[Federal Register Volume 85, Number 228 (Wednesday, November 25, 2020)]
[Notices]
[Pages 75384-75388]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26012]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90464; File No. SR-OCC-2020-011]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Adopt a New Second Amended and 
Restated Cross-Margining Agreement Between The Options Clearing 
Corporation and The Chicago Mercantile Exchange

November 19, 2020.

I. Introduction

    On September 22, 2020, the Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2020-011 (``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 adopt a new Second Amended and Restated 
Cross-Margining Agreement (``Proposed X-M Agreement'') between OCC and 
the Chicago Mercantile Exchange (``CME'').\3\ The Proposed Rule Change 
was published for public comment in the Federal Register on October 7, 
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 63305.
    \4\ Securities Exchange Act Release No. 90065 (Oct. 1, 2020), 85 
FR 63305 (Oct. 7, 2020) (File No. SR-OCC-2020-011) (``Notice of 
Filing'').
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II. Background

    OCC and CME are parties to an Amended and Restated Cross-Margining 
Agreement dated May 28, 2008, as further amended by Amendment No. 1 
dated October 23, 2008 \5\ and Amendment No. 2 dated May 20, 2009 \6\ 
(the ``Existing X-M Agreement''). OCC and CME first implemented their 
cross-margining program (the ``X-M Program'') in 1989. The purpose of 
the X-M Program is to: (1) Facilitate the cross-margining of positions 
in options cleared by OCC with positions in futures and commodity 
options cleared

[[Page 75385]]

by CME and (2) address the fact that Clearing Members may have been 
required to meet higher margin requirements at each clearinghouse than 
were warranted by the risk of combined positions, because each 
portfolio was margined separately without regard to positions held in 
the other portfolio.\7\
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    \5\ Securities Exchange Act Release No. 58258 (Jul. 30, 2008), 
73 FR 46133 (Aug. 7, 2008) (File No. SR-OCC-2008-12) (amending the 
agreement to, among other things, permit money market fund shares as 
margin).
    \6\ Securities Exchange Act Release No. 60063 (Jun. 8, 2009), 74 
FR 28738 (Jun. 17, 2009) (File No. SR-OCC-2009-10) (amending the 
agreement to redefine the term ``Eligible Contracts'' and deleting 
the list of such contracts attached as Schedule A).
    \7\ Securities Exchange Act Release Nos. 26607 (Mar. 7, 1989), 
48 FR 10608 (Mar. 14, 1989) (File No. SR-OCC-89-1); 27296 (Sep. 26, 
1989) (File No. SR-OCC-89-11).
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    According to OCC, the Proposed X-M Agreement is designed to improve 
the clarity and readability by consolidating certain redundant 
provisions and moving certain operational details from the Existing X-M 
Agreement to a standalone service level agreement (``SLA'').\8\ OCC has 
also characterized the proposed updates to the Existing X-M Agreement 
as bringing it into conformity with current operational procedures and 
eliminating provisions that are out of date.\9\ Finally, according to 
OCC, the Proposed Rule Change is designed to streamline and consolidate 
certain related Clearing Member Agreements.\10\
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    \8\ See Notice of Filing, 85 FR at 63306.
    \9\ Id.
    \10\ Id.
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Creation of a Separate Service Level Agreement

    OCC proposes moving certain operational details from the Existing 
X-M Agreement to the new SLA, including: (1) Section 6 of the Existing 
X-M Agreement, which covers acceptable forms of collateral; (2) Section 
7 of the Existing X-M Agreement, which covers the timing, methods, and 
forms of daily settlement in the Cross-Margining accounts; and (3) 
Section 15 of Existing X-M Agreement, which covers OCC and CME's 
information-sharing regarding Joint and Affiliated Clearing Members, 
banks, and their financial status.
    The other changes to the Existing X-M Agreement that OCC proposes 
may be considered in two broad categories. The first category is 
modifications to conform the terms of the agreement to existing 
practices. The second category is modifications to the X-M Program 
(i.e., changes to both the Existing X-M Agreement and related 
processes) designed to improve existing practices.

