[Federal Register Volume 83, Number 105 (Thursday, May 31, 2018)]
[Notices]
[Pages 25087-25093]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-11611]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83321; File No. SR-OCC-2018-007]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Amendment No. 1 and Order Approving Proposed Rule 
Change, as Modified by Amendment No. 1, Related to The Options Clearing 
Corporation's Trade Acceptance and Novation Rules

May 24, 2018.
    On March 23, 2018, the Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ proposed rule change SR-
OCC-2018-007. The proposed rule change was published for comment in the 
Federal Register on April 9, 2018.\3\ The Commission did not receive 
any comments on the proposed rule change. On April 19, 2018, OCC filed 
Amendment No. 1 to the proposed rule change.\4\ The Commission is 
publishing this notice to solicit comment on Amendment No. 1 from 
interested persons and is approving the proposed rule change, as 
modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 82984 (April 3, 2018), 
83 FR 15181 (April 9, 2018) (SR-OCC-2018-007) (``Notice'').
    \4\ OCC submitted Amendment No. 1 to correct an error in Exhibit 
5B of the Notice, which did not accurately reflect the text of 
existing OCC Rule 2202(c) and erroneously contained proposed changes 
to that inaccurate text. Amendment No. 1 clarifies that the rule 
text for existing Rule 2202(c) would remain unchanged and would not 
be affected by the proposed rule change.
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I. Description of the Proposed Rule Change 5
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    \5\ The subsequent description of the proposed rule change is 
substantially excerpted from OCC's description in the Notice. See 
Notice, 83 FR 15181-15186.
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    OCC proposed to amend OCC's By-Laws (``By-Laws'') and Rules to: (1) 
Clarify the time at which OCC accepts and novates \6\ 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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    \6\ 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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[[Page 25088]]

Background

Acceptance and Novation Timing
    Clearly stating the specific time at which OCC accepts transactions 
for clearance and settlement is important to Clearing Members because 
it signifies the time under the 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,\7\ including as a guarantor of 
the settlement obligations associated with transactions that OCC 
accepts and novates.\8\
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    \7\ See, e.g., Article VI, Section 5 of the By-Laws.
    \8\ See generally 15 U.S.C. 78q-1; 17 CFR 240.17Ad-22.
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Current Acceptance and Novation of Confirmed Trades
    While most trades are functionally novated upon proper submission 
to OCC for clearing, OCC's current By-Laws and Rules require a user to 
parse through a number of provisions and definitions in various 
locations to identify the time at which acceptance and novation occur. 
For example, the term Confirmed Trade \9\ is defined to include all of 
the products for which OCC currently provides clearance and settlement 
services, with the exception of certain Stock Loan \10\ transactions. A 
Confirmed Trade is novated upon OCC's acceptance of the trade, 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 one section 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.\11\ Another section of the By-Laws 
(regarding the reporting of Confirmed Trades) specifies that 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.\12\
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    \9\ Under the 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.''
    \10\ 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 are addressed separately below.
    \11\ Article VI, Section 5 of the By-Laws. This typically occurs 
at the end of each business day.
    \12\ Article VI, Section 7 of the By-Laws.
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    Under yet another section 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.\13\ 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.\14\ 
OCC proposed the changes herein to reflect this reality.
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    \13\ See Article VI, Section 8 of the By-Laws.
    \14\ 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 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 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, while setting forth the following alternate 
definitions of Commencement Time:
    (1) For futures issued in exchange-for-physical transactions,\15\ 
block trades,\16\ 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; \17\
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    \15\ 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.
    \16\ 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.
    \17\ See Article XII, Section 7 of the By-Laws.
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    (2) For 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; \18\ and
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    \18\ See Articles XX, Section 1 and XXIII, Section 1 of the By-
Laws.
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    (3) For 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.\19\
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    \19\ See Article VI, Section 5 of the By-Laws.
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    That same section of the By-Laws specifies that, for Backloaded OTC 
Options, the transaction is not accepted for clearing until the Selling 
Clearing Member has met its regular morning settlement obligation on 
the business day following the reporting of the trade to OCC.\20\
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    \20\ 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.\21\ 
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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    \21\ See generally Article VI, Section 8 of the By-Laws 
identifying these exceptions.
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    (1) For 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; \22\
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    \22\ See Article XII, Section 7 of the By-Laws.
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    (2) For 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; \23\ and
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    \23\ See Article XX, Section 5, Article XXIII, Section 7 of the 
By-Laws.
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    (3) For 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.\24\
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    \24\ 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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[[Page 25089]]

