[Federal Register Volume 85, Number 223 (Wednesday, November 18, 2020)]
[Notices]
[Pages 73582-73589]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-25388]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90406; File No. SR-OCC-2020-014]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Adopt the OCC Third-Party 
Risk Management Framework and Retire the OCC Counterparty Credit Risk 
Management Framework

November 12, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on November 4, 2020, the Options Clearing 
Corporation (``OCC'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared 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 The Options Clearing Corporation 
(``OCC'') would adopt a Third-Party Risk Management Framework 
(``TPRMF'') and retire the Counterparty Credit Risk Management Policy 
(``CCRMP''). The TPRMF and CCRMP are included in Exhibit 5 of filing 
SR-OCC-2020-014. The TPRMF is being submitted in its entirety as new 
rule text. Additionally, attached as exhibits to filing SR-OCC-2020-014 
are marked changes to OCC's rules that reference the CCRMP. These 
include the: Risk Management Framework Policy (Exhibit 5c to filing SR-
OCC-2020-014); Liquidity Risk Management Framework (Exhibit 5d to 
filing SR-OCC-2020-014); Margin Policy (Exhibit 5e to filling SR-OCC-
2020-014); and Collateral Risk Management Policy (Exhibit 5f to filing 
SR-OCC-2020-014). The proposed rule change does not require any changes 
to the text of OCC's By-Laws or Rules.
    OCC has separately submitted certain internal procedures related to 
the TPRMF, which are included in this filing as Exhibits 3a-j to filing 
SR-OCC-2020-014, and for which OCC has requested confidential 
treatment. These Exhibits to filing SR-OCC-2020-014 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 to filing SR-OCC-
2020-014.
    All capitalized terms that are not otherwise defined herein have 
the same meaning as set forth in the OCC By-Laws and Rules.\3\
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    \3\ OCC's By-Laws and Rules can be found on OCC's 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
Background
    On September 28, 2016, the Commission adopted amendments to Rule 
17Ad-22 \4\ and added new Rule 17Ab2-2 \5\ pursuant to Section 17A of 
the Securities Exchange Act of 1934 (``Exchange Act'') \6\ and the 
Payment, Clearing and Settlement Supervision Act of 2010 (``Clearing 
Supervision Act'') \7\ to establish enhanced standards for the 
operation and governance of those clearing agencies registered with the 
Commission that meet the definition of a ``covered clearing agency,'' 
as defined by Rule 17Ad-22(a)(5) \8\ (collectively, the rules are 
herein referred to as ``CCA'' rules). The CCA rules require that 
covered clearing agencies, among other things:
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    \4\ 17 CFR 240.17Ad-22.
    \5\ 17 CFR 240.17Ab2-2.
    \6\ 15 U.S.C. 78q-1.
    \7\ 12 U.S.C. 5461 et seq.
    \8\ 17 CFR 240.17Ad-22(a)(5).

    ``[E]stablish, implement, maintain and enforce written policies 
and procedures reasonably designed to . . . [m]aintain a sound risk 
management framework for comprehensively managing legal, credit, 
liquidity, operational, general business, investment, custody, and 
other risks that arise in or are borne by the covered clearing 
agency, which . . . [i]ncludes risk management policies, procedures, 
and systems designed to identify, measure, monitor, and manage the 
range of risks that arise in or are borne by the covered clearing 
agency, that are subject to review on a specified periodic basis and 
approved by the board of directors annually.'' \9\
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    \9\ 17 CFR 240.17Ad-22(e)(3). OCC is defined as a covered 
clearing agency under the CCA rules, and therefore is subject to the 
requirements of the CCA rules, including Rule 17Ad-22(e)(3).

    OCC proposes to adopt the proposed TPRMF, which would replace the 
CCRMP and provide an overview of OCC's overall approach to Third-Party 
\10\ risk management. The proposed TPRMF would identify the risks that 
pertain to OCC's Third-Party relationships and the actions taken by OCC 
at each stage of the relationship. OCC plans to make the proposed TPRMF 
publicly available on its website, which would provide transparency 
into OCC's approach to Third-Party risk management for interested 
market participants. Currently, the CCRMP includes information about 
risk management related to direct and indirect participants, Liquidity 
Providers, asset custodians, settlement banks, letter of credit 
issuers, investment counterparties, and financial market utilities 
(``FMU'') arising from its payment, clearing, and settlement processes. 
Under the proposed TPRMF, OCC would consolidate into one document its 
process for managing the risks associated with all Third-Party 
relationships across the entire lifecycle of their relationship with 
OCC. OCC believes the consolidation provides a more comprehensive and 
clear presentation of OCC's Third-Party risk management without 
requiring a reader to seek multiple sources.
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    \10\ Under the proposed TPRMF, a Third-Party would be defined 
as: A Clearing Member, Clearing Bank, custodians, liquidity 
provider, investment counterparty, financial market utility, 
Exchange, or vendor, which also has: (i) A relationship with OCC 
where products and/or services are exchanged; (ii) other ongoing 
business relationships with OCC; or (iii) responsibility for OCC 
associated records.
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Proposed Third-Party Risk Management Framework
    The proposed TPRMF would state that as a central counterparty, OCC 
is exposed to risks arising from its Third-Party relationships. The 
proposed TPRMF would outline OCC's approach to identify, measure, 
monitor, and manage risks arising from Third-Party relationships 
including: Clearing Members; Clearing Banks, custodians, liquidity 
providers and investment counterparties (``Financial

