[Federal Register Volume 86, Number 99 (Tuesday, May 25, 2021)]
[Notices]
[Pages 28181-28183]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-10961]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91935; File No. SR-OCC-2021-004]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval of Proposed Rule Change Relating to Revisions 
to OCC's Auction Participation Requirements

May 19, 2021.

I. Introduction

    On March 19, 2021, the Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2021-004 (``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 amend the 
auction participation requirements set forth in Interpretation and 
Policy (``I&P'') .02(c) to OCC Rule 1104 (Creation of Liquidating 
Settlement Account).\3\ The Proposed Rule Change was published for 
public comment in the Federal Register on April 6, 2021.\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, 86 FR 17868.
    \4\ Securities Exchange Act Release No. 91445 (Mar. 31, 2021), 
86 FR 17868 (Apr. 6, 2021) (File No. SR-OCC-2021-004) (``Notice of 
Filing'').
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II. Background

    The Proposed Rule Change by OCC would change I&P .02(c) to OCC Rule 
1104 in order to clarify and streamline the process of on-boarding 
Clearing Members and non-Clearing Members as potential bidders in 
future auctions of a suspended Clearing Member's remaining portfolio.
    Under OCC's current Rules, following the suspension of any Clearing 
Member, OCC may take a number of steps designed to reasonably ensure 
that the Clearing Member's suspension is managed in an orderly fashion. 
Such steps may include liquidating the remaining collateral, open 
positions, and/or exercised/matured contracts (i.e., the remaining 
portfolio) of the suspended Clearing Member. I&P .02(a) to OCC Rule 
1104 clarifies that OCC ``may elect to use one or more private auctions 
to liquidate all or any part'' of a suspended Clearing Member's 
remaining portfolio. In this context, the term ``private auction'' 
means an auction open to bidders who are invited by OCC and in which 
such bidders submit bids on a confidential basis.\5\
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    \5\ Interpretation and Policy .02(a) to OCC Rule 1104.
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    I&P .02(c) to Rule 1104 establishes certain basic requirements for 
the prequalification of bidders who may participate in OCC's private 
auction process. I&P .02(c) states that OCC ``will invite all Clearing 
Members to apply to become pre-qualified auction bidders'' and that 
``[a]ny Clearing Member may be included in the pool of pre-qualified 
auction bidders by completing required auction documentation in 
advance.'' Further, I&P .02(c) states that ``[b]y posting notices on 
the [OCC]'s website from time to time, [OCC] will also invite non-
Clearing Members to apply to become pre-qualified auction bidders.'' 
I&P .02(c) establishes that for a non-Clearing Member to be pre-
qualified as an auction bidder, it ``must (i) actively trade in the 
asset class in which it proposes to submit bids, (ii) actively trade in 
markets cleared by [OCC], (iii) be sponsored by, and submit its bids 
through, a Clearing Member that has agreed to guarantee and settle any 
accepted bid made by such non-Clearing Member and (iv) complete 
required auction documentation in advance.'' I&P .02(c) also states 
that OCC ``will endeavor to maintain a pool of pre-qualified auction 
bidders by periodically reviewing such bidders and their 
qualifications'' and that OCC ``will promptly notify any pre-qualified 
auction bidder removed from the pool of pre-qualified auction 
bidders.''
    OCC proposes to revise I&P .02(c) to eliminate the requirement that 
Clearing Members must first be invited by OCC before Clearing Members 
may apply to become pre-qualified auction bidders. Instead, the revised 
language in I&P .02(c) would state that all Clearing Members are 
invited to participate in auctions of a suspended Clearing Member's 
remaining portfolio. The proposed revisions would retain the current 
requirement that, in order for a Clearing Member to be pre-qualified as 
an auction bidder, the Clearing Member would need to complete any 
required auction documentation in advance.
    OCC also proposes to revise I&P .02(c) to reflect that non-Clearing 
Members, in order to become pre-qualified auction bidders, would no 
longer need OCC to post invitation notices to its website from time to 
time. The proposed revisions to I&P .02(c) would also remove the 
existing requirements that a non-Clearing Member must actively trade in 
the asset class in which it proposes to submit bids and must actively 
trade in markets cleared by

[[Page 28182]]

