
[Federal Register Volume 82, Number 128 (Thursday, July 6, 2017)]
[Notices]
[Pages 31371-31376]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-14187]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81058; File No. SR-OCC-2017-803]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Advance Notice of and No Objection to The Options 
Clearing Corporation's Proposal To Enter Into a New Credit Facility 
Agreement

June 30, 2017.
    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 (``Clearing 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 May 4, 2017, the 
Options Clearing Corporation (``OCC'') filed an advance notice (SR-OCC-
2017-803) with the Securities and Exchange Commission (``Commission''). 
The advance notice is described in Items I and II below, which have 
been prepared by OCC. The Commission is publishing this notice to 
solicit comments on the advance notice from interested persons, and to 
provide notice that the Commission does not object to the changes set 
forth in the advance notice.
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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 being filed in connection with a proposed 
change in the form of the replacement of a revolving credit facility 
that OCC maintains for a 364-day term for the purpose of meeting 
obligations arising out of the default or suspension of a Clearing 
Member, in anticipation of a potential default by a Clearing Member, or 
the failure of a bank or securities or commodities clearing 
organization to perform its obligations due to its bankruptcy, 
insolvency, receivership or suspension of operations.

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 advance notice and none have been received.

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

Description of Proposed Change
Background
    This advance notice is being filed in connection with a proposed 
change in the form of the replacement of a revolving credit facility 
that OCC maintains for a 364-day term for the purpose of meeting 
obligations arising out of the default or suspension of a Clearing 
Member, in anticipation of a potential default by a Clearing Member, or 
the failure of a bank or securities or commodities clearing 
organization to perform its obligations due to its bankruptcy, 
insolvency, receivership or suspension of operations. In such 
circumstances, OCC has certain conditional authority under its By-Laws 
and Rules to borrow or otherwise obtain funds from third parties using 
Clearing

[[Page 31372]]

