[Federal Register Volume 83, Number 15 (Tuesday, January 23, 2018)]
[Notices]
[Pages 3224-3233]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-01071]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82514; File No. SR-OCC-2017-810]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Advance Notice Concerning Updates to and 
Formalization of OCC's Recovery and Orderly Wind-Down Plan

January 17, 2018.
    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 (``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 December 8, 2017, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') an advance notice 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 advance 
notice from interested persons.
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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 filed in connection with a proposed change 
to formalize and update OCC's Recovery and Orderly Wind-Down Plan 
(``RWD Plan'' or ``Plan''), consistent with the requirement applicable 
to OCC in Rule 17Ad-22(e)(3)(ii).
    The RWD Plan was included as confidential Exhibit 5 of the 
filing.\3\ The proposed change is described in detail in Item II below. 
All terms with initial capitalization not defined herein have the same 
meaning as set forth in OCC's By-Laws and Rules.\4\
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    \3\ OCC has filed a proposed rule change with the Commission in 
connection with the proposed change. See SR-OCC-2017-021.
    \4\ OCC's By-Laws and Rules can be found on OCC's public 
website: http://optionsclearing.com/about/publications/bylaws.jsp.
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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 rule change and none have been received. OCC 
will notify the Commission of any written comments received by OCC.

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

Description of the Proposed Change
Background
    On September 28, 2016 the Commission adopted amendments to Rule 
17Ad-22 \5\ and added new Rule 17Ab2-2 \6\ pursuant to Section 17A of 
the Securities Exchange Act of 1934 \7\ and the Payment, Clearing, and 
Settlement Supervision Act of 2010 (``Payment, Clearing and Settlement 
Supervision Act'') \8\ to establish enhanced standards for the 
operation and governance of those clearing agencies registered with the 
Commission that meet the definition of a ``covered clearing agency,'' 
as defined by Rule 17Ad-22(a)(5) \9\ (collectively, the new and amended 
rules are herein referred to as ``CCA'' rules). The CCA rules require 
that covered clearing agencies, among other things:
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    \5\ 17 CFR 240.17Ad-22.
    \6\ 17 CFR 240.17Ab2-2.
    \7\ 15 U.S.C. 78q-1.
    \8\ 12 U.S.C. 5461 et. seq.
    \9\ 17 CFR 240.17Ad-22(a)(5).

[E]stablish, implement, maintain and enforce written policies and 
procedures reasonably designed to . . . [m]aintain a sound risk 
management framework for comprehensively managing legal, credit, 
liquidity, operational, general business, investment, custody, and 
other risks that arise in or are borne by the [CCA], which . . . 
[i]ncludes plans for the recovery and orderly wind-down of the [CCA] 
necessitated by credit losses, liquidity shortfalls, losses from 
general business risk, or any other losses.\10\
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    \10\ 17 CFR 240.17Ad-22(e)(3)(ii).

    OCC is defined as a covered clearing agency under the CCA rules, 
and therefore is subject to the requirements of the CCA rules, 
including Rule 17Ad-22(e)(3).\11\
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    \11\ Id.
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Proposed RWD Plan
    OCC is proposing to update, formalize and adopt its RWD Plan.\12\ 
Consistent with the Commission's guidance concerning the requirements 
of Rule 17Ad-22(e)(3)(ii), the purpose of the proposed RWD Plan is to 
(i) demonstrate that OCC has considered the scenarios which may 
potentially prevent it from being able to provide its ``Critical 
Services'' (defined below) as a going-concern,\13\ (ii) provide 
appropriate plans for OCC's recovery or orderly wind-down based on the 
results of such consideration; \14\ and (iii) impart to relevant 
authorities the information reasonably anticipated to be necessary for 
purposes of recovery and orderly wind-down planning.\15\
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    \12\ OCC maintains a recovery and orderly wind-down plan that 
was prepared in response to evolving international standards for 
CCPs. The existing version of OCC's recovery and orderly wind-down 
plan was prepared in advance of the adoption of the CCA rules.
    \13\ As defined by Rule 17Ad-22(e)(3)(ii), those scenarios are: 
``credit losses, liquidity shortfalls, losses from general business 
risks and other losses.'' 17 CFR 240.17Ad-22(e)(3)(ii).
    \14\ See Standards for Covered Clearing Agencies, 81 FR 70786, 
70810 (Oct. 13, 2016).
    \15\ Id.
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    As discussed in greater detail below, in preparing the proposed 
Plan, OCC was informed by relevant guidance from not only from OCC's 
regulators, but also from certain international organizations. Within 
the framework of this guidance, OCC has drafted the proposed Plan to 
reflect OCC's specific characteristics, including its ownership, 
organizational, and operational structures, as well as OCC's size and 
systemic importance relative to the products that its clears.\16\
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    \16\ See 81 FR at 70808.
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    The proposed RWD Plan consists of eight chapters. A description of 
each of the first seven chapters of the proposed Plan is provided below 
(Chapter 8 of the proposed plan consists of a series of appendices 
containing supporting material).
Chapter 1: Executive Summary
    Chapter 1 of the RWD Plan would provide an executive summary and 
overview of the proposed Plan. Chapter 1 would begin by acknowledging 
OCC's

[[Page 3225]]