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 proposed to amend the 
substance of Article VI, Section 5 of the By-Laws \25\ 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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    \25\ 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 proposed 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).\26\ 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 \27\ and is provided to OCC at such time as OCC 
prescribes. This change is intended to provide a more definitive 
indication of the point after which OCC no longer has authority to 
reject such transactions for clearing.\28\ Eliminating the concept of 
Commencement Time also necessitates deleting the term from the defined 
terms 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. To do this, OCC proposed to 
amend the following provisions of its By-Laws: Article I (definition of 
``American; American-style''); Sections 5, 6, and 12 of Article VI; 
\29\ and Section 7 of Article XII.
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    \26\ 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.
    \27\ 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, including but not limited to the trade source, 
symbol, expiration, strike, call or put, quantity, price, and 
Clearing Member details of both sides of the trade.
    \28\ 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.
    \29\ 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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    OCC also proposed to amend Rule 401 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, 
amended 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, new Rule 401(a)(1)(ii) would provide that OCC 
may also request certain optional trade information that is not 
required as a condition for acceptance.\30\
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    \30\ 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 be amended to 
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, new 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.
    Taken together, these changes are designed to provide a uniform 
approach for nearly all Confirmed Trades regarding acceptance and 
novation. OCC believes the changes will reduce the complexity of its 
Rules and By-Laws, while at the same time providing 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. OCC believes that adopting 
this uniform approach regarding acceptance and novation will neither 
functionally change the time at which OCC becomes obligated regarding 
Confirmed Trades nor otherwise alter the credit risk OCC faces with 
respect to such Confirmed Trades.
    First, providing 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 
OCC currently has no right to reject Confirmed Trades, upon proper 
submission, due to the failure of a Purchasing Clearing Member to pay 
any amount due to OCC at or before the settlement time. Second, OCC 
generally does not collect margin with respect to such Confirmed Trades 
until 9:00 a.m. Central the following business day.\31\ OCC, therefore, 
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 does not anticipate that moving the novation 
time from the general Commencement Time to earlier in the day as 
described above--at the point of acceptance--would 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

[[Page 25090]]

necessary through intra-day margin collection.\32\
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    \31\ 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).
    \32\ See OCC Rule 609 (addressing OCC's authority to require 
intra-day margin).
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    Further, OCC believes that it would be appropriate to also apply 
the uniform acceptance and novation time to OTC Options that are not 
Backloaded OTC Options. OTC Options currently are subject to an 
alternative Commencement Time, designated for OTC Options that are not 
Backloaded OTC Options as the time when a report of OCC's acceptance is 
made available to Clearing Members through OCC's clearing system.\33\ 
In practice, OCC automatically makes a report of its acceptance of such 
OTC Options available to Clearing Members in its clearing system, 
provided the OTC Option is properly reported to OCC, the contract 
passes OCC's validation process, and the contract is not rejected, all 
of which generally is completed immediately upon submission of the 
contract to OCC.\34\ This is consistent with the new uniform approach 
OCC proposed, which would 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. Accordingly, OCC believes 
there is no operational, risk management, or other reason to exclude 
OTC Options that are not Backloaded OTC Options from the proposed 
uniform acceptance and novation timing.
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    \33\ Article VI, Section 5 of the By-Laws.
    \34\ 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 currently are not 
subject to the general definition of Commencement Time (i.e., Confirmed 
Trades in futures issued in exchange-for-physical transactions, block 
trades, or other trades designated as non-competitively executed), OCC 
proposed to preserve the existing structure under which OCC has 
authority to reject the transactions even after they are properly 
submitted for clearing by creating an exception to the uniform 
acceptance and novation timing for such trades. OCC believes that 
delayed novation continues to be 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.\35\
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    \35\ 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 also would 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.\36\ OCC believes that an exception for Backloaded 
OTC Options remains necessary because their ``backloaded'' nature means 
that the premium payment has already been made. Backloaded OTC Options 
also are subject to being non-competitively executed and therefore 
present the same heightened settlement default risk regarding other 
non-competitively executed transactions discussed above. In addition, 
because OCC is not able to immediately validate a Backloaded OTC 
Options transaction or check its price reasonability upon submission, 
OCC believes that it remains appropriate to continue its existing 
practice of delaying 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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    \36\ See Article I, Section 1.B.(1) of the By-Laws.
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Provisional Information Regarding Confirmed Trades
    OCC proposed that its acceptance and novation time would no longer 
be tied to publication of a Daily Position Report, given that OCC's 
acceptance of a Confirmed Trade would instead be reflected in the 
position information that OCC makes available to Clearing Members 
throughout the business day. Accordingly, OCC proposed 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 
proposed to amend its rules for both programs to better describe its 
process for accepting Hedge Loans and Market Loans and to appropriately 
harmonize certain provisions governing each type of Stock Loan.\37\
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    \37\ See OCC Rules 2202(b); 2202A(b), (c).
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    Stock Loan/Hedge Loan Program. Hedge Loans are initiated as stock 
lending transactions that are negotiated and settled between Clearing 
Members at The Depository Trust Company (``DTC'') 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 DTC that 
shows a completed transaction.\38\ 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 DTC 
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.\39\
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    \38\ OCC is not obligated to accept the stock lending 
transactions of a Clearing Member that has been suspended by DTC. 
See OCC Rule 2210(a). The same condition applies regarding Market 
Loans. See OCC Rule 2210A(a).
    \39\ See Rule 2202, Interpretation and Policy .01.
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    OCC proposed to amend Rule 2202(b) to clarify that OCC receives and 
accepts completed transaction information from DTC throughout the day, 
and it 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;