Member margin deposits and/or Clearing Fund contributions.\3\
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    \3\ See generally Article VIII, Sections 5(a), (b) and (e) of 
OCC's By-Laws; Interpretation and Policy .06 to Article VIII, 
Section 5; OCC Rules 1102 and 1104(b).
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    OCC's existing credit facility (``Existing Facility'') was 
implemented as of September 30, 2016, through the execution of a credit 
agreement among OCC, Bank of America, N.A. (``BofA''), as 
administrative agent, and the lenders that are parties to the agreement 
from time to time. The Existing Facility provides short-term secured 
borrowings in an aggregate principal amount of $2 billion but may be 
increased to $3 billion if OCC so requests and sufficient commitments 
from lenders are received and accepted. To obtain a loan under the 
Existing Facility, OCC must pledge as collateral U.S. dollars or 
securities issued or guaranteed by the U.S. Government or the 
Government of Canada. Certain mandatory prepayments or deposits of 
additional collateral are required depending on changes in the 
collateral's market value. In connection with OCC's past implementation 
of the Existing Facility, OCC filed an advance notice with the 
Commission on August 29, 2016, and the Commission published a Notice of 
No-Objection on September 21, 2016.\4\
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    \4\ See Securities Exchange Act Release No. 78893 (September 21, 
2016), 81 FR 66318 (September 27, 2016) (SR-OCC-2016-803).
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Proposed Changes
    The Existing Facility is not set to expire until September 29, 
2017; however, OCC is seeking an early termination of the Existing 
Facility and is currently negotiating the terms of a new credit 
facility (``New Facility'') on substantially similar terms as the 
Existing Facility together with certain additional proposed 
modifications described herein. The proposed modifications would, among 
other things: (i) Change the renewal timing to an approximate June 30 
annual cycle; (ii) expand the types of permitted collateral under the 
credit agreement to include S&P 500 Market Index equities, Exchange 
Traded Funds (``ETFs''), and American Depositary Receipts (``ADRs'') 
and certain GSE debt securities; (iii) expand the definition of 
``Liquidity Needs'' \5\ in the credit agreement to allow OCC to borrow 
from the New Facility to satisfy anticipated same-day settlement 
obligations as a result of circumstances where a bank or securities or 
commodities clearing organization has failed to achieve daily 
settlement with OCC; and (iv) modify certain other terms and 
definitions in the agreement (including the replacement of the backup 
collateral agent).
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    \5\ Under the Existing Facility, OCC's ``Liquidity Needs'' are 
defined as the use of loan proceeds to obtain funds projected to be 
required by OCC in anticipation of a potential default by a Clearing 
Member.
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    The proposed terms and conditions that are expected to be 
applicable to the New Facility, subject to agreement by the lenders, 
are set forth in the Summary of Terms and Conditions, which is not a 
public document.\6\ OCC has separately submitted a request for 
confidential treatment to the Commission regarding the Summary of Terms 
and Conditions, which is included in this filing as Exhibit 3. The 
conditions regarding the availability of the New Facility, which OCC 
anticipates will be satisfied on or about July 5, 2017, include the 
execution and delivery of (i) a credit agreement between OCC and the 
administrative agent, collateral agent and various lenders under the 
New Facility, (ii) a pledge agreement between OCC and the 
administrative agent or collateral agent, and (iii) such other 
documents as may be required by the parties. The definitive 
documentation concerning the New Facility is expected to be consistent 
with the Summary of Terms and Conditions and substantially similar to 
the definitive documentation concerning the Existing Facility, although 
it may include certain changes to business terms as may be necessary to 
obtain the agreement of lenders with sufficient funding commitments and 
certain changes as may be necessary regarding administrative and 
operational terms being finalized between the parties.
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    \6\ The Summary of Terms and Conditions for the New Facility 
clarifies certain terms regarding mandatory prepayments or deposits 
of additional collateral, which, as described above, are also 
features of the Existing Facility.
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    The proposed changes to terms and conditions that are expected to 
be applicable to the New Facility are described in detail below.
Change in Renewal Timing
    OCC is seeking an early termination of the Existing Facility, which 
is not set to expire until September 29, 2017, and proposes to change 
the renewal timing of the New Facility. OCC's purpose in early 
termination is to change to a different renewal cycle so that the 
credit facility will be renewed on or around June 30 every year. OCC 
believes that this renewal cycle is preferable because August and 
September, on account of traditional vacation times and the Labor Day 
holiday, have historically been a challenging period during which to 
schedule negotiations and for participating banks to schedule credit 
committee meetings.
Expansion of Permitted Collateral
    OCC also proposes to expand the types of permitted collateral under 
the New Facility. As proposed, OCC would be permitted to pledge a wider 
range of collateral under the New Facility that Clearing Members are 
permitted to use in making margin deposits and Clearing Fund 
contributions. As discussed above, to obtain a loan under the Existing 
Facility, OCC must pledge as collateral certain cash or securities that 
Clearing Members have contributed to the Clearing Fund or deposited as 
margin. The Summary of Terms and Conditions for the New Facility 
contemplates that it will expand the scope of such collateral that OCC 
may pledge to include other categories of securities that OCC accepts 
as margin deposits or that it may accept upon prior approval by the 
Risk Committee (i.e., certain GSE debt securities).\7\
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    \7\ See infra note 9.
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    Specifically, the new collateral in respect of Clearing Member 
margin deposits that OCC would be permitted to pledge would include: 
(i) Common equities included in the S&P 500 Index, but not including 
securities of any type issued by or on behalf of any lender or lender's 
affiliate (``Pledged S&P Equities''); (ii) U.S. dollar exchange traded 
funds for equity, fixed income or commodity asset classes with a market 
capitalization of $300 million or more, subject to certain additional 
restrictions with respect to volume and bid/asks, among other things, 
as agreed upon by OCC and the administrative agent (``Pledged ETFs''); 
(iii) U.S. dollar denominated shares of foreign based companies traded 
on a U.S. national exchange with a market price of $5.00 or more per 
share or unit (``Pledged ADRs,'' and together with Pledge S&P Equities 
and Pledged ETFs, ``Pledged Equities''); \8\ (iv) U.S. Government 
Sponsored Enterprise mortgage backed securities, excluding 
collateralized mortgage obligations and real estate mortgage investment 
conduits, rated at least AA by two out of three of S&P, Moody's and 
Fitch (``Pledged GSE MBS''); and (v) non-callable debt securities 
issued by Freddie Mac within the reference debt program, securities 
issued by Fannie Mae within its