status as a designated Systemically Important Financial Market Utility 
(``SIFMU'') \17\ and would recognize that the proposed Plan is designed 
to satisfy OCC's regulatory requirements under Rule 17Ad-22(e)(3)(ii). 
Chapter 1 would include a list of relevant guidance that was considered 
by OCC in drafting the proposed Plan; the guidance considered by OCC 
includes, but is not limited to, the materials listed below:
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    \17\ The Financial Stability Oversight Council designated OCC a 
SIFMU on July 18, 2012 pursuant to the Payment, Clearing and 
Settlement Supervision Act. See 12 U.S.C. 5463.
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     The sections of the preamble to the Commission's adopting 
release for its CCA rules that address topics relating to recovery and 
orderly wind-down of a CCA; \18\
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    \18\ See 81 FR 70786.
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     Principles for Financial Market Infrastructures 
(``PFMI''), published by the Bank for International Settlements 
Committee on Payment and Settlement Services and the Board of the 
International Organization of Securities Commissions (``CPSS-IOSCO''); 
\19\
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    \19\ CPSS-IOSCO, Principles for financial market infrastructures 
(Apr. 16, 2012), available at http://www.bis.org/publ/cpss101a.pdf.
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     Recovery and Resolution Planning for Systemically 
Important Financial Institutions: Guidance on Identification of 
Critical Functions and Critical Shared Services, published by the 
Financial Stability Board (``FSB''); \20\
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    \20\ FSB, Recovery and Resolution Planning for Systemically 
Important Financial Institutions: Guidance on Identification of 
Critical Functions and Critical Shared Services.
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     Recovery of Financial Market Infrastructures, published by 
the Bank for International Settlements Committee on Payments and Market 
Infrastructures and the Board of the International Organization of 
Securities Commissions (``CPMI-IOSCO''); \21\
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    \21\ CPMI-IOSCO, Recovery of financial market infrastructures 
(published as revised on July 5, 2017), available at: http://www.bis.org/cpmi/publ/d162.pdf (``Recovery Report'').
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     Commodity Futures Trading Commission (``CFTC'') Staff 
Letter 16-61, published by the Division of Clearing and Risk of the 
CFTC; \22\
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    \22\ CFTC Staff Letter 16-61, available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/16-61.pdf.
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     Essential Aspects of CCP Resolution Planning, published by 
the FSB; \23\
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    \23\ FSB, Essential Aspects of CCP Resolution Planning, (Aug. 
16, 2016), available at: http://www.fsb.org/wp-content/uploads/Essential-Aspects-of-CCP-Resolution-Planning.pdf.
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     Guidance on Central Counterparty Resolution and Resolution 
Planning, published by the FSB; \24\ and
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    \24\ FSB, Guidance on Central Counterparty Resolution and 
Resolution Planning, (July 5, 2017), available at: http://www.fsb.org/wp-content/uploads/P050717-1.pdf. (``CCP Resolution 
Report'').
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     Resilience of Central Counterparties: Further Guidance on 
the PFMI, published by CPMI-IOSCO.\25\
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    \25\ CPMI-IOSCO, Resilience of central counterparties: further 
guidance on the PFMI (published on July 5, 2017), available at: 
http://www.bis.org/cpmi/publ/d163.pdf.
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    Chapter 1 would highlight OCC's designated Critical Services and 
would summarize the approach OCC used in preparing its ``Stress 
Scenarios,'' which are six detailed storyline scenarios that address 
OCC's possible response to one or more of the following stresses: 
Individual Clearing Member default, multiple successive Clearing Member 
defaults, disruption or failure of a bank or liquidity facility 
provider, inability to access another financial market infrastructure 
and general business and operational risks. The Stress Scenarios would 
be included in Appendix H of the Plan. Chapter 1 would restate each of 
the five qualitative ``Recovery Trigger Events'' that are identified in 
Chapter 5 of the RWD Plan (which constitutes OCC's ``Recovery Plan'') 
and explain that the timeframe for OCC's recovery, based on the Stress 
Scenarios, could range from intraday to several months. Chapter 1 also 
would restate each of the six qualitative ``W[ind-]D[own ]P[lan] 
Trigger Events,'' which, if occurring during OCC's recovery efforts, 
could likely jeopardize the viability of OCC's recovery and signal that 
initiation of OCC's Wind-Down Plan (``WDP'') should be considered. 
Chapter 1 would explain that, given OCC's critical role as the sole 
clearing organization for all securities options exchanges in the U.S., 
OCC would seek to focus primarily on recovering from any severe stress 
scenario; however, in the extremely remote circumstance that that OCC 
experienced a stress severe enough to initiate the WDP, the ultimate 
goal of OCC's resolution would be to transfer ownership of OCC itself 
by the consummation of a consensual sale or similar transaction, in a 
manner ensuring the ongoing provision of OCC's Critical Services. 
Chapter 1 would conclude by summarizing OCC's assumptions for the 
duration of its resolution process and the estimated amount of 
operating capital needed to fund OCC's resolution.
Chapter 2: OCC Overview
    Chapter 2 of the proposed RWD Plan is designed to impart 
information that OCC believes would be essential to relevant 
authorities for purposes of recovery and orderly wind-down planning, as 
well as to provide readers of the Plan with necessary context for the 
subsequent discussion and analysis of OCC's ``Critical Services'' and 
``Critical Support Functions'' in Chapter 4 (discussed below) and of 
OCC's resolution process in Chapter 6 (discussed below). To accomplish 
this, Chapter 2 would provide a detailed description of OCC's business, 
summarizing the role that OCC plays in the options market and the 
services and products it provides to its clearing members and market 
participants. Chapter 2 also would describe the regulatory oversight to 
which OCC is subject, and give details on the basic structure and 
organization of OCC's Board of Directors and management. Chapter 2 also 
would provide OCC's financial statements and summarize the services OCC 
provides to its clearing members and other financial market utilities 
(``FMUs''). Chapter 2 would include details about OCC's internal and 
external interconnectedness, distinguishing as appropriate between 
financial, operational and external forms of interconnectedness. 
Chapter 2 would further provide an explanation of each of OCC's three 
lines of defense, which are employed to mitigate the various risks to 
which OCC is exposed,\26\ and the internal controls framework used to 
implement OCC's three lines of defense model. Chapter 2 would also 
discuss the participation and role of OCC's internal Management 
Committee and the Board of Directors and its various committees in 
OCC's risk management process. Finally, Chapter 2 would provide a 
discussion of OCC's budgeting process, pricing decisions, refund 
pricing, retirement plan obligations, other material financial 
obligations and sources of funds relevant to OCC's critical 
operations.\27\
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    \26\ The three lines of defense are discussed in greater detail 
in a proposed rule change regarding OCC's ``Risk Management 
Framework.'' See Securities Exchange Act Release No. 34-81909 (Oct. 
19, 2017), 82 FR 49456 (Oct. 25, 2017) (SR-OCC-2017-005).
    \27\ Each of the items listed is discussed in the ``Subsequent 
Events'' section of OCC's 2016 Annual Report, available at: https://www.theocc.com/components/docs/about/annual-reports/occ-2016-annual-report.pdf.
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Chapter 3: Support Functions
    In Chapter 3 of the proposed RWD Plan, OCC would identify each of 
its fourteen different internal support functions and provide a brief 
description of the activities performed by each such support function. 
Together, Chapters 2 and 3 of the proposed Plan are designed to provide 
foundational information about the organization and operation of OCC 
that might be essential to relevant authorities in the event of an 
orderly wind-down planning. Like Chapter 2, the

[[Page 3226]]

