
[Federal Register Volume 81, Number 182 (Tuesday, September 20, 2016)]
[Notices]
[Pages 64536-64544]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-22533]



[[Page 64536]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78834; File No. SR-OCC-2016-802]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Advance Notice Concerning the Options Clearing 
Corporation's Escrow Deposit Program

September 14, 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 August 15, 2016, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
advance notice as described in Items I, II and III below, which Items 
have been primarily 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 changes that 
would improve the resiliency of OCC's escrow deposit program. Such 
changes are designed to: (1) Increase OCC's visibility into and control 
over collateral deposits made under the escrow deposit program; (2) 
strengthen clearing member's rights to collateral in the escrow deposit 
program in the event of a customer default to the clearing member; (3) 
provide more specificity concerning the manner in which OCC or clearing 
members would take possession of collateral in OCC's escrow deposit 
program; and (4) improve the readability of the rules governing OCC's 
escrow deposit program by consolidating all such rules into a single 
location in OCC's Rulebook.

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

Communications With Custodian Banks
    In light of the substantial changes proposed to the escrow deposit 
program, OCC has sought to keep custodian banks informed regarding the 
proposed changes. These communications began in January and February 
2012, when OCC notified each custodian bank of the proposal to 
restructure the escrow deposit program. As part of this notification, 
OCC informed each custodian bank of (1) OCC's intention to require that 
security pledges be made through the Depository Trust Company 
(``DTC''), (2) the percentage of cash used in the escrow deposit 
program and (3) the potential elimination of cash deposits.\3\
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    \3\ While it was ultimately determined in April 2014 that cash 
collateral would remain in the escrow deposit program, prior 
discussions with participating escrow banks reflected the evolution 
of OCC's decision on this point. For example, the PowerPoint 
presentation given to banks during June--August 2012 indicated that 
cash collateral would not be permitted in the escrow deposit 
program, while the PowerPoint presentation given during April--May 
2013, as well as the draft rules distributed to participating escrow 
banks for comment in July--August 2013, indicated that it would be 
included. A number of current participants in the escrow deposit 
program use cash, some to a substantial degree, and OCC determined 
that the use of cash collateral should remain an essential aspect of 
the escrow deposit program.
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    In June through August 2012, OCC provided a PowerPoint presentation 
to each custodian bank summarizing proposed changes to the escrow 
deposit program. This presentation included an explanation of the 
reasons for the proposed changes, including the desire to enhance and 
strengthen the escrow deposit program and increase collateral 
transparency. The presentation also included a discussion of changes to 
the validation and valuation of collateral, and the calculation of 
contract quantities based on the collateral that has been pledged.
    In April and May 2013, OCC provided each custodian bank with an 
operational overview of the restructured escrow deposit program in the 
form of a PowerPoint presentation. This presentation covered: eligible 
option types, types of eligible supporting collateral, required 
collateral value calculations for option contact coverage, valuation of 
supporting collateral, asset management locations/processing of 
supporting collateral, and validation and valuation of supporting 
collateral and calculation of option contract coverage.
    In July and August 2013, OCC distributed a draft Participating 
Escrow Bank Agreement (as described below) and the related proposed OCC 
Rules to custodian banks along with a request for feedback. Following 
the receipt of questions and comments, OCC distributed ``FAQ'' 
responses to custodian banks.
    During September 2013, OCC provided a walkthrough of the functions 
of its ENCORE \4\ system applicable to the enhanced escrow deposit 
program for custodian banks in order to provide an orientation of such 
functionality. In connection with the restructured escrow deposit 
program, clearing members will continue to use ENCORE to view member 
specific deposits, and custodian banks will use ENCORE to view third-
party specific deposits and make escrow deposits consisting of cash. 
Moreover, OCC sent requests to custodian banks for validation of the 
DTC pledgor accounts to be used for the restructured escrow deposit 
program. In October 2013, OCC distributed escrow deposit program 
eligible securities file details to custodian banks.
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    \4\ ENCORE is OCC's real-time clearing and settlement system 
that allows clearing members to, among other things, post and view 
margin collateral as well as deposits in lieu of margin.
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    In February and March 2014, OCC arranged a series of calls with 
custodian banks to solicit feedback on a term sheet detailing cash 
account structures. Following the receipt of questions and comments, 
OCC distributed ``FAQ'' responses to custodian banks.
Comments Received From Custodian Banks
    As described above, OCC discussed the proposed changes to its 
escrow deposit program with custodian banks several times since 2012. 
While these discussions were generally informational in nature, 
custodian banks provided OCC with comments and questions in two 
instances: the July/August 2013 discussions and the February/March 2014 
discussion. The primary focus of the comments in both sets of 
discussions was the manner in which custodian banks would be required 
to hold cash under the new escrow rules: in an omnibus structure or in 
a tri-party structure. The omnibus structure would provide OCC with an 
account in OCC's name and thereby perfect OCC's right under the Uniform 
Commercial Code (``UCC'') to take

[[Page 64537]]

possession of cash escrow deposits in the event of a clearing member 
default. This would also eliminate the need for a separate tri-party 
agreement. However, the omnibus structure was less desirable to 
custodian banks since all of a custodian bank's OCC escrow deposit 
program clients' assets would be comingled in a single account. From an 
operational perspective, a single omnibus account at a custodian bank 
is easier for OCC to manage since OCC would only need to have ``view 
access'' into one account at a custodian bank. On the other hand, 
custodian banks expressed privacy concerns with respect to several 
clients having view access into a single account. Eventually, OCC 
decided to use a tri-party account structure for cash escrow deposits, 
with certain controls to alleviate the concerns on both sides. 
Specifically, custodian banks agreed to facilitate the execution of a 
form tri-party agreement with each of its clients that participates in 
OCC's escrow deposit program, which perfects OCC's security interest in 
cash escrow deposits. Additionally, custodian banks agreed to establish 
an escrow specific cash account for each client so that OCC does not 
need to differentiate a client's OCC escrow cash from the client's non-
escrow cash. OCC believes that the proposed structure for cash accounts 
strikes the appropriate balance between OCC's desire for legal 
certainty as to its right to take possession of cash escrow deposits in 
the event of a clearing member default, and the operational desire to 
only have view access to a client's OCC escrow deposit program cash 
account balance at a custodian bank.
    Additional comments OCC received from the July/August 2013 
discussions with custodian banks centered on administrative items such 
as the escrow deposit program documentation structure and the manner in 
which custodian banks would post escrow deposits in OCC's clearing 
system, ENCORE. As discussed below, OCC moved the substantial majority 
of its Amended and Restated On-Line Escrow Deposit Agreement into 
proposed Rule 610C in order to have the majority of escrow rules in one 
place. Custodian banks did not express any concerns regarding the 
operational steps necessary to post an escrow deposit in ENCORE once 
OCC provided custodian banks with a ``walkthrough'' of the operational 
process.

