[Federal Register Volume 85, Number 179 (Tuesday, September 15, 2020)]
[Notices]
[Pages 57276-57279]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-20252]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89792; File No. SR-OCC-2020-805]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of No Objection To Advance Notice Concerning Proposed Changes To 
Enhance OCC's Stock Loan Close-Out Process

September 9, 2020.

I. Introduction

    On July 14, 2020, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') advance 
notice SR-OCC-2020-805 (``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 require Clearing Members that OCC instructs 
to buy-in or sell-out securities to execute such transactions and 
provide OCC notice of such action by the settlement time on the 
business day after OCC gives the instruction.\4\ The Advance Notice was 
published for public comment in the Federal Register on August 14, 
2020,\5\ and the Commission has received no comments regarding the 
changes proposed in the Advance Notice.\6\ The Commission is hereby 
providing notice of no objection to the Advance Notice.
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    \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 49697.
    \5\ Securities Exchange Act Release No. 89515 (Aug. 10, 2020), 
85 FR 49697 (Aug. 14, 2020) (File No. SR-OCC-2020-805) (``Notice of 
Filing''). On July 14, 2020, OCC also filed a related proposed rule 
change (SR-OCC-2020-008) with the Commission pursuant to Section 
19(b)(1) of the Exchange Act and Rule 19b-4 thereunder (``Proposed 
Rule Change''). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, 
respectively. In the Proposed Rule Change, which was published in 
the Federal Register on July 30, 2020, OCC seeks approval of 
proposed changes to its rules necessary to implement the Advance 
Notice. Securities Exchange Act Release No. 89393 (Jul. 24, 2020), 
85 FR 45943 (Jul. 30, 2020) (File No. SR-OCC-2020-008). The comment 
period for the related Proposed Rule Change filing closed on August 
20, 2020.
    \6\ Since the proposal contained in the Advance Notice was also 
filed as a proposed rule change, all public comments received on the 
proposal are considered regardless of whether the comments are 
submitted on the Proposed Rule Change or the Advance Notice.

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[[Page 57277]]

