
[Federal Register Volume 79, Number 236 (Tuesday, December 9, 2014)]
[Notices]
[Pages 73116-73120]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-28767]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73726; File No. SR-OCC-2014-809]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of an Advance Notice Concerning the Implementation of 
a Committed Master Repurchase Agreement Program as Part of OCC's 
Overall Liquidity Plan

December 3, 2014.
    Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act entitled the Payment, 
Clearing, and Settlement Supervision Act of 2010 (``Clearing 
Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) under the Securities 
Exchange Act of 1934 \2\ notice is hereby given that on November 4, 
2014, The Options Clearing Corporation (``OCC'') filed with the 
Securities and Exchange Commission (``Commission'') the advance notice 
as described in Items I and II below, which Items have been prepared by 
OCC. The Commission is publishing this notice to solicit comments on 
the advance notice from interested persons.
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    \1\ 12 U.S.C. 5465(e)(1).
    \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

    This advance notice is filed by OCC in connection with a proposed 
change to its operations in the form of implementing a committed master 
repurchase agreement program, as part of OCC's overall liquidity plan.

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 advance notice and 
discussed any comments it received 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 on Comments on the Advance Notice 
Received From Members, Participants or Others

    Written comments on the advance notice were not and are not 
intended to be solicited with respect to the advance notice and none 
have been received.

(B) Advance Notices Filed Pursuant to Section 806(e) of the Payment, 
Clearing and Settlement Supervision Act

Description of Change
    This advance notice is being filed in connection with a proposed 
change to OCC's operations through which OCC would implement a 
committed master repurchase agreement program, as discussed below, to 
access an additional committed source of liquidity to meet its 
settlement obligations.
Background
    OCC has been working with a lending agent and an interested 
institutional investor to develop a program that would allow OCC to 
access an additional committed source of liquidity that does not 
increase the concentration of OCC's counterparty exposure, given 
existing affiliations between a number of commercial banking 
institutions and OCC's clearing members. The program would take the 
form of OCC's implementing a committed master repurchase agreement and 
related

[[Page 73117]]

