Notice2026-18211
Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change by The Options Clearing Corporation Concerning Amendments to Its Clearing Membership Standards
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
September 8, 2026
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 91 Issue 172 (Tuesday, September 8, 2026)</title>
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[Federal Register Volume 91, Number 172 (Tuesday, September 8, 2026)]
[Notices]
[Pages 57183-57205]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-18211]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-106264; File No. SR-OCC-2026-009]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change by The Options Clearing
Corporation Concerning Amendments to Its Clearing Membership Standards
September 2, 2026.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
[[Page 57184]]
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on August 19, 2026, The Options Clearing
Corporation (``OCC'' or ``Corporation'') filed with the Securities and
Exchange Commission (``Commission'' or ``SEC'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared primarily by OCC. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
This proposed rule change would amend its clearing membership
standards as outlined in OCC's Rules. The proposed changes to OCC's
Rules are contained in Exhibit 5 to File No. SR-OCC-2026-009. Material
proposed to be added is marked by underlining and material proposed to
be deleted is marked with strikethrough text. All terms with initial
capitalization that are not otherwise defined herein have the same
meaning as set forth in the OCC By-Laws and Rules.\3\
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\3\ OCC's By-Laws and Rules can be found on OCC's public
website: <a href="https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules">https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules</a>.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. OCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
Background
OCC acts as the central counterparty clearing house (``CCP'') for
all U.S. options exchanges and certain U.S. futures exchanges. OCC
provides clearing services for options on equities, indices, Exchange
Traded Funds (``ETFs'') and for certain transactions in futures and
options on futures. Organizations become OCC Clearing Members to
facilitate the clearing and settlement of their customer transactions
or proprietary transactions through OCC. OCC also provides certain
Clearing Members with the ability to submit stock loan transactions for
novation, after which, OCC becomes the counterparty to both sides of
the transactions, guaranteeing that these obligations will be
fulfilled. In 2012, OCC was designated as a systemically important
financial market utility (``SIFMU'') by the Financial Stability
Oversight Council pursuant to Title VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 (``Dodd-Frank Act''). With
this designation came heightened regulatory expectations around
financial, operational, and systems/data obligations. To keep pace with
those expectations and ensure OCC continues to maintain a high level of
market stability, OCC completed a review of its By-Laws and Rules in
conjunction with changes in regulations and Clearing Member risk
practices and processes. From this review, OCC modified its membership
standards in a proposed rule filing approved by the Commission in
2023.\4\ The modifications, among other things, (i) expanded OCC
membership to new entity types and in additional jurisdictions and
updated its membership requirements and associated processes, including
on-boarding and off-boarding procedures, (ii) amended the financial
responsibility standards by increasing the minimum capital requirements
for Clearing Members, (iii) amended operational requirements for
Clearing Members, and (iv) changed rules governing disciplinary
actions. The proposed rule filing also reorganized and consolidated
certain Clearing Member requirements to improve existing practices.
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\4\ See Order Granting Approval of Proposed Rule Change by the
Options Clearing Corporation Concerning the Amendment of its
Clearing Membership Standards, Exchange Act Release No. 97439 (May
5, 2023), 88 FR 30373 (May 11, 2023) (SR-OCC-2023-002) (``Clearing
Membership Standards'').
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To build on the enhancements made to OCC's membership standards in
2023 and continue to align with industry best practices \5\ and
evolving technology,\6\ OCC recently conducted an in-depth review of
its membership standards with a strategic focus on mitigating
counterparty credit risk introduced by Clearing Members. From this
review, OCC determined it was necessary to further enhance certain
Clearing Member requirements to improve OCC's risk mitigation processes
and practices. OCC's proposed changes to its clearing membership
standards address, in part, (i) new onboarding requirements for
eligible applicants for clearing membership at OCC (``applicants''),
(ii) risk mitigation requirements for existing Clearing Members and
specifically for Clearing Members that OCC determines may present a
heightened risk profile, (iii) factors or circumstances that may result
in an applicant's denial of membership or a Clearing Member's
suspension of membership, (iv) the expansion of delegated authority to
the designated delegates or agents of the Risk Committee as it pertains
to the approval or denial of applicants on a risk-based approach, and
(v) the expansion of the use of protective measures that OCC may impose
on an applicant or Clearing Member.
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\5\ See Bank for International Settlements, ``Guidelines for
Counterparty Credit Risk Management'' (December2024) ISBN 978-92-
9259-823-5; McKinsey& Company, ``Moving from Crisis to Reform:
Examining the State of Counterparty Credit Risk'' October 27, 2023;
FINRA Rules and Guidance for Funding & Liquidity <a href="https://www.finra.org/rules-guidance/key-topics/funding-liquidity">https://www.finra.org/rules-guidance/key-topics/funding-liquidity</a>.
\6\ Evolving technology refers to trends or events driving
technology changes in the financial services industry, including but
not limited to: (i) an organization's increased reliance on
technology to operate and deliver services, (ii) the adoption and
use of digital banking services, and (iii) the rise in a remote work
environment as more organizations allow their employees to work
outside of a traditional office space.
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OCC's proposed changes will enhance OCC's risk mitigation processes
and practices by requiring, in part, that applicants: (i) maintain a
minimum operating history, (ii) maintain a physical office facility to
conduct business with OCC, and (iii) provide, upon request by OCC, a
business plan, assessed by an independent third-party, that
demonstrates the applicant can meet and sustain financial and
operational responsibility standards and financial obligations. Among
other things, OCC's proposed changes also broaden the scope of required
disclosures that applicants must provide during the onboarding process,
such as information related to internal stress tests, credit agreements
or audited financial statements. By proposing these changes, OCC is
strengthening its holistic approach to reviewing and analyzing
applicants that may present a heightened risk profile, which further
mitigates counterparty credit risk. Additionally, OCC believes its
proposed change that delegates certain authority to the designated
delegates or agents of the Risk Committee will streamline the decision
process and allow for applications and business expansion requests to
be reviewed and acted upon in a shorter amount of time, providing a
substantial benefit to the industry. OCC's proposed changes also
clarify and expand upon the basis for denial of an
[[Page 57185]]
applicant and the suspension of an existing Clearing Member, providing
enhanced transparency to the industry. OCC's proposed changes address
updated financial responsibility obligations for existing Clearing
Members, which is intended to mitigate risk to OCC through the
establishment of enhanced risk-based capital levels. Furthermore, OCC's
proposed changes expand upon the use of protective measures, which will
allow more assurance that OCC is able to protect itself and its members
from emerging counterparty risks.
Overall, OCC believes these proposed changes will strengthen OCC's
onboarding requirements and provide OCC with the appropriate resources
to ensure that applicants onboarded as Clearing Members present an
acceptable risk profile such that they are likely to continue to meet
OCC's membership standards in the future. The proposed changes will
also allow OCC to more effectively risk manage existing Clearing
Members that may pose a heightened risk profile and take measures to
reduce that risk.
While the membership standards that OCC proposes to change are
described in further detail below, generally, they consist of the
following:
<bullet> Amending eligibility standards by requiring applicants to
maintain a minimum operating history of one year; \7\
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\7\ See infra description of proposed Rule 201.
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<bullet> Amending admission procedures and conditions to admission
to expand the delegation of authority to the Risk Committee's
designated delegates or agents; \8\
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\8\ See infra description of proposed Rules 203 and 204.
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<bullet> Amending admission procedures to codify the processes that
OCC would undertake in hearings before the Risk Committee for appeals
of certain protective measures, or in hearings on denials of Clearing
Member applications or reapplications; \9\
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\9\ See infra description of proposed Rules 203 and 307B.
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<bullet> Adopting requirements for applicants and Clearing Members
related to confidential treatment of non-public information; \10\
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\10\ See infra description of proposed Rules 203, 207, 306.
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<bullet> Amending the conditions to admission to, among other
things:\11\
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\11\ See infra description of proposed Rule 204.
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[cir] Clarify and expand upon the basis for OCC's denial of
membership;
[cir] Require more robust notification requirements from applicants
that are subject to a formal investigation by a regulatory
organization;
[cir] Restrict applicants that have been denied membership from
reapplying for membership until the applicant has demonstrated, to
OCC's satisfaction, that they have addressed the specific reason(s) for
their denial;
[cir] Require certain applicants to provide OCC with a business
plan demonstrating the applicant has a viable plan to meet and sustain
financial and operational responsibility standards and financial
obligations at OCC;
[cir] Incorporate a probationary period for certain applicants
approved by OCC with contingencies to membership;
<bullet> Amending requirements such that applicants and Clearing
Members are required to maintain a physical office facility to conduct
business with OCC, unless an applicant or Clearing Member utilizes a
remote office model that OCC determines does not present heightened
risk to OCC; \12\
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\12\ See infra description of proposed Rule 204 and 302.
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<bullet> Amending reporting requirements such that, upon OCC's
request, an applicant or Clearing Member must furnish their parent or
affiliate's audited financial statements to OCC; \13\
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\13\ See infra description of proposed Rules 204 and 306B.
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<bullet> Amending financial responsibility requirements by
establishing risk-based minimum capital levels; \14\
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\14\ See infra description of proposed Rule 301.
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<bullet> Amending operational capability obligations related to a
Clearing Member's books and records; \15\
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\15\ See infra description of proposed Rule 302.
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<bullet> Amending financial, operations, and risk management
personnel requirements related to a Clearing Member's employment of
individuals; \16\
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\16\ See infra description of proposed Rule 303.
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<bullet> Amending event-based reporting requirements specific to
Early Warning Notices; \17\
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\17\ See infra description of proposed Rule 306A.
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<bullet> Amending requirements related to OCC's ability to impose
protective measures on Clearing Members or applicants; \18\ and
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\18\ See infra description of proposed Rule 307.
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<bullet> Clarifying and expanding upon the basis for OCC's
suspension of an existing Clearing Member.\19\
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\19\ See infra description of proposed Rule 1201(a).
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The proposed rule change generally would reflect each of these
changes in the Rules by modifying the provisions currently set forth in
Chapter I, II, III XI and XII of the Rules. OCC's proposed changes also
include various clarifying, non-substantive updates to its Rules,
including formatting and grammatical changes, and updates to section
numbering as necessary to reflect proposed rules. OCC's proposed
changes are described in more detail below under the section headers
reflecting the proposed new Rules.
1. Purpose
The purpose of this proposed rule change by OCC is to modify its
existing Rules to implement changes that are designed to strengthen its
onboarding process for applicants and enhance its monitoring of current
Clearing Members through updated financial, operational, and reporting
requirements. OCC believes these proposed changes will help to mitigate
counterparty credit risk and improve OCC's risk mitigation processes
and practices.
Chapter I--Definitions
Proposed Rule 101--Definitions
OCC proposes to adopt a definition for the term ``anti-money
laundering (``AML'')'' as it is utilized in proposed Rule 204(e) \20\
and proposed Rule 307C.\21\ In Rule 101, OCC defines ``AML'' to mean,
when used in respect of an applicant or Clearing Member's AML controls,
compliance with anti-money laundering requirements imposed under U.S.
law or comparable requirements in the Clearing Member's home
jurisdiction.
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\20\ See infra description of proposed Rule 204(e).
\21\ See infra description of proposed Rule 307C.
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OCC also proposes to adopt a key person clause by defining the term
``Key Person'' as it is utilized in proposed Rule 204(c) \22\ and
proposed Rule 307C.\23\ The definition would provide that ``Key
Person'' means any person associated with a Clearing Member or
applicant that the Corporation deems is critical to the Clearing Member
or applicant's operations or risk management, including, but not
limited to, the Clearing Member's President, Chief Executive Officer
(``CEO''), Chief Financial Officer (``CFO''), Chief Risk Officer
(``CRO''), and Chief Compliance Officer (``CCO''), or equivalent
positions, or a major shareholder or partner of the Clearing Member.
The purpose of adopting a definition for Key Person is to promote
resiliency for OCC in the event an individual deemed to be a Key Person
is unable to fulfill their position within a Clearing Member or
applicant's management team. OCC's proposed definition of Key Person
incorporates the provision ``any person associated with a Clearing
Member or applicant'' to consider Clearing Members or applicants with
legal structures that encompass multiple legal entities. The purpose of
including the
[[Page 57186]]
phrase ``associated with'' is to encompass positions beyond direct
employment or control of the Clearing Member or applicant. For example,
a director or partner level position may not be a direct employee of a
Clearing Member or applicant, however, they may constitute a critical
part of such Clearing Member or applicant's operations or risk
management functions. As such, OCC believes it is necessary that the
definition of Key Person extend to such individuals outside of direct
employment, but who are still associated with the Clearing Member or
applicant. As described in more detail in proposed Rule 307C,\24\ if a
Key Person's departure has a material impact on the Clearing Member's
operations or financial profile, OCC believes it is necessary to
maintain the ability to impose restrictions on the impacted Clearing
Member. For example, a Key Person may control the day-to-day decisions,
maintain key client relationships, or have extensive knowledge of the
company such that their position is critical to the operation of the
business. If that person's inability to fulfill such position would
likely impact the business's operations or profitability, it could pose
additional risk to OCC. Therefore, OCC believes that adopting a
definition for Key Person will strengthen its risk mitigation practices
and promote resiliency for OCC.
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\22\ See infra description of proposed Rules 204(c), 204(c)(1),
and 204(c)(2).
\23\ See infra description of proposed Rule 307C.
\24\ Id.
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To align with OCC's proposed rules concerning the protection of
OCC's non-public information,\25\ OCC proposes to add a definition of
the term ``OCC Confidential Information'' to Rule 101. The definition
would provide that ``OCC Confidential Information'' means all non-
public information provided by OCC that (i) is marked or otherwise
identified in writing prior to disclosure to the recipient as
``confidential'' or ``business sensitive,'' \26\ (ii) is designated by
the Corporation as confidential, or (iii) the recipient knows or under
the circumstances surrounding disclosure, ought to reasonably know is
confidential.
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\25\ See infra description of proposed Rules 203, 207, 306.
\26\ These classifications correspond to OCC's internal
procedures for classifying and marking records.
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OCC's proposed rules incorporate a reference to the term ``OFAC''
as it relates to an applicant's or Clearing Member's compliance with
OFAC. For clarification, OCC proposes to define the term ``OFAC'' to
mean the United States Department of the Treasury's Office of Foreign
Assets Control as defined in Title 31, Chapter V of the Federal
Regulations.\27\
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\27\ 31 CFR 509.309.
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Lastly, OCC proposes to update the rule reference in the definition
of the term ``Office'' in Rule 101. OCC proposes to eliminate reference
to Rule 201 within the description and replace it with reference to
Rule 302. OCC believes this proposed change aligns more closely with
the new proposed edits to Rule 302 as it relates to requirements around
maintaining a physical office space.
Chapter II--Clearing Membership
Proposed Rule 201--Eligibility
OCC proposes to modify its eligibility standards for applicants to
ensure that, in OCC's discretion, such applicants reflect a sound
financial and operational profile. Specifically, OCC proposes to adopt
a new subsection (b) to current OCC Rule 201 \28\ that would provide
that Clearing Members must maintain a minimum operating history of one
year in the same or substantially same business activities as being
applied for, or in the alternative, must maintain senior personnel with
sufficient financial, risk, and operational background and experience,
in the sole opinion of OCC, to conduct the business of the Clearing
Member.
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\28\ Current OCC Rule 201(b) would be renumbered as OCC Rule
201(c), and current OCC Rules 201(c)--201(e) would be renumbered as
OCC Rules 201(d)--201(f), respectively.
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The proposed change requiring a minimum operating history of one
year is designed to ensure that there is sufficient information for OCC
to formulate a holistic view of the applicant's background to help
determine, based on the applicant's history, whether the applicant
could meet OCC's existing membership standards and whether the
applicant is likely to continue to meet OCC's membership standards for
the foreseeable future. The proposed change also provides OCC with
flexibility to, in the event the applicant does not maintain an
operating history of one year, evaluate the applicant's senior
personnel to determine whether such personnel have sufficient
background experience to conduct the business of the Clearing Member.
By requiring a minimum operating history of one year, OCC believes this
proposed change will allow applicants to demonstrate their continued
capacity to operate their business. OCC believes this information will
strengthen its onboarding process by eliminating at an early-stage
applicants that do not maintain a sufficient operating history or
sufficient personnel, in OCC's discretion, therefore mitigating
potential risk to OCC.
