[Federal Register Volume 82, Number 240 (Friday, December 15, 2017)]
[Notices]
[Pages 59685-59687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27112]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82296; File No. SR-OCC-2017-806]


Self-Regulatory Organizations; the Options Clearing Corporation; 
Notice of No Objection to Advance Notice Concerning Liquidity for Same-
Day Settlement

December 12, 2017.
    The Options Clearing Corporation (``OCC'') filed on October 13, 
2017 with the Securities and Exchange Commission (``Commission'') 
advance notice SR-OCC-2017-806 (``Advance Notice'') 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 (``Exchange 
Act'') \2\ to modify the tools it has available to address the risks of 
liquidity shortfalls when OCC faces a liquidity need to meet its same-
day settlement obligations resulting from the failure of a bank or 
securities or commodities clearing organization (``Settlement Entity'') 
to achieve daily settlement. The Advance Notice was published for 
comment in the Federal Register on November 13, 2017.\3\ The Commission 
has not received any comments on the Advance Notice to date. This 
publication serves as notice of no objection to the Advance Notice.
---------------------------------------------------------------------------

    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ SR-OCC-2017-806. Securities Exchange Act Release No. 82056 
(Nov. 13, 2017) 82 FR 54430 (Nov. 17, 2017). OCC also filed a 
proposed rule change with the Commission in connection with the 
proposed change. See Securities Exchange Act Release No. 81956 (Oct. 
26, 2017), 82 FR 50705 (Nov. 1, 2017) (SR-OCC-2017-017).
---------------------------------------------------------------------------

I. Background

    OCC filed this Advance Notice in connection with its proposed 
change to modify the tools available to OCC 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 resulting from a Settlement Entity's 
failure to achieve daily settlement.
    OCC's By-Laws currently grant OCC the authority to borrow against 
its Clearing Fund where a Settlement Entity fails to make timely 
settlement with OCC due to the bankruptcy, insolvency, resolution, 
suspension of operations or similar event of such Settlement Entity.\4\ 
The Advance Notice seeks to expand this borrowing authority to 
circumstances relatively less severe than bankruptcy, insolvency, or a 
similar event to include a temporary failure of a Settlement Entity to 
achieve daily settlement.
---------------------------------------------------------------------------

    \4\ OCC By-Laws, Article VIII, Section 5.
---------------------------------------------------------------------------

    Specifically, 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, the By-Laws provide 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, the By-Laws provide 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, 
the loss must arise from a situation in which any Settlement Entity 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.'' \5\
---------------------------------------------------------------------------

    \5\ 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.
---------------------------------------------------------------------------

    Under either of the circumstances above, OCC is authorized to 
borrow

[[Page 59686]]

against the Clearing Fund for a period not to exceed 30 days, and 
during this time, the borrowing would not affect the amount or timing 
of any charges otherwise required to be made against the Clearing Fund 
pursuant to Article VIII, Section 5 of the By-Laws. 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) the amount must be considered an actual loss to the 
Clearing Fund, and OCC must immediately allocate such loss among its 
Clearing Members in accordance with Article VIII, Section 5.

II. Description of the Advance Notice

A. Proposed Change To Expand Borrowing Authority

    The Advance Notice seeks to expand OCC's authority to borrow 
against its Clearing Fund to instances where a Settlement Entity 
suffers an event relatively less extreme than a bankruptcy, insolvency, 
or similar event, but is still temporarily unable to timely make daily 
settlement with OCC. Such an event might include a scenario where the 
ordinary operations of a settlement bank are disrupted in a manner that 
temporarily prohibits the bank from timely effecting settlement 
payments in accordance with OCC's daily settlement cycle. OCC believes 
that such authority would only be used in extraordinary circumstances, 
and any funds obtained from any such transaction could only be used for 
the stated purpose of satisfying a need for liquidity for same-day 
settlement.
    Pursuant to the proposed change, any ability to borrow under this 
expanded authority would not exceed thirty (30) days. During this 
period, the funds obtained would not be deemed to be charges against 
the Clearing Fund and would not affect the amount or timing of any 
charges otherwise required to be made against the clearing fund under 
Article VIII of OCC's By-Laws.\6\ Should the borrowing unexpectedly 
remain outstanding after thirty (30) days, at the close of business on 
the 30th day (or the first Business Day thereafter), the amount 
outstanding would be considered an actual loss to the Clearing Fund. 
However, OCC would also have discretionary authority to declare a 
borrowing outstanding for less than thirty (30) days as an actual loss 
chargeable against the Clearing Fund to be collected from Clearing 
Members.\7\ If the amount outstanding becomes an actual loss to the 
Clearing Fund, OCC, in accordance with its By-Laws, would then charge 
all of its Clearing Members to make pro rata contributions to the 
Clearing Fund to cover the deficit arising from the loss.
---------------------------------------------------------------------------

