[Federal Register Volume 83, Number 209 (Monday, October 29, 2018)]
[Notices]
[Pages 54385-54395]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-23506]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84473; File No. SR-OCC-2018-012]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change Related to The Options Clearing 
Corporation's Board of Directors and Board Committee Charters

October 23, 2018.

I. Introduction

    On August 24, 2018, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2018-012 (``Proposed Rule Change'') 
pursuant to Section 19(b) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to make changes to 
OCC's (1) Audit Committee Charter, (2) Compensation and Performance 
Committee Charter, (3) Governance and Nominating Committee Charter, (4) 
Risk Committee Charter, (5) Technology Committee Charter and (6) Board 
of Directors Charter. The Proposed Rule Change was published for 
comment in the Federal Register on September 10, 2018,\3\ and the 
Commission has received no comments in response.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 84021 (Sep. 4, 2018), 83 
FR 45706 (Sep. 10, 2018) (SR-OCC-2018-012) (``Notice'').
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II. Background 4
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    \4\ All terms with initial capitalization that are not otherwise 
defined herein have the same meaning as set forth in the OCC By-Laws 
and Rules. 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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    The Proposed Rule Change would make certain changes to OCC's (1) 
Audit Committee (``AC'') Charter (``AC Charter''), (2) Compensation and 
Performance Committee (``CPC'') Charter (``CPC Charter''), (3) 
Governance and Nominating Committee (``GNC'') Charter (``GNC 
Charter''), (4) Risk Committee (``RC'') Charter (``RC Charter''), (5) 
Technology Committee (``TC'') Charter (``TC Charter''), and (6) Board 
of Directors (``Board'') Charter (``Board Charter'').\5\ These changes 
are described and broadly categorized below.\6\
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    \5\ See Notice at 45707-08. As discussed below, the changes to 
the Board Charter would involve incorporating provisions from OCC's 
Corporate Governance Principles (``CGP'') and changing the title of 
the resultant document to the Board Charter and Corporate Governance 
Principles.
    \6\ Many of the components of the Proposed Rule Change may serve 
more than one purpose and could, therefore, be discussed in more 
than one category herein. The categorization of changes is not 
designed to denote otherwise.
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    As a general matter, the Proposed Rule Change would amend the 
charters to provide that in carrying out their responsibilities the 
Board and the committees would prioritize the safety and efficiency of 
OCC, generally support the stability of the broader financial system 
and consider the legitimate interests of Clearing Members, customers of 
Clearing Members and other relevant stakeholders, including OCC's 
shareholders and other participant exchanges, taking into account 
prudent risk management standards (including systemic risk mitigation) 
and industry best practices.

A. Clarity and Transparency

    Several of the changes within the Proposed Rule Change seek to 
better describe OCC's current processes. Such changes range from 
clarification (e.g., changing ``annually'' to ``each calendar year'') 
to removal of redundancies (e.g., where a requirement is found 
elsewhere in OCC's rules) to stating the existing functions and 
responsibilities of OCC's Board and Board committees. These changes are 
described in more detail below.
    The Proposed Rule Change would make a number of changes to OCC's 
Board committee charters to clarify that, where certain actions were 
required to be performed ``annually'' under the charters, those actions 
would now be required to occur ``each calendar year.'' OCC believes 
that it is appropriate to clarify which actions are required on an 
every twelve months-basis, particularly in cases where a regulatory 
requirement

[[Page 54386]]

to do so exists.\7\ Such changes include amending the committee 
charters to provide that the following activities must occur on a 
calendar year basis: (i) Appointment of directors to particular 
committees; (ii) committee meetings with certain members of management 
in executive sessions conducted regularly (no less than once per 
calendar year); (iii) reporting from each committee to the Board 
summarizing that committee's activities for the prior year; (iv) 
confirmation by each committee to the Board that all responsibilities 
outlined in the committee's charter have been carried out; and (v) 
provision of each committee's assessment of its and its individual 
members' performance to the GNC for review.
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    \7\ See Notice at 45708.
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    The Proposed Rule Change would also make a number of clarifying 
changes to each charter. For example, with respect to the AC Charter, 
the Proposed Rule Change would replace the current reference to 
``financial and senior management'' to OCC's ``Corporate Finance 
Department'' in describing the AC's responsibility to facilitate open 
communication between external auditors and certain groups within OCC. 
Additionally, the AC Charter would be amended to provide that the AC is 
authorized to approve the ``issuance of the annual financial'' 
statements after its review of such statements.
    The Proposed Rule Change would also amend certain descriptions of 
the AC's responsibilities. For example, the Proposed Rule Change would 
revise text describing the role of the AC, along with external 
auditors, as responsible for ``planning and carrying out audit work, as 
appropriate'' rather than ``planning and carrying out a proper audit.'' 
The AC Charter's description of the AC's power to delegate to the Chief 
Audit Executive (``CAE'') ``within the external audit limits'' would be 
changed for accuracy to read ``within the co-sourced audit hour 
limits.''
    With respect to the CPC Charter, the Proposed Rule Change would 
remove a number of specified responsibilities and replace them with a 
general statement that the committee is required to perform activities 
consistent with the CPC Charter as it deems necessary or appropriate or 
as are delegated to the committee by the Board. The specified 
responsibilities that would be removed include, for example, a 
provision that states that the committee reviews special financial 
matters as requested by the Board, and provisions addressing the 
committee's review and approval of policies and programs regarding 
salary compensation and incentive compensation and its review of 
material changes to executive management benefits.
    With respect to the GNC Charter, the Proposed Rule Change would 
make revisions such that the GNC is no longer responsible for 
recommending to the Board candidates for nomination for election or re-
election by the stockholders and any Board vacancies that are to be 
filled by the Board.\8\
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    \8\ The requirement that the GNC nominate candidates is provided 
explicitly in the By-Laws. See OCC By-Law Article III, Sections 5 
and 6A. The GNC Charter would specify that the GNC's role in this 
context applies specifically to Public Directors and Member 
Directors to promote consistency with the By-Laws.
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    With respect to the RC Charter, the Proposed Rule Change would add 
a clarifying statement to state that the RC is required to perform its 
responsibilities in accordance with the provisions of the RC Charter 
and applicable regulatory requirements. Regarding meetings of the RC, 
the RC Charter would specify that joint meetings with other Board 
committees count toward the requirement to meet at least six times a 
year. The Proposed Rule Change would also clarify that in-person 
attendance at meetings is preferred.
    With respect to the TC Charter, the Proposed Rule Change would 
revise the TC Charter to remove specific references to the committee's 
oversight of OCC's physical security and instead describe the 
committee's responsibility for overseeing the adequacy of OCC's 
management of information security risks, which generally includes: 
Oversight of the confidentiality, integrity, and availability of OCC 
data; the security of the information systems used to process, 
transmit, and store OCC information; and the physical, personnel, 
procedural, administrative, and environment security disciplines. The 
Proposed Rule Change would replace language stating that the TC will 
periodically review and appraise OCC's crisis management plans with 
language stating that the TC will oversee and receive a quarterly 
report on OCC's Business Continuity and Disaster Recovery Programs 
because crisis management plans are incorporated within the Business 
Continuity and Disaster Recovery Programs.
    The Proposed Rule Change would delete certain general statements 
regarding the TC's duty to make recommendations to the Board with 
respect to IT-related projects and investments and critically review 
the progress of such projects and/or technology architecture decisions. 
These general statements would be replaced with more specific 
descriptions of the TC's duties. For example, the TC will receive a 
report on management's progress in executing on major information 
technology (``IT'') initiatives, technology architecture decisions and 
IT priorities. The TC will also review and recommend to the Board for 
approval material changes to (i) the operational execution and delivery 
of core clearing and settlement services, and (ii) written policies 
concerning information security risk.
    The Proposed Rule Change would make similar changes to the TC 
Charter with respect to other TC responsibilities. For example, the 
Proposed Rule Change would revise the language describing the TC's 
responsibility to monitor and assess OCC's management of IT-related 
compliance risks as a responsibility to monitor and oversee the overall 
adequacy of OCC's IT and operational control environment, including the 
implementation of key controls in response to regulatory requirements.
    With respect to the Board Charter, the Proposed Rule Change will 
incorporate the existing CGP into the Board Charter and rename the 
charter as the ``Board of Directors Charter and Corporate Governance 
Principles'' to reflect the change. OCC believes this change is 
appropriate to eliminate significant overlap between the contents of 
the two existing documents and thereby make the consolidated provisions 
in the Board Charter easier for Clearing Members and other OCC 
stakeholders to access, use, and understand.\9\ For example, the 
existing CGP and Board Charter each address aspects of the Board such 
as its size and composition. The Proposed Rule Change would make 
changes to the contents of the CGP to conform the existing provisions 
to the structure and organization of the Board Charter and related 
requirements in the By-Laws and Rules.\10\ However, the majority of the 
provisions in the CGP would be incorporated in their existing form, and 
these provisions address, for example, the size of the Board and its

