[Federal Register Volume 82, Number 210 (Wednesday, November 1, 2017)]
[Notices]
[Pages 50703-50705]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-23736]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81956; File No. SR-OCC-2017-017]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Concerning Liquidity for Same 
Day Settlement

October 26, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on October 13, 2017, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by OCC. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    This proposed rule change by the OCC would revise OCC's By-Laws to 
expand upon existing authority to borrow against the Clearing Fund.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. 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), 
(B), and (C) below, of the most significant aspects of these 
statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed change is to modify the tools available 
to OCC in order to provide a mechanism for addressing the risks of 
liquidity shortfalls, specifically, in the extraordinary situation 
where OCC faces a liquidity need to meet its same-day settlement 
obligations as a result of a bank or securities or commodities clearing 
organization failing to achieve daily settlement.
Proposed Changes
Current Practice
    Presently, Article VIII, Section 5(e) of OCC's By-Laws provides OCC 
with the authority to borrow against the Clearing Fund in two 
circumstances. First, Article VIII, Section 5(e) of OCC's By-Laws 
provides OCC the authority to borrow where OCC ``deems it necessary or 
advisable to borrow or otherwise obtain funds from third parties in 
order to meet obligations arising out of the default or suspension of a 
Clearing Member or any action taken by the Corporation in connection 
therewith pursuant to Chapter XI of the Rules or otherwise.'' Second, 
Article VIII, Section 5(e) of OCC's By-Laws provides OCC the authority 
to borrow against the Clearing Fund where OCC ``sustains a loss 
reimbursable out of the Clearing Fund pursuant to [Article VIII, 
Section 5(b) of OCC's By-Laws] but [OCC] elects to borrow or otherwise 
obtain funds from third parties in lieu of immediately charging such 
loss to the Clearing Fund.'' In order for a loss to be reimbursable out 
of the Clearing Fund under Article VIII, Section 5(b) of OCC's By-Laws, 
it must arise from a situation in which any bank or securities or 
commodities clearing organization has failed ``to perform any 
obligation to [OCC] when due because of its bankruptcy, insolvency, 
receivership, suspension of operations, or because of any similar 
event.'' \3\
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    \3\ To the extent that a loss resulting from any of the events 
referred to in Article VIII, Section 5(b) is recoverable out of the 
Clearing Fund pursuant to Article VIII, Section 5(a), the provisions 
of Article VIII, Section 5(a) control and render the provisions of 
Article VIII, Section 5(b) inapplicable.
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    Under either of the two aforementioned circumstances, OCC is 
authorized to borrow against the Clearing Fund for a period not to 
exceed 30 days, and during such period, the borrowing shall not affect 
the amount or timing of any charges otherwise required to be made 
against the Clearing Fund pursuant to Article VIII, Section 5. However, 
if any part of the borrowing remains outstanding after 30 days, then at 
the close of business on the 30th day (or the first Business Day 
thereafter) such amount must be considered an actual loss to the 
Clearing Fund, and OCC must immediately allocate such loss in 
accordance with Article VIII, Section 5.
Proposed Change
    While Article VIII, Section 5(e) of OCC's By-Laws currently 
provides for borrowing authority in the more extreme scenarios 
involving a bank's or securities or commodities clearing

[[Page 50704]]

