
[Federal Register Volume 81, Number 77 (Thursday, April 21, 2016)]
[Notices]
[Pages 23536-23542]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-09201]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77628; File No. SR-OCC-2016-801]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of an Advance Notice Related to the Adoption of an 
Options Exchange Risk Control Standards Policy

April 15, 2016.
    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 \1\ (``Payment, 
Clearing and Settlement Supervision Act'') and Rule 19b-4(n)(1)(i) 
under the Securities Exchange Act of 1934,\2\ notice is hereby given 
that on March 4, 2016, 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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[[Page 23537]]

I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    This advance notice by The Options Clearing Corporation (``OCC'') 
would adopt a new Options Exchange Risk Control Standards Policy 
(``Policy''), which details OCC's policy for addressing the potential 
risks arising from erroneous trades executed on an options exchange 
(``Options Exchange'' or ``Options Exchanges,'' as applicable) \3\ that 
has not demonstrated the existence of certain risk controls (``Risk 
Controls'') that are consistent with a set of principles-based risk 
control standards (``Risk Control Standards'') developed by OCC in 
consultation with the exchanges. The proposed change would also revise 
OCC's Schedule of Fees in accordance with the proposed policy to charge 
and collect from Clearing Members \4\ a fee of two cents per each 
cleared options contract (per side) (``Fee'') executed on an Options 
Exchange that did not demonstrate sufficient Risk Controls designed to 
meet the proposed Risk Control Standards.
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    \3\ Current Options Exchanges are: (i) BATS Options Market, (ii) 
Box Options Exchange LLC, (iii) C2 Options Exchange, Inc., (iv) 
Chicago Board Options Exchange, Inc., (v) EDGX Options Exchange, 
(vi) International Securities Exchange, LLC, (vii) ISE Gemini LLC, 
(viii) ISE Mercury, LLC, (ix) MIAX Options Exchange, (x) NASDAQ OMX 
BX, Inc., (xi) NASDAQ OMX PHLX, LLC, (xii) NASDAQ Options Market, 
(xiii) NYSE Amex Options, and (xiv) NYSE Arca Options.
    \4\ See Article I, Section 1 of OCC's By-Laws.
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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 were not and are not intended to be solicited with 
respect to the proposed change and none have been received.