[[Page 54387]]

composition, membership criteria, appointment of the GNC, the selection 
of Member, Public, Exchange, and Management Directors, conduct matters, 
ethics and conflicts of interest, compensation, access to senior 
management, and Board and Board committee evaluations.
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    \9\ See Notice at 45713.
    \10\ For example, the CGP provides in one instance that all 
materials for Board meetings are made available online by the office 
of the secretary. This particular provision in the CGP would not be 
incorporated into the Board Charter, but the Board Charter would be 
amended to provide that OCC operates a portal for the general 
dissemination of meeting and other written materials to directors, a 
process that is consistent with how OCC distributes such materials 
today. In addition, the Proposed Rule Change would state in the 
Board Charter that Public Directors do not have term limits, 
consistent with the requirements in Article III, Section 6 of the 
OCC By-Laws.
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    As a further result of incorporation of the CGP into the Board 
Charter, the Proposed Rule Change would remove certain existing 
provisions in the Board Charter that specifically reference, or are 
duplicative of, more comprehensive descriptions from the CGP. 
Specifically, sections of the Board Charter would be replaced with more 
detailed explanations drawn from the CGP with respect to: (i) Board 
composition; (ii) qualification standards for directors; (iii) election 
of directors, resignation, and disqualification; (iv) tenure, term, and 
age limitations; and (v) calling of Board meetings, selection of agenda 
items, and attendance.
    Currently, the Board Charter sets forth a number of functions and 
responsibilities of the Board. The Proposed Rule Change would 
reorganize this list of functions and responsibilities in a new section 
regarding the mission of the Board and would make non-substantive 
changes to some of the descriptions of the Board's responsibilities. 
For example, the Board Charter currently provides that the Board is 
responsible for advising, approving, and overseeing OCC's business 
strategies, including expansions of clearing and settlement services to 
new business lines, as well as monitoring OCC's performance in 
delivering clearance and settlement services. The Proposed Rule Change 
would amend the Board Charter to provide that the Board is responsible 
for overseeing OCC's business strategies, including expansions of 
clearance and settlement services to new business lines and product 
types, to ensure they reflect the legitimate interests of relevant 
stakeholders and are consistent with the public interest. As a further 
example, the Proposed Rule Change would revise the Board's 
responsibility to oversee ``OCC's information technology strategy, 
infrastructure, resources and risks'' to provide that the Board's 
responsibility is to oversee ``OCC's technology infrastructure, 
resources, and capabilities to ensure resiliency with regard to OCC's 
provision of its clearing, settlement, and risk management services.'' 
The Proposed Rule Change would also remove oversight of human resources 
programs from the Board Charter because that responsibility has been 
delegated to the CPC under the current CPC Charter. OCC stated that the 
changes described above are designed to improve the readability of the 
Board Charter as well as to specify additional, specific considerations 
of the Board with respect to particular responsibilities.\11\
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    \11\ See Notice at 45714.
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    In addition to the changes described above, the Proposed Rule 
Change would specify that the Board's authority extends to performing 
such functions as it believes are appropriate or necessary, or as 
otherwise prescribed by rules or regulation, including OCC's By-Laws 
and Rules, ``or other policies.'' OCC stated that this change is 
intended to clarify that the scope of the Board's authority extends to 
all of OCC's policies.\12\
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    \12\ See Notice at 45714, n. 78.
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    The Board Charter would also provide that the Board is responsible 
for the business and affairs of OCC, and that the Board will continue 
to be responsible for performing such other functions as the Board 
believes appropriate or necessary or as otherwise prescribed by rules 
or regulations, including OCC's By-Laws and Rules. Pursuant to this 
broad responsibility, OCC believes that the functions and 
responsibilities of the Board will remain consistent notwithstanding 
certain proposed deletions or rephrasing regarding the existing list of 
responsibilities.\13\ For example, the Board Charter would no longer 
specify that the Board will review committee charters and reports of 
committee activities; however, it would nevertheless provide that the 
Board is responsible for establishing a written charter for each 
committee and that each committee will be responsible for providing an 
annual report to the Board regarding its activities.
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    \13\ See Notice at 45714, n. 79.
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    The Proposed Rule Change would make certain other changes to the 
Board Charter. The Proposed Rule Change would delete the provision 
noting that the Member Vice Chairman of the Board has the 
responsibilities set forth in the By-Laws. The Proposed Rule Change 
would also delete the current footnote one (1) from the Board Charter, 
which provides an example of an instance in which certain provisions of 
the By-Laws provide that the Board should not take action. The amended 
Board Charter will continue to provide that the Board's 
responsibilities and duties are subject to any exceptions provided in 
OCC's Amended and Restated Certificate of Incorporation or the By-Laws 
and Rules. OCC believes that the footnote providing an example of such 
an instance is unnecessary, and that its deletion would improve 
readability of the Board Charter.\14\
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    \14\ See Notice at 45715.
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    Additionally, the Proposed Rule Change includes revisions 
(including by removing or relocating existing content and changing word 
choices) intended to reduce redundancy and better organize the content 
of the charters to more clearly state what a committee is authorized or 
obligated to do. OCC stated that such changes will not substantively 
alter the responsibilities or activities of the relevant committee.\15\ 
For example, all of the charters would be amended to state that the 
Board or the relevant committee will review the charter ``at least once 
every twelve months'' instead of ``annually'' to provide further 
clarity around the intended frequency. Further, the statement in the TC 
Charter that the TC ``shall also have the authority to perform any 
other duties'' consistent with the TC Charter would be revised to 
provide that the TC ``is authorized to perform any other duties'' 
consistent with the TC Charter. In addition, the statement in the AC 
Charter that the committee shall ``approve material changes in 
accounting principles and practices'' would state that the AC ``is 
authorized to approve material changes in accounting principles and 
practices.'' Consistent with this change, where a charter currently 
states that the Board or a committee ``shall approve'' a particular 
matter, the charter would state instead that the Board or a committee 
is ``authorized to approve'' the particular matter. OCC believes such 
changes properly clarify the oversight role of the Board and the 
committees, and that approval of a particular matter is not 
mandatory.\16\
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    \15\ See Notice at 45707.
    \16\ See Notice at 45707, n. 16.
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    The Proposed Rule Change would make amendments acknowledging, where 
relevant based on the particular charter, that its Executive Chairman 
(``EC'') also serves as its Chief Executive Officer (``CEO''), and that 
therefore certain responsibilities and considerations that currently 
apply to the EC would also apply to the CEO. All charters would also be 
revised to state that a role of the Board or the committee, as 
applicable, is to advise management.

