Notice2024-28257
Self-Regulatory Organizations; The Options Clearing Corporation; Order Granting Approval of Proposed Rule Change, as Modified by Partial Amendment No. 1, by The Options Clearing Corporation Concerning Its Stock Loan Programs
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 3, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 89 Issue 232 (Tuesday, December 3, 2024)</title>
</head>
<body><pre>
[Federal Register Volume 89, Number 232 (Tuesday, December 3, 2024)]
[Notices]
[Pages 95878-95891]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-28257]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101754; File No. SR-OCC-2024-011]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Granting Approval of Proposed Rule Change, as Modified by Partial
Amendment No. 1, by The Options Clearing Corporation Concerning Its
Stock Loan Programs
November 26, 2024.
I. Introduction
On August 22, 2024, the Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2024-011 pursuant to Section 19(b) of the
Securities Exchange Act of 1934
[[Page 95879]]
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder. The proposed rule
change would address limitations in the structure of OCC's Stock Loan/
Hedge (``Hedge'') Program and Market Loan Program (together, the
``Stock Loan Programs'') by creating the framework for a single,
enhanced program designed to support current and future needs. On
September 3, 2024, OCC filed a partial amendment (``Partial Amendment
No. 1'') to the proposed rule change.\3\ The Commission published a
notice for public comment on the proposed rule change, as modified by
Partial Amendment No. 1 (hereafter ``the Proposed Rule Change''), in
the Federal Register on September 10, 2024.\4\ The Commission has
received no comments regarding the Proposed Rule Change. This order
approves the Proposed Rule Change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Partial Amendment No. 1, OCC corrected an error in
Exhibit 5A to SR-OCC-2024-011 without changing the substance of the
proposed rule change. Partial Amendment No. 1 does not materially
alter the substance of the proposed rule change or raise any novel
regulatory issues.
\4\ Securities Exchange Act Release No. 100930 (Sept. 4, 2024),
89 FR 73466 (Sept. 10, 2024) (File No. SR-OCC-2024-011) (``Notice of
Filing'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
OCC has historically operated two stock lending programs, the Hedge
Program and Market Loan Program, which, together, accounted for about
0.02% of OCC's total volume in 2023.\5\ In its capacity as a central
counterparty in administering these programs, OCC becomes the lender to
every borrower and the borrower to every lender and thus guarantees the
return of the full value of cash collateral to the Borrowing Clearing
Member and the return of the Loaned Stock (or value of that Loaned
Stock) to the Lending Clearing Member. OCC also offers additional
guarantees under the Market Loan Program, including dividend equivalent
payments and rebate payments. OCC's Rules and By-Laws govern OCC's
novation of cleared stock loan transactions and provide for processes
around stock loan initiation, recordkeeping, returns and recalls, and
risk management around stock loans of suspended Clearing Members.
---------------------------------------------------------------------------
\5\ Historical volume is available at <a href="https://www.theocc.com/market-data/market-data-reports/volume-and-open-interest/historical-volume-statistics">https://www.theocc.com/market-data/market-data-reports/volume-and-open-interest/historical-volume-statistics</a>.
---------------------------------------------------------------------------
OCC's current Hedge Program requires a certain set of processes
among balancing and reconciliation of transactions. The Market Loan
Program, by comparison, does not require the same processes because of
the difference in how transactions are initiated in that program. A
recent survey of Clearing Members participating in the Stock Loan
programs \6\ indicates that most firms have a significant spend for
stock loan post-trade and reconciliation processing.\7\ Based on such
survey responses, OCC believes that a service that can provide
operational efficiencies and further reduce manual processing and
operational risk would be well received.\8\ Additionally, the Hedge and
Market Loan Programs differ in their treatment of Canadian Clearing
Members. Specifically, a Canadian Clearing Member may participate in
the Hedge Program, but not the Market Loan Program because of rules
related to certain tax withholding obligations. Separately, OCC has
recognized that its current aggregate position-level recordkeeping
practices regarding these stock loan programs could be better aligned
with the current industry practice of contract-level recordkeeping.\9\
---------------------------------------------------------------------------
\6\ OCC provided survey results as confidential Exhibit 3B to
File No. SR-OCC-2024-011.
\7\ Notice of Filing, 89 FR 73471, n.31.
\8\ Id.
\9\ See Notice of Filing, 89 FR 73467-68. (``OCC aggregates all
stock loan positions and stock borrow positions of a Clearing Member
relating to the same Eligible Stock for reporting and margin
calculation purposes. OCC separately identifies stock loan and stock
borrow positions resulting from each of the Stock Loan Programs, and
such positions are not fungible with positions resulting from the
other program. Position aggregation in both Stock Loan Programs is a
legacy practice and does not follow industry-standard book-keeping
practices. Because of position aggregation, certain industry
standard post-trade activity must be performed bilaterally away from
OCC, such as re-rate transactions that change the rebate rate on an
individual loan.'')
---------------------------------------------------------------------------
OCC has expressed a desire to consolidate the Hedge Program and
Market Loan Program at some point in the future.\10\ The immediate
proposal is designed to support that initiative by making changes to
align the Hedge Program and Market Loan Program as well as changes to
address limitations across both Stock Loan Programs, such as aligning
to the industry practice of contract-level record keeping.
Specifically, OCC proposes to (i) align the Rules for and support
transactions under both Stock Loan Programs through contract-level
recordkeeping, revisions regarding re-matching matched book positions
in suspension across Stock Loan Programs, and revisions regarding mark-
to-market settlement accounts; (ii) conform the terms of Market Loans
cleared by OCC more closely to the provisions most commonly included in
stock loan transactions executed under standard loan market documents,
and provide a uniform guaranty of terms across Market Loans, regardless
of how those Market Loans are initiated under the enhanced program; and
(iii) clarify and amend processes around the participation of Canadian
Clearing Members and other types of Clearing Members in the Stock Loan
Programs. Separately, OCC proposes to reorganize, restate, and
consolidate provisions of its By-Laws and Rules governing the Stock
Loan Programs.
---------------------------------------------------------------------------
\10\ Notice of Filing, 89 FR 73469-70. OCC intends to eventually
decommission the Hedge Program through a phased program, after which
the Market Loan Program would become OCC's single Stock Loan
Program. The immediate proposal, however, does not contemplate the
removal of provisions supporting the Hedge Program from OCC's rules.
---------------------------------------------------------------------------
In proposing the immediate changes, OCC expressed the view that its
current technology modernization project (``Renaissance'') presents an
opportunity to address limitations in the structure of OCC's Stock Loan
Programs and enhance OCC's stock loan services to support current and
future needs.\11\
---------------------------------------------------------------------------
\11\ See Notice of Filing, 89 FR 73466. Further detail on
Renaissance is available at <a href="https://www.theocc.com/company-information/occ-transformation/clearing-risk-and-data-changes">https://www.theocc.com/company-information/occ-transformation/clearing-risk-and-data-changes</a>.
Renaissance includes the replacement of its current clearance and
settlement system (``ENCORE'') with a streamlined operational
framework for clearance and settlement (``Ovation''). See Notice of
Filing, 89 FR 73466, n. 6. The Proposed Rule Change is not legally
dependent on the planned technology changes.
---------------------------------------------------------------------------
A. Limitations of OCC's Current Stock Loan/Hedge and Market Loan
Programs
1. Position Aggregation
Within both Stock Loan programs, OCC maintains records of aggregate
positions, rather than following the industry practice of contract-
level recordkeeping. OCC calculates margin by aggregating stock loan
and borrow positions for the same Eligible Stock. However, stock loans
of the same Eligible Stock are not fungible between programs. As a
result, all post-trade activity for Hedge Loan positions is performed
bilaterally between the original counterparties. For example, the
original counterparty Clearing Members to Hedge Program loans must
resolve dividend payments or distributions bilaterally, away from OCC.
This process of position aggregation complicates margin calculation and
bookkeeping, and ultimately increases OCC's operational risk.
2. Offset and Re-Matching of Matched-Book Positions
Hedge Loan Clearing Members often maintain ``Matched-Book
Positions,'' meaning they hold an account with a
[[Page 95880]]
stock loan position to one Hedge Clearing Member as well as a borrow
position to another Hedge Clearing Member for the same or fewer shares.
If a Hedge Clearing Member with a matched book defaults, OCC may re-
match the loan and borrow positions to other Hedge Loan Clearing
Members to avoid price dislocation from manually buying in and selling
out of the offsetting positions of the defaulting Hedge Clearing
Member. However, such re-matching is not currently supported separately
in the Market Loan Program, and thus the loan and borrow positions of a
defaulting Hedge Clearing Member cannot be re-matched to a Market Loan
Clearing Member.
3. Stock Loan Initiation
Under the Hedge Program, Prospective Lending and Borrowing Clearing
Members first negotiate terms bilaterally before sending them to the
Depository Trust Company (``DTC'') for settlement, and DTC then sends a
specified number of shares and amount of cash collateral to OCC for
clearing and guarantee of performance.\12\ This process adds complexity
to balancing and reconciliation under the current Hedge Program.\13\
---------------------------------------------------------------------------
\12\ OCC currently limits settlement of daily mark-to-market of
cash collateral to the Clearing Member's firm account or combined
Market-Makers' account. See OCC Rule 2201(a).
\13\ See Notice of Filing, 89 FR 73467. On the other hand,
Market Loan transactions match on an electronic platform called a
Loan Market. Then the Loan Market sends the two separate linked
instructions to DTC detailing what stock and cash collateral should
move between accounts at OCC.
---------------------------------------------------------------------------
4. Scope of OCC's Guaranty
OCC guarantees the return of the collateral and borrowed stock of
both Hedge Program and Market Loan Program loans. However, for Market
Loan Program transactions, OCC also provides a limited guaranty of
substitute dividend and rebate payments based on instructions from the
Loan Market based on the amount of margin collected. OCC does not offer
the same guaranty for loans made under the Hedge Program, which creates
operational complexity.
5. Collateralization Rate
As part of clearing, OCC marks-to-market payments for cleared stock
loans on a daily basis. The payments are made between Clearing Members
based on the value of the loaned securities. However, the loans are
marked-to-market differently depending on whether they originated from
the Hedge Program or the Market Loan Program. In the Hedge Program,
loans are collateralized 100 or 102 percent, and the preferred rounding
is dependent on the bilateral Master Securities Loan Agreement
(``MSLA'') between the original counterparties. In the Market Program,
all loans are collateralized 102 percent, rounding to the nearest
dollar. In both programs, settlements are generally combined and netted
against other OCC settlement obligations, and Clearing Member positions
are factored into that Clearing Member's overall margin and guaranty
fund contribution.
