
[Federal Register Volume 81, Number 136 (Friday, July 15, 2016)]
[Notices]
[Pages 46140-46143]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-16718]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78277; File No. SR-OCC-2016-007]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change Related to The Options Clearing 
Corporation's Membership Approval Process

July 11, 2016.
    On May 16, 2016, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2016-007 pursuant to Section 19(b)(1) of 
the Securities and Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The Commission did not receive any comments on the 
proposed rule change. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Description

    OCC is changing its rules to: (i) Vest the authority to approve or 
disapprove

[[Page 46141]]

new membership applications with OCC's Risk Committee,\3\ and (ii) 
delegate authority to the Executive Chairman or President of OCC to 
approve new membership applications provided that: (a) It is not 
recommended that the Risk Committee impose additional membership 
criteria upon the applicant pursuant to Section 1, Interpretation and 
Policy .06 of Article V of OCC's By-Laws, and (b) the Risk Committee is 
given not less than five business days to determine that the 
application should be reviewed at a meeting of the Risk Committee and 
the Risk Committee has not requested that the application be reviewed 
at a meeting of the Risk Committee within such five day period.
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    \3\ OCC's Risk Committee is a committee of OCC's Board of 
Directors. See OCC's By-Laws Article III, Section 9.
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    This proposed rule change will streamline OCC's membership approval 
process by: (i) Allowing OCC's Executive Chairman or President to 
approve pro forma applications for clearing membership, and (ii) 
vesting ultimate authority with OCC's Risk Committee, not its Board, to 
approve or disapprove applications for clearing membership that are not 
approved by either OCC's Executive Chairman or President. The practical 
effect of the proposed rule change is that either OCC's Executive 
Chairman or President will approve most applications for clearing 
membership at OCC since most applicants for clearing membership choose 
to have their application presented for approval only when such 
approval is pro forma in nature (i.e., the applicant meets all of the 
clearing membership requirements at OCC and there is no need to impose 
additional membership requirements). OCC believes that the proposed 
rule change will better allocate the time and resources of the Board 
and Risk Committee and ensure applications for clearing membership are 
considered in a timely manner.

Background

    OCC believes that its membership criteria are objective standards 
that are designed not to unfairly discriminate in the admission of 
participants to OCC,\4\ as well as to provide for fair and open access 
to OCC.\5\ Currently, the authority to approve or disapprove new 
applications for clearing membership resides with the Board.\6\ Under 
Article V, Section 2 of OCC's By-Laws, OCC's Risk Committee, including 
its designated delegates or agents, is responsible for reviewing 
applications for clearing membership, and the Risk Committee is 
responsible for making a recommendation of approval or disapproval to 
the Board (in part, relying on OCC's Management's review and 
recommendation).\7\ OCC's management (``Management'') performs the 
substantive review of applications for clearing membership on behalf of 
the Risk Committee. Management reviews a given application against 
OCC's membership criteria, which are set forth in Article V of OCC's 
By-Laws as well as Chapters 2 and 3 of OCC's Rules. Based on its 
review, Management, as the subject matter expert on OCC's membership 
criteria, either recommends an application for approval without 
conditions, recommends an application for approval with conditions (in 
accordance with OCC's By-Laws, Article V, Section 1, Interpretation and 
Policy .06), or does not recommend an application for approval. The 
Risk Committee, based on Management's review of the application, 
recommends a course of action to OCC's Board. OCC's Board then approves 
or disapproves applications for clearing membership based on the Risk 
Committee's recommendation.
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    \4\ See 15 U.S.C. 78q-1(b)(3)(F).
    \5\ See 7 U.S.C. 7a-1(c)(2)(C)(iii)(III).
    \6\ See OCC's By-Laws Article V, Section 2.
    \7\ See OCC's By-Laws Article V, Section 2. The Risk Committee, 
from a practical perspective, has designated OCC's management as its 
agent to review applications for clearing membership. OCC's 
management reviews applications for clearing membership and makes a 
recommendation to the Risk Committee concerning the applicant's 
satisfaction of OCC's membership criteria.
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    Moreover, since the rules of the Commission and the Commodity 
Futures Trading Commission require OCC to have rules that do not 
unfairly discriminate in the admission of participants and provide fair 
and open access,\8\ OCC believes that, under its rules, it is required 
to admit applicants for clearing membership that clearly meet OCC's 
membership criteria, and therefore, that the Board's ultimate approval 
of an application for clearing membership for which Management does not 
recommend approval with conditions or disapproval is pro forma. From a 
timing perspective, applications for clearing membership often do not 
track the Risk Committee or Board's regular meeting schedule and, on 
occasion, the Board has had to convene a special meeting for the sole 
purpose of considering an application for clearing membership or 
otherwise has had to seek approval via unanimous written consent, which 
OCC believes is an inefficient use of the Board's time and resources. 
In an effort to better allocate the time and resources of OCC's Board 
and Risk Committee as well as streamline its clearing membership 
approval process, OCC proposed the amendments to Articles V and VIII of 
its By-Laws as well as the Board and Risk Committee Charters described 
below. The effect of such amendments is that either OCC's Executive 
Chairman or President will approve most applications for clearing 
membership, thereby allowing the Board and the Risk Committee to better 
allocate their time and resources.
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    \8\ See 15 U.S.C. 78q-1(b)(3)(F) and 7 U.S.C. 7a-1(c)(2)(C).
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Changes to Vest Authority of New Applicant Approvals With the Risk 
Committee

