
[Federal Register Volume 82, Number 62 (Monday, April 3, 2017)]
[Notices]
[Pages 16260-16268]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-06443]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80323; File No. SR-OCC-2017-802]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Advance Notice Concerning Enhancements to OCC's 
Stock Loan Programs

March 28, 2017.
    Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, entitled Payment, Clearing 
and Settlement Supervision Act of 2010 (``Payment, Clearing and 
Settlement Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) under the 
Securities Exchange Act of 1934 (``Act''),\2\ notice is hereby given 
that on February 28, 2017, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') an 
advance notice as described in Items I and II below, which Items have 
been prepared by OCC. The Commission is publishing this notice to 
solicit comments on the advance notice from interested persons.
---------------------------------------------------------------------------

    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
---------------------------------------------------------------------------

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

    This advance notice concerns a number of proposed enhancements to 
OCC's Stock Loan/Hedge Program (``Hedge Program'') and Market Loan 
Program (collectively, the ``Stock Loan Programs''). The proposed 
changes would, among other things: (1) Require Clearing Members to have 
robust processes in place to reconcile open interest in the Stock Loan 
Programs at least once per stock loan business day; (2) provide further 
clarity and certainty regarding the formal record of stock loan 
positions being guaranteed by OCC at any given time (``golden copy'' 
rules); (3) further clarify that stock loan positions at OCC are not 
terminated until the records of OCC reflect the termination of such 
stock loan; (4) provide a specific timeframe in which Clearing Members 
in the Stock Loan Programs must buy-in or sell-out of stock loan 
positions in the event of another Hedge or Market Loan Clearing Member 
suspension (as applicable); (5) provide OCC with the authority to 
withdraw from a Clearing Member's account the value of any difference 
between the price reported by a Clearing Member instructed to execute a 
buy-in or sell-out of loaned stock as a result of another Clearing 
Member suspension and the price that OCC determines to be reasonable; 
and (6) allow OCC to close out the Matched-Book Positions of suspended 
Hedge Clearing Members through the termination by offset and ``re-
matching'' of such positions without requiring the transfer of 
securities against the payment of settlement prices as currently 
required under OCC's rules.
    All terms with initial capitalization not defined herein have the 
same meaning as set forth in OCC's By-Laws and Rules.\3\
---------------------------------------------------------------------------

    \3\ OCC's By-Laws and Rules can be found on OCC's public Web 
site: http://optionsclearing.com/about/publications/bylaws.jsp.
---------------------------------------------------------------------------

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the advance notice and 
discussed any comments it received on the advance notice. The text of 
these statements may be examined at the places specified in Item IV 
below. OCC has prepared summaries, set forth in sections A and B below, 
of the most significant aspects of these statements.

(A) Clearing Agency's Statement on Comments on the Advance Notice 
Received From Members, Participants or Others

    Written comments were not and are not intended to be solicited with 
respect to the proposed changes and none have been received. OCC has, 
however, discussed the re-matching in suspension proposal with its 
Clearing Members at numerous member outreach forums and meetings. While 
members were generally supportive of the proposal, some members did 
raise concerns over the possibility of being re-matched with a 
counterparty with which the Clearing Member does not have an existing 
securities lending relationship. For example, some Clearing Members 
noted that they could be re-matched with counterparties with which they 
do not have an existing Master Securities Lending Agreement 
(``MSLA''),\4\ which dictates all of the terms of the stock loan not 
governed by OCC's By-Laws and Rules (e.g., Mark-to-Market percentage 
and rounding preferences). In addition, re-matched counterparties that 
do not have an existing securities lending relationship would need to 
make operational changes in order to make deliveries to their new 
counterparty in the event of a termination or buy-in to close out the 
loan.
---------------------------------------------------------------------------

    \4\ Commission Staff received OCC's consent to insert ``Master 
Securities Lending Agreement'' before the acronym ``MSLA'' pursuant 
to a telephone conversation on March [6], 2017.
---------------------------------------------------------------------------

    OCC carefully considered this member feedback in the development of 
its proposal, and in order to mitigate these concerns, the proposed re-
matching in suspension rules would require OCC to make reasonable 
efforts to re-match Hedge Clearing Members that maintain between them 
current executed MSLAs. Specifically, under the proposed changes, OCC 
would use a matching algorithm to re-match stock loan and stock borrow 
positions in order of priority based on the largest available stock 
borrow or stock loan positions, as applicable, for the selected 
Eligible Stock for which a MSLA exists between the Borrowing and 
Lending Clearing Members to ensure that members with existing 
securities lending relationships are re-matched to the greatest extent 
possible. Even in light of these concerns, however, Clearing Members 
generally agreed that it is preferable to maintain a stock loan with 
another counterparty rather than attempting to close out stock loan 
positions in the event of a Hedge Clearing Member suspension as in many 
cases (and particularly in stressed market conditions) it could be 
difficult for the borrower to return the securities to the lender since 
the securities would likely be being used for other purposes.

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

Purpose of the Proposed Change
    OCC proposes a number of amendments to its By-Laws and Rules 
designed to enhance the overall resilience of its Stock Loan/Hedge 
Program (``Hedge Program'') and Market Loan Program (collectively, the 
``Stock Loan Programs''). Specifically, the proposed changes would 
improve risk management in the Stock Loan Programs by, among other 
things: (1) Requiring Clearing Members to have robust processes in 
place to reconcile open interest in the Stock Loan Programs at least 
once per stock loan business day; (2) providing further clarity and 
certainty regarding the formal record of stock loan positions being 
guaranteed by OCC at any given time (``golden copy'' rules); (3) 
further

[[Page 16261]]

clarifying that stock loan positions at OCC are not terminated until 
the records of OCC reflect the termination of such stock loan; (4) 
providing a specific timeframe in which Clearing Members in the Stock 
Loan Programs must buy-in or sell-out of stock loan positions in the 
event of another Hedge or Market Loan Clearing Member suspension as 
applicable); (5) providing OCC with the authority to withdraw from a 
Clearing Member's account the value of any difference between the price 
reported by a Clearing Member instructed to execute a buy-in or sell-
out of loaned stock as a result of another Clearing Member suspension 
and the price that OCC determines to be reasonable; and (6) allowing 
OCC to close out the Matched-Book Positions of suspended Hedge Clearing 
Members through the termination by offset and re-matching of such 
positions without requiring the transfer of securities against the 
payment of settlement prices as currently required under OCC's rules.
    The proposed amendments to the By-Laws and Rules are discussed in 
more detail below.
Background
    OCC currently operates two Stock Loan Programs: The Hedge Program 
and the Market Loan Program. In the Hedge Program, OCC acts as the 
principal counterparty for stock loans that are executed bilaterally 
outside of OCC and sent to OCC for clearance and settlement. In the 
case of a Hedge Loan, prospective Lending and Borrowing Clearing 
Members identify each other (independent of OCC), agree to bilaterally 
negotiated terms of the Hedge Loan, and then send the details of the 
stock loan to the Depository with a certain ``reason code,'' \5\ which 
designates the stock loan as a Hedge Loan for guaranty and clearance at 
OCC. The Lending Clearing Member then instructs the Depository to 
transfer a specified number of shares of Eligible Stock to the account 
of the Borrowing Clearing Member, and the Borrowing Clearing Member 
instructs the Depository to transfer the appropriate amount of cash 
collateral to the account of the Lending Clearing Member.
---------------------------------------------------------------------------

