Notice2024-27012
Self-Regulatory Organizations; Options Clearing Corporation; Order Approving 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
November 20, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 224 (Wednesday, November 20, 2024)</title>
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[Federal Register Volume 89, Number 224 (Wednesday, November 20, 2024)]
[Notices]
[Pages 91825-91831]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-27012]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101621; File No. SR-OCC-2024-013]
Self-Regulatory Organizations; Options Clearing Corporation;
Order Approving 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
November 14, 2024.
I. Introduction
On September 13, 2024, The Options Clearing Corporation (``OCC''),
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
make modifications to its By-Laws and Rules primarily to discontinue
certain outmoded or unused products and services (``Proposed Rule
Change''). The Proposed Rule Change was published for comment in the
Federal Register on October 1, 2024.\3\ The Commission has not received
any comments on the Proposed Rule Change. For the reasons discussed
below, the Commission is approving the Proposed Rule Change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 101189 (Sept. 25, 2024),
89 FR 79978 (Oct. 1, 2024) (File No. SR-OCC-2024-013) (``Notice'').
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II. Description of the Proposed Rule Change
OCC is a clearing agency that clears a number of transactions
including standardized equity options listed on national securities
exchanges and registered with the Commission, stock loans, and
futures.\4\ Since 2000, for its core clearing, risk management, and
data management applications, OCC has relied on a platform it calls
``ENCORE.'' ENCORE operates in on-premises data
[[Page 91826]]
centers.\5\ Among other things, ENCORE is OCC's system for receiving
trade and post-trade data on a transaction by transaction basis,
maintaining clearing member positions, calculating margin and clearing
fund requirements, and providing reporting to OCC staff, regulators and
clearing members.\6\ OCC plans to discontinue ENCORE and migrate its
functions to a cloud-based successor clearing system that it calls
Ovation.\7\
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\4\ All capitalized terms not defined herein have the same
meaning as set forth in the OCC By-Laws and Rules, available 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>.
\5\ Securities Exchange Act Release No. 96113 (October 20,
2022), 87 FR 64824, 64825 (Oct. 26, 2022) (File No. SR-OCC-2021-
802).
\6\ Notice, 89 FR at 79978-79.
\7\ Id.; Notice, 89 FR at 79979.
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As part of the transition to Ovation, OCC is determining which
features of ENCORE will migrate to Ovation.\8\ The Proposed Rule Change
describes certain functions that OCC proposes discontinuing because
they are outmoded, unused,\9\ or no longer support OCC's ability to
clear and settle transactions. In this category, under the Proposed
Rule Change, OCC would (i) no longer facilitate the settlement of
commissions and fees owed between Clearing Members that are party to a
Clearing Member Trade Assignment (``CMTA'') arrangement; (ii) delete
rule provisions related to over-the-counter (``OTC'') option products;
\10\ (iii) delete from its rules the ``associated Market Maker''
account subtype; and (iv) no longer require that Clearing Members
maintain records of both parties to a trade.
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\8\ Id. at 79978-79.
\9\ Id. at 79979.
\10\ An OTC option is an option contract with variable terms
that are negotiated bilaterally between the parties to such
transaction (subject to any specific requirements applicable to such
products as set forth in the By-Laws and Rules), and that is
affirmed through the facilities of an OTC Trade Source and submitted
to OCC for clearing as a confirmed trade. OCC By-Laws, Article I.
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The Proposed Rule Change also includes three sets of additional
changes that OCC proposed to make in connection with the transition to
Ovation. In this category, OCC proposes to (i) allow Clearing Members
to ``give-up'' one or more positions in cleared contracts that are
futures or futures options to another Clearing Member without
designating the specific account of the Given-Up Clearing Member to
which such positions must be allocated; (ii) categorize a trade as an
opening transaction when an opening or closing indicator is not
included on a trade; and (iii) conform rules related to the discharge
of broker-to-broker settlement obligations to current practice.