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Institutions''); FMUs; \11\ Exchanges; \12\ and vendors.
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    \11\ Under the proposed TPRMF, FMUs may include any person that 
manages or operates a multilateral system for the purpose of 
transferring, clearing, or settling payments, securities, or other 
financial transactions among Financial Institutions or between 
Financial Institutions and the person.
    \12\ Under the proposed TPRMF, Exchange relationships may 
include options exchanges, futures markets, OTC Trade Sources or 
Loan Markets.
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    The proposed TPRMF would be approved annually by the Risk Committee 
of OCC's Board (``Risk Committee'') and implemented by the OCC 
Management Committee (``MC'').
Risk Identification
    The proposed TPRMF would state that OCC faces risks associated with 
its Third-Party relationships, including:
     Financial risks arising from a Clearing Member failing to 
meet its financial obligations to OCC including, but not limited to, 
obligations related to settlement, margin, and Clearing Fund. OCC may 
also face financial risks from other Third-Parties not meeting their 
obligations to OCC, including, but not limited to, facilitating daily 
settlements, providing timely access to collateral, honoring liquidity 
draw requests, or meeting obligations under an agreement.
     Operational risks arising from errors, disruptions, 
failures, or the inability of a Third-Party to fulfill its obligations 
to OCC. These risks include a disruption preventing OCC from completing 
trade processing, daily settlements, accessing collateral, or 
safeguarding OCC property, equipment, or personnel.
     Information Technology and Security risks arising when a 
Third-Party is unable to safeguard OCC data or maintain capabilities or 
services to support OCC's operations.
     Legal and Regulatory risks arising when a Third-Party 
fails to fulfill its obligations to OCC. These risks include exposure 
to potential litigation or regulatory compliance concerns.
Relationship Lifecycle
    The proposed TPRMF would state that OCC's relationship lifecycle is 
designed to identify, measure, monitor, and manage Third-Party risks. 
The proposed TPRMF would state that the lifecycle consists of three 
stages.
     On-Boarding--The proposed TPRMF would state that Third-
Parties are evaluated to determine whether they can engage in or expand 
a relationship with OCC. The proposed TPRMF would state that after 
evaluation, OCC completes any operational tasks necessary to activate 
the relationship.
     Ongoing Monitoring--The proposed TPRMF would state that 
Third-Parties are monitored for compliance with standards, the presence 
of additional or increased risks, and fulfillment of contractual 
obligations. The proposed TPRMF would state that ongoing monitoring is 
conducted based upon the nature of each relationship and is 
commensurate with the risks posed by the Third-Party.
     Off-Boarding--The proposed TPRMF would state that Third-
Parties or OCC may elect to terminate a relationship. The proposed 
TPRMF would state that following the determination to terminate a 
relationship, OCC completes any operational tasks necessary to off-
board the relationship.
    The proposed TPRMF would state that Third-Parties that have 
multiple relationships with OCC are subject to the processes described 
below for each type of relationship. The proposed TPRMF would state 
that OCC recognizes that multiple relationships with a single entity 
may result in additional risks (as identified above) and incorporates 
this into its on-boarding and ongoing monitoring by reviewing 
affiliated relationships and their exposures at the Credit and 
Liquidity Risk Working Group (``CLRWG'').
    The proposed TPRMF would state that as described below, risks 
identified throughout the relationship lifecycle are reported and 
escalated through associated working groups. The proposed TPRMF would 
state that working groups are cross-departmental and support OCC's 
business as assigned by the MC. The proposed TPRMF would state that 
each working group has a chair and designated MC member who are 
responsible to determine the matters to be escalated to the MC. The 
proposed TPRMF would state that the working groups identified in the 
TPRMF have defined decision-making authority, functions and 
responsibilities as defined in the associated working group procedure. 
The proposed TPRMF would state that the working groups that support the 
activities described in the TPRMF are: CLRWG, Exchange Working Group 
(``EWG''), and Vendor Risk Working Group (``VRWG'').
Third-Party Relationship Management
Clearing Members
    The proposed TPRMF would state that OCC's membership standards are 
designed to be objective and risk-based, and are publicly disclosed in 
OCC's Rules and By-Laws. The proposed TPRMF would state that annually, 
Business Operations, Financial Risk Management (``FRM''), Treasury, and 
Third-Party Risk Management (``TPRM'') assess the adequacy of OCC's 
membership standards to address the management of risks presented by 
Clearing Members and the processes used to monitor initial and ongoing 
compliance with those standards, in accordance with the CLRWG 
Procedure. The proposed TPRMF would state that the review may contain 
recommendations to change the standards or monitoring processes. The 
proposed TPRMF would state that the results of the annual assessment 
are summarized for consecutive review and approval by the CLRWG, MC, 
Risk Committee, and if rule changes are necessary, Board.
    On-Boarding: The proposed TPRMF would state that Business 
Operations, FRM, and TPRM complete a risk-based evaluation of Clearing 
Member applicants by evaluating their financial resources, operational 
capacity, personnel, and facilities against OCC's membership standards. 
The proposed TPRMF would state that FRM presents the results of this 
evaluation to the CLRWG and other key stakeholders as identified within 
Article V, Section 2 of OCC's By-Laws for review and approval.
    Ongoing Monitoring: The proposed TPRMF would state that Clearing 
Members are monitored for ongoing compliance with OCC's membership 
standards. The proposed TPRMF would state that FRM, with support from 
Business Operations and TPRM, performs Watch Level reporting and 
ongoing monitoring of financial and operational risks. The proposed 
TPRMF would state that in addition to or in support of Watch Level 
reporting, Business Operations and FRM conduct the following processes 
to monitor Clearing Members:
     Determining an internal credit rating to identify 
creditworthiness;
     Performing periodic examinations to evaluate Clearing 
Member risk management policies, procedures, and practices; and
     Evaluating material risks related to customers of Clearing 
Members.
    The proposed TPRMF would state that FRM provides informational 
Watch Level \13\ reporting at meetings of the