6. Dividends and Distributions
OCC ordinarily processes Market Loan Program dividend equivalent
payments through DTC's Dividend Service. If, however, a Loan Market
notifies OCC that the dividend or distribution for a particular Market
Loan is not tracked by DTC's Dividend Service (or if OCC uses its
discretion to remove a Market Loan from the DTC Dividend Service), the
dividend equivalent payments are made through OCC's cash settlement
system the day after the expected payment date. For such dividend
payments, the Loan Market calculates the amount outside of DTC's
Dividend Service, and for non-cash dividends and distributions, the
Loan Market may set an equivalent cash settlement value for OCC to
administer. As part of clearing, OCC guarantees dividend equivalent
payments from a defaulting Clearing Member, but only to the extent OCC
has collected margin equal to such dividend equivalent according to the
instructions from the Loan Market. Additionally, OCC currently has no
responsibility to verify the accuracy of the Loan Market's calculation.
7. Termination of Stock Loans
Again, because of the differences in stock loan origination, OCC
handles stock loan terminations differently depending on whether they
are Hedge Loans or Market Loans. Hedge Loans are terminated through DTC
when: (1) a Borrowing Clearing Member instructs DTC to transfer a
specified quantity of Loaned Stock to the Lending Clearing Member in
exchange for payment of the settlement price from the Lending Clearing
Member, or (2) the Lending Clearing Member terminates all or part of
the loan with the Borrowing Clearing Member. Initiating returns through
DTC for the Hedge Program can break positions if the return
transactions are not coded properly.
As with dividend distributions, Market Loans are terminated via
instruction from a Clearing Member through the Loan Market to recall or
return Loaned Stock. The Loan Market then instructs OCC, OCC validates
the request, and OCC sends a pair of orders to DTC to initiate the
transfer.
Where a Clearing Member under either program fails to return the
stock or pay the settlement amount, the other counterparty may choose
to execute a ``buy-in'' or ``sell-out'' of the Loaned Stock. Neither of
the current Stock Loan Programs enables OCC to administer buy-ins or
sell-outs. After execution of the buy-in/sell-out, the initiating
Clearing Member provides notice to OCC and its counterparty for Hedge
Loans and to the Loan Market for Market Loans. Termination is complete
once OCC records the termination.
8. Canadian Clearing Members
Canadian Clearing Members may participate in the Hedge Program if
they appoint CDS Clearing and Depository Services Inc. (``CDS'') to act
as agent with DTC and the National Securities Clearing Corporation
(``NSCC'') to provide cross-border clearance and settlement with U.S.
counterparties. Canadian Clearing Members cannot participate in the
Market Loan Program.
Canadian Hedge Clearing Members are subject to additional
restrictions to participate in OCC's Hedge Program. Normally, federal
tax rules impose a 30% withholding on ``dividend equivalent'' payments
to non-U.S. persons for certain derivatives that reference U.S.
equities. OCC has no current tax withholding or reporting obligations
for Canadian Hedge Clearing Members, because substitute dividend
payments are handled bilaterally between Hedge Clearing Members.
Consequently, OCC requires that Canadian Hedge Clearing Members
establish that their activity will not result in the imposition of
taxes or withholding, and they are prohibited from entering into
transactions that would impose taxes or withholding.
B. Proposed Changes to OCC's Stock Loan Program Framework
1. Consolidation of the Stock Loan Programs
OCC proposes to consolidate its Stock Loan Programs into a single
stock loan program over the course of three phases. This Proposed Rule
Change covers the first and second phases. The third phase is not part
of this Proposed Rule Change and would require a separate filing with
the Commission.
The first phase would (1) amend the rules related to the Market
Loan Program to allow it to eventually become OCC's single stock loan
program, and (2) update the Hedge Program and Market Loan Program to
align with the implementation of
[[Page 95881]]
Ovation, OCC's new system for clearance and settlement. Such changes
include contract-level recordkeeping, re-matching matched book
positions in suspension across both Stock Loan Programs, and expanding
bilaterally-negotiated Market Loans. These changes are designed to
facilitate and encourage Hedge Clearing Members to submit new bilateral
stock loan transactions through the Market Loan Program.\14\ Hedge
Clearing Members would be required to provide the appropriate
documentation and certifications, similar to those required of Market
Loan Clearing Members, and to submit to certification testing before
utilizing the Market Loan program.\15\
---------------------------------------------------------------------------
\14\ Based on a survey of all Clearing Members who participate
in OCC's Stock Loan Programs (provided as confidential Exhibit 3B to
File No. SR-OCC-2024-011), members have expressed interest in being
able to have, for example, the rebate amounts calculated, settled,
and guaranteed by OCC--an expansion of services that necessarily
would be achieved by the migration from the Hedge Program to the
Market Loan Program. See Notice of Filing, 89 FR 73470, n.30. OCC
indicated that it anticipates that Clearing Members will be
motivated to migrate activity to the Market Loan Program because of
the expansion of such services and OCC's expanded guarantee under
the Market Loan Program. See Notice of Filing, 89 FR 73470.
\15\ OCC is not proposing to require business expansions for
Hedge Clearing Members, because they already are approved for stock
loan activity, and the business expansion for Market Loan Program
participation aims to verify proper subscription through a Loan
Market, which would no longer be necessary to participate in the
Market Loan Program.
---------------------------------------------------------------------------
During the second phase, OCC will announce that it will no longer
accept new loans through the Hedge Program, but will continue to
support existing Hedge Loans until they naturally terminate. To
facilitate this change, OCC proposes to adopt new Rule 2213(e)(2),
which would authorize OCC to stop accepting new Hedge Loans.
Additionally, OCC proposes to maintain its existing authority to
terminate outstanding Hedge Loans upon two business days' written
notice to Clearing Members based on several enumerated reasons, one of
which is OCC's impending termination of this line of business.\16\
Under proposed Rule 2213(e)(2), OCC's Chief Executive Officer or Chief
Operating Officer would be authorized to approve the decision for OCC
to cease accepting new Hedge Loans based on factors including, but not
limited to, the number of participants that are able to conduct
business under the Market Loan Program, the amount of transactions
flowing through the Market Loan Program, the proportion of loan
balances between the Stock Loan/Hedge Program and the Market Loan
Program, and feedback from members about when they expect to be ready
to migrate fully to the Market Loan Program. OCC is not proposing to
remove the rules related to the Hedge Program at this time.\17\
---------------------------------------------------------------------------
\16\ The relevant authority to terminate existing loans comes
from Section 2(c) of Article XXI of OCC's By-Laws. OCC proposes to
move the text of that section of its By-Laws to new Rule 2213(e)(1)
as part of the broader reorganization described herein.
\17\ OCC proposes, however, to amend its Rules to avoid
ambiguity by using ``Hedge Loan'' instead of ``Stock Loan'' when
referring to Stock Loans under the Hedge Program, unless in
reference to Stock Loans under either of the Stock Loan Programs,
consistent with the current definition of that term in Article I of
the By-Laws. See Notice of filing, 89 FR 73470.
---------------------------------------------------------------------------
2. Proposed Changes Across Both Stock Loan Programs
a. Contract-Level Recordkeeping. As stated in Section II.A.1,
above, OCC currently aggregates stock loan and borrow positions for the
same Eligible Stock, which is not the industry standard of contract-
level recordkeeping. To alleviate inaccuracies and, at times, lack of
information in OCC's bookkeeping practices, OCC proposes to eliminate
this legacy practice. Under the new contract-based approach, each stock
loan position or stock borrow position would be a distinct contract
recorded in each Clearing Member account. Every new recorded loan will
generate a new stock borrow position and stock loan position for the
number of shares lent and borrowed. By maintaining stock loan positions
and stock borrow positions at the contract level, OCC would be able to
record additional terms, such as (a) rebate rate; (b) whether the
rebate rate is a fixed or a floating value (and if floating the
interest rate benchmark); and (c) end date, if it is a term loan.
Clearing Members would not be required to submit such additional terms.
OCC would assume that no such terms exist, unless otherwise directed by
its Clearing Members. OCC believes that contract-level recordkeeping
would allow Clearing Members to see more precisely the contracts with
shares lent by lender and borrower.\18\
---------------------------------------------------------------------------
\18\ See Notice of filing, 89 FR 73477.
---------------------------------------------------------------------------
This contract-level recordkeeping would be implemented in OCC's
rules by proposed amendments to Article XXI, Section 2 (Hedge Program)
and Article XXIA, Section 5 (Market Loan Program) of OCC's By-Laws,
retained portions of which would migrate to become OCC Rules 2203 and
2206A, respectively. Under these proposed revisions, OCC would delete
the rules requiring the aggregation of positions and eliminate text
providing that OCC shall identify stock loan and stock borrow positions
resulting from Hedge Loans separately from positions resulting from
Market Loans. Because OCC proposes to eliminate position aggregation
altogether, the latter prohibition against aggregating positions across
programs would no longer be relevant.
As noted above, the proposed contract-level recordkeeping would
allow OCC to record additional terms at the contract level.
Specifically, OCC proposes to change Article XXI, Section 2(b) and
Article XXIA, Section 5(a) of OCC's By-Laws \19\ to allow Clearing
Members to provide additional terms beyond those already required by
the rules.\20\ The proposed changes regarding such optional terms,
which are not associated with OCC's guaranty (i.e., rebate rate and
interest rate benchmark with respect to Hedge Loans, and loan term with
respect to both Hedge Loans and Market Loans), would not impose any
additional obligations on OCC. Rather, the proposed changes would
facilitate the optional inclusion of additional terms between the
parties that survive OCC's novation and would be recorded in OCC's
system for the Clearing Member's convenience.\21\
---------------------------------------------------------------------------
\19\ OCC proposes to move Article XXI, Section 2(b) and Article
XXIA, Section 5(a) of its By-Laws to new Rules 2203(d)(2)(A) and
2206A(b)(2)(E), respectively, without changes other than those
explicitly described in the Notice of Filing.
\20\ OCC is not proposing to change the required terms already
defined in its rules (e.g., identification of Eligible Stock, number
of shares loaned, amount of collateral received, identity of lending
and borrowing Clearing Members).
\21\ Id.
---------------------------------------------------------------------------
To further accommodate contract-level recordkeeping, OCC proposes
the following conforming changes:
<bullet> Current Interpretation and Policy .01 to OCC Rules 2201
and 2201A (i.e., proposed OCC Rules 2206(b) and 2206A(d)), which
concern the transfer of stock loan positions or stock borrow positions
between Clearing Member accounts, would be amended to delete the phrase
``all or any portion of'' as it relates to stock loan or stock borrower
positions, and add the text ``provided, that any such transfer will
result in the transfer of all shares related to the relevant stock loan
position or stock borrow position.'' Accordingly, any transfer of a
stock loan position or stock borrow position, each representing an
individual contract, would be for all shares that are the subject of
the contract.
