[Federal Register Volume 84, Number 166 (Tuesday, August 27, 2019)]
[Notices]
[Pages 44944-44952]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-18385]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86725; File No. SR-OCC-2019-007]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Concerning a Proposed Capital 
Management Policy That Would Support The Options Clearing Corporation's 
Function as a Systemically Important Financial Market Utility

August 21, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on August 9, 2019, the Options Clearing Corporation 
(``OCC'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC) the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared primarily by 
OCC. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    This proposed rule change by OCC would adopt a Capital Management 
Policy, which includes OCC's plan to replenish its capital in the event 
it falls close to or below its target capital (as defined below, 
``Replenishment Plan''). The Capital Management Policy is included in 
confidential Exhibit 5a of the filing.\3\ In order to implement aspects 
of the new Capital Management Policy, the proposed rule change would 
also amend the following governing documents: OCC's Rules, which can be 
found in Exhibit 5b, and OCC's schedule of fees, which can be found in 
Exhibit 5c. Material proposed to be added to OCC's Rules and schedule 
of fees, as currently in effect, is marked by underlining, and material 
proposed to be deleted is marked with strikethrough text. 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.\4\
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    \3\ The Commission notes that exhibits referenced herein are 
included in the filing submitted by OCC to the Commission, but are 
not included in this Notice.
    \4\ OCC's By-Laws and Rules can be found on OCC's public 
website: http://optionsclearing.com/about/publications/bylaws.jsp.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

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

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

1. Purpose
    OCC is proposing to adopt a new Capital Management Policy and to 
make amendments to OCC's Rules and schedule of fees necessary to 
implement the new Capital Management Policy. The main features of the 
Capital Management Policy and the related changes are: (a) To determine 
the amount of Equity sufficient for OCC to meet its regulatory 
obligations and to serve market participants and the public interest 
(as defined below, ``Target Capital Requirement''), (b) to monitor 
Equity \5\ and liquid net assets funded by equity (``LNAFBE'') \6\ 
levels to help ensure adequate financial resources are available to 
meet general business obligations; and (c) to manage Equity levels, 
including by (i) adjusting OCC's fee schedule (as appropriate) and (ii) 
establishing a plan for accessing additional capital should OCC's 
Equity fall below certain thresholds (``Replenishment Plan'').
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    \5\ The Capital Management Policy would define ``Equity'' as 
shareholders' equity as shown on OCC's Statement of Financial 
Condition.
    \6\ The Capital Management Policy would define ``LNAFBE'' as the 
level of cash and cash equivalents, no greater than Equity, less any 
approved adjustments (i.e., agency-related liabilities such as 
Section 31 fees held by OCC).
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    The Replenishment Plan would: (i) Provide that should OCC's Equity 
fall below 110% of the Target Capital Requirement (as defined by the 
Capital Management Policy, ``Early Warning''), Management would 
recommend to the Board whether to implement a fee increase in an amount 
the Board determines necessary and appropriate to raise additional 
Equity; (ii) provide that should OCC's Equity fall below 90% of the 
Target Capital Requirement or fall below the Target Capital Requirement 
for a period of 90 consecutive days (as defined in the Capital 
Management Policy, ``Trigger Event''), OCC would contribute the funds 
held under The Options Clearing Corporation Executive Deferred 
Compensation Plan Trust to the extent that such funds are (x) deposited 
on or after January 1, 2020 in respect of its Executive Deferred 
Compensation Plan (``EDCP'') and (y) in excess of amounts necessary to 
pay for benefits accrued and vested under the EDCP at such time (such 
funds are defined in Chapter 1 of the proposed changes to OCC's Rules 
as the ``EDCP Unvested Balance''); and (iii) provide that should 
contribution of the EDCP Unvested Balance fail to cure the Trigger 
Event, or if a further Trigger Event occurs, OCC will charge an 
Operational Loss Fee (as defined below) in equal shares to the Clearing 
Members.
    OCC is also hereby proposing to create a layer of skin-in-the-game 
resources in the event of default losses. Specifically, OCC is amending 
Rule 1006 to state that: First, any current or retained earnings above 
110% of the Target Capital Requirement will be used to offset default 
losses after applying a defaulting Clearing Member's margin and 
Clearing Fund contributions, and next, any remaining loss will be 
charged pro rata to (a) non-defaulting Clearing Members' Clearing Fund 
contributions, and (b) the aggregate value of the EDCP Unvested 
Balance.
Proposed Changes
    OCC proposes to adopt a Capital Management Policy and make 
conforming changes to OCC's Rules and schedule of fees necessary to 
implement the Capital Management Policy, as described below, to 
formalize its policy to identify, monitor, and manage OCC's capital 
needs to promote compliance SEC Rule 17Ad-22(e)(15).\7\ In formulating 
the Capital Management Policy, OCC also has considered the Commodity 
Futures Trading Commission's (``CFTC'') regulatory

[[Page 44945]]