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

Purpose of the Proposed Change

Background
    OCC proposes to adopt a new Options Exchange Risk Control Standards 
Policy, which is designed to better protect OCC against risks related 
to erroneous transactions that may occur on Options Exchanges that have 
not implemented Risk Controls that are consistent with a defined set of 
principles-based Risk Control Standards, which were developed by OCC in 
consultation with the exchanges, and that are sent to OCC for a 
guarantee. The proposed Policy would, among other things, impose an 
additional Fee on cleared trades that are executed on an Options 
Exchange that has not certified the existence of Risk Controls that 
meet the Risk Control Standards in the following categories: (i) 
``Price Reasonability Checks;'' (ii) ``Drill-Through Protections;'' 
(iii) ``Activity-Based Protections;'' and (iv) ``Kill-Switch 
Protections'' (in each case discussed more thoroughly below) along with 
OCC's review to determine if the Risk Controls are consistent with the 
Risk Control Standards. The Policy would also require that any funds 
collected from the Fee be retained as earnings and, as such, be 
eligible for use for Clearing Member defaults under Article VIII, 
Section 5(d) of OCC's By-Laws but prohibit such funds from being used 
for any other purpose. OCC also proposes revisions to its Schedule of 
Fees to implement the Fee.
    OCC believes that the implementation of Risk Controls that are 
consistent with the proposed principles-based Risk Control Standards at 
Options Exchanges would guard against risks attendant to erroneous 
transactions on such Options Exchanges and serve OCC, its Clearing 
Members, and the financial markets OCC serves by helping to ensure the 
potential significant financial impact and elevated risk of disruption 
resulting from erroneous transactions is limited to the greatest extent 
possible. As a systemically important financial market utility and the 
sole clearing agency for the US listed options markets, OCC seeks to 
control risks presented to it that might have the effect of disrupting 
routine processes at OCC, and thus threatening the stability of the 
financial system of the United States. As described in more detail 
below, there have been numerous cases in the recent past where 
erroneous transactions have occurred that could have caused substantial 
damage to financial market entities and resultant damage to OCC. The 
options market is not immune to the harmful effects of erroneous 
transactions, and in fact OCC is more susceptible than other financial 
market entities to the risks attendant thereto by virtue of: (i) Its 
role as a guarantor of all options transactions that are novated, and 
(ii) its lack of discretion to elect not to clear transactions executed 
on Options Exchanges. OCC believes that Options Exchanges that apply 
the Risk Control Standards to all transactions executed on such Options 
Exchanges are better equipped to capture and eradicate erroneous and 
potentially disruptive transactions at the Options Exchange level, 
thereby reducing the likelihood that the risk inherent in such 
erroneous and potentially disruptive trades is transferred to OCC, its 
other Clearing Members, and the financial markets served by OCC. 
Furthermore, and as discussed in more detail below, OCC believes this 
proposal is complementary to efforts undertaken by the Commission to 
strengthen critical market infrastructure and improve its resilience, 
consistent with current Commission requirements \5\ and international 
guidance,\6\ and in furtherance of remarks made by Chair White after 
the latest in a series of prominent market disruptions to encourage 
self-regulatory organizations to consider such complementary 
efforts.\7\
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    \5\ See Clearing Agency Standards, Securities Exchange Act 
Release No. 68080 (Oct. 22, 2012), 77 FR 66220 (Nov. 2, 2012). More 
specifically, the Release states,
    ``The Commission notes however that under Section 17A(b)(3)(F) 
of the Exchange Act, a clearing agency is charged with 
responsibility to coordinate with persons engaged in the clearance 
and settlement of securities transactions, not just other clearing 
agencies. . . Further, the Commission notes that during the 
clearance and settlement process, a registered clearing agency is 
confronted with a variety of risks that must be identified and 
understood if they are to be effectively controlled. To the extent 
that these risks arise as a result of a registered clearing agency's 
links with another entity involved in the clearance and settlement 
process, Rule 17Ad-22(d)(7) should help ensure that clearing 
agencies have policies and procedures designed to identify those 
risks.''
    Id. at 66251.
    \6\ See Principle 20 of the Committee on Payment and Settlement 
Systems and Technical Committee of the International Organization of 
Securities Commissions (``CPSS-IOSCO''), Principles for Financial 
Market Infrastructures (April 16, 2012), available at http://www.bis.org/publ/cpss101a.pdf (``PFMI Report'').
    \7\ See SEC Chair White Statement on Meeting with Leaders of 
Exchanges, September 12, 2013. (``Today's meeting was very 
constructive. I stressed the need for all market participants to 
work collaboratively--together and with the Commission--to 
strengthen critical market infrastructure and improve its resilience 
when technology falls short.'') See also Chair White, Statement on 
Nasdaq Trading Interruption, August 22, 2013. (``The continuous and 
orderly functioning of the securities markets is critically 
important to the health of our financial system and the confidence 
of investors. Today's interruption in trading, while resolved before 
the end of the day, was nonetheless serious and should reinforce our 
collective commitment to addressing technological vulnerabilities of 
exchanges and other market participants.'')

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[[Page 23538]]

Proposed Options Exchange Risk Control Standards Policy
    Under the proposed Policy, if an Options Exchange does not submit a 
signed certification sufficiently demonstrating that it has certain 
Risk Controls in place that are consistent with the proposed Risk 
Control Standards, OCC will charge and collect a fee \8\ in accordance 
with its Schedule of Fees for each trade executed on such Options 
Exchange until such time that the Options Exchange completes the 
certification process, which is described in more detail below. Funds 
collected through the imposition of the Fee are segregated for 
recordkeeping purposes from other funds generated by clearing fees and 
would not be available for a Clearing Member refund or Stockholder 
Exchange dividend under OCC's approved Capital Plan. These funds would 
be available for use by OCC, with unanimous approval by the Stockholder 
Exchanges, in accordance with Article VIII, Section 5(d) of OCC's By-
Laws \9\ and as provided for in the Policy.
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    \8\ OCC is proposing to collect a fee of two cents per each 
cleared options contract (per side). Any changes to this fee would 
be subject to a future rule filing with the Commission.
    \9\ See Article VIII, Section 5(d). Under Article VIII, Section 
5(d), usage of current or retained earnings may be considered after 
the defaulting clearing member's margin has been exhausted, and it 
may be used to reduce in whole or in part the pro rata contribution 
otherwise made from the Clearing Fund to cover the loss. Id.
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Risk Control Standards