Proposed Rule 203--Admission Procedures
OCC proposes to make substantive and organizational changes to
proposed Rule 203--Admission Procedures. OCC's proposed changes would
reorganize Rule 203 into six separate subsections, outlined in proposed
subsections (a) through (f) of proposed Rule 203. OCC also proposes
adding titles that label each subsection, enhancing clarity and ease of
readability throughout the document. OCC's proposed changes adopt new
rule text in its entirety in proposed subsections (b)(4) through
(b)(6), (b)(8), (e) and (f) of proposed Rule 203, while proposed
subsections (a), (b)(1) through (b)(3), (b)(7), (c), and (d) reorganize
existing text and incorporate new text. The purpose of each substantive
change is discussed below.
i. Proposed Rule 203(a)
OCC's proposed changes would reorganize existing Rule 203(a) into
proposed Rules 203(a) and 203(b)(1) through (b)(3). The first sentence
of current Rule 203(a) provides that applicants for clearing membership
must be in such form and contain such information as OCC will from time
to time require. Proposed Rule 203(a) would be titled ``Form of
Application.'' In addition, Proposed Rule 203(a) would extend this
provision to include reapplications under Rule 309. As described in
more detail in below with respect to proposed Rule 309, OCC may
determine that a Clearing Member must reapply for membership due to an
event described in Rule 306A(b)(1) that causes a material impact on the
Clearing Member's operational condition. If OCC makes such
determination, the Clearing Member would be required to reapply for
membership pursuant to the admission procedures described in Rule 203,
and the reapplying Clearing Member would be afforded the same rights
under Rule 203 as any new applicant of OCC.
ii. Proposed Rule 203(b)
OCC's proposed Rule 203(b) would be titled ``Review by the Risk
Committee or its Delegates'' and would be organized into eight
subparts, as outlined in proposed Rule 203(b)(1) through (b)(8). OCC's
proposed changes reorganize rule text from existing Rule 203(a) into
new proposed Rules 203(b)(1) through (b)(3) while also proposing
additional provisions in those subsections. Proposed Rule 203(b)(7)
contains certain
[[Page 57187]]
text that was relocated from existing Rule 203(a) while also proposing
new rule text. Lastly, OCC proposes to adopt Rule 203(b)(4) through
(b)(6), and (b)(8) as entirely new rule text.
a. Proposed Rule 203(b)(1)
OCC proposes to modify its admission procedures to expand the
delegation authority of the Risk Committee, specifically in their
decision to approve or deny an applicant. OCC's existing Rule 203(a)
provides, in part, that the Risk Committee must approve or deny an
applicant for clearing membership, and that the Risk Committee may also
approve, under certain circumstances, an applicant on an expedited
basis.\29\ OCC proposes to expand the Risk Committee's authority such
that the Risk Committee may delegate, to its designated delegates or
agents, the ability to approve or deny new applications or
reapplications, and approve an applicant on an expedited basis.
Specifically, proposed Rule 203(b)(1) would provide that the Risk
Committee, or its designated delegates or agents, determine whether to
approve or deny applications or reapplications for clearing membership.
OCC proposes to reflect this change on the delegation of authority from
the Risk Committee to its designated delegates or agents throughout
Rule 203 and Rule 204, as described in further detail below.
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\29\ See supra note 3 at Rule 203(a), (b).
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OCC believes the proposed change to delegate certain authority of
the Risk Committee to its delegates or agents will streamline and
accelerate the decision-making process and approval, while continuing
to utilize a risk-based decision-making approach within OCC. New
Clearing Member applicants are currently reviewed and decided upon by
the Risk Committee at the regular Risk Committee meetings, which are
scheduled approximately every quarter. OCC believes this delegation of
authority will also benefit applicants that may require a more urgent
response based on their business activity, because such applicants
would not need to wait for a regularly scheduled Risk Committee meeting
for their application to be presented to the Risk Committee and
approved or denied by the Risk Committee. Given various dependencies in
the application review process, such as receiving documentation from
applicants and working through the required internal approvals, it can
be challenging from a timing perspective to align such dependencies
with the regularly scheduled Risk Committee meeting date. By expanding
the potential delegation of authority to approve or deny applications
outside of the regular scheduled Risk Committee meetings, OCC believes
this will accelerate the decision-making process and reduce delays for
applicants.
OCC's proposed changes in proposed Rule 203(b)(1) also incorporate
``reapplications'' into this provision to align with proposed Rule 309.
As described in proposed Rule 309 and outlined in the description of
proposed Rule 203(a) above, if OCC determines that a Clearing Member
must reapply for membership, the process for reapplication would follow
the same admission procedures for new applicants described in Rule 203.
As such, the reapplying Clearing Member would be afforded the same
rights as new applicants under existing Rule 203, and the Risk
Committee, or its designated delegates or agents, would determine
whether to approve or deny the reapplications, as it would for new
applicants.
Furthermore, OCC also proposes to update existing language in
proposed Rule 203(b)(1) to promote clarity and consistency on the Risk
Committee's responsibility related to approval or denial of an
applicant. OCC's existing Rule 203(a), which is reorganized, in part,
to proposed Rule 203(b)(1), provides that the Risk Committee must
review and approve or disapprove such applicants for clearing
membership.\30\ OCC's proposed changes in proposed Rule 203(b)(1)
update this language to state that the Risk Committee, or its
designated delegates or agents, ``determine whether to approve or
deny'' applications or reapplications for clearing membership. OCC
believes the proposed language ``determine whether to approve or deny''
provides a more precise description of the Risk Committee's
responsibilities, intended to promote transparency for Clearing Members
and the general public.
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\30\ See supra note 3 at Rule 203(a).
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b. Proposed Rule 203(b)(2)
Proposed Rule 203(b)(2) consists entirely of text relocated from
the third sentence of existing Rule 203(a), with no substantive
changes. Specifically, the sentence provides that the Risk Committee,
or its designated delegates or agents, may examine the books and papers
of any applicant, take such evidence as they may deem necessary or
employ such other means as they may deem desirable or appropriate to
ascertain relevant facts bearing upon the applicant's qualifications.
OCC believes relocating this information from existing Rule 203(a) into
proposed Rule 203(b)(2) enhances organizational efficiency in the
document.
c. Proposed Rule 203(b)(3)
OCC's proposed changes reorganize and restate the fourth sentence
of existing Rule 203(a) into proposed Rule 203(b)(3). That sentence
currently provides that if the Risk Committee proposes to disapprove an
application for clearing membership, it must first furnish the
applicant with a written statement of its proposed recommendation and
the specific grounds therefor, and afford the applicant an opportunity
to be heard and to present evidence on its own behalf. Proposed Rule
203(b)(3) would incorporate the proposed expansion of the delegation
authority of the Risk Committee in their decision to approve or deny an
applicant by extending this obligation to the Risk Committee's
designated delegates or agents. Proposed Rule 203(b)(3) would also
incorporate ``reapplications'' of Clearing Members to align with
proposed Rule 309, as described below. Proposed Rule 203(b)(3) would
provide that the written statement informing the applicant or Clearing
Member of the specific grounds of the proposed denial would be
furnished by OCC's Corporate Secretary. As such, proposed Rule
203(b)(3) would provide clarity regarding whose responsibility it would
be to transmit the written statement, clarifying it would be OCC's
Corporate Secretary, not the Risk Committee. In addition, this change
would provide transparency concerning the point at which the proposed
process for Risk Committee review of such proposed denial would begin,
as discussed below with respect to proposed Rule 203(b)(4) through (8).
Proposed Rule 203(b)(3) would also use the terms ``deny'' or
``denial,'' instead of ``disapprove'' and ``recommendation,''
respectively, to align with the changes to Proposed Rule 203(a).
d. Proposed Rules 203(b)(4)-(b)(6)
OCC proposes to adopt subsections (b)(4) through (b)(6) of proposed
Rule 203 as new rule text. The purpose in adopting subsections (b)(4)
through (b)(6) is to codify within OCC's rules the processes that OCC
would undertake in hearings before the Risk Committee on denials of
Clearing Member applications or reapplications.\31\ OCC believes this
detailed process set forth in (b)(4) through (b)6) of proposed Rule 203
will promote greater transparency for Clearing Members and applicants
with
[[Page 57188]]
respect to denial of participation and the procedures afforded to them.
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\31\ OCC also proposes to codify these same procedures for
appeals of certain protective measures, as described in proposed
Rule 307B.
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First, proposed Rule 203(b)(4) establishes the process by which a
Clearing Member or applicant may request a hearing, and the notice
requirements OCC must provide before that hearing takes place.
Specifically, proposed Rule 203(b)(4) would provide that a Clearing
Member or applicant may request a hearing by filing with the Secretary
of OCC within five (5) business days from the date on which the
Secretary of OCC furnished the applicant with a written statement under
paragraph (b)(3) setting forth the name of the representative of the
Clearing Member or applicant who may be contacted with respect to the
hearing. Furthermore, the proposed change would provide that the
Secretary of OCC will give the Clearing Member or applicant not less
than ten (10) business days' prior written notice of the place and time
of the hearing.
Next, proposed Rule 203(b)(5) outlines the requirements that a
Clearing Member or applicant must fulfill after requesting a hearing,
including submitting a detailed written statement of objections and
indicating their intent to attend the hearing and whether they will
have legal representation. Specifically, proposed Rule 203(b)(5) would
provide that within seven (7) business days after the Clearing Member
or applicant files such written request with OCC, the Clearing Member
or applicant must submit to the Secretary of OCC a clear and concise
statement setting forth with particularity the basis for its objection
to the denial, whether the Clearing Member or applicant intends to
attend the hearing, and whether the Clearing Member or applicant
chooses to be represented by counsel at the hearing. Additionally,
proposed Rule 203(b)(5) would include that the Secretary of OCC may
extend a Clearing Member's time for submitting a written request for
review or a written statement for good cause shown.
Finally, proposed Rule 203(b)(6) establishes the formal procedures
governing how a hearing before the Risk Committee would be conducted,
covering attendance, representation, recordkeeping, evidence submission
and objections, hearing order, and post-hearing follow-up. OCC had
previously developed and the Risk Committee had deployed these
procedures for challenges to limitations on membership under OCC Rule
307B. OCC now proposes to codify them in Rule 203(b)(6) for
transparency. Specifically, proposed Rule 203(b)(6) would provide that
a hearing will proceed before the Risk Committee pursuant to the
procedures set forth in (A) through (I) of proposed Rule 203(b)(6).
Sections (A) through (I) of proposed Rule 203(b)(6) would establish the
below procedures:\32\
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\32\ The bullet points set forth correspond to subsections (A)
through (I) of Section (b)(6), presented in sequential order.
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[cir] If the applicant fails to appear at the hearing, it may be
deemed to have waived the right to review.
[cir] The Clearing Member or applicant may be represented by
counsel, but such representation is not required.
[cir] OCC will keep a verbatim record of the hearing, which shall
be the official record of the hearing. The applicant must refrain from
making audio or video recordings or transmission of the hearing. The
verbatim record of the hearing shall constitute OCC Confidential
Information.
[cir] OCC and the Clearing Member or applicant (each a ``Party'')
may offer evidence through documentary evidence entered as exhibits in
the proceeding.
[cir] Parties must provide copies of any documents or other
materials that they plan to use at the hearing as evidence. Such
evidence must be exchanged no later than the date established by the
Risk Committee.
[cir] The formal rules of evidence, including the Federal Rules of
Evidence, do not apply to hearings held under this Rule. Parties may
argue that any documentary evidence presented by the opposing party
should not be considered by the Risk Committee by objecting orally at
the hearing on the basis that the evidence is irrelevant, immaterial,
unduly repetitious, or unduly prejudicial. After considering the
objecting party's reasons for excluding the evidence, the Risk
Committee members will determine if the document will be admitted into
evidence and into the record.
[cir] Following the presentation of each document, members of the
Risk Committee may pose questions to the presenter of the document
about the evidence offered.
[cir] Subject to the Risk Committee's authority to change the
order, the hearing will be conducted in the following order: (i) open
of record; (ii) presentation of the facts of the case, including
documents, by an Officer of the Corporation, or an Officer's delegate
or the Corporation's counsel; (iii) the applicant's presentation of
facts of the case, including documents; (iv) rebuttal by an Officer of
the Corporation, or an Officer's delegate or the Corporation's counsel;
(v) the applicant's rebuttal; and (vi) the close of record.
[cir] Following the hearing, if necessary, the Risk Committee may
submit questions in writing to either Party, with copies of all
communication provided to each Party.
e. Proposed Rule 203(b)(7)
Proposed Rule 203(b)(7) establishes the notice requirements and
finality of the Risk Committee's decision to deny an application or
reapplication. From an organizational standpoint, proposed Rule
203(b)(7) incorporates certain rule text that was relocated from
existing Rule 203(a) into proposed Rule 203(b)(7), while also
introducing new rule text.
Specifically, proposed Rule 203(b)(7) provides that if the Risk
Committee, or its designated delegates or agents, denies an application
or reapplication, OCC will provide the applicant or Clearing Member a
written notice of the decision, accompanied by a statement of the
specific grounds on which the denial is based. Furthermore, the
proposed changes would state that any decision made under this Rule
will be final upon the date OCC's Corporate Secretary provides a copy
of the written notice of the decision to the Party. Proposed Rule
203(b)(7) would incorporate the concept of reapplication as described
under proposed Rule 309 such that Clearing Members would be afforded
the same rights under proposed Rule 203 as new applicants. OCC's
proposed changes also replace the word ``disapproves'' with ``denies''
to remain consistent with the word choice in proposed Rule 203(b)(1)
through (b)(3). In addition, OCC's proposed changes eliminate existing
rule text that requires the decision must be ``mailed or delivered to
the applicant.'' OCC proposes this change for efficiency and will amend
its processes accordingly if the change is approved. Finally, proposed
Rule 203(b)(7) would make other non-substantive changes, such as (i)
replacing ``its'' with ``the'' in reference to the Risk Committee's
written notice of decision, and (ii) eliminating the word ``therefore''
because this was relocated text that OCC believes it is no longer
necessary.
f. Proposed Rule 203(b)(8)
Proposed Rule 203(b)(8) establishes that a final denial of a
Clearing Member's reapplication, pursuant to proposed Rule 309, will
constitute grounds for summary suspension under Rule 1102.
Specifically, proposed Rule 203(b)(8) would provide that a final
decision to deny a reapplication of a Clearing Member pursuant to Rule
309 and this Rule will constitute a suspension or expulsion from a
self-
[[Page 57189]]
regulatory organization and therefore grounds for summary suspension
under Rule 1102. Proposed Rule 203(b)(8) mirrors existing
Interpretation and Policy .01 to Rule 1201 (i.e., proposed Rule
1201(b)), which provides the same with respect to a suspension or
expulsion following disciplinary proceedings. In effect, these proposed
rules provide that following a determination to expel a member--whether
upon a denial of a reapplication under proposed Rule 309 after
affording the Clearing Member the process described above or as a
sanction for a violation of OCC's By-Laws and Rules under existing
Chapter XII of the Rules--suspension of the Clearing Member may proceed
in accordance with Chapter XI of the Rules (Suspension of a Clearing
Member).
iii. Proposed Rule 203(c)
OCC's proposed changes reorganize existing Rule 203(b) to become
proposed Rule 203(c), and add the title ``Expediated Approvals.'' OCC
believes these proposed changes will help to improve readability and
ease of navigation throughout OCC's rules. OCC's proposed changes also
incorporate the expansion of the delegation authority of the Risk
Committee in their decision to approve or deny an applicant on an
expediated basis, as discussed above in the description of proposed
Rule 203(b)(1). Specifically, OCC's proposed changes provide that the
Risk Committee, ``or its designated delegates or agents,'' may approve
an applicant on an expedited basis if approval of such applicant is
appropriate for the protection of investors and the public interest.
iv. Proposed Rule 203(d)
OCC's proposed changes would also modify the provisions applicable
to Clearing Members seeking to engage in clearing activities beyond the
scope of their current authorizations. Specifically, OCC's proposed
changes would reorganize existing Rule 203(c) to become new Rule
203(d)--``Business Expansion Requests.'' OCC believes the proposed
addition of a title will improve readability and ease of navigation
throughout OCC's rules. Proposed Rule 203(d) would provide that
Clearing Members' business expansion requests may be reviewed and
approved or disapproved ``by the Risk Committee, or its designated
delegates or agents'' pursuant to the procedures of OCC.