<bullet> Current Interpretation and Policy .02 to OCC Rule 2201
(i.e., proposed OCC Rule 2206(c)(1)), which concerns how OCC would
apply Hedge Loan return instructions received from DTC to a Clearing
Member's default account,
[[Page 95882]]
would be modified to eliminate the ability of Clearing Members to
designate OCC accounts in DTC delivery orders. Instead, returns of
shares will be reflected in the Clearing Member's default account. To
support the shift to contract-level recordkeeping, OCC also would add
proposed OCC Rule 2206(c)(2), which would provide that returns will
decrease the number of shares borrowed beginning with the oldest Hedge
Loan between the Borrowing Clearing Member and the Lending Clearing
Member on OCC's books and records. If the return exhausts the oldest
Hedge Loan, OCC would decrement to the next oldest.
<bullet> Current Interpretation and Policy .02 to OCC Rule 2201A
(i.e., proposed OCC Rule 2206A(e)), which concerns how Market Loan
return instructions would be applied to a Clearing Member's accounts,
would be amended to reflect that, if there are insufficient shares in
the account designated by the delivery order submitted to OCC, or in
the default account if the delivery order did not specify an account,
OCC would reject the return instruction rather than fulfill the return
to the extent of the shares in the designated or default account, as
applicable. If an account was designated in the delivery order, OCC
would fulfill the return based only on that account and would reject
the return instruction if sufficient shares were not available in that
account rather than applying shares in the default account to cover the
excess.
<bullet> Current OCC Rule 2209A(a)(2) (i.e., proposed OCC Rule
2216A(a)(5)), which concerns the termination of Market Loans upon
receipt of end-of-day information from DTC concerning return or recall
delivery orders, would be amended to delete the phrase ``and reduce the
respective Clearing Member's open stock loan and stock borrow positions
accordingly,'' which refers to adjustments required for aggregated
stock loan and stock borrow positions. OCC would also remove the phrase
``the end of the day'' with respect to the stock loan activity files it
receives from DTC because OCC receives and processes such information
from DTC throughout the business day.
b. Aligning Mark-to-Market Settlement Accounts. As described above,
in Section II.A.3, OCC currently limits settlement of daily mark-to-
market of cash collateral to the Clearing Member's firm account or
combined Market-Makers' account. OCC proposes to change its rules such
that cash settlement would occur in the account in which the stock loan
or stock borrow position is held, to reflect changes in the stock loan
market that facilitate fully paid for lending programs, which have
developed over the last two decades to allow customers to earn returns
on their portfolios by allowing their broker to lend their shares.\22\
---------------------------------------------------------------------------
\22\ See Notice of filing, 89 FR 73478.
---------------------------------------------------------------------------
The proposed change would align mark-to-market cash settlements
with positions by deleting current OCC Rules 2201(a)(iii) and
2201A(a)(iii), as relocated to proposed OCC Rules 2207(a)(1)(C) and
2207A(a)(1)(C). The text of these provisions currently requires
Clearing Members to provide OCC with standing instructions to identify
the Clearing Member's firm accounts or combined Market-Makers' account
from which mark-to-market payments are to be made. However, these
provisions would not be necessary under the Proposed Rule Change
because OCC would settle the mark-to-market payments in whichever
account the stock loan or stock borrow position is held. OCC also would
amend current Rules 2204(a) and 2204A(a), the relevant portions of
which would be renumbered as proposed Rules 2209(a) and 2209A(a),
respectively, to provide that any mark-to-market payment shall be made
in the account in which the Hedge Loan or Market Loan is held.
OCC proposes to delete the last clause to Interpretation and Policy
.04 to Rule 1104, which concerns the use of a Liquidating Settlement
Account to satisfy mark-to-market obligations arising from a suspended
Clearing Member's stock loan or borrow positions in customers'
accounts. That clause provides for the use of the Liquidating
Settlement Account, notwithstanding that such mark-to-market payments
may settle in another account under current Rules 2201(a) and 2201A(a).
This clarifying clause would no longer be relevant because of the
alignment of settlement with the accounts in which the positions are
held.\23\
---------------------------------------------------------------------------
\23\ Id.
---------------------------------------------------------------------------
c. Simplifying Mark-to-Market Accounts. As a further update to
mark-to-market settlement accounts and to help facilitate OCC's planned
switch from loan aggregation to contract-level recordkeeping, OCC
proposes to change its mark-to-market calculation to focus on the
change to the contract value of a Clearing Member's Stock Loans.
Currently, the mark-to-market calculation focuses on the value of the
loaned shares of stock by taking the quantity of stock that is on loan
each morning and marking it to a closing price each night. Quantities
of stock that correspond to new loans put on during the day are also
marked to the end-of-day closing price.
Now, OCC proposes to amend current Rules 2204 and 2204A, to be
renumbered as proposed Rules 2209 and 2209A, respectively. Proposed OCC
Rules 2209(b) and 2209A(b) would provide that the mark-to-market
payment will be the amount necessary to cause the amount of Collateral
to be equal to the Collateral requirement applicable to the Stock Loan.
For Hedge Loans, the Collateral requirement is either 100 or 102
percent of the mark-to-market value of the Loaned Stock, depending on
which percentage the parties selected when initiating the Hedge Loan,
as described in Section II.A.5., above. For Market Loans, as described
below in Section II.B.3.c., the Collateral requirement would be fixed
at 102 percent of the value of the Loaned Stock, which is the
collateralization for all Market Loans currently.
d. Re-Matching Matched Book Positions in Suspension Across Stock
Loan Programs. As stated above, in Section II.A.2., OCC's current
framework does not contemplate the re-matching of Matched-Book
Positions across OCC's Stock Loan Programs in the event of a Clearing
Member default. The Proposed Rule Change would extend OCC's authority
to close out and re-establish the Matched-Book Positions of a suspended
Clearing Member to the Market Loan Program and would allow re-matching
in suspension across the Hedge and Market Loan Programs. Under the
current OCC Rule 2212, OCC has authority to terminate Matched-Book
Positions by offset and re-matching with other Clearing Members. OCC
proposes to extend its re-matching authority and allow for re-matching
across programs by inserting proposed OCC Rule 2219A, which would be
similar in structure and content to current OCC Rule 2212.
Proposed OCC Rule 2219A(a) would provide that, in the event that a
suspended Clearing Member has Matched-Book Positions within the Hedge
or Market Loan Programs, OCC will, upon notice to affected Clearing
Members, close out the suspended Clearing Member's Matched-Book
Positions to the greatest extent possible by (1) the termination by
offset of stock loan and stock borrow positions that are Matched-Book
Positions in the suspended Clearing Member's account(s) and (2) OCC's
re-matching in the order of priority in paragraph (c) of proposed OCC
Rule 2219A of stock borrow positions for the same number of shares in
the same Eligible Stock maintained in a designated account of a
Matched-Book Borrowing Clearing
[[Page 95883]]
Member against a stock loan position for the same number of shares in
the same Eligible Stock maintained in a designated account of a
Matched-Book Lending Clearing Member. Under proposed OCC Rule 2219A(b),
as under current OCC Rule 2212(b), the Matched-Book Borrowing Clearing
Member and Matched-Book Lending Clearing Member would not be required
to issue instructions to DTC to terminate the relevant stock loan and
stock borrow positions or to initiate new stock loan transactions to
reestablish such positions, because the affected positions would be re-
matched without requiring the transfer of securities against the
payment of settlement prices.
Proposed OCC Rule 2219A(c), as under current OCC Rule 2212(c),
would provide that OCC shall make reasonable efforts to re-match
Matched-Book Borrowing Clearing Members with Matched-Book Lending
Clearing Members that maintain MSLAs executed between them, based upon
information provided by Clearing Members to OCC on an ongoing basis.
Proposed OCC Rule 2219A(c) would further provide that OCC shall be
entitled to rely on, and shall have no responsibility to verify, the
MSLA records provided by Clearing Members and on record as of the time
of re-matching. Proposed Rule OCC 2219A(c)(1) through (13), which would
mirror current OCC Rule 2212(d), would require that the termination by
offset and re-matching be done using a matching algorithm in which the
Matched-Book Positions of the suspended Clearing Member are first
terminated by offset and then the affected Matched-Book Borrowing
Clearing Members and Matched-Book Lending Clearing Members are re-
matched in order of priority based first upon whether the re-matched
Clearing Members have an existing MSLA between them or, in the case of
Anonymous Market Loans, can be kept anonymous by re-matching with a
Matched-Book Position that is another Anonymous Market Loan initiated
through the same Loan Market.\24\
---------------------------------------------------------------------------
\24\ OCC indicated that this algorithmic process would limit the
number of returns that may be initiated for re-matching that results
in Disclosed Market Loans between parties who have not executed an
MSLA. See Notice of Filing, 89 FR 73479.
---------------------------------------------------------------------------
Under this proposed matching algorithm, OCC would first select the
largest stock loan or stock borrow position regarding a Disclosed
Market Loan for a given Eligible Stock from the suspended Clearing
Member's Matched-Book Positions. These selected positions would then be
re-matched with the largest available stock borrow or stock loan
position regarding a Disclosed Market Loan for the selected Eligible
Stock for which a MSLA exists between a Matched-Book Borrowing Clearing
Member and a Matched-Book Lending Clearing Member. OCC would repeat
this process until all potential re-matching between Matched-Book
Borrowing Clearing Members and Matched-Book Lending Clearing Members
with MSLAs is completed for positions within the Hedge Program.
Simultaneously, OCC would perform the same re-matching process
within the Market Loan Program for (i) Matched-Book Positions that are
Disclosed Market Loans for which a MSLA exists between a Matched-Book
Borrowing Clearing Member and a Matched-Book Lending Clearing Member,
and (ii) Matched-Book Positions that are Anonymous Market Loans
initiated through the same Loan Market. After re-matching to the extent
possible within the Market Loan Program based on manner of initiation
and trade source, OCC would proceed to re-match Matched-Book Positions
within the Market Loan Program for which an MSLA exists between a
Matched-Book Borrowing Clearing Member and a Matched-Book Lending
Clearing Member, regardless of whether the Matched-Book Position was
part of a Disclosed Market Loan or Anonymous Market Loan.