    The proposed Options Exchange Risk Control Standards Policy details 
each of the Risk Control Standards to which an Options Exchange must 
attest so that the proposed Fee would not be applied to trades executed 
on that Options Exchange. The proposed Risk Control Standards, which 
were developed by OCC in consultation with the Options Exchanges, are 
principle-based and designed to provide the flexibility for each 
Options Exchange to develop specific Risk Controls that best suit its 
own marketplace while still guarding against the types of risks 
contemplated by the Policy. The proposed Risk Control Standards are 
described below.
1. Price Reasonability Checks
    Mandatory Price Reasonability Checks prevent limit orders,\10\ 
complex orders,\11\ and market maker quotes from being entered and 
displayed on an Options Exchange if the price on such order or quote is 
outside a defined threshold set in relation to the current market price 
or National Best Bid or Offer (``NBBO''). For example,\12\ an Options 
Exchange may set a Price Reasonability Check that would reject an order 
that is priced at a certain percentage above the set parameter or a 
quote entered by a market maker that is priced a certain dollar amount 
higher than the set threshold.\13\ Options Exchanges' Price 
Reasonability Checks would include:
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    \10\ A limit order is an order placed on an Options Exchange to 
buy or sell a specific amount of options contracts at a specified 
price or better. (See, e.g., International Securities Exchange Rule 
715(b).)
    \11\ A complex order is an order involving the execution of two 
or more different options series in the same underlying security 
occurring at or near the same time. (See, e.g., Chicago Board 
Options Exchange Rule 6.53C(a)(1).)
    \12\ Examples herein are illustrative only, and the specifics of 
such examples are not necessarily required for an Options Exchange 
to certify having specific Risk Controls sufficient to meet the Risk 
Control Standards.
    \13\ By way of example, assume the market is $1.00 bid at $1.10. 
An Options Exchange Price Reasonability Check could reject orders 
greater than 5 cents above the offer or below the bid. Accordingly, 
if a broker wanted to buy an option for $1.10, but inadvertently 
``fat fingers'' the limit price for $11.00 on the order, the Options 
Exchange would reject the order prior to execution because the limit 
on the order is greater than the Price Reasonability Check limit.
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    (i) Mandatory limit order, complex order and quote Price 
Reasonability Checks;
    (ii) Application to all trading sessions, including market 
openings; and
    (iii) If the checks do not prevent the display and execution of 
quotes, the Options Exchange would have other means by which it 
mitigates the risks associated with the display and execution of quotes 
outside the specific threshold.
    Trades executed on an Options Exchange that occur at prices that 
were input erroneously and are substantially removed from other trades 
executed in the same product have the potential to result in large 
trading losses. In 2013, a trading firm's internal algorithm used to 
satisfy market demand for equity options inadvertently produced orders 
with inaccurate price limits and sent those orders to Options Exchanges 
(``2013 Trading Firm Error''). Though many of the erroneous trades were 
later canceled, it has been estimated that the trading firm could have 
faced approximately $500 million in losses.\14\ If these potential 
losses were realized and if the OCC Clearing Member clearing and 
settling those trades was unable to honor them, OCC and its remaining 
Clearing Members would have been exposed to significant losses and a 
potential disruption to the operations of OCC.
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    \14\ See In the Matter of Goldman, Sachs & Co., Order 
Instituting Administrative and Cease-and-Desist Proceedings, 
Pursuant to Sections 15(9b) and 21C of the Securities Exchange Act 
of 1934, Making Findings, and Imposing Remedial Sanctions and a 
Cease-and-Desist Order (Jun. 30, 2015) (Release No. 34-75331).
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2. Drill-Through Protections
    Drill-Through Protections are closely related to Price 
Reasonability Checks and would require all orders, including market 
orders,\15\ limit orders, and complex orders, to be executed within 
pre-determined price increments of the NBBO. Drill-Through Protections 
also restrict orders from immediately trading up or down an unlimited 
number of price intervals and allow market liquidity to be refreshed 
prior to the execution of further trades.\16\ Options Exchanges' Drill-
Through Protections would include:
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    \15\ A market order is an order to buy or sell a stated number 
of options contracts at the best price obtainable when the order 
reaches the Options Exchange in which the order was sent to. (See, 
e.g. Chicago Board Options Exchange Rule 6.53.)
    \16\ By way of example, assume the market is $1.00 bid at $1.10 
and the size, or liquidity provided on the bid, or offered on the 
ask, is 100 contracts by 100 contracts. Assume an order is entered 
as a market order to buy 1000 contracts and the Drill-Through 
Protection is set at 5 cents and 500 milliseconds (or half a 
second). The Drill-Through Protection would allow the order to trade 
up to the price limit set, or $1.15. At $1.15, the order would be 
halted by the Options Exchange and either routed to another Options 
Exchange or manually executed. Also, after executing 100 contracts 
for $1.10, the Drill-Through Protection would temporarily halt the 
order for 500 milliseconds (or half a second) to allow market makers 
to refresh their market and size.
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    (i) Mandatory Drill-Through Protections with reasonably 
quantifiable limits;
    (ii) Application to all orders; and
    (iii) Application to all trading sessions, including market 
openings.
    Options orders that are large in size may, due to the available 
contra orders, be partially executed at reasonable prices with the 
remainder of the same order executed at prices that are far from the 
NBBO, and thus have the potential to result in large trading losses. 
For example, in 2012, a trading firm erroneously sent more than 4 
million orders to equity exchanges over a period of forty-five minutes, 
creating a loss of over $450 million that nearly resulted in the 
trading firm's insolvency (``2012 Trading Firm Error'' and collectively 
with the 2013 Trading Firm Error, the ``Trading Firm Errors'').\17\ If 
the trading firm was unable to absorb the loss and honor the trades, 
the clearing agency