confirmations (together, the ``Master Repurchase Agreement'') with one 
or more non-bank, non-clearing member institutional investors and their 
agents.\3\
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    \3\ The agents for the institutional investors would be 
responsible for handling administrative aspects of the program on 
behalf of the investors.
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    OCC would conduct a due diligence review with respect to each 
counterparty before entering into a master repurchase arrangement with 
it. Because the appropriate due diligence activities and financial 
criteria will vary for each type of counterparty and for each 
individual counterparty, OCC would determine on a case-by-case basis 
the specific due diligence criteria it would implement. However, as the 
principal purpose of these activities would be to obtain assurance that 
each counterparty has the financial ability to satisfy its obligations 
under the program, the review would encompass an assessment of the 
counterparty's financial statements (including external auditor reports 
thereon) and, as applicable, ratings and/or investment reports. As part 
of the due diligence process, OCC would identify key criteria relative 
to monitoring the financial stability of the counterparty on a going 
forward basis.
    Although the Master Repurchase Agreement would be based on the 
standard form of master repurchase agreement \4\ so that it will be 
more familiar to potential institutional investors, OCC would require 
the Master Repurchase Agreement to contain certain additional 
provisions tailored to ensure a reduction in concentration risk, 
certainty of funding, and operational effectiveness, as described in 
more detail below. OCC believes that these provisions are necessary and 
appropriate to integrate the program into its operations and in order 
to promote safety and soundness consistent with OCC's systemic 
responsibilities. The terms and conditions applicable to the Master 
Repurchase Agreement are set forth in the Summary of Indicative Terms 
attached to this filing as Exhibit 3.
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    \4\ The standard form master repurchase agreement is published 
by the Securities Industry and Financial Markets Association 
(``SIFMA'') and is commonly used in the repurchase market by 
institutional investors.
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    The program would be part of OCC's overall liquidity plan, which is 
meant to provide OCC with access to a diverse set of sources for 
liquidity, which includes committed credit facilities, securities 
lending and securities repurchase arrangements, and clearing member 
funding requirements that, under certain conditions, allow OCC to 
obtain funds from clearing members.\5\
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    \5\ See, e.g., Securities Exchange Act Release No. 72752 (August 
4, 2014), 79 FR 46490 (August 8, 2014) (SR-OCC-2014-17), Securities 
Exchange Act Release No. 71549 (February 12, 2014), 79 FR 03574 
(February 19, 2014) (SR-OCC-2014-801) and Securities Exchange Act 
Release No. 73257 (September 30, 2014), 79 FR 23698 (October 3, 
2014) (SR-OCC-2014-806).
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The Proposed Program: Standard Repurchase Agreement Terms
    The Master Repurchase Agreement would generally be structured like 
a typical repurchase arrangement, in order to help OCC attract interest 
from potential institutional investors willing to be a counterparty to 
OCC. Under the Master Repurchase Agreement, the buyer (i.e., the 
institutional investor) would purchase from OCC from time to time 
United States government securities (``Eligible Securities'').\6\ OCC, 
as the seller, would transfer Eligible Securities to the buyer in 
exchange for a payment by the buyer to OCC in immediately available 
funds (the ``Purchase Price''). The buyer would simultaneously agree to 
transfer the purchased securities back to OCC at a specified later date 
or on OCC's demand (the ``Repurchase Date'') against the transfer of 
funds by OCC to the buyer in an amount equal to the outstanding 
Purchase Price plus the accrued and unpaid price differential 
(together, the ``Repurchase Price''), which is the interest component 
of the Repurchase Price.
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    \6\ OCC would use U.S. government securities that are included 
in clearing fund contributions by clearing members and margin 
deposits of any clearing member that has been suspended by OCC for 
the repurchase arrangements. Article VIII, Section 5(e) of OCC's By-
Laws and OCC Rule 1104(b) authorize OCC to obtain funds from third 
parties through securities repurchases using these sources. The 
officers who may exercise this authority include the Executive 
Chairman and the President.
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    At all times while a transaction is outstanding, OCC would be 
required to maintain a specified amount of securities or cash margin 
with the buyer.\7\ The market value of the securities supporting each 
transaction would be determined daily, typically based on a price 
obtained from a generally recognized pricing source. If the market 
value of the purchased securities is determined to have fallen below 
OCC's required margin, OCC would be required to transfer to the buyer 
sufficient cash or additional securities reasonably acceptable to the 
buyer so that OCC's margin requirement is satisfied.\8\ If the market 
value of the purchased securities is determined to have risen to above 
OCC's required margin, OCC would be permitted to require the return of 
excess purchased securities from the buyer.
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    \7\ OCC expects that it would be required to maintain margin 
equal to 102% of the Repurchase Price, which is a standard rate for 
arrangements involving U.S. government securities.
    \8\ OCC expects that it would use clearing fund securities and 
securities posted as margin by defaulting clearing members, as more 
fully discussed in footnote 7.
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    As in a typical master repurchase agreement, an event of default 
would occur with respect to the buyer if the buyer failed to purchase 
securities on a Purchase Date, failed to transfer purchased securities 
on any applicable Repurchase Date, or failed to transfer any interest, 
dividends or distributions on purchased securities to OCC within a 
specified period after receiving notice of such failure. An event of 
default would occur with respect to OCC if OCC failed to transfer 
purchased securities on a Purchase Date or failed to repurchase 
purchased securities on an applicable Repurchase Date. The Master 
Repurchase Agreement would also provide for standard events of default 
for either party, including a party's failure to maintain required 
margin or an insolvency event with respect to the party.
    Upon the occurrence of an event of default, the non-defaulting 
party, at its option, would have the right to accelerate the Repurchase 
Date of all outstanding transactions between the defaulting party and 
the non-defaulting party, among other rights. For example, if OCC were 
the defaulting party with respect to a transaction and the buyer chose 
to terminate the transaction, OCC would be required to immediately 
transfer the Repurchase Price to the buyer. If the buyer were the 
defaulting party with respect to a transaction and OCC chose to 
terminate the transaction, the buyer would be required to deliver all 
purchased securities to OCC. If OCC or the buyer did not timely 
perform, the non-defaulting party would be permitted to buy or sell, or 
deem itself to have bought or sold, securities as needed to be made 
whole and the defaulting party would be required to pay the costs 
related to any covering transactions. Additionally, if OCC was required 
to obtain replacement securities as a result of an event of default, 
the buyer would be required to pay the excess of the price paid by OCC 
to obtain replacement securities over the Repurchase Price.

