
[Federal Register Volume 80, Number 44 (Friday, March 6, 2015)]
[Notices]
[Pages 12232-12234]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-05160]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74406; File No. SR-OCC-2014-21]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change in Order To Permit OCC To Adjust the 
Size of Its Clearing Fund on an Intra-Month Basis

March 2, 2015.

I. Introduction

    On November 13, 2014, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-OCC-2014-21 (``Proposed Rule Change'') pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange 
Act'') \1\ and Rule 19b-4 thereunder.\2\ In the Proposed Rule Change, 
OCC proposes to amend its Rule 1001(a) to delete the requirement that 
OCC readjust the size of its clearing fund on a monthly basis.\3\ On 
December 2, 2014, the proposed rule change was published in the Federal 
Register.\4\ The Commission received no comments to the Proposed Rule 
Change.\5\ This order institutes proceedings under Section 19(b)(2)(B) 
of the Exchange Act \6\ to determine whether to approve or disapprove 
the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 204.19b-4. On October 15, 2014, OCC also filed an 
emergency notice with the Commission to suspend the effectiveness of 
the second sentence of Rule 1001(a). See infra note 10 and 
accompanying discussion.
    \3\ Exchange Act Release No. 73685 (November 25, 2014) 78 FR 
71479 (December 2, 2014) (SR-OCC-2014-21).
    \4\ Id.
    \5\ On January 5, 2015, pursuant to Section 19(b)(2)(A)(ii)(II) 
of the Exchange Act, as amended, OCC consented to an extension until 
March 2, 2015, for the Commission to approve the proposed rule 
change, disapprove the Proposed Rule Change, or institute 
proceedings to determine whether to disapprove the Proposed Rule 
Change. 15 U.S.C. 78s(b)(2)(A)(ii)(II).
    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change

    OCC proposed this Proposed Rule Change to permit OCC to collect 
additional financial resources from its clearing members by increasing 
the size of its clearing fund on an intra-month basis when OCC 
determines that such action should be taken to ensure the clearing fund 
has sufficient resources to protect OCC against potential losses under 
simulated default scenarios. Specifically, OCC's Proposed Rule Change 
proposes to amend Rule 1001(a) to delete the second sentence, which 
states, ``[s]uch [clearing fund resizing calculations] shall be made on 
a daily basis, and the size of the Clearing Fund shall be readjusted 
monthly based upon the average of such daily calculations performed 
during the preceding month.'' \7\
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    \7\ OCC Rule 1001(a).
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A. Background

    In emergency circumstances and subject to certain conditions, 
Article IX, Section 14, of OCC's By-Laws permit OCC's Board of 
Directors, Executive Chairman, or President to waive or suspend its by-
laws, rules, policies and procedures, or any other rules issued by OCC, 
or extend the time fixed thereby for the doing of any act or acts for 
up to thirty calendar days. To extend such a wavier or suspension for 
more than thirty calendar days, OCC's by-laws require it to submit a 
proposed rule change to the Commission seeking approval of such 
waiver.\8\ Upon submission of a rule filing, the waiver may continue in 
effect until the Commission approves or disapproves the proposed rule 
change.\9\
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    \8\ See OCC By-Laws, Article IX, Section 14(c).
    \9\ Id.
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    Although OCC monitors the sufficiency of its clearing fund on a 
daily basis, OCC Rule 1001(a) provides that it may only readjust the 
size of the clearing fund on a monthly basis. On October 15, 2014, in 
order to address certain unanticipated intra-month market volatility 
OCC's Executive Chairman, pursuant to emergency authority, temporarily 
waived the OCC Rule 1001(a) requirement that OCC readjust the size of 
its clearing fund on a monthly basis, allowing OCC to resize the 
clearing fund intra-month. OCC was concerned that its current financial 
resources might not meet the total financial resources required to 
cover the default of its largest participant family. The waiver 
permitted OCC to increase the size of the clearing fund for the 
remainder of October 2014, prior to the next monthly resizing scheduled 
for the first business day of November 2014. As a result of the 
emergency action, OCC's clearing fund for October 2014 was increased by 
$1.8 billion to a total amount of $5.8 billion.

