
[Federal Register Volume 77, Number 198 (Friday, October 12, 2012)]
[Notices]
[Pages 62308-62310]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-25088]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68002; File No. AN-OCC-2012-03]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Advance Notice and Notice of No Objection To 
Replace The Options Clearing Corporation's Credit Facility

October 5, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4(n)(1)(i),\2\ notice is hereby 
given that on September 26, 2012, The Options Clearing Corporation 
(``OCC'') filed with the Securities and Exchange Commission 
(``Commission'') an advance notice 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 change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4(n)(i).
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I. Clearing Agency's Statement of the Terms of Substance for the 
Advance Notice

    In connection with a change to its operations (the ``Change''), OCC 
proposes to replace its credit facility designed to be used to meet 
obligations of OCC arising out of the default or suspension of a 
clearing member of OCC or the insolvency of any bank or clearing 
organization doing business with OCC.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the proposed change and 
discussed any comments it received on the proposed change. The text of 
these statements may be examined at the places specified in Item IV 
below. OCC has prepared a summary, set forth in section (A) below, of 
the most significant aspects of such statements.\3\
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    \3\ The Commission has modified the text of the summaries 
prepared by OCC.
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Advance Notices Filed Pursuant to Section 806(e) of the Payment, 
Clearing, and Settlement Supervision Act of 2010 (``Clearing 
Supervision Act'')

Description of Change
    The Change involves the replacement of a credit facility that OCC 
maintains for the purposes of meeting obligations arising out of the 
default or suspension of a clearing member or the failure of a bank or 
securities or commodities clearing organization to perform its 
obligations due to its bankruptcy, insolvency, receivership or 
suspension of operations. OCC's existing credit facility (the 
``Existing Facility'') was implemented on October 13, 2011 through the 
execution of a Credit Agreement among OCC, JPMorgan Chase Bank, N.A. 
(``JPMorgan''), as administrative agent, and the lenders that are 
parties to the agreement from time to time, which provides short-term 
secured borrowings in an aggregate principal amount of up to $2 
billion.
    The Existing Facility is set to expire on October 11, 2012, and OCC 
is therefore currently negotiating the terms of a new credit facility 
(the ``New Facility'') on substantially similar terms as the Existing 
Facility. On September 4, 2012, OCC received a commitment letter with 
regard to the New Facility from: JPMorgan, the administrative agent, 
euro administrative agent and collateral agent, and a lender, for the 
New Facility; JPMorgan Securities LLC (``JPMorgan Securities''), the 
joint lead arranger for the New Facility; Merrill Lynch, Pierce, Fenner 
& Smith Incorporated (``MLPF&S''), the joint lead arranger for the New 
Facility; and Bank of America, N.A. (``BANA''), the syndication agent 
and a lender for the New Facility. The terms and conditions applicable 
to the New Facility are set forth in the commitment letter and a 
Summary of Terms and Conditions attached as an exhibit to the 
commitment letter. One of the

[[Page 62309]]