A. Discontinuing Existing Functions
i. Discontinuing the Facilitation of Commissions and Fees Between CMTA
Clearing Members
CMTA arrangements allow a Clearing Member that executed a
securities options trade (Executing Clearing Member), to send the trade
directly through OCC to another Clearing Member (Carrying Clearing
Member) for clearance and settlement.\11\ Clearing Members generally
use CMTA arrangements when they execute transactions for correspondent
brokers that custody their assets with separate Carrying Clearing
Members or execute transactions for an institutional customer that has
a prime brokerage arrangement with a separate Clearing Member.\12\
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\11\ Securities Exchange Act Release No. 88974 (May 29, 2020),
85 FR 34468, 34469 (June 4, 2020) (File No. SR-OCC-2020-005).
\12\ Securities Exchange Act Release No. 49841 (June 9, 2004),
69 FR 34207, 34207 (June 18, 2004) (File No. SR-OCC-2003-011).
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Currently, subject to certain conditions, Clearing Members that are
parties to a CMTA arrangement may opt to have OCC facilitate the
settlement of fees and commissions for transactions pursuant to the
CMTA arrangement. However, no Clearing Member has used the service
since 2016, nor have any expressed interest in using it in the
future.\13\ Accordingly, OCC proposes to eliminate it.
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\13\ Notice, 89 FR at 79979.
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To effect the discontinuation of the service, OCC proposes a number
of changes to its Rules. Specifically, OCC proposes deleting Rules
407(a)(2) and 504(e), as well as certain text in Rule 504(g).\14\
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\14\ OCC proposes to replace the deleted text in Rule 504(e)
with the word Reserved.
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Rule 407(a)(2) allows Clearing Members that are parties to a CMTA
arrangement 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 the CMTA arrangement. It also discusses
Clearing Members' requirements \15\ and restrictions \16\ for electing
to have OCC settle the applicable fees and commissions for transactions
under the CMTA as well as guidance as to when the Clearing Members'
election to have OCC settle applicable fees and commissions under the
CMTA arrangement is effective.
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\15\ Specifically, OCC requires Clearing Members making such an
election to specifically register that aspect of their CMTA
arrangement with OCC. Clearing Members making such election
authorize (1) the Executing Clearing Member to enter into OCC's
systems fee and commission information with respect to transfers
effected pursuant to the CMTA arrangement between the Clearing
members, subject to such system checks as may be established by OCC
from time to time and (2) OCC to calculate and settle, in accordance
with the applicable provisions of Rule 504, the aggregate of such
entered amounts on the next following business day without any
further authorization or consent of the Carrying Clearing Member.
\16\ Rule 407 notes that any entries of commission and fee
information under Rule 407(a)(2) shall be solely fees and
commissions related to transfers effected pursuant to the Clearing
Members' CMTA arrangement and for no other purposes.
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Rule 504(e) provides 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 their CMTA
registration authorizes OCC to effect such settlements.\17\
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\17\ Further, Rule 504(e) also indicates how OCC determines the
aggregate amounts to be settled, warns that OCC is not obligated to
validate the accuracy of information input into OCC's systems to
determine settlement amounts, indicates when OCC effects settlement,
and confirms that OCC settlement facilitation under the CMTA
arrangement does not require the Carrying Clearing Member to give
any additional authorization or consent and that OCC does not have
any role in resolving disputes between the Carrying Clearing Member
and the Executing Clearing Member regarding these settlements. OCC
would replace the text of Rule 504(e) with the word ``Reserved.''
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Finally, certain text in Rule 504(g) indicates that OCC has 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. The Proposed Rule Change
would delete this text but leave the remainder of Rule 504(g)
untouched.
ii. Deleting Provisions Related to Clearing and Settling OTC Options
OCC's current Rules and By-Laws are designed to support the
clearing and settling of OTC options.\18\ However, OCC has only ever
cleared OTC options based on the S&P 500 index,\19\ and has not cleared
and settled an OTC option since 2014. OCC does not currently have any
open interest in OTC options and OCC's Clearing Members have not
expressed interest in clearing OTC options with OCC in the future.\20\
As such, OCC proposes removing all provisions from its By-Laws and
Rules related to clearing and settling OTC options.\21\
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\18\ Securities Exchange Act Release No. 68434 (Dec. 14, 2012),
77 FR 75243 (Dec. 19, 2012) (File No. SR-OCC-2012-14).
\19\ Notice, 89 FR at 79980.
\20\ Id.
\21\ Id. OCC indicates that it would submit a proposed rule
change to the Commission as necessary in the event that it decides
to support the clearance and settlement of OTC Options in the
future. Id.
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[[Page 91827]]
To effect this change, OCC proposes deleting from the By-Laws the
definitions for ``OTC option,'' ``OTC index option,'' ``OTC Trade
Source,'' ``OTC Trade Source Rules,'' and ``Backloaded OTC Option.''