[[Page 31373]]

benchmark debt program, or non-callable short-term discount notes from 
either Freddie Mac or Fannie Mae (``Other Pledged GSE Securities,'' and 
together with Pledged GSE MBS, ``Pledged GSE Securities'').\9\ OCC 
would be able to pledge these securities to support the New Facility 
using pledge infrastructure that is already contemplated under the 
terms of the Existing Facility.
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    \8\ Limits would be applied so that Pledged S&P Equities and 
Pledged ADRs of a single issuer would not, at any time, exceed 5% of 
the cash or securities that OCC pledges, and total Pledged Equities 
would not, at any time, exceed 37.5% of the total cash or securities 
pledged. These limits, and the other limits that are part of the 
terms of the Existing Facility, would not apply to borrowings in an 
amount of $50 million or less.
    \9\ Article I, Section 1.G.(6) of OCC's By-Laws provides that 
the term ``GSE debt securities'' means ``such debt securities issued 
by Congressionally chartered corporations as the Risk Committee may 
from time to time approve for deposit as margin.'' OCC currently 
does not accept Pledged GSE MBS for deposit as margin. As a result, 
the specific expansion of permitted collateral to include Pledged 
GSE MBS under the New Facility would not become available to OCC 
until such time, if at all, as OCC's Risk Committee approves such 
securities for deposit as margin.
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    Adding these additional categories of permitted collateral to the 
New Facility serves the purpose of aligning the scope of permitted 
collateral for the New Facility with the scope of Clearing Member 
collateral that may become available to OCC for borrowing purposes. 
Specifically, in the event of a Clearing Member default, the cash and 
securities deposited as margin by the Clearing Member may be used by 
OCC for borrowing. Should OCC draw upon the New Facility in connection 
with such a default, OCC believes that it would be appropriate for it 
to have the increased flexibility to pledge a greater range of 
securities, which are permitted to be included in the defaulted 
Clearing Member's margin deposit.
    The Summary of Terms and Conditions contemplates that the New 
Facility would also modify the ratings standards for securities that 
are issued or guaranteed by the Government of Canada. Such securities 
would be acceptable as permitted collateral provided that they have 
minimum ratings of AA (S&P) or Aa2 (Moody's)--rather than AAA or Aaa as 
under the Existing Facility.
    The terms and conditions of the New Facility would also differ from 
the Existing Facility in connection with how the amount of funds 
available to OCC is calculated. As under the Existing Facility, the 
amount would be determined in part by applying haircuts to the market 
value of the different categories of collateral pledged by OCC. 
However, to accommodate the new categories of collateral it is expected 
that Pledged S&P Equities and Pledged ETFs would be valued at 70% of 
their market value, and Pledged ADRs will be valued at 50% of their 
market value. Depending on their tenor, Pledged GSE Securities would 
also be subject to haircuts on their market value as follows: (i) Under 
one year, 95%; (ii) one year or greater but less than five years, 94%; 
(iii) five years or greater but less than 10 years, 92%; and (iv) ten 
years or greater, 88%. For the purpose of determining the fund 
availability, and also for determining the amount of mandatory 
prepayments under the terms of the New Facility, the assets in OCC's 
Clearing Fund would continue to be valued at 90% of their market value, 
except under the New Facility, U.S. cash would be valued at 100%. These 
haircuts would represent commercial terms negotiated at arms-length by 
the parties.
Expansion of Use of Proceeds
    Under the Existing Facility, OCC is permitted to finance Liquidity 
Needs in anticipation of a potential default by or suspension of a 
Clearing Member to the extent permitted under OCC's By-Laws and Rules. 
OCC has requested that the New Facility also provide it with 
flexibility to be able to borrow to address reasonably anticipated 
same-day settlement obligations under certain conditions, such as the 
failure of any bank or securities or commodities clearing organization 