OCC. OCC proposes to remove trade activity requirements because of its 
concern that the trading activity review process contemplated by I&P 
.02(c) could inappropriately limit the number of pre-qualified bidders 
by excluding, inter alia, prospective bidders who did not have 
sufficient trading activity that was visible to OCC at the time of pre-
qualification or review but were suitable bidders at the time of a 
particular auction.\6\ The proposed revisions would retain the other 
existing requirements that, to become a pre-qualified auction bidder, a 
non-Clearing Member would need to (i) have a Clearing Member sponsor to 
submit bids on behalf of the non-Clearing Member, (ii) have a Clearing 
Member agree to guarantee and settle any accepted bid made by the non-
Clearing Member, and (iii) complete any required auction documentation 
in advance.
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    \6\ See Notice of Filing supra note 4, 86 FR 17869.
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    Additionally, OCC proposes to remove two sentences related to the 
administration of OCC's pool of pre-qualified auction bidders. 
Currently, I&P .02(c) explains that OCC maintains a pool of pre-
qualified auction bidders, periodically reviews the pool of such 
bidders and their qualifications, and notifies any pre-qualified 
auction bidder that is removed from the pool. OCC proposes to remove 
the two sentences because OCC asserts that the revised text would 
eliminate the need for a periodic review and removal process. With the 
proposed revisions, a Clearing Member that terminates its required 
auction documentation or ceases to maintain its status as a Clearing 
Member would no longer be considered a pre-qualified auction bidder. 
Likewise, a non-Clearing Member whose Clearing Member sponsorship or 
guarantee is revoked or whose required auction documentation is 
terminated would no longer be considered a pre-qualified bidder.\7\
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    \7\ OCC notes that it would continue its current practice of 
maintaining a list of pre-qualified bidders through OCC's default 
management testing and review of default management testing results. 
Id.
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    The Proposed Rule Change would not make any changes to I&P .02(d) 
to Rule 1104, which describes the steps that OCC takes to select 
bidders to participate in a private auction, taking into consideration 
certain criteria. These criteria include the bidder's (and/or, in the 
case of a non-Clearing Member bidder, its sponsor Clearing Member's) 
financial strength, demonstrated activity in the products being 
auctioned and qualification to clear transactions in the asset class in 
which it proposes to submit bids.\8\ OCC notes that it would continue 
to perform this pre-auction review as described in I&P .02(d) because 
it would allow OCC to select bidders for a particular auction based on 
an objective review that gives due consideration to the specific 
portfolio that would be auctioned. OCC also believes that reviewing the 
criteria set forth in I&P .02(d) with respect to a particular auction 
is the most appropriate way for OCC to identify, monitor, and manage 
the material risks arising from a non-Clearing Member auction 
participant in accordance with Rule 17Ad-22(e)(19).\9\
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    \8\ Interpretation and Policy .02(d) to OCC Rule 1104.
    \9\ See Notice of Filing supra note 4, 86 FR 17870. Rule 17Ad-
22(e)(19) requires OCC to establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to 
identify, monitor, and manage the material risks to OCC arising from 
arrangements in which firms that are indirect participants in the 
covered clearing agency rely on the services provided by direct 
participants to access the covered clearing agency's payment, 
clearing, or settlement facilities. See 17 CFR 240.17Ad-22(e)(19).
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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.\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\ and Rule 17Ad-22(e)(13) 
\12\ thereunder, as described in detail below.
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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)(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 that the rules of 
a clearing agency be designed to, among other things, 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 the proposed changes to revise OCC's 
auction participation requirements as described above is consistent 
with assuring the safeguarding of securities and funds currently in 
OCC's custody and control, because the proposed modifications would 
enhance OCC's ability to hold robust, efficient auctions that would 
improve the likelihood of the clearing agency having sufficient 
resources to cover potential credit losses under adverse market 
conditions.
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
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    OCC proposes to revise I&P .02(c) so that all Clearing Members are 
eligible to become pre-qualified bidders, without requiring invitations 
from OCC beforehand. This change would help to ensure that Clearing 
Members understand that receiving an invitation from OCC beforehand is 
not an administrative obstacle to auction participation. This should 
help facilitate the on-boarding process for Clearing Members, which in 
turn could lead to increased Clearing Member participation in the 
auctions. Second, the proposal to remove administrative obstacles to 
non-Clearing Member auction participation--specifically, by removing 
the OCC invitation notice requirement on OCC's website and trading 
activity requirements to pre-qualify as a bidder generally, since 
trading activity would be considered later as part of a selection 
process for participation in a specific auction--could also encourage 
more non-Clearing Members to become bidders, and increase the number of 
participants in private auctions overall. Appropriate safeguards would 
remain in place for non-Clearing Member participation, as OCC would 
still require a non-Clearing Member to (i) have a Clearing Member 
sponsor submit bids on behalf of the non-Clearing Member, (ii) have a 
Clearing Member agree to guarantee and settle any accepted bid made by 
the non-Clearing Member, and (iii) complete any required auction 
documentation in advance to become a pre-qualified bidder. By retaining 
these non-Clearing Member participation requirements, OCC would have 
the necessary information to continue performing pre-auction reviews of 
all bidders, whether Clearing Member or non-Clearing Member, on a case-
by-case basis using the criteria established in I&P .02(d).
    Increasing the total number of auction participants would promote 
competition and likely generate more competitive bids, which would in 
turn increase the likelihood that OCC would be able to sell the 
defaulting Clearing Member's portfolio at a more favorable price. This 
would minimize OCC's need to draw upon Clearing Members' collateral in 
OCC's custody or control in the event of a Clearing Member default. 
Therefore,

