[Federal Register Volume 83, Number 68 (Monday, April 9, 2018)]
[Notices]
[Pages 15181-15187]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-07111]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82983; File No. SR-OCC-2018-007]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Related to The Options 
Clearing Corporation's Trade Acceptance and Novation Rules

April 3, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 23, 2018, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by OCC. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.

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[[Page 15182]]

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change by OCC concerns modifications to OCC's By-
Laws and Rules to: (1) Clarify the time at which OCC accepts and 
novates the transactions that it clears; (2) streamline provisions in 
the By-Laws and Rules related to acceptance, novation and trade 
reporting; and (3) delete provisions that apply only to certain dormant 
products that OCC no longer clears and settles or that are no longer 
applicable to OCC's current clearing processes.
    The proposed amendments to OCC's By-Laws and Rules can be found in 
Exhibits 5A and 5B to the filing, respectively. Material proposed to be 
added to OCC's By-Laws and Rules as currently in effect is marked by 
underlining and material proposed to be deleted is marked with 
strikethrough text. Because proposed Rules 403 through 406 in Chapter 
IV are new and are based on provisions relocated from Article VI of 
OCC's By-Laws, underlining and strikethrough text have been omitted 
with respect to those rules in order to enhance their readability.
    All terms with initial capitalization that are not otherwise 
defined herein have the same meaning as set forth in the By-Laws and 
Rules.\3\
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    \3\ 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 Proposed Rule Change

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

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

(1) Purpose
    The purpose of this proposed rule change is to amend OCC's By-Laws 
and Rules to: (1) Clarify the time at which OCC accepts and novates \4\ 
the transactions that it clears; (2) streamline provisions in the By-
Laws and Rules related to trade reporting and novation; and (3) delete 
provisions that apply only to certain dormant products that OCC no 
longer clears and settles or that are no longer applicable to OCC's 
current clearing processes.
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    \4\ In this context, novation is the process through which OCC 
is substituted as the buyer to the seller and the seller to the 
buyer for each cleared contact.
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Background

Acceptance and Novation Timing

    Specifying a clear time at which OCC accepts transactions for 
clearance and settlement is important to Clearing Members because that 
is the time under OCC's By-Laws and Rules at which the following events 
occur: (1) OCC is substituted through novation as the central 
counterparty (``CCP'') to each Clearing Member that was an initial 
party to the transaction; (2) the rights of the initial Clearing Member 
parties to the transaction become solely as against OCC; and (3) OCC 
becomes obligated to each Clearing Member in accordance with the By-
Laws and Rules.\5\ Acceptance of transactions is important to Clearing 
Members because, among other things, settlement obligations associated 
with transactions that OCC accepts and novates are generally guaranteed 
by OCC based upon certain financial safeguards it maintains as a CCP 
consistent with its responsibilities under the Act and relevant 
regulations thereunder.\6\
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    \5\ See, e.g., Article VI, Section 5 of the By-Laws.
    \6\ See generally 15 U.S.C. 78q-1; 17 CFR 240.17Ad-22.
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Current Acceptance and Novation of Confirmed Trades