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and its surviving Clearing Members would have been exposed to 
significant losses and a potential disruption to their operations. 
While detailed facts surrounding the incident are not publicly known, 
Drill-Through Protections could have helped limit the losses by 
preventing execution of orders that would have traded through a large 
number of price increments in a short period of time.
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    \17\ See http://www.reuters.com/article/2012/10/17/us-knightcapital-results-idUSBRE89G0HI20121017.
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3. Activity-Based Protections
    Activity-Based Protections extend an Options Exchange's Risk 
Controls to factors beyond price and are most commonly designed to 
address risks associated with a high frequency of trades in a short 
period of time. Activity-Based Protections may address the maximum 
number of contracts that may be entered as one order, the maximum 
number of contacts that may be entered or executed by one firm over a 
certain period of time, and the maximum number of messages that may be 
entered over a certain period of time. Options Exchanges' Activity-
Based Protections would include:
    (i) Application to all traded products available on the Options 
Exchange;
    (ii) Mandatory use of available Activity-Based Protections by its 
members where the use of such protections is consistent with sound risk 
management practice; and
    (iii) Maximum number of contracts or orders that may be executed 
over a certain period of time.
    Options Exchanges that don't have Activity-Based Protections have a 
greater likelihood of facilitating erroneous trades by not imposing 
limits based on factors other than price. Trading errors that result in 
a large number of orders or quotes could magnify the trading losses 
that result from the error and could cause the default of a Clearing 
Member if the Clearing Member cannot meet its obligations due to such 
losses. For example, Activity-Based Protections could have limited the 
loss associated with the 2013 Trading Firm Error mentioned above.
4. Kill-Switch Protections
    Kill-Switch Protections provide Options Exchanges, and their market 
participants, with the ability to cancel existing orders and quotes 
and/or block new orders and quotes on an exchange-wide or more tailored 
basis (e.g., symbol specific, by Clearing Member, etc.) with a single 
message to the Options Exchange after established trigger events are 
detected. A trigger event may include a situation where a market 
participant is disconnected from an Options Exchange due to an 
abnormally large order or manual errors in the system by a market 
participant causing multiple erroneous trades to occur. Kill-Switch 
Protections are considered a last line of defense, applicable where, 
for example, a severe trading problem occurs or an Options Exchange 
market participant loses connectivity to the Options Exchange. Options 
Exchanges' Kill-Switch Protections would include:
    (i) The availability, and required use in the case of Options 
Exchange market makers, of ``heartbeat monitoring,'' a function that 
periodically sends an electronic signal between the Options Exchange 
and the market participant that subsequently cancels all quotes and/or 
orders if the market participant does not respond to the signal in a 
certain period of time;
    (ii) The ability for participants of the Options Exchange to 
``cancel-on-disconnect'';
    (iii) The ability to cancel all quotes and/or orders with a single 
message to the Options Exchange, with the availability of backup 
alternative messaging systems; and
    (iv) Restricted automated reentry to trading after the activation 
of a kill-switch.
    Trades executed on Options Exchanges without Kill-Switch 
Protections increase the risk that trading malfunctions or other 
harmful events could lead to erroneous trades being executed on an 
Options Exchange and sent to OCC for clearance and settlement. If the 
Clearing Member for these trades was not able to absorb losses 
associated with them, it could potentially expose OCC and its surviving 
Clearing Members to significant losses and a disruption of operations. 
For example, the potential severity of the 2012 Trading Firm Error 
could have been substantially limited if a Kill-Switch Protection 
temporarily restricted the trading firm's ability to trade.