The Proposed Rule Change would also delete text in provisions of the
By-Laws and Rules that reference the above terms or that are otherwise
related to OCC's clearance and settlement of OTC options. As a result,
the following provisions in the By-Laws would have relevant OTC-related
terms deleted from them (or, where indicated, be deleted in their
entirety): Article I; \22\ Article VI, Section 1, Interpretation and
Policies .01(a); Article VI, Section 3, Interpretations and Policies
.09 (deleted in its entirety); Article VI, Sections 10(b) and (g);
Article VI, Sections 27(a) and (b); Article XVII, Introduction; Article
XVII, Definitions, Section 1; \23\ Article XVII, Section 3(h); Article
XVII, Section 3, Interpretation and Policies .01 (deleted in its
entirety); Article XVII, Section 4(a)(2); Article XVII, Section 5(a);
and Article XVII, Section 6 (deleted in its entirety).
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\22\ OCC proposes deleting definitions for ``OTC Index Option
Clearing Member'' and ``Origination Date.'' Additionally, OCC
proposes deleting text from the definitions for ``Class,''
``Clearing Member,'' ``Confirmed Trade,'' ``Index Multiplier,''
``Index Value Determinant,'' ``Trade Date,'' and ``Variable Terms''
that discusses the definitions in the context of OTC Options or that
is related to OTC Options. As a result of the removal of provisions
related to OTC Options, the Proposed Rule change would also delete
text from Interpretation and Policy .01 to Section C of Article I
that indicates 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 OCC's clearing activities into
OTC options. Id. at 79980 n.11.
\23\ OCC proposes deleting text related to OTC options in the
definitions for ``Class of Options,'' ``Current Underlying Interest
Value; Current Index Value,'' ``Expiration Date,'' ``Expiration Time
(deleted entirely),'' ``Reporting Authority,'' and ``Series of
Options.''
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Likewise, the following provisions in the Rules would have relevant
OTC-related terms deleted from them (or, where indicated, be deleted in
their entirety): Rule 201(b)(6) (deleted in its entirety); Rules
401(a), (a)(1)(i), (b), (d), (e), (f), and (g); Rule 405; Rule 406;
Rule 407(l) (deleted in its entirety); Rule 408(a); Rules 611(a), (b),
and (d) (deleted in its entirety); Rule 801(b); Rule 803 Interpretation
and Policy .01; Rule 804; Rule 1003 Interpretation and Policy .02
(deleted in its entirety); Rule 1104 Interpretation and Policy .03
(deleted in its entirety); Rule 1105; Rule 1106(e)(2) (deleted in its
entirety); Rule 1106 Interpretation and Policy .01; Chapter XVIII of
the Rules, Introduction; Rules 1804(b) and (c); and Rule 1804
Interpretation and Policy .03 (deleted in its entirety).
iii. Eliminating the Associated Market Maker Sub-Account Type
OCC currently allows its Clearing Members to use combined market
maker accounts. OCC's rules provide for three types of combined market
maker accounts: a combined account limited to Market-Makers that are
neither Proprietary Market-Makers \24\ nor Associated Market-Makers;
\25\ a combined account limited to Proprietary Market-Makers; and a
combined account limited to Associated Market-Makers.\26\
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\24\ A Proprietary Market-Maker is a Market-Maker that is (A) a
non-customer of such Clearing Member or (B) a Related Person of such
Clearing Member that (i) is not a customer of such Clearing Member
for purposes of Rule 15c3-3 of the Securities and Exchange
Commission, (ii) does not carry the accounts of persons who are
customers of such Market-Maker for purposes of Rule 15c3-3, and
(iii) has consented to be treated as a proprietary Market-Maker for
purposes of the By-Laws and Rules. This term includes any
participant, as such, in an account that is not required to be
segregated under Section 4d of the Commodity Exchange Act of which
10% or more is owned by a proprietary Market-Maker.
\25\ An Associated Market-Maker is 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.
\26\ OCC By-Laws, Article VI, Section 3, Interpretation and
Policy .06. The Commission has previously acknowledged that Clearing
Members may find these accounts attractive because positions in
these accounts can offset one another in a manner that may lead to
lower margin requirements. Securities Exchange Act Release No. 33492
(Jan. 19, 1994), 59 FR 3896, 3897 n.11 (Jan. 27, 1994) (File No. SR-
OCC-90-11).