After matching Matched-Book Positions to the extent possible
between borrowers and lenders with existing MSLAs in both the Hedge
Program and the Market Loan Program, OCC would then select the largest
remaining stock loan or stock borrow positions for a given Eligible
Stock regardless of whether the position is a Hedge Loan or a Market
Loan, and re-match it with the largest available stock borrow or stock
loan position for the selected Eligible Stock in the other Stock Loan
Program for which an MSLA exists between the lenders and borrowers in
the other Stock Loan Program, regardless of whether the Market Loan
selected or matched is a Disclosed Market Loan or Anonymous Market
Loan. OCC would repeat this process until it has rematched all Matched-
Book Positions to the extent possible between parties to existing MSLAs
between the two Stock Loan Programs.
After re-matching among lenders and borrowers with existing MSLAs,
OCC proposes to repeat the process for all remaining Matched-Book
Positions for which MSLAs do not exist between the lenders and
borrowers. OCC would first complete such rematching to the extent
possible within each program. The re-matching process would then be
repeated for all remaining Matched-Book Positions across the Stock Loan
Programs for which MSLAs do not exist between the lenders and
borrowers. Remaining positions that are not able to be rematched either
within or across programs would then be closed out pursuant to the
rules governing close-out of Hedge Loans or Market Loans, as
applicable.
Under proposed OCC Rule 2219A(d), as under current OCC Rule
2212(e), in the event Borrowing and Lending Clearing Members are re-
matched through this algorithmic process, the pre-defined terms and
instructions established by the Lending Clearing Member would govern
the re-matched positions pursuant to proposed OCC Rule 2207 for Hedge
Loans or proposed Rule 2207A for Market Loans. For Matched-Book
Positions re-matched across programs, the resulting re-matched loan
would be a Hedge Loan. If the re-matched positions were Anonymous
Market Loans, the resulting Loan would be an Anonymous Market Loan.
However, if one of the positions was a Disclosed Market Loan or the
positions were Anonymous Market Loans initiated through different Loan
Markets, the resulting loan would be a Disclosed Market Loan. Going
forward, such a Disclosed Market Loan would be deemed to have been
initiated through OCC, which would facilitate re-matching within the
Market Loan Program for parties who are not subscribers to a Loan
Market. Pursuant to proposed OCC Rule 2219A(j), the re-matched Clearing
Members may choose to execute an MSLA or close out the re-matched
positions in accordance with proposed OCC Rules 2213 or 2216A, as
applicable.
Under proposed OCC Rule 2219A(e), which corresponds to the second
sentence of current OCC Rule 2212(e), any change in Collateral
requirements arising from a change in the terms of stock loan or stock
borrow positions between a Lending Clearing Member and Borrowing
Clearing Member with re-matched positions would be included in the
calculation of the mark-to-market payment obligations on the stock loan
business day following the completion of the positions adjustments as
set forth in proposed OCC Rule 2219A(f). Under proposed OCC Rule
2219A(f), which reflects current OCC Rule 2212(f), the termination by
offset and re-matching of positions would be complete upon OCC
finishing all position adjustments in the accounts of the suspended
Clearing Member and the Borrowing Clearing Members and Lending Clearing
Members with re-matched positions,
[[Page 95884]]
and the applicable systems reports are produced and provided to the
Clearing Members showing the transactions.
Under proposed OCC Rules 2219A(g) through (i), from and after the
time OCC has completed the position adjustments as set forth above in
proposed OCC Rule 2219A(f), the suspended Clearing Member would have no
further obligations under the By-Laws and Rules with respect to such
positions. However, a Borrowing Clearing Member with re-matched stock
borrow positions would remain obligated as a Borrowing Clearing Member
and a Lending Clearing Member with re-matched stock loan positions
would remain obligated as a Lending Clearing Member. Furthermore, upon
notification that OCC has completed the termination by offset and re-
matching of stock loan and borrow positions, the suspended Clearing
Member and Borrowing/Lending Clearing Members with re-matched positions
would be required to promptly make any necessary bookkeeping entries at
DTC to ensure the accuracy and efficacy of those stock loan terms not
governed by OCC's By-Laws and Rules. Under proposed OCC Rule 2219A(j),
as under current OCC Rule 2212(j), Borrowing/Lending Clearing Members
that have been re-matched would be required to work in good faith to
either (i) reestablish any terms, representations, warranties, and
covenants not covered by the By-Laws and Rules (e.g., establish an
MSLA) or (ii) terminate the re-matched stock loan or borrow positions
in the ordinary course pursuant to OCC Rules 2213 or 2216A, as
applicable, as soon as reasonably practicable. Current OCC Rule 2212,
which concerns re-matching in suspension for the Hedge Program, would
be deleted and replaced with proposed OCC Rule 2217, with a cross-
reference to proposed OCC Rule 2219A.
3. Market Loan Program Enhancements
a. Expansion of Bilaterally Negotiated Market Loans. The current
Market Loan Program, as described in Section II.A.3. above, allows for
the acceptance of electronic messages from the Loan Market for new
loans and returns. OCC proposes to expand the program to allow the
acceptance of bilaterally negotiated loans submitted directly from
Clearing Members or their third-party service providers. As proposed,
after a new loan or return is affirmed, OCC would instruct DTC to
settle the transaction using OCC's DTC account, or the account of the
lender, borrower, or Appointed Clearing Member. The proposal would
allow for two separate avenues for submitting loans: either through a
Loan Market or through the direct submission of bilaterally negotiated
Loans to OCC. As proposed, the scope of OCC's guaranty and post-trade
processing for all transactions would be uniform, in contrast to the
current scope of guarantee, as described in Section II.A.4., above.
Under the proposal, counterparties to bilaterally negotiated contracts
submitted to the Market Loan Program would remain paired in OCC's
system for purposes of recalls, returns, and contract modifications, as
they are under the current Hedge Program. In OCC's view, allowing
automated submission of transactions to OCC prior to DTC settlement,
combined with OCC's control of the settlement process, would help
reduce the burden and risks associated with the balancing and
reconciliation under the current Hedge Program.\25\
---------------------------------------------------------------------------
\25\ See Notice of Filing, 89 FR 73471.
---------------------------------------------------------------------------
OCC would update its Rules to facilitate the proposed expansion of
the Market Loan Program to allow for direct submission of bilaterally
negotiated stock loans. For example, definitions of ``Anonymous Market
Loan'' and ``Disclosed Market Loan'' would be added to OCC Rule 101 to
accommodate the fact that certain proposed Rules would apply
differently to Loans matched anonymously through a Loan Market and
Loans initiated bilaterally, whether through a Loan Market or with OCC
directly. Anonymous Market Loans would be defined as those initiated
through a Loan Market and for which the identities of the Lending
Clearing Member and Borrowing Clearing Member are not disclosed to each
other. Disclosed Market Loans would be defined to include either those
Market Loans (i) initiated through a Loan Market and for which the
identities of the Lending Clearing Member and Borrowing Clearing Member
are disclosed to each other, or (ii) initiated directly between the
Lending Clearing Member and Borrowing Clearing Member away from a Loan
Market such that the identities of the Lending Clearing Member and
Borrowing Clearing Member are disclosed to each other.
The proposal further would amend OCC Rule 2202A (Initiation of
Market Loans), where the newly renumbered OCC Rule 2202A(a)(1),
currently OCC Rule 2202A(a)(i), would add that, in addition to
initiation through a Loan Market, a Market Loan may be initiated when a
Lending Clearing Member and Borrowing Clearing Member send details of a
stock loan between the two Clearing Members directly to OCC. Proposed
OCC Rule 2202A(h) would provide that a Market Loan may be either an
Anonymous Market Loan or a Disclosed Market Loan.
OCC also would amend current Article XXIA, Section 5 of OCC's By-
Laws (Maintaining Stock Loan and Stock Borrow Positions in Accounts),
which would become OCC Rule 2206A. Specifically, a new sentence would
be added to the beginning of Rule 2206A that would introduce the
concept of ``matched pairs'' to remain consistent with the definition
of ``Hedge Loan.'' \26\ The sentence would read, ``Each Market Loan
will be maintained on the books and records of the Corporation as a
unique matched pair of contracts with one such contract being between
the Lending Clearing Member and the Corporation as borrower and the
second such contract being between the Corporation as Lender and the
Borrowing Clearing Member.'' \27\ OCC stated that this clarifying
sentence would ensure that the original counterparties to such a
Disclosed Market Loan remain paired in OCC system, notwithstanding
OCC's novation.\28\ Proposed OCC Rule 2206A, Paragraph (a) additionally
would provide that the identities of the Lending Clearing Member and
Borrowing Clearing Member would be elements identified for stock loan
positions and stock borrow positions resulting from Disclosed Market
Loans.
---------------------------------------------------------------------------
\26\ See proposed OCC Rule 101.H(1), which is originally By-Law
Article XXIA, Section 1.D.(2), and was proposed to be deleted from
the By-Laws and relocated to the Rules. (``The term ``Hedge Loan''
means a matched pair of securities contracts for the loan of
Eligible Stock made through the Stock Loan/Hedge Program, with one
such securities contract being between the Lending Clearing Member
and the Corporation as the borrower and the second such securities
contract being between the Corporation as the lender and the
Borrowing Clearing Member.'').
\27\ Proposed OCC Rule 2206A(a).
\28\ See Notice of Filing, 89 FR 73471.
---------------------------------------------------------------------------
Apart from the initiation process for bilateral Market Loans, OCC
would amend its Rules regarding the accommodation of direct submission
of other types of post-trade transactions for which the Rules currently
rely on actions taken by a Loan Market. The first paragraph of current
OCC Rule 2209A(a) (Termination of Market Loans) would be reflected in
the newly renumbered OCC Rule 2216A(a)(1) and the newly created Rule
2214A (Modifications) and would provide that termination or
modification of a Market Loan, respectively, may be initiated either
through a Loan Market or OCC, depending on the way in which the Loan
was initiated. Such instructions would be made through the Loan Market
for Anonymous Market Loans;
[[Page 95885]]
through OCC for Disclosed Market Loans initiated through OCC directly;
and through either the Loan Market or OCC for Disclosed Market Loans
initiated through a Loan Market. The definitions of ``Recall'' and
``Return,'' as migrated from the By-Laws to OCC Rule 101, also would be
amended to reflect the separate channels for initiating such a
transaction.\29\
---------------------------------------------------------------------------
\29\ See proposed OCC Rules 101.R(2) and (5), which are,
respectively, By-Law Article XXIA, Section 1.R.(2) and (3), and were
proposed to be deleted from the By-Laws and relocated to the Rules.
(For example, ``The term `recall,' as used in respect of any Market
Loan, means the process by which the Lending Clearing Member may
initiate the termination of the Market Loan, or any portion thereof,
by submitting a notice to the applicable Loan Market or the
Corporation, as applicable, calling for the return of all or any
portion of the Loaned Stock.'' (emphasis added)).
---------------------------------------------------------------------------
OCC would make other conforming changes to the text of the Rules to
reflect the submission of bilaterally negotiated loans directly to OCC.