    OCC proposed amending Article V, Section 2 of its By-Laws to vest 
the authority to approve or disapprove new applicants for clearing 
membership with the Risk Committee. OCC believes that the members of 
the Board comprising the Risk Committee are capable of appropriately 
acting on membership applications. The Risk Committee is currently 
delegated the authority to (1) review applications for clearing 
membership and recommend approval or disapproval thereof to the Board, 
(2) conduct hearings if requested by applicants whose applications are 
proposed to be disapproved, and (3) review and approve or disapprove 
requests by clearing members to expand clearing activities.\9\ 
Therefore, OCC believes that requiring the Board to approve or 
disapprove an application for clearing membership that has already been 
reviewed by, and received a recommendation for approval or disapproval 
from, the Risk Committee is redundant and represents an inefficient use 
of the Board's time. Accordingly, OCC believes that the Risk Committee 
is the appropriate governing body in which to vest ultimate authority 
to approve or disapprove applications for clearing membership.\10\ 
Should the Risk Committee propose to disapprove an application for 
clearing membership, the Risk Committee must first provide the 
applicant an opportunity to be heard and present evidence on its own 
behalf (as is currently the case today with respect to the Board's 
decision to

[[Page 46142]]

disapprove an application for clearing membership).\11\
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    \9\ See Section IV of the Risk Committee Charter provided as 
Exhibit 5B to the proposed rule change.
    \10\ The Board will continue to oversee OCC's membership 
criteria and ongoing membership standards through its authority to 
approve changes to OCC's By-Laws and Rules (and specifically those 
By-Laws and Rules that concern membership). The Risk Committee will 
inform the Board, at the Board's next regularly scheduled meeting, 
of applications for clearing membership pursuant to proposed Article 
V, Section 2(c) of the By-Laws.
    \11\ See OCC's By-Laws Article V, Section 2. Typically, however, 
if OCC's due diligence review reveals issues that would prevent the 
Board or the Risk Committee from approving an application for 
clearing membership, the applicant voluntarily remediates such 
issues prior to the presentation of the application for clearing 
membership to the Risk Committee.
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    In order to effect the foregoing, and in addition to proposed 
changes to Article V, Section 2 of the By-Laws, OCC proposed conforming 
changes to Article V, Sections 1 and 3 of the By-Laws as well as the 
Board and Risk Committee Charters.\12\ Such conforming changes identify 
that the Risk Committee, and not the Board, will approve applications 
for clearing membership. Additionally, OCC proposed changes to Article 
VIII, Section 2 of the By-Laws (as well as the Board and Risk Committee 
Charters) to identify that the Risk Committee, and not the Board, will 
set initial clearing fund requirements in connection with the approval 
of an application for clearing membership.
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    \12\ Marked versions of the Board and Risk Committee Charters 
were provided as Exhibits 5A and 5B to the proposed change.
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Delegation of Authority To Approve Applications for Membership to the 
Executive Chairman or President of OCC