B. Proposed Rule Change SR-OCC-2014-21

    OCC submitted the Proposed Rule Change, which amends its Rule 
1001(a) by deleting the provision that requires OCC to readjust the 
size of its clearing fund on a monthly basis, allowing OCC to continue 
to collect additional financial resources from its clearing membership 
by increasing the size of its clearing fund on an intra-month basis 
when OCC determines such action should be taken so that the clearing 
fund is sufficient to protect OCC against potential loss under 
simulated default scenarios.\10\ OCC stated that it took this action to 
respond to the potential risk under prevailing market conditions that 
the clearing fund could be underfunded, which could have affected OCC's 
ability to provide services in a safe and sound manner. As noted, OCC's 
waiver of the provisions of the second sentence of Rule 1001(a) is 
permitted to continue for

[[Page 12233]]

no more than thirty calendar days unless OCC submits a proposed rule 
change under Section 19 of the Exchange Act seeking approval of such 
waiver.\11\ By filing this proposed rule change, OCC preserved the 
suspended effectiveness of the second sentence of Rule 1001(a) beyond 
thirty calendar days.
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    \10\ On October 15, 2014, OCC also filed an emergency notice 
with the Commission pursuant to Section 806(e)(2) of the Payment, 
Clearing, and Settlement Supervision Act of 2010 (``Clearing 
Supervision Act''). 12 U.S.C. 5465(e)(2). See Securities Exchange 
Act Release No. 73579 (November 12, 2014), 79 FR 68747 (November 18, 
2014) (SR-OCC-2014-807).
    \11\ See supra note 8.
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    OCC stated in its filing that it believes that the proposed rule 
change is appropriate: (i) To permit OCC to resize the clearing fund 
more frequently than monthly; and (ii) to determine the clearing fund's 
size in an amount sufficient to protect OCC from loss by relying on a 
broader range of sound risk management practices than only the average 
daily calculations under Rule 1001(a) that are performed during the 
preceding calendar month. OCC stated that it would use this authority 
to adjust the size of its clearing fund on an intra-month basis only to 
increase the size of the Clearing Fund where appropriate, not to 
decrease the size of the Clearing Fund. In continued reliance on the 
emergency rule waiver and the emergency notice, OCC set the November 
2014 clearing fund size at $7.8 billion, which included an amount 
determined by OCC to be sufficient to protect OCC against loss under 
simulated default scenarios (i.e., $6 billion), plus a prudential 
margin of safety (the additional $1.8 billion collected in 
October).\12\
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    \12\ See Information Memorandum #35507, dated October 31, 2014, 
http://www.theocc.com/clearing/clearing-infomemos/infomemos1.jsp.
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C. Subsequent OCC Filings