B. Public and Stakeholder Interests

    The Proposed Rule Change would specify that the GNC shall review 
the composition of the Board for consistency with public interest and 
regulatory requirements at least every three years rather than 
periodically. The

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GNC Charter would further be amended to require yearly GNC review of 
the committee charters for consistency with the public interest and 
other regulatory requirements.\17\ Lastly, the Proposed Rule Change 
would require the GNC annually to review and advise the Board with 
regard to director independence.
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    \17\ The GNC currently performs such a review of the Board 
Charter annually.
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C. Board and Management Expertise

    The Proposed Rule Change would make several changes related to the 
experience and skills of the Board and management. With respect to the 
CPC Charter, the Proposed Rule Change would clarify the role that the 
CPC plays in oversight of succession planning regarding OCC's 
Management Committee. A new provision would also provide that the CPC 
must review the results of Management Committee succession planning 
activities at least once every twelve months.
    With respect to the GNC Charter, the Proposed Rule Change would 
make two revisions that specifically address the experience and skills 
of the Board and management. First, the Proposed Rule Change would 
amend the GNC Charter to establish new responsibilities for the GNC to 
advise the Board on matters pertaining to director leadership 
development and succession planning. Second, the Proposed Rule Change 
would revise the language regarding the GNC's responsibilities with 
respect to ensuring that directors are appropriately qualified. For 
example, rather than providing that the GNC will work toward developing 
a Board with a broad spectrum of experience and expertise, the GNC 
Charter would provide that the GNC shall identify, for purposes of 
making recommendations to the Board, the criteria, skills, experience, 
expertise, attributes, and professional backgrounds (collectively, the 
``Standards'') desirable in directors to ensure the Board is able to 
discharge its duties and responsibilities. Relatedly, the GNC Charter 
would no longer include language providing that the GNC is responsible 
for recommending to the Board for approval and overseeing the 
implementation and effectiveness of OCC's policies and procedures for 
identifying and reviewing Board nominee candidates, including the 
criteria for Board nominees.
    With respect to the Board Charter, the Proposed Rule Change would 
provide that the Board is responsible for overseeing OCC's activities 
through regular assessments of Board and individual director 
performance. Because the Board has delegated responsibility to the GNC 
for the annual evaluation of the Board and its committees, OCC believes 
that it is no longer necessary to specify that the Board would have an 
annual self-evaluation obligation, as provided in the current 
charter.\18\ The Proposed Rule Change would further amend the Board 
Charter to provide that the regular assessments will no longer include 
a focus on individual director performance, but will instead focus 
primarily on the performance of the Board and each committee as a 
whole. OCC stated that focusing the annual self-evaluation on 
individual director performance is less effective than focusing on the 
performance of each committee as a whole because not every director has 
the opportunity to work with each other director.\19\
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    \18\ See Notice at 45715.
    \19\ See id.
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D. Clear and Direct Lines of Responsibility

    The Proposed Rule Change would amend the charters to provide 
clearer information regarding the functions and responsibilities of the 
Board and committees and reporting requirements. The Proposed Rule 
Change would amend all of the charters to specify that the Board and 
each committee may delegate authority to one or more designated 
officers of OCC or may refer a risk under its oversight to another 
committee or the Board as advisable or appropriate. The proposed 
revisions would provide, however, that the delegating body will retain 
the obligation to oversee any such delegation or referral and assure 
itself that delegation and reliance on the work of any delegate is 
reasonable.
    The Proposed Rule Change would further clarify that, where the 
Board or a committee has authority to approve reports or other 
proposals in its business judgment, such as materials provided by 
management, it is not obligated to approve such reports or other 
proposals, and related modifications would articulate a clear means of 
recourse for the committee or the Board if it does not approve. OCC 
stated that the purpose of these changes would be to promote governance 
arrangements that clearly prioritize the safety and efficiency of OCC 
and specify clear and direct lines of responsibility in its governance 
arrangements.\20\ The Proposed Rule Change would amend certain 
committee charters to address committee member vacancies to provide 
that in the event of a vacancy, the applicable committee would continue 
to undertake its responsibilities, so long as the remaining committee 
members are capable of satisfying the quorum requirement.\21\
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    \20\ See Notice at 45708, n. 23.
    \21\ No such change would be added to the GNC Charter because 
the matter is already addressed therein.
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    The AC Charter would describe new responsibilities for the AC that 
include reviewing the impact of litigation and other legal matters that 
may have a material impact on OCC's financial statements and overseeing 
the structure, independence and objectivity, staffing, resources, and 
budget of OCC's compliance and audit departments. The Proposed Rule 
Change would amend the AC Charter and the RC Charter to transfer 
responsibility for reviewing the investigation and enforcement outcomes 
of disciplinary actions taken by OCC against Clearing Members from the 
AC to the RC. OCC believes that the RC is appropriately situated to 
review disciplinary actions against Clearing Members given the 
committee's broader role in overseeing OCC's management of third party 
risks, which includes OCC counterparties such as Clearing Members.\22\
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    \22\ See Notice at 45712.
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    The Proposed Rule Change would revise the description of the AC's 
responsibility with respect to OCC's compliance department by providing 
more generally that the AC will review ongoing compliance monitoring 
activities by reviewing reports and other communications prepared by 
the Chief Compliance Officer (``CCO'') and inquire of management 
regarding steps taken to deal with items raised. As a result of this 
change, the AC Charter would no longer specify that the AC is 
responsible for approving the annual Compliance Testing Plan, 
monitoring progress against the annual Compliance Testing Plan, and 
approving any recommendations by the CCO relating to that plan. OCC 
stated that the purpose of this change is to shift OCC's compliance 
department to a monitoring role and away from its historic role of 
creating a specific plan to follow, as well as to facilitate the 
transition of validation responsibilities to OCC's internal audit 
department, over which the compliance department would have monitoring 
responsibilities.\23\ The AC would also be authorized to approve 
management's recommendations regarding approval or replacement of the 
CCO.
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    \23\ See Notice at 45709.
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    Under the Proposed Rule Change, the AC charter would no longer 
expressly require annual Board approval regarding audit services. 
However, the AC would

[[Page 54389]]