Certification Process \18\
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    \18\ OCC intends to begin the collection of certifications from 
the Options Exchanges after appropriate regulatory approvals/non 
objection has been obtained.
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    OCC has developed, in conjunction with the Options Exchanges, the 
following process to evaluate each Options Exchange's Risk Controls. 
Under the proposal, each Options Exchange would certify to OCC that the 
Options Exchange implemented Risk Controls consistent with the Risk 
Control Standards using a form provided by OCC and signed by an 
executive officer of the Options Exchange.\19\ Provided notice of no 
objection and all regulatory approvals are received, Options Exchanges 
that submit documentation would receive a determination from OCC 
regarding their Risk Controls by a date not sooner than June 30 of each 
year (``Evaluation Completion Date'').\20\
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    \19\ The signed certification signed by an executive officer of 
the Options Exchange will attest to the validity, efficacy and 
implementation of Risk Controls satisfying each of the above 
described Risk Control Standards. As part of the certification, the 
executive officer of the Options Exchange will certify that the 
Options Exchange has met the Risk Control Standards as described in 
this Advance Notice.
    \20\ OCC notes that the implementation of the Policy and 
resulting Evaluation Completion Date for 2016 are subject to 
receiving no objection from the Commission and all necessary 
regulatory approvals. After receiving no objection and all necessary 
regulatory approvals, OCC will notify Options Exchanges, its 
Clearing Members, and market participants of the Evaluation 
Completion Date for 2016 by issuing an Information Memo on its 
public Web site. The Evaluation Completion Date for 2016 will be set 
for a date not sooner than 30 days after issuing the Information 
Memo (which may be later than June 30, 2016).
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    Under the Policy, OCC would evaluate each Options Exchange's Risk 
Controls and the Risk Controls' compliance with the Risk Control 
Standards by the Evaluation Completion Date based on a review of its 
certification and supporting materials, which will include, but will 
not be limited to, proposed rule changes filed with the Commission, 
approved Options Exchange rules, information circulars, and/or written 
procedures, if any, in each case consistent with the date of receipt of 
the certification. If OCC is unable to determine that an Options 
Exchange has Risk Controls sufficient to meet Risk Control Standards, 
OCC would furnish the Options Exchange with a concise written statement 
of the reason(s) as soon as reasonably practicable. The Options 
Exchange may, within 30 days of receipt of the written statement 
providing the reason OCC was unable to find the Options Exchange 
maintained sufficient Risk Controls to meet the proposed Risk Control 
Standards, present further evidence of such sufficient Risk Controls to 
OCC. OCC would then conduct a second review and make a recommendation 
to OCC's Risk Committee \21\ whether the Options Exchange has 
sufficient Risk Controls within 30 days of receiving the evidence of 
such Risk Controls from the Options Exchange. OCC's Risk