    On December 1, 2014, OCC filed an Advance Notice pursuant to 
Section 806(e)(1) of the Clearing Supervision Act and Exchange Act Rule 
19b-4(n)(1)(i)) and a corresponding proposed rule change, to establish 
procedures regarding the monthly resizing of the clearing fund and the 
addition of financial resources through intra-day margin calls and/or 
an intra-month increase of the clearing fund to ensure adequate 
financial resources.\13\ The monthly clearing fund sizing procedures 
set forth in the advance notice and proposed rule change are based on 
broader risk management practices and establish the procedures that OCC 
would use to determine the size of the clearing fund on a monthly 
basis. These filings, however, do not provide OCC with authority to 
resize the clearing fund intra-month. Both filings are pending 
consideration by the Commission.\14\ By their terms, the proposals as 
identified in this advanced notice and proposed rule change will not 
take effect until all regulatory actions required with respect to the 
proposed rule change presently at issue are completed.
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    \13\ See Exchange Release No. 74091 (January 20, 2015), 80 FR 
4001 (January 26, 2015) (SR-OCC-2014-811, as modified by Amendment 
No. 1); Exchange Act Release No. 73853 (December 16, 2014), 79 FR 
76417 (December 22, 2014) (SR-OCC-2014-22, as modified by Amendment 
No. 1).
    \14\ On January 27, 2015, the Commission requested additional 
information regarding Advance Notice SR-OCC-2014-811, which tolled 
the review period pursuant to Section 806(e)(1) of the Clearing 
Supervision Act. 12 U.S.C. 5465(e)(1). OCC has also voluntarily 
extended the statutory review period for the review pursuant to 
Exchange Act Section 19(b)(2)(A)(ii)(II). 15 U.S.C. 
78s(B)(2)(A)(ii)(II).
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III. Proceedings To Determine Whether To Approve or Disapprove SR-OCC-
2014-21 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \15\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the Proposed Rule Change. As noted above, institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to comment on the Proposed Rule Change, 
and provide the Commission with arguments to support the Commission's 
analysis as to whether to approve or disapprove the Proposed Rule 
Change, as amended.
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    \15\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\16\ the 
Commission is providing notice of the grounds for disapproval under 
consideration. The Commission is instituting proceedings to allow for 
additional analysis of, and input from commenters with respect to, the 
Proposed Rule Change's consistency with Section 17A of the Exchange 
Act, and in particular, Section 17A(b)(3)(F) of the Exchange Act, which 
requires, among other things, that the rules of a clearing agency must: 
(i) Assure the safeguarding of securities and funds which are in the 
custody or control of a clearing agency; and (ii) to protect investors 
and the public interest.\17\
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    \16\ 15 U.S.C. 78s(b)(2)(B).
    \17\ See 15 U.S.C. 78q-1(b)(3)(F).
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    Here, the Proposed Rule Change is proposing to eliminate the 
currently waived second sentence of Rule 1001(a), which would result in 
the elimination of the monthly resizing requirement. In the absence of 
an alternative, OCC's rules are devoid of any timeframes within which 
OCC would be required to resize its clearing fund. OCC's clearing fund 
reinforces OCC's ability to protect against a clearing member's 
default, and as such, OCC's clearing fund size (and calculation 
thereof) would correlate directly with OCC's ability to protect the 
clearing agency and its members against default.\18\ Without a robust 
framework and specific requirements in OCC's rules to resize the 
clearing fund on an expressed and periodic basis, it is not apparent 
that OCC will have sufficient financial resources to manage the risks 
associated with the default of one or more clearing members. 
Furthermore, without such a provision in OCC's rules, clearing members 
may not be sufficiently prepared to fund OCC's clearing fund calls when 
such calls are made.
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    \18\ See http://optionsclearing.com/components/docs/about/occ_financial_guarantee.pdf.
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    With only pending proposals before the Commission for determining 
the clearing fund's size,\19\ the Proposed Rule Change raises concerns 
about how OCC will safeguard securities and funds that are in its 
custody or control, as well as how the Proposed Rule Change will 
protect investors and the public interest in the absence of any 
clearing fund resizing requirements. Consequently, the Commission 
believes that significant questions remain as to whether the Proposed 
Rule Change is consistent with the requirements of the Exchange Act, 
particularly when considered in combination with OCC's other proposed 
rule changes and advance notices currently pending before the 
Commission. Section 19(b)(2)(B) of the Exchange Act provides that 
proceedings to determine whether to approve or disapprove a proposed 
rule change must be concluded within 180 days of the date of 
publication of notice of the filing of the Proposed Rule Change. The 
time for conclusion of the proceedings may be extended for up to an 
additional 60 days if the Commission finds good cause for such 
extension and publishes its reasons for so finding or if the self-
regulatory organization consents to the extension.
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    \19\ See supra note 13 and accompanying text.
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
concerns identified above, as well as any others they may have with the 
Proposed Rule Change. In particular, the Commission invites the written 
views of interested

[[Page 12234]]

persons concerning whether the proposed rule change is inconsistent 
with Section 17A of the Exchange Act or any other provision of the 
Exchange Act, or the rules and regulations thereunder. Although there 
do not appear to be any issues relevant to approval or disapproval 
which would be facilitated by an oral presentation of views, data, and 
arguments, the Commission will consider, pursuant to Rule 19b-4, any 
request for an opportunity to make an oral presentation.\20\
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    \20\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Acts Amendments of 1975, Pub. L. 94-29, 89 Stat. 97 
(1975), grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Acts Amendments of 
1975, Report of the Senate Committee on Banking, Housing and Urban 
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 
30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments on or before March 27, 2015. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal on or 
before April 10, 2015. 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-2014-21 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-2014-21. 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 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 such filings 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_21.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-2014-21 and 
should be submitted on or before March 27, 2015. If comments are 
received, any rebuttal comments should be submitted on or before April 
10, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(57).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-05160 Filed 3-5-15; 8:45 am]
 BILLING CODE 8011-01-P