information provided in Chapter 3 also would provide readers of the RWD 
Plan with necessary context for the subsequent discussion and analysis 
in Chapters 4 and 6.
Chapter 4: Critical Services and Critical Support Functions
    The primary purpose of Chapter 4 of the proposed RWD Plan would be 
to identify OCC's ``Critical Services'' and ``Critical Support 
Functions.'' A ``Critical Service,'' as defined in the proposed Plan, 
is a service provided by OCC that, if interrupted, would likely have a 
material negative impact on participants or significant third parties, 
give rise to contagion, or undermine the general confidence of markets 
the FMU serves.\28\ Similarly, a ``Critical Support Function,'' as 
defined in the proposed Plan, is a function within OCC that must 
continue in some capacity in order for OCC to be able to continue 
providing its Critical Services.
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    \28\ See Recovery Report, p. 8.
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    Chapter 4 of the proposed Plan sets forth the framework that OCC 
has used to designate its ``Critical Services'' and provides the 
analysis that OCC employed such designation. As proposed, the framework 
for designating OCC's ``Critical Services'' enlists the following 
criteria to determine if failure or discontinuation of a particular its 
services would adversely impact financial and operational capabilities 
of OCC's clearing members, other FMUs, and/or the broader financial 
system:
     Market Dominance: This criterion considers OCC's market 
share in the relevant service and evaluation of importance of relevant 
service to clearing members and to the overall economy.
     Substitutability: This criterion considers the existence 
of service providers other than OCC that could replicate the 
functionality of OCC's Critical Service if such Critical Service failed 
or was discontinued and the ability to transfer customers and 
transactions to other providers in a short timeframe.
     Interconnectedness: This criterion considers the depth and 
breadth of connections between OCC and other market participants that 
increase the likelihood of contagion if the service failed or was 
discontinued.
     Barriers to Entry: This criterion considers the business, 
structural, and/or operational complexity of OCC's services that may 
increase barriers to entry to other service providers.\29\
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    \29\ The criteria OCC selected align with criteria set forth in 
the Recovery Report to identify services as ``critical'' based upon 
``the importance to the service to the FMI's participants and other 
FMIs, and to the smooth functioning of the markets the FMI serves 
and, in particular, the maintenance of financial stability.'' See 
Recovery Report, p. 8.
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    In proposed Chapter 4, OCC further reduces each criterion to 
between one and three ``measurable indicators.'' Each measureable 
indicator is assigned a ``high,'' ``medium'' or ``low'' rating relative 
to each of the services evaluated, and each rating assigned to a 
measurable indicator is given equal weight in OCC's designation 
analysis. OCC evaluated eight discreet services, five of which were 
assigned a ``high'' rating for at least one of the measurable 
indicators in each of the four selected criteria. In proposed Chapter 
4, certain qualitative and quantitative characteristics of each of 
those five discreet services is further discussed in order to reach a 
conclusion about the service's criticality. In proposed Chapter 4, OCC 
designates several of its services as Critical Services on the basis of 
this final discussion; the services designated as Critical Services 
would include, but not be limited to, clearance services for listed 
options and clearance services for futures.
    Proposed Chapter 4 derives OCC's Critical Support Functions from 
the Critical Services designations. In proposed Chapter 4, OCC 
inventories each of the fourteen support functions discussed in Chapter 
3 and determines which are minimally necessary for the continued and 
orderly operation each of the services identified as Critical Services. 
On the basis of this identification process, proposed Chapter 4 
identifies the eleven support functions as ``Critical Support 
Functions.''
    The final sections of Chapter 4 would discuss the critical vendors 
for each of the Critical Support Functions, as well as the critical 
external interconnections that OCC maintains with other FMUs, exchanges 
(including designated contract markets), clearing and settlement banks, 
custodian banks, letter of credit banks, clearing members and credit 
facility lenders. These sections would be supported by the materials in 
Appendix B (which identifies OCC's clearing members), Appendix C (which 
identifies OCC's settlement banks), Appendix D (which identifies OCC's 
custodial banks), Appendix E (which identifies OCC's letter of credit 
banks), Appendix F (which identifies OCC's key vendors and service 
providers) and Appendix G (which identifies key agreements to be 
maintained).
Chapter 5: Recovery Plan
    Chapter 5 of OCC's proposed Plan would constitute OCC's Recovery 
Plan. Consistent with the above-stated purpose of a recovery and 
orderly wind-down plan, the purpose of Chapter 5 would be to 
demonstrate that OCC has considered scenarios which may potentially 
prevent it from being able to provide its Critical Services as a going-
concern and that, based on the scenarios considered, OCC has prepared 
appropriate plans for its recovery.\30\
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    \30\ For the purposes of the RWD Plan, OCC would define 
``recovery'' consistent with the definition advanced by CPMI-IOSCO, 
which is ``the actions of an FMI, consistent with its rules, 
procedures, and other ex-ante contractual arrangements, to address 
any uncovered credit loss, liquidity shortfall, capital inadequacy, 
or business, operational or other structural weakness, including the 
replenishment of any depleted pre-funded financial resources and 
liquidity arrangements, as necessary to maintain the FMI's viability 
as a going concern.'' See Recovery Report, p. 3.
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    The Recovery Plan would begin by describing the approach OCC 
initially took in developing the stress scenarios and recovery 
scenarios in OCC's existing orderly recovery and wind-down plan. 
Proposed Chapter 5 would then describe the approach OCC took in 
refining existing scenarios and adding new scenarios to arrive at the 
six storyline Stress Scenarios in Appendix H of the proposed RWD 
Plan.\31\
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    \31\ As stated above, the Stress Scenarios are six detailed 
storyline scenarios that address OCC's possible response to one or 
more of the following stresses: Individual Clearing Member default, 
multiple successive Clearing Member defaults, disruption or failure 
of a bank or liquidity facility provider, inability to access 
another financial market infrastructure and general business and 
operational risks.
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    The Recovery Plan would next identify and discuss each of OCC's 
``Enhanced Risk Management Tools'' and ``Recovery Tools,'' which 
together would form the tool set that OCC could deploy, as applicable 
facts and circumstances might warrant, in a stress scenario. With 
respect to the Enhanced Risk Management Tools and Recovery Tools, the 
Recovery Plan would provide an overview of the tool, and as appropriate 
for each tool, the Recovery Plan would include a discussion of the 
implementation of the tool (including the estimated time frame for 
implementation of the tool), the key risks associated with the tool, 
and the expected impact and incentives associated with use of the tool.
Enhanced Risk Management Tools
    Proposed Chapter 5 would explain that OCC's Enhanced Risk 
Management Tools are designed to supplement OCC's existing processes 
and other existing tools in scenarios where OCC faces heightened 
stresses. Contrary to the Recovery Tools (which are described in 
greater detail below), the use of OCC's Enhanced Risk Management Tools

[[Page 3227]]

would not be intended to be limited strictly to situations in which a 
Recovery Trigger Event has occurred. Rather, OCCs Enhanced Risk 
Management Tools have been designed such that they could be used prior 
to the occurrence of a Recovery Trigger Event (and preferably, the 
Enhanced Risk Management Tools would be used prophylactically in an 
effort to prevent the occurrence of a Recovery Trigger Event). As 
proposed, OCC would not anticipate there being a rigid order or timing 
for the deployment of its Enhanced Risk Management Tools, subject to 
one caveat--``Cash Settlement of Physically Delivered Options and 
Single Stock Futures'' would only be deployed in very narrow 
circumstances where a correspondent clearing organization has rejected 
the settlement obligations of an OCC Clearing Member and OCC does not 
believe it has sufficient liquid resources immediately available to 
facilitate settlement through a substitute broker.
    Descriptions of each of the Enhanced Risk Management Tools 
contained in the proposed Recovery Plan are provided below:
    Use of Current/Retained Earnings. Section 5(d) of Article VIII of 
OCC's By-Laws provides OCC with the authority to use current and/or 
retained earnings to discharge a loss that would be chargeable against 
the Clearing Fund. The Recovery Plan would identify this existing 
authority as one of OCC's Enhanced Risk Management Tools.
    As stated in Section 5(d) of Article VIII of the By-Laws, use of 
OCC's current and/or retained earnings would require prior unanimous 
consent from the holders of OCC's Class A common stock and Class B 
common stock. Accordingly, the Recovery Plan would acknowledge that the 
utility of this particular tool is limited by the fact that the tool is 
dependent upon receipt of unanimous consent from OCC's existing 
stockholders (and therefore, the availability of the tool cannot be 
known in advance). The Recovery Plan would further acknowledge that 
because OCC's retained earnings presently amount to only a small 
fraction of OCC's existing prefunded Clearing Fund resources, the 
maximum utility of this particular tool may be realized in specific 
circumstances at either the beginning of OCC's loss waterfall (i.e., by 
attempting to fully extinguish the liabilities and obligations arising 
from a Clearing Member's default without charging the Clearing Fund 
whatsoever) or toward the end of OCC's loss waterfall (i.e., by 
attempting to contribute additional resources that may be necessary for 
OCC to fully extinguish its liabilities and obligations through tear-
up).
    Minimum Clearing Fund Cash Contribution. OCC is in the process of 
proposing a requirement that Clearing Members collectively contribute 
$3 billion in cash to the Clearing Fund and that OCC would have 
discretionary authority, in certain limited circumstances, to increase 
that minimum cash requirement from $3 billion up to the then-minimum 
size of the Clearing Fund. (``Cash Clearing Fund Requirement'').\32\ 
The Cash Clearing Fund Requirement would be included in the Recovery 
Plan as one of OCC's Enhanced Risk Management Tools.
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    \32\ See Securities Exchange Act Release No. 34-82156 (Nov. 27, 
2017), 82 FR 57015 (Dec. 1, 2017) (SR-OCC-2017-019).
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    With respect to OCC's discretionary authority to increase the 
minimum cash requirement, the proposal would allow OCC's Executive 
Chairman, Chief Administrative Officer (``CAO''), or Chief Operating 
Officer (``COO''), upon providing notice to the Risk Committee of OCC's 
Board of Directors (``Risk Committee''), to temporarily increase the 
amount of cash required to be maintained in the Clearing Fund up to an 
amount that includes the size of the Clearing Fund for the protection 
of OCC, clearing members or the general public. Any determination by 
the Executive Chairman, CAO and/or COO to implement a temporary 
increase in Clearing Fund size would (i) be based upon then-existing 
facts and circumstances, (ii) be in furtherance of the integrity of OCC 
and the stability of the financial system, and (iii) take into 
consideration the legitimate interests of Clearing Members and market 
participants. The proposal would require that any such temporary 
increase be reviewed by the Risk Committee as soon as practicable, but 
in any event within 20 calendar days of the increase. Clearing Members 
would be required to satisfy any such increase in their required cash 
contributions no later than one hour before the close of the Fedwire 
(i.e., 5:30 p.m. Central Time) on the business day following OCC's 
issuance of an instruction to increase cash contributions.
    OCC's Recovery Plan would acknowledge that the process for 
initiating any increase to the minimum cash requirement would be driven 
by the preparation of a ``Close-Out Action Plan,'' which is an internal 
document prepared in accordance with OCC's Default Management Policy 
and Default Management Procedures that, among other things, takes into 
consideration the projected liquidity demands for successful management 
of a defaulted Clearing Member. The Recovery Plan recognizes that the 
expected impact of any increase to the minimum Clearing fund cash 
requirement could be the exacerbation of any ongoing liquidity 
constraints facing OCC's Clearing Members.
    Borrowing Against Clearing Fund. 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.'' \33\ OCC has proposed to extend this 
borrowing authority to include a third scenario, whereby OCC could 
borrow (or otherwise obtain funds through any means determined to be 
reasonable by the Executive Chairman, COO or CAO) 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.\34\ This

