[Federal Register Volume 85, Number 198 (Tuesday, October 13, 2020)]
[Notices]
[Pages 64603-64605]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-22475]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90100; File No. SR-OCC-2020-010]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change Concerning the Commingling of 
Certain Non-Customer Margin Assets With Clearing Fund Contributions in 
the Options Clearing Corporation's Account at the Federal Reserve Bank 
of Chicago

October 6, 2020.

I. Introduction

    On August 7, 2020, the Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2020-010 (``Proposed Rule Change'') 
pursuant to Section 19(b) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to provide OCC 
with express authority to hold cash Clearing Fund contributions and 
certain non-customer cash margin assets in its account at the Federal 
Reserve Bank of Chicago at the same time.\3\ The Proposed Rule Change 
was published for public comment in the Federal Register on August 24, 
2020.\4\ The Commission has received no comments regarding the Proposed 
Rule Change. This order approves the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Notice of Filing infra note 4, 85 FR at 52176.
    \4\ Securities Exchange Act Release No. 89590 (Aug. 18, 2020), 
85 FR 52176 (Aug. 24, 2020) (File No. SR-OCC-2020-010) (``Notice of 
Filing'').
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II. Background

    Since March 15, 2016, OCC has maintained an account at the Federal 
Reserve Bank of Chicago to hold cash deposits from its Clearing Members 
to satisfy margin and Clearing Fund requirements.\5\ OCC's current 
rules restrict the manner in which OCC may hold Clearing Fund 
contributions and margin assets.\6\ As a result, OCC holds cash 
Clearing Fund contributions in its Federal Reserve Bank Account, but 
separately holds Clearing Members' cash margin assets in accounts with 
commercial banks. To authorize OCC to comingle certain cash margin and 
cash Clearing Fund contributions, OCC proposes to amend its Rules 604 
and 1002 as described below.
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    \5\ See Federal Reserve Bank of Chicago authorization to provide 
accounts and services to Options Clearing Corporation and Chicago 
Mercantile Exchange, Inc., in accordance with the Dodd-Frank Act and 
Regulation HH, approved March 15, 2016 (https://www.federalreserve.gov/releases/h2/20160319/h2.pdf).
    \6\ See OCC Rules at https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occ_rules.pdf.
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    Current rules. OCC Rule 604(d) requires that certain cash margin 
assets of Clearing Members (``Specified Cash Margin Assets'') must be 
deposited to the credit of OCC in an account or accounts,\7\ designated 
as Clearing Member margin accounts, with such banks, trust companies or 
other depositories as the Board of Directors may select. Rule 604(d) 
further prohibits OCC from commingling Specified Cash Margin Assets 
with OCC's funds of OCC or using such assets as working capital.
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    \7\ OCC Rule 604(d) expressly excludes from these Specified Cash 
Margin Assets those funds that are: (i) Deposited in respect of a 
segregated futures account (which must be held in accordance with 
the provisions of Section 4d of the Commodity Exchange Act and 
regulations thereunder); (ii) invested by OCC pursuant to Rule 
604(a); or (iii) credited by OCC to a liquidating settlement account 
pursuant to Chapter XI of OCC's Rules.
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    OCC Rule 1002(c) requires, among other things, that cash Clearing 
Fund contributions not otherwise invested shall be deposited by OCC in 
accounts with approved custodians, which include the Federal Reserve 
Bank of Chicago. Rule 1002(c) permits the comingling of Clearing Fund 
contributions from different Clearing Members.\8\ OCC currently holds 
cash Clearing Fund contributions in its Federal Reserve Bank Account.
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    \8\ See OCC Rule 1002(c) available at https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occ_rules.pdf.
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    Proposed Rule Change to OCC. OCC proposes to add language to Rule 
604 to allow OCC to deposit Specified Cash Margin Assets in a Federal 
Reserve Bank Account not designated as a Clearing Member margin 
account. The proposed change would apply only to non-customer margin 
assets.\9\ OCC proposes further to add language to its Rules 604 and 
1002 to allow OCC to commingle such assets and cash Clearing Fund 
contributions deposited in a Federal Reserve Bank Account.
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    \9\ See Notice of Filing, 85 FR at 52177 (stating that OCC 
proposes to add Interpretation and Policy .18 to Rule 604 to provide 
that, notwithstanding anything else in Rule 604, Specified Cash 
Margin Assets held by OCC as non-customer margin assets and 
deposited to the credit of OCC in its Federal Reserve Bank Account 
may be deposited in accounts that are not designated as Clearing 
Member margin accounts and may be commingled with cash Clearing Fund 
contributions.)
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Exchange Act directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that

[[Page 64604]]