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

Description of Change
    The purpose of this proposed change is to improve the resiliency of 
OCC's escrow deposit program. The changes would: (1) increase OCC's 
visibility into and control over collateral deposits made under the 
escrow deposit program; (2) provide more specificity concerning the 
manner in which OCC would take possession of collateral in OCC's escrow 
deposit program in the event of a clearing member or custodian bank 
default; (3) clarify clearing members' rights to collateral in the 
escrow deposit program in the event of a customer default to the 
clearing member; and (4) improve the readability of the rules governing 
OCC's escrow deposit program by consolidating all such rules into a 
single location in OCC's Rulebook. Upon implementation of the proposed 
change, all securities collateral in OCC's escrow deposit program would 
be held at DTC, and custodian banks would only be allowed to hold cash 
collateral.
    The narrative below is comprised of four sections. The first 
section provides a background of OCC's current escrow deposit program 
as well as an overview of the proposed changes to the rules and 
agreements that govern the escrow deposit program. The second section 
discusses the changes associated with: (1) Increasing OCC's visibility 
into and control over collateral deposits made under the escrow deposit 
program; (2) Providing more specificity concerning the manner in which 
OCC would take possession of collateral in OCC's escrow deposit program 
in the event of a clearing member or custodian bank default; and, (3) 
Clarifying clearing member's rights to collateral in the escrow deposit 
program in the event of a customer default to the clearing member as 
well as providing additional detail concerning the manner in which 
clearing members may take possession of such collateral. The third 
section discusses proposed technical and conforming changes to the 
rules and agreements governing the current escrow deposit program that 
would allow OCC to consolidate all such terms into a single location in 
OCC's Rulebook. The second and third sections also discuss changes that 
improve the readability of the rules governing OCC's escrow deposit 
program, which is primarily achieved by consolidating all such rules 
into a single location in OCC's Rulebook. The fourth section discusses 
the manner in which OCC proposes to transition from the current escrow 
deposit program to the new escrow deposit program, including the 
removal of certain rules and contractual provisions that would no 
longer be applicable to the new escrow deposit program.
Section 1: Background and Overview of Proposed Changes
Background/Current Escrow Deposit Program
    Each day OCC collects collateral from its clearing members in order 
to protect OCC and the markets it serves from potential losses stemming 
from a clearing member default. Approximately half of the collateral 
deposited by clearing members at OCC is deposited through OCC's escrow 
deposit program. Users of OCC's escrow deposit program are customers of 
clearing members who, through the escrow deposit program, are permitted 
to collateralize eligible positions directly with OCC (instead of with 
the relevant clearing member who would, in turn, deposit margin at 
OCC). Currently, collateral deposits made through OCC's escrow deposit 
program are characterized as either ``specific deposits'' or ``escrow 
deposits.'' Specific deposits are deposits of the security underlying a 
given options positions and are made through the DTC by a clearing 
member on behalf of its customer (at the direction of the customer).\5\ 
Escrow deposits are deposits of cash or securities made by a custodian 
bank on behalf of a customer of an OCC clearing member in support of an 
eligible options position. OCC's Rules currently contemplate two forms 
of escrow deposits: ``third-party escrow deposits'' and ``escrow 
program deposits.'' Third-party escrow deposits are substantially 
similar to specific deposits except for the fact that third-party 
escrow deposits are made by a custodian bank, and not a clearing 
member. Third-party escrow deposits consist entirely of securities and, 
like specific deposits, are made through DTC. In order to effect third-
party specific deposits, custodian banks must be DTC members. Escrow 
program deposits are bank deposits of eligible securities or cash, 
which are held at the custodian bank (versus third-party escrow 
deposits and specific deposits, which are held at DTC).
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    \5\ For example, if customer XYZ holds a short position of 
options on AAPL, customer XYZ could, through its clearing member's 
DTC account, pledge shares of AAPL to OCC in order to collateralize 
such options position and not be charged margin by OCC.
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    When a customer of a clearing member makes a deposit in lieu of 
margin through OCC's escrow deposit