[[Page 3228]]

borrowing authority, as expanded by the proposed rule change, would be 
included in the Recovery Plan as one of OCC's Enhanced Risk Management 
Tools.
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    \33\ 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.
    \34\ OCC has filed a proposed rule change with the Commission in 
connection with the authority to borrow against the Clearing Fund to 
address liquidity needs for same-day settlement. See Securities 
Exchange Act Release No. 34-81058 (Jun. 30, 2017), 82 FR 31371 (July 
6, 2017) (SR-OCC-2017-803).
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    The Recovery Plan would acknowledge that the process for initiating 
any borrowing against the Clearing Fund would be driven by the 
preparation of a ``Close-Out Action Plan'' (in the event of a Clearing 
Member default), in accordance with the execution of OCC's ``Settlement 
Bank Failure Procedure'' (in the event of a disruption to or failure of 
a settlement bank), in accordance with the execution of OCC's ``Linked 
FMI Disruption Procedure'' (in the event of a disruption to a linked 
financial market infrastructure). The Recovery Plan would further 
acknowledge that a borrowing pursuant to a recommendation in a Close-
Out Action Plan or under either of the Settlement Bank Failure 
Procedures or Linked FMI Disruption Procedures would occur in 
accordance with OCC's ``Syndicated Credit Facility Procedure.'' The 
Recovery Plan recognizes that a key risk of this particular tool would 
be that in a heightened stress scenario OCC's primary liquidity 
facilities already may be fully or partially utilized (and therefore, 
the availability of the tool cannot be known in advance).
    OCC's Credit Facility. OCC maintains a $2.0 billion senior secured 
364-day revolving credit facility with a syndicate of lenders.\35\ The 
purpose of the facility is to provide OCC with liquidity to meet 
settlement obligations as a central counterparty. The Recovery Plan 
would include the facility among OCC's Enhanced Risk Management Tools.
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    \35\ See Securities Exchange Act Release No. 34-81956 (Oct. 26, 
2017) (SR-OCC-2017-017).
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    The Recovery Plan would recognize that borrowings under the 
facility would occur in accordance with OCC's Syndicated Credit 
Facility Procedure. The Recovery Plan would further recognize that the 
key risk associated with the use of the facility is that a portion of 
the syndicate may not timely fund OCC's draw.
    OCC's Non-Bank Facility. OCC maintains a $1.0 billion secured non-
bank liquidity facility.\36\ The purpose of the non-bank facility is to 
provide OCC with a non-bank liquidity resource to meet settlement 
obligations as a central counterparty. The Recovery Plan would include 
the non-bank facility among OCC's Enhanced Risk Management Tools.
---------------------------------------------------------------------------

    \36\ See Securities Exchange Act Release No. 34-76821 (Jan 4, 
2016), 81 FR 3208 (Jan. 4, 2016) (SR-OCC-2016-805).
---------------------------------------------------------------------------

    The Recovery Plan would recognize that borrowings under the 
facility would occur in accordance with OCC's ``Non-Bank Facility 
Procedure.'' The Recovery Plan would further recognize that the key 
risk associated with the use of the non-bank facility is that OCC's 
counterparty may not timely execute the transaction.
    Cash Settlement of Physically Delivered Options and Single Stock 
Futures. OCC is in the process of proposing a new Rule 913,\37\ which 
would provide OCC the ability to require cash settlement of otherwise 
physically-settled delivery obligations arising from exercised or 
assigned stock options and/or physically-settled matured stock futures 
in the event that a correspondent clearing corporation \38\ rejects the 
settlement obligations for such stock options and/or stock futures 
(such rejected stock options and/or stock futures hereinafter, 
``Rejected Cleared Securities'') and either of the two following 
necessary conditions exists: (i) The liquidity demand on OCC to fund an 
alternative form of settlement for such Rejected Cleared Securities 
(i.e., settlement through the use of a ``substitute broker'') \39\ 
would exceed the amount of liquid resources immediately available to 
OCC, or (ii) no agent is available to serve as substitute broker to 
facilitate alternative settlement for OCC.\40\ In these extremely 
limited circumstances, fixing cash settlement amounts pursuant to 
proposed Rule 913 would provide OCC with the ability to substantially 
reduce the liquidity demands that it might otherwise face if required 
to fund an alternative form of settlement to effect physical delivery. 
The Recovery Plan would include cash settlement of otherwise 
physically-delivered options and single-stock futures pursuant to 
proposed Rule 913 among OCC's Enhanced Risk Management Tools.
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    \37\ OCC will be filing a proposed rule change with the 
Commission in connection with this proposal. See SR-OCC-2017-018.
    \38\ Under Article I of OCC's By-Laws, the term ``correspondent 
clearing corporation'' means the National Securities Clearing 
Corporation or any successor thereto which, by agreement with the 
OCC, provides facilities for settlements in respect of exercised 
option contracts or BOUNDs or in respect of delivery obligations 
arising from physically-settled stock futures.
    \39\ ``Substitute broker'' refers to the use of another OCC 
clearing member that remains in good standing at the correspondent 
clearing corporation and that, on OCC's behalf, will facilitate 
settlement of OCC's delivery obligations of the Rejected Cleared 
Securities through the correspondent clearing corporation.
    \40\ To avoid the retroactive application of Rule 913, OCC's 
ability to require cash settlement of cleared securities would only 
apply where the relevant cleared securities were issued by OCC after 
regulatory approval is received for this proposed rule change and 
the change has been implemented by OCC. As of the date of this 
filing, OCC lists standard equity options through November 25, 2024 
and flexible style equity options through December 18, 2026.
---------------------------------------------------------------------------