II. Background 7
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    \7\ 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.
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    OCC serves as the sole clearing agency for standardized U.S. 
securities options listed on Commission-registered national securities 
exchanges (``listed options'').\8\ OCC also operates two programs under 
which it clears stock loan transactions (the ``Stock Loan 
Programs'').\9\ As described in more detail below, OCC proposes to 
align the timeframes for closing out the open stock loan and non-stock 
loan positions of a defaulting Clearing Member.
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    \8\ See Securities Exchange Act Release No. 85121 (Feb. 13, 
2019), 84 FR 5157 (Feb. 20, 2019) (File No. SR-OCC-2015-02).
    \9\ OCC's two Stock Loan Programs are the ``Stock Loan/Hedge 
Program'' and the ``Market Loan Program.'' Under its Stock Loan/
Hedge Program, OCC clears transactions initiated directly between 
Clearing Members on a bilateral basis. Under its Market Loan 
Program, OCC clears transactions initiated on either a broker-to-
broker basis or anonymously through the matching of bids and offers.
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    In the event of a Clearing Member default, OCC would close out the 
defaulting Clearing Member's open positions, liquidate collateral, and 
deposit the proceeds from such a close-out into a Liquidating 
Settlement Account.\10\ Generally, OCC would seek to close out the 
defaulting Clearing Member's open positions through an auction 
conducted, before market open, on the day after a default occurs. Under 
its rules, however, OCC may also seek to close out open positions 
cleared under its Stock Loan Programs by instructing non-defaulting 
Clearing Member counterparties to the open position to execute buy-in 
or sell-out transactions by the end of the business day following the 
default.\11\ In the event that a Clearing Member counterparty fails to 
execute buy-in or sell-out transactions as instructed, OCC would 
terminate the relevant stock loan positions based on end of day prices 
from the business day following the default. Pursuant to the Advance 
Notice, OCC proposes to change (1) the time by which buy-in or sell-out 
transactions for defaulted open stock loan positions must be executed 
and (2) the price at which OCC would terminate positions not closed out 
through the execution of buy-in or sell-out transactions.
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    \10\ See OCC Rule 1104; available at https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occ_rules.pdf. See 
also Notice of Filing, 85 FR at 49698.
    \11\ ``Buy-in'' refers to a non-defaulting lender purchasing 
replacement stock. ``Sell-out'' refers to a non-defaulting borrower 
selling the loaned securities in order to recoup its collateral. See 
Notice of Filing, 85 FR at 49697, n. 4.
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    Current rules. Under its Rule 2211 and Rule 2211A, OCC may instruct 
a Clearing Member who is a party to stock loan transactions with a 
defaulting Clearing Member to execute buy-in or sell-out transactions, 
as applicable, with respect to each open stock borrow or loan position 
of the defaulting Clearing Member.\12\ Currently, a Clearing Member so 
instructed is obligated to execute the required transactions and 
provide notice of such execution to OCC by the close of the business on 
the day following receipt of such an instruction. If a Clearing Member 
fails to execute buy-in or sell-out transactions as instructed, OCC may 
terminate the relevant stock loan transactions. OCC would terminate 
such transactions based on prices from the end of the day after OCC 
issued buy-in or sell-out instructions (i.e., the same day by which the 
Clearing Member was obligated to execute the buy-in or sell-out 
transactions).
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    \12\ See OCC Rules 2211 and 2211A. Typically, OCC issues such 
instructions on the day of default. See Notice of Filing, 85 FR at 
49698.
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    Proposed change to execution time. OCC proposes to amend its Rules 
2211 and 2211A with regard to the time by which a Clearing Member must 
execute buy-in or sell-out transactions and provide notice to OCC of 
such transactions. OCC would continue to require that such transactions 
be executed by or before the business day following receipt of the 
instruction to execute such transaction. OCC proposes, however, to move 
up the time by which the transaction must be executed from the close of 
business to ``settlement time,'' which OCC's current rules define as 
9:00 a.m. Central Time.\13\
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    \13\ See By-Law Article I, Section 1.S.(16); available at 
https://www.theocc.com/getmedia/3309eceb-56cf-48fc-b3b3-498669a24572/occ_bylaws.pdf.
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    OCC considered requiring the execution of buy-in or sell-out 
transaction by the close of business on the day it instructed a 
Clearing Member to execute such transactions; however, Clearing Members 
expressed a preference for setting the deadline at 9:00 a.m. Central 
Time the following business day because doing so would allow a non-
defaulting Clearing Member the opportunity to trade at market 
opening.\14\ Because OCC typically issues buy-in or sell-out 
instructions on the day of default, the proposed rule would require 
such transactions to be executed by 9:00 a.m. Central Time on the 
business day following the default. The required transactions would, 
therefore, be executed on the same day on which OCC seeks to close out 
a defaulting Clearing Member's other positions through its auction 
procedures. OCC believes allowing non-defaulting Clearing Members to 
trade at market opening on the morning following default would provide 
additional time to execute the buy-in and sell-out transactions in a 
manner consistent with OCC's two-day liquidation assumption.\15\ The 
proposed change would provide OCC with authority under its rules to 
compel execution of buy-in or sell out transactions designed to close 
out a defaulting Clearing Member's stock loan positions at a point in 
time closer to OCC's other default management processes (i.e., 
auctions) than is currently permitted under OCC's rules.
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    \14\ See Notice of Filing, 85 FR at 49698-99.
    \15\ See Notice of Filing, 85 FR at 49699.
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    Proposed change to termination price. OCC also proposes to amend 
its Rules 2211 and 2211A with regard to the price on which termination 
of stock loan positions would be based if a Clearing Member fails to 
execute buy-in or sell-out transactions within the required timeframes. 
Under the proposal, OCC would close out such positions based on end-of-
day prices from the same day on which OCC instructed the Clearing 
Member to execute buy-in or sell-out transactions (i.e., the day before 
the Clearing Member was obligated to execute the buy-in or sell-out 
transactions).\16\ Such a price would be the last settlement price 
captured in OCC's systems prior to the time by which the non-defaulting 
Clearing Member was required to execute buy-in or sell-out 
transactions.\17\ OCC believes that using such a price, already 
available in its system, would be superior to other options because it 
would allow for an automated process not susceptible to the delays and 
errors of manually pulling price information.\18\
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    \16\ For example, OCC might rely on such end-of-day prices if 
Clearing Members were unable to execute buy-in or sell-out 
transactions to terminate open stock loan positions during the 
morning of the business day following the default because of circuit 
breaker activity. The use of the end-of-day prices from the day of 
default, as opposed to end-of-day prices following a full day of 
trading, would provide closer alignment of market conditions for 
OCC's auction and stock loan terminations than the current rules.
    \17\ See Notice of Filing, 85 FR at 49698.
    \18\ See id.
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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

