[Federal Register Volume 85, Number 46 (Monday, March 9, 2020)]
[Notices]
[Pages 13681-13684]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-04771]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88317; File No. SR-OCC-2020-801]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of No Objection to Advance Notice Concerning a Master Repurchase 
Agreement as Part of OCC's Overall Liquidity Plan

March 4, 2020.

I. Introduction

    On January 10, 2020, the Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') 
advance notice SR-OCC-2020-801 (``Advance Notice'') pursuant to Section 
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, entitled Payment, Clearing and Settlement 
Supervision Act of 2010 (``Clearing Supervision Act'') \1\ and Rule 
19b-4(n)(1)(i) \2\ under the Securities Exchange Act of 1934 
(``Exchange Act'') \3\ to enter into a committed master repurchase 
agreement with a bank counterparty to access a committed source of 
liquidity to meet its settlement obligations.\4\ The Advance Notice was 
published for public comment in the Federal Register on February 11, 
2020,\5\ and the Commission has received no comments regarding the 
changes proposed in the Advance Notice. The Commission is hereby 
providing notice of no objection to the Advance Notice.
---------------------------------------------------------------------------

    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ 15 U.S.C. 78a et seq.
    \4\ See Notice of Filing infra note 5, at 85 FR 7812.
    \5\ Securities Exchange Act Release No. 88120 (Feb. 5, 2020), 85 
FR 7812 (Feb. 11, 2020) (SR-OCC-2020-801) (``Notice of Filing'').
---------------------------------------------------------------------------

II. Background \6\
---------------------------------------------------------------------------

    \6\ Capitalized terms used but not defined herein have the 
meanings specified in OCC's Rules and By-Laws, available at https://www.theocc.com/about/publications/bylaws.jsp.
---------------------------------------------------------------------------

    OCC maintains cash and other liquid resources to help it ensure 
that it can meet its obligations in the event of a Clearing Member 
default. OCC's liquid resources have included access to a diverse set 
of funding sources, including a syndicated credit facility, a committed 
master repurchase program with institutional investors such as pension 
funds (the ``Non-Bank Liquidity Facility''), and Clearing Member 
minimum cash Clearing Fund requirements.\7\ The confirmations \8\ under 
the Non-Bank Liquidity Facility, totaling $1 billion, expired on 
January 6, 2020.\9\ To help ensure that OCC's total committed liquidity 
resources did not decrease following expiration of the $1 billion Non-
Bank Repo Facility, OCC previously sourced an additional $500 million 
by exercising the accordion feature of its syndicated bank credit 
facility.\10\ In addition to that, OCC exercised its existing authority 
to temporarily increase the cash funding requirement in its Clearing 
Fund from $3 billion to $3.5 billion, which Clearing Members were 
obligated to fund by January 6, 2020.\11\ Taken together, these two 
liquidity sources fully replaced the $1 billion Non-Bank Repo Facility 
prior to its expiration on January 6, 2020. Now, OCC proposes to access 
an additional committed source of liquidity to meet its settlement 
obligations by entering into a committed

[[Page 13682]]

master repurchase agreement (``MRA'') with a bank counterparty with 
confirmations totaling $500 million (the ``Bank Repo Facility'').\12\
---------------------------------------------------------------------------

    \7\ See Notice of Filing, 85 FR at 7812 (citations omitted).
    \8\ A confirmation under a master repurchase agreement describes 
the terms of a transaction, including the purchased securities, 
purchase price, purchase date, repurchase date, and any additional 
terms or conditions not inconsistent with the master repurchase 
agreement.
    \9\ See Notice of Filing, 85 FR at 7814 n. 19.
    \10\ See Notice of Filing, 85 FR at 7814 n. 20.
    \11\ See OCC Information Memo #46287, Revised Cash Requirement 
in Clearing Fund (Jan. 3, 2020), available at https://www.theocc.com/webapps/infomemos?number=46287&date=202001&lastModifiedDate=01%2F03%2F202000%3A00%3A00.
    \12\ Because the counterparty may be a bank with which OCC has 
existing relationships, in which case the proposed Bank Repo 
Facility could materially increase OCC's exposure to the bank, the 
Commission requested and reviewed information about existing 
relationships and exposures. See Notice of Filing, 85 FR at 7812, n. 
9 (stating that OCC provided additional information in a 
confidential Exhibit 3b). The Commission also reviewed information 
regarding OCC's processes for monitoring such exposures. Id.
---------------------------------------------------------------------------