[[Page 25091]]

(2) one or both account numbers specified are invalid; or (3) the 
information provided contains unresolved errors or omissions. OCC 
believes that these changes will help clarify the time at which Hedge 
Loans are accepted and the specific circumstances in which Hedge Loans 
will be rejected. As discussed more fully below, the change also would 
ensure consistency between parallel provisions in the Stock Loan/Hedge 
Program and Market Loan Program regarding the initiation process, which 
OCC believes should apply equally across both programs. Finally, a 
reference to the Stock Loan Mark 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.
    Market Loan Program. In connection with the Market Loan Program 
initiation process, DTC 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 DTC, 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 
proposed to clarify that OCC receives and accepts completed transaction 
information from DTC throughout the day. OCC also proposed 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 also would 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 effort to streamline its By-Laws and 
Rules, OCC proposed to relocate certain provisions from Article VI, 
Sections 4 through 8 of the By-Laws to Chapter IV of the Rules. This 
change would promote a centralized location for provisions that address 
trade reporting and novation. OCC also proposed to consolidate certain 
provisions in Chapter IV of the Rules to eliminate redundancy. These 
proposed organizational changes are summarized below.
    OCC would relocate Article VI, Section 4 of OCC's By-Laws regarding 
a Purchasing Clearing Member's obligations with respect to a Confirmed 
Trade, without amendment, to a new Rule 403. As described above, OCC 
would amend Article VI, Section 5 of the By-Laws regarding OCC's 
obligations with respect to a Confirmed Trade, and it would be 
incorporated into existing Rule 401 and new Rule 404. As described 
above, OCC would amend Article VI, Section 6 of the By-Laws regarding 
the issuance of cleared contracts, and it would be relocated to a new 
Rule 405. OCC would relocate Article VI, Section 7 of the By-Laws 
regarding the reporting of confirmed trades incorporate it 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. As described above, OCC would amend Article 
VI, Section 8 of the By-Laws regarding payments made to OCC and 
relocate it 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 also would 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, to create a more centralized trade reporting rule, 
OCC proposed to delete existing Rule 404 regarding the reporting of 
confirmed trades in OTC Options and to incorporate its substance into 
Rule 401. This 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).
Elimination of Dormant Products and Rules
    OCC no longer clears and settles cross-rate foreign currency 
options and flexibly-structured index options denominated in a foreign 
currency. Accordingly, OCC proposed to delete certain provisions from 
its By-Laws and Rules that only apply to such products. When OCC still 
actively cleared and settled these products they were subject to 
delayed novation. OCC therefore believes that eliminating the rules 
governing these products at this time would avoid confusion and enhance 
clarity regarding OCC's proposed uniform approach to trade acceptance 
and novation timing. Consequently, OCC proposed to delete Articles XX 
and XXIII of its By-Laws, which governs cross-rate foreign currency 
options, and Chapters XXI and XXIV of its Rules, which govern flexibly-
structured index options denominated in a foreign currency. 
Additionally, OCC proposed 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 proposed to delete Rule 402 concerning the supplementary 
reporting of Confirmed Trades. Rule 402 grants OCC the discretion to, 
in certain extraordinary circumstances, 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.\40\ 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. OCC adopted Rule 402 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 proposed 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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    \40\ 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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[[Page 25092]]