[[Page 57278]]

management standards for SIFMUs and strengthening the liquidity of 
SIFMUs.\19\
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    \19\ See 12 U.S.C. 5461(b).
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    Section 805(a)(2) of the Clearing Supervision Act 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.\20\ Section 805(b) of the 
Clearing Supervision Act provides the following objectives and 
principles for the Commission's risk management standards prescribed 
under Section 805(a): \21\
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    \20\ 12 U.S.C. 5464(a)(2).
    \21\ 12 U.S.C. 5464(b).
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     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.\22\
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    \22\ 12 U.S.C. 5464(c).
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    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'').\23\ 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.\24\ As such, it is appropriate for the 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,\25\ and in 
the Clearing Agency Rules, in particular Rule 17Ad-22(e)(13).\26\
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    \23\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No. 
68080 (Oct. 22, 2012), 77 FR 66220 (Nov. 2, 2012) (S7-08-11). See 
also Covered Clearing Agency Standards, 81 FR 70786. 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).
    \24\ 17 CFR 240.17Ad-22.
    \25\ 12 U.S.C. 5464(b).
    \26\ 17 CFR 240.17Ad-22(e)(13).
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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, promoting safety and soundness, reducing systemic risks, 
and supporting the stability of the broader financial system.\27\
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    \27\ 12 U.S.C. 5464(b).
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    The Commission believes that the proposed changes are consistent 
with promoting robust risk management, in particular the management of 
risks arising out of a Clearing Member default, as well as promoting 
safety and soundness. As a central counterparty and SIFMU,\28\ it is 
imperative that OCC maintain default management processes designed to 
contain losses. As described above, OCC may, in the event of a Clearing 
Member default, seek to close out stock loan positions by requiring 
Clearing Members to execute buy-in or sell-out transactions while 
closing out non-stock loan positions and liquidating collateral via an 
auction. Pursuant to the Advance Notice, OCC proposes to more closely 
align the timeframe within which buy-in and sell-out transactions would 
occur with the timeframe of a default auction. In the event that such 
transactions do not occur within the required timeframes, OCC further 
proposes to terminate such stock loan transactions based on end of day 
prices from the same day on which OCC instructed the Clearing Member to 
execute buy-in or sell-out transactions. Such prices would likely 
represent the last market price received before OCC would auction off 
the rest of the defaulting Clearing Member's portfolio prior to the 
market open on the following morning. Aligning the timeframes for 
closing out stock loan positions and non-stock loan positions and 
collateral would reduce the potential for significant market movements 
occurring between the time by which OCC closes out positions and 
liquidates collateral related to such positions. Avoiding the potential 
for such market movements would, in turn, increase the likelihood that 
such collateral would be sufficient to mitigate losses arising out of 
the close out of stock loan positions. As such, the Commission believes 
that the proposal would promote robust risk management practices at, 
and the safety and soundness of, OCC, consistent with Section 805(b) of 
the Clearing Supervision Act.\29\
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    \28\ See Financial Stability Oversight Council (``FSOC'') 2012 
Annual Report, Appendix A, available at https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
    \29\ 12 U.S.C. 5464(b).
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    The Commission also believes that the changes proposed in the 
Advance Notice are consistent with reducing systemic risks and 
promoting the stability of the broader financial system. As noted 
above, OCC is the sole registered clearing agency for the U.S. listed 
options markets and a SIFMU. By aligning OCC's default management 
practices, the Commission believes that the proposed changes would 
enhance OCC's ability to address events of Clearing Member default, 
thereby increasing the likelihood that OCC could liquidate a defaulting 
Clearing Member's portfolio without realizing severe credit losses. 
Such losses, if realized, could be mutualized through OCC's Clearing 
Fund, potentially during a period of market stress. While unavoidable 
under certain circumstances, reducing the probability of loss 
mutualization during periods of market stress could reduce the 
transmission of financial risks arising from a Clearing Member default 
to non-defaulting Clearing Members, their customers, and the broader 
options market. The Commission believes that the potential to avoid 
such severe credit losses would, therefore, reduce systemic risk and 
support the broader financial system. As such, the Commission believes 
the proposed changes are consistent with reducing systemic risks and 
promoting the stability of the broader financial system as contemplated 
in Section 805(b) of the Clearing Supervision Act.\30\
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    \30\ 12 U.S.C. 5464(b).
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    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.\31\
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    \31\ 12 U.S.C. 5464(b).
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B. Consistency With Rule 17Ad-22(e)(13) Under the Exchange Act