    The Commission previously reviewed and did not object to OCC's 
execution of the Non-Bank Repo Facility, which was based on the same 
standard form master repurchase agreement as the MRA governing the 
proposed Bank Repo Facility.\13\ As with the Non-Bank Repo Facility, 
under the MRA, the securities eligible for transactions under the MRA 
would include U.S. government securities. Specifically, OCC would use 
securities included in the margin deposits of a suspended Clearing 
Member as well as Clearing Fund contributions to access the Bank Repo 
Facility. The market value of the securities supporting each 
transaction under the Bank Repo Facility would be determined daily, and 
OCC would be obligated to provide additional securities as necessary in 
response to a fall in the market value of purchased securities. 
Similarly, the standard terms addressing an event of default under the 
MRA would be substantially similar to the terms of the agreement 
underlying the Non-Bank Liquidity Facility. Further, as part of 
establishing the Bank Repo Facility, OCC would review and monitor its 
counterparty's ability to meet obligations under the MRA.
---------------------------------------------------------------------------

    \13\ See e.g., Securities Exchange Act Release No. 76821 (Jan. 
4, 2016), 81 FR 3208 (Jan. 20, 2016) (SR-OCC-2015-805); Securities 
Exchange Act Release No. 73979 (Jan. 2, 2015), 80 FR 1062 (Jan. 8, 
2015) (SR-OCC-2014-809). Similar to the agreement underlying the 
Non-Bank Liquidity Facility, the materials terms of the MRA would be 
based on a standard form master repurchase agreement published by 
the Securities Industry and Financial Markets Association.
---------------------------------------------------------------------------

    Many of the terms of the MRA specifically tailored to the Bank Repo 
Facility would nonetheless be substantially similar to the terms of the 
agreement underlying the Non-Bank Liquidity Facility, including (1) the 
duration of the agreement; (2) the buyer's obligation to fund 
regardless of a material adverse change, such as the failure of a 
Clearing Member; (3) availability of funds within 60 minutes of OCC 
providing securities to the buyer; (4) a prohibition against 
rehypothecation of the purchased securities by the buyer; (5) OCC's 
option to terminate a transaction early and to specify a new repurchase 
date;\14\ (6) OCC's right to substitute any eligible securities for 
purchased securities; and (7) the use of a ``mini-default'' in lieu of 
declaring an event of default at the discretion of the non-defaulting 
party.\15\
---------------------------------------------------------------------------

    \14\ The buyer would not have a similar right, but rather, would 
be permitted to terminate a transaction early only upon the 
occurrence of an event of default with respect to OCC.
    \15\ For example, if the buyer fails to transfer purchased 
securities on the applicable repurchase date, rather than declaring 
an event of default, OCC may (1) if OCC has already paid the 
repurchase price, require the buyer to repay the repurchase price, 
(2) if there is a margin excess, require the buyer to pay cash or 
deliver purchased securities in an amount equal to the margin 
excess, or (3) declare that the applicable transaction, and only 
that transaction, will be immediately terminated, and apply default 
remedies under the MRA to only that transaction.
---------------------------------------------------------------------------

