
[Federal Register Volume 81, Number 202 (Wednesday, October 19, 2016)]
[Notices]
[Pages 72129-72131]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-25234]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79094; File No. SR-OCC-2016-009]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change Concerning the Options Clearing 
Corporation's Escrow Deposit Program

October 13, 2016.
    On August 15, 2016, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2016-009 pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 
19b-4 thereunder.\2\ The proposed rule change was published for comment 
in the Federal Register on August 31, 2016.\3\ 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.
    \3\ Securities Exchange Act Release No. 78675 (August 25, 2016), 
81 FR 60099 (August 31, 2016) (SR-OCC-2016-009) (``Notice'').
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I. Description of the Proposed Rule Change

A. Background

    OCC is the sole clearing agency for the U.S. listed options markets 
and a systemically important financial market utility. In this role, 
OCC seeks to manage risks that could cause a financial loss or 
settlement disruption and, therefore, threaten the stability of the 
U.S. financial system, by collecting collateral to protect against 
potential losses stemming from the default of a clearing member or its 
customers through margin from its clearing members or from deposits in 
lieu of margin of clearing members' customers through OCC's escrow 
deposit program.
    According to OCC, users of its 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 will, in turn, 
deposit margin at OCC). When a customer of a clearing member makes a 
deposit in lieu of margin through OCC's escrow deposit program, the 
relevant positions are excluded from the clearing member's margin 
requirement at OCC. OCC states that 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.

B. The Proposed Rule Change

    The proposed rule change seeks to improve the resiliency of OCC's 
escrow deposit program by effecting the following changes. First, The 
proposed rule change would increase OCC's visibility into and control 
over collateral deposits made under the escrow deposit program. As 
described in the Notice, securities deposits in the escrow deposit 
program (``specific deposits'') are currently held at either the 
Depository Trust Company (``DTC'') or custodian banks, and cash 
deposits in the escrow deposit program (``escrow deposits'') are held 
at custodian banks. While OCC currently can verify the value of the 
securities deposited at DTC through DTC's systems, it lacks similar 
visibility into cash and securities held in custodian bank accounts, 
relying instead on the custodian banks to verify the value of such 
collateral. The proposed changes require securities in the escrow 
deposit program to be held at DTC, providing OCC with increased 
visibility into the collateral, as OCC will be able to view, validate, 
and value the collateral in real time and perform the controls 
currently performed by custodian banks. As stated in the Notice, banks 
participating in the escrow deposit program (``Tri-Party Custodian 
Banks'') will also 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 
without having to rely upon a third party to value or validate the 
existence of the collateral.
    Second, the proposed changes will provide more specificity 
concerning the manner in which OCC will take possession of collateral 
in OCC's escrow deposit program in the event of a clearing member or 
custodian bank default. As described in the Notice, proposed Rules 
610A(b), 610B(f), 610C(q), and 610C(r) will provide that in the event 
of a clearing member or custodian bank default, OCC will 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. Similarly, proposed Rules 610C(q) and 610C(r) 
will give OCC 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. Further, Rule 1106(b)(2) will 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.
    Third, the proposed changes will clarify clearing members' rights 
to collateral in the escrow deposit program in the event of a customer 
default to the clearing member. According to the Notice, Proposed Rules 
610B(c) and 610C(f) will 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, with the 
clearing member's right subordinate to OCC's interest. 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, will provide that, in the event of a customer default to a 
clearing member, the clearing member will have the right to request a 
``hold'' on a deposit, which will prevent the withdrawal of deposited 
securities or cash by a custodian bank or the release of a deposit that 
will otherwise occur in the ordinary course. OCC states that placing 
the ``hold'' instruction gives a clearing member 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. OCC believes that 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 will be a significant enhancement to the current escrow 
deposit program.
    Fourth, the proposed changes will 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 changes, all securities collateral in OCC's escrow deposit 
program will be held at DTC, and custodian banks will only be allowed 
to hold cash collateral.
    Fifth, the proposed rule change will consolidate all of the rules 
concerning the escrow deposit program, including the provisions of the 
Escrow Deposit Agreement (``EDA''), which also contains substantive 
provisions governing the program, into Rules 610, 610A, 610B and 610C. 
OCC believes that consolidating the many rules governing the escrow 
deposit program into a single