capital requirements for OCC as a DCO, as set forth in CFTC Rule 
39.11(a)(2).\8\
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    \7\ 17 CFR 240.17Ad-22(e)(15).
    \8\ 17 CFR 39.11(a)(2).
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Target Capital Requirement
    The proposed Capital Management Policy would explain how OCC would 
annually determine the Target Capital Requirement. The proposed 
amendment to Chapter 1 of OCC's Rules would define OCC's Target Capital 
Requirement as the minimum level of Equity recommended by Management 
and approved by the Board to ensure compliance with applicable 
regulatory requirements and to keep such additional amount the Board 
may approve for capital expenditures. Resources held to meet OCC's 
Target Capital Requirement would be in addition to OCC's resources to 
cover participant defaults. OCC considers the LNAFBE it holds, limited 
to cash and cash equivalents, to be high quality and sufficiently 
liquid to allow OCC to meet its current and projected operating 
expenses under a range of scenarios, including in adverse market 
conditions. The Capital Management Policy would also explain that, on 
an annual basis, OCC's Chief Financial Officer (``CFO'') would 
recommend a Target Capital Requirement for the coming year. Management 
would review the CFO's report and, as appropriate, recommend the Target 
Capital Requirement to the Compensation and Performance Committee 
(``CPC''). The CPC would review, and as appropriate, recommend the 
proposal to the Board of Directors, which would review, and as 
appropriate, approve the Target Capital Requirement.
SEC Rule 17Ad-22(e)(15)
    OCC would set its Target Capital Requirement at a level sufficient 
to maintain LNAFBE at least equal to the greatest of three amounts: (x) 
Six-months' current operating expenses; (y) the amount determined by 
the Board to be sufficient to ensure a recovery or orderly wind-down of 
critical operations and services (the ``RWD Amount''); and (z) the 
amount determined by the Board to be sufficient for OCC to continue 
operations and services as a going concern if general business losses 
materialize (the ``Potential Loss Amount'').
    The RWD Amount would be the amount recommended by Management on an 
annual basis in accordance with OCC's Capital Management Procedure \9\ 
and, as appropriate, approved by the Board. OCC's Recovery and Orderly 
Wind-Down Plan (``RWD Plan'') identifies critical services and the 
length of time the Board has determined it would take to recover or 
wind-down.\10\ Pursuant to the Capital Management Procedure, Management 
would use the assumptions in the RWD Plan to determine the RWD Amount, 
which is the cost to maintain those critical services over the 
prescribed recovery or wind-down period, assuming costs remain at 
historical levels. The calculation of the Potential Loss Amount would 
be based on Management's annual determination, pursuant to the Capital 
Management Procedure, of the amount of capital required to address 
OCC's operational risks. OCC quantifies the amount of capital to be 
held against OCC's operational risks by analyzing and aggregating 
potential losses from individual operational risk scenarios, 
aggregating the loss events, and conducting loss modeling at or above 
the 99% confidence level.\11\
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    \9\ The Capital Management Procedure would be a cross-department 
internal procedure that provides direction on how those departments 
shall execute their responsibilities under the proposed Capital 
Management Policy. OCC has included a draft of the Capital 
Management Procedure OCC intends to implement if the Commission 
approves the proposed Capital Management Policy in confidential 
Exhibit 3a, for reference. The documents in Exhibit 3 are being 
provided as supplemental information to the filing and would not 
constitute part of OCC's rules, which have been provided in Exhibit 
5.
    \10\ Securities Exchange Act Release No. 83918 (Aug. 23, 2018), 
83 FR 44091 (Aug. 29, 2018) (SR-OCC-2017-021).
    \11\ Pursuant to the Capital Management Procedure, OCC's 
Enterprise Risk Management department (``ERM'') would quantify the 
Potential Loss Amount on an annual basis and provide that 
information to OCC's Chief Financial Officer (``CFO'') as an input 
to the CFO's recommendation to Management for the Target Capital 
Requirement. OCC has included ERM's process and methodology for 
quantifying the Potential Loss Amount from 2015 through present in 
confidential Exhibit 3b.
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CFTC Rule 39.11(a)(2)
    The Capital Management Policy would also specify that when setting 
the Target Capital Requirement the Board will consider OCC's projected 
rolling twelve-months' operating expenses as required by CFTC Rule 
39.11(a)(2).\12\ For the avoidance of doubt, the Board is not required 
to set the Target Capital Requirement at the level of twelve-months' 
operating expenses.\13\ Factors that OCC would consider when 
considering twelve-months' operating expenses include, but are not 
limited to: (i) OCC's obligations and responsibilities as a 
systemically important financial utility (``SIFMU''), (ii) OCC's 
obligations as a derivative clearing organization under CFTC Rule 
39.11(a)(2), (iii) the types of financial resources the CFTC allows OCC 
to count towards the twelve-month requirement, and (iv) any conditions 
on the use of those resources the CFTC has imposed.
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    \12\ 17 CFR 39.11(a)(2).
    \13\ Financial resources available to meet CFTC Rule 39.11(a)(2) 
are not limited to LNAFBE, and include OCC's own capital or any 
other form of financial resources deemed acceptable by the CFTC. See 
17 CFR 39.11(b)(2).
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Excess Equity for Capital Expenditures
    In addition, the Capital Management Policy would provide that OCC 
may increase its Target Capital Requirement by an amount to be retained 
for capital expenditures following a recommendation by Management and 
Board approval. From time to time Management may identify necessary 
capital investments in OCC's technology, facilities or other business 
tangible or intangible assets to enhance its effectiveness, efficiency 
or compliance posture. The Board would (a) determine if the capital 
needs are necessary and appropriate and, if so, (b) determine whether 
to increase the Target Capital Requirement or whether the amount can be 
accumulated as an amount in excess of the Target Capital Requirement. 
In case of the latter, capital in excess of 110% of the Target Capital 
Requirement would be available as skin in the game.\14\ Factors the 
Board would consider in making this determination include, but are not 
limited to, the amount of funding required, how much Equity is proposed 
to be retained, the potential impact of the investment on OCC's 
operation, and the duration of time over which funds would be 
accumulated.
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    \14\ See OCC Rule 1006(e), as proposed in the changes attached 
[sic; the Commission notes that ``attached'' here means that the SRO 
included the relevant document as a confidential exhibit to the 
filing] as Exhibit 5b hereto.
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Monitoring Equity
    The proposed Capital Management Policy would describe how 
Management reviews periodic analyses of LNAFBE, including projecting 
future volume, expenses, cash flows, capital needs and other factors to 
help ensure adequate financial resources are available to meet general 
business obligations. Those other factors would include, but not be 
limited to: (i) The level of existing prefunded corporate resources, 
(ii) the ability to borrow under an existing OCC line of credit; (iii) 
the ability to make a claim under certain insurance policies; (iv) 
OCC's tax rates and liabilities; and (v) unfunded obligations. The 
Capital Management Policy would further provide that Management would 
review an analysis of Equity at least monthly to identify whether an 
Early Warning or Trigger Event had occurred since the last review or 
was likely to occur before

[[Page 44946]]

