
[Federal Register Volume 77, Number 216 (Wednesday, November 7, 2012)]
[Notices]
[Pages 66900-66902]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-27130]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68130; File No. SR-OCC-2012-19]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Revise the Method for 
Determining the Minimum Clearing Fund Size To Include Consideration of 
the Amount Necessary To Draw on Secured Credit Facilities

November 1, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 18, 2012, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II 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. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    OCC proposes to revise the method for determining the minimum 
clearing fund size to include consideration of the amount necessary for 
OCC to draw on its secured credit facilities.

II. Self-Regulatory Organization'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) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of this proposed rule change is to implement a minimum 
clearing fund size equal to 110% of the amount of committed credit 
facilities secured by the clearing fund to ensure that the amount of 
the clearing fund likely will exceed the required collateral value that 
would be necessary for OCC to be able to draw in full on such credit 
facilities. OCC's clearing fund is primarily intended to provide a high 
degree of assurance that market integrity will be maintained in the 
event that one or more clearing members or other specified entities to 
which OCC has credit exposure fails to meet its obligations.\3\ This 
includes the potential use of the clearing fund as a source of 
liquidity should it ever be the case that OCC is unable to obtain 
prompt delivery of, or convert promptly to cash, any

[[Page 66901]]

asset credited to the account of a suspended clearing member.
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    \3\ Under Article VIII, Section 1 of OCC's By-Laws, the clearing 
fund may be used to pay losses suffered by OCC: (1) As a result of 
the failure of a clearing member to perform its obligations with 
regard to any exchange transaction accepted by OCC; (2) as a result 
of a clearing member's failure to perform its obligations in respect 
of an exchange transaction or an exercised/assigned options 
contract, or any other contract or obligations in respect of which 
OCC is liable; (3) as a result of the failure of a clearing member 
to perform its obligations in respect of stock loan or borrow 
positions; (4) as a result of a liquidation of a suspended clearing 
member's open positions; (5) in connection with protective 
transactions of a suspended clearing member; (6) as a result of a 
failure of any clearing member to make any other required payment or 
to render any other required performance; or (7) as a result of a 
failure of any bank or securities or commodities clearing 
organization to perform its obligations to OCC.
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    On September 23, 2011, the Commission approved a proposed rule 
change by OCC to establish the size of OCC's clearing fund as the 
amount that is required, within a confidence level selected by OCC, to 
sustain the maximum anticipated loss under a defined set of scenarios 
as determined by OCC, subject to a minimum clearing fund size of $1 
billion.\4\ OCC implemented this change in May 2012. Until that time, 
the size of OCC's clearing fund was calculated each month as a fixed 
percentage of the average total daily margin requirement for the 
preceding month, provided that the calculation resulted in a clearing 
fund of $1 billion or more.\5\
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    \4\ Securities Exchange Act Release No. 34-65386 (September 23, 
2011), 76 FR 60572 (September 29, 2011) (SR-OCC-2011-10).
    \5\ If the calculation did not result in a clearing fund size of 
$1 billion or more, then the percentage of the average total daily 
margin requirement for the preceding month that resulted in a fund 
level of at least $1 billion would be applied. However, in no event 
was the percentage permitted to exceed 7%. With the rule change 
approved in September 2011, this 7% limiting factor on the minimum 
clearing fund size was eliminated.
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    Under the formula that is implemented for determining the size of 
the clearing fund as a result of the May 2012 change, OCC's Rules 
provide that the amount of the fund is equal to the larger of the 
amount of the charge to the fund that would result from (i) a default 
by the single ``clearing member group'' \6\ whose default would be 
likely to result in the largest draw against the clearing fund or (ii) 
an event involving the near-simultaneous default of two randomly-
selected ``clearing member groups'' in each case as calculated by OCC 
with a confidence level selected by OCC.\7\ The size of the clearing 
fund continues to be recalculated monthly, based on a monthly averaging 
of daily calculations for the previous month, and it is subject to a 
requirement that its minimum size may not be less than $1 billion.
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    \6\ The term ``clearing member group'' is defined in OCC's By-
Laws to mean a clearing member and any member affiliates of the 
clearing member.
    \7\ The confidence levels employed by OCC in calculating the 
charge likely to result from a default by OCC's largest ``clearing 
member group'' and the default of two randomly-selected ``clearing 
member groups'' were approved by the Commission at 99% and 99.9%, 