    Under OCC's current By-Laws and Rules, a user must parse through a 
number of definitions and provisions in various locations to identify 
that time at which acceptance and novation occur. The term Confirmed 
Trade is defined in OCC's By-Laws to include all of the products for 
which OCC currently provides clearance and settlement services, with 
the exception of certain Stock Loan \7\ transactions. Under OCC's 
current By-Laws, a Confirmed Trade \8\ is novated upon OCC's 
acceptance, but acceptance is not deemed to occur until a designated 
Commencement Time. Commencement Time is defined differently for 
different products that meet the definition of a Confirmed Trade, but 
Article VI, Section 5 of the By-Laws (regarding OCC's obligations) 
generally defines it as the time at which OCC makes available to 
Clearing Members a Daily Position Report reflecting the Confirmed 
Trade.\9\ Pursuant to Article VI, Section 7 of the By-Laws (regarding 
the reporting of Confirmed Trades) this acceptance is subject to the 
condition that the Exchange or OTC Trade Source on which the 
transaction occurred has reported to OCC, during such times as OCC has 
prescribed, certain information regarding the Confirmed Trade and that 
such information passes OCC's initial validation checks.
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    \7\ See Article I, Section 1.S.(21) of the By-Laws. The term 
Stock Loan may refer to either a Hedge Loan that is part of OCC's 
Stock Loan/Hedge Program or a Market Loan that is part of OCC's 
Market Loan Program. Matters regarding the acceptance and novation 
of these products is addressed separately below.
    \8\ Under OCC's By-Laws, a Confirmed Trade is defined as ``a 
transaction for the purchase, writing, or sale of a cleared 
contract, or for the closing out of a long or short position in a 
cleared contract, that is (i) effected on or through the facilities 
of an Exchange and submitted to the Corporation for clearance or 
(ii) affirmed through the facilities of an OTC Trade Source and 
submitted to the Corporation for clearance.''
    \9\ This typically occurs at the end of each business day.
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    Under Article VI, Section 8 of the By-Laws, OCC generally has no 
right (other than regarding certain types of Confirmed Trades discussed 
below) to reject a Confirmed Trade due to the failure of the Purchasing 
Clearing Member to pay any amount due to OCC at or before the 
settlement time. This means that transactions in most products that are 
Confirmed Trades will inevitably be accepted for clearing and novated 
at the Commencement Time simply due to the passage of time.\10\ 
Therefore, most Confirmed Trades are functionally novated under the 
current By-Laws and Rules upon proper submission to OCC for clearing.
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    \10\ An Exchange or OTC Trade Source, however, may instruct OCC 
to disregard a transaction that it previously reported as a 
Confirmed Trade ``because of a subsequent determination that (i) the 
trade information submitted by the Purchasing Clearing Member and 
Selling Clearing Member did not agree, (ii) the trade information 
did not contain all the information required by the Corporation as 
set forth in the By-Laws and Rules, or (iii) new or revised trade 
information was required to properly clear the transaction.'' See 
Article VI, Section 7 of the OCC By-Laws. This authority would be 
preserved and relocated into OCC's Rules in connection with the 
proposed changes described herein.
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Different Commencement Times and Rejection Rights for Certain Confirmed 
Trades

    Certain categories of Confirmed Trades, however, are not subject to 
the general Commencement Time described above, and OCC retains certain 
rights to reject such transactions. Specifically, Article VI, Section 5 
of the By-Laws excludes the products described below from the general 
Commencement Time and alternate definitions of Commencement Time are 
set forth as follows:

[[Page 15183]]

    (1) Futures issued in exchange-for-physical transactions,\11\ block 
trades,\12\ or other trades designated as non-competitively executed--
the time after the transaction is reported to OCC that OCC receives the 
first variation settlement payment; \13\
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    \11\ An exchange-for-physical transaction (or ``EFP'') is a 
transaction between two parties in which a futures contract on a 
commodity or security is exchanged for the actual physical good.
    \12\ A block trade is a trade involving a large number of shares 
being traded at an arranged price between parties, outside of the 
open markets, in order to lessen the impact of such a large trade 
being made public.
    \13\ See Article XII, Section 7 of the OCC By-Laws.
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    (2) Cross-rate FX options and FX index options--the time that is 
three hours following the settlement time of the Confirmed Trade in 
which such contract was purchased; \14\ and
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    \14\ See Articles XX, Section 1 and XXIII, Section 1 of the OCC 
By-Laws.
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    (3) OTC Options (other than Backloaded OTC Options)--the time when 
a report of OCC's acceptance is made available to Clearing Members 
through OCC's clearing system.\15\
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    \15\ See Article VI, Section 5 of the OCC By-Laws.
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    For Backloaded OTC Options, the transaction is not accepted until 
the Selling Clearing Member has met its regular morning settlement 
obligation on the business day following the reporting of the trade to 
OCC.\16\
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    \16\ Id.
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    In addition to the separate Commencement Times for these types of 
Confirmed Trades, OCC also currently has certain authority to reject 
such trades due to the failure of the Purchasing Clearing Member to pay 
an amount due to OCC at or before the applicable settlement time.\17\ 
In contrast to most other types of Confirmed Trades, this means that 
OCC continues to have authority to reject these transactions even after 
they are properly submitted for clearing. OCC's authority to reject 
these types of Confirmed Trades arises under the following 
circumstances:
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    \17\ See generally Article VI, Section 8 of the OCC By-Laws 
identifying these exceptions.
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    (1) Futures issued in exchange-for-physical transactions, block 
trades, or other trades designated as non-competitively executed--in 
the event OCC fails to receive any variation payment due in the 
accounts of the Clearing Members;\18\
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    \18\ See Article XII, Section 7 of the By-Laws.
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    (2) Cross-rate FX options and FX index options--in the event OCC 
fails to receive from the Purchasing Clearing Member premiums 
denominated in the proper trading currency in the account in which the 
transaction is effected; \19\ and
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    \19\ See Article XX, Section 5, Article XXIII, Section 7 of the 
By-Laws.
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    (3) Backloaded OTC Options--in the event the Selling Clearing 
Member does not meet its regular morning settlement obligation on the 
business day following the reporting of the trade to OCC.\20\
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    \20\ See Article VI, Section 8 of the By-Laws. In addition, OCC 
will not accept a Backloaded OTC Option for clearing if OCC receives 
it from the OTC Trade Source after 4 p.m. Central on the business 
day that is four business days prior to its expiration.
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Proposed Changes to Acceptance and Novation Rules