be required to confirm annually to the Board that all of the AC's 
responsibilities have been carried out and provide an annual report to 
the Board summarizing the AC's activities during the previous year.
    The Proposed Rule Change would amend the AC Charter to provide 
that, in addition to the CAE and CCO, the Chief Financial Officer 
(``CFO'') also will be authorized to communicate directly with the 
Chair of the AC with respect to any of the responsibilities of the AC 
between meetings of the AC given the CFO's role as part of OCC's 
executive team and his/her responsibility for OCC finances.
    The Proposed Rule Change would revise the CPC Charter to provide 
that the CPC will oversee and monitor the activities of OCC's 
Administrative Committee, including the approval of the Administrative 
Committee's charter and changes thereto and of the members of the 
Administrative Committee. OCC believes that these allocations of 
responsibility are appropriate given the CPC's current oversight of the 
Administrative Committee, whereby the CPC is responsible for, among 
other things, appointing members of the Administrative Committee and 
overseeing and monitoring the activities of the Administrative 
Committee with respect to retirement and retirement savings plans.\24\
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    \24\ See Notice at 45710.
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    The Proposed Rule Change would amend the CPC Charter to state that 
the CPC assists the Board in overseeing risks related to OCC's general 
business, regulatory capital, investments, corporate planning, 
compensation, and human capital in addition to assisting the Board in 
executive management succession planning and performance assessments; 
however, OCC management will continue to identify, manage, monitor, and 
report the associated risks to the Board. The Proposed Rule Change 
would clarify that the corporate plan and budget are annual 
arrangements, and that the CPC oversees their alignment with OCC's 
business strategy.
    The Proposed Rule Change would also address the CPC's oversight of 
OCC's capital plan. The CPC Charter would clarify that oversight of 
OCC's capital plan includes the written policies adopted thereunder, 
which include OCC's fee, dividend, and refund policies. Revisions to 
the CPC Charter would also clarify that the CPC must review the capital 
plan at least once every twelve months, and that the committee makes 
recommendations to the Board concerning capital requirements, refund 
payments, and dividend payments. In addition, the Proposed Rule Change 
would add a provision to the CPC Charter requiring management to 
provide a quarterly performance report to the committee against the 
capital plan.
    Regarding the CPC's review of Public Director compensation and the 
recommendations that it provides to the Board related thereto, a 
requirement would be added to the CPC Charter for the committee to 
engage in these activities not less than once every two years. OCC 
believes that a two-year period is appropriate for such a review 
because the overall trends in industry compensation generally do not 
change dramatically from year-to-year.\25\ The CPC would no longer be 
required to perform a full review of each component of Public Director 
compensation packages and recommend adjustments to the Board on a 
yearly basis. The Proposed Rule Change would also clarify that the CPC 
is not authorized to adopt or amend compensation, retirement, or 
welfare benefit plans that require Board approval. The Proposed Rule 
Change would also add a new requirement that the CPC must review OCC's 
insurance program at least once every twelve months.
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    \25\ See id.
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    The Proposed Rule Change would amend the GNC Charter to establish 
new responsibilities for the GNC to approve all material changes to 
written policies concerning related-party transactions and recommend 
such changes to the Board for approval. The GNC Charter would also be 
amended to provide that the GNC shall review and, if appropriate, 
approve or ratify, any related-party transactions involving OCC in 
accordance with the written policy governing such transactions. Because 
the GNC is already responsible for the review of conflicts of interests 
of directors and the manner in which such conflicts will be monitored 
and resolved, OCC believes that it is appropriate for the GNC to assume 
the additional responsibility of reviewing related-party 
transactions.\26\ Additionally, the Proposed Rule Change would remove 
the ability for a designee of the chair of the GNC to call an 
additional meeting beyond the four times per year that the GNC must 
meet. OCC believes this change would help ensure that the committee's 
time and resources would be utilized appropriately.\27\
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    \26\ See Notice at 45710-11.
    \27\ See Notice at 45711, n. 47.
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    The RC Charter currently provides that the RC assists the Board in 
overseeing OCC's policies and processes for identifying and addressing 
strategic, operational, and financial (e.g., credit, market, liquidity, 
and systemic) risks. The Proposed Rule Change would amend the RC 
Charter to state more specifically that the RC will have responsibility 
for assisting the Board in its oversight of OCC's financial, 
collateral, risk model, and third party risk management processes.\28\ 
Corresponding changes would also be made to clarify that the RC has an 
oversight role regarding these responsibilities, and that it remains 
OCC management's responsibility to identify, manage, monitor, and 
report risks in these areas. The RC would continue to be responsible 
for functions delegated to it under the By-Laws and Rules and as may be 
delegated to it by the Board.
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    \28\ As described below, the RC would no longer be responsible 
for oversight of strategic or operational risks because those 
matters would be overseen by the Board as they relate to enterprise 
risk management.
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    The current provisions of the RC Charter dealing with the oversight 
of credit, collateral, liquidity, and third party risks would be 
replaced with more specific provisions. At least once every twelve 
months, the RC would be required to review the adequacy of OCC's 
management of credit, collateral, liquidity, and third party risks. In 
connection with these responsibilities, the RC would receive monthly 
reports from OCC management regarding the effectiveness of OCC's 
management of credit exposures and liquidity risks.\29\ The RC would 
also be required to review the adequacy of OCC's secured committed 
liquidity facilities at least once every twelve months and recommend 
the size and composition of such facilities to the Board for approval. 
The RC would also be responsible for approval of all material changes 
to written policies regarding risk management in these areas and 
recommending such changes to the Board.
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    \29\ For example, the report regarding the effectiveness of the 
management of credit exposures would include the results of: (i) A 
comprehensive analysis of OCC's existing stress testing scenarios, 
models and underlying parameters and assumptions, and (ii) a 
sensitivity analysis of OCC's margin models and a review of the 
associated parameters and assumptions for back testing.
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    The Proposed Rule Change would make explicit the RC's 
responsibilities in connection with the review and approval of any new 
products that materially impact OCC's established risk profile or 
introduce novel or unique financial, risk model, and third party risks. 
The RC would refer any such new

[[Page 54390]]

products that it approves to the Board for its potential approval.
    The Proposed Rule Change would amend the RC Charter to codify the 
RC's responsibility to oversee OCC's Recovery and Orderly Wind-down 
Plan (``RWD Plan''). This responsibility would include reviewing the 
adequacy of the RWD Plan at least once every twelve months. If the 
committee approves the RWD Plan, it would next recommend the RWD Plan 
to the Board for potential Board approval. The RC would also have 
responsibility for reviewing and approving any material changes to the 
RWD Plan. In the event the RC approves any such changes, it would, in 
turn, recommend the changes to the Board for its potential approval.
    The Proposed Rule Change would amend the RC Charter to detail the 
RC's responsibility regarding the structure and staffing of OCC's 
corporate risk management functions in addition to OCC's financial risk 
management group. The RC must review structure and staffing in these 
areas at least once every twelve months. A provision would also be 
added requiring that the RC review and approve the Chief Risk Officer's 
goals and objectives, and any material changes thereto, at least once 
every twelve months.
    Further, the Proposed Rule Change would add a statement to the RC 
Charter to clarify that the RC is responsible for reviewing third-party 
assessment reports as to financial, collateral, risk model, and third-
party risk management processes and for reviewing OCC management's 
remediation efforts pertaining to any such reports.
    The Proposed Rule Change would amend the TC Charter to clarify that 
the TC's role is one of oversight, and that it remains the 
responsibility of OCC management to identify, manage, monitor, and 
report on IT and other operational risks arising from OCC's business 
activities. The Proposed Rule Change would also amend the TC Charter 
such that the TC would have responsibility for OCC's operational 
initiatives, including approving major IT and operational initiatives, 
recommending major capital expenditures to the Board, and approving the 
IT and operational budget for each calendar year.\30\
---------------------------------------------------------------------------

    \30\ Relatedly, the Proposed Rule Change would amend the TC 
Charter so that it would no longer require that the TC work with, or 
report to, the AC and RC to monitor the quality and effectiveness of 
IT systems and processes that relate to or affect OCC's internal 
control systems and risk management systems.
---------------------------------------------------------------------------

    The Proposed Rule Change would amend the Board Charter to set forth 
certain key considerations and responsibilities. These include 
providing that the Board will exercise its authority to provide for 
governance arrangements that, among other things, support applicable 
public interest requirements and the objectives of owners and 
participants, establish that the Board and senior management have 
appropriate experience and skills to discharge their duties and 
responsibilities, specify clear and direct lines of responsibility, and 
consider the interests of Clearing Members' customers.\31\ The Proposed 
Rule Change would also revise the Board Charter to note that the Board 
has explicitly delegated management of specific risks to the Board 
committees, and that to the extent a specific risk is not retained by 
the Board or otherwise assigned to a Board committee, such risk shall 
be overseen by the RC.\32\ Similarly, the Proposed Rule Change would 
amend the Board Charter to state that the Board is responsible for 
approving the compensation of the EC and certain other officers because 
the Board has delegated responsibility to the CPC to evaluate and fix 
such compensation.
---------------------------------------------------------------------------