OCC's proposed changes eliminate the specific reference to the CEO
and COO \33\ and eliminate the provision requiring that the Risk
Committee must be given not less than ten business days from the date
it is notified of any such approval/disapproval to determine whether
the business expansion request should be reviewed by the Risk
Committee. Because the parties seeking to engage in business expansion
requests are existing Clearing Members that have already gone through
enhanced due diligence in the application process, OCC believes it is
not necessary that all business expansion requests be considered for
review by the Risk Committee. Rather, OCC proposes a new risk-based
framework pursuant to OCC's procedures such that only business
expansion requests that have been escalated by OCC's CEO or COO
(``OCEO'') would be subject to the review and approval of the Risk
Committee. Furthermore, pursuant to OCC's Decision Authority Framework,
it would be up to the discretion of the OCEO to determine, based on the
specific business expansion request, whether it would be necessary to
involve the Risk Committee in the decision-making process.\34\
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\33\ The revised rule text would authorize the Risk Committee,
or its designated delegates or agents, as the decision makers. As a
confidential Exhibit 3a to File No. SR-OCC-2026-009, OCC provided a
copy of its Clearing Member On-Boarding and Off-Boarding Procedure
which includes the Proposed Decision Authority Framework for New
Clearing Member Applicants and Business Expansions (``Decision
Authority Framework''). OCC's Decision Authority Framework outlines
the designated delegates or agents of the Risk Committee and their
level or review or decision, based on the Clearing Member applicant
and business expansion.
\34\ Per OCC's Decision Authority Framework, which is included
in the Clearing Member On-Boarding and Off-Boarding Procedure as
confidential Exhibit 3a to SR-OCC-2026-009, business expansion
requests will not require Risk Committee approval, however the OCEO
may escalate any business expansion request to the Risk Committee at
its discretion.
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As mentioned above, OCC's current process for business expansion
requests entails that business expansion requests are approved or
disapproved by the CEO or COO, provided the Risk Committee will be
given not less than ten business days from the date it is notified of
such approval or disapproval to determine whether the business
expansion request should be reviewed by the Risk Committee.\35\ OCC's
current process allows the Risk Committee a 10-day negative consent
period upon being notified of such approval or disapproval. If there is
no objection from the Risk Committee during that timeframe, the
business expansion request is approved or disapproved depending on the
determination of the CEO or COO. Based on the information available to
OCC at this time, OCC is not aware of a specific instance in which the
Risk Committee exercised its authority to review or object to business
expansion requests in the past. The purpose of proposed Rule 203(d) is
to eliminate the requirement that every business expansion request be
required to be reviewed by the Risk Committee. OCC believes the
proposed change will streamline business expansion requests by
eliminating the 10-day negative consent period and promoting a clear
decision-making approach for either the Clearing and Liquidity Risk
Working Group (``CLRWG'') or the OCEO.
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\35\ See supra note 3 at Rule 203(c).
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v. Proposed Rule 203(e)
OCC proposes to adopt subsection (e) of proposed Rule 203 to codify
within OCC's Rules its intent to inform the Risk Committee of all
decisions related to applicants or business expansion requests.
Specifically, Proposed Rule 203(e) would provide that OCC will provide
notice to the Risk Committee of all decisions made by the Risk
Committee's designated delegates or agents related to the approval or
denial of any applicant or business expansion request. As described in
more detail above, OCC proposes to expand the Risk Committee's
authority so that the Risk Committee may delegate, to its designated
delegates or agents, the authority to approve or deny new applicants
and business expansion requests. The purpose of the proposed Rule
203(e) is to align with the proposed delegated authority framework and
provide transparency to the Risk Committee of all decisions being made
by the Risk Committee's designated delegates or agents as it relates to
the approval or disapproval of applicants or business expansion
requests.
vi. Proposed Rule 203(f)(1) Though (2)
OCC also proposes to establish rules related to the confidential
treatment of non-public information and proposes to adopt Rule 203(f)
``Confidential Information.'' In its capacity as a self-regulatory
organization, OCC collects non-public information from its applicants
to assess whether each applicant meets OCC's membership standards. In
addition, OCC collects non-public information from its Clearing Members
as part of its ongoing monitoring of their continued adherence to those
standards. Such non-public information includes, but is not limited to,
information on the applicant or Clearing Members financial and
operational condition, agreements with other counterparties, and
written policies and procedures. OCC may also
[[Page 57190]]
provide non-public information to its Clearing Members and applicants
to support its participants' risk management and operations with
respect to their participation in OCC. Examples of non-public
information OCC may share with participants include, but are not
limited to, the detailed methodology descriptions for OCC's proprietary
margin and stress testing methodologies,\36\ and operation manuals
providing participants with detailed instructions about how to use
OCC's clearance and settlement systems.
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\36\ The Commission has reviewed such documents and has
concluded that they are appropriately withheld from OCC's public
filings under Section 23(a)(3) of the Exchange Act, 15 U.S.C.
78w(a)(3), under Exemption 4 of the Freedom of Information Act
(``FOIA''), 5 U.S.C. 552(b)(4). See, e.g., Exchange Act Release No.
95319 (July 19, 2022), 87 FR 44167, 44171 n.49 (July 25, 2022) (SR-
OCC-2022-001) (concluding that FOIA Exemption 4 applied to OCC's
STANS Methodology Description).
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With respect to non-public information that an applicant shares
with OCC, assurance of confidentiality would be provided through the
addition of paragraph (f)(1) to OCC Rule 203. Proposed Rule 203(f)(1)
provides, in part, that any non-public information furnished to OCC
pursuant to this Chapter will be held in confidence as may be required
under the laws, rules and regulations applicable to OCC that relate to
the confidentiality of records. For the avoidance of doubt, the
proposed change would also provide that nothing in this Rule would
prevent OCC from releasing such non-public information, in its sole
discretion, to (i) any governmental or regulatory authority (e.g., the
SEC of CFTC); or (ii) any regulatory organization to which the
applicant is a member or participant (e.g., Financial Industry
Regulatory Authority (``FINRA'') with respect to a broker dealer, or
other registered clearing agencies in which the applicant or Clearing
Member is a common member).\37\
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\37\ For purposes of these Rules, ``regulatory organization'' is
already defined in OCC Rule 101 to include, among other
organizations, (i) any self-regulatory organization (as defined in
Section 3(a) of the Securities Exchange Act, 15 U.S.C. 78c(a)(26))
of which the Clearing Member is a member or participant, and (ii)
any clearing organization (as defined in Regulation 1.3 under the
Commodity Exchange Act, 17 CFR 1.3), board of trade, contract market
and registered futures association of which the Clearing Member is a
member or participant.
---------------------------------------------------------------------------
OCC would also add a paragraph (2) to Rule 203(f), which would
require that each applicant must maintain OCC Confidential Information
in confidence to the same extent and using the same means it uses to
protect its own confidential information, but no less than a reasonable
standard of care, and that the applicant must not use OCC Confidential
Information or disclose OCC Confidential Information to any third party
except as necessary to perform such applicant's obligations under the
By-Laws and Rules or as otherwise required by applicable law.
Furthermore, proposed Rule 203(f)(2) would entitle OCC to seek any
temporary or permanent injunction or other equitable relief in addition
to any monetary damages related to the disclosure of OCC Confidential
Information. Specifically, proposed Rule 203(f)(2) would state that
each applicant acknowledges that breach of its confidentiality
obligations under these Rules may result in serious and irreparable
harm to OCC for which there is no adequate remedy at law, and in the
event of such a breach by the applicant, OCC will be entitled to seek
any temporary or permanent injunction or other equitable relief in
addition to any monetary damages. In addition, by promulgating Rule
203(f)(2), OCC would be entitled to impose disciplinary proceedings for
an applicant's violation of the confidentiality requirements,
consistent with existing Chapter XII of OCC's Rules. Finally, proposed
Rule 203(f)(2) would state that nothing in this Rule will prevent OCC
or the applicant from providing such OCC Confidential Information to
any governmental or regulatory authority subject to request for
confidential treatment.
Proposed Rule 204--Conditions to Admission
OCC proposes to enhance its conditions to admission to provide OCC
with the appropriate resources to thoroughly evaluate each applicant,
based on specific conditions described in the Rules, to determine if
such applicant currently meets OCC's membership standards and if such
applicant is likely to continue to meet OCC's membership standards in
the future. OCC's proposed modifications expand upon its basis for
denial of an applicant and strengthen the financial and reporting
requirements for applicants to ensure applicants reflect an acceptable
risk profile, based on OCC's discretion.
i. Proposed Rules 204(a), 204(c), and 204(d)
Consistent with the proposed changes to proposed Rule 203 described
above, OCC proposes to modify Rule 204 to expand the delegation of
authority of the Risk Committee to the Risk Committee's designated
delegates or agents. Specifically, OCC proposes to modify Rule 204(a)
to provide that the Risk Committee, ``or its designated delegates or
agents, may approve any application for clearing membership if the
applicant meets the membership requirements and standards set for in
the Rules.'' To eliminate ambiguity and promote more concise and direct
language, OCC's proposed changes update the structure of the sentence
to reflect the affirmative tone by replacing the phrase ``will not''
with ``may,'' and ``fails to meet'' with ``meets.''
OCC also proposes to modify 204(c) and 204(d), respectively, to
provide that: (i) the Risk Committee, ``or its designated delegates or
agents,'' may disapprove the application for clearing membership of any
applicant or person of the applicant who is subject to a Statutory
Disqualification, and (ii) that the Risk Committee, ``or its designated
delegates or agents,'' may disapprove an application for clearing
membership if the applicant or any natural person associated with the
applicant has engaged and there is a reasonable likelihood he will
again engage in acts or practices inconsistent with just and equitable
principles of trade. OCC believes the proposed changes to delegate
certain authority to the Risk Committee's designated delegates or
agents will streamline and accelerate the decision-making process using
a risk-based decision-making approach.
ii. Proposed Rules 204(c), 204(c)(1), and 204(c)(2)
OCC proposes to expand the statutory disqualification provision in
proposed Rules 204(c), 204(c)(1) and 204(c)(2) to include the statutory
disqualification of a Key Person, as the term is defined in Rule 101.
OCC's proposed changes to Rules 204(c) and 204(c)(1) also intended to
clarify that the provision applies not only to applicants who are
subject to a Statutory Disqualification at the time of application, but
also to applicants who become subject to a Statutory Disqualification
over the course of the application period itself.
Existing Rule 204(c) provides that the Risk Committee may
disapprove the application for clearing membership of any applicant or
person of the applicant who is subject to a Statutory Disqualification.
To promote clear construction of the rule and strengthen OCC's grounds
for denial of an applicant, OCC proposes to modify Rule 204(c) to state
that the Risk Committee, or its designated delegates or agents, may
disapprove ``an'' application for clearing membership if any applicant,
or ``Key Person'' of the applicant, is ``or becomes'' subject to a
Statutory Disqualification. The purpose of this proposed change is to
strengthen OCC's basis for denial of an applicant if the applicant
presents heightened risk to
[[Page 57191]]
OCC at the initial time of application, or over the course the
application period itself. As mentioned above under proposed Rule 101,
a Key Person is, in part, a person associated with a Clearing Member or
applicant that OCC deems is critical to the Clearing Member or
applicant's operations or risk management. For example, a Key Person
may control the day-to-day decisions, maintain key client
relationships, or have extensive knowledge of the company such that
their position is critical to the operation of the business. OCC's
proposed changes narrow the grounds from statutory disqualification of
a ``person'' of the applicant to statutory disqualification of a ``Key
Person'' of the applicant to focus on those individuals that maintain
critical and supervisory responsibilities within the organization. In
contrast to the more general reference to a ``person'' of the
applicant, OCC believes that a ``Key Person'' of the applicant has a
role within the organization that may have a stronger impact on the
organization's operations and processes. If an applicant or a Key
Person of the applicant is subject to a Statutory Disqualification at
the time of application, or if an applicant or Key Person of the
applicant becomes subject to a Statutory Disqualification over the
course of the application period, OCC believes this may present
heightened risk to OCC. Therefore, OCC proposes to expand authority to
deny an applicant if such applicant or a Key Person of the applicant is
or becomes subject to a Statutory Disqualification. OCC's proposed
changes would also make other grammatical and conforming changes in
proposed Rule 204(c).
For the same reasons described above, OCC proposes to revise Rule
204(c)(1) to incorporate the statutory disqualification of a Key
Person. Proposed Rule 204(c)(1) would provide that in cases in which
the SEC, by order, directs as appropriate in the public interest, the
Corporation will disapprove an application for clearing membership by
any applicant or ``Key Person'' of the applicant who is ``or becomes''
subject to a Statutory Disqualification.
OCC also proposes to modify Rule 204(c)(2) to expand upon the
circumstances and specify the timeframe for which an applicant must
provide notification to OCC. Specifically, OCC proposes to modify Rule
204(c)(2) to provide that every applicant must notify OCC in writing
``within two business days'' if the applicant ``or a Key Person'' is or
becomes subject to a statutory disqualification in accordance with the
requirements of Rule 306A(c), ``or if the applicant learns that it or a
Key Person is the subject of a formal investigation by a regulatory
organization.''
Existing Rule 306A(c) provides, in part, that a Clearing Member or
any applicant for clearing membership must notify OCC within 20
business days upon learning of becoming subject to a statutory
disqualification.\38\ OCC believes the proposed change to shorten the
notification timeframe requirement for applicants from 20 business
days, as provided in 306A(c), to two business days, as provided in
proposed Rule 204(c)(2), provides OCC with important information at an
earlier stage in the decision-making process. By receiving such
information from an applicant within two business days of the applicant
becoming aware, rather than within 20 business days, OCC will be able
to evaluate this information earlier in the applicant review process
and take next steps to address how the Statutory Disqualification may
impact the applicant. OCC believes this information may be a factor in
determining whether the applicant, in OCC's discretion, presents an
acceptable risk profile to OCC. Therefore, OCC believes the proposed
change to shorten the notification period will promote efficiencies and
help to accelerate the decision-making process.
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\38\ See supra note 3 at Rule 306A(c).
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In addition, proposed Rule 204(c)(2) requires that, if an applicant
learns that it or a Key Person is the subject of a formal investigation
by a regulatory organization, the applicant must notify OCC within two
business days of learning of such investigation, so that OCC can
evaluate the applicant, and the information provided, as soon as
possible and in its entirety. OCC believes that such information may be
a factor in determining whether the applicant may present an acceptable
risk profile to OCC. OCC believes that if an applicant is the subject
of a formal investigation by a regulatory organization, the applicant
may, among other things, present a heightened risk profile. Therefore,
it would be of concern to OCC if OCC learned of such investigation
after approving the applicant for membership, rather than before
approval. Furthermore, should OCC learn of such an investigation
towards the end of the onboarding process, but before presenting the
firm for approval, this may require a postponement of such presentation
until OCC can complete its due diligence on that matter, thereby
leading to a prolonged onboarding process and an inefficient approach
to decision-making.
iii. Proposed Rule 204(e)
OCC's proposed Rule 204(e) expands upon the basis for OCC's denial
of membership by providing examples of factors or circumstances, under
OCC's existing authority, that articulate OCC's denial of membership.
Proposed Rule 204(e) would provide that the Risk Committee, or its
designated delegates or agents, may disapprove any application for
clearing membership if OCC becomes aware of any factor or circumstance
about the applicant, or a Key Person of the applicant, that may pose
elevated risk to OCC or impact the suitability of the applicant as a
Clearing Member. OCC proposes to include the reference to the Key
Person of the applicant, as defined in Rule 101, to capture certain
situations when, for example, a CEO steps down from the CEO role, but
still represents a critical role in the Clearing Member's or
applicant's management team. The proposed change would also provide
that factors or circumstances that may pose elevated risk to OCC
include, but are not limited to: (i) concerns relating to an
applicant's liquidity profile; (ii) concerns with the results of an
independent assessment, performed in the last 12-18 months,\39\ of an
applicant's AML program's compliance with the Banking Secrecy Act
requirements or OFAC Sanctions List and Sanctions list data; (iii)
concerns relating to the amount or degree of financial leverage
maintained or proposed to be maintained by the applicant; (iv) concerns
relating to pending, adjudicated or settled regulatory or other legal
actions involving the applicant or its management, including the
applicant or a Key Person of the applicant being subject to a Statutory
Disqualification, as such term is defined in Rule 101; (v) if an
applicant does not conduct its business from a physical office facility
such that OCC determines this represents an unacceptable level of
operational risk to OCC, or (vi) concerns related to an applicant's
profitability.