to make daily settlement, to the extent such borrowing is permitted 
under the By-Laws and Rules.\10\ OCC believes that this expanded use of 
proceeds under the New Facility would enhance OCC's ability to 
effectively address and manage its liquidity risks as they related to 
its daily settlement obligations, specifically when any bank or 
securities or commodities clearing organization has failed to make 
daily settlement with OCC.
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    \10\ Article VIII, Section 5(e) of OCC's By-Laws authorizes OCC 
to take possession of Clearing Fund assets and to use such assets 
for purposes of securing a borrowing in circumstances concerning the 
default or suspension of a Clearing Member or where OCC has 
otherwise sustained a loss reimbursable out of the Clearing Fund 
(but OCC has elected to borrow to meet such obligations instead of 
immediately charging the Clearing Fund). OCC has requested that the 
definition of ``Liquidity Needs'' under the New Facility would 
include the ability to borrow to address reasonably anticipated 
same-day obligations as a result of the failure of any bank or 
securities or commodities clearing organization to achieve daily 
settlement, but would continue to be limited to the extent that such 
borrowing is permitted under the By-Laws and Rules. By limiting the 
ability to borrow for purposes of financing Liquidity Needs always 
to the extent permitted under the By-Laws and Rules, this borrowing 
authority in the agreement would not become operative until OCC 
receives all necessary regulatory approvals for any amendments to 
By-Laws and Rules necessary to effect such a borrowing, which would 
be the subject of a separate regulatory filing.
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Other Proposed Changes
    The New Facility may also limit the scope of those eligible to act 
as lenders in the New Facility to: (i) Banks within the meaning of 
Section 3(a)(6) of the Act; \11\ (ii) any subsidiary of such a bank; 
(iii) any corporation organized under Section 25A of the Federal 
Reserve Act; \12\ and (iv) any agency or branch of a foreign bank 
located within the United States.\13\ As discussed above, the Summary 
of Terms and Conditions contemplates that the New Facility would permit 
the pledge of certain equity securities as collateral. Lending secured 
by such securities is required to be conducted in compliance with 
Federal Reserve regulations regarding securities lending, including 
Regulation U,\14\ and this change would be designed to promote general 
consistency with such requirements.
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    \11\ 15 U.S.C. 78c(a)(6).
    \12\ 12 U.S.C. 611.
    \13\ This explicitly does not include any savings and loan 
association, any credit union, any lending institution that is an 
instrumentality of the United States, or any member of a national 
securities exchange.
    \14\ 12 CFR 221.6.
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    Finally, under the New Facility, OCC also expects that a new backup 
collateral agent will be named.
Anticipated Effect on and Management of Risk
    Completing timely settlement is a key aspect of OCC's role as a 
clearing agency performing central counterparty services. Overall, the 
New Facility would continue to promote the reduction of risks to OCC, 
its Clearing Members and the options market in general because it would 
allow OCC to obtain short-term funds to address liquidity demands 
arising out of the default or suspension of a Clearing Member, in 
anticipation of a potential default or suspension of Clearing Members 
or the insolvency of a bank or another securities or commodities 
clearing organization. The existence of the New Facility would 
therefore help OCC minimize losses in the event of such a default, 
suspension or insolvency, by allowing it to obtain funds on extremely 
short notice to ensure clearance and settlement of transactions in 
options and other contracts without interruption. OCC believes that the 
reduced settlement risk presented by OCC resulting from the New 
Facility would correspondingly reduce systemic risk and promote the 
safety and soundness of the clearing system. By drawing on the New 
Facility, OCC would also be able to avoid liquidating margin deposits 
or Clearing Fund contributions in what would