[[Page 73118]]

The Proposed Program: Customized Features To Promote a Reduction in 
Concentration Risk, Certainty of Funding and Operational Effectiveness
    In addition to the master repurchase agreement, OCC would enter 
into an individualized master confirmation with each buyer and its 
agent which would set forth certain terms and conditions applicable to 
all transactions entered into under the Master Repurchase Agreement by 
that buyer. As discussed above, these required terms and conditions 
would be designed to promote OCC's goals of reduced concentration risk, 
certainty of funding and operational effectiveness. The terms of the 
master confirmations under each Master Repurchase Agreement may vary 
from one another, because a separate master confirmation will be 
negotiated for a given buyer at the time that buyer becomes a party to 
the Master Repurchase Agreement. Because the arrangements between OCC 
and the individual buyers have not been fully negotiated, OCC has 
identified the following as key standards that would need to be 
incorporated into each repurchase arrangement entered into under the 
program.\9\
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    \9\ OCC expects that the Master Repurchase Agreement will also 
include other, more routine, provisions such as the method for 
giving notices and basic due authorization representations by the 
parties.
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Counterparties
    OCC would only enter into repurchase arrangements with 
institutional investors, such as pension funds or insurance companies, 
that are not OCC clearing members or banks affiliated with any OCC 
clearing member. This requirement would allow OCC to access stable, 
reliable sources of funding, without increasing the concentration of 
its exposure to counterparties that are affiliated banks, broker/
dealers and futures commission merchants. This reduction in 
concentration risk is a key advantage of this proposed program.
Commitment To Fund and Funding Accounts
    OCC would seek funding commitments from one or more potential 
counterparties that would equal $1 billion in the aggregate,\10\ with 
each commitment extending for 364 days or more. Each counterparty would 
be obligated to enter into transactions under the Master Repurchase 
Agreement up to its committed amount so long as no default had occurred 
and OCC transferred sufficient Eligible Securities. Each counterparty 
would be obligated to enter into transactions even if OCC had 
experienced a material adverse change, such as the failure of a 
clearing member. This commitment to provide funding would be a key 
departure from ordinary repurchase arrangements and a key requirement 
for OCC. Each commitment would be supported by an agreement by the 
counterparty to maintain cash and investments acceptable to OCC that 
must be readily converted into cash in a designated account into which 
OCC had visibility. The creation of a funding account is important 
because it would provide OCC with two key protections. First, it would 
help OCC ensure that the committed funds would be available each day, 
as discussed below. Second, it would facilitate prompt funding by 
counterparties that are not commercial banks and therefore are not in 
the business of daily funding.
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    \10\ The $1 billion in commitments could be spread across 
multiple counterparties, but $1billion represents the proposed 
aggregate size of the program.
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Funding Mechanics
    Funding mechanics would be targeted so that OCC would receive the 
Purchase Price in immediately available funds within 60 minutes of its 
request for funds and delivery of Eligible Securities and, if needed, 
prior to OCC's regular daily settlement time.\11\ These targeted 
funding mechanics would allow OCC to receive needed liquidity in time 
to satisfy settlement obligations, even in the event of a default by a 
clearing member or a market disruption. The funding mechanism may be, 
for example, delivery versus payment/receive versus payment\12\ or 
another method acceptable to OCC that both satisfies the objectives of 
the master repurchase agreement program and presents limited 
operational risks.
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    \11\ This would include OCC's regular daily settlement time and 
any extended settlement time implemented by OCC in an emergency 
situation under Rule 505.
    \12\ Delivery versus payment/receive versus payment is a method 
of settlement under which payment for securities must be made prior 
to or simultaneously with delivery of the securities.
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No Rehypothecation
    Under the terms of each master confirmation, the buyer would not be 
permitted to grant any third party an interest in purchased securities, 
the custody account at the custodian in which purchased securities are 
held or any cash held in OCC's account. This requirement is important 
for two reasons. First, because the buyer would be prohibited from 
rehypothecating purchased securities, the purchased securities should 
never leave the account and there should be no third-party claims 
against the purchased securities. Second, the prohibition on 
rehypothecation would also reduce the risk that a third party could 
interfere with the buyer's transfer of the purchased securities on the 
Repurchase Date. Further, the custodian would agree to provide OCC with 
daily information about each buyer's account. This visibility would 
allow OCC to act quickly in the event a buyer violates any 
requirements.
Early Termination Rights
    Under the Master Repurchase Agreement, OCC would have the ability 
to terminate any transaction upon written notice to the buyer, but a 
buyer would only be able to terminate a transaction upon the occurrence 
of an event of default with respect to OCC, as further described below. 
A notice of termination by OCC would specify a new Repurchase Date 
prior to the originally agreed upon Repurchase Date. Upon the early 
termination of a transaction, the buyer would be required to return all 
purchased securities to OCC and OCC would be required to pay the 
Repurchase Price. This optional early termination right is important to 
OCC because OCC's liquidity needs may change unexpectedly over time and 
as a result OCC may not want to keep a transaction outstanding as long 
as originally planned.
Substitution
    Under the Master Repurchase Agreement, OCC would have the ability 
to substitute any Eligible Securities for purchased securities in its 
discretion by a specified time, so long as the Eligible Securities 
satisfy any applicable criteria contained in the Master Repurchase 
Agreement and the transfer of the Eligible Securities would not create 
a margin deficit, as described above.\13\ This substitution right is 
important to OCC because it must be able to manage requests of clearing 
members to return excess or substitute Eligible Securities in 
accordance with established operational procedures.
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    \13\ In addition to its substitution rights, OCC could cause the 
return of purchased securities by exercising its optional early 
termination rights under the Master Repurchase Agreement. If OCC 
were to terminate part or all of a transaction, the buyer would be 
required to return purchased securities to OCC against payment of 
the corresponding Repurchase Price.
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Events of Default
    Beyond the standard events of default for a failure to purchase or 
transfer securities on the applicable Purchase