such proposed rule change is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder applicable to 
such organization.\10\ After carefully considering the Proposed Rule 
Change, the Commission finds that the proposal is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to OCC. More specifically, the Commission finds 
that the proposal is consistent with Section 17A(b)(3)(F) of the 
Exchange Act,\11\ Rule 17Ad-22(e)(7)(iii) and Rule 17Ad-22(e)(16) 
thereunder.\12\
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    \10\ 15 U.S.C. 78s(b)(2)(C).
    \11\ 15 U.S.C. 78q-1(b)(3)(F).
    \12\ 17 CFR 240.17Ad-22(e)(7)(iii) and 17 CFR 240.17Ad-
22(e)(16).
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A. Consistency With Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Exchange Act requires, among other 
things, that the rules of a clearing agency be designed to assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible.\13\ 
Based on its review of the record, and for the reasons described below, 
the Commission believes that allowing OCC to deposit non-customer 
margin in its Federal Reserve Bank Account commingled with cash 
Clearing Fund contributions as described above is consistent with the 
safeguarding of securities and funds for which it has custody or 
control over.
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Proposed Rule Change would allow OCC to deposit non-customer 
cash margin at a Federal Reserve Bank Account. The Commission continues 
to believe that access to a Federal Reserve Account is a valuable 
tool,\14\ and that the use of such a tool would reduce custody risk in 
a clearing agency.\15\ Further, the Proposed Rule Change would not 
limit OCC's access to commercial banks, and would, therefore, provide 
OCC with an additional custodian at which to deposit non-customer cash 
margin. The Commission believes, therefore, that adopting rules 
allowing OCC to deposit non-customer cash margin in a Federal Reserve 
Bank Account is consistent with the requirements of Section 
17A(b)(3)(F) of the Exchange Act.\16\
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    \14\ See Securities Exchange Act Release 71699, 79 FR 29508, 
29533 (May 22, 2014) (File No. S7-03-14).
    \15\ See Securities Exchange Act Release 68080, 77 FR 66220, 
66268 (Nov. 2, 2012) (File No. S7-08-11).
    \16\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(7)(iii) Under the Exchange Act

    Rule 17Ad-22(e)(7)(iii) 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, inter alia, using access 
to accounts and services at a Federal Reserve Bank, or other relevant 
central bank, when available and where determined to be practical by 
the board of directors to enhance its management of liquidity risk.\17\ 
In recognizing that there may be a number of ways to address compliance 
with Rule 17Ad-22(e)(7), the Commission has stated that a covered 
clearing agency generally should consider, when establishing and 
maintaining policies and procedures that address liquidity risk, 
including if the covered clearing agency has access to central bank 
accounts, payment services, or securities services, whether it uses 
these services, where practical, to enhance its management of liquidity 
risk.\18\
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    \17\ 17 CFR 240.17Ad-22(e)(7)(iii).
    \18\ See Securities Exchange Act Release 78961, 81 FR 70786, 
70823-24 (Oct. 13, 2016) (File No. S7-03-14).
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    OCC may use cash margin deposits, including non-customer cash 
margin deposits, to manage liquidity risk. OCC recently adopted a the 
Liquidity Risk Management Framework document (``LRMF'') that sets forth 
a comprehensive overview of OCC's liquidity risk management practices 
and governs OCC's policies and procedures as they relate to liquidity 
risk management.\19\ The LRMF describes the primary liquidity risks OCC 
faces when managing a Clearing Member default, and describes the 
maintenance of liquidity resources designed to address a variety of 
stress scenarios through the sizing of such resources.\20\ The LRMF 
defines such liquidity resources to include cash margin deposits where 
such deposits are required under OCC's Contingency Funding Plan.\21\ 
The Proposed Rule Change would permit, but not require, OCC to use its 
access to a central bank account as a depository for non-customer cash 
margin. The Commission believes, therefore, that allowing OCC to 
deposit non-customer cash margin in a Federal Reserve Bank Account is 
consistent with the requirements of Rule 17Ad-22(e)(7)(iii) under the 
Exchange Act.
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    \19\ See Securities Exchange Act Release 89014 (Jun. 4, 2020), 
85 FR 35446 (Jun. 10, 2020) (File No. SR-OCC-2020-003) (``LRMF 
Approval Order'').
    \20\ See LRMF Approval Order, 85 FR at 35447.
    \21\ See id.
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C. Consistency With Rule 17Ad-22(e)(16) Under the Exchange Act

    Rule 17Ad-22(e)(16) requires a clearing agency to establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to safeguard its own and its Clearing Members' 
assets, minimize the risk of loss and delay in access to these assets, 
and invest such assets in instruments with minimal credit, market, and 
liquidity risks.\22\ The Proposed Rule Change would expand OCC's 
ability to use its Federal Reserve Bank Account by allowing it to 
deposit non-customer cash margin provided by Clearing Members in the 
same account used to custody cash Clearing Fund contributions. As 
stated above, the Commission believes that access to a Federal Reserve 
Account is a valuable tool,\23\ and that the use of such a tool would 
reduce custody risk in a clearing agency.\24\ OCC deposits cash 
Clearing Fund contributions in its Federal Reserve Bank Account, but is 
precluded from depositing margin in the same account under its current 
rules. The Commission believes, therefore, that expanding the Clearing 
Member funds that OCC may custody in its Federal Reserve Bank Account 
to include non-customer cash margin is consistent with the requirements 
of Rule 17Ad-22(e)(16) under the Exchange Act.
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    \22\ 17 CFR 240.17Ad-22(e)(16).
    \23\ See Securities Exchange Act Release 71699, 79 FR 29508, 
29533 (May 22, 2014) (File No. S7-03-14).
    \24\ See Securities Exchange Act Release 68080, 77 FR 66220, 
66268 (Nov. 2, 2012) (File No. S7-08-11).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the 
Exchange Act, and in particular, the requirements of Section 17A of the 
Exchange Act \25\ and the rules and regulations thereunder.
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    \25\ In approving this Proposed Rule Change, the Commission has 
considered the proposed rules' impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\26\ that the Proposed Rule Change (SR-OCC-2020-010) be, 
and hereby is, approved.
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    \26\ 15 U.S.C. 78s(b)(2).
    \27\ 17 CFR 200.30-3(a)(12).


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-22475 Filed 10-9-20; 8:45 am]
BILLING CODE 8011-01-P