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CLRWG, MC, and Risk Committee that summarizes the circumstances leading 
to violations of higher tier Watch Level criteria, additional risks 
observed, and any corrective measures taken by such Clearing Members.
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    \13\ Under the proposed TPRMF, Watch Level would be defined as: 
OCC assigns a level of required monitoring and reporting (i.e., a 
``Watch Level'') based on the identification of events or trends 
that might signal the deterioration of an entity's financial or 
operational ability to timely meet its future obligations to OCC. 
Watch Level is a tiered structure with financial (e.g., capital and 
profitability), operational (e.g., operational difficulties and late 
financial report submissions), and general business (e.g., risk 
management issues and business restrictions by another SRO) criteria 
at each tier. Reaching the criteria at higher tier levels signals a 
more material event or trend has been detected and an entity may 
require heightened risk management. The CLRWG may recommend changes 
to Watch Level criteria to the MC, which maintains approval 
authority for recommended changes. FRM is responsible for 
implementing all approved Watch Level criteria changes.
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    The proposed TPRMF would state that should a Clearing Member 
approach or no longer meet minimum membership standards, protective 
measures may be imposed to limit or eliminate OCC's counterparty 
exposure. The proposed TPRMF would state that OCC maintains authorities 
in its Rules (Chapter III, Chapter VI Rule 608, and Chapter VII Rules 
704 and 707) to act to protect OCC, given the facts and circumstances 
of the exposure presented by a Clearing Member, including but not 
limited to the imposition of additional monitoring, changes to margin 
requirements or composition, or suspension of some or all product and 
account approvals.
    The proposed TPRMF would state that Business Operations, FRM, and 
TPRM provide reporting to the CLRWG, comprised of results from ongoing 
monitoring and management of Clearing Member financial, operational, 
legal, and regulatory risks and may raise matters for consideration to 
the CLRWG. The proposed TPRMF would state that the CLRWG may take 
action or escalate the matter to the MC, in accordance with the 
functions and responsibilities assigned to the CLRWG by the MC in the 
CLRWG Procedure.
    Off-Boarding: The proposed TPRMF would state that a Clearing Member 
may voluntarily terminate its membership. The proposed TPRMF would 
state that upon request for termination, Business Operations and FRM 
ensure all financial exposures and operational capabilities are wound 
down and all obligations to OCC are satisfied before the relationship 
is terminated. The proposed TPRMF would state that in the event a 
Clearing Member is suspended by OCC, the suspension will be managed in 
accordance with the Default Management Policy.
Clearing Banks, Custodians, Liquidity Providers and Investment 
Counterparties
    The proposed TPRMF would state that OCC maintains relationships 
with Financial Institutions that facilitate clearance and settlement 
activities, manage collateral, provide liquidity, and serve as 
investment counterparties.
    On-Boarding: The proposed TPRMF would state that FRM and TPRM, with 
support as needed from Business Operations and Treasury, complete a 
risk-based evaluation of each entity by evaluating its financial 
resources and operational capacity. The proposed TPRMF would state that 
for custodians, the evaluation considers whether a relationship is 
structured to allow prompt access to OCC and Clearing Member assets and 
whether the custodian is a supervised and regulated institution that 
adheres to generally accepted accounting practices, maintains 
safekeeping procedures, and has controls that fully protect these 
assets. The proposed TPRMF would state that the results of the 
evaluation are presented to the CLRWG for review and recommendation for 
approval prior to presentation to the Chief Executive Officer or Chief 
Operating Officer, each of whom has the authority to approve such 
relationships.
    Ongoing Monitoring: The proposed TPRMF would state that Business 
Operations, FRM, Treasury, and TPRM monitor the financial, operational, 
legal, and regulatory risks related to Financial Institution 
relationships. The proposed TPRMF would state that this monitoring 
includes Watch Level reporting, material agreement reviews, and ongoing 
monitoring of financial and operational risks. The proposed TPRMF would 
state that should Watch Level reporting detect potential issues or 
trends that might indicate the deterioration of a Financial 
Institution's ability to perform, protective measures that may be 
applied include, but are not limited to, modifying the business 
relationship or termination of the relationship.
    The proposed TPRMF would state that Business Operations, FRM, 
Treasury, and TPRM provide reporting to the CLRWG, comprised of results 
from ongoing monitoring and management of a Financial Institution's 
financial, operational, legal, and regulatory risks and may raise 
matters for consideration to the CLRWG. The proposed TPRMF would state 
that the CLRWG may take action or escalate the matter to the MC, in 
accordance with the functions and responsibilities assigned to the 
CLRWG by the MC in the CLRWG Procedure.
    Off-Boarding: The proposed TPRMF would state that a Financial 
Institution relationship may be terminated by the Financial Institution 
or OCC, pursuant to applicable agreements. The proposed TPRMF would 
state that the Chief Executive Officer or Chief Operating Officer, each 
of whom has the authority, must approve the termination of a Financial 
Institution relationship initiated by OCC. The proposed TPRMF would 
state that OCC may terminate a relationship if risks rise to an 
unacceptable level or a relationship is no longer required. Business 
Operations, FRM, Treasury, and Legal perform activities necessary to 
off-board the relationship in accordance with the agreement between OCC 
and the applicable Financial Institution.
Financial Market Utilities
    The proposed TPRMF would state that FMUs provide OCC with a range 
of services, including custody, stock loan processing, cross-margin 
programs, and securities settlement.
    On-Boarding: The proposed TPRMF would state that Business 
Operations, FRM, Legal, and TPRM consider an FMU's financial condition, 
operational capabilities, and any legal or regulatory risks associated 
with the relationship during the on-boarding process. The proposed 
TPRMF would state that the CLRWG reviews this evaluation and recommends 
approval prior to presentation to the Chief Executive Officer or Chief 
Operating Officer, each of whom has the authority to approve such 
relationships. The proposed TPRMF would state that on-boarding of the 
relationship may be subject to completion of any necessary agreements 
or regulatory filings.
    Ongoing Monitoring: The proposed TPRMF would state that Business 
Operations, FRM and TPRM monitor the financial, operational, legal, and 
regulatory risks related to FMU relationships. The proposed TPRMF would 
state that this monitoring includes Watch Level reporting, material 
agreement reviews, and ongoing monitoring of financial and operational 
risks.
    The proposed TPRMF would state that Business Operations, FRM, and 
TPRM provide reporting to the CLRWG, comprised of results from ongoing 
monitoring and management of an FMU's financial, operational, legal, 
and regulatory risks and may raise matters for consideration to the 
CLRWG. The proposed TPRMF would state that the CLRWG may take action or 
escalate the matter to the MC in accordance with the functions and 
responsibilities assigned to the CLRWG by the MC in the CLRWG 
Procedure.
    Off-Boarding: The proposed TPRMF would state that an FMU 
relationship may be terminated by the FMU or OCC, pursuant to 
applicable agreements. The proposed TPRMF would state that the