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Currently, Clearing Members do not use the Associated Market-Maker
sub-account type. Thus, OCC proposes deleting references to this sub-
account type from its By-Laws.\27\ To effect this change, the Proposed
Rule Change would delete the definition for Associated Market-Maker
from Article I of the By-Laws. It would also remove from the By-Laws
language related to Associated Market-Makers and the accounts their
trades may be included in from Article VI, Section 3(c), Interpretation
and Policy .03, and Interpretation and Policy .06. Finally, the
Proposed Rule Change would replace a reference to Section 3(i) with a
reference to Section 3(c) in the first sentence of Interpretation and
Policy .06. As a result of the changes, OCC's By-Laws would provide for
only two combined market-maker accounts going forward--one limited to
Market-Makers that are not proprietary Market-Makers and one limited to
Proprietary Market-Makers.
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\27\ Notice, 89 FR at 79982.
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iv. Recordkeeping Requirements
OCC's rules currently require Clearing Members to maintain a record
of the Purchasing Clearing Member and the Writing Clearing Member to
each confirmed trade.\28\ Before electronic trading was adopted, this
requirement helped OCC reconcile counterparty settlement obligations
and efficiently clear and settle confirmed trades, which aided OCC in
avoiding settlement delays and disputes.\29\
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\28\ Under Rule 208, Clearing Members must keep records showing
all confirmed trade data required by OCC's By-Laws and Rules
including confirmed trade information reported to OCC under Rule
401. OCC Rules, Rule 208. Rule 401 requires that confirmed trades
include the identity of the Purchasing Clearing Member and the
Writing Clearing Member to the transaction. OCC Rules, Rule
401(a)(1)(i).
\29\ Notice, 89 FR at 79980.
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With the adoption of electronic trading, OCC no longer needs
Clearing Members to keep a record of the Purchasing Clearing Member and
the Writing Clearing Member to each transaction.\30\ OCC's role as a
CCP further diminishes the need for this requirement because OCC
novates all confirmed trades in options contracts so that it becomes
the buyer to every seller and the seller to every buyer. As such, the
original counterparty information in transactions is not relevant or
necessary in respect of OCC's clearance and settlement process.\31\
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\30\ Id.
\31\ Id. at 79981. Additionally, OCC asserts that configuring
Ovation to maintain such records would require OCC to invest
significant resources that could impact Ovation's release timeline.
Id. at 79980.
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OCC proposes no longer requiring that Clearing Members keep records
of the Purchasing Clearing Member and the Writing Clearing Member to
transactions. To accomplish this, OCC proposes adding an exception to
its Rule 208 so that it would require only that Clearing Members 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.
B. Miscellaneous Changes
As noted above, OCC also proposes three miscellaneous changes to
its By-Laws and Rules. First, the Proposed Rule Change would allow
Clearing Members to ``give up'' one or more positions in cleared
contracts that are futures or futures options to another
[[Page 91828]]
Clearing Member without designating the specific account of the Given-
Up Clearing Member to which such positions must be allocated in order
to better facilitate give-up allocations to the appropriate account.
Second, OCC's amendments would categorize a trade as an opening
transaction when an opening or closing indicator is not included on a
trade for an options or futures contract to ensure that an existing
position is not inadvertently closed out. Third, OCC proposes changes
related to the discharge of broker-to-broker settlement obligations to
better reflect its current practice.\32\
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\32\ Id. at 79979.
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i. Designating the Appropriate Given-Up Clearing Member Account
Similar to the CMTA arrangements described above, a second way that
OCC provides flexibility with respect to which broker executes a
transaction is through give-up transactions.\33\ Rule 408 allows for
one or more positions in cleared contracts to be allocated from a
designated account of a Giving-Up Clearing Member to a designated
account of a Given-Up Clearing Member. Mechanically, these transactions
are initiated post-trade by the Giving-Up Clearing Member by
instructing OCC to move a position in one of its accounts to the
designated account of the Given-Up Clearing Member. The Giving-Up
Clearing Member may designate the Given-Up Clearing Member's account to
which it would like to allocate positions. Currently, this allocation
process is only available for positions in futures and options on
futures cleared and settled by OCC.\34\
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\33\ Securities Exchange Act Release No. 85779 (May 6, 2019), 84
FR 20689 (May 10, 2019) (File No. SR-OCC-2019-003).
\34\ Notice, 89 FR at 79981.