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program, the relevant positions are excluded from the clearing member's 
margin requirement at OCC. The escrow deposit program therefore 
provides users of OCC's services with a means to more efficiently use 
cash or securities they may have available.
Overview of Rule Changes (Including Terminology Changes) and New 
Agreements
Rule Consolidation and Terminology Changes
    Currently, the rules concerning OCC's escrow deposit program are 
located in OCC Rules 503, 610, 613 and 1801. Additionally, OCC and 
custodian banks participating in OCC's escrow deposit program enter 
into an Escrow Deposit Agreement (``EDA''), which also contains 
substantive provisions governing the program. OCC is proposing to 
consolidate all of the rules concerning the escrow deposit program, 
including the provisions of the EDA relevant to the revised escrow 
deposit program, into proposed Rules 610, 610A, 610B and 610C.\6\ OCC 
believes that consolidating the many rules governing the escrow deposit 
program into a single location would significantly enhance the 
understandability and transparency of the rules concerning the escrow 
deposit program for current users of the program as well as any persons 
that may be interested in using the program in the future.
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    \6\ As described herein, OCC is proposing to eliminate the EDA 
based on such consolidation. When appropriate, and as described in 
more detail below, conforming changes were made to certain Rules as 
a result of OCC proposing to require that all non-cash deposits in 
the escrow deposit program be made through DTC (and not held at 
custodian banks).
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    In connection with the above described rule consolidation, OCC is 
also proposing to rename the types of escrow deposits available within 
the escrow deposit program, as well as rename the term ``approved 
depository'' to ``approved custodian.'' Specific deposits would now be 
called ``member specific deposits,'' which are equity securities 
deposited by clearing members at DTC at the direction of their 
customers; third-party escrow deposits would now be called ``third-
party specific deposits,'' which are equity securities deposited by 
custodian banks at DTC at the direction of their customers; and, escrow 
program deposits would now be called, ``escrow deposits,'' which are 
either cash deposits held at a custodian bank for the benefit of OCC, 
or Government securities deposited at DTC by custodian banks at the 
direction of their customers. The term ``approved depository'' would 
also be changed to ``approved custodian'' to eliminate any potential 
confusion with the term ``Depository,'' which is defined in the Rules, 
to mean DTC.
New Rule Organization
    With respect to the rules governing the escrow deposit program, 
proposed Rule 610 would set forth general terms and conditions common 
to all types of deposits permitted under the escrow deposit program. 
Specifically, proposed Rule 610: (1) Sets forth the different types of 
eligible positions for which a deposit in lieu of margin may be used, 
(2) sets forth operational aspects of the escrow deposit program such 
as the days and the times during which a deposit in lieu of margin may 
be made and where the different types of deposits in lieu of margin 
must be maintained (either DTC or a custodian bank), (3) provides the 
conditions under which OCC may take possession of a deposit in lieu of 
margin (from DTC or a custodian bank), and (4) describes OCC's security 
interest in deposits in lieu of margin.\7\ Proposed Rule 610 is 
supplemented by: (1) Proposed Rule 610A for member specific deposits, 
(2) proposed Rule 610B for third-party specific deposits, and (3) 
proposed Rule 610C for escrow deposits. Proposed Rules 610A, 610B and 
610C provide further guidance and specificity on the topics initially 
addressed in proposed Rule 610 (and delineated above) as they relate to 
member specific deposits, third-party specific deposits and escrow 
deposits, respectively.
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    \7\ OCC would continue to maintain a perfected security interest 
in deposits in the escrow deposit program under the proposed Rules 
notwithstanding changes to the location of the rules that perfect 
such security interest. OCC's security interest in securities 
deposits in the escrow deposit program, which are held at DTC, is 
perfected by operation of DTC's rules. OCC's security interest in 
cash deposits in the escrow deposit program is perfected under 
proposed Rules 610C(i), 610C(j) and 610C(k), which replace Sections 
3.3, 3.4, 4.3, 4.4, 5.3, 5.4 and 21 of the EDA. Proposed Rule 610(g) 
also concerns OCC's security interest in deposits in escrow deposit 
program.
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    The new rule structure differs from the existing rule structure in 
that existing Rules 503, 610, 613 and 1801 discuss topics concerning 
deposits in lieu of margin (such as withdrawal, roll-over \8\ and 
release) in general terms and without regard to the type of deposit in 
lieu of margin. The existing rule structure also does not provide 
operational details of the escrow deposit program. The new rule 
structure discusses each aspect of OCC's escrow deposit program by type 
of deposit in lieu of margin (member specific deposits, third-party 
specific deposit or escrow deposits) as well as provides operational 
details concerning the program. OCC believes that the more detailed 
presentation of the new rules concerning the escrow deposit program 
enhances the understandability of the program to all users, and 
potential users, of the program because all such persons will be able 
to better understand how topics apply by type of deposit in lieu of 
margin and with regard to the operational differences between each type 
of deposit in lieu of margin.
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    \8\ A ``roll-over'' occurs when a customer chooses to maintain 
an existing escrow deposit after the options supported by the escrow 
deposit expires, or are closed-out, and the customer re-allocates 
the escrow deposit to a new options position.
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Agreements Concerning the Escrow Deposit Program
    In addition to the above-described Rule changes, many provisions of 
the EDA would be moved in to the Rules. Accordingly, OCC is proposing 
to eliminate the EDA and replace it with a simplified agreement 
entitled the ``Participating Escrow Bank Agreement.'' \9\ The 
Participating Escrow Bank Agreement would provide that custodian banks 
are subject to all terms of the Rules governing the revised escrow 
deposit program,\10\ as they may be amended from time to time.\11\ The 
Participating Escrow Bank Agreement would contain eligibility 
requirements for custodian banks, including representations regarding 
the custodian bank's Tier 1 Capital,\12\ and provide

[[Page 64539]]