Proposed Uniform Acceptance and Novation Timing for Nearly All 
Confirmed Trades

    To provide greater certainty and clarity to Clearing Members and 
other interested parties regarding the acceptance and novation timing 
for transactions that OCC clears and settles, OCC is proposing to amend 
the substance of Article VI, Section 5 of the By-Laws \21\ to set forth 
a uniform acceptance and novation time for nearly all Confirmed Trades. 
As described in more detail below, OCC would retain exceptions from the 
uniform acceptance and novation time for Confirmed Trades in Backloaded 
OTC Options and Confirmed Trades in futures issued in exchange-for-
physical transactions, block trades, or other trades designated as non-
competitively executed.
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    \21\ As described below under the heading Reorganization, OCC 
also proposes to relocate the provisions currently in Article VI, 
Section 5 of the By-Laws to Rules 401 and 404.
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    To accomplish this, OCC proposes to eliminate the concept of 
Commencement Time and instead deem nearly all Confirmed Trades to be 
accepted and simultaneously novated when they are reported to OCC and 
the related position information has been recorded in OCC's clearing 
system (which occurs on a real-time basis).\22\ This would, however, be 
subject to the condition that the required transaction information 
reported to OCC by the Exchange or OTC Trade Source first passes OCC's 
validation procedures \23\ and is provided to OCC at such time as OCC 
prescribes. OCC believes this change provides a more clear indication 
of the point after which OCC does not have authority to reject such 
transactions for clearing.\24\ Eliminating the concept of Commencement 
Time also necessitates the deletion of the term from the defined terms 
that appear in Article I, Section 1 of the By-Laws and replacing all 
references to Commencement Time with references to the time at which 
OCC accepts a transaction for clearing. This change requires amendments 
to OCC's By-Laws, specifically, amendments to the Article I definition 
of ``American; American-style,'' Article VI, Sections 5 and 6,\25\ 
Section 12 of Article VI, and Section 7 of Article XII.
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    \22\ OCC notes that upon acceptance and recording of position 
information in OCC's ENCORE clearing system, Clearing Members have 
the ability to see the trades they are responsible for via position 
information screens in the ENCORE system and through real-time 
messaging.
    \23\ All inbound trades to OCC are subject to coded validation 
of the required fields for trades. These fields contain the critical 
details of the trade. These details include, but are not limited to, 
the trade source, symbol, expiration, strike, call or put, quantity, 
price, and Clearing Member details of both sides of the trade.
    \24\ As described above, an Exchange or OTC Trade Source would 
continue to have the authority to instruct OCC to disregard a 
Confirmed Trade. See supra 10.
    \25\ As described in more detail below, OCC proposes to relocate 
Article VI, Sections 5 and 6 to Rules 401, 404 and 405 to help 
streamline and reorganize provisions addressing trade reporting and 
novation.
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    As part of this proposed rule change, OCC also proposes to clarify 
the trade information required to be submitted by the participant 
Exchange to OCC as a condition to acceptance and novation. For options 
transactions, Rule 401(a)(1)(i) would provide that these terms include: 
(a) The identity of the Purchasing Clearing Member and Writing Clearing 
Member to the transaction; (b) the clearing date; (c) the transaction 
time; (d) the trade source; (e) the trade quantity; (f) the trade 
price; (g) the security type; (h) the ticker symbol; (i) the series/
contract date; (j) whether the trade is a put or a call; (k) the strike 
price; (l) whether the trade is a purchase or a sale; (m) the account 
type; (n) the allocation indicator, if applicable; (o) the CMTA 
indicator, if applicable; (p) the Give-Up Clearing Member, if 
applicable; (q) the trade type, including, in the case of futures 
options, whether the transaction is a block trade, exchange-for-
physical, or any other trade designated by the futures market or 
security futures market reporting the trade as a non-competitively 
executed trade; (r) in the case of OTC options transactions in a 
securities customers' account, a unique customer ID for the customer 
for whom the trade was executed; and (s) in the case of OTC options, 
such other variable terms as provided in Section 6 of Article XVII of 
the By-Laws. In addition to the foregoing information that is required 
as a condition to OCC's acceptance of the confirmed trade, Rule 
401(a)(1)(ii) would provide that OCC may also request certain optional 
trade