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Chief Executive Officer or Chief Operating Officer, each of whom has 
the authority, must approve the termination of an FMU relationship 
initiated by OCC. The proposed TPRMF would state that Business 
Operations, FRM, Legal, and TPRM coordinate the activities necessary to 
off-board the relationship, including, but not limited to, the wind 
down of all services with the FMU and, if necessary, revising OCC 
policies and procedures and filing rule changes with OCC's regulators 
after receiving the appropriate internal approvals.
Exchanges
    The proposed TPRMF would state that OCC provides clearing services 
for Exchanges pursuant to applicable agreements (Exchange agreements 
are filed with OCC's regulators, as required). The proposed TPRMF would 
state that under these agreements, OCC clears products including equity 
and index options, commodity contracts, treasury futures, security 
futures, and stock loan transactions.
    On-Boarding: The proposed TPRMF would state that Product and 
Business Development, in coordination with stakeholders which may 
include, but are not limited to, FRM, Business Operations, and TPRM, 
completes an evaluation of proposed Exchange relationships, including 
assessing whether an Exchange meets OCC's qualification requirements 
(as further described in the OCC By-Laws, Article VIIA--Equity 
Exchanges and Article VIIB--Non-Equity Exchanges). The proposed TPRMF 
would state that the due diligence performed for a proposed Exchange 
relationship is presented to the EWG for review and subsequently to the 
MC for approval. The proposed TPRMF would state that a summary of due 
diligence and on-boarding activities are presented to the Board for 
approval to launch.
    Ongoing Monitoring: The proposed TPRMF would state that Business 
Operations and TPRM monitor the operational, legal and regulatory risks 
related to Exchange relationships. The proposed TPRMF would state that 
such relationships are monitored for connectivity and trade activity on 
an ongoing basis. The proposed TPRMF would state that Exchange 
monitoring allows for internal escalation to Production Support and the 
EWG, and externally to Exchanges.
    The proposed TPRMF would state that Business Operations and TPRM 
conduct reviews to assess an Exchange's operational performance, 
overall financial condition, and ability to meet contractual 
obligations. The proposed TPRMF would state that to assess operational 
performance, Business Operations executes testing activities throughout 
the year aimed at mitigating operational risk, including the 
requirement that all Exchanges must participate in annual disaster 
recovery tests. The proposed TPRMF would state that in addition, 
Business Operations supports external testing with all Exchanges upon 
request or related to OCC system changes and enhancements. The proposed 
TPRMF would state that TPRM monitors the financial condition of 
Exchanges and evaluates whether an Exchange's operations meet its 
contractual obligations. The proposed TPRMF would state that Business 
Operations facilitates annual meetings with each Exchange that include 
an operational performance review, communicate updates about upcoming 
OCC system enhancements and changes, and seek feedback.
    The proposed TPRMF would state that Business Operations and TPRM 
provide reporting to the EWG, comprised of results from ongoing 
monitoring and management of an Exchange's financial, operational, 
legal and regulatory risks and may raise matters for consideration to 
the EWG. The proposed TPRMF would state that the EWG may take action or 
escalate the matter to the MC, in accordance with the functions and 
responsibilities assigned to the EWG by the MC in the EWG Procedure.
    Off-Boarding: The proposed TPRMF would state that an Exchange 
relationship may be terminated by the Exchange or OCC, pursuant to the 
applicable Exchange agreement. The proposed TPRMF would state that upon 
request for termination by the Exchange, Business Operations notifies 
the EWG and the MC to discuss any immediate actions such as limiting 
connectivity with the Exchange to mitigate exposure to operational, 
legal, or regulatory risks and to determine a termination date.
    The proposed TPRMF would state that additionally, Business 
Operations leads the development of a deployment plan to identify the 
departments and required actions necessary to reduce any interim risk 
prior to termination, which may include performing clearing system 
maintenance and limiting or removing connectivity to the Exchange. The 
proposed TPRMF would state that Business Operations and other 
supporting departments coordinate and perform activities necessary to 
off-board the relationship in accordance with the applicable Exchange 
agreement.
Vendors
    The proposed TPRMF would state that OCC engages and maintains 
vendor relationships for various purposes, including to accomplish its 
strategic objectives, outsource operational activities, and assist in 
compliance with legal and regulatory obligations. The proposed TPRMF 
would state that all Third-Party relationships that are not Clearing 
Members, Financial Institutions, FMUs, or Exchanges are treated as 
vendor relationships.
    On-Boarding: The proposed TPRMF would state that during on-
boarding, TPRM works with the business area requesting the vendor to 
assign a vendor relationship manager (``VRM'') who is obligated to 
manage the vendor relationship and execute the phases of the vendor 
relationship lifecycle. The proposed TPRMF would state that TPRM 
coordinates with the VRM to complete an evaluation of inherent risks 
posed by the vendor relationship. The proposed TPRMF would state that 
the evaluation of inherent risk results in a vendor risk tier which is 
used to inform the level of due diligence and frequency of monitoring 
for each vendor. The proposed TPRMF would state that due diligence is 
based on the inherent risks identified and may include a review of 
financial health, operational capacity, and other standards based on 
the relationship.
    The proposed TPRMF would state that any potential risk issues 
identified are presented to the VRM and OCC's Legal Department for 
review. Potential risk issues may also be shared with the VRWG. The 
proposed TPRMF would state that an agreement that addresses control and 
business requirements is then negotiated with the vendor and executed 
by an OCC officer (an OCC Vice President or above).
    Ongoing Monitoring: The proposed TPRMF would state that VRMs and 
TPRM monitor vendors to assess whether they are delivering services as 
required by applicable agreements. The proposed TPRMF would state that 
the scope and frequency of monitoring is determined by the vendor risk 
tier and inherent risks identified during on-boarding. The proposed 
TPRMF would state that monitoring may include reviewing a vendor's 
financial health, operational capacity, and other standards based on 
the relationship's inherent risks.
    The proposed TPRMF would state that TPRM provides reporting to the 
VRWG, comprised of results from ongoing monitoring and management of a 
vendor's financial, operational, legal, and regulatory risks and may 
raise matters for consideration to the VRWG. The proposed TPRMF would 
state that the VRWG may take action (e.g., additional monitoring, 
require