[[Page 73119]]

Date or Repurchase Date, as described above, OCC would require that the 
Master Repurchase Agreement not contain any additional events of 
default that would restrict OCC's access to funding and that it contain 
an additional default remedy. Most importantly, OCC would require that 
it would not be an event of default if OCC suffers a ``material adverse 
change''.\14\ This provision is important because it provides OCC with 
certainty of funding, even in difficult market conditions.
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    \14\ When included in a contract, a ``material adverse change'' 
is typically defined as a change that would have a materially 
adverse effect on the business or financial condition of a company.
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    Upon the occurrence of an event of default, in addition to the non-
defaulting party's right to accelerate the Repurchase Date of all 
outstanding transactions or to buy or sell securities as needed to be 
made whole, the non-defaulting party may elect to take the actions 
specified in the ``mini close-out'' provision of the Master Repurchase 
Agreement, rather than declaring an event of default. For example, if 
the buyer fails to transfer purchased securities on the applicable 
Repurchase Date, rather than declaring an event of default, OCC may (1) 
if OCC has already paid the Repurchase Price, require the buyer to 
repay the Repurchase Price, (2) if there is a margin excess, require 
the buyer to pay cash or delivered purchased securities in an amount 
equal to the margin excess, or (3) declare that the applicable 
transaction, and only that transaction, will be immediately terminated, 
and apply default remedies under the Master Repurchase Agreement to 
only that transaction. Therefore, if the buyer fails to deliver 
purchased securities on any Repurchase Date, OCC would have remedies 
that allow it to mitigate risk with respect to a particular 
transaction, without declaring an event of default with respect to all 
transactions under the Master Repurchase Agreement.
Anticipated Effect on and Management of Risk
    OCC believes that the overall impact of the program on the risks 
presented by OCC would be to reduce settlement risk associated with 
OCC's operations as a clearing agency. The program would reduce 
settlement risk by providing an additional source of liquidity, from 
diversified funding sources that decrease OCC's concentration of risk, 
with funding certainty and operational efficiency. The resulting 
reduction in OCC settlement risk would lead to a corresponding 
reduction in systemic risk and would have a positive impact on the 
safety and soundness of the clearing system by enabling OCC to have 
continuous access to funds to settle its obligations to its clearing 
members. OCC's consistent ability to timely settle its obligations is a 
key part of OCC's role as a clearing agency and allows OCC to mitigate 
counterparty risk within the market. In order to sufficiently perform 
this key role in promoting market stability, it is critical that OCC 
continuously has access to funds to settle its obligations.
    The Master Repurchase Agreement, like any liquidity source, would 
involve certain risks, but OCC would structure the program to mitigate 
those risks. Most of these risks are standard in any master repurchase 
agreement. For example, a buyer could fail to deliver, or delay in 
delivering, purchased securities to OCC by the applicable Repurchase 
Date. OCC will address this risk by seeking a security interest from 
the buyer in that portion of the purchased securities representing the 
excess of the market value over the Repurchase Price, or by obtaining 
other comfort from the buyer that the purchased securities will be 
timely returned. Further, the purchased securities generally will not 
be ``on-the-run'' securities, i.e the most recently issued Treasury 
securities. The demand in the marketplace for Treasury securities, for 
uses other than collateral, is much greater for on-the-run Treasury 
securities, and therefore, OCC believes buyers will have little 
incentive to retain the securities transferred by OCC.
    The mechanics under the Master Repurchase Agreement would be 
structured so that OCC could avoid losses by paying the Repurchase 
Price. For example, OCC will have optional early termination rights in 
each master confirmation, under which OCC would be able to accelerate 
the Repurchase Date of any transaction by providing written notice to 
the buyer and paying the Repurchase Price. Through this mechanism, OCC 
can maintain the benefit of the Master Repurchase Agreement, while 
mitigating any risk associated with a particular transaction.
    The Master Repurchase Agreement would be structured to avoid 