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\39\ OCC's rationale for proposing that the independent
assessment be performed in the last 12-18 months is based on
consideration from NFA Compliance Rule 2-9(c), which requires that
FCMs provide for independent testing, conducted at least every 12
months, of the adequacy of their anti-money laundering compliance
programs. See National Futures Association. (2022). NFA Interpretive
Notice 9045--NFA Compliance Rule 2-9: FCM and IB Anti-Money
Laundering Program. Retrieved from https://www.nfa.futures.org/
rulebooksql/
rules.aspx?Section=9&RuleID=9045#:~:text=2%20including%20FCMs.-
,3,maintain%20and%20update%20customer%20information.
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Although OCC does not specify in proposed Rule 204(e)(ii) who must
perform an independent assessment of
[[Page 57192]]
an applicant's AML program's compliance with the Banking Secrecy Act
requirements or OFAC Sanctions List and Sanctions list data, OCC would
expect such assessment to be conducted by an applicant's internal audit
department, consultants, or other qualified independent third parties
to help to ensure the information is accurate and as unbiased as
possible. OCC believes it is also reasonable to require that the
assessment be conducted by an independent third-party to align with
other self-regulatory organizations, such as FINRA and the National
Futures Association (``NFA''), both of which also maintain provisions
in their rules requiring independent testing of their AML compliance
program.\40\
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\40\ FINRA Rule 3110(c) and NFA Rule 2-9(c) Interpretation 9045.
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OCC believes the provisions set forth in this proposed rule are
necessary and appropriate for OCC to take into consideration when
evaluating whether an applicant presents a heightened risk profile. OCC
believes proposed Rule 204(e) will provide greater transparency to
applicants and the general public at an earlier stage in the
application process because the considerations listed in the proposed
rule are part of OCC's existing application review process. Proposed
Rule 204(e) is not intended to represent an exhaustive list of all
circumstances in which OCC may disapprove an application, nor is
proposed Rule 204(e) intended to seek new authority for OCC. Rather,
proposed Rule 204(e) is intended to articulate OCC's current authority
to deny an application based on certain circumstances that, in OCC's
discretion, may reflect an unacceptable risk profile. Furthermore, OCC
believes the proposed provision strengthens OCC's risk mitigation
practices by articulating in OCC's Rules examples of circumstances that
OCC may rely on to disapprove an applicant in the event an applicant
presents a heightened risk profile.
iv. Proposed Rule 204(f)
OCC proposes to adopt Rule 204(f) to establish a requirement
related to reapplication for those applicants that have been denied
membership. Specifically, proposed Rule 204(f) provides that if an
applicant is denied membership, the applicant is restricted from
reapplying for membership until the applicant has demonstrated to the
satisfaction of the Corporation that the applicant has adequately
addressed the specific grounds upon which the applicant was denied. OCC
believes this proposed rule would require applicants to make meaningful
changes to their risk profile after being denied membership and
demonstrate, based on their changes, that they have addressed the
underlying reason for their denial. OCC believes this proposed rule
would reduce the possibility that an applicant will immediately reapply
for membership without taking action to adjust their risk profile and
address the reason for denial, which would promote an effective use of
OCC's and an applicant's time and resources.
v. Proposed Rule 204(g)
OCC's proposed new Rule 204(g) would outline OCC's requirements
related to an applicant's office model. The proposed rule provides that
every applicant must maintain physical office facilities for conducting
business with OCC, unless the applicant utilizes a remote office model
that OCC determines, in its sole discretion, does not present
heightened risk to OCC.\41\ In addition, the proposed rule provides
that every applicant may be subject to an on-site visit from OCC at the
applicant's physical office facility as part of OCC's onboarding
process. The proposed rule also states that applicants will be provided
with no less than 24 hours' notice prior to OCC's on-site visit.
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\41\ OCC intends for such discretionary review to rest with OCC
generally, and not to a particular committee or OCC officer.
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Evolving technology has introduced the ability for employees to
work remotely outside of a traditional office space, and more
organizations are allowing for the ability of remote work. OCC believes
the use of a fully remote, non-hybrid, office model may introduce
challenges for OCC to communicate with the applicant and perform an on-
site examination of the applicant, therefore posing heightened risk to
OCC. The purpose of proposed Rule 204(g) is to minimize risk for OCC,
by providing for a more fixed location for communication and on-site
examination performed by OCC. OCC believes that an applicant's lack of
maintaining any physical office facility presents risks that would not
exist in a hybrid office model where an applicant may have some form of
physical office to allow for in-person communication. OCC believes the
risks posed by an applicant that is fully remote include, but are not
limited to, challenges in communication between the applicant's staff
and OCC, and the lack of visibility that OCC may have into the
applicant's operational stability that could be mitigated during an on-
site visit or in-person meeting. OCC also proposes to adopt 204(g) and
to align with FINRA's Rules related to designating a physical office
space.\42\ For applicants that are also members of FINRA, OCC expects
those applicants would already adhere to FINRA's Rules on designation
of office facilities and supervision of such facilities, so OCC
believes it is reasonable that such applicants must maintain a physical
office facility under OCC's Rules. OCC intends to apply such standards
of maintaining a physical office facility not just to all applicants,
but to all existing Clearing Members as well, as described in proposed
Rule 302(b). Although OCC is not aware of any current Clearing Member
that utilizes a fully remote business model, OCC considers the use of a
fully remote business model to be a part of OCC's operational risk
management. OCC would consider, on a case-by-case basis, whether an
applicant or Clearing Member's risk profile would be impacted if such
applicant or Clearing Member utilized a remote business model. OCC
believes this proposed requirement that applicants and Clearing Members
maintain a physical office facility to conduct business with OCC,
unless OCC determines that the use of a remote office model does not
pose additional risk for OCC, would strengthen OCC's operational risk
management.
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\42\ FINRA Rule 3110(a)(3) and 3110(f).
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vi. Proposed Rule 204(h) \43\
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\43\ Existing Rule 204(h) would be renumbered to Rule 204(q).
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OCC proposes to renumber existing Rule 204(e) to Rule 204(h).
Proposed Rule 204(h) describes the nine-month timeframe requirement in
which an applicant must meet all conditions applicable to admission. In
proposed Rule 204(h), OCC proposes to provide examples of such
conditions that are applicable to an applicant's admission. OCC's
proposed changes provide that such referenced conditions shall include,
but are not limited to, clearing fund deposits and operational testing
requirements. By providing illustrative examples of conditions that may
be applicable to an applicant's admission, OCC believes this proposed
change helps to promote transparency for applicants.
vii. Proposed Rule 204(j)
OCC proposes to adopt Rule 204(j), which provides that if an
applicant fails to respond fully to OCC's requests for information
after a period of 90 days from the inception of the application
process, or for any subsequent 90-day period thereafter, OCC may deny
the
[[Page 57193]]
applicant. This proposed change is intended to ensure applicants are
engaged in the application process, to help streamline the process and
promote productive business practices and processes for OCC. OCC
believes it is an inefficient use of its time and resources to continue
waiting for responsiveness or complete information longer than 90 days
following an OCC request, or any subsequent 90-day period, as this time
can be more efficiently allocated to processing other new applicants
which have provided the information requested by OCC in a timely
fashion.
viii. Proposed Rule 204(k)
OCC's proposed changes would adopt new Rule 204(k). In proposed
Rule 204(k), OCC's proposed change specifies that OCC may share with
such Designated Examining Authority or designated SRO any information
provided by the applicant to OCC in connection with the application
process. OCC believes this proposed change promotes enhanced
transparency to other industry regulatory authorities.
ix. Proposed Rule 204(l)
OCC's proposed changes would renumber existing Rule 204(g) to
proposed Rule 204(l). The proposed change also expands the delegation
authority of the Risk Committee, as described in further detail above,
and clarifies OCC's existing authority to impose additional
requirements for clearing membership pursuant to Rule 307.
Specifically, the proposed change provides, in part, that if the Risk
Committee, ``or its designated delegates or agents,'' determines that
an applicant's financial condition, operational capability, risk
management capability or experience and competence, in relation to the
business that the applicant is expected to transact with OCC, makes it
necessary or advisable, for the protection of OCC, Clearing Members, or
the general public, the Risk Committee may impose additional
requirements for membership including, but not limited to, the
imposition of protective measures pursuant to Rule 307. OCC proposes
removing the term ``temporary'' before ``requirements'' to articulate
that this provision was never intended to limit OCC's existing
authority under Rule 307 to impose requirements on Clearing Members
that may be permanent. For example, a permanent requirement that OCC
may impose is the requirement that the new Clearing Member must hire
personnel on a full-time basis to help demonstrate that such Clearing
Member maintains sound risk management and operational controls. In
this example, the requirement that the Clearing Member hire new
personnel on a full-time basis, rather than on a part-time basis, is
intended to be a permanent requirement. OCC believes the removal of the
term ``temporary'' will align more closely with OCC's existing
authority under Rule 307 and help strengthen OCC's resiliency in the
event an applicant may present, in OCC's discretion, a heightened risk
profile. For additional clarification, OCC's proposed change to
proposed Rule 204(l) also includes the provision that states ``any
contingencies that the Risk Committee, or its designated delegates or
agents, designates as temporary will remain in effect'' until the
heightened risk presented by the Clearing Member is sufficiently
reduced, ``based on the judgment of the Corporation, or if applicable,
the maturity date of such contingency as specified by the
Corporation.''
x. Proposed Rule 204(m)
OCC proposes to adopt new Rule 204(m), which provides, in part,
that applicants, upon OCC's request, must provide OCC with a business
plan, supported by financial projections and assumptions that includes
the applicant's proposed use of OCC's services that demonstrates, to
the satisfaction of OCC, that the applicant has a viable plan to meet
and sustain the financial and operational responsibility standards and
financial obligations under OCC's Rules. In addition, the proposed
change states that the applicant must provide, upon OCC's request, an
assessment of the applicant's business plan by an independent third-
party consultant deemed acceptable by OCC, at the expense of the
applicant, to evaluate the reasonableness and viability of the plan,
including its assumptions and projections, and that failure to provide
such a plan, when requested by OCC, may result in denial of the
application.
This proposed change is intended to strengthen OCC's basis for
determining whether to approve or deny an applicant. OCC believes this
proposed change will provide OCC with accurate, relevant information to
consider when evaluating an applicant's background, operational and
business history, and future projections, to determine if the applicant
presents an acceptable risk profile. In addition, OCC believes that
requiring the applicant's business plan to be assessed by an
independent third-party provides additional comfort to OCC that the
information provided to OCC is as accurate and as unbiased as possible.
As the sole clearing agency for standardized equity options listed
on national securities exchanges registered with the Commission, OCC
holds a significant responsibility in managing risk to the U.S. listed-
options marketplace. Therefore, OCC believes it is essential that when
requested, applicants provide OCC with a business plan, vetted by an
independent third-party consultant, to allow OCC to perform its due
diligence and thoroughly evaluate each applicant in its entirety to
determine whether such applicant presents an acceptable risk profile.
Additionally, it is critical for OCC's review that the information
received from an applicant is as accurate and as unbiased as possible.
OCC expects that applicants will leverage their existing third-party
relationships to undertake an independent review of the applicant's
business plan. By leveraging existing relationships, OCC believes that
an applicant can minimize additional costs and limit the risk of any
potential confidentiality issues from sharing information because such
relationships already exist and there is, presumably, a level of trust
in existence with such relationships. OCC believes that the requirement
to provide OCC, upon its request, with a business plan, assessed by an
independent third-party consultant is appropriate to further strengthen
OCC's risk management practices.
xi. Proposed Rule 204(n)
OCC proposes to adopt new Rule 204(n), which provides, in part,
that if OCC determines to apply a limitation or restriction on an
applicant in lieu of applying a membership standard, as OCC is
currently authorized to do as outlined in Rule 307, such limitations
and restrictions may also include contingencies. Furthermore, OCC's
proposed changes explain that such limitations, restrictions, and
contingencies may include, in addition to the examples already provided
in Rule 307, increased or adjusted ongoing membership financial
requirements or an ongoing requirement to provide additional
information or reports to OCC. Proposed Rule 204(n) also provides that
any such financial requirements will be risk-based.
This proposed change is intended to provide OCC with the
flexibility to approve an applicant for Clearing Membership with
contingencies attached to its membership. The proposed change
articulates specific circumstances in which an applicant's
[[Page 57194]]
approval for membership may be contingent upon, such as the requirement
for an applicant to provide ongoing reporting to OCC. OCC believes this
proposed change to apply contingencies to an applicant's membership
will equip OCC with the necessary tools and resources to address each
individual applicant based on the specific scenario of the applicant,
and apply, for example, adjusted financial or reporting requirements to
a newly approved Clearing Member if OCC believes such applicant may
present a heightened risk profile.
xii. Proposed Rule 204(o)
OCC proposes to adopt new Rule 204(o), which provides, in part,
that if an applicant is approved by OCC with contingences attached to
its membership, such applicant's membership will be deemed to be in a
probationary period for twelve months following the date of the
approval as a Clearing Member. In addition, the proposed rule provides
that if a Clearing Member subject to a probationary period violates any
contingency, or any OCC Rule, the Clearing Member is subject to
suspension by OCC pursuant to Chapter XII of OCC's Rules. OCC believes
this proposed change provides OCC with the necessary resources to
manage an applicant that presents a heightened risk profile. The
purpose of proposed Rule 204(o), in contrast to existing Rule
1201(a)(2), is to introduce a probationary period of twelve months for
new Clearing Members that have been recently approved with
contingencies attached to their membership due to their heightened risk
profile as an applicant. The probationary period introduced in proposed
Rule 204(o) applies to those Clearing Members that have been approved
with certain contingencies attached to their membership. The
probationary period is not intended to apply to existing Clearing
Member that have been members at OCC for a period of time and do not
have contingencies attached to their membership. Proposed Rule 204(o)
broadens OCC's authority to suspend a newly approved Clearing Member
that, but for the contingencies attached to their membership, OCC may
not have approved their application for clearing membership.
xiii. Proposed Rule 204(p)
OCC proposes to adopt new Rule 204(p) which provides, in part, that
upon OCC's request, the applicant must provide to OCC the annual
audited financial statements of a parent or affiliate for the
applicable fiscal year, certified by an independent certified public
accountant and prepared in accordance with generally accepted
accounting principles applicable to the parent or affiliate. The
proposed change also provides that if the annual audited financial
statements of the applicant's parent or affiliate are not available,
the applicant must provide, upon OCC's request, unaudited financial
statements, audited consolidated financial statements, or other
financial information of the applicant's parent or affiliate, as
applicable.
This proposed rule is intended to enhance OCC's reporting
requirements, so that OCC has the necessary information available to
fully review an applicant and address their risk profile. OCC believes
it is necessary and appropriate to require, in certain circumstances,
that an applicant, regardless of the applicant entity type, provide OCC
with their parent or affiliate's audited financial statements for OCC's
review so that OCC can take into consideration, from a broader
perspective, the data that is provided and complete an extensive review
to determine if the applicant presents an acceptable risk profile. In
addition, by requiring, upon request, that an applicant provide OCC
with their parent or affiliate's audited financial statements, OCC may
gain a deeper understanding of the overall applicant's financial health
and performance, which would assist OCC in determining the applicant's
risk profile.
Proposed Rule 207--Submission to and Retrieval of Items to and From the
Corporation
OCC describes in proposed Rule 203(f) the requirement for
applicants to maintain OCC Confidential Information in confidence.
Similarly, OCC proposes to apply the same standard of maintaining OCC
Confidential information in confidence to existing Clearing Members. To
clearly differentiate which proposed rules apply to applicants and
which proposed rules apply to Clearing Members, OCC proposes to
introduce Rule 207(d) to describe requirements as applicable to
existing Clearing Members.