the next review. The Capital Management Policy would provide that the 
Board of Directors is notified promptly if those triggers are breached. 
To the extent OCC suffers a catastrophic or sizable loss intra-month, 
and such loss amount is known or can reasonably be estimated, 
Management would review a forecast of the impact on Equity and, should 
that forecast demonstrate that Equity has fallen below the Early 
Warning or Trigger Event, Management shall promptly notify the Board.
Managing Equity
    The Capital Management Policy would describe the actions OCC may 
take to manage its current or future levels of Equity. As described 
below, the primary forms of capital management actions would include: 
(i) Changes to OCC's fees or other tools to change costs for market 
participants; (ii) the Replenishment Plan; and (iii) use of current and 
retained earnings greater than 100% of the Target Capital Requirement 
to cover losses caused by the default of a Clearing Member.
Fee Schedule
    The Capital Management Policy would provide that clearing fees will 
be based on the sum of OCC's annual budgeted/forecasted operating 
expenses, a defined operating margin and OCC's capital needs, divided 
by forecasted contract sides. On an annual basis, Management would 
review the operating margin level considering historical volume 
variance and other relevant factors, including but not limited to 
variance in interest rates and OCC's operating expenses. Management 
would recommend to the CPC, to which the Board has delegated authority 
for review and approval of changes to OCC's fees pursuant to the CPC's 
charter, whether changes to OCC's defined operating margin should be 
made.
    The Capital Management Policy would provide that on a quarterly 
basis, Management would review its fee schedule and, considering 
factors including, but not limited to projected operating expenses, 
projected volumes, anticipated cash flows, and capital needs, recommend 
to the Board, or a Committee to which the Board delegated authority, 
whether a fee increase, decrease or waiver should be made in accordance 
with Article IX, Section 9 of OCC's By-Laws.\15\
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    \15\ OCC By-Law Art. IX, Sec.  9.
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    The Capital Management Policy would provide that if OCC's Equity is 
above, in the aggregate, 110% of the Target Capital Requirement and any 
amount of excess Equity the Board approves for capital expenditures, 
the Board of Directors, or a Committee the Board has delegated, may use 
such tools as it considers appropriate to lower costs for Clearing 
Members, providing the Board believes doing so would likely not lower 
OCC's Equity below the Early Warning. Such tools would include lowering 
fees, a fee holiday or a refund. The Capital Management Policy would 
further provide that if OCC charges the Operational Loss Fee, as 
described below, and its Equity thereafter returns to a level at which 
the Board approves use of such tools, OCC would first employ tools to 
lower the cost of Clearing Member participation in equal share up to 
the amount of the Operational Loss Fee charged. This provision would 
help ensure that in the event OCC must charge an Operational Loss Fee 
to Clearing Members in equal shares, Clearing Members will recover the 
amount charged in equal shares up to the amount charged.
Replenishment Plan
Early Warning
    The Capital Management Policy would provide that in the event OCC's 
Equity breaches the Early Warning threshold, or 110% of the Target 
Capital Requirement, Management would recommend to the Board whether to 
implement a fee increase in an amount the Board determines necessary 
and appropriate to raise additional Equity.\16\ The recommendation 
whether to implement a fee increase would be informed by several 
factors including, but not limited to, (i) the facts, circumstances and 
root cause of a decrease in Equity below the Early Warning threshold; 
(ii) the time it would take to implement a fee increase, inclusive of 
securing Board and SEC approval as required for those actions; (iii) 
the anticipated time a fee increase would take to accumulate the needed 
revenue based on projected contract volume, operational expenses and 
interest income over that time period; and (iv) the potential of a 
Trigger Event.
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    \16\ Pursuant to the Capital Management Procedure, Management's 
recommendation would be informed by the clearing fee amount 
calculated pursuant to the Fee Schedule Calculation Procedure, which 
provides direction to OCC's Finance department on how to calculate 
the necessary fee level pursuant to the requirements of the Capital 
Management Policy. OCC has included a draft of the Fee Schedule 
Calculation Procedure it intends to implement if the Commission 
approves the proposed Capital Management Policy in confidential 
Exhibit 3c, for reference.
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    The Early Warning is intended to signal to OCC that its Equity is 
``close to'' the Target Capital Requirement, as directed by Rule 
17Ad22(e)(15)(iii). The Early Warning threshold is set at 110% because 
based on an analysis of OCC's projected revenue and expenses,\17\ a 10% 
premium of the Target Capital Requirement represents approximately two 
months earnings based on current and projected data,\18\ which OCC 
believes would provide sufficient time for Management and the Board to 
respond. The Capital Management Policy would provide that to the extent 
Management determines, during its annual review of the Capital 
Management Policy, that there is a change in the estimated length of 
time to accumulate approximately 10% of the Target Capital Requirement, 
Management will consider whether to recommend changes to the Early 
Warning and Trigger Event thresholds.
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    \17\ OCC has included the analysis in confidential Exhibit 3d.
    \18\ OCC defines earnings for purposes of this analysis as 
Operating Income, or revenue less expenses before taxes. Earnings 
does not include interest pass through earned on the cash deposits.
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Trigger Event
    The Capital Management Policy would also define a Trigger Event to 
be when OCC's Equity falls below 90% of the Target Capital Requirement 
or remains below the Target Capital Requirement for ninety consecutive 
calendar days. OCC is proposing the 90% threshold based on its analysis 
showing that two-months' earnings represents approximately a 10% 
premium of the Target Capital Requirement, discussed above. OCC 
believes, based on that analysis, that Equity below the 90% threshold 
would be a sign that corrective action more significant and with a more 
immediate impact than increasing fees should be taken to increase OCC's 
Equity Capital. OCC also set another Trigger Event at a threshold of 
Equity above 90% but below the Target Capital Requirement for a period 
of 90 consecutive days based on the time necessary for a clearing fee 
change to have an impact and to exhaust remedies prior to charging the 
Operational Loss Fee. This timeframe takes into account 30-day advance 
notice to Clearing Members to implement the fee change, implementation 
on the first of the month to accommodate changes to Clearing Members' 
systems, and, as discussed above, the approximately two-month period 
required to accumulate approximately 10% of the Target Capital 
Requirement. Based on the above-referenced analysis, OCC believes that, 
in the event a fee increase resulting from an Early Warning could not 
increase OCC's Equity above the

[[Page 44947]]