    The Recovery Plan would acknowledge that, assuming one of the two 
necessary conditions exists, the process for initiating cash settlement 
would be driven by the preparation of a ``Close-Out Action Plan,'' 
which would recommend impacted options and single-stock futures be cash 
settled in lieu of physical delivery. The Recovery Plan would also 
acknowledge that execution of cash settlement would occur in accordance 
with OCC's ``Alternative Cash Settlement of Cleared Contracts 
Procedure.'' The Recovery Plan recognizes that a key risk of this 
particular tool would be the potentially detrimental impacts on 
Clearing Members and their customers, who would receive a cash 
settlement amount when they had anticipated receiving physical 
securities.
Recovery Tools
    Proposed Chapter 5 would explain that OCC's Recovery Tools differ 
from OCC's Enhanced Risk Management Tools in that the use of each 
Recovery Tool is generally limited to a scenario in which a Recovery 
Trigger Event has occurred, and as discussed below, the sequence and 
timing of the deployment of each Recovery Tool is more structured than 
the sequence and timing for the deployment of the Enhanced Risk 
Management Tools. As noted below, each of the Recovery Tools is 
discussed in greater detail in a proposed rule change that has been 
filed with the Commission.
    Descriptions of each of the Recovery Tools contained in the 
proposed Recovery Plan are provided below:
    Assessment Powers. OCC is in the process of amending its By-Laws to 
revise its assessment powers such that OCC would have the authority to 
assess non-defaulting Clearing Members during any ``cooling-off 
period'' (explained below) in an aggregate amount equal to 200% of each 
such Clearing Member's required contribution as of the time immediately 
preceding the start of the applicable cooling-off period (hereinafter, 
``Assessment Powers'').\41\ Under the proposed Assessment Powers, an 
automatic minimum fifteen calendar day cooling-off period would begin 
whenever a proportionate charge is

[[Page 3229]]

assessed by OCC against Clearing Members' Clearing Fund contributions. 
While the cooling-off period would continue for a minimum of fifteen 
consecutive calendar days, if one or more of the events described in 
clauses (i) through (iv) of Article VIII, Section 5(a) of OCC's By-Laws 
occur(s) during that fifteen calendar day period and result(s) in one 
or more proportionate charges against the Clearing Fund, the cooling-
off period would be extended through either (i) the fifteenth calendar 
day from the date of the most recent proportionate charge resulting 
from the subsequent event, or (ii) the twentieth day from the date of 
the proportionate charge that initiated the cooling-off period, 
whichever is sooner. During such cooling-off period, the proposed 
Assessment Powers would cap each Clearing Member's aggregate liability 
to replenish the Clearing Fund at 200% of the Clearing Member's then-
required contribution to the Clearing Fund. Once the cooling-off period 
ends each remaining Clearing Member would be required to replenish the 
Clearing Fund in the amount necessary to meet its then-required 
contribution.\42\ The Recovery Plan would include the proposed 
Assessment Powers among OCC's Recovery Tools.
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    \41\ OCC has filed a proposed rule change with the Commission in 
connection with this proposal. See SR-OCC-2017-020.
    \42\ Under the proposed Assessment Powers, the time frame within 
which a Clearing Member may provide a termination notice to OCC to 
avoid liability for replenishment of the Clearing Fund after the 
cooling-off period would be extended and the obligations of such a 
terminating Clearing Member for closing-out and transferring its 
remaining open positions would be modified. Specifically, to 
effectively terminate its status as a Clearing Member and not be 
liable replenishing the Clearing Fund after the cooling-off period, 
a Clearing Member would be required to: (i) Notify OCC in writing of 
its intent to terminate not later than the last day of the cooling-
off period, (ii) not initiate any opening purchase or opening 
writing transaction, and, if the Clearing Member is a Market Loan 
Clearing Member or a Hedge Clearing Member, not initiate any Stock 
Loan transaction, through any of its accounts, and (iii) close-out 
or transfer all of its open positions by no later than the last day 
of the cooling-off period. If a Clearing Member failed to satisfy 
all of these conditions by the end of a given cooling-off period, it 
would not have completed all of the requirements necessary to 
terminate its status as a Clearing Member and therefore it would 
remain subject to the obligation to replenish the Clearing Fund 
after the end of the cooling-off period.
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    The Recovery Plan would discuss the mechanics for replenishment of 
the Clearing Fund, which is the mechanism by which assessments would be 
collected from Clearing Members.\43\ The Recovery Plan would 
acknowledge that one of the key risks associated with OCC's assessment 
powers is that utilization of assessment powers (or even prefunded 
Clearing Fund resources) may incentivize Clearing Members to withdraw 
from membership (to avoid replenishing the Clearing Fund following the 
cooling-off period), thereby potentially reducing the size of the 
future Clearing Fund as well as OCC's future assessment powers.
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    \43\ Article 6 of OCC's By-Laws states that Clearing Members are 
required to promptly make good any deficiency in their required 
contribution that results from a charge against the Clearing Fund, 
and Clearing Members must make good any such deficiencies by 9:00 
a.m. Central Time on the first business day following the day on 
which OCC notifies Clearing Members of such deficiency.
---------------------------------------------------------------------------

    Voluntary Payments. OCC is in the process of proposing new Rule 
1009, which would provide a framework by which OCC could receive 
voluntary payments in a circumstance where a Clearing Member has 
defaulted and OCC has determined that, notwithstanding the availability 
of any remaining resources under OCC Rules 707, 1001, 1104 through 
1107, 2210 and 2211,\44\ OCC may not have sufficient resources to 
satisfy its obligations and liabilities resulting from such 
default.\45\ Under proposed Rule 1009, non-defaulting Clearing Members 
would be invited to make voluntary payments to the Clearing Fund, in 
addition to any amounts they are otherwise required to contribute. If 
OCC subsequently recovers from the estate(s) of the defaulted Clearing 
Member(s), all non-defaulting Clearing Members that made voluntary 
payments would be repaid from such recovery (and if the amount 
recovered the defaulted Clearing Member(s) is less than the aggregate 
amount of voluntary payments, non-defaulting Clearing Members that made 
voluntary payments each would receive a percentage of the recovery that 
corresponds to that Clearing Member's percentage of the total amount of 
voluntary payments received). The Recovery Plan would include proposed 
Rule 1009 among OCC's Recovery Tools.
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    \44\ Rule 707 addresses the treatment of funds in a Clearing 
Member's X-M accounts. Rule 1001 addresses the size of OCC's 
Clearing Fund and the amount of a Clearing Member's contribution. 
Rules 1104 through 1107 concern the treatment of the portfolio of a 
defaulted Clearing Member. Rules 2210 and 2211 concern the treatment 
of Stock Loan positions of a defaulted Clearing Member.
    \45\ OCC has filed a proposed rule change with the Commission in 
connection with this proposal. See SR-OCC-2017-020.
---------------------------------------------------------------------------

    The Recovery Plan would discuss the mechanics for voluntary 
payments and the estimated time frame for issuing a ``Voluntary Payment 
Notice'' and collecting voluntary payments (from several hours to 
overnight, depending on the timing of the event driving OCC's 
determination to call for voluntary payments).\46\ The Recovery Plan 
would acknowledge that the key risk associated with the ability to call 
for voluntary payments is that non-defaulting Clearing Members would be 
unwilling, or unable, to participate.
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    \46\ Article 6 of OCC's By-Laws states that Clearing Members are 
required to promptly make good any deficiency in their required 
contribution that results from a charge against the Clearing Fund, 
and Clearing Members must make good any such deficiencies by 9:00 
a.m. Central Time on the first business day following the day on 
which OCC notifies Clearing Members of such deficiency.
---------------------------------------------------------------------------