[[Page 31374]]

likely be volatile market conditions, which would preserve funds 
available to cover any losses resulting from the failure of a Clearing 
Member, bank or other clearing organization. Expanding the scope of 
collateral that OCC is permitted to pledge to the New Facility to 
include the Pledged Equities and Pledged GSE Securities that OCC 
permits its Clearing Members to deposit as margin would further this 
purpose by giving OCC greater flexibility to pledge a broader range of 
collateral to the New Facility that it determines is appropriate under 
the circumstances. Expanding the uses of proceeds under the New 
Facility to support Liquidity Needs in respect of OCC's settlement 
obligations would also further this purpose to the extent such 
borrowing is authorized under OCC's By-Laws and Rules. OCC believes 
that the change would not otherwise affect or alter the management of 
risk at OCC because the New Facility generally preserves the same terms 
and conditions as the Existing Facility.
Consistency With the Payment, Clearing and Settlement 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.\15\ 
Section 805(a)(2) of the Clearing Supervision Act \16\ 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 \17\ states that the objectives 
and principles for risk management standards prescribed under Section 
805(a) shall be to:
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    \15\ 12 U.S.C. 5461(b).
    \16\ 12 U.S.C. 5464(a)(2).
    \17\ 12 U.S.C. 5464(b).
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     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 in furtherance of 
these objectives and principles.\18\ In particular, Rule 17Ad-22(e)(7) 
\19\ requires that a covered clearing agency establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to effectively measure, monitor, and manage the liquidity risk 
that arises in or is borne by it, including measuring, monitoring and 
managing its settlement and funding flows on an ongoing and timely 
basis and its use of intraday liquidity.
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    \18\ 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 as of April 11, 2017.
    \19\ 17 CFR 240.17Ad-22(e)(7).
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    OCC believes that the New Facility is consistent with Section 
805(b)(1) of the Clearing Supervision Act \20\ and Rule 17Ad-22(e)(7) 
\21\ because it promotes robust risk management by OCC of its liquidity 
risks to ensure that OCC can continue meeting its settlement 
obligations. The New Facility would provide OCC with timely access to a 
stable and reliable liquidity funding source to help it complete timely 
clearing and settlement. Expanding the purposes for which borrowing 
proceeds may be used and the scope of permitted collateral under the 
New Facility would further the timeliness and reliability of OCC's 
access to liquidity funding, by providing greater flexibility regarding 
(i) the use of proceeds under the New Facility to address and manage 
settlement obligations and (ii) the collateral that OCC may determine 
is appropriate to pledge to support borrowing in the event of a 
Clearing Member default. The expansion of permitted collateral would 
better enable OCC to manage liquidity risk associated with its 
settlement obligations by having access to a broader range of 
collateral to pledge to the New Facility in the form margin collateral 
that a defaulting Clearing Member may have on deposit. Expanding the 
uses of proceeds under the New Facility to support Liquidity Needs in 
respect of OCC's settlement obligations would also promote management 
of settlement and funding flows (to the extent such borrowing is 
authorized under OCC's By-Laws and Rules). In these ways, the proposed 
changes are consistent with Section 805(b)(1) of the Clearing 
Supervision Act \22\ and Rule 17Ad-22(e)(7).\23\
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    \20\ 12 U.S.C. 5464(b)(1).
    \21\ 17 CFR 240.17Ad-22(e)(7).
    \22\ 12 U.S.C. 5464(b)(1).
    \23\ 17 CFR 240.17Ad-22(e)(7).
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Accelerated Commission Action Requested
    Pursuant to Section 806(e)(1)(I) of the Clearing Supervision 
Act,\24\ OCC requests that the Commission notify OCC that it has no 
objection to the New Facility not later than Friday, June 30, 2017, 
which shall be fifty-seven calendar days from the date of OCC's 
submission of this proposed change and two business days prior to the 
expected July 5, 2017 availability of the New Facility. OCC requests 
Commission action by this date to ensure that the New Facility is able 
to become effective and will launch according to the new renewal cycle. 
For the reasons described above, OCC believes that the new renewal 
cycle will help it manage certain commercial structuring and 
administrative coordination risks associated with the renewal process.
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    \24\ 12 U.S.C. 5465(e)(1)(I).
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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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Comments may be submitted by any of 
the following methods:

[[Page 31375]]

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-2017-803 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-2017-803. 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_803.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-2017-803 and 
should be submitted on or before July 27, 2017.