Target Capital Requirement within 90 days, it would likewise indicate 
that corrective action in the form of a fee increase would be 
insufficient.
    If a Trigger Event occurs, OCC would first contribute the EDCP 
Unvested Balance to cure the loss. OCC believes that contributing the 
EDCP Unvested Balance to cover operational losses would align 
Management's interests with OCC's interest in maintaining required 
regulatory capital and operating OCC in a prudent manner. If 
application of the EDCP Unvested Balance brings OCC's Equity to within 
the Early Warning threshold (between 90% and 110% of the Target Capital 
Requirement), OCC would act to raise fees, in accordance with the 
Capital Management Policy's direction for OCC action in the event of an 
Early Warning, as discussed above.
    If, however, OCC Equity remains below 90% of the Target Capital 
Requirement after applying the EDCP Unvested Balance, or if a 
subsequent Trigger Event occurs after applying all of the available 
EDCP Unvested Balance, OCC would charge an ``Operational Loss Fee,'' up 
to the maximum Operational Loss Fee identified in OCC's schedule of 
fees as described below, in equal shares to each Clearing Member, 
payable on five business days' notice, to raise additional capital. A 
further Trigger Event based on Equity falling below the Target Capital 
Requirement for a period of 90 consecutive calendar days would be 
measured beginning on the date OCC applies the EDCP Unvested Balance. 
OCC chose five business days to allow Clearing Members subject to the 
fee to assess its impact on their liquidity and take appropriate 
actions. OCC did not select a shorter period, such as the two-day 
period in which Clearing Members must fund Clearing Fund 
contributions,\19\ because that shorter period is necessary for 
settlement obligations, which is not the case for the Operational Loss 
Fee.
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    \19\ See, e.g., OCC Rule 1006(h)(A).
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    OCC would calculate the maximum aggregate Operational Loss Fee 
based on the RWD Amount, which would ensure that OCC would have 
sufficient capital to facilitate a recovery or an orderly wind-down in 
the event of an operational loss. In order to account for OCC's tax 
liability for retaining the Operational Loss Fee as earnings, OCC may 
apply a tax gross-up to the RWD Amount (``Adjusted RWD Amount'') 
depending on whether the operational loss that caused Equity to fall 
below the Trigger Event threshold is tax deductible. The Capital 
Management Policy would provide that, in the event less than the full 
amount of the maximum Operational Loss Fee is needed to bring OCC's 
Equity to 110% of the Target Capital Requirement, only that amount will 
be charged. If OCC charges less than the maximum Operational Loss Fee, 
any remaining amount up to the maximum Operational Loss Fee will remain 
available for subsequent Trigger Events, provided that the sum of all 
Operational Loss Fees that have not been refunded shall not exceed the 
maximum Operational Loss Fee.
    In the event that OCC employs a refund to Clearing Members in equal 
shares up to the amount of Operational Loss Fees previously charged, 
the amount of the maximum Operational Loss Fee available for subsequent 
Trigger Events would include the amount refunded. By allowing OCC to 
charge up to the maximum Operational Loss Fee--less any amounts 
previously charged and not refunded--should subsequent Trigger Events 
arise, the proposed Capital Management Policy would help maintain the 
continued ability of OCC to access replenishment capital should 
multiple Trigger Events occur in quick succession before OCC could 
implement a new or modified replenishment plan. In the unlikely event 
that the sum of all Operational Loss Fees charged exhausts the maximum 
Operational Loss Fee, the Board would need to convene to develop a new 
replenishment plan, subject to regulatory approval.
    In formulating the Capital Management Policy OCC considered other 
means of allocating the Operational Loss Fee among OCC's Clearing 
Members, including allocating the cost to Clearing Members 
proportionally based on measures such as contract volume or risk 
profile, as evidenced by a Clearing Member's margin or clearing fund 
contributions. As part of its analysis for determining the Potential 
Loss Amount, OCC has identified individual operational risk scenarios 
that could result in an operational loss, including such risks as 
internal fraud, a cyber-attack on OCC's systems, employee lawsuits and 
damage to its facilities. The operational risks OCC identified are 
separate and distinct from the credit risk that Clearing Members 
present to OCC, which OCC manages through margin and Clearing Fund 
contributions and OCC's Default Management Procedures. OCC has not 
observed any correlation between the annual quantification of these 
risks and contract volume or Clearing Member credit risk. OCC has 
included a comparison of its quantification of these risks to contract 
volume and the amount of Clearing Fund deposits in confidential Exhibit 
3e. OCC believes that charging the Operational Loss Fee in equal shares 
is preferable because it equally mutualizes risk of operational loss 
amongst the firms that use OCC's services. OCC believes that such 
mutualization is preferable because all Clearing Members benefit from 
equal access to the clearance and settlement services provided by OCC, 
irrespective of how much they choose to use it. Such access provides 
the benefit of credit and liquidity risk intermediation and associated 
regulatory capital benefits.
    To implement the Operational Loss Fee, OCC is proposing an 
amendment to its schedule of fees that would provide a formula for 
calculating the maximum Operational Loss Fee OCC could charge, attached 
[sic] to this rule filing as Exhibit 5c. The amendment to OCC's fee 
schedule would express the Operational Loss Fee as a fraction, the 
numerator of which would be the Adjusted RWD Amount less the aggregate 
amount of Operational Loss Fees that OCC has previously charged that 
are not refunded at the time of calculation, and the denominator of 
which would be the number of Clearing Members at the time OCC charges 
the Operational Loss Fee. OCC would also include in the schedule of 
fees the conditions that would trigger the Operational Loss Fee to be 
charged. OCC proposes to amend its schedule of fees now: (1) To 
increase transparency about Clearing Members' maximum contingent 
obligations under the Capital Management Policy in the unlikely event 
OCC's Equity falls below the Trigger Event thresholds, (2) to promote 
operational efficiency so that OCC can access replenishment capital 
expeditiously if a Trigger Event occurs, and (3) to reduce the 
likelihood that OCC would be required to file an advance notice or 
proposed rule change prior to charging the Operational Loss Fee, 
thereby accelerating the time frame in which OCC could access 
replenishment capital if losses materialize that threaten OCC's ability 
to continue operations and services as a going concern.
    To effectuate the Capital Management Policy, OCC also proposes to 
amend OCC Rule 209 so that the Operational Loss Fee would be payable 
within five business days. OCC Rule 209 currently provides that all 
charges and fees owed by a Clearing Member to OCC shall be due and 
payable within five business days following the end of each calendar 
month. The proposed amendment would add an exception for payment of the 
Operational Loss Fee, which would be due and payable within five 
business days following OCC's notice to the

[[Page 44948]]

Clearing Member that OCC had charged the Operational Loss Fee. The 
amendment to OCC Rule 209 would ensure that OCC can timely respond to 
operational losses that threaten OCC's ability to continue operations 
and services as a going concern. OCC would also amend Rule 101 to 
define ``Operational Loss Fee'' to mean the fee that would be charged 
to Clearing Members in equal shares, up to the maximum amount 
identified in OCC's schedule of fees less the aggregate amount of all 
such Operational Loss Fees previously charged and not yet refunded at 
the time of calculation, if, after contributing the entire EDCP 
Unvested Balance, Equity remains below the levels identified in OCC's 
schedule of fees.
Use of Current and Retained Earnings for Default Losses
    The Capital Management Policy would provide that in the event of a 
clearing member default, OCC would use Equity above 110% of the Target 
Capital Requirement to offset any loss after applying the margin assets 
and Clearing Fund contribution of the defaulting Clearing Member. In 
addition, the Capital Management Policy would provide that OCC would 
contribute the EDCP Unvested Balance on a pro rata basis with non-
defaulting Clearing Member contributions to the Clearing Fund to 
satisfy any remaining balance after applying the margin assets and 
Clearing Fund contribution of the defaulting Clearing Member and any 
OCC Equity above 110% of the Target Capital Requirement.
    To implement this aspect of the Capital Management Policy, OCC 
would also amend OCC Rule 1006 to adjust the default waterfall and the 
allocation of Clearing Fund losses accordingly. Rule 1006(e), which 
currently governs use of retained earnings to cover certain losses 
prior to charging those losses to the Clearing Fund under Rule 1006(b) 
(i.e., losses caused by Clearing Member defaults) and Rule 1006(c) 
(i.e., losses caused by bank and clearing organization failures to 
perform obligations to OCC not recoverable under Rule 1006(b)), would 
be divided into subsections numbed Rule 1006(e)(i) through (e)(iii). 
OCC would add Rule 1006(e)(i) to require OCC to charge a loss or 
deficiency associated with a Clearing Member default to OCC's current 
and retained earnings that are greater than 110% of its Target Capital 
Requirement (which would be defined as above in Rule 101) prior to 
charging the Clearing Fund and the EDCP Unvested Balance under Rule 
1006(b), as discussed below. Rule 1006(e)(ii) would contain the current 
text of the first two sentences of the current Rule 1006(e), updating 
the cross-reference therein to limit the scope to the use of earnings 
to cover losses caused by bank or clearing organization failures before 
charging the Clearing Fund under Rule 1006(c). Thus, OCC would retain 
the option, but not the obligation, to use current or retained earnings 
to cover such bank or clearing organization losses, for which the Rules 
currently provide. Rule 1006(e)(iii) would contain the last two 
sentences of Rule 1006(e) currently in effect, which concern (1) the 
meaning of ``current earnings'' and (2) provide for a Clearing Member's 
continuing liability for any deficiencies in that member's Clearing 
Fund contribution that OCC covers with OCC's current and retained 
earnings. With respect to the latter, OCC would amend Rule 1006(e)(iii) 
to remove reference to OCC's ``elect[ion]'' to charge the deficiency to 
current or retained earnings so that such liability for Clearing Fund 
contribution deficiencies remains if OCC is obligated to charge current 
and retained earnings over 110% of the Target Capital Requirement under 
proposed Rule 1006(e)(i).
    OCC also proposes to amend Rule 1006(b) to provide that OCC would 
apply the EDCP Unvested Balance (which would be defined as above in 
Rule 101) on a pro rata basis with the Clearing Fund contributions of 
non-defaulting Clearing Members to satisfy any remaining balance after 
applying the defaulting Clearing Member's margin and Clearing Fund 
contribution and OCC's current and retained earnings greater than 110% 
of its Target Capital Requirement. By amendment to Rule 1006(b)(iii), 
the EDCP Unvested Balance's proportion of the loss would be calculated 
by a fraction, the numerator of which would be EDCP Unvested Balance 
and the denominator of which would be the sum of the EDCP Unvested 
Balance and the balance of all non-defaulting Clearing Members' 
Clearing Fund contributions.\20\ Pursuant to proposed amendments to 
Rule 1006(b) and (e), such contribution of current and retained 
earnings would be made after applying the defaulting Clearing Member's 
margin and Clearing Fund contribution, but before charging that loss or 
deficiency proportionately to the Clearing Fund.
---------------------------------------------------------------------------