    Rule 17Ad-22(e)(13) under the Exchange Act requires that a covered 
clearing agency establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to ensure the covered 
clearing agency has the authority and operational capacity to take 
timely action to contain losses and liquidity demands and continue to 
meets its obligations.\32\
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    \32\ 17 CFR 240.17Ad-22(e)(13).

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    As described above OCC, proposes to use its authority to alter the 
time when OCC will close out a defaulting Clearing Member's open stock 
loan positions. The proposed change would move the point in time by 
which OCC can close out open stock loan positions closer to the point 
in time by which OCC would seek to close the defaulting Clearing 
Member's non-stock loan positions and liquidate the defaulting Clearing 
Member's collateral via an auction. Aligning the timeframes for closing 
out stock loan positions and non-stock loan positions and collateral 
would reduce the potential for significant market movements occurring 
between the time by which OCC closes out positions and liquidates 
collateral related to such positions. Avoiding the potential for such 
market movements would, in turn, increase the likelihood that such 
collateral would be sufficient to mitigate losses arising out of the 
close out of stock loan positions.
    OCC also proposes to terminate stock loan positions not closed out 
through buy-in or sell-out transactions based on end of day prices from 
the same day on which OCC instructed the Clearing Member to execute 
buy-in or sell-out transactions. As described above, such prices would 
likely represent the last market price received before OCC would 
auction off the rest of the defaulting Clearing Member's portfolio 
prior to the market open on the following morning. Similar to the 
change in the time by which Clearing Members would be instructed to 
execute buy-in or sell-out transactions, the proposed change in 
termination price would mitigate losses arising out of the close out of 
open stock loan positions by reducing the potential for significant 
market movements between the close out of positions and liquidation of 
related collateral. Taken together, the Commission believes that 
proposed changes regarding the close out a defaulting Clearing Member's 
open stock loan positions would enhance OCC's authority to take timely 
action to contain losses.
    Accordingly, the Commission believes that Advance Notice would be 
consistent with Rule 17Ad-22(e)(13) under the Exchange Act.\33\
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    \33\ 17 CFR 240.17Ad-22(e)(13).
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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 (SR-OCC-2020-805) and that OCC is authorized to 
implement the proposed change as of the date of this notice or the date 
of an order by the Commission approving proposed rule change SR-OCC-
2020-008 whichever is later.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-20252 Filed 9-14-20; 8:45 am]
BILLING CODE 8011-01-P