    \5\ Unique reason codes were created by the Depository for 
Clearing Members to designate stock loan transactions intended to be 
sent to OCC for novation and guarantee.
---------------------------------------------------------------------------

    In the Market Loan Program, stock loans are initiated through the 
matching of bids and offers that are either agreed upon by the Market 
Loan Clearing Members or matched anonymously through a Loan Market. In 
order to initiate a Market Loan, the Loan Market sends a matched 
transaction to OCC, which in turn sends two separate but linked 
settlement instructions to the Depository to effect the movement of 
Eligible Stock and cash collateral between the accounts of the Market 
Loan Clearing Members through OCC's account at the Depository.
    Regardless of whether a transaction is initiated under the Hedge 
Program or Market Loan Program, OCC novates the transaction and becomes 
the lender to the Borrowing Clearing Member and the borrower to the 
Lending Clearing Member after it accepts an end-of-day report from the 
Depository showing completed Stock Loans.\6\ As the principal 
counterparty to the Borrowing and Lending Clearing Members, OCC 
guarantees the return of the full value of cash collateral to a 
Borrowing Clearing Member and guarantees the return of the Loaned Stock 
(or value of that Loaned Stock) to the Lending Clearing Member.\7\ 
After novation, as part of the guaranty, OCC makes Mark-to-Market 
Payments for all cleared stock loans on a daily basis to collateralize 
all loans to the negotiated levels.\8\ Settlements generally are 
combined and netted against other OCC settlement obligations in a 
Clearing Member's account, including trade premiums and margin 
deficits. Clearing Member open positions in the Stock Loan Programs are 
factored into the Clearing Member's overall Margin \9\ and Clearing 
Fund contribution requirements.\10\
---------------------------------------------------------------------------

    \6\ See OCC Rules 2202(b) and 2202A(b).
    \7\ Under the Market Loan Program, OCC also provides a limited 
guaranty of dividend and rebate payments.
    \8\ Mark-to-Market Payments are based on the value of the loaned 
securities and made between Clearing Members using OCC's cash 
settlement system. In the Hedge Program, the percentage of the value 
of the loaned securities, either 100% or 102%, as well as the 
preferred Mark-to-Market rounding, are dependent upon the terms of 
the Master Securities Loan Agreement (``MSLA'') between the two 
Hedge Clearing Member parties to the transaction. In the Market Loan 
Program, all Market Loans are collateralized to 102%.
    \9\ See OCC Rules 601 and 2203.
    \10\ See OCC Rule 1001.
---------------------------------------------------------------------------

Stock Loan Position Records
    OCC's Rules currently provide that termination of a Hedge Loan is 
not complete until either: (1) The Depository makes final entries on 
its records reflecting that the stock loan position has been unwound 
and OCC receives notice thereof; or (2) the counterparties to the 
transaction certify to OCC that the stock loan is terminated and the 
settlement price has been transferred between them.\11\ Under this 
process, it is possible for a Hedge Clearing Member to close an open 
Hedge Loan but fail to submit the necessary reason codes to the 
Depository to effect the termination of the stock loan position at OCC, 
resulting in conflicting records between OCC and its Clearing Members.
---------------------------------------------------------------------------

    \11\ See OCC Rule 2209(a) which describes the requirements for 
the termination of a stock loan transaction.
---------------------------------------------------------------------------

    Market Loans are typically terminated by a Market Loan Clearing 
Member providing notice to the relevant Loan Market calling for the 
recall or return of a specified quantity of the Loaned Stock. The Loan 
Market then sends details of the matched return/recall transaction to 
OCC, which validates the transaction and sends a pair of delivery 
orders to the Depository in connection with the recall/return. However, 
in certain circumstances where a Market Loan Clearing Member fails to 
return the specified quantity of Loaned Stock or to pay the applicable 
settlement price for a Loaned Stock, the counterparty Clearing Member 
may choose to execute a buy-in or sell-out of the Loaned Stock on its 
own.\12\ The Market Loan Clearing Member is then required to provide 
notice to the Loan Market of the buy-in or sell-out after execution is 
complete. This limited scenario could also give rise to the risk that a 
Market Loan Clearing Member has terminated a stock loan transaction but 
failed to provide the necessary report to the Loan Market for 
notification to OCC.
---------------------------------------------------------------------------

    \12\ See OCC Rule 2209A(b)-(c).
---------------------------------------------------------------------------

    When either of the above scenarios occur, the Clearing Member 
remains obligated to effect the required settlements, including, for 
example, making the associated Mark-to-Market Payments, until the stock 
loan position is terminated at OCC. Moreover, in these scenarios, a 
Clearing Member may continue to receive margin benefits on the closed 
stock loan until the appropriate trade corrections are made at OCC. 
Such scenarios could give rise to operational and/or credit risk if a 
Clearing Member's expectations of its obligations for certain stock 
loan positions are inconsistent with the Clearing Member's formal 
obligations for such positions on the records of OCC (e.g., 
requirements to post margin or make mark-to-market settlements for 
positions that have already been closed).
Default Management in the Stock Loan Programs
    Currently, in the event a Stock Loan Program Clearing Member is 
suspended, the suspended Clearing Member's open stock loan positions 
are closed by instructing the respective non-suspended Clearing Member 
counterparties (within either the Hedge

[[Page 16262]]

Program or Market Loan Program, as applicable) to buy-in or sell-out 
the Eligible Stock.\13\ The reported execution price of the buy-in or 
sell-out is used as the settlement price to facilitate the final 
marking price between the non-suspended Clearing Member and the 
liquidating settlement account of the suspended Clearing Member. This 
process has significant benefits as it distributes the liquidity 
demands across multiple counterparties and aligns the liquidity demands 
necessary to facilitate an unwind with the Clearing Member currently in 
possession of the Collateral. However, this approach effectively 
utilizes each counterparty to the suspended Clearing Member as 
independent ``liquidating agents,'' making the process prone to greater 
execution risk due to the number of counterparties effecting the buy-
in/sell-out transactions, which is further compounded by the manually-
intensive nature of the process. In the event a large Hedge or Market 
Loan Clearing Member is suspended, the process could become more 
susceptible to errors given the numerous manual steps and the quantity 
of positions that must be closed. Moreover, any delay in the buy-in/
sell-out process could result in increased credit risk to OCC as the 
close out process for stock loans could fail to align with OCC's margin 
and liquidation period assumptions of a two-day close out process 
(which is applicable to all products without differentiation). For 
example, OCC may be exposed to credit risk if the price paid or 
received for the buy-in or sell-out of the Eligible Stock varies from 
the price at which OCC last collected a Mark-to-Market Payment from the 
defaulter and that price differential exceeds the amount of margin on 
deposit for such positions.
---------------------------------------------------------------------------