    \20\ Because Rule 1006 has separate provisions addressing use of 
the Clearing Fund to cover losses arising from a Clearing Member 
default (Rule 1006(b)) and losses arising from bank or clearing 
organization failures (Rule 1006(c)), certain changes would be made 
to the rules to limit the changes for purposes of effecting the 
Capital Management Policy to the use of current and retained 
earnings and the EDCP Unvested Balance in the event of a Clearing 
Member default. Specifically, the proposed changes to OCC's rules 
would eliminate Interpretations and Policies .01 and establishes the 
respective allocation provisions in Rule 1006(b)(iii) and (c)(iii). 
No substantive changes to Rule 1006(c) are intended.
---------------------------------------------------------------------------

    In addition, a proposed amendment to Rule 1006(g), concerning, 
among other things, the allocation of funds received under the Limited 
Cross-Guaranty Agreement between OCC and certain other clearing 
agencies in the event of the default of a common member, would provide 
that any funds received under that agreement by OCC with respect to 
losses incurred by OCC would be credited in accordance with Rule 1010. 
Rule 1010 concerns recovery of losses charged to non-defaulting 
Clearing Members and provides that any recovery of a loss charged 
proportionately against the contributions of those Clearing Members 
shall be paid to each Clearing Member charged in proportion to the 
amounts charged. The amendment to Rule 1006(g) would establish that the 
non-defaulting Clearing Members whose Clearing Fund contributions were 
charged would recover proportional to the amount their contributions 
were charged up to the amount their Clearing Fund contributions were 
charged. The recovery proportional to the amount charged to the EDCP 
Unvested Balance would be available for return to the EDCP.
Market Participant Outreach
    In developing the proposed plan for replenishment capital OCC also 
sought input from market participants. On May 1, 2019, OCC Management 
presented to the SIFMA options committee and the Securities Traders 
Association on the following topics: (1) How OCC will set fees, (2) how 
OCC determines its operating margin, (3) OCC's proposal to add a 
working capital line of credit, (4) the triggers and thresholds for 
action, and (5) the amount that a replenishment plan would need to 
raise. A discussion ensued with participants from the SIFMA options 
committee concerning how OCC would set the Target Capital Requirement.
    On May 28, 2019, OCC provided Clearing Members with a notice 
concerning the details of the Capital Management Policy.\21\ OCC has 
included a copy of the letter in Exhibit

[[Page 44949]]

3f. OCC sent the same letter to the participant exchanges (including 
the non-shareholder exchanges). Either calls or meetings were held with 
non-shareholder exchanges to discuss the proposed Capital Management 
Policy and allow them to raise questions or concerns. No such concerns 
were expressed.
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    \21\ The letter references a ``one-time'' Operational Loss Fee, 
consistent with the proposed Capital Management Policy as approved 
by the Board at its May 13, 2019 meeting. As discussed below, the 
Board approved a revision to the proposal at its July 17, 2019 
meeting to allow OCC to retain the ability to charge the Operational 
Loss Fee for subsequent Trigger Events up to the maximum Operational 
Loss Fee, less any Operational Loss Fees previously charged and not 
yet refunded.
---------------------------------------------------------------------------