    Where necessary and appropriate, however, certain terms of the 
proposed MRA would differ from the terms of the agreement underlying 
the Non-Bank Liquidity Facility. For example, the Bank Repo Facility 
would include confirmations totaling $500 million rather than $1 
billion.\16\ Other differences between the MRA and the agreement 
underlying the Non-Bank Liquidity Facility relate to the fact that 
OCC's counterparty for the Bank Repo Facility is a commercial bank 
rather than a pension fund. Specifically, unlike the terms underlying 
the Non-Bank Liquidity Facility, OCC would not require the Bank Repo 
Facility counterparty to maintain cash and investments in a designated 
account into which OCC has visibility.\17\ Such a designated account 
was necessary to facilitate prompt funding for the Non-Bank Liquidity 
Facility counterparties because they, unlike the Bank Repo Facility 
counterparty, were not commercial banks and therefore were not in the 
business of daily funding.\18\ Similarly, the MRA would not include 
terms related to a custodian other than the Bank Repo Facility 
counterparty because OCC's counterparty, as a commercial bank, would be 
capable of acting as custodian of the purchased securities.\19\
---------------------------------------------------------------------------

    \16\ As described above, OCC has already sourced additional 
liquid resources through its syndicated credit facility that would 
cover the other half of the Non-Bank Liquidity Facility. 
Additionally, the establishment of the Bank Repo Facility would not 
preclude OCC from establishing other arrangements with different 
liquidity providers in the future.
    \17\ See Notice of Filing, 85 FR at 7813 n. 16.
    \18\ See id.
    \19\ Based on information provided by OCC, the Commission 
understands that OCC's counterparty to the Bank Repo Facility, as a 
commercial bank, would custody the purchased securities, and would 
provide to OCC information regarding purchased securities similar to 
what was required of a third-party custodian under the Non-Bank Repo 
Facility. See Notice of Filing, 85 FR at 7812, n. 9 (stating that 
OCC provided additional information in a confidential Exhibit 3b).
---------------------------------------------------------------------------

III. Commission Findings and Notice of No Objection

    Although the Clearing Supervision Act does not specify a standard 
of review for an advance notice, the stated purpose of the Clearing 
Supervision Act is instructive: To mitigate systemic risk in the 
financial system and promote financial stability by, among other 
things, promoting uniform risk management standards for systemically 
important financial market utilities (``SIFMUs'') and strengthening the 
liquidity of SIFMUs.\20\
---------------------------------------------------------------------------

    \20\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------

    Section 805(a)(2) of the Clearing Supervision Act \21\ authorizes 
the Commission to prescribe regulations containing risk-management 
standards for the payment, clearing, and settlement activities of 
designated clearing entities engaged in designated activities for which 
the Commission is the supervisory agency. Section 805(b) of the 
Clearing Supervision Act \22\ provides the following objectives and 
principles for the Commission's risk-management standards prescribed 
under Section 805(a):
---------------------------------------------------------------------------

    \21\ 12 U.S.C. 5464(a)(2).
    \22\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

     To promote robust risk management;
     to promote safety and soundness;
     to reduce systemic risks; and
     to support the stability of the broader financial system.
    Section 805(c) provides, in addition, that the Commission's risk-
management standards may address such areas as risk-management and 
default policies and procedures, among other areas.\23\
---------------------------------------------------------------------------

    \23\ 12 U.S.C. 5464(c).
---------------------------------------------------------------------------

    The Commission has adopted risk-management standards under Section 
805(a)(2) of the Clearing Supervision Act and Section 17A of the 
Exchange Act (the ``Clearing Agency Rules'').\24\ The Clearing Agency 
Rules require, among other things, each covered clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures that are reasonably designed to meet certain minimum 
requirements for its operations and risk-management practices on an 
ongoing basis.\25\ As such, it is appropriate for the

[[Page 13683]]

Commission to review advance notices against the Clearing Agency Rules 
and the objectives and principles of these risk management standards as 
described in Section 805(b) of the Clearing Supervision Act. As 
discussed below, the Commission believes the changes proposed in the 
Advance Notice are consistent with the objectives and principles 
described in Section 805(b) of the Clearing Supervision Act,\26\ and in 
the Clearing Agency Rules, in particular Rules 17Ad-22(e)(7).\27\
---------------------------------------------------------------------------