Throughout the Rules governing the Market Loan Program, OCC would
remove references to ``matching'' or ``matched'' transactions (i.e.,
matched through a Loan Market) to reflect that Market Loan transactions
could also be initiated bilaterally, either through a Loan Market or
directly with OCC. The definition of ``Market Loan Program,'' as
migrated from Section 1 of Article I of the OCC By-Laws to OCC Rule
101, would be amended to recognize that Market Loans may be initiated
either through a Loan Market or through direct submission of
bilaterally negotiated Loans to OCC.
b. Recognition of Additional/Supplementary MSLA Terms. The Proposed
Rule Change would allow OCC to recognize supplementary or additional
terms under an MSLA between the counterparties to such bilaterally
negotiated transactions submitted under the Market Loan Program, as
OCC's Rules currently recognize under the Hedge Program. Because
parties to a bilaterally negotiated stock loan transaction typically
execute an MSLA, OCC's current Rule 2202(b) allows Hedge Clearing
Members to establish and maintain additional terms under an MSLA that
are not extinguished through OCC's novation, provided that the
additional terms are not inconsistent with OCC's By-Laws or Rules. Such
additional or supplementary terms may include a term structure or fees
for buy-in transactions, for example. Under the proposal, OCC would add
the same provision allowing additional or supplementary terms (so long
as they are not inconsistent with the By-Laws and Rules) to the Market
Loan Program in proposed OCC Rule 2202A(b)(2)(E).\30\ As described
above, in Section II.B.2.b., OCC indicated that the recognition of
MSLAs within the Market Loan Program also would facilitate the re-
matching of Matched Book Positions in suspension because OCC would give
priority to re-matching counterparties with existing MSLAs, both when
re-matching within and across the Stock Loan Programs.\31\
---------------------------------------------------------------------------
\30\ See proposed OCC Rule 2202A(b)(2)(E). (``[W]ith respect to
Disclosed Market Loans, the terms of the original stock loan (other
than terms that establish congruence) and the representations,
warranties and covenants made by each of the parties to the original
stock loan under the Master Securities Loan Agreement or any other
agreements with respect to the original stock loan shall (1) to the
extent that they are inconsistent with the By-Laws and Rules of the
Corporation, be eliminated from the pair of congruent contracts
constituting the Market Loan and replaced by applicable By-Laws and
Rules of the Corporation, and (2) to the extent that they are not
inconsistent with the By-Laws and Rules of the Corporation, remain
in effect as between such parties to the original stock loan, but
shall not impose any additional obligations on the Corporation.'')
\31\ See Notice of Filing, 89 FR 73471-72.
---------------------------------------------------------------------------
c. Collateral and Mark-to-Market Pricing. To further facilitate the
submission of bilaterally negotiated Market Loans directly to OCC, the
Proposed Rule Change would set the collateral for all Market Loans at
102 percent, which is the same rate at which Market Loans submitted
through a Loan Market currently are collateralized. OCC Rule 2204A
(Mark-to-Market Payments), which would become proposed OCC Rule 2209A,
would be amended to provide in proposed paragraph (b) (Market-to-Market
Payment Amount) that the collateralization rate for all Market Loans
would be 102 percent, regardless of whether it was initiated through a
Loan Market or submitted directly to OCC. Current text in OCC Rule
2204A, providing that the collateralization rate shall be set by the
relevant Loan Market, would then be deleted, because it would no longer
be accurate. OCC also would delete the part of the definition of the
term ``Collateral'' in Article XXIA of the OCC By-Laws, as migrated to
OCC Rule 101, that references setting the collateralization rate by the
relevant Loan Market, to maintain consistency and avoid confusion.
According to OCC, fixing the collateral at 102 percent not only would
assist in preserving compatibility between OCC's cleared offerings and
the standard practices for over-the-counter (``OTC'') uncleared stock
loans (as well as with OCC's current practice within the Market Loan
Program), but also reduce complexity in OCC's risk management process
by establishing a single rate across all Market Loans.\32\
---------------------------------------------------------------------------
\32\ See Notice of Filing, 89 FR 73472. OCC previously
contemplated fixing the collateralization rate at 100 percent,
considering that its guaranty would replace the additional
collateral needed to protect Lenders from counterparty default risk.
However, in a survey of all Clearing Members who participate in
OCC's Stock Loan Programs (provided as confidential Exhibit 3B to
File No. SR-OCC-2024-011), most were opposed to that idea and
preferred that the rate be fixed at 102 percent because, in part,
the loss of the additional two percent in collateral would
materially reduce the income lenders earn by investing the cash
collateral, which is one of the reasons lenders choose to lend their
shares. Id.
---------------------------------------------------------------------------
The Proposed Rule Change would further align the Market Loan
Program with the Hedge Program by allowing Clearing Members submitting
Market Loans directly to OCC to select the default rate at which mark-
to-market payments would be rounded up to the nearest level, which is
the current practice for Hedge Loans, as described in Section II.A.5.,
above. Under the proposal, OCC Rule 2201A (Instructions to the
Corporation) would become proposed OCC Rule 2207A, and would provide
that the default rate is one of the standing instructions that Market
Loan Clearing Members must submit with respect to Market Loans
submitted directly to OCC.\33\ The Lending Clearing Member's default
rate would govern the Market Loan if there is a difference between the
default rates of a Borrowing Clearing Member and a Lending Clearing
Member. OCC indicated that allowing the same flexibility in the Market
Loan Program as currently exists in the Hedge Program would support
Clearing Members in synchronizing cash flows between cleared and OTC
stock loan transactions.\34\
---------------------------------------------------------------------------
\33\ OCC indicated that rounding rates for Market Loans
submitted through a Loan Market would not change. See Notice of
Filing, 89 FR 73472.
\34\ See id.
---------------------------------------------------------------------------
d. Cancellation of Pending Transactions. As proposed, OCC would
modify its Rules that concern the cancellation of pending transactions
to accommodate the submission of cancellation instructions by Clearing
Members, in addition to such submissions made by a Loan Market. This
change is designed to bolster OCC's ability to accept bilaterally
negotiated contracts in the Market Loan Program.\35\ To that end, OCC
proposes to amend current OCC Rule 2202A(a)(ii), which allows a Loan
Market to instruct OCC to disregard a previously reported matched
transaction that is pending settlement at DTC, after which OCC
instructs DTC to cancel the previously issued delivery order. The
current OCC Rule 2202A(a)(ii) also provides that, upon
[[Page 95886]]
confirmation that DTC has processed such cancellation instructions, the
related matched transaction is deemed null and void and given no
effect; but also clarifies that OCC has no obligation to any Market
Loan Clearing Member in acting pursuant to a Loan Market's instruction
to disregard a previously reported transaction. OCC would amend OCC
Rule 2202A(a)(ii), which would be renumbered as proposed OCC Rule
2202A(a)(2), to permit a Market Loan Clearing Member to submit a
cancellation instruction for a pending transaction directly to OCC for
bilaterally negotiated transactions submitted under the Market Loan
Program.
---------------------------------------------------------------------------
\35\ Id.
---------------------------------------------------------------------------
OCC would add a new OCC Rule 2215A (Cancellation of Pending
Instructions) to address the cancellation of pending post-trade
instructions, other than cancellation of loan initiation under current
OCC Rule 2202A. Under current OCC Rule 2202A, Hedge Clearing Members
are able to cancel return instructions or recall instructions pending
with DTC, and Market Loan Clearing Members likewise may cancel pending
transactions by issuing a cancellation instruction to the Loan Market,
which may then instruct OCC to disregard a previously reported
transaction. The newly proposed OCC Rule 2215A would allow members that
submit bilaterally negotiated Market Loans to issue cancellation
instructions directly to OCC, as they do now to DTC and the Loan
Market, thus further aligning the Stock Loan Programs.\36\
---------------------------------------------------------------------------
\36\ Id.
---------------------------------------------------------------------------
e. Transaction Affirmation. Currently, Market Loan Program
transactions are matched when a Loan Market sends them to OCC. To help
assure that the same matched status applies to loans submitted directly
to OCC, the Proposed Rule Change would establish a transaction
affirmation process. Regarding new loans, counterparties would be
required to affirm the transaction details prior to OCC submitting the
new loan to DTC for settlement and OCC would reject new loans that are
not affirmed by the time that it stops accepting instructions for the
day. Proposed OCC Rule 2202A(a)(1) would describe this process in
detail, providing that a Market Loan is initiated when (i) the Loan
Market sends details of a stock loan transaction to OCC or (ii) a
Lending Clearing Member and Borrowing Clearing Member send details to
OCC of a stock loan transaction between them and such details are
either matched by OCC or affirmed by the Clearing Members, as
applicable.
The Proposed Rule Change would allow a Lending Clearing Member to
have the opportunity to affirm or reject the initiation of a return by
a cut-off time on the same business day, so long as the Borrowing
Clearing Member initiated a return within OCC's timeframe for
submitting such an instruction on a stock loan business day. Proposed
OCC Rule 2216A(a)(2) would describe an auto-affirmation process in
detail, providing that any such returns pending after the cut-off time
would be deemed affirmed and submitted to DTC for processing. OCC
indicated that this approach would help balance a Lending Clearing
Member's desire to have the opportunity to affirm or reject return
instructions, while simultaneously addressing a Borrowing Clearing
Member's concern that a delay in affirmation or allowing the
transaction to pend indefinitely could have regulatory consequences for
the Borrowing Clearing Member.\37\
---------------------------------------------------------------------------
\37\ See Notice of Filing, 89 FR 73473.
---------------------------------------------------------------------------
Unlike returns, recalls would not need to be affirmed under the
Proposed Rule Change. Proposed OCC Rule 2216A(a)(3) would provide that,
according to standard MSLA terms, a Borrowing Clearing Member will be
deemed to have affirmed the initiation of a recall, provided that the
Lending Clearing Member requested the return of the specific quantity
of Loaned Stock no earlier than the standard settlement date that would
apply to a purchase or sale of the Loaned Stock in the principal market
of such Loaned Stock.
Proposed OCC Rule 2214A(a) would be amended to add a new
affirmation requirement to contract modifications. Specifically,
contract modifications to the rebate rate, interest rate benchmark, or
loan term submitted by either a Borrowing Clearing Member or Lending
Clearing Member would not become effective until affirmed by both
parties.