    OCC has stated that, in order to better streamline OCC's membership 
application approval process, and allow the Board and the Risk 
Committee to more efficiently allocate their time, it proposed 
additional amendments to Article V, Section 2 of its By-Laws to allow 
OCC's Executive Chairman or its President to approve certain 
applications for clearing membership. As described above: (i) OCC 
believes that, based on the applicable rules of the Commission and the 
Commodity Futures Trading Commission, applications for clearing 
membership that clearly meet OCC's membership criteria must be 
approved,\13\ and (ii) applications for clearing members do not 
necessarily track the Risk Committee or Board's regular meeting 
schedule and, on occasion, the Board has had to convene in a special 
meeting for the sole purpose of considering a clearing member 
application or otherwise seek approval via unanimous written consent, 
which is not a good use of either the Board or the Risk Committee's 
time and resources. Therefore, OCC proposed amending Article V, Section 
2 of its By-Laws to delegate the authority to approve applications for 
clearing membership to the Executive Chairman or President of OCC 
provided that: (i) It is not recommended that the Risk Committee impose 
additional membership criteria upon the applicant pursuant to Section 
1, Interpretation and Policy .06 of Article V of OCC's By-Laws, and 
(ii) the Risk Committee is given not less than five business days from 
the date it is notified by its designated delegates or agents that the 
Executive Chairman or President intends to approve a given application 
to determine that such application should be reviewed at a meeting of 
the Risk Committee and the Risk Committee has not requested that the 
application be reviewed at a meeting of the Risk Committee within such 
five day period. If five business days pass and no member of the Risk 
Committee notifies Management that a given application for clearing 
membership should be reviewed at a meeting of the Risk Committee, then 
the Executive Chairman and President shall have the authority to 
approve the application for clearing membership. This proposed change 
will allow either OCC's Executive Chairman or the President to approve 
most applications for clearing membership received by OCC. Neither the 
Executive Chairman nor the President will be allowed to disapprove an 
application for clearing membership. Instead, if either the Executive 
Chairman or President determined he cannot approve an application for 
clearing membership, the application will be considered by the Risk 
Committee for approval or disapproval at its next regularly scheduled 
meeting. OCC believes that allowing the Executive Chairman or President 
to approve applications for clearing membership that clearly meet OCC's 
membership criteria will allow the Board and the Risk Committee to 
allocate their time to more efficiently and effectively.
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    \13\ See 15 U.S.C. 78q-1(b)(3)(F) and 7 U.S.C. 7a-1(c)(2)(C).
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II. Discussion

    Section 19(b)(2)(C) of the Act \14\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that the rule change, as proposed, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such organization.
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    \14\ 15 U.S.C. 78s(b)(2)(C).
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    The Commission finds that the proposed rule change is consistent 
with Section 17A(b)(3)(F) \15\ of the Act. This section requires, among 
other things, that the rules of a clearing agency be designed to 
protect investors and the public interest while not being designed to 
permit unfair discrimination in the admission of participants. The 
proposed rule change will preserve Board-level oversight for the 
membership approval process by vesting the authority to approve or 
disapprove applications for clearing membership with the Risk 
Committee, a Board-level committee. A considerable portion of the Risk 
Committee's functions and responsibilities, as listed in its charter, 
pertains to the oversight of membership and membership standards 
generally. Therefore it is reasonable to expect that the Risk Committee 
should have the requisite expertise and authority to carry out the 
membership application approval or disapproval process previously 
tasked to the entire Board.
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    \15\ 15 U.S.C. 78q-1(b)(3)(F).
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    The proposed rules also delegate to the Executive Chairman or the 
President the authority to approve new applications provided that: (i) 
It is not recommended that the Risk Committee impose additional 
membership criteria upon the applicant pursuant to Section 1, 
Interpretation and Policy .06 of Article V of OCC's By-Laws, and (ii) 
the Risk Committee is given not less than five business days to 
determine that the application should be reviewed at a meeting of the 
Risk Committee and the Risk Committee has not requested that the 
application be reviewed at a meeting of the Risk Committee within such 
five day period. The authority to disapprove applications is not 
delegated to the Executive Chairman or the President. The rules, as 
revised, continue to provide Board-level oversight of the membership 
approval process by ensuring involvement of the Risk Committee. For the 
above reasons, although the revised rules will streamline the 
membership approval process, the Commission believes that they are 
designed to protect investors and the public interest. Additionally, 
the revised rules are not designed to permit unfair discrimination 
because they do not alter the criteria considered for the approval of 
new membership.
    Additionally, the Commission finds that the revised rules are 
consistent with Rule 17Ad-22(d)(8) under the Act.\16\ Rule 17Ad-
22(d)(8) requires that a clearing agency establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to, as applicable, have governance arrangements that are clear 
and transparent to fulfill the public interest requirements in Section 
17A of the Act \17\ applicable to clearing agencies and support the 
objectives of owners and participants. OCC's revised rules

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provide clarity and transparency in its governance processes by 
identifying, in OCC's public rulebook, the parties authorized to 
approve or disapprove membership applications, and fulfill the public 
interest requirements of Section 17A of the Act as described above.
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    \16\ 17 CFR 240.17Ad-22(d)(8).
    \17\ 15 U.S.C. 78q-1.
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of Act, and in particular, 
with the requirements of Section 17A of the Act \18\ and the rules and 
regulations thereunder.
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    \18\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-OCC-2016-007) be, and it 
hereby is, approved.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-16718 Filed 7-14-16; 8:45 am]
 BILLING CODE 8011-01-P