organization's bankruptcy, insolvency, receivership, suspension of 
operations or similar event, such authority does not extend to the 
similar, but less extreme scenarios in which a bank or securities or 
commodities clearing organization might be temporarily unable to timely 
make daily settlement with OCC for reasons other than its bankruptcy, 
insolvency, receivership or suspension of operations or similar events. 
An example of such a related scenario would be a disruption of the 
ordinary operations of a settlement bank that temporarily prohibits the 
bank from timely effecting settlement payments in accordance with OCC's 
daily settlement cycle.
    The proposed rule change would expand upon the existing borrowing 
authority in Article VIII, Section 5(e) of OCC's By-Laws. As expanded, 
OCC would be authorized to borrow (or otherwise obtain funds through 
any means determined to be reasonable by the Executive Chairman, COO or 
CAO) against the Clearing Fund in the extraordinary event that OCC 
faces a liquidity need in order to complete same-day settlement. As 
specified in the proposed rule text, the funds obtained from any such 
transaction can be used only for their stated purpose, namely, to 
satisfy a need for liquidity for same-day settlement. Consistent with 
the existing borrowing authority in Article VIII, Section 5(e) of OCC's 
By-Laws, OCC would be authorized to borrow against the Clearing Fund 
for a period not to exceed 30 days, and during such period, the funds 
obtained would not be deemed to be charges against the Clearing Fund, 
irrespective of how such funds are applied, and the borrowing shall not 
affect the amount or timing of any charges otherwise required to be 
made against the Clearing Fund pursuant to Article VIII, Section 5. 
However, in the unlikely event that any part of the borrowing were to 
remain outstanding after 30 days, then at the close of business on the 
30th day (or the first Business Day thereafter), such amount would be 
considered an actual loss to the Clearing Fund, and OCC must 
immediately allocate such loss in accordance with Article VIII, Section 
5.
    Like the existing borrowing authority in Article VIII, Section 5(e) 
of OCC's By-Laws, OCC envisions that the proposed expanded authority 
only would be relevant in extraordinary circumstances and, even then, 
only would be used where OCC, exercising its discretion, believes the 
employment of this particular authority would be appropriate to address 
OCC's immediate liquidity need.
    OCC proposes to amend Sections 1(a), 5(b) and 5(e) of Article VIII 
of its By-Laws in order to give effect to the expanded borrowing 
authority discussed herein. Section 5(e) of Article VIII of OCC's By-
Laws would be amended to permit OCC to borrow against the Clearing Fund 
if it reasonably believes such borrowing is necessary to meet its 
liquidity needs for same-day settlement as a result of the failure of 
any bank or securities or commodities clearing organization to achieve 
daily settlement.
    Section 1(a) of Article VIII of OCC's By-Laws would be amended to 
include conforming changes that would reflect that the purpose of the 
Clearing Fund includes borrowing against the Clearing Fund as permitted 
under Section 5(e) of Article VIII of the By-Laws.
    Section 5(b) of Article VIII of the By-Laws would be amended to 
include conforming changes that would declare that any borrowing 
remaining outstanding for less than 30 days may be considered, in OCC's 
discretion, an actual loss and the amount of any such loss then shall 
be charged proportionately against all Clearing Members' computed 
contributions to the Clearing Fund as fixed at the time, and any 
borrowing remaining outstanding on the 30th day shall be considered an 
actual loss to the Clearing Fund and the amount of any such loss shall 
be charged proportionately against all Clearing Members' computed 
contributions to the Clearing Fund as fixed at the time. The OCC 
proposes to include discretionary authority to declare any borrowing 
outstanding for less than 30 days as an actual loss chargeable against 
the Clearing Fund because the proposed borrowing authority is intended 
only to address same-day liquidity needs, and intended to be promptly 
repaid upon the bank's or securities or commodities clearing 
organization's resolution of the temporary disruption. In the unlikely 
circumstance that a disruption of a bank or securities or commodities 
clearing organization is not timely resolved, OCC may need to exercise 
its discretion to declare an actual loss, depending on the size of the 
borrowing, to ensure that OCC replenishes its ``Cover 1'' financial 
resources.\4\ The requirement to recognize any borrowing outstanding 
after 30 days as an actual loss chargeable against the Clearing Fund 
would be consistent with the requirements of the borrowing authority 
currently permitted by Section 5(e) of Article VIII of the By-Laws.
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    \4\ ``Cover 1'' financial resources refers to the requirement 
that a CCA maintains financial resources sufficient to enable it to 
cover the ``default of the participant family that would potentially 
cause the largest aggregate credit exposure for the [CCA] in extreme 
but plausible market conditions.'' 17 CFR 240.17Ad-22(e)(7)(viii).
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2. Statutory Basis
    Section 17A(b)(3)(F) of the Act \5\ requires, among other things, 
that the rules of a clearing agency be designed to perfect the 
mechanism of a national system for the prompt and accurate clearance 
and settlement of securities transactions. The proposed rule change is 
designed to ensure that OCC can continue to promptly settle the 
securities and derivatives transactions it clears by enhancing the 
existing tools OCC has to address liquidity shortfalls. Specifically, 
the proposed rule change would expand the existing borrowing authority 
in OCC's By-Laws to also authorize borrowing in the extraordinary event 
that OCC faces a liquidity need in order to complete same day 
settlement, independent of whether OCC has suffered a loss resulting 
from the bankruptcy or similar event of a bank or securities or 
commodities clearing organization.
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    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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    It is conceivable, though extremely unlikely, that parties may fail 
to make timely settlement with OCC as the result of an event that does 
not result in a loss to OCC from the bankruptcy, insolvency, 
resolution, suspension of operations or similar event of a bank or 
securities or commodities clearing organization. A hypothetical example 
of one such event might be a temporary disruption to the ordinary 
operation of a settlement bank resulting from a technology issue. The 
issue presents no concern about the bank's creditworthiness (or the 
creditworthiness of any Clearing Member that has selected such 
institution as its settlement bank) but the bank's technology issue 
nonetheless temporarily interferes with the ability of the bank to 
timely move funds in accordance with OCC's daily settlement cycle. In 
this hypothetical, the most likely alternative for OCC is to exercise 
its ability under Rule 505 to extend the settlement window to the close 
of Fedwire. The proposed rule change would provide OCC with an 
alternative tool with which to address the type of extraordinary 
circumstance highlighted by OCC's hypothetical. The proposed rule 
change would improve OCC's ability to address the situation in the 
hypothetical example because use of the proposed expanded borrowing 
authority would enable OCC to borrow against the Clearing Fund in order 
to avoid