    \13\ See OCC Rules 2211 and 2211A.
---------------------------------------------------------------------------

    Furthermore, and as described in more detail below, because OCC 
maintains inventory in the Hedge Program on a bilateral basis (i.e., 
maintains the borrower and lender to a given transaction) if a 
suspended Hedge Clearing Member maintains Matched-Book Positions,\14\ 
logistically OCC would be required to recall the loan and return the 
borrowed shares to unwind the Matched-Book positions. This results in a 
potential exposure to OCC, not accounted for by its margin model,\15\ 
related to the potential price dislocation between the recall and 
return transactions.
---------------------------------------------------------------------------

    \14\ Matched-Book Positions are Hedge Loan positions in which a 
single Hedge Clearing Member borrows Eligible Stock from a Lending 
Clearing Member and lends an equal or lesser amount of the same 
Eligible Stock to a Borrowing Clearing Member. Previously, OCC 
adopted a proposed rule change to allow for the voluntary 
termination by offset and re-matching of Matched-Book Positions, 
outside of the suspension scenario, subject to the agreement of all 
affected Hedge Clearing Members. See Securities Exchange Act Release 
No. 34-77415 (March 22, 2016), 81 FR 17231 (March 28, 2016) (SR-OCC-
2016-006).
    \15\ With Matched-Book Positions, a member is simultaneously 
borrowing and lending the same securities (and quantity), which are 
marked to the same price. OCC's margin process recognizes this and 
currently nets loans and borrows in the same security prior to 
calculating exposure, resulting in no margin on a perfectly matched 
positions.
---------------------------------------------------------------------------

Proposed Changes to the By-Laws and Rules
    OCC is proposing a number of rule changes to provide more clarity, 
transparency, and certainty around the status of stock loan positions 
being cleared and guaranteed at OCC. In addition, OCC is proposing 
enhancements to its default management process for the Stock Loan 
Programs to mitigate the risks associated with the buy-in/sell-out and 
recall/return processes as described above. The proposed changes are 
discussed in more detail below.
1. Trade Balancing
    A key attribute of managing risk in the Stock Loan Programs is 
ensuring that OCC and its Clearing Members have identical records of 
open and closed positions to ensure all parties are aware of their 
obligations with respect to those positions. As described above, a 
stock loan transaction may be terminated by a Hedge Clearing Member 
(and, in more limited circumstances, a Market Loan Clearing Member) 
without OCC being made aware of the termination if the correct reason 
codes are not used in connection with stock loan activity at the 
Depository.\16\ Such a discrepancy between the records of OCC and its 
Clearing Members could give rise to operational and/or credit risk if a 
Clearing Member's expectations of its obligations for certain stock 
loan positions are inconsistent with the Clearing Member's formal 
obligations for such positions on the records of OCC (see discussion of 
the proposed ``golden copy'' rules below).
---------------------------------------------------------------------------

    \16\ See supra note 5.
---------------------------------------------------------------------------

    In order to minimize the potential dislocation between the records 
of OCC and its Clearing Members and mitigate the risks that may arise 
from such out trades, OCC is proposing to amend Rules 2205 and 2205A to 
require that Hedge and Market Loan Clearing Members, respectively, have 
adequate policies and procedures in place to perform a reconciliation 
of stock loan position balances between the records of the Clearing 
Member and any report or reports provided by OCC at least once per 
stock loan business day and resolve any discrepancies based on such 
report(s) for a given stock loan business day by 9:30 a.m. Central Time 
on the following stock loan business day. The proposed change would 
therefore ensure that OCC and its Clearing Members have an accurate and 
consistent understanding of each member's open stock loan positions at 
OCC and the obligations associated therewith.
2. Golden Copy Rules
    OCC also proposes clarifying amendments to Articles XXI and XXIA of 
its By-Laws to emphasize that the records of OCC are the official 
record of open and closed stock loan transactions in the Stock Loan 
Programs and that Clearing Members remain liable for all obligations 
related to open stock loan positions as reflected in the records of 
OCC. In particular, OCC proposes to amend Article XXI, Sections 3 and 4 
(relating to the agreements of Borrowing and Lending Clearing Members 
in the Hedge Program) and Article XXIA, Sections 3 and 4 (relating to 
the agreements of Borrowing and Lending Clearing Members in the Market 
Loan Program) to explicitly state that, in the event of a conflict 
between the records of OCC and any records generated by Borrowing or 
Lending Clearing Members regarding stock borrow or stock loan 
positions, the records generated by OCC will prevail and the Borrowing 
or Lending Clearing Member shall remain liable for all obligations 
associated with such stock borrow or stock loan positions maintained on 
the records of OCC. The proposed amendment would provide additional 
transparency and certainty to Clearing Members regarding OCC's 
treatment of its own records as the formal ``golden copy'' record of 
stock loan positions at OCC.
3. Termination Rules
    OCC also proposes amendments to Rules 2209 and 2209A to provide 
that the termination of Hedge Loans and Market Loans, respectively, 
shall be deemed to be complete when the records of OCC reflect the 
termination of such stock loans. The proposed change is intended to 
clarify and reinforce that OCC's records of stock loan positions, and 
in particular, the termination of stock loan positions, are the formal 
record of cleared stock loan positions at OCC. OCC believes the 
proposed change will provide additional clarity and transparency around 
the obligations of OCC and its Clearing Members in the Stock Loan 
Programs, particularly

[[Page 16263]]

where discrepancies may arise between the records of OCC and its 
Clearing Members concerning terminated stock loans.
4. Buy-In and Sell-Out Timeframe in Suspension
    In order to mitigate the risks involved in the existing buy-in/
sell-out process, as described in detail above, and enhance the 
resiliency of the Stock Loan Programs, OCC proposes to amend Rules 2211 
and 2211A to require Lending Clearing Members or Borrowing Clearing 
Members that are instructed to buy-in or sell-out in connection with a 
Hedge or Market Loan Clearing Member suspension to execute such 
transactions by the close of the stock loan business day after the 
receipt of such instruction by OCC.\17\ If the instructed Clearing 
Member fails to execute the buy-in or sell-out transaction within this 
timeframe, OCC would terminate the Stock Loan and effect Settlement 
based upon the Marking Price used at the close of business on the stock 
loan business day after the original instruction was made by OCC.
---------------------------------------------------------------------------