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contingency plans, and additional contractual requirements) or escalate 
the matter to the MC, in accordance with the functions and 
responsibilities assigned to the VRWG by the MC in the Vendor Risk 
Working Group Procedure.
    Off-Boarding: The proposed TPRMF would state that a vendor 
relationship may be terminated by the vendor or OCC, pursuant to 
applicable agreements. The proposed TPRMF would state that OCC 
mitigates exposure to operational, legal, and regulatory risk and 
performs activities necessary to off-board the relationship in 
accordance with the applicable vendor agreement.
Retirement of Counterparty Credit Risk Management Policy
    OCC proposes retiring the CCRMP and replacing it with the proposed 
TPRMF. Currently, the CCRMP includes information about the Third-Party 
risk management lifecycle for Clearing Members, Financial Institutions, 
and FMUs. The information related to the Third-Party risk management 
lifecycle (on-boarding, ongoing monitoring and off-boarding) is now 
included in the proposed TPRMF. The proposed TPRMF also includes 
information about the Third-Party risk management lifecycle for 
Exchanges and Vendors, and OCC believes consolidating its Third-Party 
risk management lifecycle information into one publicly available 
document will provide for greater efficiency and transparency.
    Additionally, by reconciling procedural information that was 
previously in the CCRMP with OCC's existing procedures, OCC was able to 
eliminate redundancy that could lead to confusion. In the proposed 
TPRMF, the Third-Party risk management lifecycle for each entity type 
is described. Detailed supporting procedural information that covers 
the various Third-Party relationships, lifecycle phases and governance 
steps is provided for in OCC's procedures.
    The below table summarizes where the information currently in the 
CCRMP will reside following its proposed retirement. The left column 
lists the sections of the current CCRMP, the right column indicates 
where the information will be available under the proposed rule 
changes, including in the TPRMF and OCC Rules and By-Laws, as well as 
related OCC procedures. The CCRMP applies only to Clearing Members, 
Financial Institutions, and FMUs. Therefore, the below table only 
illustrates information related to those Third-Parties. A comprehensive 
statement about the Third-Party risk management lifecycle approach for 
Exchanges and Vendors has not been previously filed as a rule.

