit the Clearing
Members affected by such suspension to discharge their obligations by
delivery or receipt of the underlying security. In this situation OCC
will exercises its authority to fix a cash value to settle the
obligation for exercised option contracts, and/or, in the event that
the suspended security underlies matured, physically-settled stock
futures, terminates all rights and obligations to deliver or receive
underlying securities and instead require payment and receipt of the
final variation payment to fully discharge the rights and obligation
for such matured, physically-settled stock futures.\24\
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\20\ OCC Rule 909(d).
\21\ See, e.g., Information Memo #53517, available at <a href="https://infomemo.theocc.com/infomemos?number=53517">https://infomemo.theocc.com/infomemos?number=53517</a> (exemplative OCC Info
Memo directing broker-to-broker settlement).
\22\ See By-Laws Article VI, Section 19(a)(2)-(3) (providing
that OCC may suspend the settlement obligations of exercised options
when Clearing Members are unable to deliver the underlying
security).
\23\ See id. Section 19(b).
\24\ See id. Section 19(c).
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When such settlement obligation is delayed, the conditions under
Rule 909(d) for considering a contraparty's failure to respond when the
other Clearing Member marks an obligation settled is not satisfied.
Accordingly, OCC proposes to amend Rule 909(d) to remove the provision
directing that a contraparty's failure to respond to the other Clearing
Member's settlement notice in OCC's system within two business days
after such notice was made available to such Clearing Member may be
treated as acknowledgement of settlement. In its place, OCC would
provide that the contraparty's failure to respond would indicate that
the obligation is unsettled and that OCC would maintain that status
until such time as either (i) both Delivering and Receiving Clearing
Members mutually agree to settle the obligation and notify OCC; or (ii)
OCC settles the obligation on behalf of both Delivering and Receiving
Clearing Members pursuant to OCC's policies and procedures. As amended,
Rule 909(d) would clarify and better align Rule 909 with OCC's
practices with respect to shortages of underlying securities under
Article VI, Section 19 of the By-Laws.
OCC also proposes to make an associated clarifying change by
removing text from the first paragraph of Rule 909 related to the
amount received or paid for the underlying security. Currently when OCC
directs broker-to-broker settlement, the Delivering and Receiving
Clearing Members inform OCC of settlement by submitting notices that
specify the number of units of the underlying security delivered or
received and equivalent cash amounts received or paid. In practice,
however, the cash amounts received or paid are systematically
determined and not specified by either Delivering or Receiving Clearing
Members. The practice of systematically calculating the cash amounts
received or paid allows OCC to reduce operational risk and avoid
processing any inaccurate notices entered by Clearing Members. OCC
believes that the proposed change would clarify and conform Rule 909
with OCC's current practices.
Elimination of Associated Market Maker Sub-Account Type
Article VI, Section 3(c), of OCC's By-Laws currently allows
Clearing Members to use a combined market makers' account to carry the
positions of multiple proprietary Market Makers or to carry the
positions of multiple associated Market Makers,\25\ so long as such
accounts are restricted to positions of proprietary Market Makers or
associated Market Makers, respectively. Today, the associated Market
Maker subaccount type is not used by Clearing Members. As a result, OCC
proposes to eliminate the associated Market Maker sub-account type.
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\25\ An ``associated Market Maker'' is currently defined in
Article I of OCC's By-Laws as a person maintaining an account with a
Clearing Member as a Market-Maker, specialist, stock market-maker,
stock specialist or Registered Trader that is a Related Person of
the Clearing Member and shall include any participant, as such, in
an account of which 10% or more is owned by an associated Market-
Maker, or an aggregate of 10% or more of which is owned by one or
more associated Market-Makers.
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Accordingly, OCC proposes to delete the definition of an
``associated Market Maker'' from Article I of the By-Laws and remove
provisions in the By-Laws related to associated Market Makers and
[[Page 79983]]
the ability to establish a combined Market Maker account of associated
Market Makers. Specifically, OCC proposes to delete references to an
associated Market Maker and the ability to establish a combined Market
Maker account from Article VI, Section 3(c) and Interpretation and
Policies .03 and .06, and to revise the reference in the first sentence
of Interpretations and Policies .06 to refer to Section 3(c). As
amended, OCC's By-Laws would, in effect, provide for two, rather than
three, combined Market Maker accounts: (i) a combined account limited
to Market Makers that are not proprietary Market Makers; and (ii) a
combined account limited to proprietary Market Makers.\26\
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\26\ See proposed By-Law Article VI, Section 3(c),
Interpretation and Policy .06.