    \17\ In the situation of a buy-in, the Lending Clearing Member 
would be required to use the cash collateral to buy-in the 
securities. OCC would not be responsible for funding the buy-in.
---------------------------------------------------------------------------

    Additionally, OCC proposes a conforming change to Rules 2211 and 
2211A to eliminate the requirement that Hedge or Market Loan Clearing 
Members executing a buy-in or sell-out must be prepared to defend the 
reasonableness of the timing of such transaction as all instructed 
Clearing Members would be required to execute the buy-in/sell-out 
within the newly specified two business day timeframe or be subject to 
automatic termination and settlement under the proposed changes. OCC 
also proposes conforming changes to delete language stating that OCC, 
in its discretion and upon notice to the Lending Clearing Member or the 
independent broker, may fix a cash settlement value for the quantity of 
the Loaned Stock not returned to the Lending Clearing Member as this 
rule text would no longer be necessary under the proposed two-day buy-
in/sell-out rules described above.
    OCC believes the proposed changes will help to mitigate potential 
credit risks that may be associated with a delay in a Hedge or Market 
Loan Clearing Member effecting buy-in or sell-out transactions as it 
would ensure that positions are closed out--either through the buy-in/
sell-out of stock loans by the instructed Hedge or Market Loan Clearing 
Members or by the automatic termination and settlement of stock loans 
by OCC--in a time period consistent with OCC's margin assumptions and 
thereby reducing the risk that the price paid or received for the buy-
in or sell-out of the Eligible Stock varies greatly from the price at 
which OCC last collected a Mark-to-Market Payment from the defaulter.
5. Authority To Enforce Reasonable Prices in the Buy-In/Sell-Out 
Process
    Under existing Rules 2211 and 2211A, after a buy-in or sell-out 
occurs in a Clearing Member suspension scenario, OCC validates the 
prices reported by the Clearing Members to determine whether or not the 
price utilized to buy-in or sell-out is reasonable given the market 
prices during the two stock loan business day window. Clearing Members 
executing the buy-in or sell-out must be prepared to defend the 
reasonableness of the price, transactional costs, or cash settlement 
value of the transaction. OCC is proposing to amend Rules 2211 and 
2211A to provide OCC with the authority to withdraw from the Clearing 
Member's account the value of any difference between the price reported 
by the Clearing Member executing the buy-in or sell-out, as applicable, 
and the price that OCC, in its sole discretion, determines to be 
reasonable. In addition, OCC proposes to amend Rules 2211 and 2211A to 
provide further clarity that a Clearing Member may defend the 
reasonableness of a reported price or cash settlement value of a buy-in 
or sell-out by demonstrating that it fell within the trading range of 
the Eligible Stock on that day. OCC believes this proposed change will 
further incentivize Clearing Members to execute a buy-in or sell-out at 
a reasonable price in accordance with the newly implemented two-day 
close out timeframe.
6. Hedge Program Re-Matching in Suspension
    A significant portion of the activity in OCC's Hedge Program 
relates to what is often referred to as matched-book activity where a 
Hedge Clearing Member maintains in an account a stock loan position for 
a specified number of shares of an Eligible Stock reflecting a stock 
lending transaction with one Hedge Clearing Member (the Borrowing 
Clearing Member) and also maintains in that same account a stock borrow 
position for the same number, or lesser number, of shares of the same 
Eligible Stock with another Hedge Clearing Member (the Lending Clearing 
Member) (such positions being Matched-Book Positions). From a daily 
mark-to-market settlement perspective, there are typically no 
obligations related to Matched-Book Positions because the member is 
simultaneously borrowing and lending the same securities (and 
quantity), which are marked to the same price. OCC's margin process 
recognizes this and currently nets loans and borrows in the same 
security prior to calculating exposure, resulting in no margin on a 
perfectly matched position.
    As discussed above, in the event of a Hedge Clearing Member 
suspension, OCC terminates the suspended Hedge Clearing Member's stock 
loans in accordance with the buy-in and sell-out process described in 
Rule 2211.\18\ Due to the nature of Matched-Book Positions, OCC would 
be required to both recall the loan and return the borrowed shares to 
completely unwind the Matched-Book Positions. In addition to potential 
delays in the buy-in/sell-out process, this process also exposes OCC to 
potential price dislocation between the buy-in and sell-out 
transactions.
---------------------------------------------------------------------------

    \18\ Rule 2211 also allows OCC, at its discretion, to instruct 
an independent broker, to buy in or sell out, as applicable, the 
Loaned Stock. In the case where the Lending Clearing Member or the 
independent broker fails to execute a buy-in or if, for any reason, 
effecting a buy-in is not permitted, OCC, in its discretion and upon 
notice to the Lending Clearing Member or the independent broker, may 
fix a cash settlement value for the quantity of the Loaned Stock not 
returned to the Lending Clearing Member. See OCC Rule 2211.
---------------------------------------------------------------------------

    In addition, to the extent Borrowing and Lending Clearing Member 
counterparties to the suspended Hedge Clearing Member's Matched-Book 
Positions wish to maintain equivalent stock loan positions at OCC, 
those Borrowing and Lending Clearing Members would be required to 
initiate new stock loans to replace the closed out positions. 
Throughout this process of terminating and reestablishing stock loan 
positions, a number of operational steps are required to facilitate and 
settle those transactions, which introduce the potential for market 
disruption. The successful initiation of new replacement stock loans 
for the Borrowing or Lending Clearing Members could be subject to 
disruption by operational or execution risks with the result that one 
``leg'' of the initiating transaction would fail, resulting in a 
temporary imbalance of the previously ``matched-book'' position. 
Moreover, the Borrowing and Lending Clearing Members lose the 
protections afforded by OCC's guaranty of their stock loan positions 
until the newly initiated stock loan transactions have been accepted, 
novated, and guaranteed by OCC.
    OCC is proposing new Rule 2212 to allow OCC to perform an orderly 
close out of a suspended Hedge Clearing

[[Page 16264]]

Member's Matched-Book Positions through the termination by offset and 
re-matching \19\ of such positions, without requiring the transfer of 
securities against the payment of settlement prices as currently 
required under OCC Rule 2211. OCC believes the proposed changes will 
strengthen the risk management processes in place at OCC by mitigating 
the risks involved in the buy-in/sell-out of Matched-Book Positions as 
well as provide the overall marketplace served by the Hedge Program 
with more stability.\20\
---------------------------------------------------------------------------