[[Page 15184]]

information that is not required as a condition for acceptance.\26\
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    \26\ OCC makes available to its participant Exchanges and 
Clearing Members the complete list of required and optional trade 
information in an inbound reference guide for Exchange trades.
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    For futures transactions, Rule 401(a)(2)(i) would provide that the 
required terms for acceptance and novation include: (a) The identity of 
the Purchasing Clearing Member and the Selling Clearing Member to the 
transaction; (b) the clearing date; (c) the transaction time; (d) the 
trade source; (e) the trade quantity; (f) the trade price; (g) the 
security type; (h) the ticker symbol; (i) the series/contract date; (j) 
whether the trade is a purchase or a sale; (k) the account type; (l) 
the allocation indicator, if applicable; (m) the CMTA indicator, if 
applicable; (n) the Give-Up Clearing Member, if applicable; and (o) 
whether the trade is an exchange-for-physical or block trade or any 
other trade designated by the futures market or security futures market 
reporting the trade as a non-competitively executed trade. In addition 
to the foregoing information that is required as a condition to OCC's 
acceptance of the confirmed trade, Rule 401(a)(2)(ii) would provide 
that OCC may also request certain optional trade information that is 
not required as a condition for acceptance.

Reasons the Uniform Acceptance and Novation Timing for Nearly All 
Confirmed Trades is Appropriate

    OCC believes that using a uniform approach for nearly all Confirmed 
Trades regarding acceptance and novation and reducing the complexity of 
related provisions would provide significantly greater clarity and 
transparency in OCC's legal framework for Clearing Members and other 
interested parties concerning the point at which OCC does not have 
authority to reject a transaction after it has been properly submitted 
to and validated by OCC. As described above, amending OCC's By-Laws and 
Rules to provide that nearly all Confirmed Trades are accepted and 
novated upon proper submission functionally would not change the time 
at which OCC becomes obligated regarding such Confirmed Trades because, 
upon proper submission, OCC has no right today to reject such 
transactions due to the failure of a Purchasing Clearing Member to pay 
any amount due to OCC at or before the settlement time. OCC generally 
does not collect margin with respect to such Confirmed Trades until 
9:00 a.m. Central the following business day,\27\ and therefore OCC 
already faces this same credit risk between the acceptance of the 
Confirmed Trades and the time that it collects margin from Clearing 
Members. Accordingly, OCC believes that moving the novation time from 
the general Commencement Time to earlier in the day as described 
above--at the point of acceptance--would not alter the credit risk OCC 
faces with respect to such Confirmed Trades. In addition, OCC would 
continue to have the same authority that it does today to address any 
credit risk as necessary through intra-day margin collection.\28\
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    \27\ See Article I, Section 1.S.(16) of the By-Laws (defining 
the term ``settlement time'' in respect of a Clearing Member's 
obligation to pay amounts owed to OCC).
    \28\ See OCC Rule 609 (addressing OCC's authority to require 
intra-day margin).
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    OTC Options that are not Backloaded OTC Options are not currently 
subject to the general Commencement Time; however, OCC believes that 
applying the uniform acceptance and novation time to those transactions 
is appropriate. This is because under the current approach, acceptance 
and the Commencement Time both occur when a report is made available to 
Clearing Members within OCC's clearing system, and therefore this 
approach is already consistent with the proposed approach described 
herein. In practice, OCC automatically makes a report available to 
Clearing Members in its clearing system regarding an OTC Option 
provided that it is properly reported to OCC, the contract passes OCC's 
validation process, and the contract is not rejected. All of this is 
generally completed immediately upon submission and therefore OCC does 
not believe there is any operational, risk management, or other reason 
for excluding OTC Options that are not Backloaded OTC Options from the 
proposed uniform acceptance and novation timing.\29\
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    \29\ See Securities Exchange Act Release No. 68434 (December 14, 
2012), 77 FR 75243 (December 19, 2012) (SR-OCC-2012-14 and AN-OCC-
2012-01) (discussing the trade submission mechanics for OTC 
Options).
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Proposed Exceptions to the Uniform Acceptance and Novation Timing