OCC with express representations concerning the bank's authority to 
enter into the Participating Escrow Bank Agreement.\13\ Moreover, 
standard contractual provisions concerning topics such as assignment, 
governing law and limitation of liability have been enhanced in the 
Participating Escrow Bank Agreement when compared to the EDA.\14\ OCC 
is also proposing to move notification requirements into proposed Rule 
610C(l), which is an enhancement of Section 7 of the EDA that requires 
custodian banks to provide notice to OCC only when there are changes to 
the ``authorized persons'' and changes to the address of the bank. 
Proposed Rule 610C(l) would require escrow banks to provide OCC with 
notices of material changes to the bank (in additional to items such as 
changes of authorized persons and the address of bank, as currently 
required under Section 7 of the EDA).
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    \9\ The Participating Escrow Bank Agreement is attached to this 
filing as Exhibit 5A, with changes from the EDA marked. Custodian 
banks participating in the revised escrow deposit program are 
defined as ``Participating Escrow Banks'' in the Participating 
Escrow Bank Agreement, and such banks must also be an Approved 
Custodian pursuant to proposed Section 1.A(13) of OCC's By-Laws. In 
addition, and as described above, certain provisions of the EDA are 
proposed to be incorporated into OCC's Rules; however, no rights or 
obligations of either OCC or a custodian bank would change solely as 
a result of such an incorporation.
    \10\ The Rules governing the revised escrow deposit program are 
proposed Rules 610, 610A, 610B and 610C.
    \11\ Under the Participating Escrow Bank Agreement, however, OCC 
will agree to provide custodian banks with advance notice of 
material amendments to the Rules relating to deposits in lieu of 
margin and custodian banks will have the opportunity to withdraw 
from the escrow deposit program if they object to the amendments. As 
a general matter, the Participating Escrow Bank Agreement will not 
be negotiable, although OCC may determine to vary certain non-
material terms in limited circumstances.
    \12\ OCC recently enhanced the measurement it uses--Tier 1 
Capital instead of shareholders' equity--to establish minimum 
capital requirements for banks approved to issue letters of credit 
that may be deposited by clearing members as a form of margin asset. 
See Securities Exchange Act Release No. 74894 (May 7, 2015), 80 FR 
27431 (May 13, 2015) (SR-OCC-2015-007). For the reasons set forth in 
SR-OCC-2015-007, OCC is proposing to adopt the same standard with 
respect to custodian bank escrow deposits.
    \13\ These provisions include, but are not limited to, Sections 
1.1 and 1.2 of the EDA.
    \14\ Sections 2.1, 2.2, 3.5, 3.6, 3.8, 4.7, and 5.6, 6 and 7 of 
the EDA would be removed entirely since they are no longer needed 
under OCC's revised escrow deposit program. These provisions concern 
a custodian bank's movement of securities escrow collateral; such 
collateral would be deposited at DTC under the revised escrow 
deposit program (as described below). Section 2.3 of the EDA would 
also be removed in its entirety because escrow deposits would not be 
permitted for equity calls in the revised escrow deposit program. 
Additionally, the concept of cash settlements concerning escrow 
deposits would not be included in the revised escrow deposit program 
and, as a result, Sections 15, 16, 17 and 18(b) to 18(d) would be 
removed in their entirety.
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    OCC, under Proposed Rule 610C(b), would also require customers 
wishing to deposit cash collateral and custodian banks holding escrow 
deposits comprised of cash to enter into a tri-party agreement 
involving OCC, the customer and the applicable custodian bank (``Tri-
Party Agreement,'' attached hereto as Exhibit 5B). The Tri-Party 
Agreement governs the customer's use of cash in the program, confirms 
the grant of a security interest in the customer's account to OCC and 
the relevant clearing member, as set forth in proposed Rule 610C(f), 
and causes customers of clearing members to be subject to all terms of 
the Rules governing the revised escrow deposit program.\15\ Each 
custodian bank entering into the Tri-Party Agreement (``Tri-Party 
Custodian Bank''), would agree to follow the directions of OCC with 
respect to cash escrow deposits without further consent by the 
customer.\16\ As discussed in greater detail below, use of the Tri-
Party Agreement significantly enhances OCC's rights concerning cash 
escrow deposits, and provides OCC with greater certainty regarding its 
rights to cash escrow deposits in the event of a customer or clearing 
member default.
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    \15\ The Rules governing the revised escrow deposit program are 
proposed Rules 610, 610A, 610B and 610C.
    \16\ OCC has determined to use this cash account structure as a 
result of a series of discussions with certain custodian banks 
involved in the cash portion of the escrow deposit program, as 
described in Item 5 above. The intended structure would permit a 
greater number of customers to participate in the escrow deposit 
program than, for example, a commingled ``omnibus'' account 
structure at each custodian bank, which would preclude the 
participation of customers subject to restrictions under the 
Investment Company Act of 1940 requiring segregation of a registered 
investment company's funds.
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Section 2: Transparency and Controls, Taking Possession of Collateral, 
and Clearing Member Rights to Collateral
Transparency and Control Over Collateral Included in Escrow Deposits
    Currently, securities deposits in the escrow deposit program are 
held at either DTC or a custodian bank, and cash deposits in the escrow 
deposit program are held at a custodian bank. In the case of either 
cash or securities held at a custodian bank, OCC relies on the 
custodian bank to verify the value and control of collateral since OCC 
does not have any visibility into relevant accounts. OCC is proposing 
to require that all securities deposited within the escrow deposit 
program, regardless of the type of deposit, be held at DTC.\17\ 
Additionally, OCC is proposing to require Tri-Party Custodian Bank to 
provide OCC with view access into the account in which the deposit is 
held.
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    \17\ OCC has discussed the proposed changes to the escrow 
deposit program with DTC and, based on feedback from DTC, no 
concerns were communicated to OCC by DTC regarding the proposed 
changes. DTC has also indicated that the proposed changes to the 
escrow deposit program are consistent with DTC's operations.
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    Holding securities escrow deposit program collateral at DTC would 
provide OCC with increased visibility into the collateral within the 
escrow deposit program because OCC would be able to use its existing 
interfaces with DTC to view, validate and value collateral within the 
escrow deposit program in real time, allowing OCC to perform the 
controls for which it currently relies on the custodian banks. It would 
also provide OCC with the ability to obtain possession of deposited 
securities upon a clearing member default by issuing a demand of 
collateral instruction through DTC's systems, without the need for 
custodian bank involvement. Furthermore, a clearing member would have 
the ability to obtain possession of deposited securities upon a 
customer default in a similar manner by notifying OCC of such customer 
default and submitting a request for delivery of such deposited 
securities (OCC's and clearing members' ability to take possession of a 
deposit within the escrow deposit program is discussed in greater 
detail below). OCC does not believe that requiring use of DTC to 
deposit securities escrow collateral presents a material change for 
users of OCC's escrow deposit program because such users currently use 
DTC to effect certain types of deposits in lieu of margin under the 
current escrow deposit program.\18\
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    \18\ Specifically, users of OCC's escrow deposit program would 
use DTC's Collateral Loan Services, which is described at: http://www.dtcc.com/products/training/helpfiles/settlement/settlement_help/help/collateral_loans.htm.
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    Cash collateral pledged to support an escrow deposit would continue 
to be facilitated through the existing program interfaces; however, for 
increased security, any pledges of cash would be required to be made in 
a customer's account at the Tri-Party Custodian Bank that is used 
solely for the purpose of making escrow deposits. As described above, 
under the proposed changes OCC would require Tri-Party Custodian Bank 
and customers to enter into a Tri-Party Agreement in order to provide 
legal certainty concerning this arrangement. Further, and as set forth 
in the Tri-Party Agreement, each Tri-Party Custodian Bank would agree 
to disburse funds from the pledged account only at OCC's direction. 
From an operational perspective, each Tri-Party Custodian Bank would 
provide OCC with online view access to each customer's cash account 
designated for the escrow deposit program, allowing visibility into 
transactional activity and account balances. OCC would not process a 
cash escrow deposit in its systems until it sees the appropriate amount 
of cash deposited in the designated bank account at the Tri-Party 
Custodian Bank. This process ensures that OCC does not rely on a third 
party to value, or warrant the existence of, collateral within the 
escrow deposit program. The Tri-Party Agreement, in connection with the 
new cash collateral structure, would provide OCC with additional 
transparency and control over cash collateral under the revised escrow 
deposit program.
    In order to effect the foregoing, OCC is proposing to adopt 
proposed Rules 610A(a), 610B(a), 610C(b) and 610C(c). Proposed Rules 
610A(a) and 610B(a), Effecting a Member Specific Deposit and Effecting 
a Third-Party Specific Deposit,