    \19\ In order to effect the re-matching of stock loan and borrow 
positions at OCC, OCC would simultaneously close out the existing 
positions of the Matched-Book Lending and Borrowing Clearing Members 
and create new stock loan and borrow positions between the re-
matched members and OCC. As a result, the re-matched positions would 
maintain the benefits of OCC's guaranty throughout the re-matching 
process and would not require the re-matched Hedge Clearing Members 
to issue instructions to the Depository to terminate or initiate 
Stock Loans and transfer securities against the payment of 
Collateral.
    \20\ As further described in Item 5, OCC discussed the re-
matching in suspension proposal with its Clearing Members at 
numerous member outreach forums and meetings. While members were 
generally supportive of the proposal, some members did raise 
concerns over the possibility of being re-matched with a 
counterparty with which the Clearing Member does not have an 
existing securities lending relationship. Specifically, Clearing 
Members noted that the proposal could result in a Hedge Clearing 
Member being re-matched with a counterparty with which it does not 
have an existing MSLA, which dictates all of the terms of the stock 
loan not governed by OCC's By-Laws and Rules (e.g., Mark-to-Market 
percentage and rounding preferences), and could require operational 
changes in order to make deliveries to their new counterparty in the 
event of a termination or buy-in to close out the loan. OCC would 
mitigate these concerns by prioritizing the re-matching of Hedge 
Clearing Members that maintain between them current executed MSLAs, 
as discussed in more detail below. Moreover, even in light of these 
concerns, Clearing Members generally agreed that it is preferable to 
maintain a stock loan with another counterparty rather than 
attempting to close out stock loan positions in the event of a Hedge 
Clearing Member suspension as in many cases (and particularly in 
stressed market conditions) it could be difficult for the borrower 
to return the securities to the lender since the securities would 
likely be being used for other purposes.
---------------------------------------------------------------------------

    Proposed Rule 2212(a) would provide that, in the event that a 
suspended Hedge Clearing Member has Matched-Book Positions within the 
Hedge Program, OCC will, upon notice to affected Hedge Clearing 
Members, close out the suspended Hedge Clearing Member's Matched-Book 
Positions to the greatest extent possible by (i) the termination by 
offset of stock loan and stock borrow positions that are Matched-Book 
Positions in the suspended Hedge Clearing Member's account(s) and (ii) 
OCC's re-matching of stock borrow positions for the same number of 
shares in the same Eligible Stock maintained in a designated account of 
a Matched-Book Borrowing Clearing Member against a stock lending 
position for the same number of shares in the same Eligible Stock 
maintained in a designated account of a Matched-Book Lending Clearing 
Member.
    Under proposed Rule 2212(b), the Matched-Book Borrowing Clearing 
Member and Matched-Book Lending Clearing Member would not be required 
to issue instructions to the Depository in accordance with Rules 
2202(a) and 2208(a) to terminate the relevant stock loan and stock 
borrow positions or to initiate new stock loan transactions to 
reestablish such positions, as the affected positions would be re-
matched without requiring the transfer of securities against the 
payment of settlement prices.
    Proposed Rule 2212(c) provides that OCC shall make reasonable 
efforts to re-match Matched-Book Borrowing Clearing Members with 
Matched-Book Lending Clearing Members that maintain between them 
current executed MSLAs based on information provided by Hedge Clearing 
Members to the Corporation on an ongoing basis. In connection with the 
proposed changes, OCC will add functionality to its ENCORE clearing 
system to allow Hedge Clearing Members to add and remove records of 
MSLA agreements between themselves and other Hedge Clearing Members. 
OCC would be entitled to rely on, and would have no responsibility to 
verify, the MSLA records provided by Hedge Clearing Members and on 
record as of the time of re-matching.
    Under proposed Rule 2212(d), the termination by offset and re-
matching of positions would be done using a matching algorithm in which 
the Matched-Book Positions of the suspended Hedge Clearing Member are 
first terminated by offset and then affected Matched-Book Borrowing 
Clearing Members and Matched-Book Lending Clearing Members are re-
matched in order of priority based first upon whether the re-matched 
Clearing Members have an existing MSLA between them. Specifically, 
under the re-matching algorithm, OCC would first select the largest 
stock loan or stock borrow position in a given Eligible Stock from the 
suspended Hedge Clearing Member's Matched-Book Positions. The selected 
positions would then be re-matched with the largest available stock 
borrow or stock loan positions, as applicable, for the selected 
Eligible Stock for which a MSLA exists between a Matched-Book Borrowing 
Clearing Member and a Matched-Book Lending Clearing Member. OCC would 
repeat this process until all potential re-matching between Matched-
Book Borrowing Clearing Members and Matched-Book Lending Clearing 
Members with MSLAs is completed. After re-matching among lenders and 
borrowers with existing MSLAs, the re-matching process would then be 
repeated for all remaining Matched-Book Positions for which MSLAs do 
not exist between the lenders and borrowers. During this stage, 
positions would be selected for re-matching in order of priority based 
on largest outstanding position size.
    Under proposed Rule 2212(e), in the event Borrowing and Lending 
Clearing Members are re-matched through this process, the re-matched 
positions would be governed by the pre-defined terms and instructions 
established by the Lending Clearing Member pursuant to Rule 2201. In 
this case, the re-matched Hedge Clearing Members may choose to execute 
an MSLA or close-out the re-matched positions in accordance with 
existing Rule 2208. Any change in Collateral requirements arising from 
a change in the terms of stock loan or stock borrow positions between a 
Lending Clearing Member and Borrowing Clearing Member with re-matched 
positions would be included in the calculation of the Mark-to-Market 
Payment obligations as provided in Rule 2204 on the stock loan business 
day following the completion of the positions adjustments as set forth 
in proposed Rule 2212(f).
    Under proposed Rule 2212(f), the termination by offset and re-
matching of positions would be complete upon OCC completing all 
position adjustments in the accounts of the suspended Hedge Clearing 
Member and the Borrowing Clearing Members and Lending Clearing Members 
with re-matched positions and the applicable systems reports are 
produced and provided to the Clearing Members reflecting the 
transaction.
    Under proposed Rules 2212(g)-(i), from and after the time OCC has 
completed the position adjustments as set forth in OCC Rule 2212(f), 
the suspended Hedge Clearing Member would have no further obligations 
under the By-Laws and Rules with respect to such positions; however, a 
Borrowing Clearing Member with re-matched stock borrow positions would 
remain obligated as a Borrowing Clearing Member and a Lending Clearing 
Member with re-matched stock loan positions would remain obligated as a 
Lending Clearing Member as specified in the By-Laws and Rules 
applicable to the Hedge Program. Moreover, upon notification that OCC 
has completed the termination by offset and re-matching of stock loan 
and borrow positions, the suspended Hedge Clearing Member and