V. Commission Findings and Notice of No Objection

    Although the Clearing Supervision Act does not specify a standard 
of review for an advance notice, its stated purpose is instructive: 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.\25\ Section 805(a)(2) of the Clearing Supervision Act 
authorizes the Commission to prescribe risk management standards for 
the payment, clearing, and settlement activities of designated clearing 
entities and financial institutions engaged in designated activities 
for which it is the supervisory agency or the appropriate financial 
regulator.\26\ Section 805(b) of the Clearing Supervision Act \27\ 
states that the objectives and principles for the risk management 
standards prescribed under Section 805(a) shall be to:
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    \25\ 12 U.S.C. 5461(b).
    \26\ 12 U.S.C. 5464(a)(2).
    \27\ 12 U.S.C. 5464(b).
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     Promote robust risk management;
     promote safety and soundness;
     reduce systemic risks; and
     support the stability of the broader financial system.\28\
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    \28\ Id.
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    The Commission has adopted risk management standards under Section 
805(a)(2) of the Clearing Supervision Act \29\ and Section 17A of the 
Exchange Act (``Rule 17Ad-22'').\30\ Rule 17Ad-22 requires registered 
clearing agencies to establish, implement, maintain, and enforce 
written policies and procedures that are reasonably designed to meet 
certain minimum requirements for their operations and risk management 
practices on an ongoing basis.\31\ Therefore, it is appropriate for the 
Commission to review changes proposed in advance notices against Rule 
17Ad-22 and the objectives and principles of the risk management 
standards described in Section 805(b) of the Clearing Supervision 
Act.\32\ The Commission believes that the proposal in the Advance 
Notice is consistent with the objectives and principles described in 
Section 805(b) of the Clearing Supervision Act,\33\ and in Rule 17Ad-22 
under the Exchange Act, particularly Rule 17Ad-22(e)(7).\34\
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    \29\ 12 U.S.C. 5464(a)(2).
    \30\ See 17 CFR 240.17Ad-22.
    \31\ Id.
    \32\ 12 U.S.C. 5464(b).
    \33\ Id.
    \34\ See 17 CFR 240.17Ad-22(e)(7).
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A. Consistency With Section 805(b) of the Clearing Supervision Act

    As discussed below, the Commission believes that the changes 
proposed in the Advance Notice are consistent with Section 805(b) of 
the Clearing Supervision Act because they: (i) Promote robust risk 
management; (ii) are consistent with promoting safety and soundness; 
and (iii) are consistent with reducing systemic risks and promoting the 
stability of the broader financial system.
    The Commission believes that the changes proposed in the Advance 
Notice are consistent with promoting robust risk management, in 
particular management of liquidity risk. In particular, the terms of 
the proposed New Facility give OCC expanded flexibility to manage 
liquidity stresses arising from a Clearing Member default by broadening 
the range of collateral that OCC can pledge to the facility. The 
expanded range of collateral that may be pledged therefore affords OCC 
a new option of pledging margin assets other than cash, U.S. Government 
Securities, and Canadian Government Securities as an alternative to its 
existing choices of either liquidating other margin collateral or 
pledging primarily Clearing Fund collateral in order to access the 
Existing Facility.\35\ The broader collateral eligibility reflected in 
the proposed New Facility also would bring OCC's liquidity risk 
management resources in line with those of other CCPs that already have 
the ability to pledge equities to their revolving credit facility 
liquidity lines.\36\ In addition, broadening the definition of 
``Liquidity Needs'' in the New Facility to address losses that may 
arise when a bank or securities or commodities clearing organization 
has failed to make daily settlement with OCC (as opposed to the 
narrower instance under the Existing Facility of losses from a 
bankruptcy or insolvency of a bank or securities or commodities 
clearing organization)--subject to necessary amendments of OCC's By-
Laws and Rules and concomitant regulatory approvals \37\--would further 
enhance OCC's ability to continue to meet its settlement obligations. 
As such, the Commission believes that the proposal would promote robust 
risk management