    \31\ The Board Charter would also provide as a guiding principle 
that the Board is, among other things, mindful of the public 
interest as it fulfills its duties by complying with the obligations 
imposed on it under relevant law, and that it discloses major 
decisions to relevant stakeholders and the public.
    \32\ The amended Board Charter would further specify that the 
Board may form and delegate authority to committees and may delegate 
authority to one or more of its members and to one or more 
designated officers of OCC, but would note that the Board retains 
the obligation to oversee any such delegation or referral and assure 
itself that delegation and reliance on the work of any delegate is 
reasonable.
---------------------------------------------------------------------------

    Finally, the Proposed Rule Change would amend the Board Charter to 
provide that a number of different activities related to the conduct 
and functioning of the Board would involve participation by or input 
from certain other officers of OCC that serve functions relevant to the 
topic at issue. For example, the Board Charter would state that the EC 
and CEO, in consultation with the Chief Operating Officer (``COO'') and 
Chief Administrative Officer (``CAO''), other directors or officers of 
OCC, and the Corporate Secretary shall establish the agenda for Board 
meetings.\33\ OCC stated that these changes are designed to make clear 
the roles and authority of certain officers and to ensure that input 
from additional officers is included where appropriate.\34\
---------------------------------------------------------------------------

    \33\ Similarly, the Proposed Rule Change would amend the Board 
Charter to provide that the CEO, COO and CAO would have the 
authority to invite employees to Board meetings, that such officers 
encourage members of senior management to respond to questions posed 
by directors relating to their areas of expertise, and that 
directors shall coordinate access to members of senior management 
and outside advisors through such officers. The criteria for Board 
member eligibility would also be expanded to ensure that candidates' 
experience and expertise are not only adequate to offer advice and 
guidance to the Executive Chairman, but also to the CEO, COO, and 
CAO.
    \34\ See Notice at 45715.
---------------------------------------------------------------------------

    The Proposed Rule Change would also amend the charters to provide 
for clear reporting requirements. The Proposed Rule Change would amend 
the AC Charter to provide that certain mandatory reports be sent to the 
AC for review, including quarterly reports from the CAE regarding the 
internal audit plan and from the General Counsel regarding existing, 
pending, or threatened litigation.\35\ OCC believes that such quarterly 
reports would help provide the AC with the necessary information to 
appropriately discharge its duties and responsibilities.\36\ OCC also 
believes that these quarterly reports to the AC would help specify 
clear and direct lines of responsibility in OCC's governance 
arrangements by ensuring that these officers keep the AC apprised of 
OCC's ongoing performance or handling of these matters, which in turn 
would allow the AC to more effectively carry out its oversight 
functions and the responsibilities associated therewith.\37\
---------------------------------------------------------------------------

    \35\ The Proposed Rule change would also include certain other 
descriptive changes to the AC Charter, such as providing that the AC 
will review OCC's Reporting Concerns and Whistleblower Policy (and 
specifying that such review will occur each calendar year), rather 
than providing a more detailed description of what the reporting 
concerns and whistleblower procedures under the relevant policy 
entail.
    \36\ See Notice at 45709.
    \37\ See Notice at 45709, n. 33.
---------------------------------------------------------------------------

    A new provision of the CPC Charter would require management to 
provide a quarterly report to the committee that contains information 
on OCC's performance against the corporate plan and the budget. OCC 
believes that quarterly reporting by management to the CPC would help 
specify clear and direct lines of responsibility in OCC's governance 
arrangements by ensuring that management keeps the CPC apprised of 
OCC's ongoing performance on these matters, which, in turn, would allow 
the CPC to more effectively carry out its oversight functions and the 
responsibilities associated therewith.\38\
---------------------------------------------------------------------------

    \38\ See Notice at 45710, n. 42.
---------------------------------------------------------------------------

    The Proposed Rule Change would also require OCC management to 
provide the RC with quarterly reports regarding the effectiveness of 
OCC's management of collateral and third-party risks. OCC believes that 
this quarterly reporting would help specify clear and direct lines of 
responsibility in OCC's governance arrangements by

[[Page 54391]]

ensuring that management keeps the RC apprised of OCC's ongoing 
performance on these matters, which, in turn, would allow the RC to 
more effectively carry out its oversight functions and the 
responsibilities associated therewith.\39\ A new provision in the RC 
Charter would provide that, from time to time, the RC may receive 
reports and guidance relating to financial risk issues from, among 
others, OCC's Financial Risk Advisory Council, and that the RC would 
consider and discuss such reports and consider how such financial risk 
issues may impact the options and futures industries. The RC would take 
such guidance into account in the exercise of its fiduciary judgment 
and the performance of its functions and responsibilities.
---------------------------------------------------------------------------

    \39\ See Notice at 45712, n. 55.
---------------------------------------------------------------------------

    The Proposed Rule Change would amend the TC Charter to introduce 
mandatory periodic reporting from management on major IT initiatives. 
The TC would oversee and receive quarterly reports from management that 
provide information on: (i) Executing on major IT initiatives, 
technology architecture decisions (as applicable) and IT priorities as 
well as overall IT performance; (ii) the effectiveness of the 
management of information security risks; (iii) OCC's Business 
Continuity and Disaster Recovery Programs, including the progress on 
executing the annual test plan and achieving recovery time objectives; 
and (iv) major operational initiatives and metrics on the effectiveness 
of OCC's operations with reference to key indicators. OCC believes that 
such reports would provide the TC with the necessary information to 
discharge its oversight duties and responsibilities appropriately and 
would facilitate dialogue between the TC and OCC's senior IT management 
team. OCC believes that this reporting would also help specify clear 
and direct lines of responsibility in OCC's governance arrangements by 
ensuring that management keeps the TC apprised of OCC's ongoing 
performance on these matters, which, in turn, would allow the TC to 
more effectively carry out its oversight functions and the associated 
responsibilities.\40\
---------------------------------------------------------------------------

    \40\ See Notice at 45713, n. 63.
---------------------------------------------------------------------------

E. Risk Management

    The Proposed Rule Change would amend the committee charters to 
provide that each committee would perform, and is authorized to 
perform, such other responsibilities and functions as may, from time to 
time, be assigned to it under the By-Laws and Rules, other policies, or 
delegated to it by the Board.\41\ The Proposed Rule Change would amend 
the committee charters to provide that each committee shall perform any 
other duties consistent with their respective charters as the committee 
deems necessary or appropriate, or as the Board shall further delegate 
to the particular committee.\42\ OCC believes that these changes would 
provide for flexibility for each committee to supervise and account for 
matters naturally within the scope of their responsibility or that may 
be assigned to them by the Board.\43\
---------------------------------------------------------------------------

    \41\ OCC noted that a comparable provision to this exists in the 
RC Charter. See Notice at 45708.
    \42\ OCC noted that comparable language currently appears in the 
AC Charter, GNC Charter, and TC Charter. See Notice at 45708, n. 25.
    \43\ See Notice at 45708.
---------------------------------------------------------------------------