Provisions in proposed OCC Rule 2216A, paragraphs (b)(2)(B) and
(c)(2) would define the processes for buy-ins and sell-outs to
alleviate some of the concerns surrounding termination of stock loans,
as described in Section II.A.7., above. In particular, for Market Loans
submitted directly to OCC, the Borrowing Clearing Member and Lending
Clearing Member will be given the opportunity to affirm or reject a
buy-in or sell-out, respectively, by a cut-off time specified by OCC on
the stock loan business day the buy-in or sell-out transaction is
received by OCC. If the Clearing Member does not affirm or reject the
buy-in or sell-out by that time, OCC would deem the buy-in or sell-out
to be complete if OCC determines that the Buy-In or Sell-Out Costs for
the Loaned Stock initiated is more than the lowest market price and
less than the highest market price for the Loaned Stock on the stock
loan business day the buy-in or sell-out is submitted to OCC.
Otherwise, the buy-in or sell-out would be rejected. This approach
would be aligned with the buy-in and sell-out process under the current
Hedge Program, in which any objection that the counterparty has with
respect to the timeliness of the buy-in or sell-out, or the
reasonableness of the Buy-In or Sell-Out Costs are matters that must be
resolved away from OCC, and between the Lending Clearing Member and the
Borrowing Clearing Member.\38\
---------------------------------------------------------------------------
\38\ OCC clarified that it would not alter or eliminate the
authority to permit Clearing Members to submit standing
instructions, which currently exists under OCC Rule 2201A
(Instructions to the Corporation), the applicable provision of which
would be renumbered OCC Rule 2207A(a)(2). See Notice of Filing, 89
FR 73473. OCC added that this existing authority would be
facilitated by planned technology changes, which would support
automatic affirmation based on system settings that could be
selected by Clearing Members. When new loans are received, the
system would check whether there is a standing instruction that
applies to the new loan. If no instruction is found, then the new
loan would be pended for affirmation. If a standing instruction
applies, then OCC would follow that instruction as satisfaction of
the affirmation requirement. Id.
---------------------------------------------------------------------------
f. Cash Distributions. The Proposed Rule Change would allow OCC to
calculate and effect cash entitlements, including dividends,
distributions, and rebates, using its internal clearance and settlement
system. Paragraphs (a)(ii) and (a)(iii) of current OCC Rule 2206A
(Dividends and Distributions; Rebates) would be renumbered as proposed
OCC Rule 2211A(b) and (c), and would provide that under OCC's
proprietary clearance and settlement system, OCC shall assume
responsibility for calculating the margin add-on collected with respect
to dividend equivalent payments. As under the current OCC process,
described in Section II.A.6., above, OCC would continue to effect
dividend equivalent payments primarily through DTC's Dividend Service.
However, as amended under the proposed OCC Rule 2211A(b), OCC would
effect payments through its proprietary clearance and settlement system
if (i) OCC determines that the dividend or distribution for a Market
Loan is not tracked through DTC's dividend tracking service or (ii) if
OCC has determined to remove a Market Loan from DTC's dividend tracking
service. Consistent with current OCC Rules, OCC would continue to add
non-cash dividends and distributions to the Loaned Stock if OCC
determines that such dividends and distributions are
[[Page 95887]]
legally transferable and the transfer can be effected through DTC.
However, the proposed changes to proposed OCC Rule 2211A(c) would
clarify that the determination to fix a cash value for non-cash
dividends and distributions not added to the Loaned Stock would lie
with OCC, rather than the Loan Market. OCC contends that this change
would eliminate OCC's reliance on the Loan Market for its margin add-on
process and settlement of dividend equivalent payments,\39\ and, as
such, OCC proposes to eliminate the limitations under current OCC Rule
2206A, including the provision that OCC's guaranty is limited by the
amount of margin OCC collected in reliance of the Loan Market's
calculation.\40\
---------------------------------------------------------------------------
\39\ See Notice of Filing, 89 FR 73473.
\40\ OCC clarified that this change would not have any effect on
OCC's margin methodology and that OCC would continue to collect a
margin add-on for such cash distributions. See Notice of Filing, 89
FR 73473-74.
---------------------------------------------------------------------------
A new paragraph (d) would be added to proposed OCC Rule 2211A,
addressing the rights of a Lending Clearing Member with respect to
optional dividends, meaning those that a shareholder can elect to
receive in cash, stock, or some combination of the two. Proposed OCC
Rule 2211A(d) would provide that the Lending Clearing Member will have
the right to elect an option only if it recalls the Loaned Stock in
time to make such election. Otherwise, if the Lending Clearing Member
does not recall the Loaned Stock, the Lending Clearing Member would be
entitled to receive the default option set by the issuer of the Loaned
Stock. OCC indicated that by adding paragraph (d) to proposed OCC Rule
2211A, the proposed rule would match the Loan Market's current process
for optional dividends and would help clarify OCC's approach to such
optional dividends in the stock lending context in OCC Rules, which
currently do not address the rights of a Lending Clearing Member with
respect to optional dividends.\41\
---------------------------------------------------------------------------
\41\ See Notice of Filing, 89 FR 73474.
---------------------------------------------------------------------------
OCC also proposes to amend current OCC Rule 2206A(b), which would
be renumbered as OCC Rule 2211A(e), to facilitate the calculation,
collection, and payment of rebates under its internal clearance and
settlement system. Currently, OCC Rule 2206A(b) provides that OCC
generally will collect and pay rebate payments on a monthly basis as
instructed by the Loan Market, with the rationale being that the Loan
Market currently is responsible for rebate payment calculation, as it
is with the calculation of dividend equivalent payments.\42\ However,
proposed OCC Rule 2211A(e) would provide that OCC would assume
responsibility for calculating the rebate payments under its internal
clearance and settlement system. Paragraph (e) of proposed OCC Rule
2211A would provide OCC the flexibility to calculate and effect
collection and payment of rebate payments not just on a monthly basis,
but also on each business day, with OCC indicating that this change
would prepare it for if and when the stock loan industry transitions to
daily, rather than monthly, collection of rebate payments.\43\
---------------------------------------------------------------------------
\42\ Id.
\43\ Id.
---------------------------------------------------------------------------
g. Market Loan Modifications. To support OCC's move to the industry
standard practice of contract-level recordkeeping, the Proposed Rule
Change would add a new rule, proposed OCC Rule 2214A, regarding Market
Loan modifications. Permissible modifications would be limited to the
rebate rate, interest rate benchmark, or loan term. Modifications
agreed to by the Market Loan Clearing Members over the life of a Market
Loan would be accepted by OCC and maintained in OCC's books and records
at the contract level.
The channel through which modification requests would be processed
would be determined by the manner in which the loan was initiated. For
example, under proposed OCC Rule 2214A(b)(1), in the case of Anonymous
Market Loans, modification requests must be submitted to the Loan
Market through which the Market Loan was initiated, consistent with
current practice. Proposed OCC Rule 2214A(b)(2)-(3) would extend this
approach by providing that, in the case of Disclosed Market Loans
initiated directly with OCC, modification requests must be submitted to
OCC; or, in the case of Disclosed Market Loans initiated through a Loan
Market, modification requests must be submitted either through the Loan
Market or OCC. Proposed OCC Rule 2214A(c) would state that OCC shall
update the relevant terms in its books and records if, as applicable,
(i) the Loan Market notifies OCC that the parties agreed to the
modification, or, (ii) with respect to Market Loans initiated directly
through OCC, the parties provided OCC with matching or affirmed
instructions. OCC would provide notice of the modified terms in the
daily reports that OCC is required to make available to Market Loan
Clearing Members under proposed OCC Rule 2210A.
h. Buy-In Controls and Settlement Cycle. As stated above, in
Section II.A.7., neither of the present Stock Loan Programs enables OCC
to administer buy-ins of the Loaned Stock. OCC proposes to amend
current OCC Rule 2209A, which would be renumbered as proposed OCC Rule
2216A, to provide OCC with additional controls over the buy-in process
for the recall of a Market Loan initiated by a Lending Clearing Member
if the Borrowing Clearing Member fails to return the Loaned Stock in
situations other than suspension of the Borrowing Clearing Member.
Current OCC Rule 2209A provides that a Lending Clearing Member is
entitled to initiate a buy-in if a recall transaction fails to settle
by the Settlement Time on the first stock loan business day after
submitting the recall. Also under OCC's current rules, the Borrowing
Clearing Member may return the Loaned Stock up until the time that the
Lending Clearing Member that initiated the return or recall provides
written notice to the Loan Market that it has executed the buy-in or
sell-out. OCC noted that such a process can lead to situations where
the Borrowing Clearing Member is allowed to return the Loaned Stock
during the period after the buy-in becomes permissible, but before the
Lending Clearing Member executes the transaction and provides written
notice.\44\
---------------------------------------------------------------------------
\44\ See Notice of Filing, 89 FR 73474.
---------------------------------------------------------------------------
To address such situations, proposed OCC Rule 2216A(b) would be
amended to provide that, upon timely notice from the Lending Clearing
Member that it intends to execute a buy-in after a Borrowing Clearing
Member fails to return the Loan Stock following a recall transaction,
OCC would prevent the Borrowing Clearing Member from returning the
Loaned Stock while the Lending Clearing Member executes the buy-in. OCC
would recognize the Borrowing Clearing Member's return of the Loaned
Stock until the Lending Clearing Member provides such notice. The stock
loan and stock borrow positions would then remain open until the
Lending Clearing Member provides notice that the buy-in is complete.
4. Accommodating Canadian and Other Clearing Members
a. Supporting Canadian Clearing Members. The Proposed Rule Change
would allow Canadian Clearing Members to expand their participation
beyond OCC's Hedge Program, which they currently are permitted to use,
and into the Market Loan Program, while preventing certain transactions
that could trigger tax withholding
[[Page 95888]]
obligations. To facilitate this expansion, OCC proposes to amend
current Rules to recognize Canadian Clearing Members as potential
participants in the Market Loan Program and address operational
capabilities that will be required to support their participation. The
proposal would revise paragraph (f) of OCC Rule 302 (Operational
Capability) to include Canadian Clearing Members as members qualifying
for participation in the Market Loan Program, including by providing
these members the ability to settle transactions through a CDS sub-
account at the Depository, which they do under the Hedge Program today,
as described in Section II.A.8., above. This same provision also would
consolidate operational requirements for participation in the Hedge
Program and the Market Loan Program so that the historical division
between the programs does not impede the planned eventual decommission
of the Hedge Program. As a further example, OCC would revise OCC Rule
306A (Event-Based Reporting) to reflect that a Canadian Clearing
Member's current obligation to provide OCC with prompt written notice
if CDS has or likely will cease to act for that Canadian Clearing
Member would extend to such members that participate in both Stock Loan
Programs. OCC also proposes to replicate OCC Rule 2201(c), which
concerns a Canadian Clearing Member's appointment of CDS for purposes
of settling Hedge Loan delivery-versus-payment transactions, as
proposed OCC Rule 2207A(c), to help ensure that the same requirements
would apply to Canadian Clearing Members that participate in the Market
Loan Program.