[[Page 16265]]

Borrowing Clearing Members and Lending Clearing Members with re-matched 
positions would be required to promptly make any necessary bookkeeping 
entries at the Depository necessitated by the re-matching to ensure the 
accuracy and efficacy of those stock loan terms not governed by OCC's 
By-Laws and Rules.
    Finally, under proposed Rule 2212(j), Borrowing Clearing Members 
and Lending Clearing Members that have been re-matched would be 
required to work in good faith to either (i) reestablish any terms, 
representations, warranties and covenants not governed by the By-Laws 
and Rules (e.g., establish an MSLA) or (ii) terminate the re-matched 
stock loan or borrow positions in the ordinary course pursuant to Rule 
2208, as soon as reasonably practicable.
    OCC also proposes a number of conforming changes to Article XXI, 
Sections 2-4 of the By-Laws and to Rule 2210 to reflect the proposed 
adoption of new Rule 2212. In particular, OCC would amend Rule 2210(b), 
which concerns the treatment of open stock loan and borrow positions 
resulting from Stock Loans of a suspended Hedge Clearing Member, to 
provide that such positions may now also be closed out using the re-
match in suspension authority under proposed Rule 2212. Under the 
default management rules and procedures for stock loan positions in the 
Hedge Program, OCC would first attempt to close out any Matched-Book 
Positions of the suspended Hedge Clearing Member to the greatest extent 
possible using the re-match in suspension authority under proposed Rule 
2212. After executing the re-matching process, OCC would generally look 
to close out the remaining stock loan positions of the suspended 
Clearing Member, to the extent that the defaulting member was the 
borrower of loans that were not matched, by using any stock pledged to 
OCC as margin collateral that is the same as the Eligible Stock in 
question to deliver to its counterparty lenders via the Depository. 
Finally, all remaining open stock loan positions would be closed out 
pursuant to the buy-in/sell-out process under Rule 2211, and in 
accordance with the proposed enhancements to that process as described 
herein.
Expected Effect on and Management of Risks to the Clearing Agency, Its 
Participants, and the Market
    OCC believes that the proposed changes would reduce the nature and 
level of risk presented by OCC because they would enhance the overall 
resilience of OCC's Stock Loan Programs by: (i) Providing more clarity 
and certainty regarding the stock loan positions at OCC and the 
obligations associated therewith and (ii) enhancing the default 
management processes for the Stock Loan Programs to mitigate the risks 
associated with the buy-in/sell-out and recall/return processes 
described above.
Trade Balancing, Golden Copy, and Termination Rules
    As described in detail above, OCC is proposing a number of 
improvements in the area of trade balancing and recordkeeping of stock 
loan positions at OCC. Specifically, the proposed changes would require 
Clearing Members in the Stock Loan Programs to have adequate policies 
and procedures in place to perform reconciliations of open and closed 
stock loan and stock borrow positions to OCC's records at least once 
each stock loan business day and resolve any discrepancies based on 
such report(s) for a given stock loan business day by 9:30 a.m. Central 
Time on the following stock loan business day to minimize the risk 
inaccurate records may present. OCC is also proposing a number of 
clarifying amendments to its By-Laws and Rules to emphasize that the 
records of OCC are the official record of open and closed stock loan 
transactions in the Stock Loan Programs, including for terminations of 
stock loan positions, and that Clearing Members remain liable for all 
obligations related to open stock loan positions as reflected in the 
records of OCC. OCC believes the proposed changes will provide more 
certainty regarding the formal record of the open stock loan positions 
guaranteed by OCC and provide additional clarity and transparency 
around the obligations of OCC and its Clearing Members in the Stock 
Loan Programs, particularly where differences may arise between the 
records of OCC and its Clearing Members. OCC believes the changes would 
therefore reduce the likelihood of credit or operational risks arising 
due to discrepancies between the records of OCC and its Clearing 
Members.
Timeframe for Buy-In and Sell-Out in Suspension
    OCC Rules 2211 and 2211A describe the buy-in and sell-out process 
in the event of a Hedge Clearing Member and Market Loan Clearing Member 
suspension, respectively, but the rules do not currently require that 
such actions be taken within a specified period of time. As described 
in detail above, OCC's margin and liquidation period assumptions 
contemplate a two-day close out process, which is applicable to all 
products without differentiation. Any delay in the buy-in/sell-out 
process could result in increased credit risk to OCC as the close out 
process for stock loans could fail to align with such margin and 
liquidation period assumptions. As a result, OCC may be exposed to 
credit risk if the price paid or received for the buy-in or sell-out of 
the Eligible Stock varies from the price at which OCC last collected a 
Mark-to-Market Payment from the defaulter and that price differential 
exceeds the amount of margin on deposit for such positions.
    OCC proposes to amend Rules 2211 and 2211A to require Lending 
Clearing Members or Borrowing Clearing Members that are instructed to 
buy-in or sell-out in connection with a Hedge or Market Loan Clearing 
Member suspension to execute such transactions by the close of the 
stock loan business day after the receipt of such instruction by 
OCC.\21\ If the instructed Clearing Member fails to execute the buy-in 
or sell-out transaction within this timeframe, OCC would terminate the 
Stock Loan and effect Settlement based upon the Marking Price used at 
the close of business on the stock loan business day after the original 
instruction was made by OCC. OCC believes the proposed changes will 
help to mitigate the potential credit risk that may be associated with 
a delay in a Hedge or Market Loan Clearing Member effecting buy-in or 
sell-out transactions by ensuring that positions are closed out--either 
through the buy-in/sell-out of stock loans by the Hedge Clearing 
Members or by the automatic termination and settlement of stock loans 
by OCC--in a time period consistent with OCC's margin assumptions.
---------------------------------------------------------------------------

    \21\ In the situation of a buy-in, the Lending Clearing Member 
would be required to use the cash collateral to buy-in the 
securities. OCC would not be responsible for funding the buy-in.
---------------------------------------------------------------------------

Authority To Enforce Reasonable Prices in Buy-In/Sell-Out Process
    OCC also proposes changes to provide it with the authority to 
withdraw from a Clearing Member's account the value of any difference 
between the price reported by the Clearing Member for a buy-in or sell-
out under Rule 2211 and Rule 2211A, as applicable, and the price that 
OCC, in its sole discretion, determines to be reasonable (if OCC 
determines that the Clearing Member's reported price was unreasonable 
based on whether the reported price fell within the trading range of 
the Eligible Stock on that day). The proposed changes are designed to 
incentivize Clearing Members to execute a buy-in or