    For other categories of Confirmed Trades that are not subject to 
the general definition of Commencement Time, OCC proposes to preserve 
the existing structure under which OCC has authority to reject the 
transactions even after they are properly submitted for clearing. An 
exception to the uniform acceptance and novation timing would be made 
for Confirmed Trades in futures issued in exchange-for-physical 
transactions, block trades, or other trades designated as non-
competitively executed. OCC believes that delayed novation is still 
appropriate for such non-competitively executed transactions because 
there is a heightened risk that non-competitive execution may cause 
them to be effected at off-market prices, which could lead to 
significant losses if a Clearing Member defaults on the related 
settlement obligations.\30\
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    \30\ OCC also proposes to add new Interpretation and Policy .05 
to provide that OCC will not treat an EFP or block trade as a 
noncompetitively executed trade subject to Article XII, Section 7 of 
the By-Laws if the Exchange on which such trade is executed has made 
representations satisfactory to OCC that the Exchange has rules, 
policies or procedures that require each EFP and block trade that is 
submitted to OCC to be executed at a reasonable price and that such 
price is validated by the Exchange. This new Interpretation and 
Policy to Rule 401 would reiterate current Interpretation and Policy 
.04 to Article XII, Section 7 of the By-Laws to provide additional 
clarity in the Rules around the acceptance and novation time for 
competitively executed EFPs and block trades.
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    As proposed, an exception to the uniform acceptance and novation 
timing would also be made for Confirmed Trades that are Backloaded OTC 
Options, which are defined as OTC Options for which the premium payment 
date is prior to the business day on which the transaction is submitted 
to OCC for clearing.\31\ OCC believes an exception for Backloaded OTC 
Options remains necessary because of their ``backloaded'' nature, which 
means that the premium payment has already been made. In addition, 
Backloaded OTC Options are subject to being non-competitively executed 
and therefore present the same heightened settlement default risk that 
is discussed above regarding other non-competitively executed 
transactions. However, in contrast to those other types of non-
competitively executed transactions, OCC is not able to immediately 
validate a Backloaded OTC Options transaction or check its price 
reasonability upon submission. Therefore, OCC believes it remains 
appropriate to delay acceptance and novation for these contracts until 
the selling Clearing Member has met its regular morning settlement 
obligations on the business day following trade reporting.
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    \31\ See Article I, Section 1.B.(1) of the OCC By-Laws.
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Provisional Information Regarding Confirmed Trades

    OCC proposes that its acceptance and novation time would no longer 
be tied to publication of a Daily Position Report as OCC's acceptance 
of a Confirmed Trade would instead be reflected in the position 
information that OCC makes available to Clearing Members

[[Page 15185]]

throughout the business day. OCC therefore proposes to amend 
Interpretation and Policy .01 to Rule 501 to: (1) Clarify that OCC 
makes updated position data reflecting accepted and novated trades 
available to its Clearing Members throughout the day; and (2) remove 
from that provision a statement that Clearing Members must rely on the 
Daily Position Report for definitive information regarding their 
positions.