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OCC proposes changing which Clearing Member must designate the
account to which OCC should allocate given-up positions from the
Giving-Up Clearing Member to the Given-Up Clearing Member. OCC believes
this change will help reduce the risk of positions being transferred to
an incorrect account because it would provide the Given-Up Clearing
Member with more control over where positions it executes ultimately
are transferred.\35\ To do this, OCC would delete certain references to
designated accounts in Rules 408(a) and (b). Currently, Rule 408(a)
provides that positions may be allocated to a designated account of a
Given-Up Clearing Member. OCC proposes deleting the reference to a
designated account so that Rule 408(a) provides that positions may be
allocated to a Given-Up Clearing Member. Rule 408(b) contemplates
instructions to allocate positions from a designated account of the
Giving-Up Clearing Member to a designated account of the Given-Up
Clearing Member. Under OCC's proposal, the revised rule text would
instead contemplate instructions to allocate positions from a
designated account of the Giving-Up Clearing Member to a Given-Up
Clearing Member. OCC also proposed to add text to Rule 408(b)
indicating that, if certain conditions are met, the Given-Up Clearing
Member may designate an account to which the allocation will be made.
Once the Given-Up Clearing Member designates an account, OCC will
adjust the positions in the respective designated accounts of the
Giving-Up and Given-Up Clearing Members in accordance with the
allocation instruction.
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\35\ Id.
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In line with current practice, the Proposed Rule Change would also
clarify that this allocation process is only available for futures and
options on futures. OCC would amend the title of Rule 408 to be
``Allocations of Positions for Futures and Futures Options'' rather
than just ``Allocations of Positions.'' Currently, Rule 408(a) provides
that give up allocations are available for cleared contracts. OCC's
proposal would clarify that one or more positions in cleared contracts
that are futures or futures options may be allocated in a give up
allocation. Similarly, in Rule 408(e), OCC proposes replacing the word
``options'' with ``futures options'' in multiple locations to clarify
that give-up allocations are only available for futures and options on
futures contracts.\36\
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\36\ Id.
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To remove duplicative text from Rule 408, OCC proposes deleting the
last sentence from Rule 408(b), which currently provides that if the
Giving-Up Clearing Member and the Given-Up Clearing Member are not
parties to an allocation agreement registered with OCC, then OCC 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.\37\
OCC believes this rule text is already covered elsewhere in Rule
408.\38\
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\37\ Id.
\38\ Id. As discussed above, proposed Rule 408(b) would indicate
that OCC will adjust positions in the respective designated accounts
of the Giving-Up and Given-Up Clearing Members in accordance with an
allocation instruction only after the Given-Up Clearing Member
designates the account to which the allocation instruction will be
made. Moreover, Rule 408(d) would provide that if the Given-Up
Clearing Member has rejected or not provided OCC with notice of its
affirmative acceptance of an allocation at or before the deadline
prescribed by OCC, the position(s) that is (are) the subject of such
allocation instruction shall remain in the account of the Giving-Up
Clearing Member, which shall be responsible for all settlement and
other obligations in respect thereof, unless the position is
transferred or adjusted pursuant to other provisions of the By-Laws
and Rules.
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Similarly, OCC proposes removing a reference to allocation
agreements in Rule 408(b) because that reference is duplicative of Rule
408(d).\39\ Rule 408(b) requires the Giving-Up Clearing Member and the
Given-Up clearing Member to be parties to an allocation agreement
registered with OCC before OCC is required to allocate positions
pursuant to a give-up transaction. OCC Rule 408(d), however, provides
that the Given-Up Clearing Member is responsible for all settlement and
other obligations in respect of each position that has been allocated
to one of its accounts pursuant to a its acceptance of an allocation
instruction. Further, under Rule 408(c) registration of an allocation
agreement functionally is notice of affirmative acceptance of an
allocation.\40\ In OCC's view, because of Rule 408(c), there is no need
for this separate requirement in Rule 408(b).
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\39\ Notice, 89 FR at 79981.
\40\ Rule 408(c) provides that the registration of an allocation
agreement constitutes notice to OCC that the Giving-Up Clearing
Member has been authorized by the Given-Up clearing Member to
allocate positions to an account of the Given-Up Clearing Member
without further action by the Given-Up Clearing Member.