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Implementation Timeframe
OCC will release and implement the proposed change described above
into production concurrently with the release of Ovation and the
attendant retirement of ENCORE, which is planned to launch no earlier
than July of 2025. 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 change 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.
2. Statutory Basis
Section 17A(b)(3)(F) of the Exchange Act requires, among other
things, that the rules of a clearing agency must be designed to promote
the prompt and accurate clearance and settlement of securities
transactions, safeguard securities and funds in its custody or control
or for which it is responsible, remove impediments to and perfect the
mechanism of a national system for the prompt and accurate clearance
and settlement of securities transactions, and, in general, to protect
investors and the public interest; and are not designed to permit
unfair discrimination among participants using the clearing agency.\27\
In addition, Rule 17Ad-22(e)(21) requires OCC, as a covered clearing
agency, to establish, implement, maintain, and enforce written policies
and procedures reasonably designed to be efficient and effective in
meeting the requirements of its participants and the markets it serves,
and have its management regularly review the efficiency and
effectiveness of OCC's clearing and settlement arrangements, operating
structure, and the scope of products cleared or settled.\28\
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\27\ 15 U.S.C. 78q-1(b)(3)(F).
\28\ 17 CFR 240.17Ad-22(e)(21).
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OCC believes that the proposed rule changes are consistent with
these requirements because the proposed rule change is designed to
decommission or render inoperative services that OCC no longer plans to
provide based on the products and services demands of Clearing Members.
For example, because OCC has not cleared any OTC options since 2014 and
Clearing Members have not expressed an interest in using OCC to clear
and settle OTC options going forward, OCC believes that removing all
By-Law and Rule provisions related to OTC options promotes OCC being
effective and efficient in meeting the requirements of Clearing Members
with respect to the scope of products cleared and settled, consistent
with Rule 17Ad-22(e)(21).\29\ Similarly, OCC believes that
decommissioning OCC's voluntary service for Clearing Members that are
party to a CMTA to facilitate the settlement of commissions and fees,
which service has not been used by Clearing Members since 2016, also
promotes the efficient and effective satisfaction of the requirements
of Clearing Members consistent with Rule 17Ad-22(e)(21).\30\ As a third
example, no Clearing Members currently use the associated Market Maker
account subtype, so OCC proposes to eliminate such account type. By no
longer supporting products or services that have not been used by
Clearing Members, OCC can free up resources to focus on products and
services for which there is demand from Clearing Members, thereby
promoting a more efficient and effective OCC to meet the requirements
of Clearing Members. OCC also believes that specifying in its By-Laws
and Rules which products and services are no longer available or that
are currently inoperative generally serves to protect investors and the
public interest who benefit from clear and transparent rulebooks,
consistent with Section 17A(b)(3)(F) of the Exchange Act.\31\
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\29\ Id.
\30\ Id.
\31\ 15 U.S.C. 78q-1(b)(3)(F).
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Several other proposed changes would similarly promote a clear and
transparent rulebook consistent with Section 17A(b)(3)(F) of the
Exchange Act.\32\ For example, the proposed change to Rule 408, which
would make clear that the account allocation functionality is only
available for futures and options on futures would eliminate any
potential confusion that Clearing Members might have regarding the
scope of this service. OCC's proposal to clarify that the default
treatment of confirmed trades in futures and options as opening
transactions in Rule 401 similarly promotes a clear and transparent
rulebook and would reduce any potential concerns of a Clearing Member
that a confirmed trade without having been marked as an opening
position might inadvertently result in closing a Clearing Member's
position.\33\ For the same reasons, the proposed change to Rule 909(d)
would make clear OCC's practices with respect to the discharge of
broker-to-broker obligations by specifying that OCC treats transactions
as pending and would better align that Rule with By-Law Article VI,
Section 19.\34\
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\32\ Id.