Hedge Loans and Market Loans

    In addition to its clearance and settlement of Confirmed Trades, 
OCC also acts as a CCP for certain stock lending transactions that are 
part of its Stock Loan/Hedge Program and Market Loan Program. OCC 
proposes to amend its Stock Loan/Hedge Program and Market Loan Program 
Rules to better describe OCC's process for accepting Hedge Loans and 
Market Loans and to appropriately harmonize certain provisions 
governing each type of Stock Loan.\32\
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    \32\ See OCC Rules 2202(b); 2202A(b), (c).
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    Hedge Loans are initiated as stock lending transactions that are 
negotiated and settled between Clearing Members at The Depository Trust 
Company (``Depository'') before they are reported to OCC. Rule 2202(b) 
provides that OCC must generally accept these stock lending 
transactions upon receipt of a report from the Depository that shows a 
completed transaction.\33\ However, OCC may reject a transaction if it 
determines that it is: (1) Not in accordance with OCC's By-Laws or 
Rules; (2) one or both account numbers specified are invalid for Hedge 
Loans; or (3) the information provided by the Depository contains 
errors or omissions. Moreover, Rule 2202(b) provides that if OCC does 
not affirmatively reject a reported transaction by such a time as OCC 
is authorized to specify from time to time then the transaction is 
deemed accepted as a Hedge Loan. Upon acceptance, OCC becomes the 
lender to the Borrowing Clearing Member and the borrower to the Lending 
Clearing Member. Although OCC has discretion during each business day 
to make provisional information available to Clearing Members regarding 
their lending and borrowing activity, only the Stock Loan Mark to 
Market Activity Report is recognized as providing definitive Hedge Loan 
positions.\34\
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    \33\ OCC is not obligated to accept the stock lending 
transactions of a Clearing Member that has been suspended by the 
Depository. See OCC Rule 2210(a). The same condition applies 
regarding Market Loans. See OCC Rule 2210A(a).
    \34\ See Rule 2202, Interpretation and Policy .01.
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    OCC proposes to amend Rule 2202(b) to clarify that OCC receives and 
accepts completed transaction information from the Depository 
throughout the day and would delete the statement that a transaction is 
deemed accepted by a particular cut off time if OCC does not 
affirmatively notify Clearing Members of a rejection. Rule 2202(b) 
would instead state that OCC generally accepts completed transactions 
reported to it unless: (1) OCC is otherwise required to reject a 
transaction because it is not in accordance with the By-Laws or Rules; 
(2) one or both account numbers specified are invalid; or (3) the 
information provided contains unresolved errors or omissions. OCC 
believes these changes would help clarify the time at which Hedge Loans 
are accepted and the specific circumstances in which Hedge Loans will 
be rejected. As described below, the change would also ensure 
consistency between parallel provisions in the Stock Loan/Hedge Program 
and Market Loan Program regarding the initiation process that OCC 
believes should apply equally. Finally, a reference to the Stock Loan 
Market to Market Activity Report being the only definitive statement of 
positions would be deleted because Hedge Loan positions would be 
definitive upon acceptance in OCC's clearing system.
    In connection with the Market Loan Program initiation process, the 
Depository also sends information to OCC regarding completed stock 
lending transactions. Rule 2202A(b) provides that upon OCC's receipt of 
an end of day stock loan activity file from the Depository OCC must 
accept the transactions as Market Loans unless it is required to reject 
them for the same reasons described above concerning Hedge Loans. The 
Rule further provides that, upon OCC's affirmative acceptance, OCC 
becomes the lender to the Borrowing Clearing Member and the borrower to 
the Lending Clearing Member.
    As with the proposed changes to the Stock Loan Hedge Program, OCC 
proposes to clarify that OCC receives and accepts completed transaction 
information from the Depository throughout the day. OCC also proposes 
to delete a reference to affirmative acceptance in Rule 2202A(b) 
because the other proposed changes would clarify that acceptance will 
generally take place automatically unless OCC is specifically required 
to reject transactions due to the deficiencies described above. A 
conforming change would also be made in this regard in Rule 2202A(c). 
References to the definitive nature of the Stock Loan Mark to Market 
Activity Report would be deleted for the same reasons described above 
regarding Hedge Loans.