[[Page 16266]]

sell-out at a reasonable price in accordance with the newly implemented 
two-day close out timeframe and would allow OCC to withdraw the 
difference for any buy-in or sell-out reported outside of the trading 
range of the Eligible Stock, thereby helping to ensure that the buy-in/
sell-out is executed at a price that falls within OCC's margin and 
liquidation assumptions.
Re-Matching in Suspension
    As noted above, a significant portion of the activity in OCC's 
Hedge Program relates to matched-book activity. Under OCC's existing 
rules, OCC would terminate a suspended Hedge Clearing Member's Matched-
Book Positions in accordance with the buy-in and sell-out process 
contained in Rule 2211. Logistically, this requires OCC to both recall 
the loan and return the borrowed shares to completely unwind the 
Matched-Book positions, which exposes OCC to potential price 
dislocation between the buy-in and sell-out transactions. Moreover, as 
noted above, the buy-in/sell-out process effectively utilizes each 
counterparty to the suspended Hedge Clearing Member's Matched-Book 
Positions as independent ``liquidating agents,'' making the process 
prone to greater operational and execution risk due to the number of 
counterparties effecting the buy-in/sell-out transactions, and thereby 
posing risks to the prompt and accurate clearance and settlement of 
securities transactions and the safeguarding of securities and funds 
associated therewith. In addition, to the extent Borrowing and Lending 
Clearing Member counterparties to the Matched-Book Positions wish to 
maintain equivalent stock loan positions at OCC, those Clearing Members 
would be required to initiate new stock loans to replace the closed out 
positions and would lose the protections afforded by OCC's guaranty of 
their stock loan positions until the newly initiated stock loan 
positions have been accepted, novated, and guaranteed by OCC.
    Proposed Rule 2212 would allow OCC to perform an orderly close out 
of a suspended Hedge Clearing Member's Matched-Book Positions through 
the termination by offset and re-matching of such positions without 
requiring the transfer of securities against the payment of settlement 
prices as currently required under OCC Rule 2211. As a result, the 
proposed changes would minimize the potential for operational and 
execution risks and eliminate any risk resulting from potential price 
dislocation between recall and return transactions. OCC believes the 
proposed changes will strengthen the risk management processes in place 
at OCC by mitigating the risks involved in the buy-in/sell-out of 
Matched-Book Positions as well as provide the overall marketplace with 
more stability with respect to the Hedge Program.
    In addition, OCC would use a matching algorithm to re-match stock 
loan and stock borrow positions in order of priority based on the 
largest available stock borrow or stock loan positions, as applicable, 
for the selected Eligible Stock for which a MSLA exists between the 
Borrowing and Lending Clearing Members. In the event Hedge Clearing 
Members are re-matched that do not have existing securities lending 
relationships, those members may choose to either work in good faith to 
reestablish any terms, representations, warranties and covenants not 
governed by the By-Laws and Rules (e.g., MSLA) or to terminate the re-
matched stock loan or borrow positions in the ordinary course pursuant 
to Rule 2208, as soon as reasonably practicable. The proposed changes 
therefore provide for an objective process for re-matching stock loan 
and borrow positions and ensures that members with existing securities 
lending relationships are re-matched to the greatest extent possible 
and would still allow for Hedge Clearing Members that are re-matched 
but that do not have existing securities lending relationships to 
terminate such positions in the ordinary course pursuant to Rule 2208.
Consistency With Clearing Supervision Act
    The stated purpose of the Clearing Supervision Act is to mitigate 
systemic risk in the financial system and promote financial stability 
by, among other things, promoting uniform risk management standards for 
systemically important financial market utilities and strengthening the 
liquidity of systemically important financial market utilities.\22\ 
Section 805(a)(2) of the Clearing Supervision Act \23\ also authorizes 
the Commission to prescribe risk management standards for the payment, 
clearing and settlement activities of designated clearing entities, 
like OCC, for which the Commission is the supervisory agency. Section 
805(b) of the Clearing Supervision Act \24\ states that the objectives 
and principles for risk management standards prescribed under Section 
805(a) shall be to:
---------------------------------------------------------------------------

    \22\ 12 U.S.C. 5461(b).
    \23\ 12 U.S.C. 5464(a)(2).
    \24\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

     Promote robust risk management;
     promote safety and soundness;
     reduce systemic risks; and
     support the stability of the broader financial system.
    The Commission has adopted risk management standards under Section 
805(a)(2) of the Clearing Supervision Act and the Act.\25\ In 
particular, Rule 17Ad-22(d)(11) \26\ requires registered clearing 
agencies to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to make key aspects of the clearing 
agency's default procedures publicly available and establish default 
procedures that ensure that the clearing agency can take timely action 
to contain losses and liquidity pressures and to continue meeting its 
obligations in the event of a participant default. In addition, 
recently adopted Rule 17Ad-22(e)(13) \27\ requires covered clearing 
agencies to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to, in part, ensure the covered 
clearing agency has the authority and operational capacity to take 
timely action to contain losses and liquidity demands and continue to 
meet its obligations in the event of a Clearing Member default. 
Moreover, recently adopted Rule 17Ad-22(e)(23) \28\ requires covered 
clearing agencies to maintain written policies and procedures 
reasonably designed to, among other things, provide for publicly 
disclosing all relevant rules and material procedures, including key 
aspects of its default rules and procedures.
---------------------------------------------------------------------------

    \25\ 17 CFR 240. 17Ad-22. See Securities Exchange Act Release 
Nos. 68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-
08-11) (``Clearing Agency Standards''); 78961 (September 28, 2016), 
81 FR 70786 (October 13, 2016) (S7-03-14) (``Standards for Covered 
Clearing Agencies''). The Standards for Covered Clearing Agencies 
became effective on December 12, 2016. OCC is a ``covered clearing 
agency'' as defined in Rule 17Ad-22(a)(5) and therefore OCC must 
comply with new section (e) of Rule 17Ad-22 by April 11, 2017.
    \26\ 17 CFR 240.17Ad-22(d)(11).
    \27\ 17 CFR 240.17Ad-22(e)(13).
    \28\ 17 CFR 240.17Ad-22(e)(23).
---------------------------------------------------------------------------

    OCC believes that the proposed changes are consistent with the 
principles of the Clearing Supervision Act and the risk management 
standards adopted thereunder because the proposed changes would promote 
robust risk management and safety and soundness for OCC's Stock Loan 
Programs for the reasons set forth below.
Trade Balancing, Golden Copy, and Termination Rules
    OCC is proposing changes to require Clearing Members in the Stock 
Loan Programs to have adequate policies and procedures in place to 
perform reconciliations of open and closed stock