Proposed Rule 207(d) would require each Clearing Member to maintain
OCC Confidential Information in confidence to the same extent and using
the same means it uses to protect its own confidential information, but
no less than a reasonable standard of care, and that the Clearing
Member must not use OCC Confidential Information or disclose OCC
Confidential Information to any third party except as necessary to
perform such Clearing Member's obligations under the By-Laws and Rules
or as otherwise required by applicable law. Furthermore, proposed Rule
207(d) would entitle OCC to seek any temporary or permanent injunction
or other equitable relief in addition to any monetary damages related
to the disclosure of OCC Confidential Information. Specifically,
proposed Rule 207(d) would state that each Clearing Member acknowledges
that breach of its confidentiality obligations under these Rules may
result in serious and irreparable harm to OCC for which there is no
adequate remedy at law, and in the event of such a breach by the
Clearing Member, OCC will be entitled to seek any temporary or
permanent injunction or other equitable relief in addition to any
monetary damages. In addition, by promulgating Rule 307, OCC would be
entitled to impose disciplinary proceedings for a Clearing Member's
violation of the confidentiality requirements, consistent with existing
Chapter XII of OCC's Rules. Finally, proposed Rule 207(d) would state
that nothing in this Rule will prevent OCC or the Clearing Member from
providing such OCC Confidential Information to any governmental or
regulatory authority subject to request for confidential treatment.
CHAPTER III--Clearing Membership
Proposed Rule 301--Financial Responsibility
OCC proposes to modify its existing Rule 301(b) and 301(d) to
strengthen financial responsibility obligations for existing Clearing
Members.
i. Proposed Rule 301(b)
OCC proposes to modify Rule 301(b) to address OCC's ability to
implement, in certain circumstances, risk-based minimum capital levels.
Specifically, OCC's proposed changes provide that OCC, in its sole
discretion, may, pursuant to Rule 307C(a), establish risk-based minimum
capital levels, higher than those specified in Rule 301 to mitigate
risk to OCC. The proposed change would state that examples of such
risks giving rise to a higher capital requirement include, but are not
limited to, Clearing Members that may, as determined by OCC, present:
(i) a short operating history, (ii) an inadequate liquidity profile,
(iii) a business strategy that is high risk, (iv) a profile that is
highly leveraged, (v) weak internal risk controls, or (vi) insufficient
personnel. This proposed change is intended to provide OCC with
flexibility to implement different capital levels than the standard
capital levels outlined in OCC's existing rules to address the various
risk profiles presented by its
[[Page 57195]]
Clearing Members. OCC's bases for applying risk-based minimum capital
levels would be detailed in OCC's Clearing Member On-Boarding and Off-
Boarding Procedure.\44\ OCC believes this proposed change will help to
further strengthen its risk mitigation practices by providing OCC with
necessary tools to address Clearing Members that may present elevated
risk to OCC and other Clearing Members.
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\44\ As a confidential Exhibit 3a to File No. SR-OCC-2026-009,
OCC provided a copy of its Clearing Member On-Boarding and Off-
Boarding Procedure (the ``Procedure'') to the Commission. The
Procedure would specify several examples of when OCC may apply risk-
based minimum capital levels. Such examples would include, but are
not limited to: (i) if the applicant does not maintain any lines of
credit or has limited liquidity resources; (ii) if the applicant
does not maintain an operating history of one year; (iii) if the
applicant consistently reports monthly losses over a 12-month period
or losses are projected by the firm over the subsequent 12 month
period; (iv) if the applicant's proposed business generates a
calculated clearing fund requirement near or greater than the
applicant's excess net capital, and (v) if the applicant's financial
statements for the past 12 months reveal a pattern of substantial
swings in capital levels. The Procedure would also include that
risk-based minimum capital levels may be applied depending on the
applicant's tail risk when compared to capital or liquidity.
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ii. Proposed Rule 301(d)
OCC proposes to modify Rule 301(d) to clarify requirements related
to a Clearing Member's contingency plans, and the obligation to provide
information about such plans. Specifically, OCC's proposed changes to
Rule 301(d) include the provision that every Clearing Member must
furnish copies of such procedures related to its contingency planning
upon the request of OCC. OCC believes this requirement will strengthen
its ability to verify that Clearing Members maintain sufficient
procedures to meet obligations arising from clearing membership in
extreme but plausible market conditions, as determined by OCC.
Proposed Rule 302--Operational Capability
OCC proposes to enhance its operational capability standards for
existing Clearing Members in proposed Rule 302(b) and 302(c).
Proposed Rule 302(b) would specify that every Clearing Member must
maintain physical office facilities for conducting business with OCC,
unless such Clearing Member utilizes a remote office model that OCC
determines, in its sole discretion, does not present heightened risk to
OCC. OCC also proposes to include the provision that every Clearing
Member may be subject to an on-site visit from OCC at the Clearing
Member's physical office facility as part of OCC's ongoing monitoring
and due diligence of Clearing Members. In addition, OCC proposes that
Clearing Members will be provided with no less than 24 hours notice
prior to such on-site visit from OCC. As described in proposed Rule
204(g), OCC proposes to apply the same standard to applicants and
existing Clearing Members as it relates to the requirement to maintain
a physical office facility to conduct business with OCC. To
differentiate which proposed requirements apply to applicants and which
requirements apply to existing Clearing Members, OCC incorporated this
provision in proposed Rule 204(g) in reference to applicants, and
proposed Rule 302(b) in reference to existing Clearing Members. OCC
believes that Clearing Members that do not maintain any type of
physical office facility to conduct business with OCC may present a
heightened risk profile. OCC believes the risks posed by a Clearing
Member that maintains a fully remote office model include, but are not
limited to, challenges in communication between the Clearing Member's
staff and OCC, and the lack of visibility that OCC may have into the
Clearing Member's operational stability that could be mitigated during
an on-site visit or in-person meeting. OCC will determine, in its sole
discretion and on a case-by-case basis, if such Clearing Member
presents a heightened risk profile based on its use of a remote office
model. Through proposed Rule 302(b), OCC intends to strengthen its
operational capability standards for Clearing Members to limit
potential operational risk posed to OCC by Clearing Members that do not
maintain a physical office facility.
To further strengthen its operational requirements and ensure
Clearing Members meet and maintain an acceptable risk profile, OCC
proposes to update Rule 302(c) to include the provision that every
Clearing Member must make its books and records available for
inspection by OCC upon request.
Lastly, OCC proposes to correct an error in Rule 302(f), which
concerns operational requirements for Clearing Members participating in
OCC's Stock Loan Programs. As the titles to the subparagraphs imply,
paragraph (f)(1) concerns the Stock Loan/Hedge Program and paragraph
(f)(2) was intended to concern the Market Loan Program. OCC proposes to
correct an inadvertent reference to the Stock Loan/Hedge Program in
paragraph (f)(2), which would instead refer to the Market Loan Program.
Proposed Rule 303--Financial, Operations, and Risk Management Personnel
OCC proposes to modify Rule 303(a) to establish specific
requirements related to staffing of Clearing Member personnel. Proposed
Rule 303(a) provides that every Clearing Member must employ individuals
with relevant industry experience in senior management roles, or
equivalent positions, including: President or Chief Executive Officer,
Chief Financial Officer, Chief Risk Officer, and Chief Compliance
Officer. The proposed change also provides that the Clearing Member
must maintain a clear division of responsibility between each of the
listed roles above, the purpose of which is to reduce conflicts of
interest. The proposed change also states that the Clearing Member must
maintain a minimum number of total full-time personnel, including a
minimum number of four full-time risk management personnel. Lastly, the
proposed change provides that a Clearing Member may, with the agreement
of OCC, substitute for certain full-time personnel contractual
arrangements with third-party service providers acceptable to OCC with
substantial experience in clearing the kind of cleared contracts that
the applicant or member proposes to clear. OCC's proposed additions to
Rule 303(a) are intended to verify and support, from OCC's perspective,
that Clearing Members maintain a sufficient level of staffing in risk
management roles with sufficient industry experience to demonstrate
that such Clearing Members are operationally reliable. OCC believes it
is essential that Clearing Members maintain sufficient staffing of
personnel to present an acceptable risk profile, in OCC's judgement.
Proposed Rule 305--Clearing Member Risk Management
OCC's existing Rule 305 requires, in part, that Clearing Members
maintain written risk management policies and procedures that address
the risks that Clearing Members pose to OCC.\45\ Existing Rule 305 also
states that OCC will review the risk management policies, procedures,
and practices of each Clearing Member on a periodic basis.\46\ OCC
proposes to modify existing Rule 305 to add a clarifying provision that
states ``based on OCC's review of the policies, procedures and
practices, OCC'' may take appropriate action to address concerns
identified in
[[Page 57196]]
such reviews, including but not limited to the imposition of protective
measures pursuant to Rule 307. OCC believes this proposed change
articulates more clearly the basis for OCC to take action to address
concerns based on review of the Clearing Member's policies, procedures
and practices.
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\45\ See supra note 3 at Rule 305.
\46\ Id.
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Proposed Rule 306--Notification and Reporting Requirements
As described in further detail above in proposed Rule 203(f), OCC's
proposed changes establish rules related to the confidential treatment
of non-public information provided to and received from applicants and
Clearing Members. Proposed Rule 203(f) concerns non-public information
related to an applicant. To differentiate which proposed requirements
apply to applicants and which proposed requirements apply to existing
Clearing Members, OCC proposes to adopt Rule 203(f), with respect to
applicants, and Rule 306(b) with respect to Clearing Members.
With respect to non-public information that a Clearing Member
shares with OCC, assurance of confidentiality would be provided through
the addition of paragraph (b) of Rule 306.\47\ Proposed Rule 306(b)
provides, in part, that any non-public information furnished by a
Clearing Member to OCC pursuant to Chapter 3 will be held in confidence
as may be required under the laws, rules and regulations applicable to
OCC that relate to the confidentiality of records. Furthermore,
proposed Rule 306(b) provides that nothing in this Rule will prevent
the Corporation from releasing such non-public information, in its sole
discretion, to (i) any governmental or regulatory authority (e.g., the
SEC or CFTC); or (ii) any regulatory organization to which the
applicant is a member or participant (e.g., FINRA with respect to a
broker dealer, or other registered clearing agencies in which the
applicant or Clearing Member is a common member).\48\
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\47\ The existing provision of Rule 306 would be numbered Rule
306(a).
\48\ See supra note 37.
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Proposed Rule 306A--Event-Based Reporting
OCC proposes to modify existing Rule 306A(a)(1). Existing Rule
306A(a)(1) requires, in part, that under the Early Warning Notices
provision, a Clearing Member must notify OCC prior to 3:00 p.m. CT in
writing if the Clearing Member receives notice from any regulatory
organization (as defined in this paragraph) of any financial or
operational difficulty affecting the Clearing Member or of any failure
by the Clearing Member to be in compliance with the financial or
operational responsibility rules or capital requirements of any
regulatory organization. To align with OCC's definition of ``regulatory
organization'' in existing Rule 101, OCC's proposed change revises the
text in Rule 306A(a)(1) that references regulatory organization from
``as defined in this paragraph'' to ``as defined in Rule 101.'' OCC's
proposed change incorporates additional language following this
provision that states ``to the extent that laws applicable to the
Clearing Member do not prevent the disclosure of such notice to the
Corporation.'' OCC proposes to include this information to articulate
that OCC acknowledges that Clearing Members may be subject to
confidentiality provisions under certain laws of various regulatory
organizations that would prohibit disclosure of such information to
OCC.
Furthermore, in relation to the referenced term ``regulatory
organization'' in existing Rule 306A(a)(1), OCC proposes to update the
language from ``any regulatory organization (as defined this
paragraph)'' to ``any regulatory organization (as defined in Rule
101).'' Because the term ``regulatory organization'' is defined in OCC
Rule 101, OCC believes it is more appropriate to include the specific
reference to Rule 101. For the same reasons, OCC also proposes to
revise the text in Rule 306A(a)(2)(D) from ``as defined below'' to ``as
defined in Rule 101.''
OCC also proposes to update Rules 306A(a)(2)(A)(i) and
306A(a)(4)(B)(i). In the event OCC determines to implement risk-based
minimum capital levels, as described in proposed Rule 301, OCC will
adjust its event-based reporting requirements to account for such risk-
based minimum capital levels. OCC's proposed change to Rules
306A(a)(2)(A)(i) and 306A(a)(4)(B)(i) provide that a Clearing Member
must notify OCC when the Clearing Member's net capital is less than the
greater of $12 million, ``or amount equal to 20% above the applicable
Clearing Member's minimum capital requirement.'' OCC selected a 20%
reporting threshold to account for potential instances where OCC may
require that an applicant or Clearing Member maintain a minimum net
capital requirement that is higher than the $10 million requirement
outlined in Rule 301 or higher than the reporting threshold of $12
million in existing Rule 306A. For example, there may be an instance
when OCC establishes a higher minimum net capital requirement for a
Clearing Member, such as $15 million, instead of $10 million. In this
example, the trigger for when a Clearing Member would be required to
notify OCC would be set at a net capital below $18 million, which is
$20% above $15 million. If OCC utilized the current $12 million
threshold for all situations, it may not have an impact on Clearing
Members with minimum net capital requirements greater than existing $10
million.
To promote parallel construction and coherent language for ease of
readability throughout OCC's Rules, OCC proposes to update Rules
306A(a)(4)(C), 306A(a)(4)(D), 306A(a)(5)(C) and 306A(a)(5)(D) by
incorporating the language ``such Clearing Member receives'' at the
beginning of each referenced provision. OCC also proposes to make
conforming changes to proposed Rules 306A(a)(4)(D) and 306A(a)(5)(D) by
deleting the term ``received.'' Similar to proposed provision in Rule
306A(a)(1), OCC proposes to add language at the end of Rule
306A(a)(5)(D) that states ``to the extent that laws applicable to the
Clearing Member do not prevent the disclosure of such notice to the
Corporation'' to articulate that OCC acknowledges that Clearing Members
may be prohibited from disclosing certain information to OCC based on
laws of their regulatory agency.
OCC also proposes to update Rule 306A(b)(1) to promote clarity,
strengthen its notification requirements for Clearing Members, and
provide OCC with flexibility and tools to address Clearing Members with
a heightened risk profile. OCC's proposed change updates proposed Rule
306A(b)(1) to clarify a specific timeframe in which Clearing Members
must notify OCC of any material change in its form of organization.
Specifically, OCC's proposed change provides that each Clearing Member
must give OCC ``a minimum of 30 days'' prior written notice, ``or
prompt written notice where such decision is made less than 30 days
prior to taking effect,'' of any material change in its form of
organization or ownership structure.\49\
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\49\ In contrast, OCC's current Rule 306A(b)(1) requires only
``prompt'' notification.
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OCC's existing Rule 306A(c) provides, in part, that a Clearing
Member, or applicant for clearing membership, that is or becomes
subject to a statutory disqualification, must notify OCC in writing of
the statutory disqualification within 20 business days.\50\ OCC
proposes to apply the same standard to applicants and Clearing Members
as it
[[Page 57197]]
relates to an applicant's or Clearing Member's responsibility to notify
OCC upon learning of being subject to a statutory disqualification. To
align with proposed Rule 204(c)(2) and promote consistency and
transparency to applicants and Clearing Members, OCC proposes to modify
Rule 306A(c) to incorporate statutory disqualification of a Key Person,
and to reduce the notification requirement for Clearing Members from 20
business days to two business days upon learning of such statutory
disqualification. OCC believes this change will allow OCC to better
manage and more quickly address such Clearing Members who may present a
heightened risk profile to OCC. Lastly, because Rules in Chapter III
apply to existing Clearing Members, while Rules in Chapter II primarily
concern applicants for clearing membership, OCC also proposes to remove
the reference to applicants in proposed Rule 306A(c) by eliminating the
phrase ``or any applicant for clearing membership.'' The purpose of
this proposed change is to promote clarity and organizational
consistency within the Rules.
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\50\ See supra note 3 at Rule 306A(c).
---------------------------------------------------------------------------
Proposed Rule 306B--Periodic Reporting
i. Proposed Rule 306B(b)
OCC proposes to update Rule 306B(b) as it relates to reporting
requirements for existing Clearing Members. Specifically, OCC proposes
to require that upon OCC's request, the Clearing Member must provide to
OCC the annual audited financial statements of a parent or affiliate
for the applicable fiscal year, certified by an independent certified
public accountant and prepared in accordance with generally accepted
accounting principles applicable to the parent or affiliate. The
proposed provision would also provide that if the annual audited
financial statements of the Clearing Member's parent or affiliate are
not available, the Clearing Member must provide, upon the Corporation's
request, unaudited financial statements, audited consolidated financial
statements, or other financial information of the Clearing Member's
parent or affiliate, as applicable.
