
[Federal Register Volume 78, Number 204 (Tuesday, October 22, 2013)]
[Notices]
[Pages 62719-62722]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-24550]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70596; File No. SR-OCC-2013-806]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Advance Notice of and No Objection to The Options 
Clearing Corporation's Proposal To Enter a New Credit Facility 
Agreement

October 2, 2013.
    Notice is hereby given that, on September 12, 2013, The Options 
Clearing Corporation (``OCC'') filed an advance notice with the 
Securities and Exchange Commission (``Commission'') pursuant to Section 
806(e) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act,\1\ entitled the Payment, Clearing, and Settlement 
Supervision Act of 2010 (``Clearing Supervision Act''), and Rule 19b-
4(n)(1)(i) of the Securities Exchange Act of 1934 (``Exchange 
Act'').\2\ The advance notice is described in Items I, II, and III 
below, which Items have been prepared by OCC. The Commission is 
publishing this notice to solicit comments from interested persons, and 
to provide notice that the Commission has no objection to the changes 
set forth in the advance notice and authorizes OCC to implement those 
changes earlier than 60 days after the filing of 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). OCC was designated as a 
systemically important financial market utility by the Financial 
Stability Oversight Council on July 18, 2012. See Financial 
Stability Oversight Council 2012 Annual Report, Appendix A, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, OCC is required to comply 
with Title VIII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act.
    \2\ 17 CFR 240.19b-4(n)(1)(i).
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I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    In connection with a change to its operations (the ``Change''), OCC 
proposes to replace its credit facility with a new credit facility, 
which is designed to be used to meet obligations of OCC arising out of 
the default or suspension of a clearing member of OCC, in anticipation 
of a potential default by a clearing member or as a result of 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, if any, on the advance notice. 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 and 
B below, of the most significant aspects of these statements.

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

(i) 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 11, 2012 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 $2 billion and 
may be increased to $3 billion.
    The Existing Facility is set to expire on October 10, 2013 and OCC 
is therefore currently negotiating the terms of a new credit facility 
(the ``New

[[Page 62720]]

Facility'') on substantially similar terms as the Existing Facility. On 
September 9, 2013, OCC received a Commitment Letter with regard to the 
New Facility from: JPMorgan, the administrative agent and collateral 
agent, and a lender, for the New Facility; J.P. Morgan Europe Limited 
(``JPM Europe''), the euro administrative agent; 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. The Commitment Letter, 
including the exhibit, is attached to this filing as Exhibit 3A. One of 
the 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 9, 2013. Another condition is the successful syndication of the 
facility to a group of lenders who will in the aggregate provide 
commitments of $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, except for test borrowings under the 
facility, which mature and are payable one business day 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, in anticipation of a potential default by 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 
securities issued or guaranteed by the U.S. Government or the 
Government of Canada, 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. 
Securities issued by the Government of Canada will only be eligible to 
be pledged as collateral if they have a minimum rating of AAA/Aaa as 
determined by S&P or Moody's. 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 U.S. and Canadian 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 prepay 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.
(ii) 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 out of the 
default or suspension of a clearing member of OCC, in anticipation of a 
potential default 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

[[Page 62721]]

ensure that the clearance and settlement 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.
    Two new features of the New Facility have been added to enhance OCC 
liquidity and reduce risk. The inclusion of Canadian Government 
securities as eligible collateral will increase the amount of OCC 
collateral that can be pledged to support borrowings under the New 
Facility, resulting in increased availability of loans. The 
clarification that OCC may borrow under the New Facility in 
anticipation of a potential default by of a clearing member is subject 
to the condition that such provision will not become effective until an 
appropriate rule change is filed with and approved by the Commission.
    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 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.
    The New Facility will further the relevant objectives from Section 
805(b) of the Payment, Clearing and Settlement Supervision Act of 2010 
(``Clearing Supervision Act'') \3\ while also promoting compliance with 
the clearing agency standards in Rule 17Ad-22 of the Securities 
Exchange Act of 1934.\4\ The objectives and principles of Section 805 
of the Clearing Supervision Act specify the promotion of robust risk 
management, promotion of safety and soundness, reduction of systemic 
risks and support of the stability of the broader financial system.\5\ 
OCC believes the New Facility would promote these objectives because 
the New Facility would provide OCC with an additional source of 
liquidity to meet its settlement obligations while at the same time 
being structured to address certain risks, as described above, that 
arise in connection with the New Facility. OCC also believes that the 
New Facility would provide OCC with a mechanism to maintain sufficient 
financial resources that is consistent with Rule 17Ad-22(b)(3).\6\ The 
New Facility could enable OCC to minimize losses in the event of a 
default, suspension or insolvency, by allowing it to obtain funds on 
extremely short notice to ensure that the clearance and settlement of 
transactions in options and other contracts occurs without 
interruption. Moreover, the New Facility would permit OCC to avoid 
liquidating margin or clearing fund assets in what would likely be 
volatile market conditions and preserve sufficient financial resources 
to cover any losses resulting from the failure of a clearing member, 
bank or other clearing organization.
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    \3\ 12 U.S.C. 5464.
    \4\ 17 CFR 240.17Ad-22.
    \5\ 12 U.S.C. 5464(b).
    \6\ 17 CFR 240.17Ad-22(b)(3).
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(iii) Accelerated Commission Action Requested
    Pursuant to Section 806(e)(1)(I) of Title VIII of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act of 2010, OCC requests 
that the Commission notify OCC that it has no objection to the Change 
no later than October 3, 2013, which is one week prior to the October 
10, 2013 effective date of the New Facility. OCC requests Commission 
action one week 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.

(B) Clearing Agency's Statement on Comments on the Advance Notice 
Received From Members, Participants or Others

    Written comments were not and are not intended to be solicited with 
respect to the proposed Change and none have been received.

III. Date of Effectiveness of the Proposed Change 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 the period for review by an additional 60 
days if the proposed change raises novel or complex issues, subject to 
the Commission 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.

[[Page 62722]]

    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. 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-2013-806 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-2013-806. 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 of submission. 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 filing also will 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_13_806.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-2013-806 
and should be submitted on or before November 12, 2013.

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 from the Commission within 60 days of the 
later of (i) the date that the Commission receives notice of the 
proposed change or (ii) the date the Commission receives any further 
information it requests for consideration of the notice. A designated 
financial market utility may implement a proposed change in less than 
60 days from the date of receipt of the notice of the change by the 
Commission, or the date the Commission receives any further information 
it requested, if the Commission notifies the designated financial 
market utility in writing that it does not object to the proposed 
change and authorizes the designated financial market utility to 
implement the proposed change on an earlier date, subject to any 
conditions imposed by the Commission.\7\
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    \7\ 12 U.S.C. 5465(e)(1)(I).
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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 3, 2013, which is one week before the October 10, 2013 
effective date of the New Facility. OCC requested Commission action by 
this 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 framework.
    The Commission does not object to the proposed change. Ensuring 
that OCC has uninterrupted access to a credit facility will promote the 
safety and soundness of the broader financial system by providing OCC 
with an additional source of liquidity to meet its clearance and 
settlement obligations in the event of the failure of a clearing 
member, bank, or clearing organization doing business with OCC. Having 
access to a credit facility will help OCC minimize losses in the event 
of such a failure by allowing it to access funds on extremely short 
notice, and without having to liquidate assets at a time when market 
prices could be falling precipitously.

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 (SR-OCC-2013-806) as of the date of this 
Order.\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. 2013-24550 Filed 10-21-13; 8:45 am]
BILLING CODE 8011-01-P