    The Proposed Rule Change would modify the description of the 
Board's functions and responsibilities as part of the description of 
the mission of the Board to include: (i) Overseeing OCC's governance 
structures and processes, including through regular assessments of 
Board and individual director performance, to ensure that the Board is 
positioned to fulfill its responsibilities effectively and efficiently, 
consistent with applicable requirements; (ii) ensuring that risk 
management, compliance, and internal audit personnel have sufficient 
authority, resources, independence from management, access to the 
Board, and a direct reporting line to, and oversight by, certain 
committees; (iii) ensuring that the Audit Committee of the Board is 
independent; (iv) transitioning the overall oversight of ERM to the 
Board; and (v) assigning responsibility for risk decisions and policies 
to address decision-making during a crisis. The Board Charter would 
also be amended to codify the Board's existing responsibility for 
overseeing and approving OCC's RWD Plan.
    As noted above, the Proposed Rule Change would transfer 
responsibility for the oversight of the enterprise risk management 
(``ERM'') program from the RC to the Board.\44\ This change would allow 
the Board to retain responsibility for the comprehensive oversight of 
OCC's overall risk management framework, while retaining the ability to 
delegate oversight of specific risks to designated committees, which 
would then report to and be subject to oversight by the Board. OCC 
believes that shifting enterprise risk oversight responsibility from 
the RC to the Board would promote further engagement by and attention 
from the Board regarding OCC's risk universe and how such risks impact 
OCC's strategic direction and priorities, as well as provide for more 
meaningful dialogue and discussion at Board meetings.\45\ OCC believes, 
moreover, that the change would alleviate the potential for 
overburdening the RC and establish clearer lines of oversight 
responsibilities for particular risks across the Board's 
committees.\46\ Additionally, the collective expertise of the Board 
would be available to provide appropriate guidance relative to each key 
risk within OCC's risk universe.\47\
---------------------------------------------------------------------------

    \44\ For example, the Proposed Rule Change would modify the 
description of the Board's functions and responsibilities as part of 
the description of the mission of the Board to include transitioning 
the overall oversight of ERM to the Board. The RC Charter currently 
provides that the committee is responsible for overseeing OCC's 
overall ERM framework, including ``reviewing material policies and 
processes relating to (i) membership criteria and financial 
safeguards, (ii) member and other counterparty risk exposure 
assessments, (iii) liquidity requirements and maintenance of 
financial resources, (iv) risk modeling and assessments, (v) default 
management planning, and (vi) risks related to new initiatives.'' 
The revised descriptions in the RC Charter regarding its oversight 
of these areas would continue to involve responsibilities related to 
credit, market, liquidity and systemic risk, but would no longer 
include responsibility for overseeing those aspects related to the 
ERM program.
    \45\ See Notice at 45714.
    \46\ See id.
    \47\ See Notice at 45715.
---------------------------------------------------------------------------

    Consistent with changes to the RC Charter that provide that the RC 
would no longer have responsibilities related to the ERM program, the 
Proposed Rule Change would remove the RC's responsibility for strategic 
and operational risks. OCC believes that these changes are appropriate 
because issues regarding ERM are central to OCC's comprehensive 
management of risk and would therefore benefit from the experience and 
attention of the full Board.\48\
---------------------------------------------------------------------------

    \48\ See Notice at 45711.
---------------------------------------------------------------------------

    In connection with the RC no longer having responsibilities 
regarding the ERM program, several related provisions would be removed 
from the RC Charter. For example, the RC would no longer have 
responsibility to oversee the structure, staffing, and resources of the 
ERM program or approve its goals and objectives on an annual basis. 
Additionally, the RC would no longer be responsible for reviewing OCC's 
risk appetite statements and risk tolerances because the Board would 
assume responsibility for approval of these matters.
    The Proposed Rule Change would require that the TC review, at least 
every twelve months, the adequacy of OCC's management of information 
security risks, approve all material changes to written polices related 
to the managing information security risks, and recommend such changes 
to the Board.

[[Page 54392]]

    Additionally, the Proposed Rule Change would address the 
identification and escalation of risks. The AC Charter, the RC Charter, 
and the TC Charter would each be amended to require the respective 
committees to identify risk issues relating to their areas of oversight 
that should be escalated to the Board for its review and consideration.

F. Internal Audit

    The AC Charter would be amended to clarify that the AC shall 
oversee the independence and objectivity of the internal audit 
department. Further, the Proposed Rule Change would amend the AC 
Charter to provide that the AC must review the effectiveness of the 
internal audit function, including conformance with the Institute of 
Internal Auditor's Code of Ethics and the International Standards for 
Professional Practice of Internal Auditing. The AC Charter would also 
be amended to authorize the AC to approve deviations to the audit plan 
that may arise over the course of an audit. OCC believes that these 
changes would be a natural extension of the AC's role and 
responsibilities.\49\ Additionally, the Proposed Rule Change would 
amend the AC charter to authorize the AC to approve management's 
recommendation to appoint or replace the CAE.
---------------------------------------------------------------------------

    \49\ See Notice at 45709.
---------------------------------------------------------------------------

    The Proposed Rule Change would also amend the AC charter to 
authorize the AC to approve OCC's audited financial statements after 
review, to oversee the timing and process for implementing a rotation 
of the engagement partner of the external auditor, and to discuss 
certain significant issues with the external auditor. OCC believes that 
framing the AC's responsibilities in this manner would provide 
appropriate flexibility for the committee to carry out its oversight 
and advisory responsibilities using its business judgment.\50\
---------------------------------------------------------------------------

    \50\ See id.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Exchange 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.\51\ After carefully considering the 
Proposed Rule Change, the Commission finds the proposal is consistent 
with the requirements of the Exchange Act and the rules and regulations 
thereunder applicable to OCC. More specifically, the Commission finds 
that the proposal is consistent with Section 17A(b)(3)(F) of the 
Exchange Act \52\ and Rules 17Ad-22(e)(2) and (3) thereunder.\53\
---------------------------------------------------------------------------

    \51\ 15 U.S.C. 78s(b)(2)(C).
    \52\ 15 U.S.C. 78q-1(b)(3)(F).
    \53\ 17 CFR 240.17Ad-22(e)(2) and (3).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transaction and, in 
general, to protect investors and the public interest.\54\
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As described above, the Proposed Rule Change would make numerous 
changes to OCC's rules. The changes address a number of areas, 
including providing clarification and transparency to the committees' 
processes and responsibilities, reducing redundancy and improving 
readability of the charters, addressing the consistency of the charters 
with the public interest, providing further detail and specificity 
regarding the Board and management expertise, specifying clear and 
direct lines of responsibility, including the responsibilities of the 
Board and the committees and the responsibilities of management to 
provide particular information to the Board and the committees, and 
ensuring that the Board is responsible for OCC's overall risk 
management.
    The Commission believes that, as a general matter, the Proposed 
Rule Change should help ensure that OCC has governance arrangements 
that support its ability to promptly and accurately offer clearance and 
settlement services to its Clearing Members and the markets OCC serves, 
and effectively manage the range of risks that arise in the course of 
providing such services. Moreover, the Commission believes that the 
Proposed Rule Change should provide greater accessibility, transparency 
and clarity to market participants to better understand OCC's 
governance arrangements. For both of these reasons, the Commission 
believes that the Proposed Rule Change is consistent with the prompt 
and accurate clearance and settlement of securities transaction, and, 
accordingly, with Section 17A(b)(3)(F) of the Exchange Act.\55\
---------------------------------------------------------------------------

    \55\ Id.
---------------------------------------------------------------------------