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Committee would, within 30 days of receipt of the recommendation, 
review the recommendation and the Options Exchange's supporting 
materials, as appropriate, to determine whether the Options Exchange 
has Risk Controls sufficient to meet the Risk Control Standards (``Risk 
Committee Review''). OCC would furnish the Options Exchange with a 
concise written statement of the Risk Committee determination and the 
reason for such determination as soon as reasonably practicable 
following the Risk Committee Review.
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    \21\ OCC's Risk Committee is chaired by a public Director and it 
does not currently have an Options Exchange representative. In the 
event OCC's Risk Committee has an exchange representative at some 
time in the future, such representative would be recused from a 
decision on the appeal of a determination of an Options Exchange's 
compliance with the Risk Control Standards.
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    Pursuant to the proposed Policy, on June 30 of each year (with the 
potential exception of 2016, as noted above),\22\ OCC would post a 
notice to its Web site to which Clearing Members (but not the general 
public) have access advising Clearing Members, with respect to each 
Options Exchange, whether: (1) The Options Exchange has implemented 
sufficient Risk Controls to meet the Risk Control Standards; (2) OCC 
was unable to determine the Options Exchange has sufficient Risk 
Controls that meet the Risk Control Standards; or (3) a certification 
has not been submitted by the Options Exchange.\23\
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    \22\ See supra note 20.
    \23\ For annual certifications commencing in 2017 and 
thereafter, beginning June 30 of the calendar year for which the 
certification is being made, OCC would post a notice to its Web site 
to which Clearing Members (but not the general public) have access 
advising members, with respect to each Options Exchange, whether: 
(i) OCC has determined the Options Exchange has sufficient Risk 
Controls that meet the Risk Control Standards; (ii) OCC was unable 
to determine the Options Exchange has sufficient Risk Controls that 
meet the Risk Control Standards; or (iii) a certification has not 
been submitted by the Options Exchange. In addition, OCC will 
continue to keep a record posted of the history of each Options 
Exchange's compliance submission status, and any changes made to 
that status, with the Risk Control Standards on the same OCC Web 
site to which Clearing Members (but not the general public) have 
access in order for Clearing Members to properly keep internal 
records.
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Collection of Proposed Fee

    Beginning on the first business day that is at least 60 days after 
OCC posts such notice, OCC would charge and collect the Fee in 
accordance with the Policy for trades executed on an Options Exchange 
that was determined not to have sufficient Risk Controls to satisfy the 
Policy.\24\ In the event the Fee is charged, it would continue to be 
charged to and collected from Clearing Members,\25\ and the notice 
would remain posted on OCC's Web site to which Clearing Members (but 
not the general public) have access, until the Options Exchange has 
demonstrated it has Risk Controls that satisfy the Policy.\26\ OCC 
believes that implementing this Fee may incentivize Options Exchanges 
to maintain Risk Controls that are consistent with the proposed Risk 
Control Standards, thereby reducing the likelihood that erroneous 
trades are submitted to OCC and the attendant risk identified above 
comes to fruition.\27\ However, the primary reason for the Fee is to 
provide additional funds for OCC to manage the elevated risk that would 
be presented to OCC absent the Risk Control Standards and for which OCC 
has no reasonable means to predict, measure, or consider otherwise. OCC 
believes the Fee is reasonable, as it represents less than half but 
more than a third of a premium over the base rate of five cents per 
contract, and, since clearing fees represent two percent or less of the 
total execution cost, should not materially impact a Clearing Member 
that chooses to execute a transaction on an Options Exchange that has 
not certified its Risk Control Standards.
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    \24\ Exhibit 5A contains an updated Schedule of Fees reflecting 
the Fee. As proposed, the Fee will be applied to all trades executed 
on an Options Exchange that has not completed the certification 
process.
    \25\ The Accounting and Finance Department is responsible for 
the collection of the Fee and segregation of those funds from other 
monies collected by OCC.
    \26\ The National Operations Group is responsible for 
operationally updating each Options Exchange's certification status, 
and associated Fee date, as applicable, within the OCC system.
    \27\ OCC notes, however, that an Options Exchange that does not 
maintain Risk Controls consistent with the Risk Control Standards is 
not prevented from submitting transactions to OCC.
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    OCC believes ensuring that funds collected through imposition of 
the Fee are available for use as current or retained earnings in 
accordance with Article VIII Section 5(d) of OCC's By-Laws is an 
integral component of the proposed change, as it provides OCC with 
increased financial means to cover potential losses stemming from a 
default caused by erroneous trades that would be presented to OCC 
absent the Risk Controls and for which OCC has no reasonable means to 
predict, measure, or consider.