[[Page 50705]]

disrupting its ordinary settlement cycle (and thusly, to avoid imposing 
the same disruption on Clearing Members), thereby avoiding the need to 
extend the settlement window and allowing OCC to settle transactions in 
a more timely fashion. In this regard, OCC believes the proposed rule 
change is designed to promote the prompt and accurate clearance and 
settlement of securities transactions, in accordance with the 
requirements of Section 17A(b)(3)(F) of the Act.\6\
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    \6\ Id.
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    Additionally, Rule 17Ad-22(e)(7)(viii) requires that a covered 
clearing agency (``CCA'') address foreseeable liquidity shortfalls that 
would not be covered by the CCA's liquid resources and seek to avoid 
unwinding, revoking, or delaying the same-day settlement of payment 
obligations.\7\ As stated above, OCC believes that it could be 
foreseeable, though extremely unlikely, that a bank or securities or 
commodities clearing organization may fail to make timely settlement 
with OCC as the result of an event that does not result in a loss to 
OCC from the bankruptcy, insolvency, resolution, suspension of 
operations or similar event of such bank or securities or commodities 
clearing organization. The proposed rule change would improve OCC's 
ability to address such situations by expanding OCC's borrowing 
authority to enable OCC to borrow against the Clearing Fund in order to 
avoid disrupting its ordinary settlement cycle (and thusly, to avoid 
imposing the same disruption on Clearing Members).
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    \7\ 17 CFR 240.17Ad-22(e)(7)(viii).
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    The proposed rule change is not inconsistent with the existing 
rules of OCC, including any other rules proposed to be amended.

(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act \8\ requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. OCC does not 
believe the proposed rule change would have any impact or impose any 
burden on competition. The primary purpose of the proposed rule change 
is to enhance the existing tools OCC has to address liquidity 
shortfalls by expanding the existing borrowing authority in OCC's By-
Laws to also authorize borrowing in the extraordinary event that OCC 
faces a liquidity need in order to complete same day settlement. The 
proposed rule change would apply equally to all Clearing Members and 
would not affect Clearing Members' access to OCC's services or 
disadvantage or favor any particular user in relationship to another 
user. As such, OCC believes that the proposed changes would not have 
any impact or impose any burden on competition.
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    \8\ 15 U.S.C. 78q-1(b)(3)(I).
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments were not and are not intended to be solicited with 
respect to the proposed rule change, and none have been received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commissions Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-OCC-2017-017 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2017-017. 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 proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change 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 such 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_017.pdf.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File Number SR-OCC-2017-017 and 
should be submitted on or before November 22, 2017.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-23736 Filed 10-31-17; 8:45 am]
 BILLING CODE 8011-01-P