Changes Conforming to Existing Practices

    The first category, modifications to conform the terms of the 
agreement to existing practices, includes various new or updated 
definitions: (1) The newly-defined terms ``FSOC,'' ``Dodd Frank Act,'' 
``DCO,'' ``Exchange Act,'' and ``SEC'' to reflect OCC and CME's 
registration statuses and designations as systemically important by the 
Financial Stability Oversight Counsel; \11\ (2) ``Eligible Contracts,'' 
to conform with the substance of the definition that was adopted in 
2009 as part of Amendment No. 2 to the Existing X-M Agreement, by 
including any contracts that have been ``jointly designated'' by OCC 
and CME as eligible for inclusion in the list of eligible contracts 
jointly maintained by OCC and CME; (3) ``Accepted Transaction,'' to 
provide certainty and clarity regarding the specific transactions for 
which OCC and CME would be jointly responsible, and would include all 
positions that are Eligible Contracts and have been included on the 
``daily margin detail report'' generated by OCC and transmitted to CME; 
(4) added and updated terms to describe the accounts related to the X-M 
Program and their purpose more accurately, including ``Proprietary 
Joint Margin Cash Account'' (in place of ``Proprietary Joint Margin 
Account''), ``Segregated Joint Margin Cash Account'' (in place of 
``Segregated Joint Margin Account''), ``Proprietary Joint Margin 
Custody Account'' (in place of ``Proprietary Joint Custody Account''), 
``Segregated Joint Margin Custody Account'' (in place of ``Segregated 
Joint Custody Account''), ``Proprietary Bank Account,'' ``Segregated 
Funds Bank Account,'' and ``Liquidating Accounts;'' (5) updated 
terminology to more accurately characterize the margin requirement set 
by OCC's System for Theoretical Analysis and Numerical Simulations 
(``STANS''), such as ``Posted Collateral'' (in place of ``Margin'' and 
``Initial Margin'') and the terms ``Collateral Requirement,'' 
``Collateral Deficit,'' and ``Collateral Excess'' to replace references 
to margin requirements and deficits or surpluses in respect to such 
requirements; and (6) defined terms that are already used and defined 
elsewhere in the Existing X-M Agreement but that are not currently 
listed in Section 1, including the defined terms ``AAA,'' ``Affiliated 
Clearing Member,'' ``CME Clearing Member,'' ``CME Rules,'' 
``Confidential Information,'' ``Indemnitor,'' ``Indemnified Party,'' 
``Losses,'' ``OCC Clearing Member,'' and ``OCC Rules.''
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    \11\ See Financial Stability Oversight Council (``FSOC'') 2012 
Annual Report, Appendix A, available at https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
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    The non-definitional changes or additions reflecting already-
existing practices include the following: (1) Removing references to X-
M Pledge Accounts and Section 3 of the Existing X-M Agreement, entitled 
``Establishment of X-M Pledge Accounts,'' as these accounts are no 
longer in use; (2) revising Section 5 of the Existing X-M Agreement to 
reflect that the amount of collateral to be deposited with regard to an 
X-M Account would be determined using OCC's approved margin 
methodology, because CME already elects to use the margin requirements 
calculated by OCC; (3) stating that OCC and CME would each be permitted 
to invest any cash deposited as collateral in their joint margin cash 
accounts overnight in certain eligible investments and with certain 
custodians, depositories, and counterparties, as OCC and CME may 
mutually agree, with each clearinghouse sharing equally in any proceeds 
received or losses incurred from such overnight investments, to 
formalize the existing practice of equally sharing proceeds or losses 
from the investment of X-M cash margin; (4) modifying Section 7 and the 
relevant definitions in Section 1 to reflect that the ``Margin and 
Settlement Report'' would become the ``Account Summary by Clearing 
Corporation Report'' provided by OCC to Clearing Members, as only OCC 
has provided the current Margin and Settlement Report to Clearing 
Members in practice; (5) revising Section 8 of the X-M Agreement to 
clarify that each clearinghouse will follow its own rules for the 
default of a Clearing Member, while using best efforts to coordinate 
with the other clearinghouse regarding liquidation or transfer of 
accepted transactions; (6) clarifying the requirement that one 
clearinghouse must notify the other when subjected to a court order to 
disclose confidential information, only to the extent permitted by law; 
(7) clarifying that while OCC and CME are not permitted to reject any 
transaction effected in an X-M Account without the other's express 
consent, this condition would not interfere with their respective 
abilities to implement recovery and orderly wind-down plans under their 
own rules; (8) adding electronic mail and removing facsimiles as 
acceptable forms of communication for notice requirements, in 
conformance with current communication standards; and (9) adding 
Section 17 to clarify that each clearinghouse is responsible for 
obtaining its own regulatory approval in connection with the 
implementation of the Proposed X-M Agreement.