OCC proposes to apply the same reporting standard for Clearing
Members and applicants, regardless of Clearing Member or applicant
type, as it relates to requiring that the applicant or Clearing Member
provide OCC with the annual audited financial statements from such an
entity's parent or affiliate. To differentiate which proposed
requirements apply to applicants and which requirements apply to
existing Clearing Members, OCC incorporated the above provision in
proposed Rule 204(p) in reference to applicants, and proposed Rule
306B(b) in reference to existing Clearing Members. The proposed change
to Rule 306B(b) is intended to enhance OCC's reporting requirements, so
that OCC has the necessary information available to fully review a
Clearing Member and address their risk profile. OCC believes it is
necessary and appropriate to require, in certain circumstances, that
the Clearing Member provide to OCC their parent or affiliate's audited
financial statements so that OCC can complete an extensive review to
determine if the Clearing Member presents an acceptable risk profile.
As mentioned above as it relates to applicants, OCC believes it is
necessary and appropriate to require, in certain circumstances, that a
Clearing Member provide their parent or affiliate's audited financial
statements for OCC's review so that OCC can take into consideration,
from a broader perspective, the data that is provided and complete an
extensive review to determine if the Clearing Member presents an
acceptable risk profile. In addition, by requiring, upon request, that
a Clearing Member provide to OCC their parent or affiliate's audited
financial statements, OCC may gain a deeper understanding of the
overall Clearing Member's financial health and performance, which would
assist OCC in determining the applicant's risk profile.
ii. Proposed Rule 306B(f)
OCC proposes to adopt Rule 306B(f) to strengthen its reporting
requirements for Clearing Members. Proposed Rule 306B(f) would require
that Clearing Members provide accurate, complete and timely responses
to OCC's annual and periodic due diligence information requests,
including any supplemental or follow-up requests thereto. This proposed
change is intended to promote efficient and timely delivery of
information to OCC. OCC's annual and periodic due diligence information
requests include, but are not limited to, annual and periodic
attestations requesting Clearing Members to confirm, for example, their
current office address, back-up internet provider, and list of senior
level leaders employed at the Clearing Member's organization. OCC
believes this proposed provision requiring Clearing Members to provide
accurate, complete and timely responses to OCC's requests is necessary
to ensure successful ongoing monitoring of Clearing Members.
Proposed Rule 307--Protective Measures
OCC proposes to update Rule 307 to provide enhanced transparency to
Clearing Members, applicants, and the public on OCC's existing
authority to impose protective measures. OCC's proposed changes
renumber existing Rule 307 to Rule 307(a), and provide that OCC may
impose protective measures on any Clearing Member or applicant for
clearing membership that: (i) presents increased credit, ``market'' or
liquidity risk to OCC, (ii) is ``or will be, in the case of a new
Clearing Member,'' subject to enhanced monitoring and surveillance
under OCC's watch level reporting process, or (iii) whose financial
condition, operational capability, risk management capability,
``regulatory or compliance risk profile'' otherwise make it necessary
or advisable, for the protection of OCC, other Clearing Members, or the
general public. The purpose of these proposed changes in proposed Rule
307(a) is to articulate OCC's existing practices and provide clarifying
language as a means of providing transparency to applicants, Clearing
Members and the public.
OCC proposes to adopt Rule 307(b), which provides that OCC may
impose protective measures on any Clearing Member or applicant
regardless of whether the Clearing Member or applicant is subject to
enhanced monitoring and surveillance under OCC's watch level reporting
process. Furthermore, OCC proposes to adopt Rule 307(c), which provides
that OCC determines protective measures on a case-by-case basis
depending on factors such as the Clearing Member or applicant's
financial and operational risk profile or the current or anticipated
nature or level of the Clearing Member's or applicant's activity. The
purpose of adopting proposed Rules 307(b) and 307(c) is to codify OCC's
existing authority to impose protective measures within OCC's Rules.
OCC believes it is important to articulate these provisions in its
Rules to provide applicants, Clearing Members, and the public with
readily available information on how OCC determines to impose
protective measures to promote transparency and improve the clarity of
its Rules.
Proposed Rule 307B--Restrictions on Certain Transactions, Positions and
Activities
OCC's proposed changes to Rule 307B codify the processes that OCC
would undertake in hearings before the Risk Committee for appeals of
certain protective measures. The proposed
[[Page 57198]]
changes to Rule 307B mirror the provisions in proposed Rule 203 for the
process OCC would undertake in hearings on denials of Clearing Member
applications or reapplications. OCC's proposed changes revise Rule
307B(b) by introducing new rule text in proposed Rule 307B(b)(1) and
(b)(3) and revising existing rule text in proposed Rule 307B(b)(2).
Section (b) of Rule 307B provides a Clearing Member with a formal
process to appeal any action taken under section (a) of Rule 307B.
OCC's proposed changes to Rule 307B(b) specify that the Clearing Member
must submit a ``written'' request for review to the Secretary of OCC
within five business days of the date such action is taken. The
addition of the word ``written'' clarifies the form the request must
take, which OCC believes will help to ensure there is a documented
record of the submission. OCC also proposes to relocate the existing
requirement that the Risk Committee schedule an early hearing, with not
less than one day's notice to the Clearing Member, to proposed Rule
307B(b)(2). In doing so, OCC would clarify that the notice period is
one business day.
Similar to proposed Rule 203(b)(5), proposed Rule 307B(b)(1)
outlines the requirements that a Clearing Member must fulfill after
requesting a hearing for appeals of certain protective measures,
including submitting a detailed written statement of objections and
indicating their intent to attend the hearing and whether they will
have legal representation. Specifically, proposed Rule 307B(b)(1) would
provide that within seven (7) business days after the Clearing Member
files such written request with OCC, the Clearing Member must submit to
the Secretary of OCC a clear and concise statement setting forth with
particularity the basis for its objection to the action, whether the
Clearing Member or applicant intends to attend the hearing, and whether
the Clearing Member or applicant chooses to be represented by counsel
at the hearing. Additionally, proposed Rule 307B(b)(1) would include
that OCC may extend a Clearing Member's time for submitting a written
request for review or a written statement for good cause shown.
The process OCC would undertake in hearings on denials of Clearing
Member applications or reapplications would be the same process for
hearings on appeals of certain protective measures. As such, the
provisions in proposed Rule 307B(b)(2) outline the procedural
requirements for the hearing before the Risk Committee on appeals of
certain protective measures. Proposed Rule 307B(b)(2) ensures the
Clearing Member receives at least one business day's notice of the
hearing's time and place and establishes that the hearing will follow
the procedures already set forth in Rule 203(b)(6), rather than
restating those same procedures here. Specifically, OCC's changes to
proposed Rule 307B(b)(2) would provide that the Clearing Member will be
given not less than one ``business'' day's notice of the place and time
of such hear. OCC proposes to include the addition of one ``business''
day to clarify that the notice period cannot fall on a weekend or
holiday. OCC's proposed changes also provide that ``the hearing before
the Risk Committee will proceed pursuant to the procedures set forth in
Rule 203(b)(6).'' OCC's proposed changes eliminate the remaining rule
text in proposed Rule 307B(b)(2). OCC believes the stricken text is no
longer necessary as the procedures it previously outlined, including
the conduct of the hearing, representation by counsel, record-keeping,
and written notification of the outcome, are now covered by the
provisions set forth in proposed Rule 203(b)(6), which governs the
hearing process.
Lastly, OCC proposes to incorporate proposed Rule 307B(b)(3), which
establishes when a decision made under this Rule becomes final and
requires OCC to provide the Clearing Member with a written notice of
decision stating the grounds for the decision. Proposed Rule 307B(b)(3)
states that OCC will provide the Clearing Member a notice of decision
setting forth the specific grounds upon which the decision is based. In
addition, proposed Rule 307B(b)(3) would provide that any decision made
under this Rule will be final (i) when the Clearing Member stipulates
to the taking of such action by OCC, at which time OCC will furnish the
Clearing Member with its notice of decision, or (ii) upon the
expiration of the applicable time period provided in these Rules for
the filing of a written request for a hearing or a written statement,
at which time OCC will furnish the Clearing Member with its notice of
decision, or (iii) if a hearing is held, the date the Secretary of OCC
provides a copy of the written notice of the decision to the Clearing
Member. OCC believes that codifying these processes in its Rules helps
to ensure clarity and transparency to Clearing Members by providing a
defined framework for when a decision is considered final.
Proposed Rule 307C--Additional Operational, Personnel, Financial
Resource and Risk Management Requirements
OCC's proposed changes to Rule 307C include five additional
examples of protective measures that OCC may impose on a Clearing
Member or applicant. The purpose in highlighting these five specific
examples within OCC's Rules is to provide transparency to applicants,
Clearing Members and the public on protective measures that OCC most
commonly uses, or that OCC anticipates may be used in the future.
OCC's proposed changes provide that OCC may impose protective
measures in the form of additional operational, personnel, financial
resource, or risk management requirements, including, but not limited
to: (i) requiring a financial guaranty from a Clearing Member's parent
company or affiliate (proposed Rule 307C(b)); (ii) imposing limitations
on a Clearing Member's financial leverage (e.g., gross or adjusted
leverage caps) (proposed Rule 307C(c)); (iii) requiring Clearing
Members to fill a key risk management or operation role created by the
loss of a Key Person, as defined in Rule 101 (proposed Rule 307C(f));
(iv) requiring Clearing Members to implement or enhance certain
internal controls, procedures or systems (proposed Rule 307C(i)); and
(v) requiring Clearing Members provide OCC with an independent
assessment of the Clearing Member's financial projections, operational
capabilities, AML controls or compliance with OFAC (proposed Rule
307C(l)).\51\
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\51\ The protective measures described in the above paragraph
would be numbered as Rule 307C(b), 307C(c), 307C(f), 307C(i) and
307C(l), respectively. All other provisions in Rule 307C would be
renumbered accordingly.
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The protective measures described in proposed Rules 307C(b),
307C(c) and 307C(i) constitute OCC's current practices, and are already
permissible pursuant to OCC's existing authority under Rule 307. OCC
believes it is important to articulate its current practices in
proposed Rule 307C to provide transparency to applicants, Clearing
Members and the public. The proposed provisions in Rules 307C(f) and
307C(l) expand upon OCC's existing authority to impose protective
measures. OCC believes these examples are consistent with the changes
to Chapter II and III which enhance requirements for applicants and
Clearing Members. Specifically, provision 307C(l) aligns with proposed
Rule 204(e), which allows, in part, the Risk Committee, or its
designated delegates or agents, to disapprove an
[[Page 57199]]
application for clearing membership if there are concerns with the
results of an independent assessment, performed in the last 12-18
months, of an applicant's (a) AML program's compliance with the Banking
Secrecy Act requirements or (b) OFAC Sanctions List and Sanctions list
data. In addition, proposed provision 307C(f) introduces an example of
protective measure related to a Key Person's departure from the
Clearing Member. This provision aligns with proposed Rule 101 in
defining the term Key Person in OCC's Rules.
OCC believes the proposed protective measures are necessary and
appropriate to help ensure that OCC is able to address the various
risks (including credit risk, liquidity risk, and operational risk)
that may be presented by applicants or Clearing Members that do not
comply, or who may be at risk of not complying in the future, with
OCC's membership standards, present increased credit or liquidity risk
to OCC, or are otherwise experiencing difficulties in their financial
condition, operational capability, or risk management capability. By
articulating the examples of protective measures that OCC believes it
is already authorized to impose through proposed Rules 307C(b), 307C(c)
and 307C(i), OCC is providing enhanced transparency to applicants and
Clearing Members. For proposed Rules 307C(f) and 307C(l) that expand
OCC's authority to impose a broader set of protective measures, OCC
believes such expansion of authority is necessary and appropriate to
equip OCC with necessary tools to mitigate risk introduced by
applicants or Clearing Members that present a heightened risk profile.
Based on OCC's crucial responsibility to provide financial stability
and risk management to the U.S. listed-options marketplace, OCC
believes it is prudent and reasonable to expand upon its ability to
impose protective measures on applicants or Clearing Members that
present a heightened risk profile. OCC believes the expansion of OCC's
authority to impose such protective measures will provide OCC with the
ability to better protect OCC, its Clearing Members, market
participants and the public from emerging counterparty risks.
Proposed Rule 309--Reapplication for Membership
OCC's proposed change establishes new Rule 309 titled Reapplication
for Membership. Proposed Rule 309(a) would provide that in connection
with above events specified in Rule 306A(b)(1), OCC may: (i) require an
existing Clearing Member to reapply for membership if OCC determines,
in its sole discretion, that any such event has or is expected to have
a material impact on the financial or operational condition or
materially change the business strategy of such Clearing Member or (ii)
apply protective measures necessary to address any new risks arising
from any material change defined in sections A through E of Rule
306A(b)(1). In addition, proposed Rule 309(b) provides that if OCC
determines that a Clearing Member must reapply for membership, the
Clearing Member's access to OCC's services will remain active during
the reapplication period; provided, however, that this Rule would not
limit OCC's authority to impose protective measures under Rule 307
through 307C or suspend a Clearing Member pursuant to Rule 1102.
Furthermore, proposed Rule 309(c) provides that any decision to suspend
a Clearing Member following reapplication would be made pursuant to
Rule 203.
The purpose of proposed Rule 309 is to strengthen OCC's risk
mitigation tools by allowing OCC the ability to address Clearing
Members' risk profiles that may have materially changed due to an event
that occurred during their time of membership and that has impacted the
Clearing Member in a material way. For example, if an existing Clearing
Member is materially impacted financially or operationally by the sale
of a large portion of its business such that the Clearing Member is
unable to maintain the minimum capital requirements or the required
number of risk management personnel, this may, in OCC's discretion,
present a heightened risk profile. Therefore, OCC believes it would
strengthen its risk mitigation practices to require, in certain
circumstances, that the Clearing Member reapply for membership and
allow OCC to re-examine whether the Clearing Member still meets OCC's
membership standards based on the material change that has impacted the
Clearing Member.
Under proposed Rule 309, the process for review of reapplications
would align with the existing process for review of new applications,
as described in proposed Rule 203, including the provisions for a
hearing before the Risk Committee should the reapplying Clearing Member
be denied. If OCC determines that a Clearing Member must reapply for
membership, the requirement to reapply would not automatically result
in restricting the Clearing Member's access to OCC's services. However,
if, for example, a Clearing Member is required to reapply and the
Clearing Member can no longer satisfy the minimum margin requirements
during the reapplication process, OCC may determine to impose
protective measures under Rules 307 through 307C or suspend the
Clearing Member pursuant to 1102. In summary, the provisions in
proposed Rule 309(a) through 309(c) would not impair OCC's authority to
act under Rules 307 through 307C or 1102.
If OCC determines that a Clearing Member must reapply for
membership under proposed Rule 309, the Clearing Member would follow
the admission procedures for new applicants outlined in proposed Rule
203 and would be afforded the same rights under Rule 203 as any new
applicant. As described above with respect to proposed Rule 203, the
Risk Committee, or its designated delegates or agents, determines
whether to approve or deny the reapplication and the Clearing Member
would be given an opportunity to request a hearing before the Risk
Committee and may be represented by counsel and present evidence on its
behalf. OCC believes the Risk Committee is the appropriate governing
body to hear and determine membership reapplication decisions because
it is the Risk Committee that hears appeals of initial membership
determinations under Rule 203 and limitations to membership under OCC
Rule 307B, which present the same questions concerning the risks that
an applicant or Clearing Member presents to OCC on a go-forward
basis.\52\
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\52\ In contrast, while a Disciplinary Committee may impose
suspension or expulsion as a sanction under Chapter XII of OCC's
Rules, the questions presented to the Disciplinary Committee are
limited to whether a Clearing Member has violated an OCC Rule and,
if so, the appropriate sanction.
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Chapter XI--Suspension of a Clearing Member
Proposed Rule 1101
OCC's existing Rule 1101 outlines, in part, a Clearing Member's
obligation to notify OCC if a Clearing Member is unable to meet its
obligations, is insolvent, or becomes the subject of a bankruptcy
petition, receivership proceeding or the equivalent. OCC proposes to
relocate existing Rule 1102(b) to become new Rule 1101(b), which would
provide that any Non-U.S. Clearing Member which has been expelled or
suspended by its Non-U.S. Regulatory Agency or any securities exchange
of which it is a member shall immediately so notify OCC. OCC does not
propose to change the language of the relocated provision. Because Rule
1101 focuses on a Clearing Member's requirement to notify OCC, OCC
believes it is more efficient to structure
[[Page 57200]]
Rule 1101 to also include the notification requirement of a Non-U.S.