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OCC also proposes removing duplicative text from Rule 408(d) to
clarify Rule 408.\41\ Currently, Rule 408(d) contains references to
registered allocation agreements alongside references to acceptances of
allocation instructions. For instance, 408(d) indicates that the Given-
Up Clearing Member shall be responsible for all settlement and other
obligations in respect of each position that has been allocated to one
of its accounts pursuant to a registered allocation agreement or
pursuant to its acceptance of an allocation instruction. Rule 408(d)
also provides that, if there is not a registered allocation agreement
on file with OCC or the Given-Up Clearing Member has rejected or not
timely provided OCC with notice of its affirmative acceptance of an
allocation, the relevant position will remain in the account of the
Giving-Up Clearing Member. As noted above, registration of an
allocation agreement is functionally the same as notice of affirmative
acceptance of an allocation. Thus, referring to allocation
[[Page 91829]]
agreements in addition to acceptance of allocation instructions is
duplicative. As such, OCC proposes removing references to allocation
agreements in Rule 408(d).\42\
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\41\ Notice, 89 FR at 79981.
\42\ Notice, 89 FR at 79981.
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ii. Default Treatment for Certain Confirmed Transactions
OCC currently accepts and novates confirmed transactions in
options, sent to OCC by an options exchange, irrespective of whether
there is an indication that the transaction is either an opening or
closing transaction. In practice, if the transaction is not identified
as either an opening or closing transaction, then OCC treats it as an
opening transaction.
OCC proposes to reflect this current practice in its rules.\43\
Rule 401, Interpretation and Policy .01 already provides that, in the
case of futures, trade information submitted by an Exchange need not
identify a transaction as opening or closing. It also indicates that if
trade information submitted by an Exchange for a futures trade does not
identify a transaction as opening or closing, OCC will treat all
purchase and sale transactions in futures in accounts other than Market
Maker accounts as opening transactions. OCC proposes to broaden the
application of Rule 401, Interpretation and Policy .01 to encompass
options as well as futures.
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\43\ Id.
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OCC also proposes to broaden the scope of Rule 401, Interpretation
and Policy .01 to apply to Market-Maker accounts. Currently, Rule 401,
Interpretation and Policy .01 does not apply to purchase and sale
transactions in futures and options in Market Maker accounts. OCC
proposes removing this limitation because it believes that the practice
of treating unidentified trades as opening transactions is
operationally safer because it helps avoid the unintentional closure of
existing positions, irrespective of whether the specific unidentified
trade is in a Market Maker account or not.\44\
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\44\ Id. at 79982.
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iii. Broker-Broker Settlement Obligations
OCC proposes two changes related to its broker-to-broker settlement
obligations to align its rules with its practices. Ordinarily,
settlement of exercise and assignment activity occurs through OCC's
correspondent clearing corporation, the National Securities Clearing
Corporation (``NSCC'') pursuant to OCC's Rule 901.\45\ In certain
circumstances, such as when an underlying security is not CCC-
eligible,\46\ OCC directs that settlement will occur on a broker-to-
broker basis pursuant to Rules 903-912. Under OCC Rule 909, when
settlement is not made through the correspondent clearing corporation,
for example when broker-broker settlement is directed, the Delivering
Clearing Member and the Receiving Clearing Member must send notices to
OCC as to the number of units of the underlying security delivered and
the amount received. Under OCC Rule 909(d), when a Delivering or
Receiving Clearing Member submits to OCC notice of a delivery, payment,
or receipt of delivery or payment, and the contra Clearing Member does
not respond to such notice within two business days, the contraparty's
failure to respond constitutes acknowledgement to OCC that the
obligation has been settled as indicated in the submitting Clearing
Member's notice, provided that the designated delivery date has
occurred. However, OCC's current practice differs from this provision
in Rule 909. Rather, when OCC directs broker-broker settlement it also
indicates 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 Delivering and
Receiving Clearing Members will be delayed until OCC designates a new
exercise settlement date, settlement method, and/or settlement
value.\47\
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\45\ See Interpretation and Policy .02 to OCC Rule 901.
\46\ Id. The term CCC-eligible means that securities contracts
in the underlying security arising from the exercise or maturity of
a cleared security are eligible for settlement through the
Continuous Net Settlement Accounting Operation of NSCC. OCC By-Laws,
Article I, Section C.6.
\47\ Taking such action is allowed under Article VI, Section 19
of the By-Laws.
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The Proposed Rule Change would amend Rule 909 to align the Rule
with current practice. Specifically, OCC would amend Rule 909(d) to
provide that OCC will construe a contraparty's failure to respond to
indicate that the obligation is unsettled 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.