Changes to the X-M Program

    The second category, modifications to the X-M Program (i.e., 
changes to both the Existing X-M Agreement and related processes), 
includes the following

[[Page 75386]]

updated definitions: (1) ``Losses,'' which is revised to include claims 
and other potential loss events; (2) ``Affiliate,'' which is revised to 
no longer state that 10% ownership of common stock would be deemed 
prima facie control of that entity for purposes of determining whether 
an entity is under direct or indirect control of a Clearing Member, but 
rather that the clearinghouses would make a facts-and-circumstances 
determination; and (3) ``Business Day,'' which is revised to state that 
when one or more markets on which cleared contracts trade are closed 
but banks are open, OCC and CME would each make their own determination 
regarding whether and to what extent to treat any such day as a 
Business Day for purposes of Section 7 of the Proposed X-M Agreement 
regarding daily settlements.
    The non-definitional modifications to the cross-margining 
arrangement include the following: (1) In Section 5 of the Proposed X-M 
Agreement, adding a requirement for OCC to provide 30 calendar days' 
prior notice to CME of any proposed changes to OCC's margin 
methodology, and any changes to the way collateral requirements are 
calculated with respect to X-M Accounts would be required to be agreed 
upon in writing in advance by OCC and CME; (2) in Section 5, requiring 
OCC and CME to each determine net amount of premiums, exercise 
settlement amounts, and variation margin due for its respective 
products (newly defined as ``Net Pay/Collect'') because the 
determination is made based upon the products cleared by OCC and CME, 
and to notify each other of the Net Pay/Collect amount in accordance 
with the SLA; (3) to the extent the two clearinghouses impose different 
concentration limits for eligible margin, requiring the use of the more 
conservative limits; (4) amending Section 7 to permit 30 minutes, 
rather than 15 minutes, for OCC and CME to approve or disapprove of 
revised Settlement Instructions to all for a full review of such 
instructions, to provide additional time during the process of 
performing a full review of such instructions; (5) amending Section 7 
to provide for the communication of intra-day instructions to X-M 
clearing banks to facilitate the deposit of collateral in response to 
an intra-day margin call from CME or OCC, and amending Section 1 to 
include the term ``Intra-day Instruction;'' (6) amending Section 8 to 
include new language regarding the manner in which OCC and CME would 
prepare for and manage a Clearing Member default, including the 
establishment of liquidation plan for the transfer or liquidation of 
the Clearing Member's Accepted Transactions, the execution of liquidity 
agreements to ensure that the clearinghouses can obtain liquidity 
during a default scenario and will be jointly and equally responsible 
for providing liquidity, the potential use of a joint liquidating 
auction with respect to X-M Accounts during a Clearing Member default 
scenario, and joint default management testing for the X-M accounts at 
least annually; (7) amending Section 13 to change the process and 
timing related to termination of the agreement because OCC and CME 
believe the revised language would reduce risk in the event of a 
termination; \12\ and (8) streamlining and consolidating six current 
Clearing Member template agreements into three templates, so that Joint 
Clearing Members and Affiliated Clearing Members would use the same 
template agreement for the appropriate account type (i.e., proprietary, 
non-proprietary, or market professional).
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    \12\ See Notice of Filing, 85 FR at 63310.
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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 such proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to such organization.\13\ 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 \14\ and Rules 17Ad-22(e)(20) 
and (13) thereunder.\15\
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    \13\ 15 U.S.C. 78s(b)(2)(C).
    \14\ 15 U.S.C. 78q-1(b)(3)(F).
    \15\ 17 CFR 240.17Ad-22(e)(20) and 17 CFR 240.17Ad-22(e)(13).
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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 remove 
impediments to and help perfect the mechanism of a national system for 
the prompt and accurate clearance and settlement of securities 
transactions; and to foster cooperation and coordination with persons 
engaged in the clearance and settlement of securities transactions.\16\ 
Based on its review of the record, and for the reasons described below, 
the Commission believes that the rule proposal as described above is 
consistent with the requirements of Section 17A(b)(3)(F).
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    \16\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission continues to view cross-margining programs as 
consistent with clearing agency responsibilities under Section 17A of 
the Exchange Act. Cross-margining programs enhance clearing member 
liquidity and systemic liquidity both in times of normal trading and in 
times of market stress by reducing margin requirements for clearing 
members, which could prove crucial in maintaining Clearing Member 
liquidity during periods of market volatility, and enhancing market 
liquidity as a whole. By enhancing market liquidity, cross-margining 
arrangements remove impediments to and help perfect the mechanism of a 
national system for the prompt and accurate clearance and settlement of 
securities transactions.\17\
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    \17\ Securities Exchange Act Release No. 38584 (May 8, 1997), 62 
FR 26602, 26604-05 (May 14, 1997) (File No. SR-OCC-97-04) 
(establishing a cross-margining agreement with OCC, CME, and the 
Commodity Clearing Corporation).
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    The Commission believes that the proposed updates to the Existing 
X-M Agreement to conform to current practices provide additional 
clarity and certainty around the X-M Program to the relevant clearance 
and settlement topics, including the determination of the collateral 
requirement for the X-M Program, daily settlement, and suspension and 
liquidation. For example, replacing ``Margin'' or ``Initial Margin'' 
with ``Posted Collateral'' clarifies that STANS is the methodology used 
to determine the collateral requirement for the X-M Program and does 
not produce a separate initial margin requirement. This conforming 
change ensures that both clearinghouses are like-minded regarding the 
characterization of the margin requirement. Similarly, by updating the 
agreement to reflect that the amount of collateral to be deposited with 
regard to an X-M Account would be determined using OCC's margin 
methodology, the change confirms the already-existing practice of CME 
using OCC's margin calculation. Moreover, the proposed streamlining and 
consolidation of the Clearing Member Agreements would provide Joint 
Clearing Members and Affiliated Clearing Members with additional 
clarity with respect to the X-M Program. Reducing the number of 
available templates from six to three by having both Joint Clearing 
Members and Affiliated Clearing Members use the same three templates 
eliminates redundancy and makes the preparation

