
[Federal Register Volume 78, Number 35 (Thursday, February 21, 2013)]
[Notices]
[Pages 12121-12123]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-03969]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68935; File No. SR-OCC-2012-801]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of No Objection To Advance Notice Filing, as Modified by 
Amendment No. 1 Thereto, To Enter Into an Unsecured, Committed Credit 
Agreement

February 14, 2013.

I. Introduction

    On December 18, 2012, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') 
advance notice SR-OCC-2012-801 pursuant to Section 806(e) of Title VIII 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(``Dodd-Frank Act''),\1\ entitled the Payment, Clearing, and Settlement 
Supervision Act of 2010 (``Title VIII'' or ``Clearing Supervision 
Act''). On December 21, 2012, OCC filed Amendment No. 1 to advance 
notice SR-OCC-2012-801.\2\ The advance notice, as amended by Amendment 
No. 1, was published in the Federal Register on January 16, 2013.\3\ 
The Commission did not receive comments on the advance notice 
publication. This publication serves as a notice of no objection to the 
advance notice.
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    \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ Amendment No. 1 clarifies the date the proposed change was 
approved by the OCC Board of Directors.
    \3\ Notice of Filing of Advance Notice, as Modified by Amendment 
No. 1 Thereto, in Connection with a Proposed Change to Enter into an 
Unsecured, Committed Credit Agreement, Securities Exchange Act 
Release No. 34-68618 (January 10, 2013), 78 FR 3483 (January 16, 
2013) ``(Notice of Filing of Advance Notice'').
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II. Description of Proposed Rule Change

    OCC filed this advance notice to permit it to enter into an 
unsecured, committed credit agreement (``Facility'') in an aggregate 
principal amount not to exceed $25 million. The Facility is designed to 
satisfy the Commodity Futures Trading Commission's (``CFTC'') liquidity 
requirement contained in Regulation 39.11(e)(2) and also to provide OCC 
with access to additional liquidity for working capital needs and 
general corporate purposes.
    Among other things, CFTC Regulation 39.11(a)(2) requires a 
derivatives clearing organization (``DCO'') to hold an amount of 
financial resources that, at a minimum, exceeds the total amount that 
would enable the DCO to cover its operating costs for a period of at 
least one year, calculated on a rolling basis.\4\ In turn, CFTC 
Regulation 39.11(e)(2) provides that these financial resources must 
include unencumbered, liquid financial assets (i.e., cash and/or highly 
liquid securities), equal to at least six months' operating costs and 
that if any portion of such financial resources is not sufficiently 
liquid, the DCO may take into account a committed line of credit or 
similar facility for the purpose of meeting this requirement.\5\ 
Accordingly, OCC would enter into a credit agreement for the Facility 
with BMO Harris Bank N.A. (``Lender'') having a maximum aggregate 
principal loan amount not to exceed $25 million.
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    \4\ 17 CFR 39.11(a)(2).
    \5\ 17 CFR 39.11(e)(2).
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    A condition of OCC's access to the Facility is the execution of 
credit agreement documents between OCC and the Lender. OCC anticipates 
that the parties will finalize the forms of the credit agreement 
documents in early 2013. Ongoing conditions governing OCC's ability to 
access the Facility include that no default or event of default by OCC 
may exist before or during an extension of credit by the Lender to OCC 
through the Facility and that certain representations of OCC must 
remain true and correct. Events of default would include, but not be 
limited to, failure to pay any interest, principal, fees or other 
amounts when due, default under any covenant or agreement in any loan 
document, materially inaccurate or false representations or warranties, 
cross default with other material debt agreements, insolvency, 
bankruptcy, dissolution or termination of the existence of OCC, and 
unsatisfied judgments.
    OCC anticipates that the Facility would be available to OCC on a 
revolving basis for a 364-day term. According to OCC, upon notice by 
OCC to the Lender of a request for funds, whether in writing or by 
telephone, the Lender would disburse loaned funds to OCC in U.S. 
dollars. The date of any loan would be required to be a business day, 
and the loans would be unsecured and made and evidenced by a promissory 
note provided by OCC. Any loan proceeds would be required to be used by 
OCC to finance its working capital needs or for OCC's general corporate 
purposes. According to OCC, its ability to draw against the Facility, 
even though no such draw is actually made, would contribute to OCC's 
compliance with the liquidity requirements prescribed by CFTC 
Regulation 39.11(e)(2).