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        CCRMP Section            Location in proposed revised structure
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I. Purpose...................  No longer necessary, as the CCRMP will be
                                retired. TPRMF includes an Executive
                                Summary appropriate to that document.
II.A. Identification of        TPRMF Section II: Risk Identification.
 Credit Risk.                  In the TPRMF, OCC has defined the risks
                                it faces to include financial risks,
                                operational risks, information
                                technology and security risks, and legal
                                and regulatory risks. The credit risk
                                areas identified in the CCRMP are
                                covered in the broader OCC definition of
                                financial risks in the TPRMF. The teams
                                monitoring credit risk continue to
                                monitor for each potential area of
                                credit risk in accordance with OCC's
                                procedures for each type of Third-Party
                                relationship.
                               OCC does not believe this reorganization
                                changes the risks faced by OCC or the
                                rights and obligations of OCC.
II.B. Counterparty Access and  TPRMF Section III: Relationship Lifecycle
 Participation.                 (On-Boarding).
                               TPRMF Section IV: Third-Party
                                Relationship Management (Clearing
                                Members, Financial Institutions and
                                FMUs).
                               OCC By-Laws Articles IV and Article V,
                                Section 1.03(e) and Section 2.
                               OCC Rules Chapters II and III, Rule 604.
                               The information about how OCC on-boards
                                and monitors the ongoing compliance with
                                standards of its Third-Party
                                relationships is summarized in the
                                proposed TPRMF relationship lifecycle
                                overview and then in greater detail in
                                the section related to each Third-Party
                                type. The proposed TPRMF is organized by
                                Third-Party type where the CCRMP is
                                organized by relationship phase. While
                                the sections have been reorganized and
                                the drafting style has been changed from
                                stating what OCC ``shall'' do to
                                statements of what OCC does, the
                                approach to risk management for Clearing
                                Members, Financial Institutions and FMUs
                                (e.g., OCC's procedures require
                                monitoring for a low probability of
                                defaulting on obligations and assessing
                                potential risks presented by indirect
                                participants) during on-boarding and
                                initial approval has not changed.
                               Additionally, specific information
                                related to the qualification and
                                approval of Clearing Members and
                                Financial Institutions is currently
                                publicly available in the OCC Rules and
                                By-Laws. OCC modified the approval
                                process for FMUs to reflect its
                                practices more accurately. While the
                                Board approves any project that would
                                require the on-boarding of an FMU, the
                                final authority to implement the
                                relationship is maintained by the CEO or
                                COO, consistent with the approval
                                structure OCC utilizes for Financial
                                Institutions. The TPRMF is consistent
                                with the management structure changes
                                previously approved by the
                                Commission.\14\
                               Finally, on-boarding is done in
                                accordance with OCC's procedures for
                                each type of Third-Party relationship.
II.C. Measuring Counterparty   TPRMF Section III: Relationship Lifecycle
 Credit Risk.                   (Ongoing Monitoring).
                               TPRMF Section IV: Third-Party
                                Relationship Management (Clearing
                                Members, Financial Institutions and
                                FMUs).

[[Page 73587]]

 
                               The information about how OCC monitors
                                its established Third-Party
                                relationships on an ongoing basis is
                                summarized in the proposed TPRMF
                                relationship lifecycle overview and then
                                in greater detail in the section related
                                to the on-going monitoring of each Third-
                                Party type. The proposed TPRMF is
                                organized by Third-Party type where the
                                CCRMP is organized by relationship
                                phase. While the sections have been
                                reorganized and the drafting style has
                                been changed from stating what OCC
                                ``shall'' do to statements of what OCC
                                does, the approach to risk management
                                for Clearing Members, Financial
                                Institutions and FMUs (e.g., OCC's
                                procedures require measurement and
                                reporting of credit risk and other
                                exposures) during ongoing monitoring has
                                not changed.
                               Additionally, the relationship lifecycle
                                section in the proposed TPRMF states
                                that OCC recognizes that multiple
                                relationships with a single entity may
                                result in concentration risk and
                                incorporates this into its monitoring
                                and reporting processes. Finally,
                                ongoing monitoring is done in accordance
                                with OCC's procedures for each type of
                                Third-Party relationship.
II.D. Monitoring and Managing  TPRMF Section III: Relationship Lifecycle
 Counterparty Credit Risk.      (Ongoing Monitoring).
                               TPRMF Section IV: Third-Party
                                Relationship Management (Clearing
                                Members, Financial Institutions and
                                FMUs).
                               The information about how OCC monitors
                                its established Third-Party
                                relationships on an ongoing basis is
                                summarized in the proposed TPRMF
                                relationship lifecycle overview and then
                                in greater detail in the section related
                                to the on-going monitoring of each Third-
                                Party type. The proposed TPRMF is
                                organized by Third-Party type where the
                                CCRMP is organized by relationship
                                phase. While the sections have been
                                reorganized and the drafting style has
                                been changed from stating what OCC
                                ``shall'' do to statements of what OCC
                                does, the approach to risk management
                                for Clearing Members (e.g., OCC's
                                procedures require monitoring for
                                potential risks presented by indirect
                                participants), Financial Institutions
                                and FMUs during ongoing monitoring has
                                not changed.
                               In this section, OCC proposes to maintain
                                the information related to OCC's program
                                for Watch Level reporting but remove the
                                specificity about what constitutes the
                                Watch Level Tiers for Clearing Members,
                                Financial Institutions and FMUs. OCC
                                proposes to define the term Watch Level
                                in the TPRMF and use it consistently
                                throughout the on-going monitoring
                                sections related to Clearing Members
                                (and related indirect participants),
                                Financial Institutions and FMUs. In each
                                of these sections, the proposed TPRMF
                                would describe OCC's utilization of
                                Watch Level reporting and the steps that
                                can be taken if a Third-Party is
                                trending towards lower creditworthiness.
                                OCC proposes to remove the information
                                about what constitutes each Watch Level
                                tier from its rules and maintain this
                                information in its procedures. OCC
                                believes this is appropriate as it would
                                allow OCC to react to changing or
                                unforeseen circumstances that may call
                                for an update to its tiering
                                immediately.
                               Finally, ongoing monitoring is done in
                                accordance with OCC's procedures for
                                each type of Third-Party relationship.
II.E. Counterparty Credit      TPRMF Section III: Relationship Lifecycle
 Risk Termination.              (Off-Boarding).
                               TPRMF Section IV: Third-Party
                                Relationship Management (Clearing
                                Members, Financial Institutions and
                                FMUs).
                               The information about how OCC off-boards
                                Third-Party relationships is summarized
                                in the proposed TPRMF relationship
                                lifecycle overview and then in greater
                                detail in the section related to the off-
                                boarding of each Third-Party type. The
                                proposed TPRMF is organized by entity
                                type where the CCRMP is organized by
                                relationship phase. While the sections
                                have been reorganized and the drafting
                                style has been changed from stating what
                                OCC ``shall'' do to statements of what
                                OCC does, the approach to risk
                                management for Clearing Members,
                                Financial Institutions and FMUs during
                                off-boarding monitoring has not changed.
                               Finally, off-boarding is done in
                                accordance with OCC's procedures for
                                each type of Third-Party relationship.
------------------------------------------------------------------------