Exception and Escalation Processes

    The proposed Policy also provides that, on rare occasion, OCC may 
grant exceptions to the Policy in order to appropriately address 
immediate business issues and provides for an escalation process to 
report breaches of the Policy.
Commission Rules and Statements on Critical Market Infrastructure
    Exchange Act Rule 15c3-5 (``Market Access Rule'') \28\ and 
Regulation Systems Compliance and Integrity (``Regulation SCI,'' 
collectively with ``Market Access Rule,'' ``Market Integrity Rules'') 
\29\ provide some requirements for the resiliency of critical market 
infrastructures. The Market Access Rule, which was adopted in November, 
2010, generally prohibits broker-dealers from providing ``unfiltered'' 
or ``naked access'' to the securities markets through an exchange or 
automated trading system. To comply, broker-dealers must establish and 
maintain a system of risk management controls and supervisory 
procedures that are reasonably designed to systematically limit the 
financial, regulatory, and other risks related to the business activity 
of any customer utilizing the broker-dealer for access to the national 
market system. OCC believes that the Risk Control Standards 
contemplated by the Policy are in no way designed to interfere with, 
contradict, or undermine the Market Access Rule and are in fact 
designed to be complementary to the Market Access Rule. The proposed 
Risk Control Standards, which are based upon calculated prices of 
orders, bids, and offers, and activity of each Options Exchange 
participant, as described in more detail above, would provide an 
additional layer of protections at the Options Exchange level to guard 
against the risks associated with erroneous trades and would thereby 
complement the Market Access Rule, which is primarily aimed at 
controlling access to the marketplace at the firm level. While the 
Market Access Rule has no doubt contributed to a more resilient market 
infrastructure, OCC believes there remain gaps in critical market 
infrastructure with respect to erroneous transactions that should be 
addressed; in fact, each of the Trading Firm Errors discussed above 
occurred while the Market Access Rule was in place.
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    \28\ See 17 CFR 240.15c3-5.
    \29\ See Securities Exchange Act Release No. 73639 (November 19, 
2014), 79 FR 72252 (December 5, 2014) (Reg SCI Adopting Release).
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    In addition, OCC believes that the Risk Control Standards 
complement Regulation SCI. Regulation SCI is focused on the need for 
market participants to bolster the operational integrity of automated 
systems, whereas the Risk Control Standards are designed to adopt more 
granular controls around the actual entry of an order that occurs 
outside the four walls of OCC before a trade is settled or cleared by 
OCC. As such, OCC believes the Risk Control Standards set specific 
standards to better further the intent of Regulation SCI. Regulation 
SCI mandates that an applicable entity have reasonable policies, 
procedures, and controls in place to ensure the integrity of its

[[Page 23541]]