\33\ This change would also make uniform such default treatment
(as an opening transaction) across all account types (i.e.,
including market makers), which eliminates any potential unfair
discrimination across different account types, consistent with the
requirement under Section 17A(b)(3)(F) of the Exchange Act that
OCC's rules not be designed to permit unfair discrimination in the
use of OCC. 15 U.S.C. 78q-1(b)(3)(F).
\34\ OCC also notes that all Clearing Members would continue to
be treated the same under Rule 909(d) with respect to OCC's role in
settling broker-to-broker transactions, which OCC believes promotes
consistency with Section 17A(b)(3)(F) of the Exchange Act
(prohibiting OCC's rules from being designed to permit unfair
discrimination in the use of OCC).
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OCC believes that no longer requiring that Clearing Members must
maintain records of both parties to a trade (pursuant to the proposed
changes to Rule 208) is consistent with Section 17A(b)(3)(I) because
OCC would no longer provide the counterparty information of trades to
Clearing Members party to those trades. Such information is not
required for clearing and settlement purposes, and providing this
information would result in OCC developing and supporting functionality
that would impact OCC's implementation of Ovation. In turn, by not
providing counterparty information, OCC would help ensure that its
Rules do not inappropriately burden competition among its participants
by forcing Clearing Members to develop and support functionality not
necessary for the clearing and settlement of trades.\35\
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\35\ 15 U.S.C. 78q-1(b)(3)(I).
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OCC believes that the proposed changes to clarify that a Giving-Up
Clearing Member is not required to provide instructions that identify
the designated account of the Given-Up Clearing member serves the
protection
[[Page 79984]]
of investors and the public interest consistent with Section
17A(b)(3)(F) of the Exchange Act by providing more control to Clearing
Members in allocating give-ups. For example, a Given-Up Clearing Member
will have control to designate the account to which positions should be
allocated and a Giving-Up Clearing Member will no longer be required to
designate the specific account when it may or may not know the correct
account. OCC believes that this would protect investors by reducing
potential operational risk arising from a Giving-Up Clearing Member
selecting the incorrect account of the Given-Up Clearing Member. This
change would also provide a more efficient means for Giving-Up Clearing
Members to ensure positions are allocated to the desired account, which
efficiencies OCC believes helps removes impediments to and perfect the
mechanism of a national system for the prompt and accurate clearance
and settlement of securities transactions.\36\
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\36\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Exchange Act \37\ 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. OCC does not believe that the proposed rule changes related to
discontinuing OCC's settlement of fees and commissions for Clearing
Member CMTA arrangements, elimination of the unused associated Market
Maker account subtype, and rendering OTC option services inoperative
would impact or impose any burden on competition. Neither of these
services have been used by Clearing Members for at least six years, and
the proposed changes would apply equally to all Clearing Members.
Regarding the proposed rule change to no longer require a Clearing
Member to keep records of its counterparties to confirmed trades, OCC
believes that this change will remove any burden on competition that
could arise from Clearing Members developing solutions to support
functionality not required for clearing and settlement purposes. In
that regard, OCC believes that this proposed rule change promotes
greater consistency with Section 17A(b)(3)(I) of the Exchange Act.\38\
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\37\ 15 U.S.C. 78q-1(b)(3)(I).
\38\ Id.
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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 clearing agencies, and
either would not impact or impose a burden on competition or would help
alleviate potential burdens on competition.
(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/rules-regulations/self-regulatory-organization-rulemaking">https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking</a>);
or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#146661787139777b7979717a6067546771773a737b62"><span class="__cf_email__" data-cfemail="a6d4d3cac38bc5c9cbcbc3c8d2d5e6d5c3c588c1c9d0">[email protected]</span></a>. Please include
file number SR-OCC-2024-013 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-2024-013. 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/rules-regulations/self-regulatory-organization-rulemaking">https://www.sec.gov/rules-regulations/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/Company-Information/Documents-and-Archives/By-Laws-and-Rules">https://www.theocc.com/Company-Information/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-2024-013 and
should be submitted on or before October 22, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
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\39\ 17 CFR 200.30-3(a)(12).
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Vanessa Countryman,
Secretary.
[FR Doc. 2024-22412 Filed 9-30-24; 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.