    OCC conducted calls open to all Clearing Members on May 31, 2019 to 
discuss the proposal. The calls were attended by approximately 140 
participants representing 40 organizations. No concerns with the 
proposed Capital Management Policy were expressed. Discussion ensued 
about the mechanics of the Operational Loss Fee, alternatives to equal 
allocation of the Operational Loss Fee among Clearing Members that OCC 
considered and the likelihood that OCC would need to charge the 
Operational Loss Fee. Management has also met with individual Clearing 
Members and other market participants to discuss the proposed Capital 
Management Policy.
    After the Board meeting on July 17, 2019, OCC conducted a call with 
the SIFMA options committee to discuss certain features of the Capital 
Management Policy proposal approved at that meeting, including: (a) If 
OCC charges the Operational Loss Fee and its Equity thereafter returns 
to a level at which the Board approves use of tools to lower the cost 
of participation for Clearing Members, OCC would first employ tools to 
lower the Clearing Members' costs in equal share up to the amount of 
the Operational Loss Fee charged; and (b) if OCC charges the 
Operational Loss Fee, OCC would retain the ability to charge 
Operational Loss Fees for subsequent Trigger Events up to the maximum 
Operational Loss Fee, less any Operational Loss Fees previously charged 
and not yet refunded.
    OCC has included a summary of the questions raised and Management's 
responses during the above referenced calls and meetings in Exhibit 3g.
2. Statutory Basis
    OCC believes the proposed rule change is consistent with Section 
17A of the Securities Exchange Act of 1934 (``Exchange Act'') and the 
rules and regulations thereunder. In particular, OCC believes that the 
Capital Management Policy is consistent with Section 17A(b)(3)(F) of 
the Exchange Act \22\ and Rule 17Ad-22(e)(15) \23\ thereunder for the 
reasons described below. In addition, OCC believes adding the 
Operational Loss Fee to its schedule of fees is consistent with Section 
17A(b)(3)(D) of the Exchange Act,\24\ and that the changes to OCC's 
Rules to effectuate the use of current and retained earnings in excess 
of 110% of the Target Capital Requirement and the EDCP Unvested Balance 
to cover default losses is consistent with Rule 17Ad-22(e)(4).\25\
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78q-1(b)(3)(F).
    \23\ 17 CFR 240.17Ad-22(e)(15).
    \24\ 15 U.S.C. 78q-1(b)(3)(D).
    \25\ 17 CFR 240.17Ad-22(e)(4).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Exchange Act requires, in part, that 
the rules of OCC be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and, in general, to 
protect investors and the public interest. The Capital Management 
Policy is designed to ensure that OCC holds sufficient LNAFBE such that 
it could continue to promptly and accurately clear and settle 
securities transactions even if it suffered significant operational 
losses. In other words, holding sufficient LNAFBE would help OCC to 
absorb such operational losses and avoid a disruption that could 
negatively impact OCC's prompt and accurate clearing and settlement of 
transactions. By limiting the financial resources OCC counts toward its 
LNAFBE to cash and cash equivalents, the Capital Management Policy 
ensures those resources would be high quality and sufficiently liquid 
to allow OCC to meet its current and projected operating expenses under 
a range of scenarios, including in adverse market conditions. OCC would 
protect the interests of investors and the general public by 
establishing the Capital Management Policy, which is designed to ensure 
that such losses would not result in a failure or disruption of a 
SIFMU, as OCC is designated by the Financial Stability Oversight 
Council (``FSOC'') pursuant to the Payment, Clearing and Settlement 
Supervision Act.\26\ FSOC has concluded that a failure or disruption at 
OCC would negatively affect significant dollar value and volume 
transactions in the options and futures markets, impose material losses 
on OCC counterparties and create liquidity and credit problems for 
financial institutions and others that rely on the markets OCC serves, 
and that such credit and liquidity problems would spread quickly and 
broadly among financial institutions and other markets.\27\ 
Accordingly, FSOC determined that a failure or disruption at OCC could 
threaten the stability of the U.S. financial system.\28\ Therefore, OCC 
believes that the Capital Management Policy, which is reasonably 
designed to ensure that OCC has sufficient LNAFBE to continue 
operations in the event of an operational loss, is consistent with the 
requirements of Section 17A(b)(3)(F) of the Exchange Act by protecting 
investors and the public interest.\29\
---------------------------------------------------------------------------

    \26\ 12 U.S.C. 5463.
    \27\ FSOC Annual Report, Appendix A, at 187 (2012), available at 
https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Appendix%20A%20Designation%20of%20Systemically%20Important%20Market%20Utilities.pdf.
    \28\ Id.
    \29\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(15) under the Exchange Act requires OCC to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to identify, monitor and manage OCC's 
general business risk and hold sufficient LNAFBE to cover potential 
general business losses so that OCC can continue operations and 
services as a going concern if those losses materialize.\30\ The 
Capital Management Policy and amendments to OCC's Rules and Fee 
Schedule are designed for consistency with the requirements of Rule 
17Ad-22(e)(15) for the reasons described below.
---------------------------------------------------------------------------

    \30\ 17 CFR 240.17Ad-22(e)(15).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(15)(i) requires, in part, that OCC establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to identify, monitor, and manage OCC's general 
business risk, including by determining the amount of LNAFBE based upon 
OCC's general business risk profile and the length of time required to 
achieve recovery or orderly wind-down, as appropriate, of its critical 
operations and services if such action is taken.\31\ Pursuant to the 
Capital Management Policy, OCC would set its Target Capital Requirement 
at a level sufficient to maintain LNAFBE at least equal to the greater 
of (x) six months' of OCC's current operating expenses; (y) the amount 
determined by the Board to be sufficient to ensure a recovery or 
orderly wind-down of critical operations and services, plus any excess 
Equity Management recommends, and the Board approves, to be retained 
for capital expenditures; and (z) the amount determined by the Board to 
be sufficient for OCC to continue operations and services as a going 
concern if general business losses materialize. By providing that OCC 
would set its Target Capital Requirement no less than the greatest of 
these three amounts, OCC believes the Capital Management Policy is 
consistent with Rule 17Ad-22(e)(15)(i).
---------------------------------------------------------------------------

    \31\ 17 CFR 240.17Ad-22(e)(15)(i).
---------------------------------------------------------------------------

    The Capital Management Policy is also designed to identify, monitor 
and manage OCC's general business risk,

[[Page 44950]]

consistent with Rule 17Ad-22(e)(15), by providing that OCC's Board 
would review and approve the Target Capital Requirement annually. The 
Capital Management Policy is also designed to monitor OCC's general 
business risk by providing that OCC would perform an analysis of its 
Equity on at least a monthly basis to ensure that OCC's Equity has not 
fallen below the Early Warning or Trigger Event thresholds and is not 
likely to fall below those thresholds prior to the next review. The 
Capital Management Policy's requirement that Management report on the 
firm's LNAFBE relative to the Early Warning and Trigger Event 
thresholds at each regularly scheduled Board meeting is also designed 
to identify, monitor, and manage OCC's general business risk. The 
Capital Management Policy's requirement that the Board be promptly 
notified in the event of an Early Warning or Trigger Event is also 
reasonably designed to ensure that OCC can act quickly to ensure OCC's 
compliance with the LNAFBE-holding requirements of Rule 17Ad-22(e)(15).
    Rule 17Ad-22(e)(15) further requires, in part, that OCC establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to hold sufficient LNAFBE to cover potential 
general business losses so that OCC can continue operations and 
services as a going concern if those losses materialize, including by 
holding LNAFBE equal to the greater of either (x) six months of OCC's 
current operating expenses, or (y) the amount determined by the Board 
to be sufficient to ensure a recovery or orderly wind-down of critical 
operations and services.\32\ As described above, the Capital Management 
Policy would provide that OCC sets its Target Capital Requirement at a 
level sufficient to maintain LNAFBE in an amount that is the greatest 
of three amounts, which include six months' operating expenses, an 
amount determined by the Board to be sufficient to ensure recovery or 
orderly wind-down, and an amount determined by the Board to be 
sufficient for OCC to continue operations and services as a going 
concern if general business losses materialize. Therefore, the Capital 
Management Policy is designed to ensure that OCC maintains, at a 
minimum, LNAFBE equal to the greater of the two amounts required by 
Rule 17Ad-22(e)(15)(ii). By also including an amount determined by the 
Board to be sufficient to meet general business losses should they 
materialize, the Capital Management Policy is designed to ensure OCC 
maintains LNAFBE at an amount necessary to satisfy Rule 17Ad-
22(e)(15)'s broader requirement that OCC hold sufficient LNAFBE to 
cover potential general business losses so that OCC can continue 
operations and services as a going concern if those losses materialize.
---------------------------------------------------------------------------