Streamlining and Reorganization

    As part of its continued efforts to streamline its By-Laws and 
Rules, OCC proposes to relocate certain provisions from Article VI, 
Sections 4 through 8 of the By-Laws to Chapter IV of the Rules. This 
would promote a centralized location for provisions that address trade 
reporting and novation. OCC also proposes to consolidate certain 
provisions in Chapter IV of the Rules to eliminate redundancy. These 
proposed organizational changes are summarized below.
    Article VI, Section 4 of OCC's By-Laws regarding a Purchasing 
Clearing Member's obligations with respect to a Confirmed Trade would 
be relocated, without amendment, to a new Rule 403. Article VI, Section 
5 of the By-Laws regarding OCC's obligations with respect to a 
Confirmed Trade would be amended, as described above, and incorporated 
into existing Rule 401 and new Rule 404. Article VI, Section 6 of the 
By-Laws regarding the issuance of cleared contracts would be amended as 
described above and relocated to a new Rule 405. Article VI, Section 7 
of the By-Laws regarding the reporting of confirmed trades would be 
relocated and incorporated into Rule 401. More specifically, Article 
VI, Section 7(b) of the By-Laws would become Rule 401(e), Section 7(c) 
would become Rule 401(f), and Interpretation and Policy .01 to Section 
7 would become Interpretation and Policy .03 to Rule 401. Article VI, 
Section 8 of the By-Laws regarding payments made to OCC would be 
amended as described above and relocated to new Rule 406. To 
accommodate these new rules in Chapter IV, current Rule 403 would be 
renumbered as 407, and current Rule 405 would be renumbered as Rule 
408. Cross-references would also be updated to reflect this renumbering 
throughout Chapter IV of the Rules, as well as in Article I, Section 
1.G.(3) and (4), Article VI, Section 2, and Article XVII, Sections 2(a) 
and 2(c)(1) of the By-Laws, and Rules 504(e), 504(g), and 611(a).
    Additionally, OCC proposes to delete existing Rule 404 regarding 
the reporting of confirmed trades in OTC Options and to incorporate its 
substance into Rule 401 in order create a more centralized trade 
reporting rule. This incorporation of Rule 404 into Rule 401 would 
require the addition of references to OTC Trade Sources in Rule 401(a) 
and (b), and the merger of language from Rule 404(b) into Rule 401(b) 
and from Rule 404(c) into Rule 401(d).

[[Page 15186]]