Clearing Member. Therefore, OCC proposed changes relocate Rule 1102(b)
to new Rule 1101(b) to include the requirement for Non-U.S. Clearing
Member's to notify OCC. Subsequently, OCC's existing Rule 1101 would be
new Rule 1101(a).
Proposed Rule 1102
OCC proposes to modify Rule 1102 to reorganize the existing rule
structure to improve clarity and promote efficiency within OCC's Rules.
OCC's proposed modifications to Rule 1102 organize the rule text into
three separate sections: (i) proposed Rule 1102(a) ``Grounds for
Suspension,'' (ii) proposed Rule 1102(b) ``Event of Default; Cease to
Act,'' and (iii) proposed Rule 1102(c) ``Notice to the Board of
Directors.'' OCC's proposed modifications also include relocating,
without substantive revision, the Interpretation and Policies section
under existing Rule 1102 as rule text.
Under proposed Rule 1102(a), OCC's proposed changes include the
description titled ``Grounds for Suspension'' and incorporate eight
subsections in proposed Rule 1102(a)(1) through (8) that outline OCC's
grounds for suspension of a Clearing Member. The text of five of the
eight subsections remains unchanged, as shown in proposed Rule
1102(a)(1) through Rule 1102(a)(4) and Rule 1102(a)(6). OCC's proposed
changes in Rule 1102(a)(v) (renumbered as proposed rule 1102(a)(5))
reflect a reorganization without substantive changes, and the proposed
changes in what would become proposed Rule 1102(a)(7) reflect textual
updates to align with OCC's existing Rules. Lastly OCC proposes to
adopt one new ground for summary suspension in proposed Rule
1102(a)(8).
To promote clarity, ease of readability and enhanced transparency
to Clearing Members, OCC's proposed changes adopt the provisions in
Interpretation and Policy .02 as proposed Rule 1102(a)(5)(A) through
proposed Rule 1102(a)(5)(C). OCC's proposed changes to proposed Rule
1102(a)(5) also include subsequent conforming changes and additional
grammatical modifications, such as using acronyms for terms already
defined in OCC's Rules. To promote consistency and align with existing
language in Rule 707 and Article VI, Section 25 of the By-Laws, OCC's
proposed changes adopt subsection seven of proposed Rule 1102(a).
Proposed Rule 1102(a)(7) provides, in part, that the Board of Directors
or a Designated Officer of the Corporation may suspend any Clearing
Member which is ``in default, or its affiliated CCO Clearing Member is
in default, in the payment of funds or any other obligation in respect
of sets of X-M accounts under Rule 707 or in respect of an internal
non-proprietary cross-margining account under Article VI, Section 25 of
the By-Laws.'' Finally, OCC proposes to adopt subsection eight of
proposed Rule 1102(a) to align with the proposed provisions governing
suspension of a Clearing Member following reapplication pursuant to
proposed Rule 309. As previously described above, if OCC determines
that a Clearing Member does not meet OCC's membership standards
following the reapplication process under proposed Rule 309, OCC may
determine to deny the Clearing Member, and such decision to deny
clearing membership following reapplication will be made pursuant to
proposed Rule 203. OCC proposes to adopt Rule 1102(a)(8), which
provides, in part, that a Clearing Member may be suspended if it does
not meet OCC's membership standards following reapplication under Rule
309, as determined by OCC. The purpose of this proposed change is to
codify that following a determination to expel a member--whether upon a
denial of a reapplication under proposed Rule 309 after affording the
Clearing Member the process described in proposed Rule 203 or as a
sanction for a violation of OCC's By-Laws and Rules under existing
Chapter XII of the Rules--suspension of the Clearing Member may proceed
in accordance with Chapter XI of the Rules (Suspension of a Clearing
Member).
OCC proposes to adopt Rule 1102(b), titled ``Event of Default;
Cease to Act.'' Under proposed Rule 1102(b), OCC proposes to relocate
the text of current Interpretation and Policy .01 to new Rule
1102(b)(1) without substantive change.\53\ Proposed Rule 1102(b)(1)
provides, in part, that each event described in Rule 1102(a)
constitutes an event of ``default'' with respect to a Clearing Member.
OCC believes this proposed change is consistent with the proposed
reorganization of the rule text and that such change will promote
clarity and ease of readability. Furthermore, proposed Rule 1102(b)(2)
reorganizes existing rule text and makes additional conforming changes
so that Rule 1102(b)(2) provides, in part, that OCC shall cease to act
for a suspended Clearing Member except as specified in this Chapter.
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\53\ The proposed Rule 1102(b)(1) would incorporate grammatical
changes and updated cross-references to reflect the proposed
organizational changes to Rule 1102(a) described above.
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Lastly, OCC proposes to adopt Rule 1102(c), titled ``Notice to the
Corporation,'' which relocates the existing rule text under 1102 to new
Rule 1102(c).
OCC's changes to proposed Rule 1102(a) through 1102(c) also include
other non-substantive, conforming changes that include formatting and
grammatical modifications.
Chapter XII--Disciplinary Proceedings
Proposed Rule 1201
OCC proposes to update Rule 1201(a) to articulate certain specific
examples to Clearing Members and the general public of events that may
result in grounds for disciplinary proceedings at OCC. OCC's proposed
changes also reorganize existing Rule 1201(a) to provide enhanced
transparency and efficiency. OCC proposes to include new subsections
two through five of Rule 1201(a) as examples of conduct that may
embarrass the operations of OCC, as referenced in existing Rule
1201(a). OCC's proposed changes provide that such examples include but
are not limited to: (i) the Clearing Member's failure to comply with a
protective measure and failure to cure such failure to OCC's
satisfaction within the cure period specified by OCC, (ii) the Clearing
Member exhibits a pattern of providing late financial information or
other information requested by OCC, (iii) the Clearing Member exhibits
a pattern of providing OCC with false or misleading financial
information such that, in the sole opinion of OCC, OCC can no longer
fully assess or monitor the risk presented by the Clearing Member; or
(iv) the Clearing Member or Key Person of the Clearing Member exhibits
a pattern of regulatory or legal infraction such that, in the sole
opinion of OCC, it creates a significant reputational risk for OCC. The
purpose of including these specific examples of conduct that may lead
OCC to censure, suspend, expel, fine or otherwise limit the activities,
functions, or operations of the Clearing Member is to promote
transparency with Clearing Members and to support a sound legal
framework. OCC believes the proposed provisions will also foster
accountability and promote clear communication with Clearing Members by
articulating in OCC's Rules specific examples upon which OCC may rely
to act. OCC believes the proposed modifications to Rule 1201(a) will
strengthen its grounds for taking disciplinary action against a
Clearing Member, improve its risk mitigation practices, and support its
responsibility to promote financial stability and integrity to the
marketplace. The examples provided in subsections one through five of
proposed Rule 1201(a)
[[Page 57201]]
are not intended to be an exhaustive list of conduct that would violate
OCC's By-Laws, Rules or procedures. Rather, OCC believes these
referenced examples may be the most frequent violations, and therefore
OCC believes it is appropriate to articulate such information.
OCC's proposed changes to Rule 1201(a) also reorganize the rule
text to promote clarity and efficiency. OCC's proposed changes provide,
in part, that OCC may censure, suspend, expel, ``fine'' or limit the
activities, functions or operations of any Clearing Member for any
violation of the By-Laws and Rules ``or procedures of the
Corporation.'' OCC's proposed changes restructure the provision so that
OCC's authority to fine a Clearing Member is more clearly described and
is more consistent with the description of the other actions that OCC
may take under Rule 1201(a). In reference to the provision that
outlines OCC's ability to impose a disciplinary sanction on any
Clearing Member for violation of OCC's By-Laws and Rules, OCC's
proposed changes also encompass that such violation includes that of
``other statutory rules of the Corporation'' to align more closely with
the text of the Exchange Act \54\ and provide enhanced transparency to
Clearing Members and the general public. The purpose of this change is
to encompass a violation of OCC's statutory rules, as defined in OCC's
By-Laws, rather than solely those rules memorialized in OCC's By-Laws
and Rules. By reorganizing the introductory provision to include the
reference to OCC's authority to fine a Clearing Member, OCC's proposed
changes also eliminate the phrase that states ``The Corporation may, in
addition to or in lieu of such sanctions, impose a fine on any Clearing
Member for any violation of the By-Laws or Rules or procedures of or
its agreements with Corporation or the correspondent clearing
corporation.'' In addition, OCC's proposed changes reorganize the rule
text so that subsection one under proposed Rule 1201(a) describes the
example provided in existing Rule 1201(a) of a Clearing Member
violation. Specifically, OCC's proposed changes adopt subsection one
and provide, in part, that examples of conduct embarrassing the
operations of OCC include, but are not limited to, the Clearing
Member's failure to provide adequate personnel or facilities for its
transactions with OCC or the correspondent clearing corporation. OCC's
proposed changes to Rule 1201(a) also make other conforming,
grammatical and non-substantive changes.
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\54\ 15 U.S.C. 78c(a)(27).
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Finally, OCC's proposed changes eliminate the Interpretation and
Policy .01 and adopt the same provision as Rule 1201(b) to promote
clarity and consistency in Chapter XII. OCC believes it is more
appropriate for the information in proposed Rule 1201(b) to be adopted
as a separate rule under existing Rule 1201, rather than an
interpretation to Rule 1201(a).
Proposed Rule 2212--Suspension of Clearing Member--Re-Matching in
Suspension
OCC's existing Rule 2212 states that in the event a suspended
Clearing Member has Matched-Book Positions, OCC will, upon notice to
affected Clearing Members, close out the suspended Clearing Member's
Matched-Book Positions to the greatest extent possible.\55\ To mitigate
risk in this specific scenario, OCC proposes to incorporate a provision
in proposed Rule 2212(c) which would require that all Clearing Members
that are participants of the Stock Loan/Hedge program must register
their existing Master Securities Loan Agreement (``MSLA'') relationship
within OCC's clearing system.
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\55\ See supra note 3 at Rule 2212(a).
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Under OCC's existing Rule 2212,\56\ OCC already has the authority
to rematch Stock Loan/Hedge positions in the event a defaulting member
is borrowing shares from one Clearing Member and on-lending the same
shares to another Clearing Member. OCC's rematching process gives
priority to a pair of rematched Clearing Members who have registered
with OCC an existing MSLA relationship. Once, and if, all registered
MSLA relationships are exhausted in the rematching algorithm, OCC then
rematches between a pair of Clearing Members who have not registered an
existing MSLA relationship. Those pairings without an existing MSLA
relationship recorded in OCC's clearing system are forced to promptly
decide between executing a new MSLA (and conducting their processes to
onboard a new counterparty) or closing out of the position under the
current market conditions. The proposed revision to Rule 2212(c) would
require Clearing Members to register their MSLAs with other OCC
Clearing Members within OCC's clearing system, as opposed to the
optional registration that exists currently, so that the rematching
algorithm performs most optimally by pairing Clearing Members who
already have existing relationships to mitigate these issues Clearing
Members may face.
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\56\ See supra note 3 at Rule 2212(c).
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Lastly, throughout Rule 2212, OCC removed reference to ``Hedge''
Clearing Member as such term is no longer recognized as a defined term
in OCC's Rules, pursuant to the Commission's prior approval.\57\
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\57\ See supra note 4.
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2. Statutory Basis
OCC believes the proposed rule change is consistent with Section
17A of the Exchange Act \58\ and the rules thereunder applicable to
OCC, including Rule 17Ad-22(e)(18),\59\ Rule 17Ad-22(e)(2),\60\ and
Rule 17Ad-22(e)(1) \61\ thereunder.
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\58\ 15 U.S.C. 78q-1.
\59\ 17 CFR 240.17Ad-22(e)(18).
\60\ 17 CFR 240.17Ad-22(e)(2).
\61\ 17 CFR 240.17Ad-22(e)(1).
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Section 17A(b)(4)(B) of the Act \62\ provides that a clearing
agency may deny participation to, or condition the participation of,
any person if such person does not meet such standards of financial
responsibility, operational capability, experience, and competence as
are prescribed by the rules of the clearing agency. Additionally,
Section 17A(b)(4)(B) of the Act \63\ also provides that a registered
clearing agency may examine and verify the qualifications of an
applicant to be a participant in accordance with procedures established
by the rules of the clearing agency. As described in greater detail
herein, OCC's proposed rule change primarily modifies Chapters II and
III of its Rules to strengthen and expand upon its conditions to
admission and membership requirements applicable to applicants and
existing Clearing Members. OCC's proposed changes in Chapters II and
III detail OCC's standards of financial responsibility, operational
capability, experience, and competence applicable to applicants and
Clearing Members. More specifically, OCC's proposed changes to Chapter
II of its Rules address, in part: (i) enhanced membership eligibility
standards in proposed Rule 201 by requiring applicants maintain a
minimum operating history of one year, (ii) enhanced operational
capability requirements by requiring applicants maintain a physical
office facility in proposed Rule 204, unless OCC deems the use of a
remote office facility does not present heightened risk to OCC, and
(iii) expansion on basis for OCC's denial of membership in proposed
Rule 204. Additionally, OCC's proposed changes to Chapter III of its
Rules address, in
[[Page 57202]]
part, a Clearing Member's: (i) financial responsibilities related to
requiring risk-based minimum capital levels in proposed Rule 301, (ii)
operational capability obligations related to maintaining a physical
office facility in proposed Rule 302, unless OCC deems the use of a
remote office facility does not present heightened risk to OCC, (iii)
responsibilities on employment of risk management personnel in proposed
Rule 303 and (iv) notification and reporting requirements in proposed
Rule 306. OCC's proposed changes to Chapters II and III are intended to
assist OCC in reviewing, examining, verifying and ultimately approving
or disapproving applications for clearing membership. Under the
proposed rule change, OCC retains its authority to suspend, deny or
otherwise condition the participation of any applicant or Clearing
Member that does not meet the applicable membership standards.
Therefore, OCC believes that the proposed rule change promotes the
purposes of Section 17A(b)(4)(B) of the Act.\64\
---------------------------------------------------------------------------
\62\ 15 U.S.C. 78q-1(b)(4)(B).
\63\ Id.
\64\ 15 U.S.C. 78q-1(b)(4)(B).
---------------------------------------------------------------------------
Section 17A(b)(3)(F) of the Act \65\ requires, among other things,
that the rules of a clearing agency be designed, in part, to promote
the prompt and accurate clearance and settlement of securities
transactions and to assure the safeguarding of securities and funds
which are in the custody or control of the clearing agency or for which
it is responsible. OCC believes its proposed changes to Chapters II and
III are consistent with Section 17A(b)(3)(F) of the Act \66\ as it
relates to confidential treatment of non-public information and the
obligations applicable to OCC and its participants. Proposed Rules
203(f) and 306(b) establish a standard relating to OCC's obligation to
maintain the confidentiality of information it collects from
participants to assess each participant's compliance with OCC's
membership requirements. OCC believes the proposed change establishes a
uniform standard that will help OCC meet its obligations and will also
help each participant better understand OCC's obligations for
maintaining the confidential information it shares with OCC. OCC
believes this will better facilitate the sharing of such information
and improve OCC's ability to evaluate its participants' eligibility to
access OCC's clearing and settlement services. Additionally, proposed
Rules 203(f) and 207(d) establish a standard relating to an applicant
or Clearing Member's obligation to maintain OCC Confidential
Information in confidence. By establishing uniform participant
confidentiality requirements, OCC believes this will help each
participant better understand its rights and obligations for
maintaining the confidential information which will help to promote
participant compliance. Therefore, OCC believes the proposed changes to
establish OCC and participant confidentiality obligations are
consistent with the prompt and accurate clearing and settlement of
securities specified in Section 17A(b)(3)(F) of the Act.\67\
---------------------------------------------------------------------------
\65\ 15 U.S.C. 78q-1(b)(3)(F).
\66\ Id.
\67\ Id.
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OCC believes the proposed rule change is consistent with Section
17A(b)(5)(B) of the Act, which provides, in part, that in any
proceeding by a registered clearing agency to determine whether a
person shall be denied participation with respect to access to services
offered by the clearing agency, the clearing agency must notify such
person of, and give him an opportunity to be heard upon, the specific
grounds for denial or prohibition or limitation under consideration and
keep a record.\68\ Furthermore, Section 17A(b)(5)(B) of the Act
provides, in part, that determination to deny participation must be
supported by a statement setting forth the specific grounds on which
the denial or prohibition or limitation is based.\69\ OCC believes the
denial of a Clearing Member following reapplication, as described in
proposed Rule 309(c), is consistent with Section 17A(b)(5)(B) of the
Act. Proposed Rule 309(c) provides that any decision to deny clearing
membership following reapplication will be made pursuant to Rule 203.