respectively. However, the Commission approval order notes that OCC 
retains discretion to employ different confidence levels in these 
calculations provided that OCC will not employ confidence levels of 
less than 99% without first filing a proposed rule change.
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    This minimum dollar size for OCC's clearing fund is the subject of 
this proposed rule change. OCC maintains committed credit facilities 
that are secured by the clearing fund in order to provide a source of 
liquidity in the event of a default by a clearing member or one of 
OCC's settlement banks. The proposed rule change arises out of a 
regular review that OCC conducts in order to determine the appropriate 
aggregate amount of such committed credit facilities. In addition to 
its liquidity exposure to the potential failure of a clearing member, 
OCC also evaluates its liquidity exposure to settlement banks in 
respect of their ability to wire net settlement proceeds in time for 
OCC to meet its settlement obligations at one or more of OCC's other 
settlement banks as well as OCC's credit exposure to banks that issue 
letters of credit on behalf of clearing members as a form of margin.
    OCC's committed credit facilities are secured by assets in the 
clearing fund and certain margin deposits of suspended clearing 
members. In light of the uncertainty regarding the amount of margin 
assets of a suspended clearing member that might be eligible at any 
given point to support borrowing under the secured credit facilities, 
OCC has considered the availability of funds based on a consideration 
of the amount of the clearing fund deposits available as collateral. To 
draw on the full amount of its credit facilities secured by the 
clearing fund, the size of the clearing fund would need to be 
approximately $2.2 billion. The $2.2 billion figure reflects a 10% 
increase above the total size of such credit facilities, which is meant 
to account for the percentage discount applied to collateral pledged by 
OCC in determining the amount available for borrowing.
    Based on monthly recalculation information, the size of OCC's 
clearing fund during the period from July 2011 to July 2012 was less 
than $2.2 billion on eight occasions. Therefore, to address the risk 
that the assets in the clearing fund might at any time be insufficient 
to enable OCC to meet potential liquidity needs by fully accessing its 
committed credit facilities that are secured by the clearing fund, the 
proposed rule change would amend the requirement that the minimum size 
of the clearing fund cannot be less than $1 billion by providing 
instead that the minimum clearing fund size would be equal to the 
greater of either $1 billion or 110% of the amount of such committed 
credit facilities. OCC proposes to denote the credit facility component 
of the minimum clearing fund requirement as a percentage of the total 
amount of the credit facilities that OCC actually secures with clearing 
fund assets because OCC negotiates these credit facility agreements, 
including size and other terms, on an annual basis and the total size 
is therefore subject to change.
    OCC believes that the proposed rule change is consistent with 
Section 17A of the Act \8\ and the rules and regulations thereunder 
because the proposed modifications would help ensure that the Rules of 
OCC are designed to promote the prompt and accurate clearance and 
settlement of securities transactions \9\ by requiring a minimum 
clearing fund size that is designed to enable OCC to draw in full on 
its committed credit facilities that are secured by the clearing fund.
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    \8\ 15 U.S.C. 78q-1.
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would impose any 
burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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 the proposed rule change or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The proposals contained in this proposed rule change shall not take 
effect until all regulatory actions required with respect to the 
proposals are completed.\10\ The clearing agency

[[Page 66902]]

shall post notice on its Web site of proposed changes that are 
implemented.
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    \10\ OCC also filed the proposed rule change as an advance 
notice under Section 806(e)(1) of the Payment, Clearing, and 
Settlement Supervision Act of 2010 (``Clearing Supervision Act''). 
12 U.S.C. 5465(e)(1). Proposed changes filed under the Clearing 
Supervision Act may be implemented either: (i) At the time the 
Commission notifies the clearing agency that it does not object to 
the proposed rule change and authorizes its implementation, or, if 
the Commission does not object to the proposed rule change within 
sixty days of the later of: (i) the date the advance notice was 
filed with the Commission or (ii) the date that any additional 
information requested by the Commission is received. 12 U.S.C. 
5465(e)(1)(G).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. 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 SR-OCC-2012-19 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 SR-OCC-2012-19. 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 rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule 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 at http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/sr_occ_12_19.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 SR-OCC-2012-19 and should be submitted on 
or before November 28, 2012.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-27130 Filed 11-6-12; 8:45 am]
BILLING CODE 8011-01-P