[[Page 12122]]

    OCC stipulates that it would have the ability to terminate the 
Facility at any time.\6\ Termination within the first six months of the 
Facility would trigger a termination fee; termination after six months 
from the date of entering into the Facility does not trigger a 
termination fee. Upon five days written notice during the term of the 
Facility, OCC would also be permitted to reduce the overall size of the 
Facility at any time. Any such reductions would be required to be made 
in an initial amount of at least $2.5 million. Thereafter, reductions 
would be able to be made in multiples of $1 million. In no event, 
however, would OCC be permitted to reduce the size of the Facility to 
an amount that is less than the greater of either its aggregate 
principal amount of indebtedness outstanding with respect to loans from 
the Facility or $15 million.
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    \6\ In the event that OCC seeks to terminate or reduce the 
overall size of the Facility, OCC will first file an advance notice 
with the Commission pursuant to Dodd-Frank Act Section 806(e). See 
Notice of Filing of Advance Notice.
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    The outstanding principal balance of all loans made to OCC through 
the Facility will accrue interest equal to a base rate (generally equal 
to a Prime Rate, a Federal Funds Rate, or a LIBOR rate), as in effect 
from time to time, plus a certain applicable margin. Regardless of 
which method applies to a particular portion of OCC's total outstanding 
loan balance, in an event of a default the calculation of the amount of 
interest would be subject to a 2.00% increase above the otherwise 
applicable rate.
    The Facility would involve a variety of customary fees payable by 
OCC to the Lender, including, but not limited to: (1) A one-time 
upfront fee payable at closing to the Lender calculated as a percentage 
of the total commitment amount of the Facility; (2) commitment fees 
payable quarterly in arrears on the average daily unused amount of the 
Facility; (3) reasonable out-of-pocket costs and expenses of the Lender 
in connection with the negotiation, preparation, execution, and 
delivery of the Facility and loan documentation, and costs and expenses 
in connection with any default, event of default, or enforcement of the 
Facility; and (4) termination fees if OCC elects to terminate the 
Facility prior to six months from the date of the credit agreement 
underlying the Facility.
    OCC believes that any impact of the Facility on the risks presented 
by OCC would be to reduce such risks by providing an additional source 
of liquidity for the protection of OCC, its clearing members, and the 
options market in general. OCC also believes the Facility would provide 
OCC with additional liquidity for working capital needs and general 
corporate purposes and thereby assist OCC in satisfying the CFTC's 
requirements with respect to liquidity under CFTC Regulation 39.11.
    Like any lending arrangement, OCC notes there is a risk that the 
Lender would fail to fund when OCC requests a loan, because of the 
Lender's insolvency, operational deficiencies, or otherwise. Even if 
OCC were to draw on the Facility for liquidity purposes, which it does 
not anticipate, OCC believes that the potential funding risk associated 
with the Facility is mitigated in several ways. OCC notes that the 
Lender is a national banking association that is subject to oversight 
by prudential banking regulators with respect to its safety and 
soundness and its ability to meet its lending obligations. Furthermore, 
OCC notes that the $25 million size of the Facility is relatively small 
when compared to the total resources available to OCC. Therefore, if 
the Facility proved unavailable to OCC for any reason, OCC believes 
that it readily would be able to access, or arrange for access, to 
other sources of liquidity if necessary.
    According to OCC, a second risk associated with the Facility is the 
risk that OCC would default on its obligation to make timely payment of 
principal or interest. OCC believes the benefits of the Facility 
outweigh this risk. Finally, because the Facility would be an unsecured 
lending arrangement, OCC believes that it would not be at risk in an 
event of default of the Lender potentially liquidating OCC assets that 
are used to secure loaned funds.