The admission procedures described in Rule 203 already provide for the
requirements outlined in Section 17A(b)(5)(B) of the Act, specifically
in proposed Rules 203(b)(3) and (4). In the event the Risk Committee,
or its designated delegates or agents, deny an application or
reapplication for clearing membership, proposed Rule 203(b)(3) states
that the Risk Committee must first furnish the applicant with a written
statement of its proposed recommendation and the specific grounds
therefore, and afford the applicant an opportunity to be heard and to
present evidence on its own behalf. Furthermore, proposed Rules
203(b)(4) through (b)(6) codifies the specific processes that OCC would
undertake in hearings before the Risk Committee for appeals of certain
protective measures, or in hearings on denials of Clearing Member
applications or reapplications. OCC believes this detailed process
outlined in proposed Rule 203(b)(4) through (b)6) will promote greater
transparency for Clearing Members and applicants with respect to denial
of participation and the procedures afforded to them. As such, OCC
believes proposed Rule 203 aligns with the requirements in Section
17A(b)(5)(B) of the Act. Furthermore, proposed Rule 203(b)(8) mirrors
existing Interpretation and Policy .01 to Rule 1201 (i.e., proposed
Rule 1201(b)), which provides the same with respect to a suspension or
expulsion following disciplinary proceedings in Chapter XII. Because
OCC's proposed Rule 309(c) provision to deny a Clearing Member
following reapplication will be made pursuant to Rule 203, OCC believes
proposed Rule 309(c) is consistent with Section 17A(b)(5)(B) of the
Act.
---------------------------------------------------------------------------
\68\ 15 U.S.C. 78q-1(b)(5)(B).
\69\ Id.
---------------------------------------------------------------------------
OCC believes the proposed rule change is also consistent with
Section 17A(b)(3)(H) of the Act \70\ and Section 17A(b)(5) of the
Act.\71\ Section 17A(b)(3)(H) of the Act requires, in part, that the
rules of a clearing agency, in general, provide a fair procedure with
respect to denial of participation to any person seeking participation
therein.\72\ Section 17A(b)(3)(H) of the Act also requires that the
clearing agency's rules are in accordance with Section 17A(b)(5) of the
Act, which outlines the procedures to be followed by a clearing agency
in disciplining participants.\73\ The proposed rule change seeks to
expand certain delegation of authority from the Risk Committee to the
Risk Committee's designated delegates or agents in determining to
approve or deny an applicant. OCC is not seeking to change its current
appellate process for applicants that have been denied membership. In
addition, OCC is not seeking to change the process for disciplining
participants. Rather, OCC seeks to expand certain delegation of
authority from the Risk Committee to the Risk Committee's designated
delegates or agents in determining the approval or denial of an
applicant. Specifically, proposed Rule 203(b) expands authority so that
the Risk Committee, or its designated delegates or agents, must
determine whether to approve or deny applications for clearing
membership. If an applicant is denied membership, OCC's current
practices under existing Rule 203(a) provides, in part, that the
applicant, if denied by the Risk Committee, is given
[[Page 57203]]
a written statement with the specific grounds for denial, and the
applicant has the opportunity to be heard by the Risk Committee and to
present evidence on its own behalf.\74\ OCC is not seeking to change
this process. If an applicant is denied membership by the Risk
Committee's designated delegates or agents, as proposed Rule 203(b)
authorizes the Risk Committee's designated delegates or agents to do
so, the applicant would still be given the opportunity to be heard by
the Risk Committee. OCC believes its current process provides for a
fair procedure with respect to denial of participation. Because OCC is
not seeking to change its current appellate process for applicants
denied membership, OCC believes its proposed changes related to
delegated authority process under this proposed rule change are
consistent with Section 17A(b)(3)(H) of the Act and Section 17A(b)(5)
of the Act. OCC believes the proposed rule change is also consistent
with proceedings under Section 17A(b)(5)(B) of the Act,\75\ which
requires, in part, that ``in any proceeding by a registered clearing
agency to determine whether a person shall be denied participation or
prohibited or limited with respect to access to services offered by the
clearing agency, the clearing agency shall notify such person of, and
give him an opportunity to be heard upon, the specific grounds for
denial.'' OCC believes that proposed Rule 1201(a) is consistent with
Section 17A(b)(5)(B) of the Act \76\ because proposed Rule 1201(a)
articulates explicit examples that may result in grounds for OCC's
denial, prohibition or limitation on a Clearing Member's access under
OCC's disciplinary proceedings. Proposed Rule 1201(a) describes
specific examples, but does not provide an exhaustive list, of
potential violations of OCC's By-Laws and Rules, which promotes
transparency and specificity to Clearing Members and the general public
on possible grounds for such disciplinary proceedings.
---------------------------------------------------------------------------
\70\ 15 U.S.C. 78q-1(b)(3)(H).
\71\ 15 U.S.C. 78q-1(b)(5).
\72\ 15 U.S.C. 78q-1(b)(3)(H).
\73\ 15 U.S.C. 78q-1(b)(5).
\74\ See supra note 3 at Rule 203(a).
\75\ 15 U.S.C. 78q-1(b)(5)(B).
\76\ Id.
---------------------------------------------------------------------------
OCC believes the proposed rule change is consistent with Rule 17Ad-
22(e)(18).\77\ Rule 17Ad-22(e)(18) \78\ requires a clearing agency, in
part, to ``[e]stablish objective, risk-based, and publicly disclosed
criteria for participation'' that ``permit fair and open access'' and
``require participants to have sufficient financial resources and
robust operational capacity to meet obligations arising from
participation in the clearing agency.'' The primary purpose of the
proposed rule change is to improve OCC's existing financial and
operational membership standards and strengthen its reporting
requirements to continue to permit fair and open access and to further
mitigate counterparty credit risks introduced by Clearing Members. The
proposed changes establish requirements to help ensure that applicants
and Clearing Members maintain sufficient financial resources and robust
operational capacity to meet obligations arising from participation at
OCC. With respect to requiring that participants have sufficient
financial resources, the proposed rule change establishes in proposed
Rule 301 the ability for OCC to, in its sole discretion, implement
risk-based minimum capital levels for Clearing Members that are higher
than those already specified in OCC's Rules. As described in further
detail above, the bases and processes for applying risk-based minimum
capital levels would be detailed in the Procedure and such information
would be publicly disclosed in OCC's pre-qualification form. The
proposed rule change also clarifies and expands upon OCC's existing
authority to deny an applicant for clearing membership in proposed Rule
204(e), including but not limited to, if such applicant poses elevated
risk due to the amount or degree of financial leverage maintained by
the applicant. With respect to requiring that participants maintain
robust operational capability, the proposed rule change establishes
eligibility criteria for Clearing Members to maintain a one-year
minimum operating history in proposed Rule 201. The proposed rule
change also establishes new provisions and modifies existing provisions
set forth in proposed Rules 204(g), 302 and 303 as it relates to OCC's
operational capability, experience, and competence standards and
related resources for applicants and Clearing Members. This includes,
among other things, the requirement for participants to maintain a
minimum total number of personnel and risk management personnel, and
the requirement to maintain physical office facilities utilized to
conduct business with OCC, unless OCC deems such remote office facility
does not pose heightened risk to OCC. OCC believes that an applicant or
Clearing Member's use of a fully remote office model, as opposed to a
hybrid model, may introduce communication challenges for OCC and the
applicant or Clearing Member's staff as well as pose operational risk
to OCC that could be mitigated through an in-person office visit or on-
site exam. Therefore, OCC believes it is necessary to implement
requirements surrounding physical office facilities to promote
operational resiliency. OCC believes these proposed changes promote the
purposes of Rule 17Ad-22(e)(18).\79\
---------------------------------------------------------------------------
\77\ 17 CFR 240.17Ad-22(e)(18).
\78\ 17 CFR 240.17Ad-22(e)(18)(i)-(ii).
\79\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(18) \80\ also requires a clearing agency to monitor
for compliance with its participation requirements on an ongoing basis.
OCC believes the proposed rule change is consistent with this
requirement because it enhances and otherwise clarifies OCC's ongoing
monitoring of Clearing Member's participation requirements by
strengthening its early warning notice and periodic reporting
requirements for Clearing Members under proposed Rules 306A and 306B.
Proposed Rule 309 strengthens OCC's ongoing monitoring of Clearing
Members by providing OCC with the ability to require Clearing Members
to reapply for membership or to apply protective measures necessary to
address risks arising from any material change impacting the financial
or operational condition of the Clearing Member. The proposed rule
change expands upon OCC's reporting requirements for Clearing Members,
including the obligation for Clearing Members, upon OCC's request, to
provide OCC with their parent or affiliate's audited financial
statements in proposed Rule 306B. Furthermore, the proposed rule change
adopts additional protective measures under proposed Rule 307C,
including but not limited to, restrictions on a Clearing Member related
to the departure of a Key Person from their management team, and
requirements to obtain an independent assessment of the Clearing Member
or applicant's financial projections or operational capabilities. The
proposed rule change subjects Clearing Members to each of these
financial and operational membership standards in a non-discriminatory
manner under OCC's Rules. As such, OCC believes that these enhanced
financial, reporting, and operational membership standards promote the
requirements of Rule 17Ad-22(e)(18).\81\
---------------------------------------------------------------------------
\80\ 17 CFR 240.17Ad-22(e)(18)(iii).
\81\ Id.
---------------------------------------------------------------------------
OCC believes the proposed rule change is also consistent with Rule
17Ad-22(e)(2).\82\ Rule 17Ad-22(e)(2) requires, among other things,
that OCC establish, implement, maintain and enforce written policies
and procedures reasonably designed to provide for
[[Page 57204]]
governance arrangements that are clear and transparent and specify
clear and direct lines of responsibility.\83\ Proposed Rules 203 and
204 provide, in part, changes to expand certain delegation of authority
from the Risk Committee to the Risk Committee's designated delegates or
agents in the approval or denial of applications for clearing
membership and business expansions requests at OCC. OCC believes the
proposed rule change outlines in a clear, direct, and transparent
manner the lines of responsibility in the approval or denial of
membership applicants and business expansions. Proposed Rules 203 and
204 describe that new membership decisions and business expansion
requests are not required to be presented to the Risk Committee at the
regularly scheduled Risk Committee meetings. By vesting the authority
to approve or deny certain applicants for clearing membership to the
Risk Committee's designated delegates or agents, as described in
proposed Rule 203(b), OCC will not subject all applicants for clearing
membership to the regular meeting cycle of the Board or Risk Committee.
This, in turn, will streamline the decision-making process by
eliminating the need to wait until the next quarterly scheduled Risk
Committee meeting to determine whether such applicant or business
expansion is approved. Similarly, by modifying Rule 203 to provide that
business expansion requests may be reviewed and approved or disapproved
by the Risk Committee, or its designated delegates or agents, pursuant
to the procedures of OCC, OCC believes this sets forth clear governance
arrangements while also streamlining the decision process so that not
every business expansion request will be required to be presented to
the Risk Committee. As such, OCC believes the proposed change promotes
the requirements of Rule 17Ad-22(e)(2).\84\
---------------------------------------------------------------------------
\82\ 17 CFR 240.17Ad-22(e)(2).
\83\ 17 CFR 240.17Ad-22(e)(2)(i),(v).
\84\ Id.
---------------------------------------------------------------------------
OCC believes the proposed rule change is also consistent with Rule
17Ad-22(e)(1).\85\ Rule 17Ad-22(e)(1) requires, in part, that OCC
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.\86\ As described in more
detail above, the primary reason for the proposed rule change is to
enhance OCC's onboarding requirements and surveillance of existing
Clearing Members to reduce counterparty credit risk introduced by
Clearing Members. In addition, the proposed rule change also makes
certain organizational, administrative, and clarifying changes to its
Rules to provide greater clarity and transparency, and to promote
efficient administration of the Rules. For example, proposed Rule
204(e) articulates examples under OCC's existing authority to deny an
applicant for membership if such applicant poses elevated risk to OCC.
OCC believes that articulating examples in its Rules provides enhanced
transparency to applicants and the general public. As such, OCC
believes the proposed rule change promotes the purposes of Rule 17Ad-
22(e)(1).\87\
---------------------------------------------------------------------------
\85\ 17 CFR 240.17Ad-22(e)(1).
\86\ 17 CFR 240.17Ad-22(e)(1).
\87\ Id.
---------------------------------------------------------------------------
(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \88\ requires that the rules of a
clearing agency not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act. OCC does not
believe that the proposed rule changes would impact or impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Act. The proposed rule change is generally intended
to improve upon OCC's existing financial and operational membership
standards to mitigate counterparty credit risk introduced by Clearing
Members. With the exception of OCC's proposed change to implement risk-
based minimum capital levels, OCC believes the proposed rule change
imposes the enhanced financial and operational membership standards
uniformly on all applicants and Clearing Members within a particular
category of institution, and whenever possible, uniformly across all
Clearing Members irrespective of category.
---------------------------------------------------------------------------
\88\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
OCC's proposed Rule 301 provides, in part, that OCC may establish
and impose risk-based minimum capital levels on Clearing Members to
further mitigate risk to OCC. OCC acknowledges that this proposed
change establishing the ability for OCC to implement risk-based minimum
capital levels, higher than those already specified in its Rules, may
present a burden on competition among certain Clearing Members.
Specifically, smaller Clearing Members that maintain a smaller level of
capital may be impacted more than larger Clearing Members that maintain
larger capital pools. While OCC understands that establishing risk-
based minimum capital levels may impact certain Clearing Members over
others, OCC believes the establishment of risk-based minimum capital
levels is necessary and appropriate in furtherance of the purposes of
the Act. OCC's intention in establishing risk-based minimum capital
levels is to strengthen its risk management practices. As the central
counterparty for all listed options in the U.S., OCC has an obligation
to address and manage risk, including counterparty credit risk
introduced by its Clearing Members. OCC believes it is necessary to
maintain the ability to impose risk-based minimum capital levels so
that OCC can prevent financial risk from impacting other Clearing
Members. If, for example, a Clearing Member presents, in OCC's
discretion, a highly leveraged profile, short operating history, an
inadequate liquidity profile, a business strategy that is high risk,
weak profitability, weak internal risk controls, or insufficient
personnel, OCC believes that such Clearing Member may present greater
credit and liquidity risks to OCC that may impact OCC's ability to
comply with the requirements of the Act applicable to clearing
agencies. Therefore, OCC believes the burden imposed on certain
Clearing Members that may be impacted by risk-based minimum capital
levels is outweighed by the critical responsibility that OCC maintains
in managing risk to OCC, its Clearing Members, and the U.S. listed
options market.
OCC believes the proposed rule change would continue to provide for
objective and risk-based standards that balance fair and open access
with prudent qualification standards while ensuring its membership base
is appropriately capitalized to support the prompt and accurate
clearance and settlement of securities transactions and derivative
agreements, contracts and transactions cleared by OCC, the safeguarding
of securities and funds in the custody or control of OCC or for which
it is responsible, and the protection of investors and the public
interest in accordance with Section 17A(b)(3)(F) of the Act.\89\
---------------------------------------------------------------------------
\89\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
For the foregoing reasons, OCC believes that the proposed rule
change is in the public interest, would be consistent with the
requirements of the Act applicable to clearing agencies, and would not
impact or impose a burden on competition not necessary or appropriate
in furtherance of the purposes of the Act.
[[Page 57205]]
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments were not and are not intended to be solicited with
respect to the proposed change and none have been received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#255750494008464a4848404b5156655640460b424a53"><span class="__cf_email__" data-cfemail="5321263f367e303c3e3e363d2720132036307d343c25">[email protected]</span></a>. Please include
file number SR-OCC-2026-009 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-OCC-2026-009. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of such filing will be available for inspection and
copying at the principal office of OCC and on OCC's website at <a href="https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules">https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules</a>. Do not include personal identifiable information in submissions;
you should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to File Number SR-OCC-2026-009 and should
be submitted on or before September 29, 2026.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\90\
---------------------------------------------------------------------------
\90\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2026-18211 Filed 9-4-26; 8:45 am]
BILLING CODE 8011-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.