    Voluntary Tear-Up. OCC is in the process of proposing new Rule 
1111, which, in relevant part, would establish a framework by which 
non-defaulting Clearing Members and non-defaulting customers of 
Clearing Members could be given an opportunity to voluntarily 
extinguish (i.e., voluntarily tear-up) their open positions at OCC in a 
circumstance where a Clearing Member has defaulted and OCC has 
determined that, notwithstanding the availability of any remaining 
resources under OCC Rules 707, 1001, 1104 through 1107, 2210 and 2211, 
OCC may not have sufficient resources to satisfy its obligations and 
liabilities resulting from such default.\47\ OCC presumes that the 
scope of any voluntary tear-up would be dictated by the cleared 
contracts remaining in the portfolio(s) of the defaulted Clearing 
Member(s); however, to ensure OCC retains sufficient flexibility to 
effectively deploy this tool in an extreme stress event, proposed Rule 
1111(c) would provide the Risk Committee with discretion to determine 
the appropriate scope of each voluntary tear-up. New Rule 1111(c) also 
would impose standards designed to circumscribe the Risk Committee's 
discretion, requiring that any determination regarding the scope of a 
voluntary tear-up would (i) be based on then-existing facts and 
circumstances, (ii) be in furtherance of the integrity of OCC and the 
stability of the financial system, and (iii) take into consideration 
the legitimate interests of Clearing Members and market participants. 
The Recovery Plan would include this proposed authority to call for 
voluntary tear-ups among OCC's Recovery Tools.
---------------------------------------------------------------------------

    \47\ OCC has filed a proposed rule change with the Commission in 
connection with this proposal. See SR-OCC-2017-020.
---------------------------------------------------------------------------

    The Recovery Plan anticipates that OCC's tear-up process--for both 
voluntary tear-ups as well as partial tear-ups--would be initiated on a 
date sufficiently in advance of the exhaustion of OCC's financial 
resources such that OCC would be expected to have adequate remaining 
resources to cover the amount it must pay to extinguish the positions 
of Clearing Members and customers without

[[Page 3230]]

haircutting gains.\48\ The Recovery Plan contemplates that, if tear-up 
becomes necessary, OCC likely would initiate its tear-up process after 
the market closes on the date on which OCC has determined that the 
amount of its remaining financial resources measured against the 
estimated stressed exposure of the unauctioned positions in the 
portfolio(s) of the defaulted Clearing Member(s) warrants the 
initiation of OCC's tear-up process (for purposes of this example, Day 
T). The Recovery Plan anticipates that notice of tear-up (both 
voluntary tear-up and partial tear-up) would be published no later than 
the morning of the following trading day prior to the market opening 
(for purposes of this example, Day T+1) and that the call for voluntary 
tear-ups would remain open throughout the duration of the trading on 
Day T+1. The Recovery Plan anticipates that voluntarily tendered 
positions would be extinguished either after the close on Day T+1 or 
prior to the opening of the markets on Day T+2 (where Day T+2 is a 
trading day), and that such positions would be extinguished at their 
last established end-of-day settlement price, in accordance with OCC's 
existing practices concerning pricing and valuation (i.e., the closing 
price on Day T+1).
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    \48\ OCC is not proposing a tear-up process that would require 
the imposition of ``gains haircutting'' (i.e., the reduction of 
unpaid gains) on a portion of OCC's cleared contracts. In general, 
OCC believes that forced gains haircutting is a tool that can be 
more easily applied to products whose gains are settled at least 
daily, like futures through an exchange of variation margin, and by 
central counterparties with comparatively large daily settlement 
flows. Listed options, which constitute the vast majority of the 
contracts cleared by OCC, do not have daily settlement flows and any 
attempt to reduce the ``unrealized gains'' of a listed options 
contract would require the reduction of the option premium that is 
embedded within the required margin (such a process would 
effectively require haircutting the listed option's initial margin). 
In OCC's proposed tear-up process, the holders of torn-up positions 
would be assigned a Tear-Up Price and OCC would draw on its 
remaining financial resources in order to extinguish the torn-up 
positions at the assigned Tear-Up Price without forcing a reduction 
in the amount unpaid gains on such positions.
---------------------------------------------------------------------------

    After OCC has completed its tear-up process and re-established a 
matched book, OCC expects that holders of both voluntarily torn-up and 
mandatorily torn-up positions would be provided with a limited 
opportunity to re-establish positions in the contracts that were 
voluntarily or mandatorily extinguished. For the losses, costs or 
expenses imposed upon the holders of torn-up positions, proposed Rule 
1111 would provide OCC with two separate and non-exclusive means of 
equitably re-allocating such losses costs or expenses.\49\
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    \49\ Proposed Rule 1111 would provide OCC discretion to use 
remaining Clearing Fund contributions to re-allocate losses imposed 
on non-defaulting Clearing Members and customers from such tear-
up(s). Further, proposed Rule 1111(a) also would provide that if OCC 
subsequently recovers from the estate(s) of the defaulted Clearing 
Member(s) and the amount of such recovery exceeds the amount OCC 
received in voluntary payments, then non-defaulting Clearing Members 
and non-defaulting customers that voluntarily tore-up open positions 
and incurred losses from such tear-ups would be repaid from the 
amount of the recovery in excess of the amount OCC received in 
voluntary payments (if the amount recovered is less than the 
aggregate amount of voluntary tear-up, each non-defaulting Clearing 
Member and non-defaulting customer that incurred losses from 
voluntarily torn-up positions would be repaid in an amount 
proportionate to the percentage of its total amount of losses, costs 
and fees imposed on Clearing Members or customers as a result of the 
voluntary tear-ups).
---------------------------------------------------------------------------

    In addition to discussing the above mechanics for voluntary tear-up 
and the estimated time frame for initiating and completing OCC's tear-
up process, the Recovery Plan would acknowledge that the key risk 
associated with the ability to call for voluntary tear-ups is that non-
defaulting Clearing Members and nonwould be unwilling, or unable, to 
participate.
    Partial Tear-Up. Proposed Rule 1111 also would provide the Board 
with discretion to extinguish the remaining (i.e., mandatorily 
extinguish) open positions of any defaulted Clearing Member or customer 
of such defaulted Clearing Member(s) (such positions, ``remaining open 
positions''), as well as any related open positions as necessary to 
mitigate further disruptions to the markets affected by the Remaining 
Open Positions (such positions, ``related open positions''), in a 
circumstance where a Clearing Member has defaulted and OCC has 
determined that, notwithstanding the availability of any remaining 
resources under OCC Rules 707, 1001, 1104 through 1107, 2210 and 2211, 
OCC may not have sufficient resources to satisfy its obligations and 
liabilities resulting from such default (such tear-ups, ``partial tear-
ups''). Like the determination for voluntary tear-ups, OCC presumes 
that the scope of any partial tear-up would be dictated by the cleared 
contracts remaining in the portfolio(s) of the defaulted Clearing 
Member(s); however, to ensure OCC retains sufficient flexibility to 
effectively deploy this tool in an extreme stress event, proposed Rule 
111(c) would provide the Risk Committee with discretion to determine 
the appropriate scope for each partial tear-up. Proposed Rule 1111(c) 
would impose the same standards designed to circumscribe the Risk 
Committee's discretion as would be imposed with respect to voluntary 
tear-ups: partial tear-ups would (i) be based on then-existing facts 
and circumstances, (ii) be in furtherance of the integrity of OCC and 
the stability of the financial system, and (iii) take into 
consideration the legitimate interests of Clearing Members and market 
participants. The Recovery Plan would include this proposed authority 
to impose mandatory tear-ups among OCC's Recovery Tools.
    As explained above, the Recovery Plan would anticipate that the 
process for implementing a partial tear-up would be intertwined with 
the process for implementing a voluntary tear-up. The Recovery Plan 
would also make clear that partially torn-up positions would be 
allocated to non-defaulting Clearing Members' accounts (and further 
allocated by Clearing Members to their non-defaulting customers' 
accounts) on a pro rata basis.
    Replenishment Capital. In 2015 OCC adopted a capital plan 
(``Capital Plan'') under which OCC's stockholder exchanges made an 
additional capital contribution and, in the event that total 
shareholder's equity falls below a certain threshold, committed to 
replenishing OCC's capital up to an amount determined as OCC's 
``Baseline Capital Requirement.'' \50\ The Recovery Plan would include 
the replenishment capital that OCC's stockholder exchanges would be 
required to provide under the Capital Plan among OCC's Recovery Tools.
---------------------------------------------------------------------------