conditions to the availability of the New Facility is the execution and 
delivery of a credit agreement and pledge agreement between OCC, 
JPMorgan, JPMorgan Securities, MLPF&S, BANA and the various lenders 
under the New Facility, which OCC anticipates will occur on or before 
October 11, 2012. Another condition is the successful syndication of 
the facility to a group of lenders who will in the aggregate provide 
commitments of at least $2 billion.
    Under the New Facility, a syndicate of banks, financial 
institutions and other entities will make loans to OCC on request. The 
New Facility includes a tranche that may be drawn in dollars or euros 
and a dollar-only tranche. The aggregate amount of loans available 
under the facility, subject to the value of eligible collateral, is up 
to $2 billion. The dollar equivalent of the total loans denominated in 
euros under the euro/dollar tranche of the New Facility may not exceed 
$100 million. During the term of the New Facility, the amount of the 
New Facility may be increased to up to $3 billion if OCC so requests 
and if sufficient commitments from lenders are received and accepted.
    The New Facility is available on a revolving basis for a 364-day 
term. OCC may request a loan under the New Facility on any business day 
by providing a notice to JPMorgan, as administrative agent, which will 
then notify the lenders, who will be required to fund their pro rata 
share of any requested loan within a specified period of time after 
receiving notice from JPMorgan. The funding deadline is designed to 
permit OCC to obtain funds on the date of the request, subject to a 
cutoff time after which funding will occur on the next business day. 
Each loan issued pursuant to the New Facility matures and is payable 30 
days after the borrowing date. Proceeds of these loans must be used to 
meet the obligations of OCC arising out of the default or suspension of 
a clearing member or the failure of a bank or securities or commodities 
clearing organization to perform its obligations to OCC. In order to 
obtain a loan under the facility, OCC must pledge as collateral cash or 
government securities that are margin deposits of suspended members or 
that are held in OCC's clearing fund, and that in either case are not 
otherwise subject to liens, security interests or other encumbrances. 
OCC has the authority to pledge these assets in connection with 
borrowings under Section 5(e) of Article VIII of its By-Laws and Rule 
1104(b).
    The amount available under the New Facility at any given point in 
time is equal to the lesser of (i) $2 billion, or the increased size of 
the facility, if applicable, and (ii) the sum of (A) 90% of the value 
of OCC's clearing fund that is not subject to liens or encumbrances 
granted by OCC other than in connection with the New Facility and (B) 
90% of the value of unencumbered margin deposits of suspended clearing 
members that are not subject to liens or encumbrances granted by OCC 
other than in connection with the New Facility. If the aggregate 
principal amount of loans under the New Facility exceeds the amount 
available under this formula, OCC must prepay loans, obtain the release 
of liens and/or require additional margin and/or clearing fund deposits 
to cure the deficiency. A condition to the making of any loan under the 
New Facility is that, after giving effect to the loan, the sum of 100% 
of the dollar-denominated loans and 105% of the euro-denominated loans 
under the New Facility may not exceed the ``borrowing base.'' The 
borrowing base is determined by adding the value of all collateral 
pledged in connection with all loans under the New Facility, after 
applying ``haircuts'' to government securities based on their remaining 
maturity. If the borrowing base is less than the sum of 100% of the 
dollar-denominated loans and 105% of the euro-denominated loans under 
the New Facility, OCC must repay loans or pledge additional collateral 
to cure the deficiency. There are additional customary conditions to 
the making of any loan under the New Facility, including that OCC is 
not in default. Importantly, however, the absence of a material adverse 
change affecting OCC is not a condition to the making of a loan. Loans 
may be prepaid at any time without penalty.
    Events of default by OCC under the New Facility include, but are 
not limited to, non-payment of principal, interest, fees or other 
amounts when due; non-compliance with a daily borrowing base when loans 
are outstanding; material inaccuracy of representations and warranties; 
bankruptcy events; fundamental changes; and failure to maintain a first 
priority perfected security interest in collateral. In the event of a 
default, the interest rate applicable to outstanding loans would 
increase by 2.00%. The New Facility also includes customary defaulting 
lender provisions, including provisions that restrict the defaulting 
lender's voting rights, permit set-offs of payments against the 
defaulting lender and suspend the defaulting lender's right to receive 
commitment fees.
    The New Facility involves a variety of customary fees payable by 
OCC, including: (1) A one-time arrangement fee payable to JPMorgan 
Securities and MLPF&S (2) a one-time administrative and collateral 
agent fee payable to JPMorgan if the New Facility closes; (3) a one-
time euro administrative fee payable to JPMorgan if the New Facility 
closes; (4) upfront commitment fees payable to the lenders based on the 
amount of their commitments; and (5) an ongoing quarterly commitment 
fee based on the unused amount of the New Facility.
Anticipated Effect on and Management of Risk
    Overall, the New Facility reduces the risks to OCC, its clearing 
members and the options market in general because it will allow OCC to 
obtain short-term funds to address liquidity demands arising in 
connection with the default or suspension of clearing members or the 
insolvency of a bank or another securities or commodities clearing 
organization. The existence of the New Facility could enable OCC to 
minimize losses in the event such a default, suspension or insolvency, 
by allowing it to obtain funds on extremely short notice to ensure that 
the clearance of transactions in options and other contracts occurs 
without interruption. By drawing on the facility OCC would be able to 
avoid liquidating margin or clearing fund assets in what would likely 
be volatile market conditions, which would preserve funds available to 
cover any losses resulting from the failure of a clearing member, bank 
or another clearing organization. OCC's entering into the New Facility 
will not increase the risks associated with its clearing function 
because it is entered into on substantially the same terms as the 
Existing Facility.
    While the New Facility will, in general, reduce the risks 
associated with OCC's clearing function, like any lending arrangement 
the New Facility involves risks. One of the primary risks to OCC and 
its clearing function associated with the New Facility is the risk that 
a lender fails to fund when OCC requests a loan, because of the 
lender's insolvency or otherwise. This risk is mitigated through the 
use of a syndicated facility, which does not depend on the 
creditworthiness of a small number of lenders. In addition, the New 
Facility has lender default provisions designed to discourage lenders 
from failing to fund loans. Moreover, OCC has the ability under the New 
Facility to replace a defaulting lender. Finally, in the event a 
particular lender fails to fund its portion of the requested loan, the 
New Facility includes provisions pursuant to which