    \32\ 17 CFR 240.17Ad-22(e)(15)(ii).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(15)(ii) further requires, in part, that LNAFBE held 
by OCC pursuant to Rule 17Ad-22(e)(15)(ii) shall be (A) in addition to 
resources held to cover participant defaults or other credit or 
liquidity risks,\33\ and (B) of high quality and sufficiently liquid to 
allow OCC to meet its current and projected operating expenses under a 
range of scenarios, including in adverse market conditions.\34\ The 
Capital Management Policy is designed to satisfy Rule 17Ad-
22(e)(15)(ii)(A) by providing that the resources held to meet OCC's 
Target Capital Requirement are in addition to OCC's resources to cover 
participant defaults and liquidity shortfalls. While the Capital 
Management Policy and proposed changes to OCC's Rules provide for the 
use of capital to cover credit losses in the event of a Clearing Member 
default, the proposed changes limit the amount of current and retained 
earnings available to cover such losses to the amount above 110% of the 
Target Capital Requirement. The Capital Management Policy is also 
designed to satisfy Rule 17Ad-22(e)(15)(ii)(B) by providing that the 
resources held to meet OCC's Target Capital Requirement be high quality 
and sufficiently liquid. As a result, OCC believes the Capital 
Management Policy is designed to comply with Rule 17Ad-22(e)(15)(ii)(A) 
and (B).
---------------------------------------------------------------------------

    \33\ 17 CFR 240.17Ad-22(e)(15)(ii)(A).
    \34\ 17 CFR 240.17Ad-22(e)(15)(ii)(B).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(15)(iii) requires that OCC establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to identify, monitor, and manage OCC's general business risk, 
including by maintaining a viable plan, approved by the Board and 
updated at least annually, for raising additional equity should its 
equity fall close to or below the amount required under Rule 17Ad-
22(e)(15)(ii). The Capital Management Policy and amendments to OCC's 
Rules and schedule of fees are reasonably designed to establish a 
viable plan to raise additional capital in an amount up to the amount 
the Board determines annually to be sufficient to ensure recovery or 
orderly wind-down should OCC's Equity fall close to or below its Target 
Capital Requirement. By setting the threshold triggers by reference to 
the Target Capital Requirement, OCC's plan for replenishment capital is 
designed to require OCC to act to raise capital should its LNAFBE fall 
close to or below the amounts required under Rule 17Ad-22(e)(15)(ii). 
In addition, by providing that the Target Capital Requirement must be 
the greater of those amounts or the amount determined by the Board to 
be sufficient to cover potential general business losses so that OCC 
can continue operations and services as a going concern if those losses 
materialize, the Capital Management Policy is also reasonably designed 
to ensure that OCC has a viable plan to raise the capital necessary to 
comply with Rule 17Ad-22(e)(15) as a whole. Furthermore, the Capital 
Management Policy provides that Management shall on an annual basis 
recommend the Board approve or, as appropriate, modify the 
Replenishment Plan. The Board would review and, as appropriate, approve 
Management's recommendation. Should OCC charge the full amount of the 
Operational Loss Fee, Management would recommend a new or modified 
replenishment plan, subject to regulatory approval. The Board would 
review and, as appropriate, approve Management's recommendation.
    OCC's proposed addition of an Operational Loss Fee as part of its 
Replenishment Plan is also reasonably designed to establish a viable 
plan to raise additional capital. OCC's By-Laws and Rules serve as a 
contract between OCC and its Clearing Members. Thus, OCC believes the 
Operational Loss Fee is no less reliable than any other potential 
replenishment plan that does not involve accumulating replenishment 
capital in advance of any operational loss. Failure of a Clearing 
Member to pay the Operational Loss Fee if charged will have the same 
impact as failure to meet a margin call or clearing fund assessment, 
and thus may have significant consequences. Any Clearing Member in 
default of its obligations to OCC is subject to suspension and 
liquidation of the defaulting member's positions, from which OCC may 
collect all unpaid obligations to OCC.\35\ Should the assets of the 
defaulting member be insufficient to cover its obligations, OCC may 
recover the unpaid amount from the Clearing Fund.\36\
---------------------------------------------------------------------------

    \35\ OCC Rule 1108.
    \36\ OCC Rule 1006(a), clause (vi) (failure of any Clearing 
Member to make any other required payment or render any other 
required performance).
---------------------------------------------------------------------------

    While Rule 17Ad-22(e)(15)(iii) does not by its terms specify the 
amount of additional equity a clearing agency's plan for replenishment 
capital must be

[[Page 44951]]

designed to raise, the SEC's adopting release states that ``a viable 
plan generally should enable the covered clearing agency to hold 
sufficient liquid net assets to achieve recovery or orderly wind-
down.'' \37\ OCC believes that the Capital Management Policy and 
Operational Loss Fee is consistent with the SEC's adopting release for 
Rule 17Ad-22(e)(15)(iii) because OCC sets the maximum Operational Loss 
Fee at an amount sufficient to raise, on a post-tax basis, the amount 
determined annually by the Board to be sufficient to ensure recovery or 
orderly wind-down pursuant to the Board's annual approval of the RWD 
Plan.
---------------------------------------------------------------------------

    \37\ Standards for Covered Clearing Agencies, Exchange Act 
Release No. 78961 (Sept. 28, 2016), 81 FR 70786, 70836 (Oct. 13, 
2016).
---------------------------------------------------------------------------

    In its adopting release, the SEC also states that in developing its 
policies and procedures, a covered clearing agency ``generally should 
consider and account for circumstances that may require a certain 
length of time before any plan can be implemented.'' \38\ In the case 
of an Early Warning, a fee increase would require Board approval, which 
could be obtained in a special meeting of the Board on an expedited 
basis. OCC would file the fee increase with the SEC for immediate 
effectiveness, thereby minimizing the amount of time needed to 
implement the new fee. In the case of a Trigger Event, the Operational 
Loss Fee added to the fee schedule would not require further Board 
approval to implement, and would likely not require further regulatory 
approval to implement because this proposed rule change would add the 
fee to OCC's schedule of fees. By allowing OCC to charge up to the 
maximum Operational Loss Fee, less any Operational Loss Fees previously 
charged and not yet refunded, the Capital Management Policy would help 
OCC maintain its ability to access replenishment capital during the 
time it would take to implement a new or revised Replenishment Plan. 
The Operational Loss Fee and amendment to Rule 209(a) further account 
for the length of time to implement OCC's plan for replenishment 
capital by requiring payment within five business days. Therefore, OCC 
believes the proposed Capital Management Policy, Operational Loss Fee, 
and amendments to OCC's Rules are consistent with the SEC's adopting 
release for Rule 17Ad-22(e)(15)(iii).
---------------------------------------------------------------------------

    \38\ Id.
---------------------------------------------------------------------------