Separately, OCC Rule 909 currently requires Clearing Members to
submit notices indicating the number of units of the underlying
security delivered (received) and the amount received (paid) therefor
for transactions not settled via NSCC. In practice, however, the amount
received or paid is systematically determined at OCC rather than being
specified by the Clearing Members.\48\ Therefore, OCC proposes removing
``and the amount received (paid)'' from the text of Rule 909.
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\48\ OCC states that the practice of systematically calculating
cash amounts helps OCC avoid processing notices entered by Clearing
Members that may be inaccurate. See Notice, 89 FR at 79982.
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III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act requires the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
the proposed rule change is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to the
organization.\49\ Under the Commission's Rules of Practice, the
``burden to demonstrate that a proposed rule change is consistent with
the [Act] and the rules and regulations issued thereunder . . . is on
the self-regulatory organization [`SRO'] that proposed the rule
change.'' \50\ The description of a proposed rule change, its purpose
and operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\51\ and any failure of an
SRO to provide this information may result in the Commission not having
a sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Act and the applicable rules and
regulations.\52\ Moreover, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\53\
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\49\ 15 U.S.C. 78s(b)(2)(C).
\50\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\51\ Id.
\52\ Id.
\53\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
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After carefully considering the Proposed Rule Change, the
Commission finds that the Proposed Rule Change is consistent with
Section 17A(b)(3)(F) of the Act \54\ and Rule 17Ad-22(e)(21).\55\
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\54\ 15 U.S.C. 78q-1(b)(3)(F).
\55\ 17 CFR 240Ad-22(e)(21).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Under Section 17A(b)(3)(F) of the Act, OCC's rules, among other
things, must be ``designed to promote the prompt and accurate clearance
and settlement of securities transactions and, to the extent
applicable, derivative agreements,
[[Page 91830]]
contracts, and transactions.'' \56\ Based on the Commission's review of
the record, and for the reasons discussed below, OCC's proposed rule
change is consistent with Section 17A(b)(3)(F).
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\56\ 15 U.S.C. 78q-1(b)(3)(F).
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OCC proposes amending its rules to discontinue a number of existing
functions that are outmoded or unused. As described above, OCC would no
longer offer services through which it facilitates the settlement of
commissions and fees owed between Clearing Members that are party to a
CMTA arrangement because Clearing Members have neither expressed
interest in using this service nor, since 2016, have they used it.\57\
OCC would cease clearing and settlement services with respect to OTC
options because it has not cleared or settled an OTC option since 2014,
its Clearing Members have not expressed interest in OCC doing so in the
future, and it does not currently have any open interest in OTC
options.\58\ OCC's amendments would also discontinue the Associated
Market-Maker account subtype because its Clearing Members do not use
it.\59\ OCC also proposes to eliminate the requirement that Clearing
Members maintain records of both parties to a trade because the
original counterparty information in transactions is not relevant or
necessary in respect of OCC's clearance and settlement process.
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\57\ Notice, 89 FR at 79979.
\58\ Id. at 79980.
\59\ Id. at 79982.
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Discontinuing services no longer in use, and the rules related to
such services, removes unnecessary complexity from OCC's rules without
impeding the clearance or settlement of securities transactions.
Similarly, removing from its rules obligations on Clearing Members that
are no longer necessary to support OCC's ability to clear and settle
transactions, such as the obligation for Clearing Members to maintain
unnecessary records, reduces complexity without impeding OCC's
clearance and settlement activities. Reducing complexity would also
improve the clarity of OCC's rules.
As described above, OCC also proposes changes to improve the
accuracy of its clearance and settlement of transactions. Specifically,
OCC proposes requiring the Given-Up Clearing Member, rather than the
Giving-Up Clearing Member, to designate an account to which the
allocation in a give up transaction will be made. This proposed change
would provide a Given-Up Clearing Member with more control over its own
account and could help reduce the risk that such a Clearing Member
would receive positions it does not want.\60\ Separately, OCC proposes
to treat confirmed transactions in options and futures as opening
transactions where the trade information provided to OCC does not
indicate whether the transaction is an opening or closing transaction.
This would reduce the risk of an unintentional closure of existing
positions. By avoiding mistakenly closing existing positions and
reducing the risk that a transaction will be transferred to the wrong
account, OCC's proposed changes promote the accurate clearance and
settlement of securities transactions.
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\60\ As noted above, OCC also proposes to remove duplicative
provisions in the rules governing such transactions.