[[Page 64540]]

respectively, require that member specific deposits and third-party 
specific deposits must be made through DTC, and are largely based upon 
existing Rule 610(e), which discusses effecting deposits in lieu or 
margin generally. Language has been added to each proposed rule to more 
accurately articulate that member specific deposits and third-party 
specific deposits must be made through DTC and the party that is 
required to effect each type of deposit (i.e., a clearing member or a 
third-party depository). In the case of member specific deposits and 
third-party specific deposits, which are already made through DTC, OCC 
believes that proposed Rules 610A(a) and Rule 610B(a) are rules that 
clarify existing practices and provide additional operational detail to 
users of the escrow deposit program (i.e., member specific deposits and 
third-party specific deposits must be made through DTC's Electronic 
Data Processing (``EDP'') Pledge System and clearing members are 
required to maintain records of such deposits). Proposed Rules 610C(b) 
and 610C(c), Manner of Holding and Method of Effecting Escrow Deposits, 
respectively, are largely based upon existing Rules 610(d), 610(g), 
1801(d) and 1801(g), as well as Section 8 of the EDA with language 
added to more accurately articulate that securities escrow deposits 
must be made through DTC and cash must be deposited through a Tri-Party 
Custodian Bank, and provide operational detail concerning effecting 
escrow deposits. Moreover, OCC is proposing to adopt new Rule 610(e) in 
order to specify that all types of deposits in the escrow deposit 
program may be made only during the time specified by OCC. The purpose 
of specifying the time frames in which participants are allowed to 
effect deposits in the escrow deposit program is to facilitate OCC 
daily margin processing and ensure that all of the positions it 
guarantees are timely collateralized.\19\
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    \19\ In the event a deposit in the escrow deposit program is not 
timely made, OCC would collect margin from the relevant clearing 
member.
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    In addition to the above, and with respect to escrow deposits only, 
OCC is proposing enhancements to its process of ensuring that customers 
meet initial and maintenance minimums.\20\ Specifically, under the 
revised escrow deposit program, in the event a customer falls below the 
maintenance minimum, the custodian bank, pursuant to the Participating 
Escrow Bank Agreement, would be required to ensure that the customer 
deposits additional collateral or escalate the matter to OCC. In 
addition to such notification requirement, OCC would also implement 
automated processes to ensure that escrow deposits meet required 
initial and maintenance minimums. In the event the matter is escalated 
to OCC or OCC's systems identify a shortfall, OCC would: (1) Demand 
that the relevant clearing member post additional margin to cover the 
margin requirement on the applicable position, and (2) if the relevant 
clearing member fails to satisfy such a demand for additional margin, 
OCC would close-out the applicable position and demand the escrow 
deposit from DTC or the Tri-Party Custodian Bank, as applicable, under 
its existing authority pursuant to Rule 1106. This process is much more 
robust than the current process concerning maintenance minimums in that 
OCC currently relies entirely on custodian banks holding escrow 
deposits to ensure the customer deposits additional collateral, as 
necessary, to meet initial and maintenance minimums. OCC believes that 
the proposed new process is more streamlined and efficient because OCC 
would not have to rely entirely on a custodian bank to ensure customers 
comply with initial and maintenance minimums.
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    \20\ Initial and maintenance minimums do not apply to member 
specific deposits and third-party specific deposits since the 
clearing member or custodian bank, as applicable, is pledging the 
security that is deliverable upon exercise of the germane options 
position.
---------------------------------------------------------------------------

    In order to implement the foregoing within the new rules concerning 
the escrow deposit program, OCC is proposing to adopt Rules 610C(g) and 
610C(h) that concern the initial and maintenance minimum escrow deposit 
values required by OCC as well as actions OCC's[sic] is permitted to 
take in the event an escrow deposit falls below a required amount. 
These proposed rules are based on existing Rules 1801(c) and 1801(e) as 
well as Sections 3.2, 4.2, 5.2, 3.7, 4.8 and 5.7 of the EDA.\21\ With 
respect to the computation of initial and maintenance minimums, 
proposed Rules 610C(g) and 610C(h) would explain the formula through 
which OCC computes the initial and maintenance minimum for a given 
options position, with the specific percentage applicable to such 
calculation provided to participants in the escrow deposit program in a 
schedule posted on OCC's Web site. With respect to the effects of a 
failure to meet maintenance minimums, proposed Rule 610C(h) sets forth 
the conditions under which OCC would close out a given escrow deposit 
should it fall below the requisite maintenance minimum. Proposed Rule 
610C(h) would also provide OCC with the authority to use the cash and 
securities included within the escrow deposit to reimburse itself for 
costs incurred in connection with the close-out. OCC believes that by 
virtue of their proposed new location in the rules, as well as the 
additional detail provided in the proposed rules, all participants, and 
potential participants, in OCC's escrow deposit program would better 
understand the rules concerning initial and maintenance minimums, as 
they relate to escrow deposits, under the enhanced escrow deposit 
program (versus under the current escrow deposit program).
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    \21\ OCC is proposing to eliminate the concept of 
``substitutions'' of escrow deposit collateral (located in Sections 
4.7 and 5.6 of the EDA)--instead a given escrow deposit must at all 
times must meet the minimum amount (as set forth in proposed Rules 
610(g)(1) and (2)) and OCC would permit any excess amount to be 
withdrawn.
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OCC's Rights to Collateral in the Escrow Deposit Program in the Event 
of a Clearing Member or Bank Default
    The proposed Rules would enhance OCC's default management regime as 
it relates to the escrow deposit program by more specifically 
delineating the conditions under, and the process through which, OCC 
would take possession of collateral within the escrow deposit program 
should a clearing member or custodian bank default. Specifically, 
proposed Rules 610A(b), 610B(f), 610C(q) and 610C(r) provide that in 
the event of a clearing member or custodian bank default OCC would have 
the right to direct DTC to deliver the securities included in a member 
specific deposit, third-party specific deposit or escrow deposit to 
OCC's DTC participant account for the purpose of satisfying the 
obligations of the clearing member or reimbursing itself for losses 
incurred as a result of the failure, as applicable. Similarly, pursuant 
to proposed Rules 610C(q) and 610C(r) OCC would have the right in the 
event of a Tri-Party Custodian Bank default to take possession of cash 
included within an escrow deposit for the same purposes. In the event 
of a custodian bank default, pursuant to proposed Rule 610C(r) OCC 
would have the right to remove the custodian bank from the escrow 
deposit program, prohibit the custodian bank from making new escrow 
deposits, disallow withdrawals with respect to existing deposits, close 
out short positions covered by escrow deposits at the defaulted 
custodian bank and use such escrow deposits to reimburse itself for the 
costs of the close-out, or disregard