    \24\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No. 
68080 (October 22, 2012), 77 FR 66220 (Nov. 2, 2012) (S7-08-11). See 
also Securities Exchange Act Release No. 78961 (September 28, 2016), 
81 FR 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing Agency 
Standards''). The Commission established an effective date of 
December 12, 2016 and a compliance date of April 11, 2017 for the 
Covered Clearing Agency Standards. OCC is a ``covered clearing 
agency'' as defined in Rule 17Ad-22(a)(5).
    \25\ 17 CFR 240.17Ad-22.
    \26\ 12 U.S.C. 5464(b).
    \27\ 17 CFR 240.17Ad-22(e)(7).
---------------------------------------------------------------------------

A. Consistency With Section 805(b) of the Clearing Supervision Act

    The Commission believes that the proposal contained in OCC's 
Advance Notice is consistent with the stated objectives and principles 
of Section 805(b) of the Clearing Supervision Act. Specifically, as 
discussed below, the Commission believes that the changes proposed in 
the Advance Notice are consistent with promoting robust risk management 
in the area of liquidity risk, promoting safety and soundness, reducing 
systemic risks, and supporting the stability of the broader financial 
system.\28\
---------------------------------------------------------------------------

    \28\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    The Commission believes that the proposed changes are consistent 
with promoting robust risk management, in particular management of 
liquidity risk presented to OCC. OCC is a SIFMU.\29\ As a SIFMU, it is 
imperative that OCC have adequate resources to be able to satisfy its 
counterparty settlement obligations, including in the event of a 
Clearing Member default.\30\ As described above, OCC proposes to 
implement the Bank Repo Facility, in part, to address the expiration of 
the Non-Bank Facility and ensure that OCC's committed liquid resources 
remain at or above the amount that OCC has determined it needs to 
ensure that it has adequate resource to be able to satisfy its 
counterparty settlement obligations, after the Non-Bank Repo Facility 
expired on January 6, 2020. In addition, implementing the Bank Repo 
Facility would help OCC maintain its access to liquid resources through 
a committed repurchase agreement, which would have the additional 
advantage of helping to maintain diversity among the liquidity 
resources that OCC may use to resolve a Clearing Member default.\31\ As 
such, the Commission believes that the proposal would promote robust 
risk management practices at OCC, consistent with Section 805(b) of the 
Clearing Supervision Act.\32\
---------------------------------------------------------------------------

    \29\ See Financial Stability Oversight Council (``FSOC'') 2012 
Annual Report, Appendix A, available at https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
    \30\ See Securities Exchange Act Release No. 73979 (Jan. 2, 
2015), 80 FR 1062, 1065 (Jan. 8, 2015) (SR-OCC-2014-809).
    \31\ OCC maintains access to a diverse set of funding sources in 
addition to the Bank and Non-Bank Repo Facilities, including a 
syndicated credit facility and Clearing Member minimum cash Clearing 
Fund requirements.
    \32\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    The Commission also believes that the changes proposed in the 
Advance Notice are consistent with promoting safety and soundness, 
reducing systemic risks, and promoting the stability of the broader 
financial system. As described above, the Bank Repo Facility would 
provide OCC with another liquidity resource in the event of a Clearing 
Member default, in addition to the existing syndicated credit facility 
and Clearing Member minimum cash Clearing Fund requirements. This would 
promote safety and soundness for Clearing Members because it would 
provide OCC with diversity among resources and a readily available 
liquidity resource that could enable OCC to continue to meet its 
settlement obligations in a timely fashion in the event of a Clearing 
Member default, thereby helping to contain losses and liquidity 
pressures from such a default. Maintaining adequate and diversified 
resources to help manage a Clearing Member default, in turn, enhances 
OCC's ability to manage systemic risk and to support the broader 
financial system. As such, the Commission believes it is consistent 
with promoting safety and soundness, reducing systemic risks, and 
promoting the stability of the broader financial system as contemplated 
in Section 805(b) of the Clearing Supervision Act.\33\
---------------------------------------------------------------------------