    The Proposed Rule Change is also designed, in part, to reallocate 
responsibilities across OCC's governing bodies. For example, the 
Proposed Rule Change would shift responsibility for investigations and 
enforcement outcomes from the AC to the RC, which OCC has stated is 
appropriate because the RC is better situated to review such matters 
given its oversight the OCC's Clearing Membership framework.\56\ 
Similarly, the Proposed Rule Change would shift responsibility for ERM 
from the RC to the Board, which OCC has stated would promote engagement 
by and attention from the Board regarding OCC's risk universe and how 
risks impact OCC's strategic direction and priorities.\57\ The 
Commission believes that these aspects of the Proposed Rule Change 
should better align these particular responsibilities with the relevant 
expertise within OCC's Board and promote Board engagement in a manner 
that should provide for a more effective framework for comprehensive 
risk management, which, in turn, should help protect the public 
interest. The Commission believes, therefore, that the Proposed Rule 
Change is consistent, in general, with the protection of investors and 
the public interest, and, accordingly, with Section 17A(b)(3)(F) of the 
Exchange Act.\58\
---------------------------------------------------------------------------

    \56\ See Notice at 45709.
    \57\ See Notice at 45712.
    \58\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(2) Under the Exchange Act

    Rule 17Ad-22(e)(2) under the Exchange Act requires, among other 
things, that a covered clearing agency establish, implement, maintain, 
and enforce written policies and procedures reasonably designed to 
provide for governance arrangements that meet certain criteria.\59\
---------------------------------------------------------------------------

    \59\ 17 CFR 240.17Ad-22(e)(2).
---------------------------------------------------------------------------

    As described above in section II., the Proposed Rule Change would 
amend the charters to provide that, in carrying out their 
responsibilities, the Board and the committees would prioritize the 
safety and efficiency of OCC, generally support the stability of the 
broader financial system and consider legitimate interests of Clearing 
Members, customers of Clearing Members and other relevant stakeholders, 
including OCC's shareholders and other participant exchanges, taking 
into account prudent risk management standards (including systemic risk 
mitigation) and industry best practices. Such amended charter language 
would be, at least in part, aligned with the provisions of Exchange Act 
Rule 17Ad-22(e)(2), such as prioritizing the safety and efficiency of a 
covered clearing agency and considering the interests of participants' 
customers, securities issuers and holders, and other relevant 
stakeholders

[[Page 54393]]

of the covered clearing agency.\60\ The Commission believes that these 
amendments should provide for governance arrangements that allow the 
Board and the committees to consider whether their actions are 
consistent with such considerations. Accordingly, the Commission 
believes that the proposed change providing for the inclusion of such a 
statement is consistent with Exchange Act Rule 17Ad-22(e)(2).\61\
---------------------------------------------------------------------------

    \60\ See 17 CFR 240.17Ad-22(e)(2)(ii) and (vi).
    \61\ See 17 CFR 240.17Ad-22(e)(2).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(2)(i) under the Exchange Act requires that such 
governance arrangements are clear and transparent.\62\ As described 
above in section II.A., the Proposed Rule Change includes changes that 
should better clarify and assign certain responsibilities for the 
governance and oversight of OCC among the Board and its respective 
committees. Certain aspects of the Proposed Rule Change would amend 
OCC's rules to provide clear and transparent descriptions of existing 
operating procedures and lines of responsibility throughout OCC. For 
example, the RC Charter would clarify that joint meetings of the RC 
with other Board committees count toward the requirement to meet at 
least six times a year. The Board Charter would remove the language 
stating that the Board oversees ``OCC's information technology 
strategy, infrastructure, resources and risks'' and replace it with 
language stating that the Board oversees ``OCC's technology 
infrastructure, resources, and capabilities to ensure resiliency with 
regard to OCC's provision of its clearing, settlement, and risk 
management services.'' Additionally, such statements include the 
replacement of general statements in the TC Charter with specific 
duties such as the review material changes to the operational execution 
and delivery of core clearing and settlement services. The Commission 
believes that these aspects of the Proposed Rule Change should improve 
the clarity and transparency of OCC's governance arrangements by 
clearly identifying the current responsibilities of the Board, its 
committees, and management.
---------------------------------------------------------------------------

    \62\ 17 CFR 240.17Ad-22(e)(2)(i).
---------------------------------------------------------------------------

    The Proposed Rule Change also includes changes ranging from 
clarification (e.g., changing ``annually'' to ``each calendar year'') 
to removal of redundancies (e.g., where a requirement is found 
elsewhere in OCC's rules). Delineating between those tasks that must be 
completed once each calendar year and those that must be completed 
annually provides more specificity and clarity around the requirements 
of OCC's rules. Similarly, the removal of redundant language, such as 
the removal of statements in the GNC Charter are regarding candidate 
nominations, which is in OCC's by-Laws, reduces the likelihood of later 
interpretive conflicts arising. In addition, the consolidation of 
documents, such as the Board Charter and CGP, along with the removal of 
redundancies between such documents would improve the accessibility and 
clarity of OCC's rules. The Commission believes that such consolidation 
and removal of redundancies would make OCC's rules more readable for 
the public and reduce the potential for internal inconsistencies in 
OCC's rules. Accordingly, based on the foregoing, the Commission 
believes that the proposed changes pertaining to the clarity and 
transparency of OCC's rules are consistent with Exchange Act Rule 17Ad-
22(e)(2)(i).\63\
---------------------------------------------------------------------------

    \63\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(2)(iii) under the Exchange Act requires that the 
governance arrangements required under Rule 17Ad-22(e)(2) support the 
public interest requirements of Section 17A of the Exchange Act 
applicable to clearing agencies, and the objectives of owners and 
participants.\64\ Further, Rule 17Ad-22(e)(2)(vi) under the Exchange 
Act requires that the governance arrangements required under Rule 17Ad-
22(e)(2) consider the interests of participants' customers, securities 
issuers and holders, and other relevant stakeholders of the covered 
clearing agency.\65\ As described above in section II.B., the Proposed 
Rule Change includes changes relevant to the consideration of the 
interests of OCC's various stakeholders. The GNC would review the 
composition of the Board at least once every three years and the Board 
and committee charters at least annually for consistency with public 
interest and regulatory requirements. Further, the GNC would annually 
review and advise the Board with regard to whether directors are 
independent as defined by the Board. The Commission believes that these 
requirements should help ensure the protection of the public interest.
---------------------------------------------------------------------------

    \64\ 17 CFR 240.17Ad-22(e)(2)(iii).
    \65\ 17 CFR 240.17Ad-22(e)(2)(vi).
---------------------------------------------------------------------------

    The Proposed Rule Change would also amend the charters to clarify, 
among other things, that the Board and committees will generally 
support the stability of the broader financial system and consider 
legitimate interests of Clearing Members, customers of Clearing Members 
and other relevant stakeholders, including OCC's shareholders and other 
participant exchanges. The Commission believes that these amendments 
should provide for governance arrangements that allow the Board and the 
committees to consider whether their actions support the stability of 
the broader financial system and to consider the legitimate interests 
of Clearing Members, customers, and other relevant stakeholders. 
Accordingly, based on the foregoing, the Commission believes that the 
proposed changes pertaining to the composition of the Board, charter 
language, and director independence are consistent with Exchange Act 
Rules 17Ad-22(e)(2)(iii) and (vi).\66\
---------------------------------------------------------------------------

    \66\ 17 CFR 240.17Ad-22(e)(2)(iii) and (vi).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(2)(iv) under the Exchange Act requires that the 
governance arrangements required under Rule 17Ad-22(e)(2) establish 
that the board of directors and senior management have appropriate 
experience and skills to discharge their duties and 
responsibilities.\67\ As described above in section II.C., the Proposed 
Rule Change includes revisions relevant to ensuring that the directors 
and senior management have appropriate skills and experience. The 
Proposed Rule Change would also address the CPC's role in management 
succession planning and the GNC's role in director succession planning. 
Succession planning is important to ensuring that future members of 
OCC's senior management have appropriate experience and skills. 
Relatedly, the Proposed Rule Change would revise the language 
describing the GNC's role in identifying the Standards for directors on 
OCC's Board. The Commission believes that these aspects of the Proposed 
Rule Change should provide governance arrangements reasonably designed 
to ensure that the board of directors and senior management have 
appropriate experience and skills. The Proposed Rule Change would also 
directly address the Board and GNC's responsibilities regarding Board 
and director assessments. The Commission believes that assessing the 
performance of the Board and directors may provide the information 
necessary for OCC to identify gaps in the experience and skills 
represented on its Board. Accordingly, based on the foregoing, the 
Commission believes that the proposed changes pertaining to succession 
planning, Standards for directors, and Board assessments are consistent 
with Exchange Act Rule 17Ad-22(e)(2)(iv).\68\
---------------------------------------------------------------------------

    \67\ 17 CFR 240.17Ad-22(e)(2)(iv).
    \68\ Id.