    \6\ Assets contained in the Clearing Fund, including those 
assets pledged by OCC pursuant to its authority under this proposed 
expansion of borrowing authority, would remain in OCC's possession.
    \7\ OCC states that such discretionary authority could be 
exercised in a circumstance where, depending on the size of the 
borrowing, OCC must ensure that it maintains financial resources 
necessary to meet a ``Cover 1'' liquidity resource standard. OCC 
must establish, implement, maintain and enforce written policies and 
procedures reasonably designed to, as applicable, effectively 
identify, measure, monitor, and manage its credit exposures to 
participants and those arising from its payment, clearing, and 
settlement processes, including by maintaining sufficient financial 
resources to cover its credit exposure to each participant fully 
with a high degree of confidence, and, to the extent not already 
maintained pursuant to the foregoing, maintaining additional 
financial resources at the minimum to enable it to cover a wide 
range of foreseeable stress scenarios that include, but are not 
limited to, 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)(4)(iii).
---------------------------------------------------------------------------

B. Proposed Change to OCC's By-Laws

    To implement the proposed change, OCC proposed to amend Sections 
1(a), 5(b) and 5(e) of Article VIII of its By-Laws to give effect to 
the expanded borrowing authority. First, Article VIII, Section 5(e) of 
the 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 Settlement Entity to achieve daily settlement. Second, 
Article VIII, Section 1(a) of the By-Laws would be amended to include 
conforming changes stating that the purpose of the Clearing Fund 
includes borrowing against the Clearing Fund as permitted under Article 
VIII Section 5(e).
    Next, Article VIII, Section 5(b) 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 to the Clearing Fund to be charged 
proportionately against all Clearing Members' computed contributions. 
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.

III. Discussion and Commission Findings

    Although the Clearing Supervision Act does not specify a standard 
of review for an advance notice, its stated purpose is instructive.\8\ 
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 (``SIFMUs'') and 
strengthening the liquidity of SIFMUs.\9\
---------------------------------------------------------------------------

    \8\ See 12 U.S.C. 5461(b).
    \9\ Id.
---------------------------------------------------------------------------

    Section 805(a)(2) of the Clearing Supervision Act \10\ authorizes 
the Commission to prescribe regulations containing risk-management 
standards for the payment, clearing, and settlement activities of 
designated clearing entities engaged in designated activities for which 
the Commission is the supervisory agency. Section 805(b) of the 
Clearing Supervision Act \11\ provides the following objectives and 
principles for the Commission's risk-management standards prescribed 
under Section 805(a):
---------------------------------------------------------------------------

    \10\ 12 U.S.C. 5464(a)(2).
    \11\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

     To promote robust risk management;
     To promote safety and soundness;
     To reduce systemic risks; and
     To support the stability of the broader financial system.
    Section 805(c) provides, in addition, that the Commission's risk-
management standards may address such areas as risk-management and 
default policies and procedures, among others areas.\12\
---------------------------------------------------------------------------

    \12\ 12 U.S.C. 5464(c).
---------------------------------------------------------------------------

    The Commission has adopted risk-management standards under Section 
805(a)(2) of the Clearing Supervision Act and the Exchange Act (the 
``Clearing Agency Rules'').\13\ The Clearing Agency Rules require each 
covered clearing agency, among other things, to establish, implement, 
maintain, and enforce written policies and procedures that are 
reasonably designed to meet certain

[[Page 59687]]

minimum requirements for operations and risk-management practices on an 
ongoing basis. As such, it is appropriate for the Commission to review 
advance notices for consistency with the objectives and principles for 
risk-management standards described in Section 805(b) of the Clearing 
Supervision Act and the Clearing Agency Rules.
---------------------------------------------------------------------------

    \13\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No. 
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11). 
See also Securities Exchange Act Release No. 78961 (September 28, 
2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing 
Agency Standards''). The Commission established an effective date of 
December 12, 2016, and a compliance date of April 11, 2017, for the 
Covered Clearing Agency Standards. On March 4, 2017, the Commission 
granted covered clearing agencies a temporary exemption from 
compliance with Rule 17Ad-22(e)(3)(ii) and certain requirements in 
Rules 17Ad-22(e)(15)(i) and (ii) until December 31, 2017, subject to 
certain conditions. OCC is a ``covered clearing agency'' as defined 
in Rule 17Ad-22(a)(5).
---------------------------------------------------------------------------

A. Consistency With Section 805(b) of the Clearing Supervision Act

    The Commission believes the Advance Notice proposal is consistent 
with the stated objectives and principles of Section 805(b) of the 
Clearing Supervision Act.\14\ Specifically, the Commission believes 
that the changes proposed in the Advance Notice are consistent with 
promoting robust risk management in the area of liquidity risk, as well 
as enhancing safety and soundness across the broader financial system.
---------------------------------------------------------------------------