[[Page 75387]]

of Clearing Member Agreements more efficient. In this manner, the 
proposed changes to conform the terms of the Existing X-M Agreement to 
already-existing practices and to consolidate the Clearing Member 
Agreements would be consistent with the removal of impediments to and 
help perfect the mechanism of a national system for the prompt and 
accurate clearance and settlement of securities transactions.
    The Commission believes that the Proposed Rule Change is also 
consistent with the fostering of cooperation and coordination with 
persons engaged in the clearance and settlement of securities 
transactions. Based on a review of the documents provided by OCC, the 
Commission believes that the SLA presents operational details, such as 
those related to daily settlement procedures, more clearly than the 
Existing X-M Agreement. By moving Sections 6, 7, and 15 of the Existing 
X-M Agreement to a separate and newly-created SLA, OCC will be able to 
modify specific terms regarding forms of collateral, daily settlement, 
and information-sharing provisions without having to modify the 
language of the Proposed X-M Agreement. The Commission believes that 
clarifying operational details and reducing the cost of updating such 
details would foster cooperation and coordination between OCC and CME.
    Similarly, the proposed changes to the X-M Program reflected in the 
Proposed X-M Agreement would modify certain program details that would 
augment the existing cooperation and coordination between OCC and CME. 
For example, OCC has proposed to amend Section 7 to facilitate the 
deposit of collateral in response to an intra-day margin call from CME 
or OCC by providing for the communication of intra-day instructions to 
X-M clearing banks with respect to the X-M Account. The non-
definitional modifications that are new to the X-M Program would also 
serve to enhance the already existing cooperation between the two 
clearinghouses. For example, the proposed addition of the 30-calendar 
day notice period for changes to OCC's margin methodology would provide 
CME with additional time to understand and address the implications of 
the methodology changes. The Commission believes, therefore, that the 
proposed changes to the X-M Program reflected in the Proposed X-M 
Agreement would be consistent with the fostering of cooperation and 
coordination between OCC and CME in the settlement of securities 
transactions.
    For the above reasons, the Commission believes that the Proposed 
Rule Change is designed to promote the prompt and accurate clearance 
and settlement of securities transactions and, to the extent 
applicable, derivative agreements, contracts and transactions; and to 
foster cooperation and coordination with persons engaged in the 
clearance and settlement of securities transactions. The Commission 
believes, therefore, that the Proposed Rule Change is consistent with 
the requirements of Section 17A(b)(3)(F) of the Exchange Act.\18\
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    \18\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(20) Under the Exchange Act