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[[Page 54394]]

    Rule 17Ad-22(e)(2)(v) under the Exchange Act requires that the 
governance arrangements required under Rule 17Ad-22(e)(2) specify clear 
and direct lines of responsibility.\69\ As described above in section 
II.D., the Proposed Rule Change would amend the charters in numerous 
places to clarify the various responsibilities of the Board, the 
committees, and OCC management. For example, the Proposed Rule Change 
addresses the delegation of authority from the Board and committees and 
describes the oversight responsibilities of the delegating body. The 
Proposed Rule Change addresses revisions to the specific 
responsibilities of the Board and committees, such as the oversight of 
ERM by the Board and the review of investigation and enforcement 
outcomes of disciplinary actions by the RC. Such changes document which 
bodies would be granted various authorities while clarifying where the 
ultimate responsibilities would reside. More generally, the Proposed 
Rule Change would provide greater specificity and clarity regarding the 
responsibilities of particular Board committees and would address how 
the committees interact with the Board and also with management. The 
Commission believes that these assignments and specifications of 
responsibilities among the Board and its committees should provide for 
clear and direct lines of responsibility for particular areas and 
functions performed by OCC.
---------------------------------------------------------------------------

    \69\ 17 CFR 240.17Ad-22(e)(2)(v).
---------------------------------------------------------------------------

    The Proposed Rule Change also describes channels of communication 
from management to the Board, such as authorization for the CFO to 
communicate directly with the chair of the AC, as well as routine 
reporting requirements designed to keep OCC's governing bodies apprised 
of OCC's ongoing performance in areas relevant to each body. 
Additionally, as noted above, the Proposed Rule Change would provide 
for quarterly reporting to the RC from management regarding the 
effectiveness of OCC's management of collateral and third party risks. 
The Commission believes that such changes should clarify reporting 
lines and access to OCC's Board and committees. Accordingly, based on 
the foregoing, the Commission believes that the proposed changes 
pertaining to the assignment of responsibilities and reporting are 
consistent with Exchange Act Rule 17Ad-22(e)(2)(v).\70\
---------------------------------------------------------------------------

    \70\ Id.
---------------------------------------------------------------------------

C. Consistency With Rule 17Ad-22(e)(3) Under the Exchange Act

    Rule 17Ad-22(e)(3) under the Exchange Act requires, among other 
things, that a covered clearing agency establish, implement, maintain, 
and enforce written policies and procedures reasonably designed to 
maintain a sound risk management framework for comprehensively managing 
legal, credit, liquidity, operational, general business, investment, 
custody, and other risks that arise in or are borne by the covered 
clearing agency, which meet certain criteria.\71\ As described above in 
section II.E., a number of the amendments that would be made by the 
Proposed Rule Change address Board and committee responsibilities for 
risk-related activities. For example, the transfer of oversight of ERM 
from the RC to the Board may elevate and strengthen the focus on risk 
management at OCC. Additionally, the Proposed Rule Change would provide 
clarity regarding the identification and escalation of risk from 
committees to the Board. The Commission believes that having in place 
clear and transparent arrangements that facilitate risk identification 
and escalation is an important component of a sound risk management 
framework. Additionally, the Proposed Rule Change is designed, in part, 
to provide flexibility in stating that the committees would perform 
other duties as necessary or appropriate. The Commission recognizes 
that, while a covered clearing agency's risk management framework must 
be detailed to be comprehensive, it can also reflect a reasonable 
degree of flexibility in order to allow the covered clearing agency to 
respond to particular risks or issues arising in its operations in an 
effective manner.\72\ Therefore, the Commission believes that including 
in the Proposed Rule Change flexibility for the committees to address 
such risks or issues, where exercised appropriately, may be a useful 
complement to a detailed risk management framework that otherwise is 
designed to comprehensively manage foreseeable risks that arise in or 
are borne by the covered clearing agency.\73\ Accordingly, based on the 
foregoing, the Commission believes that the proposed changes pertaining 
to the assignment of responsibility for risk oversight are generally 
are consistent with Exchange Act Rule 17Ad-22(e)(3).\74\
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    \71\ 17 CFR 240.17Ad-22(e)(3).
    \72\ Securities Exchange Act Release No. 78961 (September 28, 
2016), 81 FR 70786, 70801 (Oct. 13, 2016.
    \73\ In making this statement, the Commission is not expressing 
a view as to the comprehensiveness of OCC's overall risk management 
framework, which was not the subject of the Proposed Rule Change.
    \74\ 17 CFR 240.17Ad-22(e)(3).
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    Further, Rule 17Ad&22(e)(3)(iv) under the Exchange Act requires, in 
part, that the risk management framework required under Rule 17Ad-
22(e)(3) provides internal audit personnel with oversight by an 
independent audit committee of the board of directors.\75\ As described 
above in section II.F., the Proposed Rule Change includes revisions 
designed to strengthen the AC's oversight of OCC's internal audit 
department. The Proposed Rule Change addresses the independence of 
OCC's internal audit personnel by charging the AC with oversight of the 
independence and objectivity as well as the effectiveness of OCC's 
internal audit department. Such changes also provide for oversight of 
audit personnel by the AC. Similarly, the Proposed Rule Change 
strengthens the AC's oversight by providing authority to approve or 
replace the CAE and to oversee the timing and process for implementing 
a rotation of the engagement partner of the external auditor, and is 
authorized to discuss certain significant issues with the external 
auditor. The Commission believes that these aspects of the Proposed 
Rule Change should provide an appropriate framework for the AC's 
oversight of the internal audit function. Accordingly, based on the 
foregoing, the Commission believes that the proposed changes pertaining 
to the oversight of internal audit personnel are consistent with 
Exchange Act Rules 17Ad-22(e)(3)(iii) and (iv).\76\
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    \75\ 17 CFR 240.17Ad-22(e)(3)(iv).
    \76\ 17 CFR 240.17Ad-22(e)(3)(iii) and (iv).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the 
Exchange Act, and in particular, the requirements of Section 17A of the 
Exchange Act \77\ and the rules and regulations thereunder.
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    \77\ In approving this Proposed Rule Change, the Commission has 
considered the proposed rules' 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) of the 
Exchange Act,\78\ that the Proposed Rule Change (SR-OCC-2018-012) be, 
and hereby is, approved.
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    \78\ 15 U.S.C. 78s(b)(2).


[[Page 54395]]


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\79\
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    \79\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-23506 Filed 10-26-18; 8:45 am]
 BILLING CODE 8011-01-P