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Finally, OCC proposes to amend its rules to no longer construe a
Clearing Member's failure to act as acknowledgement of settlement in
broker-to-broker transactions. Rather, OCC would not construe such a
transaction to have settled until either it receives notice from both
Clearing Members of their mutual agreement to settle the obligation or
OCC settles the positions pursuant to its policies and procedures. This
could reduce potential inaccuracies in OCC's settlement of the
contracts it clears, and would also be consistent with current
practice.\61\
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\61\ As discussed above, other proposed changes that align the
rules with current practice include clarifying that give-up
transactions are only available for futures and options on futures;
removing the requirement to include certain information in notices;
and defaulting to an opening transaction when certain trade
information do not indicate that a transaction is either an opening
or closing transaction.
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By removing the duplicative portions of Rule 408, OCC would improve
the clarity of its Rules,\62\ which in turn increases the likelihood
that its participants understand the methods available to clear and
settle transactions and how those methods function. Similarly, ensuring
that the rules align with current practice, in the ways discussed
above, helps prevent confusion by OCC's Clearing Members as to the
methods available to clear and settle transactions and how those
methods function. By preventing such confusion, OCC makes it more
likely that participants are able to efficiently and accurately execute
their transactions. As such, the Proposed Rule Change promotes the
prompt and accurate clearance and settlement of securities
transactions.
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\62\ OCC also proposes correcting an inaccurate reference to
Section 3 of its By-Laws, Paragraph I. This too increases the
clarity of its rules.
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The Proposed Rule Change is, therefore, consistent with the
requirements of Section 17A(b)(3)(F) of the Act.\63\
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\63\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(21)
Rule 17Ad-22(e)(21) requires OCC 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 . . . .''
\64\ Based on its review of the record, and for the reasons discussed
below, OCC's Proposed Rule Change is consistent with Rule 17Ad-
22(e)(21). When clearing agencies establish policies and procedures
that address Rule 17Ad-22(e)(21), the Commission has indicated that
they should ask whether their policies' and procedures' design meets
the needs of its participants and the markets it serves, particularly
with respect to choice of a clearance and settlement arrangement,
operating structure, scope of products cleared, settled, or recorded,
and use of technology and procedures.\65\
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\64\ 17 CFR 240.17Ad-22(e)(21).
\65\ Securities Exchange Act Release No. 78961, 81 FR 70786,
70841 (Oct. 13, 2016) (File No. S7-03-14).
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OCC's policies and procedures would meet the needs of its
participants and the markets it serves after its proposed
discontinuation of products and services its Clearing Members no longer
use. OCC proposes discontinuing its facilitation of the settlement of
commissions and fees owed between Clearing Members that are party to a
CMTA arrangement because Clearing Members have neither expressed
interest in using this service nor, since 2016, have they used it.\66\
OCC plans on no longer offering clearing and settlement services with
respect to OTC options because it has not cleared and settled an OTC
option since 2014, its Clearing Members have not expressed interest in
OCC doing so in the future, and it does not currently have any open
interest in OTC options.\67\ OCC also would discontinue the Associated
Market-Maker account subtype because its Clearing Members do not use
it.\68\ OCC is not obligated to offer these products and services.
Further, its Clearing Members' lack of interest in these products and
services suggests that they do not need them. As such, OCC's proposed
discontinuation of these products and services is consistent with the
requirements of Rule 17Ad-22(e)(21).\69\
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\66\ Notice, 89 FR at 79979.
\67\ Id. at 79980.
\68\ Id. at 79982.
\69\ 17 CFR 240.17Ad-22(e)(21).
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[[Page 91831]]
The Proposed Rule Change is, therefore, consistent with the
requirements of Rule 17Ad-22(e)(21).\70\
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\70\ 17 CFR 240.17Ad-22(e)(21).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act,
and in particular, Section 17A(b)(3)(F) of the Act \71\ and Rule 17Ad-
22(e)(21).\72\
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\71\ 15 U.S.C. 78q-1(b)(3)(F).
\72\ 17 CFR 240.17Ad-22(e)(21).
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It is therefore Oodered pursuant to Section 19(b)(2) of the Act
that the proposed rule change (SR-OCC-2024-013) be, and hereby is,
approved.\73\
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\73\ In approving the proposed rule change, the Commission
considered the proposal's impacts on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\74\
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\74\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-27012 Filed 11-19-24; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on November 20, 2024.
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.