    \50\ See Securities Exchange Act Release No. 34-74387 (Feb. 26, 
2015), 80 FR 12215 (Mar. 6, 2015) (SR-OCC-2014-813). As stated in 
the advance notice, OCC's Baseline Capital Requirement for 2015 was 
$117,000,000.
---------------------------------------------------------------------------

    In addition to generally discussing each of the Enhanced Risk 
Management Tools and Recovery Tools as described above, the Recovery 
Plan also would provide a mapping of OCC's Enhanced Risk Management 
Tools and Recovery Tools against the types of financial market 
infrastructure (``FMI'') risk exposures identified in the Recovery 
Report.\51\ The general mapping of tools to risk exposures is presented 
below:
---------------------------------------------------------------------------

    \51\ The Recovery Report recognizes the following risk exposures 
for an FMI: legal risk, credit risk, liquidity risk, general 
business risk, custody risk, investment risk and operational risk. 
See Recovery Report, p. 12.
---------------------------------------------------------------------------

     Tools to address uncovered credit losses from a Clearing 
Member default: Use of current/retained earnings, proposed voluntary 
payments and proposed Assessment Powers.
     Tools to address liquidity shortfalls: minimum Clearing 
Fund cash contribution, borrowing against Clearing Fund, OCC's credit 
facility, OCC's non-

[[Page 3231]]

bank facility and cash settlement of physically delivered options and 
single stock futures.
     Tools to replenish financial resources: Replenishment 
capital.
     Tools to address losses related to business, operational 
or other structural weaknesses (i.e., losses not caused by Clearing 
Member Default): Borrowing against Clearing Fund and replenishment 
capital.
     Tools to re-establish a matched book: Voluntary tear-up 
and partial tear-up.
    The Recovery Plan would include a short discussion of how the 
Enhanced Risk Management Tools and Recovery Tools would apply to each 
of the risk categories and failure scenarios identified in the Recovery 
Report.\52\ The discussion of each risk category would reference the 
appropriate Stress Scenarios in Appendix H that demonstrate the use of 
applicable Enhanced Risk Management Tools and Recovery Tools. The 
Recovery Plan also would discuss the Enhanced Risk Management Tools and 
Recovery Tools in the context of the characteristics of recovery tools 
enumerated in the CPMI-IOSCO Recovery Report.\53\
---------------------------------------------------------------------------

    \52\ The Recovery Report identifies the following purposes for 
an FMI's recovery tools: (i) Tools to allocate uncovered credit 
losses caused by a participant default, (ii) tools to address 
uncovered liquidity shortfalls, (iii) tools to replenish financial 
resources, (iv) tools for CCPs to re-establish a matched book 
following a participant default, and (v) tools to allocate losses 
not caused by participant default. See Recovery Report, p. 17.
    \53\ The Recovery Report states that a financial market 
infrastructure's recovery tools should (i) be comprehensive, (ii) be 
effective, (ii) be transparent, measurable, manageable and 
controllable, (iv) create appropriate incentives, and (v) minimize 
negative impact. See Recovery Report, p. 13.
---------------------------------------------------------------------------

    After discussing the Enhanced Risk Management Tools and Recovery 
Tools, the Recovery Plan would identify five qualitative ``Recovery 
Trigger Events'' (events that--if occurring during OCC's risk 
management efforts--would indicate that OCC is facing an extreme stress 
event that potentially threatens OCC's viability). The Recovery Plan 
would specify that the occurrence of a Recovery Trigger Event shall 
require OCC personnel to notify the Commission and the CFTC (and the 
Federal Deposit Insurance Corporation, to the extent applicable), and 
such notice shall apprise the regulator(s) of the specific Recovery 
Trigger Event that has occurred and sufficient information to enable 
the regulator(s) to understand the nature of the occurrence of the 
Recovery Trigger Event. The Recovery Plan would further outline an 
escalation process for the occurrence of a Recovery Trigger Event. The 
escalation process would start with individual support function leads, 
who would be responsible for communicating the possible occurrence of a 
Recovery Trigger Event to other support functions within OCC. The 
escalation process would require OCC's Enterprise Risk Management and 
Financial Risk Management groups to be responsible for assessing the 
situation and providing recommendations regarding the potential use of 
Enhanced Risk Management Tools and Recovery Tools. The escalation 
process would identify that the Chief Executive Officer and Executive 
Chairman would be responsible for providing necessary approvals for the 
implementation of Enhanced Risk Management Tools and Recovery Tools, 
and that the Chief Risk Officer and the Management Committee would be 
responsible for overseeing the deployment of any Enhanced Risk 
Management Tools or Recovery Tools. The escalation process would 
identify OCC's Board and the Risk Committee of the Board as being 
responsible for generally overseeing OCC's recovery efforts.
    Finally, the Recovery Plan would provide general descriptions of 
how OCC would anticipate deploying its Enhanced Risk Management and 
Recovery Tools in response to each of the six Stress Scenarios detailed 
in Appendix H. As described above, the six detailed Stress Scenarios 
would be grouped into the following categories of stresses: Individual 
Clearing Member default, multiple successive Clearing Member defaults, 
disruption or failure of a bank or liquidity facility provider, 
inability to access another financial market infrastructure and general 
business and operational risks.
Chapter 6: Wind-Down Plan
    Chapter 6 of OCC's proposed RWD Plan would constitute OCC's WDP. 
Consistent with the above-stated purpose of an orderly wind-down plan, 
Chapter 6 would demonstrate that OCC has considered scenarios which may 
potentially prevent it from being able to provide its Critical Services 
as a going-concern and that OCC has adequately evaluated plans for its 
orderly wind-down.\54\
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    \54\ For the purposes of the RWD Plan, OCC would frame its wind-
down objective consistent with the objective advanced by the FSB for 
CCP resolution: ``CCP resolution should have as its objective the 
pursuit of financial stability and ensure the continuity of critical 
CCP functions in all jurisdictions where those functions are 
critical and without exposing taxpayers to risk of loss. . . . The 
objectives of CCP resolution can be achieved either by: (i) 
restoring the ability of the CCP to continue to perform its critical 
functions as a going concern; or (ii) ensuring continued performance 
of those functions by another entity or arrangement (including a 
bridge entity established by the resolution authority) coupled with 
the orderly wind-down of the residual CCP in resolution.'' See CCP 
Resolution Report, p. 2.
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    The WDP would state OCC's basic assumptions concerning the 
resolution process, including assumptions about the duration of the 
resolution process, the cost of the resolution process, OCC's 
capitalization through the resolution process, the maintenance of 
Critical Services and Critical Support Functions and the retention of 
personnel and contractual relationships. The WDP would further identify 
six ``WDP Trigger Events'' that--if occurring during OCC's recovery 
efforts--could likely jeopardize the viability of OCC's recovery and 
signal that initiation of the WDP should be considered. Upon the 
occurrence of any WDP Trigger Event, the WDP would require OCC 
personnel to notify the Commission and the CFTC (and the Federal 
Deposit Insurance Corporation, to the extent applicable), and such 
notice must apprise the regulator(s) of the specific WDP Trigger Event 
that has occurred and sufficient information to enable the regulator(s) 
to understand the nature of the occurrence of the WDP Trigger Event. 
Additionally, the WDP would prescribe for each WDP Trigger Event more 
tailored internal notification requirements. These more tailored 
notification requirements would designate OCC personnel in specific 
support functions (generally, the function whose area is most closely 
related to, or impacted by, the specific WDP Trigger Event) as 
responsible for identifying such WDP Trigger Event and for notifying 
OCC's senior management.
    The WDP also would reference the importance of the critical 
external interconnections (discussed in Chapter 4) to the resolution 
process and highlight the key agreements that would be necessary to 
maintain throughout OCC's resolution (such agreements would be listed 
in Appendix G). The WDP would provide a discussion of the key actions 
that OCC (or a resolution authority) could take during the resolution 
process. The key actions discussed in the WDP would include the 
following: The decision by OCC's Board (informed by senior management) 
to abandon recovery and initiate OCC's resolution process; the 
potential institution of new or heightened requirements on clearing 
membership; the potential imposition of heightened capital requirements 
on clearing members (consistent with the existing requirements in Rule 
301); the imposition of increased margin requirements for Clearing 
Members