[[Page 64541]]

or require the withdrawal of existing escrow deposits.
    Proposed Rules 610A(b), 610B(f) and 610C(q), concern OCC's rights 
to a member specific deposits, third-party specific deposits and escrow 
deposits, respectively, in the event of a clearing member default. They 
would provide a more specific description of OCC's rights to a third-
party specific deposit during a default than existing Rule 610(k) and 
Section 18 of the EDA. However, the additional specificity that would 
be provided in proposed Rules 610A(b), 610B(f) and 610C(q) would not 
change OCC's nor clearing members' rights or obligations regarding 
member specific, third-party specific or escrow deposits in the event 
of a clearing member default. Proposed Rule 610C(r) addresses OCC's 
rights in the event of a custodian bank default and is based on 
existing Rules 613(h) and 1801(k). Proposed Rule 610C(r) would clarify 
OCC's existing operational practices when a custodian bank defaults 
(i.e., demand monies, not allow new deposits, etc. . ., as described 
immediately above), but does not change any of the rights of OCC, 
clearing members or custodian banks as they are set forth in existing 
Rules 613(h) and 1801(k).
    In addition to the above described proposed changes, OCC is 
proposing to amend Rule 1106 to set forth the treatment of deposits in 
the escrow deposit program in the event of a suspension of a clearing 
member. Rule 1106(b)(2) would be amended to provide that OCC may close 
out a short position of a suspended clearing member covered by a member 
specific, third-party specific or escrow deposit, subject to the 
ability of the suspended clearing member or its representative to 
transfer the short position to another clearing member under certain 
circumstances. Further, current Rule 1106(b)(3) would be combined with 
Rule 1106(b)(2) and amended to set forth OCC's right to take possession 
of the cash and/or securities included within an escrow, member 
specific, or third-party specific deposit for the purpose of 
reimbursing itself for costs incurred in connection with the close-out 
of a short position covered by the deposit. These proposed amendments 
to Rule 1106 are consistent with proposed Rules 610B(f), 610C(q) and 
610C(r).
Clearing Members' Rights to Collateral in the Escrow Deposit Program
    Clearing members' rights to escrow deposits and third-party 
specific deposits would be clarified under the proposed rules. While 
clearing members have secondary lien rights on the escrow deposits of 
their customers under the current escrow deposit program, OCC is 
proposing to add several rules that would clarify these rights and 
provide additional guidance to clearing members regarding operational 
steps that would need to be taken in order to exercise their secondary 
lien rights. Specifically, OCC is proposing to add Rules 610B(c) and 
610C(f) to delineate the rights of a clearing member as they relate to 
third-party specific deposits and escrow deposits. Proposed Rules 
610B(c) and 610C(f) would provide for the grant of a security interest 
by the customer to the clearing member with respect to any given third-
party specific deposit and escrow deposit, as applicable. The Rules 
would further provide that any such security interest of a clearing 
member in an escrow deposit would be subordinated to OCC's interest. 
For purposes of perfecting a clearing member's security interest under 
the UCC, OCC would obtain control over the security both on its own 
behalf and on behalf of the relevant clearing member, with clear 
subordination of the clearing member's interest to OCC's interest. In 
the event OCC had to direct delivery of the security to the clearing 
member, OCC would do so on the clearing member's behalf. Proposed Rules 
610B(c) and 610C(f) would better codify clearing members' secondary 
lien rights to third-party specific deposits and escrow deposit[sic] 
than they are currently codified in Section 21 of the EDA, without 
changing any clearing member rights or obligations. OCC believes that 
such a codification would provide more transparency regarding clearing 
member's secondary lien rights under the enhanced escrow deposit 
program because all users, and potential users, of OCC's escrow deposit 
program would be able to easily identify and understand the rules 
concerning clearing members' secondary lien rights in a single location 
within OCC's publically available Rulebook.
    Additionally, OCC is proposing to add several procedural rules that 
would set forth the process by which clearing members could exercise 
their secondary lien rights in a given deposit in the escrow deposit 
program. Proposed Rules 610C(d), 610C(o), 610C(p) and 610C(s), relating 
to escrow deposits, and proposed Rules 610B(d) and 610B(e), relating to 
third-party specific deposits, would provide that, in the event of a 
customer default to a clearing member, the clearing member would have 
the right to request a ``hold'' on a deposit. The hold would prevent 
the withdrawal of deposited securities or cash by a custodian bank or 
the release of a deposit that would otherwise occur in the ordinary 
course. Subsequent to placing a hold instruction on a deposit, a 
clearing member would have the right to request that OCC direct 
delivery of the deposit to the clearing member through DTC's systems, 
in the case of securities, or an instruction to the Tri-Party Custodian 
Bank in the case of cash. Providing clearing members with transparent 
instructions regarding how to place a hold instruction on and direct 
delivery of a deposit in the escrow deposit program would significant 
enhancement to the current escrow deposit program.
    OCC is also proposing to adopt Rules 610B(e) and 610C(s), which 
would protect OCC in the event that it delivers a third-party specific 
deposit or escrow deposit to a clearing member. Under proposed Rules 
610B(e) and 610C(s) a clearing member making a request for delivery 
would be deemed to have made the appropriate representations to OCC 
that the clearing member has a right to take possession of the 
deposited securities or cash and would agree to indemnify OCC against 
losses resulting from a breach of these representations or the delivery 
of the deposit. A clearing member would also be required to provide 
documentation regarding its right to possession of the securities or 
cash as OCC may reasonably request.
Section 3: Technical and Conforming Changes to OCC'S Rules
    OCC also proposes a number of technical, conforming and structural 
changes in order to move the majority of the terms governing the escrow 
deposit program into one section in its Rulebook. OCC believes that 
changes to proposed Rules 610, 610A, 610B and 610C, described in 
greater detail below, are either non-substantive or conforming changes 
that do not alter the current rights or obligations of OCC, clearing 
members or participants in the escrow deposit program.
Proposed Rule 610--Deposits in Lieu of Margin (General Provisions)
    Proposed Rule 610 contains general provisions applicable to the 
escrow deposit program. Specifically, proposed Rule 610(a) replaces 
existing Rule 610(a) and sets forth general provisions of the escrow 
deposit program including: (1) Who may participate in the escrow 
deposit program, (2) the types of positions included in the escrow 
deposit program, (3) the types of deposits in the escrow deposit 
program, and (4) the collateral that is eligible for the escrow deposit 
program. Proposed Rule 610(b) replaces existing Rule

[[Page 64542]]