    \33\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    Accordingly, and for the reasons stated above, the Commission 
believes the changes proposed in the Advance Notice are consistent with 
Section 805(b) of the Clearing Supervision Act.\34\
---------------------------------------------------------------------------

    \34\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(7) Under the Exchange Act

    Rule 17Ad-22(e)(7)(ii) under the Exchange Act requires that a 
covered clearing agency establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to effectively 
measure, monitor, and manage the liquidity risk that arises in or is 
borne by the covered clearing agency, including measuring, monitoring, 
and managing its settlement and funding flows on an ongoing and timely 
basis, and its use of intraday liquidity by, at a minimum, holding 
qualifying liquid resources sufficient to meet the minimum liquidity 
resource requirement under Rule 17Ad-22(e)(7)(i) \35\ in each relevant 
currency for which the covered clearing agency has payment obligations 
owed to clearing members.\36\ For any covered clearing agency, 
``qualifying liquid resources'' means assets that are readily available 
and convertible into cash through prearranged funding arrangements, 
such as, committed arrangements without material adverse change 
provisions, including, among others, repurchase agreements.\37\
---------------------------------------------------------------------------

    \35\ Rule 17Ad-22(e)(7)(i) requires OCC to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to effectively measure, monitor, and manage liquidity risk 
that arises in or is borne by OCC, including measuring, monitoring, 
and managing its settlement and funding flows on an ongoing and 
timely basis, and its use of intraday liquidity by, at a minimum, 
maintaining sufficient liquid resources at the minimum in all 
relevant currencies to effect same-day settlement of payment 
obligations with a high degree of confidence under a wide range of 
foreseeable stress scenarios that includes, but is not limited to, 
the default of the participant family that would generate the 
largest aggregate payment of obligation for the covered clearing 
agency in extreme but plausible conditions. 17 CFR 240.17Ad-
22(e)(7)(i).
    \36\ 17 CFR 240.17Ad-22(e)(7)(ii).
    \37\ 17 CFR 240.17Ad-22(a)(14)(ii)(3).
---------------------------------------------------------------------------

    As described above, implementation of the Bank Repo Facility would 
provide OCC with a committed funding arrangement that would give OCC 
access to $500 million of committed liquid resources through an MRA 
with a bank counterparty. Under the terms of the MRA, OCC's bank 
counterparty would be required to provide OCC with funding subject to a 
number of conditions, including an obligation to fund regardless of any 
material adverse change at OCC, such as the failure of a Clearing 
Member. Taken together, the Commission believes that the Bank Repo 
Facility provides OCC with $500 million of ``qualifying liquid 
resources'' as that term is defined in Rule 17Ad-22(e)(14) of the 
Exchange Act,\38\ and therefore is consistent with the requirements of 
Rule 17Ad-22(e)(7)(ii) under the Exchange.
---------------------------------------------------------------------------

    \38\ 17 CFR 240.17Ad-22(a)(14)(ii)(3).
---------------------------------------------------------------------------

    Accordingly, the Commission believes that implementation of the 
Bank Repo Facility would be consistent with Rule 17Ad-22(e)(7)(ii) 
under the Exchange Act.\39\
---------------------------------------------------------------------------

    \39\ 17 CFR 240.17Ad-22(e)(7)(ii).
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act, that the Commission DOES NOT OBJECT to 
Advance Notice

[[Page 13684]]

(SR-OCC-2020-801) and that OCC is AUTHORIZED to implement the proposed 
change as of the date of this notice.

    By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-04771 Filed 3-6-20; 8:45 am]
 BILLING CODE 8011-01-P