[[Page 62310]]

OCC may request ``covering'' loans from non-defaulting lenders to make 
up the shortfall, or OCC may simply make a second borrowing request for 
the shortfall amount that lenders are committed to make, subject to 
OCC's satisfying the borrowing conditions for the second loan, although 
in either case the total amount available for borrowing under the New 
Facility would be reduced by the unfunded commitment of the defaulting 
lender. The failure by one or more lenders to fund the first loan does 
not relieve the lenders of their commitment to fund the second loan.
    A second risk associated with the New Facility is the risk that OCC 
is unable to repay a loan within 30 days, which would allow the lenders 
to seize the pledged collateral and liquidate it, potentially at 
depressed prices that would result in losses to OCC. OCC believes that 
this risk is at a manageable level, because 30 days should be an 
adequate period of time to allow OCC to generate funds to repay the 
loans under the New Facility, such as by liquidating clearing fund 
assets other than those pledged to secure the loans. As provided in 
Section 5(e) of Article VIII of its By-Laws, if the loans have not been 
repaid within 30 days, the amount of clearing fund assets used to 
secure the loans will be considered to be an actual loss to the 
clearing fund, which will be allocated in accordance with Section 5 of 
Article VIII, and the proceeds of such allocation can be used to repay 
the loans.

III. Date of Effectiveness of the Advance Notice and Timing for 
Commission Action

    The proposed change may be implemented if the Commission does not 
object to the proposed change within 60 days of the later of (i) the 
date that the proposed change was filed with the Commission or (ii) the 
date that any additional information requested by the Commission is 
received. The clearing agency shall not implement the proposed change 
if the Commission has any objection to the proposed change.
    The Commission may extend period for review by an additional 60 
days if the proposed change raises novel or complex issues, subject to 
the Commission or the Board of Governors of the Federal Reserve System 
providing the clearing agency with prompt written notice of the 
extension. A proposed change may be implemented in less than 60 days 
from the date the advance notice is filed, or the date further 
information requested by the Commission is received, if the Commission 
notifies the clearing agency in writing that it does not object to the 
proposed change and authorizes the clearing agency to implement the 
proposed change on an earlier date, subject to any conditions imposed 
by the Commission.
    The clearing agency shall post notice on its Web site of proposed 
changes that are implemented.
    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 
change is consistent with the Exchange Act. Comments may be submitted 
by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an email to rule-comments@sec.gov. Please include 
File Number AN-OCC-2012-03 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number AN-OCC-2012-03. 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed change that are filed 
with the Commission, and all written communications relating to the 
proposed change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Section, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filings will also be available 
for inspection and copying at the principal office of OCC and on OCC's 
Web site: (http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/an_occ_12_03.pdf).
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number AN-OCC-2012-03 
and should be submitted on or before November 2, 2012.

V. Commission's Findings and Notice of No Objection

    Section 806(e)(1)(G) of the Clearing Supervision Act provides that 
a designated financial market utility may implement a change if it has 
not received an objection by the Commission within 60 days of an 
advanced notice.\4\ Section 806(e) of the Clearing Supervision Act 
allows the Commission to act prior to the 60th day.\5\ If the 
Commission chooses to not object prior to the 60th day, it must notify 
the designated financial market utility in writing that it does not 
object and authorize implementation of the change on an earlier 
date.\6\ If the Commission chooses to object prior to the 60th day, it 
must similarly notify the designated financial market utility.\7\
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    \4\ 12 U.S.C. 5465(e)(1)(G).
    \5\ 12 U.S.C. 5465(e).
    \6\ 12. U.S.C. 5465(e)(1)(I).
    \7\ 12. U.S.C. 5465(e)(1)(E).
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    In its filing with the Commission, OCC requested that the 
Commission notify OCC that it has no objection to the Change no later 
than October 9, 2012, which is two days prior to the October 11, 2012 
effective date of the New Facility. OCC requested Commission action two 
days in advance of the effective date to ensure that there is no period 
of time that OCC operates without a credit facility, given the 
importance of the borrowing capacity in connection with OCC's risk 
management.
    For the reasons set forth above, the Commission does not object to 
the proposed change.

VI. Conclusion

    Pursuant to Section 806(e)(1)(I) of the Clearing Supervision Act, 
the Commission does not object to the proposed change and authorizes 
OCC to implement the change (AN-OCC-2012-03) as of the date of this 
notice.\8\
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    \8\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25088 Filed 10-11-12; 8:45 am]
BILLING CODE 8011-01-P