[[Page 31376]]

practices at OCC, consistent with Section 805(b) of the Clearing 
Supervision Act.\38\
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    \35\ The Commission notes that OCC does not currently accept 
Pledged GSE MBS for deposit as margin, and that OCC has represented 
that it will not do so unless and until OCC's Risk Committee 
approves such securities for deposit as margin, in accordance with 
OCC's By-laws. See supra note 9.
    \36\ The Commission notes that the National Securities Clearing 
Corporation has the right to post equity securities as part of its 
revolving credit facility. See Securities Exchange Act Release No. 
69557 (May 10, 2013), 78 FR 28936, 28936 & n.5 (May 16, 2013) (SR-
NSCC-2013-803); see also NSCC Rules and Procedures, Rule 4 (http://dtcc.com/legal/rules_proc/nscc_rules.pdf).
    \37\ The Commission notes that OCC has represented that the 
expanded borrowing authority in this agreement would not become 
operative unless and until OCC receives all necessary regulatory 
approvals for any amendments to its By-Laws and Rules necessary to 
effect such a borrowing, which would be subject to a separate 
regulatory filing with the Commission. See supra note 10. For the 
purposes of the findings herein, the Commission relies on this 
representation and expects that OCC will make a separate regulatory 
filing in connection with effecting consistent changes of this sort 
to its By-Laws and Rules.
    \38\ 12 U.S.C. 5464(b).
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    The Commission also believes that the changes proposed in the 
Advance Notice are consistent with promoting safety and soundness. The 
New Facility would continue to provide OCC with a liquidity resource in 
the event of a participant default or of losses due to the bankruptcy 
or insolvency of a bank or securities or commodities clearing 
organization. Subject to amendment of OCC's By-Laws and Rules and 
related regulatory approvals, the New Facility also would provide 
liquidity to OCC in the event of a failure by a bank or securities or 
commodities clearing organization to perform same-day settlement 
obligations outside the context of such bank or clearing organization's 
bankruptcy or insolvency. This expanded set of circumstances in which 
OCC could access liquidity would promote safety and soundness for OCC 
and its Clearing Members because it would provide OCC with a readily 
available liquidity resource that would enable it to continue to meet 
its settlement obligations in a timely fashion, thereby helping OCC to 
contain losses and liquidity pressures that otherwise might cause 
financial distress to OCC or its Clearing Members. As such, the 
Commission believes the proposed change is consistent with promoting 
safety and soundness, as contemplated in Section 805(b) of the Clearing 
Supervision Act.
    Finally, the Commission believes that the Advance Notice is 
consistent with reducing systemic risks and promoting the stability of 
the broader financial system. The New Facility would provide OCC, which 
has been designated a systemically important financial market utility, 
with a more flexible and thus improved, liquidity resource. The 
Commission believes that the New Facility should bolster the likelihood 
that OCC will meet its settlement obligations, thereby reducing the 
risk of loss contagion and enhancing the ability of OCC and its 
Clearing Members to provide reliability, stability, and safety to the 
financial markets that they serve. Accordingly, the Commission believes 
that the proposal could help to reduce systemic risk and support the 
stability of the broader financial system, consistent with Section 
805(b) of the Clearing Supervision Act.