In expanding the Market Loan Program to Canadian Clearing Members,
OCC stated that it considered its ability to offer an expanded guaranty
without incurring tax or withholding obligations on the associated
payments that would be incurred under the expanded Market Loan
Program.\45\ OCC stated that its current Rules, particularly OCC Rule
202, already provide the framework for the expanded guaranty under the
Market Loan Program, while balancing the need to avoid tax imposition
triggers. OCC Rule 202 currently imposes obligations on Canadian
Clearing Members to allow OCC to clear listed options transactions free
from tax withholding obligations on dividend equivalent payments or
deemed payments. OCC indicated that current OCC Rule 202 also would
allow it to make substitute dividend payments to Canadian Clearing
Members as Lending Clearing Members under the enhanced Market Loan
Program without imposing tax or withholding obligations.\46\ OCC would
report substitute dividend payments to the IRS using information
provided by the Canadian Clearing Members, as OCC currently does for
dividend equivalent payments or deemed payments to Canadian Clearing
Members in connection with listed options transactions. Additionally,
under current OCC Rule 202(b), OCC has the authority to prohibit or
limit specific transactions with respect to non-U.S. members that may
give rise to tax or withholding obligations, and OCC expects to
continue to use that authority to impose certain limitations on the
Market Loan activity of Canadian Clearing Members to address specific
situations in which tax withholding obligations might otherwise arise,
including limitations on transactions involving (i) Canadian underlying
securities, (ii) Positive Rebate, and (iii) Negative Rebate. OCC Rule
202(b)(5) also requires Canadian Clearing Members to indemnify OCC for
any loss, liability or expense--including taxes and penalties--that it
may sustain as a result of its failure to comply with requirements of
OCC Rule 202(b).
---------------------------------------------------------------------------
\45\ See Notice of Filing, 89 FR 73475. Specifically, under the
expanded Market Loan Program, OCC would clear and settle the types
of cash distributions, such as substitute dividend and rebate
payments, that OCC does not guarantee under the Hedge Program and
must be resolved bilaterally by Hedge Clearing Members, away from
OCC. Id.
\46\ See Notice of Filing, 89 FR 73475.
---------------------------------------------------------------------------
As stated above, OCC is not proposing to change any part of OCC
Rule 202, but OCC has indicated that it believes the current framework
under OCC Rule 202 can be applied to the expansion of the Market Loan
Program to Canadian Clearing Members, and could help OCC avoid tax or
withholding obligations.\47\ Pursuant to OCC Rule 202(b), OCC would
preclude a Canadian Clearing Member from executing Market Loan
transactions as a Borrowing Clearing Member, whether on behalf of a
customer or for its own account, for which the Loaned Stock is issued
by a Canadian issuer because of tax withholding obligations under
Canadian law for substitute dividend payments that would be owed by the
Canadian Clearing Member in its capacity as the lender.\48\ In such a
situation, the Borrowing Clearing Member would be precluded from
initiating a Market Loan in its capacity as a Borrowing Clearing Member
because the Canadian Clearing Member could not fulfill its obligation
under OCC's Rules to provide a substitute dividend payment free from
tax and withholding obligations.\49\
---------------------------------------------------------------------------
\47\ Id.
\48\ OCC understands that under Canadian law, the loan of a
security issued by a Canadian company would be treated as a loan of
the underlying shares for Canadian tax purposes. The substitute
dividend paid by the Canadian Clearing Member as the Borrowing
Clearing Member to OCC, in its capacity as the lender, would be a
payment made by the Canadian Clearing Member, as a corporation, to
OCC of a dividend payable on the underlying securities under
subparagraph 260(8)(a)(ii) of the Income Tax Act (Canada), and the
payment would be subject to Canadian withholding tax under
subsection 212(2) of that act. See Notice of Filing, 89 FR 73475.
\49\ OCC understands that no similar tax withholding obligation
would exist for substitute dividend payments with respect to a
Canadian underlying security made by OCC, in its capacity as the
borrower, to a Canadian Clearing Member that was a Lending Clearing
Member. See Notice of Filing, 89 FR 73475.
---------------------------------------------------------------------------
With respect to positive and negative rebate payments, OCC also
believes that current OCC Rule 202 would allow clearance and settlement
of such payments to Canadian Clearing Members in connection with the
expanded Market Loan Program without triggering tax withholding
obligations. Although neither the Internal Revenue Code nor Internal
Revenue Service (``IRS'') regulations specifically provide for the
treatment of rebate payments, OCC believes that such rebate payments to
Canadian Clearing Members would not trigger tax withholding
obligations, because, not only would these members be considered
qualified intermediaries and therefore exempt under U.S. tax law, but
they also are required to be Qualified Intermediaries as a condition of
membership under OCC Rule 202.\50\ OCC understands that rebate
payments, whether positive or negative, to a Canadian Clearing Member
in its capacity as a Qualified Intermediary, may be made by OCC free
from withholding, consistent with treatment of dividend equivalent
payments in connection with listed options
[[Page 95889]]
transactions.\51\ As with substitute dividends, OCC would add rebate
payments for transactions in a Canadian Clearing Member's capacity as a
Qualified Intermediary to the current reporting OCC submits to the IRS
for dividend equivalent payments on listed options, based on
information to be received from the Canadian Clearing Member pursuant
to current OCC Rule 202(b)(3).
---------------------------------------------------------------------------
\50\ OCC believes that Positive Rebate would be treated as
interest for U.S. federal tax purposes because Positive Rebate
compensates the Borrowing Clearing Member for the use of the cash
collateral by the Lending Clearing Member, and would therefore
constitute U.S.-source ``fixed or determinable annual or periodic
income,'' or ``FDAPI,'' under section 1442 of the I.R.C. While U.S.-
source FDAPI generally is subject to a 30% U.S. withholding tax when
paid to a foreign corporation, exemptions from withholding apply to
(i) payments to a Qualified Intermediary in its capacity as an
intermediary that has accepted primary withholding responsibility,
and (ii) interest paid to a Canadian Clearing Member that qualifies
for an exemption from withholding on interest under Article XI of
the Convention Between the United States of America and Canada with
Respect to Taxes on Income, October 16, 1980, as amended by
subsequent Protocols (the ``Canada Treaty''). A Qualified
Intermediary that has accepted primary withholding responsibility is
exempt from U.S. federal withholding on payments from a withholding
agent, including U.S.-source interest, received in its capacity as
an intermediary. See Notice of Filing, 89 FR 73475-76.
\51\ See Notice of Filing, 89 FR 73476.
---------------------------------------------------------------------------
In the case of Positive Rebate payments on Market Loans initiated
by a Canadian Clearing Member in its capacity as principal, OCC would
require Canadian Clearing Members to demonstrate through annual
certification and submission of underlying tax documents, pursuant to
OCC Rule 202, that such payments are subject to exemption from U.S.
withholding obligations under the Canada Treaty.\52\
---------------------------------------------------------------------------
\52\ Article XI(1) of the Canada Treaty reduces the rate of
withholding from 30% to zero for U.S.-source interest beneficially
owned by a resident of Canada entitled to treaty benefits, provided
that income is not attributable to a permanent establishment, within
the meaning of the Canada Treaty, or effectively connected with a
trade or business conducted in the United States. See Notice of
Filing, 89 FR 73476.
---------------------------------------------------------------------------
OCC understands that, because there is a risk that no exemption
from U.S. tax withholding would apply to the payment of Negative Rebate
to a Canadian Clearing Member outside its capacity as a Qualified
Intermediary, OCC would limit Canadian Clearing Members from initiating
Market Loans with a Negative Rebate as a Lending Clearing Member other
than in its capacity as a Qualified Intermediary, pursuant to OCC Rule
202(b), as further protection from potential tax liability.\53\ In
addition, OCC would limit Canadian Clearing Members' ability to modify
the rebate on a Market Loan to a Negative Rebate as a Lending Clearing
Member other than in its capacity as a Qualified Intermediary.\54\
---------------------------------------------------------------------------
\53\ See Notice of Filing, 89 FR 73476.
\54\ Id.
---------------------------------------------------------------------------
b. Provide for Appointed and Appointing Clearing Members. Under
current OCC Rule 302, all participants in the Market Loan Program are
required to be members of DTC. As stated above, in Section II.B.4.a,
OCC would allow Canadian Clearing Members to settle Market Loan
transactions through a CDS sub-account maintained at DTC as a way to
extend the Market Loan Program to Canadian Clearing Members. In a
similar manner, OCC proposes to build a framework of Appointing
Clearing Members and Appointed Clearing Members so that the Market Loan
Program would be available to new types of Clearing Members who are not
necessarily members of DTC, given that OCC expanded its membership to
different types of participants in 2023.\55\
---------------------------------------------------------------------------
\55\ See Exchange Act Release No. 97439 (May 5, 2023), 88 FR
30373, 30373 (May 11, 2023) (SR-OCC-2023-002).
---------------------------------------------------------------------------
To make this accommodation, OCC proposes to revise current OCC
Rules 101 and 302, as well as proposed OCC Rules 2202A, 2207A, and
2216A. This accommodation would allow a Clearing Member participating
in the Market Loan Program--the Appointing Clearing Member--to appoint
an Appointed Clearing Member to make settlement of obligations arising
from the initiation or termination of Market Loans. The approach would
be similar to how current OCC Rule 901 allows for the operation of
Appointed and Appointing Clearing Members with respect to delivery or
receipt of underlying securities arising from the exercise of equity
options and maturity of stock futures, or how current OCC Rule 2201
allows Canadian Clearing Members to appoint CDS as its agent for
purposes of effective delivery orders for stock loan and stock borrow
transactions. Under the Proposed Rule Change, Clearing Members wishing
to participate in the Market Loan Program would be able to forego
membership at DTC and instead establish a relationship with an
Appointed Clearing Member. To support this process, OCC would revise
the definitions in current OCC Rule 101 for ``Appointed Clearing
Member'' and ``Appointing Clearing Member'' to reference the initiation
and termination of Market Loans. These definitions would refer to
proposed Rule 2207A (Instructions to the Corporation), which would
contain a paragraph providing the mechanism for such appointments.
Proposed OCC Rules 2202A (Initiation of Market Loans) and 2216A
(Termination of Market Loans) would also provide for OCC to submit
delivery orders to the Depository's account for the Appointed Clearing
Member in connection with the initiation or termination of a Market
Loan, respectively.