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location will 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. As part of the 
consolidation efforts, the proposed rule change would also rename 
certain existing terminologies used in the escrow deposit program.\4\
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    \4\ See Notice, supra note 3, 81 FR at 60100.
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    Finally, OCC will eliminate the EDA and replace it with a 
streamlined agreement entitled the ``Participating Escrow Bank 
Agreement.'' The Participating Escrow Bank Agreement will provide that 
custodian banks are subject to all terms of the rules governing the 
revised escrow deposit program, as they may be amended from time to 
time.\5\ The Participating Escrow Bank Agreement will contain 
eligibility requirements for custodian banks, including representations 
regarding the custodian bank's Tier 1 Capital, and provide OCC with 
express representations concerning the bank's authority to enter into 
the Participating Escrow Bank Agreement.
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    \5\ 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. 
OCC states that, 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.
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    Additionally, Proposed Rule 610C(b) will 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. While cash collateral 
pledged in the escrow deposit program will continue to be facilitated 
through existing interfaces, OCC states that pledges will be required 
to be made in the customer's account at the Tri-Party Custodian Bank. 
OCC states that the Tri-Party Agreement will govern the customer's use 
of cash in the program, confirm 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 cause customers of clearing 
members to be subject to all terms of the Rules governing the revised 
escrow deposit program. Each custodian bank entering into the Tri-Party 
Agreement will also agree to follow the directions of OCC with respect 
to cash escrow deposits without further consent by the customer.

II. Discussion and Commission Findings

    Exchange Act Section 19(b)(2)(C) \6\ 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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    \6\ 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) of the Exchange Act, which requires, among 
other things, that the rules of a clearing agency assure the 
safeguarding of securities and funds that are in the custody or control 
of the clearing agency or for which it is responsible.\7\ As described 
above, the proposed rule change will enhance OCC's ability to validate 
and value escrow deposit program deposits in real time and enhance its 
ability to expeditiously take possession of such deposits in the event 
of a default. These enhancements will enable OCC to better ensure that 
it monitors and maintains adequate financial resources in the event of 
a clearing member default and thereby assure the safeguarding of 
securities and funds in OCC's custody or control or for which it is 
responsible.
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    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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    Additionally, the Commission finds that the proposed rule change is 
consistent with Exchange Act Rules 17Ad-22(d)(1), (3), and (11). 
Exchange Act Rule 17Ad-22(d)(1) requires clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide a well-founded, transparent, 
and enforceable legal framework for each aspect of its activities in 
all relevant jurisdictions.\8\ Through the proposed change, OCC will 
provide clarity to clearing members, their customers, and potential 
users of OCC's escrow deposit program regarding the operations of the 
escrow deposit program and the rights of OCC, clearing members and 
customers upon a clearing member or customer default. For example, the 
proposed change will better codify OCC's and clearing members' rights 
to collateral in the escrow deposit program the event of a clearing 
member or customer default and provide greater transparency regarding 
the operational steps involved in taking possession of such collateral. 
Moreover, consolidating the rules governing the escrow deposit program 
and terms previously located in the EDA into a single location will 
enhance the transparency of the applicable rules. As such, the 
Commission believes the proposed change is consistent with Exchange Act 
Rule 17Ad-22(d)(1).\9\
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    \8\ 17 CFR 240.17Ad-22(d)(1).
    \9\ Id.
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    In addition, the Commission believes that the proposed change is 
consistent with Exchange Act Rule 17Ad-22(d)(3), which requires 
clearing agencies to, among other things, establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to hold assets in a manner that minimizes risk of loss or 
delay in its access to them.\10\ As described above, all non-cash 
collateral in the escrow deposit program will be held at DTC, allowing 
OCC to validate and value collateral in real time and quickly obtain 
possession of deposited securities in an event of default without 
involving custodian banks by issuing a transfer instruction through 
DTC's systems. The proposed change will also codify OCC's right to take 
possession of cash collateral within an escrow account upon a clearing 
member or custodian bank default and provide OCC with online view 
access to each customer's cash account at the custodian bank. Together, 
these changes will allow OCC to monitor the adequacy of collateral in 
the escrow deposit program and be able to more quickly take possession 
of such collateral in the event of a clearing member default, which 
will, thereby, reduce potential losses to OCC, other clearing members 
and market participants.
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    \10\ 17 CFR 240.17Ad-22(d)(3).
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    Finally, the Commission believes that the proposed change is 
consistent with Exchange Act Rule 17Ad-22(d)(11), which requires 
clearing agencies to, among other things, establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to make key aspects of their default procedures publicly 
available.\11\ The Commission believes that the proposed change is 
consistent with Rule 17Ad-22(d)(11) because it will incorporate the 
substantive terms of the escrow deposit program, and specifically the 
rules concerning default management, into OCC's Rules, which are 
publicly available on OCC's Web site, rather than in private 
agreements.
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    \11\ 17 CFR 240.17Ad-22(d)(11).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act, and in 
particular, with the requirements of Section 17A of the

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Act \12\ and the rules and regulations thereunder.
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    \12\ 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 
Exchange Act,\13\ that the proposed rule change (SR-OCC-2016-009) be, 
and it hereby is, approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-25234 Filed 10-18-16; 8:45 am]
 BILLING CODE 8011-01-P