610(b) and provides further specificity with respect to the types of 
options positions included within OCC's escrow deposit program.\22\ 
This additional specificity clarifies OCC's existing rules and provides 
more transparency to users and potential users of OCC's escrow deposit 
program. Proposed Rule 610(c), which is not derived from an existing 
rule, clarifies OCC's existing practice that OCC will disregard a 
member specific deposit or a third-party specific deposit if such 
deposit is no longer eligible to be delivered upon the exercise of the 
associated stock option contract. Proposed Rule 610(d), which replaces 
existing Rules 610(c) and 1801(l), requires that deposits within the 
escrow deposit program be made in accordance with applicable laws and 
regulations, and be appropriately authorized. Proposed Rule 610(f), 
which replaces existing Rule 610(l), would clarify OCC's right to use 
deposits within the escrow deposit program until such deposits are 
withdrawn. Proposed Rule 610(f) is supplemented by proposed Rules 610A, 
610B and 610C with respect to member specific, third-party specific and 
escrow deposits. Proposed Rule 610(g) codifies OCC's security interest 
in deposits within the escrow deposit program.
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    \22\ As described in greater detail below, proposed Rules 610(a) 
and 610(b) are supplemented by proposed Rules 610A, 610B and 610C.
---------------------------------------------------------------------------

Proposed Rule 610A--Member Specific Deposits
    Proposed Rule 610A clarifies many of the current rules concerning 
the escrow deposit program as they relate to member specific deposits. 
For example, proposed 610A(c) describes the process by which a clearing 
member may withdraw a member specific deposit (i.e., effecting a 
withdrawal or release through DTC's EDP Pledge System and ensuring that 
its margin requirement at OCC is met). While this issue is addressed in 
existing Rule 610(j) in general terms, OCC believes that the additional 
operational details regarding its existing process in proposed Rule 
610A(c), along with its inclusion in proposed Rule 610A, further 
clarify how those existing processes apply to member specific deposits 
as opposed to other types of deposits in lieu of margin in existing 
Rule 610.\23\ Proposed Rule 610A(d) also establishes that member 
specific deposits may be ``rolled-over,'' a concept that is not 
specifically set forth in existing Rule 610 but has historically 
applied in connection with member specific deposits (formerly specific 
deposits).
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    \23\ Proposed Rule 610A(c) supplements to proposed Rule 610(f).
---------------------------------------------------------------------------

Proposed Rule 610B--Third-Party Specific Deposits
    Proposed Rule 610B clarifies many of the current rules concerning 
third-party specific deposits. For example, proposed 610B(b), which 
addresses rollovers of a third-party specific deposit and replaces 
existing Rules 613(a) and Section 9 of the EDA, and articulates how to 
rollover third-party specific deposits by its inclusion within Rule 
610B. Withdrawals and releases of third-party specific deposits are 
addressed in proposed Rule 610B(d), which is based on existing Rules 
613(b) and 613(f). Specifically, releases and withdrawals of third-
party specific deposits would be effected through DTC's EDP Pledge 
System, subject to the clearing member's margin requirement being met, 
the clearing member's approval of the release or withdrawal, and the 
absence of a ``hold'' instruction. In addition, proposed Rule 610B(g) 
seeks to provide a more detailed description of the effect of a release 
of a third-party specific deposit than existing Rule 613(i).
Proposed Rule 610C--Escrow Deposits
    Proposed Rule 610C, which is based on existing Rule 1801(a), would 
clarify the current rules concerning escrow deposits. For example, the 
introductory paragraph of proposed Rule 610C would provide a more 
detailed overview of a custodian bank's role in the escrow deposit 
program, specifying such a bank's role in effecting escrow deposits, 
and would describe eligible positions as they relate to escrow 
deposits. Proposed Rules 610C(a) through 610C(e) and proposed Rule 
610C(t) concern eligible collateral, the manner in which escrow 
deposits are to be held, and withdrawing an escrow deposit and rolling 
over an escrow deposit. These operational rules are based on: (1) 
Existing Rules 610(g) and 1801(b) and Sections 3.1, 4.1 and 5.1 of the 
EDA with respect to eligible collateral (proposed Rule 610C(a)); (2) 
existing Rules 610(j) and 1801(i), and Sections 10 and 20 of the EDA 
with respect to withdrawing an escrow deposit (proposed Rule 610C(d)); 
(3) existing Rule 613(i) with respect to the effect of a release or 
withdrawal of an escrow deposit (proposed Rule 610C(t)); and (4) 
existing Rule 613(a) and Section 9 of the EDA, with respect to 
rollovers of an escrow deposit (Proposed Rule 610C(e)).
    In order to provide additional transparency concerning 
representations that custodian banks are deemed to make when effecting 
an escrow deposit, OCC is proposing to move several contractual 
provisions of the EDA into proposed Rules 610C(i), 610C(j), and 
610C(k). Specifically: (1) Proposed Rule 610C(i), which concerns 
agreements and representations an escrow bank is deemed to have made 
when effecting an escrow deposit, is based upon Sections 1.6 and 4.6 of 
the EDA; (2) proposed Rule 610C(j), which concerns representations and 
warranties a custodian bank is deemed to make when giving an 
instruction to OCC and is based upon Sections 1.3, 1.4, 1.5, 1.6, 1.7 
and 1.8 of the EDA; and (3) proposed Rule 610C(k), which concerns 
agreements a custodian bank is deemed to make when giving an 
instruction to OCC and is based upon Sections 4, 5 and 21 of the EDA. 
Moreover, and in addition to locating deemed representations of 
custodian banks in the Rules, proposed Rules 610C(i), 610C(j) and 
610C(k) contain language that perfects OCC's security interest in 
escrow deposits under Section 9 of the UCC, and replace Sections 3.3, 
3.4, 4.3, 4.4, 5.3 and 5.4 of the EDA.\24\ OCC believes that by 
locating the above described provisions in the Rules, all users and 
potential users of OCC's escrow deposit program would better understand 
the relationship between OCC and custodian banks.
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    \24\ The primary UCC-related provisions in the proposed Rules 
include Rules 610C(j)(1), 610C(j)(9) and 610C(k)(1), which provide 
for the perfection of OCC's security interest in deposits consisting 
of securities under UCC Sections 9-106 and 9-314; Rules 610C(j)(1), 
610C(j)(10), and 610C(k)(2), which provide for the perfection of 
OCC's security interest in deposits consisting of cash under UCC 
Sections 9-104, 9-312 and 9-314; and Rules 610C(i)(1), 610C(i)(2) 
and 610C(j)(3), which support the first priority of OCC's security 
interest by preventing competing liens or claims.
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    Proposed Rules 610C(m), 610C(n), 610C(o) and 610C(p) concern the 
exercise of options positions collateralized by escrow deposits and the 
release of escrow deposits upon expiration. As with other parts of 
proposed Rule 610C, OCC believes that the location of proposed Rules 
610C(m), 610C(n), 610C(o) and 610C(p) provides all users and potential 
users of OCC's escrow deposit program with a more transparent 
understanding of how exercises of options positions affect escrow 
deposits as well as the manner in which OCC would release an escrow 
deposit upon the expiration of an options position. Similar to other 
parts of Rule 610C, proposed Rules 610C(m), 610C(n), 610C(o) and 
610C(p) are based on existing Rules of OCC as well as the EDA.\25\ 
Proposed Rule 610C(m)