[[Page 16267]]

loan and stock borrow positions to OCC's records at least once each 
stock loan business and resolve any discrepancies based on such 
report(s) for a given stock loan business day by 9:30 a.m. Central Time 
on the following stock loan business day to minimize the risk 
inaccurate records may present. OCC is also proposing a number 
amendments to its By-Laws and Rules to emphasize that the records of 
OCC are the official record of open and closed stock loan transactions 
in the Stock Loan Programs, including for terminations of stock loan 
positions, and that Clearing Members remain liable for all obligations 
related to open stock loan positions as reflected in the records of 
OCC. OCC believes the proposed changes will provide more certainty 
regarding the formal record of the open stock loan positions guaranteed 
by OCC and the obligations associated therewith. The proposed changes 
are intended to reduce the likelihood of credit or operational risks 
arising due to discrepancies between the records of OCC and its 
Clearing Members and are thereby designed to promote the safety and 
soundness of OCC.
Timeframe for Buy-In and Sell-Out in Suspension
    OCC proposes to amend Rules 2211 and 2211A to require Lending 
Clearing Members or Borrowing Clearing Members that are instructed to 
buy-in or sell-out in connection with a Hedge or Market Loan Clearing 
Member suspension to execute such transactions by the close of the 
stock loan business day after the receipt of such instruction by 
OCC.\29\ If the instructed Clearing Member fails to execute the buy-in 
or sell-out transaction within this timeframe, OCC would terminate the 
Stock Loan and effect Settlement based upon the Marking Price used at 
the close of business on the stock loan business day after the original 
instruction was made by OCC.
---------------------------------------------------------------------------

    \29\ In the situation of a buy-in, the Lending Clearing Member 
would be required to use the cash collateral to buy-in the 
securities. OCC would not be responsible for funding the buy-in.
---------------------------------------------------------------------------

    OCC believes the proposed changes to its Rules will help to 
mitigate the potential credit risk that may be associated with a delay 
in a Hedge or Market Loan Clearing Member effecting buy-in or sell-out 
transactions by ensuring that positions are closed out--either through 
the buy-in/sell-out of stock loans by the Hedge Clearing Members or by 
the automatic termination and settlement of stock loans by OCC--in a 
time period consistent with OCC's margin assumptions. As a result, the 
proposed changes would make key aspects of OCC's default rules and 
procedures for the Stock Loan Programs publicly available (particularly 
with respect to the buy-in/sell-out process) and would establish 
default procedures for the Stock Loan Programs that ensure that OCC can 
take timely action to contain losses and liquidity demands and continue 
meeting its obligations in the event of a participant default in 
accordance with Rules 17Ad-22(d)(11), (e)(13), and (e)(23).\30\
---------------------------------------------------------------------------

    \30\ 17 CFR 240.17Ad-22(d)(11), (e)(13), and (e)(23).
---------------------------------------------------------------------------

Authority To Enforce Reasonable Prices in Buy-In/Sell-Out Process
    OCC also proposes changes to provide it with the authority to 
withdraw from a Clearing Member's account the value of any difference 
between the price reported by the Clearing Member for a buy-in or sell-
out under Rule 2211 and Rule 2211A, as applicable, and the price that 
OCC, in its sole discretion, determines to be reasonable (if OCC 
determines that the Clearing Member's reported price was unreasonable 
based on whether the reported price fell within the trading range of 
the Eligible Stock on that day). The proposed changes are designed to 
incentivize Clearing Members to execute a buy-in or sell-out at a 
reasonable price in accordance with the newly implemented two-day close 
out timeframe and would allow OCC to withdraw the difference for any 
buy-in or sell-out reported outside of the trading range of the 
Eligible Stock, thereby helping to ensure that the buy-in/sell-out is 
executed at a price that falls within OCC's margin and liquidation 
assumptions. Accordingly, OCC believes the proposed change to its Rules 
would make key aspects of OCC's default rules and procedures for the 
Stock Loan Programs publicly available (particularly with respect to 
the buy-in/sell-out process) and would establish default procedures for 
the Stock Loan Programs that ensure that OCC can take timely action to 
contain losses and liquidity pressures and continue meeting its 
obligations in the event of a participant default in accordance with 
Rules 17Ad-22(d)(11), (e)(13), and (e)(23).\31\
---------------------------------------------------------------------------

    \31\ Id.
---------------------------------------------------------------------------

Re-Matching in Suspension
    OCC proposes to adopt new Rule 2212, which would allow OCC to 
perform an orderly close out of a suspended Hedge Clearing Member's 
Matched-Book Positions through the termination by offset and re-
matching of such positions without requiring the transfer of securities 
against the payment of settlement prices as currently required under 
OCC Rule 2211. As a result, the proposed changes would minimize the 
potential for operational and execution risks and eliminate any risk 
resulting from potential price dislocation between recall and return 
transactions, as described in detail above. OCC believes the proposed 
changes will strengthen the risk management processes in place at OCC 
by mitigating the risks involved in the buy-in/sell-out of Matched-Book 
Positions as well as provide the overall marketplace with more 
stability with respect to the Hedge Program.
    In addition, OCC would use a matching algorithm to re-match stock 
loan and stock borrow positions in order of priority based on the 
largest available stock borrow or stock loan positions, as applicable, 
for the selected Eligible Stock for which a MSLA exists between the 
Borrowing and Lending Clearing Members. In the event Hedge Clearing 
Members are re-matched that do not have existing securities lending 
relationships, those members may choose to either work in good faith to 
reestablish any terms, representations, warranties and covenants not 
governed by the By-Laws and Rules (e.g., MSLA) or to terminate the re-
matched stock loan or borrow positions in the ordinary course pursuant 
to Rule 2208, as soon as reasonably practicable. The proposed changes 
therefore provide for an objective process for re-matching stock loan 
and borrow positions and ensures that members with existing securities 
lending relationships are re-matched to the greatest extent possible 
and would still allow for Hedge Clearing Members that are re-matched 
but that do not have existing securities lending relationships to 
terminate such positions in the ordinary course pursuant to Rule 2208.
    OCC believes the proposed changes to its Rules to provide for the 
termination by offset and re-matching of Matched-Book Positions would 
make key aspects of OCC's default procedures for the Stock Loan Program 
publicly available and would establish default procedures for the Stock 
Loan Programs that ensure that OCC can take timely action to contain 
losses and liquidity demands and continue meeting its obligations in 
the event of a participant default in accordance with Rules 17Ad-
22(d)(11), (e)(13), and (e)(23).\32\
---------------------------------------------------------------------------

    \32\ Id.

---------------------------------------------------------------------------

[[Page 16268]]

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 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.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, 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
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-OCC-2017-802 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549.

All submissions should refer to File Number SR-OCC-2017-802. 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_17_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-2017-802 and 
should be submitted on or before April 24, 2017.

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-06443 Filed 3-31-17; 8:45 am]
 BILLING CODE 8011-01-P