Proposed Corresponding Changes to Risk Management Framework Policy, 
Liquidity Risk Management Framework, Margin Policy, and Collateral Risk 
Management Policy
---------------------------------------------------------------------------

    \14\ See Securities Exchange Act Release No. 34-85129 (February 
13, 2019), 84 FR 5129 (February 13, 2019) (SR-OCC-2018-015).
---------------------------------------------------------------------------

    OCC additionally proposes to make changes to its rule filed 
documents that refer to the CCRMP. OCC believes this change will not 
substantively alter these documents, but rather refer readers to the 
TPRMF which will provide information related to the risk management of 
all OCC Third-Parties in one document.
    OCC proposes to update all references to the CCRMP in the Risk 
Management Framework Policy to refer to the TPRMF. Additionally, OCC 
proposes to update references to the Third-Party Risk Management Policy 
\15\ in the Risk Management Framework Policy to also refer to the 
TPRMF. Similarly, OCC proposes to update all references to the CCRMP 
and Third-Party Risk Management Policy in the Liquidity Risk Management 
Framework and Margin Policy to refer to the TPRMF. Finally, OCC 
proposes to update references to the CCRMP in the Collateral Risk 
Management Policy to refer to the TPRMF. In some cases, these proposed 
revisions include combining redundant references to the CCRMP in favor 
of one reference to the TPRMF. Lastly, OCC proposes to remove, rather 
than update, a paragraph in the Collateral Risk Management Policy 
related to cross-margining that refers to the CCRMP as it is redundant 
with the Margin Policy. OCC believes the redundant description does not 
need to remain in both rule filed documents.
---------------------------------------------------------------------------

    \15\ The OCC Third-Party Risk Management Policy has never been 
filed as a rule, and will be retired upon approval of the TPRMF.
---------------------------------------------------------------------------

(2) Statutory Basis
    Section 17A(b)(3)(F) of the Act \16\ requires, in part, that the 
rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions, to assure 
the safeguarding of securities and funds in the custody or control of 
the clearing agency or for which it is responsible, and in general, to 
protect investors and the public interest. OCC believes that the 
proposed rule change is consistent with Section 17A(b)(3)(F)

[[Page 73588]]

of the Act \17\ because OCC's TPRMF details OCC's approach to managing 
risks associated with Third-Parties. Third-Parties are involved in 
OCC's clearance and settlement process in various ways and therefore 
present risks to OCC's ability to promptly and accurately clear and 
settle securities transactions. The following provides one example for 
each Third-Party. Clearing Members present risk if they are not able to 
meet their financial obligations to OCC; Financial Institutions present 
risk if they are unable to provide ready access to OCC's funds; FMUs 
present risk if they do not perform as expected under agreements with 
OCC; Exchanges present risk if inaccurate trade information is sent to 
OCC for processing; and vendors present risk as OCC outsources certain 
critical activities, such as gathering pricing data, to vendors. OCC 
manages these risks by scrutinizing the Third-Party before it can be 
on-boarded, monitoring the Third-Party throughout its relationship with 
OCC and carefully off-boarding the Third-Party should the relationship 
end. This organized and diligent approach to managing the risks 
associated with Third-Parties, promotes the prompt and accurate 
clearance and settlement of securities transactions by providing for 
the management of the risks associated Third-Party relationships. By 
identifying the risks associated with Third-Party relationships 
throughout their lifecycle in accordance with the TPRMF, OCC would aim 
to avoid or manage these risks in order to continue providing prompt 
and accurate clearance and settlement services.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78q-1(b)(3)(F).
    \17\ Id.
---------------------------------------------------------------------------