[[Page 3232]]

(pursuant to the existing authority under Rule 603); ceasing OCC's 
investment activities; instituting new operational practices (to 
address any operation weaknesses that caused, or contributed to, the 
events resulting in the initiation of the resolution process), and; 
targeted reductions in force (by each of the fourteen support functions 
discussed in Chapter 3).
    The WDP also would identify potential transactions that could be 
entered to accomplish the objectives of wind-down (``WDP 
Transactions''), as well as discuss the possibility of ceasing 
operation of OCC's Critical Services. The WDP would state that the goal 
of OCC's resolution--and thusly of any WDP Transaction--would be to 
transfer ownership of OCC itself by the consummation or a consensual 
sale or similar transaction, in a manner that ensures the continuation 
of OCC's Critical Services. The WDP would examine the structure of 
three potential WDP Transactions, with a focus on the corporate, 
transactions, governance and regulatory issues relating to each 
structure. In order of preference based on OCC's examination, the first 
structure would be a ``Stock Transaction,'' meaning a sale by OCC's 
stockholder exchanges of all of their shares of stock to one or more 
new owners; the second structure would be a ``Merger Transaction,'' 
meaning a merger or consolidation of OCC with another entity (with the 
aim of OCC remaining as the surviving entity), and; the third structure 
would be an ``Asset Transaction,'' meaning that substantially all of 
OCC's assets and some or all of OCC's liabilities, including open 
positions in OCC-cleared contracts along with related Clearing Fund 
deposits and margin collateral, would be transferred to a third party.
    With respect to the possibility of ceasing OCC's Critical Services, 
the WDP would consider taking a corporate action to consider 
institution of a bankruptcy or insolvency proceeding, which would have 
the effect of triggering the existing close-out netting provisions in 
Article VI, Section 27 of OCC's By-Laws.
Chapter 7: RWD Plan Governance
    Chapter 7 of OCC's proposed Plan would memorialize the prior 
governance for approval of the earlier drafts of OCC's recovery and 
orderly wind-down plan and would establish an internal governance 
process for the maintenance, review and approval of the proposed RWD 
Plan. The internal governance process for the approval of subsequent 
changes to OCC's proposed RWD Plan would initiate with an RWD Working 
Group, which would recommend any changes to OCC's Management Committee. 
OCC's Management Committee, in turn, would review and, as appropriate, 
approve and recommend any changes to OCC's Risk Committee. OCC's Risk 
Committee, in turn, would review and, as appropriate, approve and 
recommend any changes to OCC's Board. OCC's Board would have final 
responsibility for review and approval of subsequent changes to OCC's 
proposed RWD Plan.
Expected Effect on and Management of Risk
    OCC believes that the proposed change would reduce the nature and 
level of risk presented to OCC by formalizing a plans designed to 
enhance OCC's ability to address extreme stress events and minimize the 
risks of contagion to OCC's Clearing Members, market participants or to 
the wider financial system, including other FMIs. Specifically, the RP 
would seek to enhance OCC's ability to address extreme stresses or 
crises by establishing a framework that OCC could use to navigate the 
use its Enhanced Risk Management Tools and Recovery Tools, with the aim 
of maintaining OCC's viability as a going concern. In the event that 
OCC's recovery efforts are not successful, the WDP would seek to 
improve the possibility that a resolution of OCC's operations can be 
conducted in an orderly manner, thereby minimizing the disruption to 
Clearing Members and market participants and improving the likelihood 
of minimizing the risk of contagion to the broader financial system. In 
this regard, OCC believes its proposed RWD Plan improves the 
possibility of maintaining market and public confidence during a time 
of unprecedented stress.
Consistency With the 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.\55\ 
Section 805(a)(2) of the Clearing Supervision Act \56\ 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 \57\ states that the objectives 
and principles for risk management standards prescribed under Section 
805(a) shall be to:
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    \55\ 12 U.S.C. 5461(b).
    \56\ 12 U.S.C. 5464(a)(2).
    \57\ 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, including those standards adopted 
pursuant to the Commission rules cited below.\58\ For the reasons set 
forth below, OCC believes that the proposed change is consistent with 
the risk management standards promulgated under Section 805(a) of the 
Clearing Supervision Act.\59\
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    \58\ 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 is subject 
to section (e) of Rule 17Ad-22.
    \59\ 12 U.S.C. 5464(b)(1) and (4).
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    OCC believes that the proposed rule change is also consistent with 
Rule 17Ad-22(e)(3)(ii).\60\ As stated above, the RWD Plan would 
describe OCC's plans to recover from, or orderly resolve its operations 
as a result of, severe stress brought about by credit losses, liquidity 
shortfalls, losses from general business risk or other losses.\61\ 
Consistent with the Commission's guidance concerning, the proposed RWD 
Plan would consider scenarios which may potentially prevent OCC from 
providing its Critical Services as a going-concern and provide 
appropriate plans for OCC's recovery or orderly wind-down based on the 
results of such considerations. Further, OCC's proposed Plan would seek 
to provide the information that a resolution authority may reasonably 
anticipate as necessary for purposes of recovery and orderly wind-down 
planning.\62\ In this regard, OCC believes its proposed rule change is 
consistent with Rule 17Ad-22(e)(3)(ii).\63\
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    \60\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \61\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \62\ See 81 FR at 70810.
    \63\ 17 CFR 240.17Ad-22(e)(3)(ii).

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[[Page 3233]]

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 website 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 Clearing Supervision 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 [email protected]. Please include 
File Number SR-OCC-2017-810 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-OCC-2017-810. 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 website (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 website 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 website at 
https://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_17_810.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-2017-810 and 
should be submitted on or before February 13, 2018.

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-01071 Filed 1-22-18; 8:45 am]
 BILLING CODE 8011-01-P