potential third-party risks, which are typical of repurchase 
arrangements. The prohibition on buyer rehypothecation and use of 
purchased securities, along with OCC's visibility into the buyer's 
custody account, would reduce the risk to OCC of a buyer default.
    As with any repurchase arrangement, OCC is subject to the risk that 
it may have to terminate existing transactions and accelerate the 
applicable Repurchase Date with respect to a buyer due to changes in 
the financial health or performance of the buyer. Terminating 
transactions could negatively affect OCC's liquidity position. However, 
any negative effect is reduced by the fact that OCC maintains a number 
of different financing arrangements, and thus will have access to 
liquidity sources in the event the Master Repurchase Agreement is no 
longer a viable source.
    Under the Master Repurchase Agreement, OCC would be obligated to 
transfer additional cash or securities as margin in the event the 
market value of any purchased securities decreases. OCC seeks to ensure 
it can meet any such obligation by monitoring the value of the 
purchased securities and maintaining adequate cash resources to make 
any required payments. Such payments are expected to be small in 
comparison to the total amount of cash received for each transfer of 
purchased securities.
Consistency With the Payment, Clearing and Settlement Supervision Act
    OCC believes that the proposed change is consistent with Section 
805(b)(1) of the Payment, Clearing and Settlement Supervision Act.\15\ 
The objectives and principles of Section 805(b)(1) of the Payment, 
Clearing and Settlement 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.\16\ OCC believes that the proposed change would promote these 
objectives because the program should provide OCC with an additional 
source of committed liquidity to meet its settlement obligations while 
at the same time being structured to mitigate certain operational 
risks, as described above, that arise in connection with this committed 
liquidity source.
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    \15\ 12 U.S.C. 5464(b)(1).
    \16\ Id.
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Accelerated Commission Action Requested
    OCC requests that the Commission notify OCC that it has no 
objection to the change no later than December 12, 2014, in order to 
allow OCC to implement the master repurchase agreement program 
beginning in mid-December. OCC requests Commission action to ensure 
that OCC can access this source of additional liquidity on a timely 
basis, given the importance of maintaining diverse funding sources in 
connection with OCC's risk management.

[[Page 73120]]

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

    The designated clearing agency may implement this change if it has 
not received an objection to the proposed change within 60 days of the 
later of (i) the date that the Commission receives the notice of 
proposed change, or (ii) the date the Commission receives any further 
information it requests for consideration of the notice. The designated 
clearing agency shall not implement this change if the Commission has 
an objection.
    The Commission may, during the 60-day review period, extend the 
review period for an additional 60 days for proposed changes that raise 
novel or complex issues, subject to the Commission providing the 
designated clearing agency with prompt written notice of the extension. 
The designated clearing agency may implement a change in less than 60 
days from the date of receipt of the notice of proposed change by the 
Commission, or the date the Commission receives any further information 
it requested, if the Commission notifies the designated clearing agency 
in writing that it does not object to the proposed change and 
authorizes the designated clearing agency to implement the change on an 
earlier date, subject to any conditions imposed by the Commission.
    The designated 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. 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-2014-809 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-OCC-2014-809. 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 advance notice that are filed 
with the Commission, and all written communications relating to the 
advance notice 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 Room, 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 the filing also will be available for inspection 
and copying at the principal office of OCC and on OCC's Web site at 
http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_14_809.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-2014-809 
and should be submitted on or before December 30, 2014.

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-28767 Filed 12-8-14; 8:45 am]
BILLING CODE 8011-01-P