Elimination of Dormant Products and Rules

    OCC proposes to delete certain provisions from its By-Laws and 
Rules that only apply to cross-rate foreign currency options and 
flexibly-structured index options denominated in a foreign currency 
because OCC no longer clears and settles such products. These products, 
when they were still actively cleared and settled, were subject to 
delayed novation, so OCC believes eliminating the rules governing these 
products at this time would reduce confusion related to the adoption of 
the proposed changes described herein concerning trade acceptance and 
novation timing. Consequently, OCC proposes to delete Articles XX and 
XXIII of its By-Laws and Chapters XXI and XXIV of its Rules, which 
govern each of those products, respectively. Additionally, OCC proposes 
to eliminate all other references to such products throughout its By-
Laws and Rules, including in Section 1(d) of Article V, and 
Interpretation and Policy .03 to Section 1 of Article V of the By-Laws 
and Rules 607, 1107(a)(3) and 1107(a)(4), as well as in the definitions 
of Option Contract, Trading Currency and Underlying Currency in Article 
I of the By-Laws.
    OCC also proposes to delete Rule 402 concerning the supplementary 
reporting of Confirmed Trades. Under Rule 402, in certain extraordinary 
circumstances, OCC may in its discretion accept from an Exchange after 
the cut-off time for receiving Confirmed Trade information for a 
particular business day (``trade date'') supplementary Confirmed Trade 
information reflecting the comparison of additional trades executed on 
or before the trade date that remained unconfirmed at the cut-off time. 
Rule 402 was adopted at a time when OCC received matched trade 
information from Exchanges for a given trade date in a single batch 
submission after the close of the trading day.\35\ Under this old 
process, trades that remained unmatched when an Exchange prepared its 
nightly trade tape to OCC were omitted from the tape and, if a trade 
was subsequently matched, the Exchange reported the trade to OCC the 
following night to be processed as if it had not been executed until 
the date when it was reported. Rule 402 was adopted to accommodate the 
late submission of trades that had not been matched in time to be 
submitted on the Exchange's original trade tape, thereby allowing those 
trades to be processed as if they were submitted on their original 
trade date. OCC is proposing to delete Rule 402 because it is no longer 
applicable to OCC's current clearing processes, whereby OCC 
continuously receives matched trade information from Exchanges on a 
real-time basis.
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    \35\ See Filing and Order Granting Accelerated Approval of 
Proposed Rule Change of Options Clearing Corporation, Securities 
Exchange Act Release No. 21233 (August 10, 1984) (SR-OCC-84-12).
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(2) Statutory Basis
    Section 17A(b)(3)(F) of the Act \36\ requires, among other things, 
that the rules of a clearing agency be designed to foster cooperation 
and coordination with persons engaged in the clearance and settlement 
of securities transactions, promote the prompt and accurate clearance 
and settlement of securities and derivatives transactions, and, in 
general, protect investors and the public interest. The proposed rule 
change is intended to provide a clear and uniform acceptance and 
novation time for nearly all Confirmed Trades and to clarify the 
acceptance and novation timing regarding Stock Loans by creating 
greater certainty regarding the time at which novation occurs and such 
Confirmed Trades and Stock Loans may no longer be rejected by OCC. 
Under the newly proposed uniform acceptance time, OCC would deem nearly 
all Confirmed Trades to be accepted and simultaneously novated when 
they are reported to OCC, provided that the transaction information 
reported to OCC by the Exchange or OTC Trade Source first passes OCC's 
validation procedures and is provided to OCC at such time as OCC 
prescribes. In addition, the proposed rule change also would eliminate 
certain dormant rules that are no longer applicable to OCC's clearance 
and settlement services and processes. As a result, OCC believes that 
the proposed rule change would provide greater clarity and transparency 
to Clearing Members, other users of OCC, and the general public 
regarding OCC's processes for the reporting of transactions, 
acceptance, and novation. OCC therefore believes that the proposed rule 
change is designed to foster cooperation and coordination with persons 
engaged in the clearance and settlement of securities transactions, 
promote the prompt and accurate clearance and settlement of securities 
and derivatives transactions, and, in general, protect investors and 
the public interest in accordance with Section 17A(b)(3)(F) of the 
Act.\37\
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    \36\ 15 U.S.C. 78q-1(b)(3)(F).
    \37\ Id.
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    In addition, Rule 17Ad-22(e)(1) \38\ requires a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to provide for a well-founded, 
clear, transparent and enforceable legal basis for each aspect of its 
activities in all relevant jurisdictions. First, the proposed rule 
change would provide a clear and uniform time regarding OCC's 
acceptance and novation for nearly all Confirmed Trades and clarify 
OCC's acceptance and novation process regarding Stock Loans. Achieving 
this outcome by, among other things, eliminating the use of the term 
Commencement Time and the current structure in which users must parse 
through a number of By-Law and Rule provisions to identify the time at 
which novation occurs would help ensure that OCC has a well-founded, 
clear, transparent, and enforceable legal basis regarding the rights 
and obligations of OCC and Clearing Members in respect of the reporting 
of transactions, acceptance, and novation. Second, OCC also believes 
that the proposal to streamline and reorganize provisions concerning 
transaction reporting, acceptance, and novation is consistent with Rule 
17Ad-22(e)(1) \39\ because consolidating them in Chapter IV of the 
Rules would promote readability and therefore allow the provisions to 
be more easily understood. OCC believes this same purpose of promoting 
clarity and readability would also be furthered by eliminating By-Law 
and Rule provisions that concern certain dormant products that are no 
longer cleared and settled by OCC or that concern processes no longer 
supported by OCC.
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    \38\ 17 CFR 240.17Ad-22(e)(1).
    \39\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act \40\ requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. OCC does not 
believe that the proposed rule change would impact or impose any burden 
on competition. The proposed rule change is designed to provide more 
clarity and transparency to, and therefore foster cooperation and 
coordination among, Clearing Members, other users of OCC, and the 
general public regarding OCC's processes regarding the reporting of 
transactions, acceptance and novation. This proposed rule change would 
not inhibit access to OCC's services or

[[Page 15187]]

disadvantage or favor any particular user in relationship to another, 
and it would be applied uniformly to all Clearing Members. For the 
foregoing reasons, OCC believes the proposed rule change is in the 
public interest, would be consistent with the requirements of the Act 
applicable to clearing agencies and would not impact or impose a burden 
on competition.
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    \40\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

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

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the 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-2018-007 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-OCC-2018-007. 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 proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for 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 such 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/about/publications/bylaws.jsp.
    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-2018-007 and 
should be submitted on or before April 30, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-07111 Filed 4-6-18; 8:45 am]
 BILLING CODE 8011-01-P