B. Consistency With Rule 17Ad-22(e)(7)

    The Commission believes that the proposed changes associated with 
the New Facility are consistent with the requirements of Rule 17Ad-
22(e)(7) under the Exchange Act.\39\ This rule requires that a covered 
clearing agency establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to ``effectively measure, 
monitor, and manage the liquidity risk that arises in or is borne by 
[it], including measuring, monitoring, and managing its settlement and 
funding flows on an ongoing and timely basis, and its use of intraday 
liquidity.'' \40\
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    \39\ 17 CFR 240.17Ad-22(e)(7).
    \40\ Id.
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    In particular, Rule 17Ad-22(e)(7)(i) directs that a covered 
clearing agency meet this obligation by, among other things, 
``[m]aintaining sufficient liquid resources at the minimum in all 
relevant currencies to effect same-day . . . settlement of payment 
obligations with a high degree of confidence under a wide range of 
foreseeable stress scenarios that includes, but is not limited to, the 
default of the participant family that would generate the largest 
aggregate payment obligation for the covered clearing agency in extreme 
but plausible conditions.'' \41\
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    \41\ 17 CFR 240.17Ad-22(e)(7)(i).
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    The Commission believes that the proposal is consistent with 
Exchange Act Rule 17Ad-22(e)(7)(i). The proposed New Facility would 
permit OCC to pledge a broader range of collateral to the facility, and 
therefore would allow OCC to utilize a greater range of margin 
collateral to obtain liquidity from the facility, as an alternative to 
selling such collateral under what may be stressed and volatile market 
conditions and as an alternative to pledging collateral deposited to 
the Clearing Fund. The proposal thus increases OCC's flexibility to 
respond to a clearing member default by providing OCC with greater 
opportunity, depending on prevailing market conditions, to select among 
different types of collateral assets and make efficient use of margin 
collateral and to preserve Clearing Fund assets in managing a Clearing 
Member default. The New Facility also would permit OCC to cover any 
losses resulting from the failure of a bank or other clearing 
organization to achieve same-day settlement, subject to further 
internal governance and concomitant regulatory approvals that OCC must 
obtain.\42\ This would provide OCC with additional liquidity to manage 
scenarios outside of a Clearing Member default, thereby mitigating the 
likelihood of liquidity stress to OCC. The additional features of the 
New Facility described above would support OCC's ability to meet 
liquidity needs and to effect same-day, intraday, and multiday 
settlement payment obligations under a wider range of stress scenarios 
than under the Existing Facility. Therefore, the Commission believes 
that the proposal is consistent with Rule 17Ad-22(e)(7)(i).\43\
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    \42\ As stated above, OCC's ability to utilize borrowings for 
these purposes would be subject to a further OCC regulatory filing 
to make the changes to its By-Laws and Rules. See note 10, supra.
    \43\ Id.
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    Finally, Rule 17Ad-22(e)(7)(ii) under the Exchange Act requires 
that OCC establish, implement, maintain, and enforce written policies 
and procedures reasonably designed to hold qualifying liquid resources 
sufficient to satisfy payment obligations owed to clearing members.\44\ 
Rule 17Ad-22(a)(14) of the Exchange Act defines ``qualifying liquid 
resources'' to include, among other things, lines of credit without 
material adverse change provisions, that are readily available and 
convertible into cash.\45\ Based upon review of the relevant provisions 
of the Summary of Terms and Conditions, the Commission believes that 
the New Facility would not be subject to any material adverse change 
provision, and is thus consistent with Rule 17Ad-22(a)(14).\46\ 
Further, and as described above, the New Facility is designed to help 
ensure that OCC has sufficient, readily-available qualifying liquid 
resources to meet the cash settlement obligations of OCC's largest 
family of affiliated Clearing Members. Therefore, the Commission 
believes that the proposal is consistent with Rule 17Ad-
22(e)(7)(ii).\47\
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    \44\ 17 CFR 240.17Ad-22(e)(7)(ii).
    \45\ 17 CFR 240.17Ad-22(a)(14).
    \46\ Id.
    \47\ 17 CFR 240.17Ad-22(e)(7)(ii).
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VI. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act, that the Commission does not object to the 
Advance Notice SR-OCC-2017-803 and OCC can and hereby is authorized to 
implement the change as of the date of this notice.

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2017-14187 Filed 7-5-17; 8:45 am]
 BILLING CODE 8011-01-P


