
[Federal Register Volume 76, Number 241 (Thursday, December 15, 2011)]
[Notices]
[Pages 78059-78060]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-32142]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65927; File No. SR-OCC-2011-15]


 Self-Regulatory Organizations; Options Clearing Corporation; 
Order Approving Proposed Rule Change Relating to Management of 
Liquidity Risk

December 9, 2011.

I. Introduction

    On October 12, 2011, the Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2011-15 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal Register on November 1, 2011.\3\ The Commission received no 
comment letters on the proposed rule change. This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 65622 (October 28, 
2011), 76 FR 67523.
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II. Description

    The purpose of the proposed rule change is to amend OCC's by-laws 
and rules to clarify OCC's authority to use, and the manner in which 
OCC may use, a defaulting clearing member's margin deposits and 
contributions to the clearing fund and all other clearing members' 
clearing fund contributions \4\ to obtain temporary liquidity for 
purposes of meeting liquidity needs arising from Default 
Obligations.\5\
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    \4\ Margin deposits secure only the depositing clearing member's 
own obligations to OCC whereas clearing fund deposits of all 
clearing members may be applied by OCC not only to losses arising 
from the depositing clearing member's default, but also to losses 
resulting from defaults by other clearing members and specified 
other third parties such as settlement banks and other clearing 
organizations. See generally Article VIII, Sections 1 and 5 of OCC's 
by-laws and Rule 604 of OCC's rules.
    \5\ The specific language of the proposed changes can be found 
at http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/sr_occ_11_15.pdf.
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    An essential element of OCC's risk management regime is sound 
management of liquidity risk. OCC regularly examines its liquidity risk 
exposure to determine the optimal amount and form of available 
liquidity. OCC's largest potential liquidity needs are projected to 
occur in the case of a clearing member's default where OCC would be 
obligated to settle the defaulting clearing member's payment 
obligations with respect to option premiums, settlement of cash-settled 
option exercises, and mark-to-market payments. These are obligations 
that OCC must fund on time and potentially with only a few hours of 
advance notice--from notice of default until the payments are due.
    One of the resources that OCC may use to meet its liquidity needs 
is its existing committed credit facility. The amount of funds 
available to OCC under the committed credit facility is limited not 
only by the overall size of the facility, but also by the amount of 
assets that OCC can pledge as collateral to lenders supporting the 
facility. OCC believes that, in addition to the authority it already 
has to pledge clearing fund assets to secure a loan to cover Default 
Obligations, it should also have the express power to pledge a 
suspended clearing member's margin deposits to secure loans for the 
purpose of meeting obligations arising out of the default and 
suspension of that clearing member or any action taken by OCC in 
connection therewith. OCC clearly has authority to pledge a suspended 
clearing member's clearing fund deposits for that

[[Page 78060]]

purpose under Article VIII, Section 5(e) of the by-laws. OCC believes 
that it is not as clear that it has authority to pledge a suspended 
clearing member's margin deposits. Rule 1104(a) provides, among other 
things, that upon the suspension of a clearing member, OCC shall 
promptly ``convert to cash,'' in the most orderly manner practicable, 
all of the clearing member's margin deposits. Although this mandate 
might be construed to include the authority to pledge margin assets as 
collateral for borrowings under the committed credit facility, the 
phrase ``convert to cash'' has generally been used in the by-laws as 
synonymous with ``liquidate'' to refer to a final disposition of an 
asset. And even if OCC does have implied authority to pledge margin 
assets, that may not be transparent to all clearing members because it 
is not expressly stated in the rule. In order to eliminate any 
ambiguity, OCC proposed to (i) Amend Rule 1104 and Rule 1106 to replace 
the phrases ``convert to cash,'' '' conversion to cash'' and 
``converted to cash'' with the words ``liquidate,'' ``liquidation'' and 
``liquidated,'' respectively; and (ii) amend Rule 1104(b) to expressly 
give OCC the power to pledge a suspended clearing member's margin 
deposits as security for loans if designated executive officers of OCC 
determine that immediate liquidation of such assets for cash under 
then-existing circumstances would not be in the best interests of OCC, 
other clearing members, or the general public.
    While OCC's $2 billion committed credit facility should normally be 
more than sufficient to meet OCC's liquidity needs, it is nevertheless 
possible that OCC could encounter a liquidity demand that exceeds the 
size of that facility. Moreover, it could be difficult to maintain the 
size of the facility under unfavorable market conditions (i.e., if the 
credit markets tighten significantly). In addition, future regulatory 
requirements for clearinghouses could impose liquidity requirements 
that would be difficult to meet with a committed credit facility alone. 
In order to be better prepared to deal with such situations, OCC 
believes that it is necessary to actively explore a variety of means 
for raising and maintaining liquidity resources, including 
participation in securities lending or tri-party repo markets. 
Therefore, OCC proposed to amend both Article VIII, Section 5(e) of the 
by-laws and Rule 1104(b) to clarify that OCC's authority to use a 
suspended clearing member's margin and clearing fund deposits and other 
clearing members' clearing fund deposits to obtain temporary liquidity 
for purposes of meeting Default Obligations is not limited to pledging 
such assets under the committed credit facility. Rather, OCC would have 
express authority to use such assets to obtain liquidity through any 
reasonable means as determined by designated executive officers of OCC 
in their discretion. The addition of the language ``or otherwise 
obtain'' in Article VIII, Section 5(e) of the by-laws reflects that 
certain transactions by which OCC may obtain liquidity could be 
characterized as something other than a transaction in which funds are 
``borrowed.'' For example, in a Master Repurchase Agreement, the 
Agreement states that the parties' intent is for the transactions to be 
``sales'' and ``purchases,'' but also contains provisions if such 
transactions are deemed to be loans. Accordingly, the use of ``or 
otherwise obtain'' in the phrase ``borrow or otherwise obtain'' 
addresses the possibility that the transaction by which OCC obtains 
funds may not be deemed to be a ``borrowing'' and forestalls technical 
arguments that it would be necessary for the transaction to be a 
``loan'' in order for OCC to borrow funds.

III. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
registered clearing agency be designed 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.\6\ The proposed rule change is designed to clarify OCC's 
authority to take action following a clearing member default in order 
to facilitate the settlement of the defaulting clearing member's 
payment obligations with respect to option premiums, settlement of 
cash-settled option exercises, and mark-to-market payments. The 
Commission believes that the express authority to obtain funds based on 
a suspended member's clearing fund deposits and margin deposits may 
facilitate OCC's ability to obtain the liquidity it needs 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 or for which OCC is responsible.
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    \6\ 15 U.S.C. 78a-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 \7\ and the 
rules and regulations thereunder.
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    \7\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (File No. SR-OCC-2011-15) be, and 
hereby is, approved.\9\
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    \8\ 15 U.S.C. 78s(b)(2).
    \9\ In approving this proposed rule change the Commission has 
considered the proposed rule's impact of efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-32142 Filed 12-14-11; 8:45 am]
BILLING CODE 8011-01-P