[[Page 64543]]

concerns reports OCC provides regarding escrow deposits and is based 
upon existing Rules 613(d) and 613(e) as well as Sections 11, 12 and 13 
of the EDA. Proposed Rules 610C(n), 610C(o) and 610C(p), which concern 
assignments of exercises and releases of escrow deposits upon 
expiration is based upon existing Rules 613(f) and 1801(j) and Section 
14 of the EDA.
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    \25\ As discussed in Section 3 above, Rules 610C(n) and 610C(p) 
contain language that prevents the release of an escrow deposit in 
the event such deposit is subject to a hold instruction, which is a 
proposed enhancement to the escrow deposit program.
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Section 4: Transition Period
    For the administrative convenience of clearing members, custodian 
banks and customers, the existing Rules governing deposits in lieu of 
margin would remain in effect, in parallel with the proposed Rules, for 
a transition ending November 30, 2017. During this transition period, 
deposits in lieu of margin could be made under either the existing 
Rules or the proposed Rules. This will eliminate the need of all 
clearing members to provide new collateral on a single date in the 
absence of a transition period. After the transition period, proposed 
Rules 610, 610A, 610B and 610C would provide the sole means of making 
deposits in lieu of margin and existing Rules 613 and 1801 would be 
removed from the Rulebook. In connection with the transition, existing 
Rule 610 would be re-designated as 610T to indicate that it is a 
temporary rule, and would become ineffective and removed after the 
transition period. Furthermore, following the transition period, 
existing Rule 503, which addresses instructions that call for the 
payment of a premium by or to the clearing member for whose account the 
deposit is made, would be removed from the Rules because these 
instructions would no longer be permitted under the revised escrow 
deposit program since this aspect of the program has not been used for 
a number of years.\26\ In addition, Government securities would be 
given full market value under the revised escrow deposit program and 
therefore existing Rule 610(h) would be removed from the Rules after 
the transition period.
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    \26\ For the purposes of clarity, existing Rules 613(c), 613(g), 
613(h), 613(j) address the same topic and would be removed from 
OCC's Rulebook following the transition period without being 
migrated into a proposed Rule.
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Consistency With the Payment, Clearing and Settlement Supervision Act
    OCC believes that the proposed change concerning deposits in lieu 
of margin described above is consistent with Section 805(b)(1) of the 
Payment, Clearing and Settlement Supervision Act \27\ because the 
proposed change would promote robust risk management. OCC collects 
margin, or deposits in lieu of margin, in order to protect OCC and 
market participants from risks resulting from default of a clearing 
member. As described above, this proposed change would enhance OCC's 
control over and visibility into deposits in lieu of margin. By 
increasing OCC's transparency and control over deposits in lieu of 
margin the change would enable OCC to better ensure that it maintains 
adequate financial resources in the event of a default of a clearing 
member and thereby promote robust risk management.
---------------------------------------------------------------------------

    \27\ 12 U.S.C. 5464(b)(1).
---------------------------------------------------------------------------

    The proposed change also provides clarity to clearing members, 
their customers and potential users of OCC's escrow deposit program 
regarding the manner in which OCC would risk manage a clearing member 
default or the default of a customer of a clearing member using the 
escrow deposit program. By implementing changes that better describe 
OCC's risk management regime as it relates to use of the deposits of a 
clearing member, or customer of a clearing member, within the escrow 
deposit program, OCC would provide all users, or potential users, of 
its services with additional certainty and predictability concerning 
actions OCC would take in the event of a clearing member default that 
would, in turn, promote robust risk management by making it less likely 
that such a default would have a have a substantive impact on the 
ongoing operations of OCC or on the markets OCC serves.
Anticipated Effect on and Management of Risk
    OCC believes that the proposed change would reduce the nature and 
level of risk presented to OCC because OCC would enhance its control 
over and visibility into deposits in lieu of margin that are made to 
OCC and thereby enhance OCC's default management practices. As 
described above, OCC collects margin, or deposits in lieu of margin, in 
order to protect OCC and market participants from risks associated with 
the default of a clearing member and such deposits can be in cash or 
non-cash. The proposal would ensure that all non-cash deposits in lieu 
of margin would be pledged to OCC through DTC, which would enable OCC 
to (1) better validate its control over such deposits and (2) ensure 
that it is properly valuing such deposits in real-time. In addition, 
OCC would have greater visibility into deposits in lieu of margin 
consisting of cash, and Tri-Party Custodian Banks would contractually 
agree to only release such deposits in lieu of margin upon the approval 
of OCC. These processes would ensure that OCC could verify that 
deposits in lieu of margin sufficiently collateralize germane short 
options position(s) and OCC would be able to use its existing 
functionality with DTC to more quickly take possession of such deposits 
in the event of a clearing member default that would, in turn, protect 
OCC and market participants from risks associated with a clearing 
member default. Accordingly, OCC believes the proposed change would 
reduce the nature or level of risk presented to OCC.

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

    The proposed change may be implemented if the Commission does not 
object to the proposed change within 60 days of the later of (i) the 
date the proposed change was filed with the Commission or (ii) the date 
any additional information requested by the Commission is received. OCC 
shall not implement the proposed change if the Commission has any 
objection to the proposed change.
    The Commission may extend the period for review by an additional 60 
days if the proposed change raises novel or complex issues, subject to 
the Commission or the Board of Governors of the Federal Reserve System 
providing the clearing agency with prompt written notice of the 
extension. A proposed change may be implemented in less than 60 days 
from the date the advance notice is filed, or the date further 
information requested by the Commission is received, if the Commission 
notifies the clearing agency in writing that it does not object to the 
proposed change and authorizes the clearing agency to implement the 
proposed change on an earlier date, subject to any conditions imposed 
by the Commission.
    OCC shall post notice on its Web site of proposed changes that are 
implemented.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the advance 
notice is consistent with the Act. 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

[[Page 64544]]

     Send an email to rule-comments@sec.gov. Please include 
File Number SR-OCC-2016-802 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-2016-802. 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_16_802.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-
2016-802 and should be submitted on or before October 11, 2016.
    By the Commission.

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-22533 Filed 9-19-16; 8:45 am]
BILLING CODE 8011-01-P