    OCC also believes the Operational Loss Fee is consistent with 
Section 17A(b)(3)(D) of the Exchange Act, which requires that the rules 
of a clearing agency provide for the equitable allocation of reasonable 
dues, fees and other charges among its participants. OCC believes the 
proposed Operational Loss Fee is reasonable because it is designed to 
accumulate additional capital to ensure that OCC can continue to meet 
its obligations as a SIFMU to Clearing Members and the general public. 
OCC believes that the proposed Operational Loss Fee is reasonable also 
because it is designed as a viable plan for replenishing OCC's LNAFBE 
in the event OCC's Equity falls below certain thresholds that are 
themselves designed to ensure that OCC act to raise additional capital 
before OCC's Equity reaches the amounts required by Rule 17Ad-
22(e)(15)(ii). And as discussed above, by providing that the 
Replenishment Amount be sufficient to ensure OCC has sufficient capital 
to cover the amount the Board determines sufficient to ensure a 
recovery or orderly wind-down, OCC believes the Operational Loss Fee is 
consistent with Rule 17Ad-22(e)(15)(iii). OCC also believes that the 
proposed Operational Loss Fee would result in an equitable allocation 
of fees among its participants because it would equally mutualize risk 
of operational loss amongst the firms that use OCC's services. The 
Clearing Members' equal access to the clearance and settlement services 
provided by OCC, which provide the benefit of credit and liquidity risk 
intermediation and associated regulatory capital benefits, is of equal 
benefit to all Clearing Members irrespective of how much they choose to 
use it. In addition, the Capital Management Policy provides that if OCC 
charges the Operational Loss Fee and its Equity thereafter returns to a 
level at which the Board approves use of tools to lower the cost of 
Clearing Member participation to return Equity in excess of 110% of its 
Target Capital Requirement, such as a refund, OCC will employ such 
tools to lower costs for Clearing Members in equal shares, up to the 
amount of the Operational Loss Fee charged. Thus, Clearing Members will 
share both the cost and recovery of the Operational Loss Fee equally. 
As a result, OCC believes that the proposed Operational Loss Fee 
provides for the equitable allocation of reasonable fees in accordance 
with Section 17A(b)(3)(D) of the Exchange Act.\39\
---------------------------------------------------------------------------

    \39\ 15 U.S.C. 78q-1(b)(3)(D).
---------------------------------------------------------------------------

    OCC also believes the amendments to its Rules for use of current 
and retained earnings and the EDCP Unvested Balance to cover default 
losses are consistent with Rule 17Ad-22(e)(4), which provides, in part, 
that OCC establish, implement, maintain and enforce written policies 
and procedures reasonably designed to effectively identify, measure, 
monitor and manage its credit exposures to participants and those 
arising from its payment, clearing and settlement processes, including 
by maintaining sufficient financial resources to cover its credit 
exposure to each participant fully with a high degree of 
confidence.\40\ By providing that OCC shall use current and retained 
earnings in excess of 110% of its Target Capital Requirement, as well 
as contributing the EDCP Unvested Balance on a pro rata basis with 
Clearing Member's Clearing Fund contributions, OCC is providing for 
additional financial resources available to cover losses in the event 
of a Clearing Member default, and reducing the amount OCC would charge 
the Clearing Fund contributions of non-defaulting Clearing Members. 
Therefore, OCC believes the amendments to its Rules are consistent with 
Rule 17Ad-22(e)(4).
---------------------------------------------------------------------------

    \40\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

B. Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Exchange Act \41\ requires that the 
rules of a clearing agency not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act. OCC 
believes that the Capital Management Policy and amendments to OCC's 
Rules and schedule of fees would not have any impact, or impose any 
burden, on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act. As discussed above, 
the Capital Management Policy describes how OCC would measure, monitor 
and manage its capital needs to ensure appropriate financial resiliency 
for a SIFMU and comply with applicable financial regulations, including 
requirements about the amount of LNAFBE it must hold. The Capital 
Management Policy is designed for OCC to maintain Equity at a level 
necessary to meet the requirements of Rule 17Ad-22(e)(15) and serve its 
Clearing Members and the public interest.
---------------------------------------------------------------------------

    \41\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    While the proposed Operational Loss Fee, in the unlikely event it 
is charged, would have an effect on the amount of fees that Clearing 
Members pay for OCC's services, the proposed rule change is designed to 
allocate those fees on an equal basis to all Clearing Members. OCC's 
Rules currently require Clearing Members to maintain net

[[Page 44952]]

capital of at least $2 million.\42\ Based on the most recent financial 
information reported by Clearing Members, which OCC has included in 
confidential Exhibit 3h, OCC believes that 98% of Clearing Members 
could absorb the maximum amount of the Operational Loss Fee without 
breaching their minimum net capital requirements or the SEC's ``early 
warning'' threshold.\43\ OCC is comfortable with Clearing Members' 
ability to pay the Operational Loss Fee because the amount of the 
maximum Operational Loss Fee that would be charged per Clearing Member 
is approximately the same as the contingent obligations under the OCC 
clearing fund assessment requirements for a Clearing Member operating 
at the minimum clearing fund deposit--$1 million. Consequently, OCC 
does not believe the Operational Loss Fee obligation poses a 
significant barrier to entry for smaller Clearing Members. By adding 
the Operational Loss Fee to OCC's schedule of fees, the fee would be a 
transparent obligation of membership based upon which Clearing Members 
can independently assess their rights and obligations.
---------------------------------------------------------------------------

    \42\ OCC Rule 302.
    \43\ 17 CFR 240.15c3-1.
---------------------------------------------------------------------------

    In addition, the Capital Management Policy would help address the 
relative impact that charging the Operational Loss Fee in equal shares 
would have on smaller Clearing Members by providing that should OCC 
charge the fee and thereafter return to a position where the Board may 
approve tools to lower costs for Clearing Members, such as refunds, OCC 
would employ such tools to lower costs for Clearing Members on an equal 
basis, up to the amount of the Operational Loss Fee charged. Thus, all 
Clearing Members shall share equally in the cost and recovery of the 
Operational Loss Fee amounts charged.
    Moreover, any barrier to entry that the Operational Loss Fee may 
impose is not unnecessary in furtherance of the Exchange Act, and the 
rules the SEC has promulgated thereunder. Pursuant to those rules, OCC 
must hold minimum LNAFBE and have a viable plan to replenish equity 
should OCC's equity fall close to or below those minimums. It is 
entirely appropriate that the Clearing Members that benefit equally 
from OCC's services share the burden equally should OCC experience an 
operational loss that threatens its ability to continue providing those 
services and comply with its regulatory obligations.

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

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

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

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Exchange 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 rule-comments@sec.gov. Please include 
File Number SR-OCC-2019-007 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-2019-007. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of OCC and on OCC's website at 
https://www.theocc.com/about/publications/bylaws.jsp.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File Number SR-OCC-2019-007 and 
should be submitted on or before September 17, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\44\
---------------------------------------------------------------------------

    \44\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-18385 Filed 8-26-19; 8:45 am]
BILLING CODE 8011-01-P