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\41\ After carefully considering the proposed rule change, 
the Commission believes that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to OCC. More specifically, the Commission 
believes that the proposal is consistent with Section 17A(b)(3)(F) of 
the Act \42\ and Rule 17Ad-22(e)(1) under the Act.\43\
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    \41\ 15 U.S.C. 78s(b)(2)(C).
    \42\ 15 U.S.C. 78q-1(b)(3)(F).
    \43\ 17 CFR 240.17Ad-22(e)(1).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act \44\ 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. As described above, 
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 
specifying the time at which novation occurs and when Confirmed Trades 
and Stock Loans may no longer be rejected by OCC. Under the 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 passes OCC's 
validation procedures and is provided to OCC at such time as OCC's 
rules prescribe. In addition, the proposed rule change would eliminate 
certain dormant rules no longer applicable to OCC's clearance and 
settlement services and processes.
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    \44\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission believes that these changes 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. Instead of parsing through 
multiple different definitions and provisions in various locations 
throughout OCC's By-Laws and Rules to identify the different times at 
which acceptance and novation occurs for different transactions, users 
and other interested parties will be able to refer to more uniform 
approach set forth in a single chapter of OCC's Rules. This, in turn, 
will help avoid potential confusion and ambiguity. Accordingly, the 
Commission believes that, taken together, these changes will help 
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 consistent with Section 17A(b)(3)(F) of the Act.\45\
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    \45\ Id.
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B. Consistency with Rule 17Ad-22(e)(1)

    Rule 17Ad-22(e)(1) \46\ 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. The Commission believes the 
proposed changes are consistent with Rule 17Ad-22(e)(1) for the reasons 
set forth below.
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    \46\ 17 CFR 240.17Ad-22(e)(1).
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    First, by modifying the current process so that all Confirmed 
Trades, subject to limited exceptions, would be deemed accepted and 
simultaneously novated when they are reported to OCC and the related 
position information has been recorded in OCC's clearing system, 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. 
The Commission believes this would bring clarity and transparency to 
OCC's By-Laws and Rulebook and help simplify the process of reporting 
transactions, acceptance, and novation, which in turn will help ensure 
that OCC has a well-founded, clear, transparent, and enforceable legal 
basis regarding the rights and obligations of OCC and Clearing Members 
regarding Confirmed Trades, consistent with Rule 17Ad-22(e)(1).
    Second, the Commission believes that the streamlining and 
reorganizing all of the provisions concerning transaction reporting, 
acceptance, and novation and consolidating them in Chapter IV of the 
Rules would promote consistency and readability and help avoid 
potential confusion and ambiguity, and therefore allow the provisions 
to be more easily understood. For example, enumerating the trade 
information required to be submitted by participant Exchanges to OCC 
for options and futures transactions would allow for greater clarity of 
the information required and that may be requested by OCC. Similarly, 
by better describing the process by which Hedge Loans and Market Loans 
are accepted, OCC would harmonize the relevant provisions of its 
Rulebook governing each type of Stock Loan. In addition, the Commission 
believes eliminating provisions related to processes no longer 
supported by OCC and dormant products that are no longer cleared and 
settled by OCC would improve the clarity and transparency of its By-
Laws and Rules. Accordingly, the Commission believes that the changes 
proposed in the proposed rule change are consistent with Rule 17Ad-
22(e)(1) under the Act.\47\
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    \47\ Id.
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III. Solicitation of Comments on Amendment No. 1

    Interested persons are invited to submit written data, views and 
arguments concerning whether Amendment No. 1, 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

[[Page 25093]]

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 June 15, 2018.

IV. Approval of Proposed Rule Change, as Modified by Amendment No. 1

    As discussed above, OCC submitted Amendment No. 1 to accurately 
reflect existing Rule 2202(c), which would not be affected by the 
proposed rule change. The Commission believes that Amendment No. 1 does 
not raise any novel issues or alter the proposed changes in any way. In 
addition, the Commission finds that the proposed rule change, as 
modified by Amendment No. 1, is consistent with Act and applicable 
rules thereunder for the reasons discussed above. Accordingly, the 
Commission finds good cause to approve the proposed rule change, as 
modified by Amendment No. 1 pursuant to Section 19(b)(2) of the 
Act.\48\
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    \48\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change, as modified by Amendment No. 1, is consistent 
with the requirements of the Act, in particular with the requirements 
of Section 17A of the Act \49\ and Rule 17Ad-22(e)(1) thereunder.
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    \49\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) \50\ of the 
Act, that the proposed rule change (SR-OCC-2018-007) be, and it hereby 
is, approved.
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    \50\ 15 U.S.C. 78s(b)(2).
    \51\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\51\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-11611 Filed 5-30-18; 8:45 am]
 BILLING CODE 8011-01-P


