
[Federal Register Volume 76, Number 125 (Wednesday, June 29, 2011)]
[Notices]
[Pages 38225-38226]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-16302]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64740; File No. SR-OCC-2011-05]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Provide Flexibility to The 
Options Clearing Corporation With Respect to Its Obligations To Pay 
Settlement Amounts to Clearing Members Generally as Well as in 
Emergency Situations

June 24, 2011.

I. Introduction

    On April 28, 2011, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2011-05 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ The proposed rule change 
was published for comment in the Federal Register on May 12, 2011.\2\ 
No comment letters were received on the proposal. This order approves 
the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 34-64436 (May 6, 2011), 
76 FR 27697 (May 12, 2011).
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II. Description

    The purpose of this rule change is to revise OCC's By-Laws and 
Rules to provide flexibility to OCC with respect to its obligations to 
pay settlement amounts to clearing members generally as well as in 
emergency situations. The proposed rule amendments will change the 
current daily deadline for OCC to pay settlement amounts to clearing 
members from 10 a.m. to 1 p.m. (All times referred to in this fling are 
Central Time). In addition, in the event that an emergency condition 
exists, the Board of Directors or certain executive officers of OCC 
would be authorized to extend OCC's obligation to pay settlement 
amounts to clearing members beyond the 1 p.m. deadline.
    Currently, each business day morning, OCC is obligated to collect 
cash owed by its clearing members for the prior day's settlement 
activity by 9 a.m. OCC, in turn, is obligated to pay cash owed to its 
clearing members for the prior day's settlement activity by 10 a.m. 
This one-hour window is designed to give OCC time to collect all 
required settlement funds before having to disburse any settlement 
funds to its clearing members. Daily settlement activity includes 
obligations relating to: (1) The net premium payments arising from the 
prior day's option purchases and sales,

[[Page 38226]]

(2) the mark-to-market of futures contracts and stock loan positions, 
and (3) exercises and assignments of cash-settled option contracts.
    OCC's settlement banks routinely approve and are required to honor 
the associated settlements made by OCC and OCC's clearing members 
within these time frames. On most business days, the entire bank 
approval process, which irrevocably obligates each settlement bank to 
make settlement, is completed by 8:30 a.m.
    Under OCC's rules, a failure by OCC to pay its daily settlement 
obligations to clearing members by 10 a.m. constitutes a default. 
During discussions among OCC's senior management of various potential 
extreme default and liquidity squeeze scenarios, including the possible 
default of one of OCC's largest clearing members, OCC analyzed the risk 
associated with not being able to immediately access liquidity 
resources in time to meet the 10 a.m. deadline for OCC to pay 
settlement amounts to clearing members. The deadline may be difficult 
to meet if, for example, OCC learned of a default near the 9 a.m. 
deadline. In such a circumstance, OCC would have only one hour or less 
when the time needed to process and communicate information is 
considered to access the funds necessary to meet the 10 a.m. deadline.
    OCC's immediate liquidity resources rely heavily upon its $2.0 
billion revolving credit facility, which is backed by Treasuries held 
in the clearing fund. A one-hour advance notice is required prior to 
OCC drawing funds from the credit facility. Beyond the credit facility, 
it would probably take more than one hour to raise cash by borrowing 
against the Treasuries held in the clearing fund that are not securing 
the credit facility either through tri-party repurchase agreements or a 
traditional bank loan.
    The main benefit of moving the deadline to 1 p.m. for OCC to pay 
clearing members settlement amounts is that it allows up to four hours 
as opposed to the current one hour, within which OCC can meet its daily 
settlement requirement without being required to declare an emergency 
in order to do so. In addition, based on discussions with its 
settlement banks, OCC believes that notwithstanding a change from the 
current 10 a.m. deadline to a 1 p.m. deadline, the settlement banks 
will continue the current practice of approving settlements as soon as 
they can make a credit determination (i.e., confirm present funds or 
extend credit to the customer) and process OCC's payment requests, 
which are tasks that are typically completed by 8:30 a.m.
    OCC also has incorporated in its rules the authority to extend the 
deadline for it to pay settlement amounts to clearing members to the 
close of the Federal Reserve Banks' Fedwire Funds Service on a 
settlement day, if necessary, during an emergency situation.\3\ Such an 
extension is consistent with the emergency authority other 
clearinghouses have to deal with late settlement scenarios. The rule 
amendments would authorize the Board, Chairman of the Board, Management 
Vice Chairman, or President of OCC to delay settlement beyond 1 p.m. in 
emergency situations. The rule amendments would authorize the named 
officers to take such action because the decision may need to be made 
under time constraints where the Board (or even the Membership/Risk 
Committee) could not be convened in time to take the necessary 
action.\4\ OCC anticipates that the emergency authority would be used 
infrequently, if ever. Under proposed Rule 505, such authority could 
only be used upon a determination by the Board or an authorized officer 
that extension of the settlement time is necessary or advisable for the 
protection of OCC or otherwise in the public interest. In the event 
that the emergency authority is exercised, a number of protections are 
built into the process. For example, the determination and the reasons 
for the extension will be promptly reported to the Commission, the 
Commodities Futures Trading Commission, and any other regulatory or 
supervisory authorities having jurisdiction over OCC. In addition, the 
clearing members will be notified of the extension, and a report 
outlining the emergency actions will be maintained in OCC's records.
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    \3\ In the event that OCC is unable to pay settlement amounts to 
clearing members by the close of the Fedwire Funds Service on a 
settlement day due to an emergency or force majeure condition, OCC 
will seek appropriate relief from the regulatory or supervisory 
authorities having jurisdiction over OCC.
    \4\ Similar authority is provided to the OCC Chairman (or the 
Board) to summarily suspend a clearing member. See OCC Rule 1102.
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    For drafting clarity and economy, the specific settlement times 
have been removed from the applicable rules, a new definition of 
``settlement day'' has been created, and a revised definition of 
``settlement time'' has been inserted in Article I of the By-Laws.

III. Discussion

    Section 17A(b)(3)(F) of the Act \5\ requires, among other things, 
that the rules of a clearing agency be designed to promote the prompt 
and accurate clearance and settlement of security transactions and to 
generally protect investors and the public interest. Because the 
proposed rule change modifies OCC's Rules and By-Laws to give OCC 
flexibility to make settlement payments to its clearing members in a 
timely manner during normal and abnormal market conditions, the 
proposed rule change promotes the prompt and accurate clearance and 
settlement of security transactions and generally protects investors 
and the public interest and therefore is consistent with the 
requirements of Section 17A(b)(3)(F) of the Act.
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    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \6\ and the 
rules and regulations thereunder.
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    \6\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\7\ that the proposed rule change (File No. SR-OCC-2011-05) be, and 
hereby is, approved.\8\
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    \7\ 15 U.S.C. 78s(b)(2).
    \8\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-16302 Filed 6-28-11; 8:45 am]
BILLING CODE 8011-01-P