systems, but the rule doesn't necessarily prescribe what those controls 
should be. As proposed, the Risk Control Standards complement the 
objectives of Regulation SCI by applying specific risk controls related 
to the execution of trades on Options Exchanges. Because the Risk 
Control Standards would act to further the intentions of the Market 
Integrity Rules, rather than undermine or act contrary to them, OCC 
believes the implementation of the Risk Controls by Options Exchanges 
consistent with the proposed Risk Control Standards would promote 
market resiliency when working alongside these Market Integrity Rules.
    Finally, OCC believes the proposed Risk Control Standards are 
consistent with Commission rules requiring clearing agencies to 
establish and enforce written policies reasonably designed to evaluate 
the potential sources of risks that can arise when the clearing agency 
establishes links to clear and settle trades, and to ensure that these 
risks are managed prudently on an ongoing basis.\30\
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    \30\ See 17 CFR 240.17Ad-22(d)(7). OCC notes that these links 
are not limited in scope to linkages between clearing agencies. See 
supra note 5 at 66250-66251.
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    OCC also notes that the proposed Risk Control Standards are 
principle-based in nature and do not prescribe any specific method for 
satisfying the standards, which would allow each Options Exchange to 
develop specific Risk Controls that are best suited for its 
marketplace. Moreover, the adoption of any Risk Control that would be 
deemed to be a ``rule of an exchange'' \31\ under the Securities 
Exchange Act of 1934, as amended (the ``Act''), would be subject to the 
rule filing requirements of Section 19(b) of the Act \32\ and thereby 
subject to review by the Commission before it could be implemented by 
the Options Exchange.\33\
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    \31\ See 15 U.S.C. 78c(a)(27).
    \32\ 15 U.S.C. 78(s)(b).
    \33\ Certain Options Exchanges have already filed proposed rule 
changes, and received approval for such rule changes, with the 
Commission to implement risk controls that are designed to guard 
against the same types of risks contemplated by the Risk Control 
Standards. See, e.g., Securities Exchange Act Release No. 76123 
(October 16, 2015), 80 FR 62591 (October 16, 2015) (SR-NASDAQ-2015-
096) (Order Approving Proposed Rule Change to Adopt a Kill Switch 
for NOM). See also Securities Exchange Act Release No. 77092 
(February 9, 2016), 81 FR 7873 (February 16, 2016) (SR-BOX-2016-03) 
(Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change to Add Rule 7310 (Drill-through Protection) to Implement a 
New Price Protection Feature).
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Consistency With the Payment, Clearing and Settlement Supervision Act
    OCC believes that the proposed change concerning Risk Control 
Standards described above is consistent with Section 805(b)(1) of the 
Payment, Clearing and Settlement Supervision Act \34\ because the 
proposed change would promote robust risk management. By imposing a Fee 
on trades executed on Options Exchanges that do not have adequate Risk 
Control Standards, OCC is attempting to protect itself against the 
risks associated with clearing and settling trades that have an 
increased risk of being erroneous and potentially disruptive to OCC. 
With the proposed Fee and Risk Control Standards, OCC is attempting to 
prevent market disruptions at the exchange level by implementing 
consistent Risk Control Standards across all Options Exchanges, thereby 
promoting robust risk management.
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    \34\ 12 U.S.C. 5464(b)(1).
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Anticipated Effect on and Management of Risk
    As discussed above and throughout the rule proposal, OCC believes 
that charging an additional fee for trades executed on Options 
Exchanges that have not implemented Risk Controls consistent with the 
proposed Risk Control Standards would mitigate potential risks to OCC, 
its Clearing Members, and the financial markets OCC serves, and 
mitigate any threat to the stability of the financial system of the 
United States. OCC believes the potential harm from the recent market 
disruptions described above would have been limited if Risk Control 
Standards were in place on the exchanges on which they occurred. As 
discussed above, OCC believes that market disruptions of this nature 
present additional risk to OCC for which it has no other means to 
reasonably predict, measure, or consider, and as a result presents 
otherwise uncovered risk to OCC's Clearing Members and the financial 
markets OCC serves and, if left unchecked, could threaten the stability 
of the financial system of the United States. The imposition of the 
proposed Fee would provide additional financial resources to help OCC 
mitigate such risks.

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

    The advance notice may be implemented if the Commission does not 
object to the advance notice within 60 days of the later of (i) the 
date that the advance notice was filed with the Commission or (ii) the 
date that any additional information requested by the Commission is 
received. OCC shall not implement the advance notice if the Commission 
has any objection to the advance notice.
    The Commission may extend the period for review by an additional 60 
days if the advance notice raises novel or complex issues, subject to 
the Commission providing OCC with prompt written notice of the 
extension. An advance notice 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 OCC in writing that it does not object to the advance notice 
and authorizes OCC to implement the advance notice 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.
    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-2016-801 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-2016-801. 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

[[Page 23542]]

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_16_801.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-2016-801 and should be 
submitted on or before May 12, 2016.

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2016-09201 Filed 4-20-16; 8:45 am]
BILLING CODE 8011-01-P