    Additionally, OCC's TPRMF provides for the safeguarding of 
securities and funds in the custody or control of OCC or for which it 
is responsible by detailing the program OCC uses to manage its 
relationships with Third-Parties and more specifically, Financial 
Institutions and FMUs. The TPRMF would outline the process OCC would 
use to manage the risks associated with Financial Institutions and 
FMUs. Financial Institutions and FMUs present settlement risk to OCC if 
they do not perform within expected settlement time frames. In 
addition, Financial Institutions and FMUs present custodial risk to OCC 
if they are unable to provide ready access to OCC's funds in their 
custody. Furthermore, Financial Institutions and FMUs present risk to 
OCC if they are unable to promptly recover from a business continuity 
or disaster recovery event in order to perform services for OCC. By 
following the risk management process proposed in the TPRMF, OCC 
believes it would identify the risks associated with Financial 
Institutions and FMUs and use this information to make decisions about 
whether to begin a relationship with the Third-Party and whether to 
maintain the on-going relationship.
    OCC believes following the process contained in the proposed TPRMF 
will contribute to the safeguarding of securities and funds in its 
custody or control or for which OCC is responsible by documenting the 
process OCC aims to consistently follow in order to identify, measure, 
monitor and manage the risks associated with Third-Parties.
    Rule 17Ad-22(e)(3) \18\ requires, in part, that a covered clearing 
agency ``establish, implement, maintain and enforce written policies 
and procedures reasonably designed to . . . [m]aintain a sound risk 
management framework for comprehensively managing legal, credit, 
liquidity, operational, general business, investment, custody, and 
other risks that arise in or are borne by the covered clearing agency, 
which . . . [i]ncludes risk management policies, procedures, and 
systems designed to identify, measure, monitor, and manage the range of 
risks that arise in or are borne by the covered clearing agency, that 
are subject to review on a specified periodic basis and approved by the 
board of directors annually.'' OCC believes that the proposed rule 
change is also consistent with Rule 17Ad-22(e)(3) \19\ because the 
proposed TPRMF would provide an overview of OCC's approach to Third-
Party risk management. The proposed TPRMF would describe how OCC 
monitors the risks that arise in or are borne by OCC through a variety 
of risk assessment, risk reporting, evaluation and internal control 
management activities, consistent with the requirements of Rule 17Ad-
22(e)(3).\20\ Additionally, OCC believes that retiring the CCRMP in 
favor of the proposed TPRMF, which includes a more thorough description 
of the OCC Third-Party risk management lifecycle approach across entity 
types, will provide a more comprehensive, clear and transparent 
presentation of OCC's Third-Party risk management program. Currently, 
OCC's approach to Third-Party risk management for Clearing Members, 
Financial Institutions and FMUs is included the CCRMP, while OCC's 
approach to Third-Party risk management for Exchanges and Vendors is 
currently contained in policies and procedures that are not filed as 
rules. OCC believes that consolidating its approach to Third-Party risk 
management into one public document, will provide for greater 
consistency and a single source for information related to OCC's 
approach to the management of risks presented by Third-Parties. 
Additionally, OCC believes clarity and consistency will be gained by 
maintaining certain procedural information previously redundantly 
contained in the CCRMP and OCC's procedures only in OCC's procedures, 
rather than redundantly in the TPRMF. OCC believes resolving these 
redundancies will avoid potential confusion that could be created by 
any inconsistency between the TPRMF and OCC's procedures. Finally, OCC 
believes that making the proposed TPRMF publicly available will provide 
for greater transparency into OCC's policy to identify, measure, 
monitor, and manage risks related to Third-Party relationships.
---------------------------------------------------------------------------

    \18\ 17 CFR 240.17Ad-22(e)(3).
    \19\ Id.
    \20\ Id.
---------------------------------------------------------------------------

    Finally, OCC believes the proposed corresponding changes to the 
Risk Management Framework Policy, Liquidity Risk Management Framework, 
Margin Policy, and Collateral Risk Management Policy contribute to the 
maintenance required related to these policies as OCC aims to continue 
to maintain a sound risk management framework. While these edits do not 
change the substance or meaning of the Risk Management Framework 
Policy, Liquidity Risk Management Framework, Margin Policy, and 
Collateral Risk Management Policy, OCC believes accurate references 
within its policies and procedures support the maintenance of its risk 
management framework.
    The proposed rule change is not inconsistent with the existing 
rules of OCC, including any other rules proposed to be amended.

(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act \21\ 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 does not 
believe that the proposed rule changes would impact or impose any 
burden on competition. The proposed rule change clearly and 
transparently presents the framework OCC uses to identify, monitor and 
manage its risks related to Third-Parties in the TPRMF. In addition, by 
retiring the CCRMP, the TPRMF consolidates information related to 
Third-Parties in one document for

[[Page 73589]]

ease of access by interested parties. In addition, OCC plans to make 
this document publicly available on its website, thereby providing 
additional transparency and equal availability to all market 
participants. While the proposed rule change would enhance OCC's 
framework of risk management documentation, these updates do not affect 
Clearing Members' access to OCC's services or impose any direct burdens 
on Clearing Members. Accordingly, the proposed rule change would not 
unfairly inhibit access to OCC's services or disadvantage or favor any 
particular user in relationship to another user.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    For the foregoing reasons, OCC believes that the proposed rule 
change is in the public interest, would be consistent with the 
requirements of the Act applicable to clearing agencies, and would not 
impact or impose a burden on competition.

(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 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-2020-014 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-2020-014. 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/Company-Information/Documents-and-Archives/By-Laws-and-Rules#rule-filings.
    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-2020-014 and 
should be submitted on or before December 9, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-25388 Filed 11-17-20; 8:45 am]
BILLING CODE 8011-01-P