[[Page 28183]]

the Commission believes that the proposal is consistent with assuring 
the safeguarding of securities and funds which are in OCC's custody or 
control.
    The Commission believes, therefore, that the proposal to modify the 
auction participation requirements for Clearing Members and non-
Clearing Members is consistent with the requirements of Section 
17A(b)(3)(F) of the Exchange Act.\14\
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    \14\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(13) Under the Exchange Act

    Rule 17Ad-22(e)(13) under the Exchange Act requires OCC to 
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.\15\
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    \15\ 17 CFR 240.17Ad-22(e)(13).
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    Based on its review of the record, and for the reasons described 
below, the Commission believes that the proposed changes described 
above are consistent with Rule 17Ad-22(e)(13) under the Exchange Act. 
The proposed changes would facilitate on-boarding of potential bidders 
by removing certain administrative steps in the process of becoming a 
pre-qualified auction bidder. For example, the proposal would remove an 
administrative step so that Clearing Members would not need OCC's 
initial invitation for consideration as a pre-qualified bidder. As long 
as a Clearing Member completes the required documentation in advance, 
the Clearing Member could be considered for the pre-qualified bidder 
pool. Meanwhile, OCC proposes to remove the initial step for OCC to 
post a website invitation notice to non-Clearing Members from time to 
time, and to remove existing limitations on non-Clearing Members 
seeking to become pre-qualified bidders (e.g., that a non-Clearing 
Member must currently fulfill certain trading activity requirements to 
pre-qualify as a bidder generally, as opposed to having its trading 
activity considered later during a selection process for participation 
in a specific auction). Additionally, OCC's proposal to eliminate 
periodic reviews of the pre-qualified bidder pool and the accompanying 
removal process would simplify the administration of pre-qualified 
bidders, as it would eliminate a bidder review process that appears 
duplicative in purpose to the I&P .02(d) pre-auction reviews that OCC 
has stated it would continue to perform.\16\
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    \16\ The Commission also believes that in the case of non-
Clearing Member auction participants, OCC will continue to meet the 
requirements of Rule 17Ad-22(e)(19) regarding ``indirect 
participants,'' as OCC intends to continue performing the I&P .02(d) 
pre-auction reviews for both Clearing Member and non-Clearing Member 
participants. See 17 CFR 240.17Ad-22(e)(19).
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    Removing administrative obstacles to the bidder on-boarding process 
would increase the likelihood that OCC would have a large enough bidder 
pool and the operational capacity to hold effiicient, competitive 
auctions in a timely manner, and as a result cover losses and meet 
liquidity demands promptly. The Commission believes, therefore, that 
the proposal to modify auction participant requirements for Clearing 
Members and non-Clearing Members is consistent with the requirements of 
Rule 17Ad-22(e)(13) under the Exchange Act.\17\
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    \17\ 17 CFR 240.17Ad-22(e)(13).
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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 \18\ and the rules and regulations thereunder.
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    \18\ 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,\19\ that the Proposed Rule Change (SR-OCC-2021-004) be, 
and hereby is, approved.
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    \19\ 15 U.S.C. 78s(b)(2).
    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-10961 Filed 5-24-21; 8:45 am]
BILLING CODE 8011-01-P