III. Analysis of Advance Notice

    Although Title VIII does not specify a standard of review for an 
Advance Notice, Commission staff believes that the stated purpose of 
Title VIII is instructive.\7\ The stated purpose of Title VIII is to 
mitigate systemic risk in the financial system and promote financial 
stability by, among other things, promoting uniform risk management 
standards for systemically-important financial market utilities 
(``FMU'') and providing an enhanced role for the Federal Reserve Board 
in the supervision of risk management standards for systemically-
important FMUs.\8\
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    \7\ 12 U.S.C. 5461(b).
    \8\ Id.
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    Section 805(a)(2) of the Clearing Supervision Act \9\ authorizes 
the Commission to prescribe risk management standards for the payment, 
clearing, and settlement activities of designated clearing entities and 
financial institutions engaged in designated activities for which it is 
the supervisory agency or the appropriate financial regulator. Section 
805(b) of the Clearing Supervision Act\10\ states that the objectives 
and principles for the risk management standards prescribed under 
Section 805(a) shall be to:
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    \9\ 12 U.S.C. 5464(a)(2).
    \10\ 12 U.S.C. 5464(b).
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     Promote Robust Risk Management;
     Promote Safety And Soundness;
     Reduce Systemic Risks; and
     Support the stability of the broader financial system.
    The Commission adopted risk management standards under Section 
805(a)(2) of the Clearing Supervision Act on October 22, 2012 
(``Clearing Agency Standards'').\11\ The Clearing Agency Standards 
became effective on January 2, 2013 and require clearing agencies that 
perform central counterparty services to establish, implement, 
maintain, and enforce written policies and procedures that are 
reasonably designed to meet certain minimum requirements for their 
operations and risk management practices on an ongoing basis.\12\ As 
such, the Commission believes it is appropriate to review Advance 
Notices against these risk management standards that the Commission 
promulgated under Section 805(a) and the objectives and principles of 
these risk management standards as described in Section 805(b).
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    \11\ Clearing Agency Standards, Securities Exchange Act Release 
No. 34-68080 (October 22, 2012), 77 FR 66219 (November 2, 2012).
    \12\ The Clearing Agency Standards are substantially similar to 
the risk management standards established by the Board of Governors 
governing the operations of designated FMUs that are not clearing 
entities and financial institutions engaged in designated activities 
for which the Commission or the Commodity Futures Trading Commission 
is the Supervisory Agency. See Financial Market Utilities, 77 FR 
45907 (Aug. 2, 2012).
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    OCC states that its principal reason for entering into the Facility 
is to help ensure that OCC is in compliance with a CFTC requirement to 
hold an amount of financial resources that, at a minimum, exceeds the 
total amount that would enable OCC to cover its operating costs for a 
period of at least one year, calculated on a rolling basis, and to 
provide OCC with additional flexibility in managing its liquid assets 
while ensuring continued compliance with this requirement.\13\ The size 
of the Facility ($25 million) is unlikely to raise risk concerns 
commonly associated with additional leverage. The Facility allows OCC 
to manage its general business risks and help ensure that it has

[[Page 12123]]

sufficient liquid assets to cover operational costs that may arise. 
Consistent with Section 805(a), this added liquidity should promote the 
safety and soundness of OCC, reduce systemic risks to OCC members, and, 
as a result, support the stability of the broader financial system.
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    \13\ See Notice of Filing of Advance Notice.
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    Furthermore, Rule 17Ad-22(d)(4),\14\ adopted as part of the 
Clearing Agency Standards, requires clearing agencies to establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to identify sources of operational risk and 
minimize them through the development of appropriate systems, controls, 
and procedures; implement systems that are reliable, resilient and 
secured, and have adequate, scalable capacity; and have business 
continuity plans that allow for timely recovery of operations and 
fulfillment of a clearing agency's obligations. The Facility should 
help ensure that OCC holds an amount of financial resources that, at a 
minimum, exceeds the total amount that would enable OCC to cover its 
operating costs for a period of at least one year and, as a result, 
should contribute to minimizing operational risk. For these reasons, 
the Commission does not object to the advance notice.
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    \14\ 17 CFR 240.17Ad-22(d)(4).
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IV. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act,\15\ that, the Commission does not object to 
the advance notice (File No. SR-OCC-2012-801).
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    \15\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-03969 Filed 2-20-13; 8:45 am]
BILLING CODE 8011-01-P