5. By-Laws and Rules Reorganization and Restatement
In consolidating the two stock loan programs, OCC proposes to move
pertinent provisions out of its By-Laws and into its Rules to allow for
a clearer and more transparent presentation of the details. OCC
proposes to make clarifying, conforming, and organizational changes to
OCC's By-Laws and Rules, and rule-filed policies that reference those
By-Laws or Rules. OCC would reorganize, restate, and consolidate
provisions of OCC's By-Laws governing the Stock Loan Programs into
Chapter XXII (Hedge Program) and Chapter XXIIA (Market Loan Program) of
OCC's Rules, as amended by this Proposed Rule Change. As part of these
revisions, OCC would preserve the governance requirements concerning
amendments to the stock loan-related By-Laws migrated to the Rules by
amending Article XI, Section 2 of the OCC By-Laws.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Exchange Act directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to such organization.\56\ Under the Commission's
Rules of Practice, the ``burden to demonstrate that a proposed rule
change is consistent with the Exchange Act and the rules and
regulations issued thereunder . . . is on the self-regulatory
organization [`SRO'] that proposed the rule change.'' \57\
---------------------------------------------------------------------------
\56\ 15 U.S.C. 78s(b)(2)(C).
\57\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
---------------------------------------------------------------------------
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,\58\ and any failure of an
SRO to provide this information may result in the Commission not having
a sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Exchange Act and the applicable rules and
regulations.\59\ 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.\60\
---------------------------------------------------------------------------
\58\ Id.
\59\ Id.
\60\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
---------------------------------------------------------------------------
After carefully considering the Proposed Rule Change, the
Commission finds that the proposal is consistent with the requirements
of the Exchange Act and the rules and regulations thereunder applicable
to OCC. More specifically, the Commission finds that the proposal is
consistent with Section
[[Page 95890]]
17A(b)(3)(F) of the Exchange Act,\61\ and Rules 17Ad-22(e)(21)(ii) \62\
and 17Ad-22(e)(1) \63\ thereunder, as described below.
---------------------------------------------------------------------------
\61\ 15 U.S.C. 78q-(b)(3)(F).
\62\ 17 CFR 240.17Ad-22(e)(21)(ii).
\63\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F) of the Exchange Act
Section 17A(b)(3)(F) of the Exchange Act requires, among other
things, that a clearing agency's rules are designed to promote the
prompt and accurate clearance and settlement of securities transactions
and, to the extent applicable, derivative agreements, contracts, and
transactions.\64\ Based on a review of the record, and for the reasons
described below, the changes described above are consistent with
promoting the prompt and accurate clearance and settlement of
securities transactions and, to the extent applicable, derivative
agreements, contracts, and transactions.
---------------------------------------------------------------------------
\64\ 15 U.S.C. 78q-(b)(3)(F).
---------------------------------------------------------------------------
As discussed above, OCC's current Stock Loan Programs are limited
in several ways due to their historical development on two separate
pathways. For example, OCC does not currently record stock loan
transactions in its books and records on a contract-level basis but
instead uses position aggregation, which is not aligned to the current
industry standard. Additionally, Hedge Program participants, unlike
Market Loan Program participants, currently must first negotiate terms
bilaterally before sending them to DTC for settlement, as well as
address certain post-trade transactions bilaterally with each of their
counterparties, away from OCC. This creates operational burdens and
costs when Clearing Members must reconcile their internal records with
OCC's position-based records on a daily basis. Finally, the treatment
of Canadian and other types of Clearing Members participating in the
Stock Loan Programs potentially raises tax liability issues under the
current stock loan framework.
The Proposed Rule Change would help address these concerns by,
among other things, aligning the rules governing both of OCC's Stock
Loan Programs with each other, thus streamlining the loan initiation,
tracking, and termination processes for both programs. The Proposed
Rule Change also would replace OCC's current practice of aggregating
new stock loan positions and stock borrow positions for the same
Clearing Member in the same Eligible Stock with contract-level
accounting, consistent with current industry-standard bookkeeping
practices. The Proposed Rule Change also would allow for the submission
of bilaterally negotiated transactions in the Market Loan Program.
Likewise, the Proposed Rule Change would conform the terms of Market
Loans cleared by OCC more closely to the provisions most commonly
included in stock loan transactions executed under standard loan market
documents; provide a uniform guaranty of terms across Market Loans,
regardless of how those Market Loans are initiated under the enhanced
program; and support transactions under both Stock Loan Programs. The
proposed changes also would allow re-matching of Matched-Book Positions
in suspension across both loan programs, thus helping to manage stock
loan transactions in the event of a Clearing Member default. Also, OCC
would use its current Rules to facilitate equal treatment of Canadian
Clearing Members participating in the Stock Loan Programs, as well as
to prevent certain transactions that could trigger tax withholding
obligations. OCC would similarly amend its Rules to build a framework
of Appointing Clearing Members and Appointed Clearing Members so that
the Market Loan Program would be available to new types of Clearing
Members who are not necessarily members of DTC.
Taken together, these proposed changes would aid in reducing
existing frictions in the current stock loan program framework, both by
ensuring the accuracy and consistency of information and contract terms
that OCC receives rather than relying on a one-on-one reconciliation
process with each participating Clearing Member, and by more precisely
managing the rebates, dividends, and other information that OCC keeps
on its books. The proposed changes would also broaden Canadian Clearing
Member access, which would facilitate a transition away from the Hedge
Program in the event that OCC proposes to decommission it in the
future. By eliminating the current manual reconciliation process, the
Proposed Rule Change also would help reduce participating Clearing
Members' costs and operational burdens associated with that process. As
a result, the Proposed Rule Change would aid in promoting the prompt
and accurate clearance and settlement of securities transactions and,
to the extent applicable, derivative agreements, contracts, and
transactions.
Accordingly, the changes proposed to the Stock Loan Programs are
consistent with the requirements of Section 17A(b)(3)(F) of the
Exchange Act.\65\
---------------------------------------------------------------------------
\65\ Id.
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(21)(ii) Under the Exchange Act
Rule 17Ad-22(e)(21)(ii) under the Exchange Act requires, in part,
that a covered clearing agency 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.\66\ In adopting Rule 17Ad-22(e)(21), the
Commission provided guidance that a covered clearing agency generally
should consider in establishing and maintaining policies and procedures
that address efficiency and effectiveness, including whether its design
meets the needs of its participants and the market it serves.\67\
---------------------------------------------------------------------------
\66\ 17 CFR 240.17Ad-22(e)(21)(ii).
\67\ Securities Exchange Act Release No. 78961 (Sept. 28, 2016),
81 FR 70786, 70841 (Oct. 13, 2016) (File No. S7-03-14) (``Standards
for Covered Clearing Agencies'').
---------------------------------------------------------------------------
As described in Section II.A., the historical development of the
Market Loan and Hedge Programs resulted in two programs designed to
clear similar products in different ways. The current form of the
programs presents certain inefficiencies, such as the costly
reconciliation processes related to the Hedge Program and lack of
visibility into additional contract terms due to OCC's aggregate
portfolio-level bookkeeping. Such inefficiencies, in turn, have
resulted in costs and burdens to Clearing Members, who have expressed
interest in the enhancements such as having the rebate amounts
calculated, settled, and guaranteed by OCC. The alignment of rules
governing the Hedge and Market Loan Programs, along with improvements
to both programs described above (e.g., contract-level recordkeeping,
expanded guaranty encompassing additional contract terms), help to
address such inefficiencies to meet the needs of OCC's Clearing Members
that participate in the Stock Loan Programs, and would reduce manual
processing and the potential for stock loan transactions to be delayed
or to fail. For example, while OCC continue to operate both the Hedge
and Market Loan Programs, OCC would provide the same, uniform guaranty
and post-trade processing for all transactions. By allowing for
automated submission of transactions to OCC prior to DTC settlement and
by controlling the settlement process, the Stock Loan Programs would
help reduce the burden and risks currently associated with
[[Page 95891]]
balancing and reconciliation. Additionally, by fixing the collateral
for Market Loans at a single rate of 102 percent consistent with member
feedback, as described in Section II.B.3.c., OCC would reduce the
complexity in its risk management of stock loan positions by
establishing a single rate across all Market Loans.
Accordingly, the changes proposed to the Stock Loan Programs are
consistent with the requirements of Rule 17Ad-22(e)(21) under the
Exchange Act.\68\
---------------------------------------------------------------------------
\68\ 17 CFR 240.17Ad-22(e)(21)(ii).
---------------------------------------------------------------------------
C. Consistency With Rule 17Ad-22(e)(1) Under the Exchange Act
Rule 17Ad-22(e)(1) under the Exchange Act requires that a covered
clearing agency establish, implement, maintain, and enforce written
policies and procedures reasonably designed to provide for a well-
founded, clear, transparent, and enforceable legal basis for each
aspect of its activities in all relevant jurisdictions.\69\ In adopting
Rule 17Ad-22(e)(1), the Commission provided guidance that a covered
clearing agency generally should consider in establishing and
maintaining policies and procedures to address legal risk, including
whether its rules, policies and procedures, and contracts are clear,
understandable, and consistent with relevant laws and regulations.\70\
---------------------------------------------------------------------------
\69\ 17 CFR 240.17Ad-22(e)(1).
\70\ Standards for Covered Clearing Agencies, 81 FR 70802.
---------------------------------------------------------------------------
As described above, in Section II.B.5., the proposed changes
consolidate and reorganize provisions concerning the Stock Loan
Programs that are scattered across two documents--both OCC's By-Laws
and Rules--into a single location: OCC's Rules. The streamlining and
consolidation of these provisions into OCC's Rules enhances their
clarity, transparency, and consistency for Clearing Members and
stakeholders who choose to participate in the Stock Loan Programs. More
specifically, the incorporation of current Interpretations and Policies
into the body of the Rules would enhance clarity and readability of the
provisions concerning the Stock Loan Programs. Additionally, the global
and administrative changes would apply consistent terms and numbering
conventions, improve consistency of the text between similar Hedge
Program and Market Loan Program rules, and remove duplicative
provisions, thus increasing clarity, understandability, and
consistency.
Accordingly, the changes proposed to the Stock Loan Programs are
consistent with the requirements of Rule 17Ad-22(e)(1) under the
Exchange Act.\71\
---------------------------------------------------------------------------
\71\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------
IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the
Exchange Act, and in particular, the requirements of Section 17A of the
Exchange Act \72\ and the rules and regulations thereunder.
---------------------------------------------------------------------------
\72\ In approving this Proposed Rule Change, the Commission has
considered the proposed rules' impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\73\ that the proposed rule change, as modified by Partial
Amendment No. 1, (SR-OCC-2024-011) be, and hereby is, approved.
---------------------------------------------------------------------------
\73\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\74\
---------------------------------------------------------------------------
\74\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-28257 Filed 12-2-24; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on December 3, 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.