    \14\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    The Commission believes that the expanded authority proposed by OCC 
under the Advance Notice would enhance OCC's ability to access liquid 
resources that, in turn, would allow OCC to continue to meet its 
settlement obligations to its Clearing Members in a timely fashion, 
thereby promoting robust liquidity risk management at OCC. The 
Commission notes that OCC's By-Laws already grant OCC the authority to 
borrow against the Clearing Fund to manage the bankruptcy, insolvency, 
receivership, suspension of operations or similar event of a Settlement 
Entity.\15\ The proposed change would therefore constitute a limited 
expansion of that authority to relatively less extreme scenarios that 
nevertheless temporarily prevent a Settlement Entity from achieving 
daily settlement. While the Commission notes that this expansion of 
OCC's authority to use the Clearing Fund potentially expands that range 
of scenarios where OCC might have to use Clearing Fund resources, the 
Commission believes that the ability of OCC management to exercise its 
discretion to either borrow against the Clearing Fund or utilize some 
other tool would permit OCC to consider and effectively manage such 
scenarios based on the facts and circumstances present.\16\
---------------------------------------------------------------------------

    \15\ The Commission previously issued a Notice of No Objection 
to OCC's Advance Notice Proposal to Enter Into a New Credit Facility 
Agreement, which involved a replacement of a revolving credit 
facility. See Securities Exchange Act Release No. 81058 (June 30, 
2017), 82 FR 31371 (July 6, 2017) (SR-OCC-2017-803). The Commission 
believes that the present Advance Notice is consistent with the new 
credit facility agreement, which provides OCC with the ability to 
borrow to address reasonably anticipated same-day settlement 
obligations, including but not limited to, the failure of any 
Settlement Entity to achieve daily settlement.
    \16\ For example, OCC could use existing authority to expand the 
settlement window under OCC Rule 505, rather than borrowing against 
the Clearing Fund, should it determine that this tool would be more 
appropriate in light of other demands on Clearing Fund resources.
---------------------------------------------------------------------------

    Further, the Commission believes that the Advance Notice is 
consistent with reducing systemic risks and promoting the stability of 
the broader financial system. The Commission believes that expanding 
OCC's authority to use the Clearing Fund in the manner proposed by the 
Advance Notice increases the probability of OCC being able to meet its 
settlement obligations to its Clearing Members. The ability to use the 
Clearing Fund to obtain liquid resources to cover a liquidity gap that 
arises where a Settlement Entity is unable to perform enhances OCC's 
ability to contain losses and liquidity pressures that otherwise might 
cause financial distress to OCC or its Clearing Members, thereby 
enhancing safety and soundness across the broader financial system. The 
Commission believes that the Advance Notice is designed to bolster 
OCC's ability to meet its settlement obligations even if a Settlement 
Entity temporarily fails to achieve daily settlement with OCC, 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)(viii) Under the Exchange Act

    The Commission further believes that the proposed change is 
consistent with Rule 17 Ad-22(e)(7)(viii), which requires that a 
covered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to, as applicable, 
effectively measure, monitor, and manage liquidity risk that arises in 
or is borne by the covered clearing agency, including measuring, 
monitoring, and managing its settlement and funding flows on an ongoing 
and timely basis, and its use of intraday liquidity by, at a minimum, 
addressing foreseeable liquidity shortfalls that would not be covered 
by its liquid resources and seek to avoid unwinding, revoking, or 
delaying the same-day settlement of payment obligations.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 240.17Ad-22(e)(7)(viii).
---------------------------------------------------------------------------

    The Commission believes that the Advance Notice is designed to 
improve OCC's ability to address a temporary liquidity need resulting 
from the failure of a Settlement Entity to achieve timely settlement. 
The Commission believes that the proposed change is designed to provide 
OCC with additional tools to address a foreseeable, temporary liquidity 
shortfall to prevent the unwinding, revoking, or delaying of same-day 
settlement should that scenario materialize, and is therefore 
consistent with Rule 17Ad-22(e)(7)(viii) under the Exchange Act.

IV. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(G) of the 
Payment, Clearing and Settlement Supervision Act,\18\ that the 
Commission does not object to Advance Notice (SR-OCC-2017-806) and that 
OCC is authorized to implement the proposed change.\19\
---------------------------------------------------------------------------

    \18\ 12 U.S.C. 5465(e)(1)(G).
    \19\ OCC is authorized to implement the proposed change as of 
the date of this Notice of No Objection or the date of an Order by 
the Commission approving the proposed rule change filed in 
connection with this Advance Notice, SR-OCC-2017-017, whichever is 
later.

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2017-27112 Filed 12-14-17; 8:45 am]
 BILLING CODE 8011-01-P