    Rule 17Ad-22(e)(20) under the Exchange Act requires that a covered 
clearing agency establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to identify, monitor, and 
manage risks related to any link the covered clearing agency 
establishes with one or more other clearing agencies, financial market 
utilities, or trading markets.\19\
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    \19\ 17 CFR 240.17Ad-22(e)(20). For the purposes of Rule 17Ad-
22(e)(20), the Commission defines a link, in part, as a set of 
contractual and operational arrangements between two clearing 
agencies that connect them for the purpose of cross-margining. 17 
CFR 240.17Ad-22(a)(8).
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    One of the primary objectives of the Proposed Rule Change is to 
update the Existing X-M Agreement to bring it into conformity with 
current operational procedures and eliminate provisions that are out of 
date. Updating the terms of the X-M Program to reflect existing 
operational procedures ensures that the two clearinghouses may 
incorporate the latest considerations and any resulting updated 
practices for identifying, monitoring, and managing risks associated 
with the link between OCC and CME. Moreover, the Proposed Rule Change 
also includes changes to the Existing X-M Agreement to reflect changes 
in the X-M Program. Regardless of whether the additions or changes in 
the Proposed X-M Agreement conform to already-existing practices or if 
they are new to the X-M Program, the terms of the Proposed X-M 
Agreement are, as discussed above, clearer than those in the Existing 
X-M Agreement. This greater clarity serves to reduce risk related to 
the link between the two clearinghouses; specifically, the increased 
clarity reduces potential operational risks by promoting a common 
understanding between the two clearinghouses of the terms governing the 
X-M Program.
    Further, the transfer of certain sections of the Existing X-M 
Agreement to a separate SLA would streamline the Proposed X-M Agreement 
and more clearly present operational details, such as those related to 
daily settlement procedures. The clearinghouses would also have the 
ability to review the service level details separately and modify them 
without requiring changes to the full agreement. Simplifying the 
presentation and maintenance of such operational details would serve to 
reduce risks associated with the link between OCC and CME.
    The Commission believes, therefore, that the Proposed Rule Change 
is consistent with the requirements of Rule 17Ad-22(e)(20) under the 
Exchange Act.

C. 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 
meet its obligations by, at a minimum, requiring the covered clearing 
agency's participants to participate in the testing and review of its 
default procedures at least annually.\20\ In recognizing that there may 
be a number of ways to address compliance with Rule 17Ad-22(e)(13), the 
Commission has stated that a covered clearing agency generally should 
consider, when establishing and maintaining policies and procedures 
that address participant-default rules and procedures: (1) Whether it 
involves its participants and other stakeholders in the testing and 
review of its default procedures; and (2) whether such testing and 
review is conducted at least annually or following material changes to 
the rules and procedures to ensure that the testing and review are 
practical and effective.\21\
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    \20\ 17 CFR 240.17Ad-22(e)(13).
    \21\ See Securities Exchange Act Release 78961, 81 FR 70786, 
70830 (Oct. 13, 2016) (File No. S7-03-14).
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    The Proposed X-M Agreement would require OCC and CME to conduct 
joint default management drills for the cross-margin accounts at least 
annually. The Commission believes that the adoption of rules requiring 
such joint default management tests on an at-least-annual basis is 
consistent with the involvement of stakeholders in default management 
testing as well as ensuring that such tests are conducted at least 
annually.
    The Commission believes, therefore, that the Proposed Rule Change 
is consistent with the requirements of Rule 17Ad-22(e)(13) under the 
Exchange Act.

[[Page 75388]]

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 \22\ and the rules and regulations thereunder.
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    \22\ 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,\23\ that the Proposed Rule Change (SR-OCC-2020-011) be, 
and hereby is, approved.
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    \23\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-26012 Filed 11-24-20; 8:45 am]
BILLING CODE 8011-01-P


