[Federal Register Volume 87, Number 41 (Wednesday, March 2, 2022)]
[Notices]
[Pages 11776-11779]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-04330]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94304; File No. SR-OCC-2021-014)]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval of Proposed Rule Change Concerning The Options 
Clearing Corporation's Cash and Investment Management

February 24, 2022.

I. Introduction

    On December 23, 2021, the Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2021-014 (``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 (i) add OCC's 
existing policy regarding cash and related investments to its Rules, 
and (ii) amend OCC's Rules governing the use of Clearing Fund 
contributions to ensure access in the event of the failure of an 
investment counterparty with whom OCC has invested cash collateral.\3\ 
The Proposed Rule Change was published for public comment in the 
Federal Register on January 12, 2022.\4\ The Commission has

[[Page 11777]]

received no comments regarding the substance of the Proposed Rule 
Change.\5\ 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 5, at 87 FR 1819.
    \4\ Securities Exchange Act Release No. 93916 (Jan. 12, 2022), 
87 FR 1819 (Jan. 12, 2022) (File No. SR-OCC-2021-014) (``Notice of 
Filing''). OCC also filed a related advance notice (SR-OCC-2021-803) 
(``Advance Notice'') with the Commission pursuant to Section 
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, entitled the Payment, Clearing, and 
Settlement Supervision Act of 2010 and Rule 19b-4(n)(1)(i) under the 
Exchange Act. 12 U.S.C. 5465(e)(1). 15 U.S.C. 78s(b)(1) and 17 CFR 
240.19b-4, respectively. The Advance Notice was published in the 
Federal Register on January 12, 2022. Securities Exchange Act 
Release No. 93915 (Jan. 6, 2022), 87 FR 1814 (Jan. 12, 2022) (File 
No. SR-OCC-2021-803). A Notice of No Objection to the Advance Notice 
was published in the Federal Register on February 23, 2022. See 
Securities Exchange Act Release No. 94270 (Feb. 17, 2022), 87 FR 
10262 (Feb. 23, 2022) (File No. SR-OCC-2021-803).
    \5\ The Commission received no comments on the Proposed Rule 
Change; however, since the Proposed Rule Change was also filed as an 
advance notice, all public comments received on the proposal are 
considered regardless of whether the comments are submitted on the 
Proposed Rule Change or the Advance Notice. The Commission received 
a comment letter on the Advance Notice that addressed market conduct 
generally; however, additional discussion is unnecessary because the 
substance of the letter does not bear on the basis for the 
Commission's decision to approve the Proposed Rule Change. Comments 
on the Advance Notice are available at https://www.sec.gov/comments/sr-occ-2021-803/srocc2021803.htm.
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II. Background \6\
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    \6\ Capitalized terms used but not defined herein have the 
meanings specified in OCC's Rules and By-Laws, available at https://www.theocc.com/about/publications/bylaws.jsp.
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    OCC is proposing to add to its Rules a policy governing OCC's cash 
and investment practices (the ``Cash and Investment Management Policy'' 
or ``Policy'') and amend its Rules regarding access to Clearing Fund 
contributions to address the failure of an investment counterparty to 
return Clearing Member cash collateral.

A. Policy Regarding Cash and Related Investments

    OCC's current rules include provisions governing the management and 
investment of both OCC's own funds and cash deposited by Clearing 
Members. Pursuant to its rules, OCC's Board of Directors (``Board'') 
may invest funds in excess of the amount needed as working capital in 
Government securities or such other securities or financial instruments 
as theBoard may from time to time approve.\7\ Further, OCC's rules 
allow it to invest in Government securities cash that it receives and 
holds from Clearing Members' margin requirements and Clearing Fund 
contributions.\8\ OCC proposes to add its Cash and Investment 
Management Policy to its current investment related rules.\9\
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    \7\ See By-Law Art. IX, Sec. 1.
    \8\ See OCC Rule 604(a); Rule 1006(c).
    \9\ See Notice of Filing, 87 FR 1820.
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    The proposed Cash and Investment Management Policy will build on 
OCC's existing Rules by (i) outlining the safeguarding standards for 
cash and related investments managed by OCC to minimize credit and 
liquidity risk, and (2) providing guidelines for investments permitted 
by OCC's Rules as described above. With regard to safeguarding cash, 
the Policy would allow OCC to hold OCC Cash \10\ and Clearing Member 
Cash \11\ in demand deposit accounts with commercial banks or in 
accounts at a Federal Reserve Bank. Consistent with OCC's current 
Rules, the Policy would require OCC to move all margin and Clearing 
Fund cash related to a suspended Clearing Member into a liquidating 
settlement account for use in meeting the obligations of the Clearing 
Member.\12\ The Policy would also require that OCC employ a bank 
account structure that segregates customer funds per applicable 
regulatory requirements \13\ and OCC's By-Laws and Rules.\14\
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    \10\ Under the proposed Policy, OCC Cash would include working 
capital related to future operating costs, inclusive of financial 
resources held to meet liquidity and resiliency requirements, 
proceeds from lines of credit, if any, maintained to support OCC's 
working capital, and investments made with OCC Cash. OCC Cash would 
also include OCC's Minimum Corporate Contribution. See Securities 
Exchange Act Release No. 92038 (May 27, 2021), 86 FR 29861 (Jun. 3, 
2021) (File No. SR-OCC-2021-003) (establishing a persistent minimum 
level of OCC's own capital that it would contribute to default 
losses or liquidity shortfalls prior to allocating a default loss to 
the Clearing Fund contributions of non-defaulting Clearing Members). 
OCC Cash would not include cash held in respect of OCC's pension 
plan, post-retirement welfare plan, or other deferred compensation 
plans.
    \11\ Under the proposed Policy, Clearing Member Cash would 
include cash collateral deposited as margin or Clearing Fund 
contributions, cash held in liquidating settlement accounts for 
suspended Clearing Members pursuant to OCC's Rule 1104, and 
investments made with Clearing Member Cash. Clearing Member Cash 
would also include proceeds from OCC's syndicated credit facility 
and liquidity facilities. See Securities Exchange Act Release No. 
88971 (May 28, 2020), 85 FR 34257 (Jun. 3, 2020) (File No. SR-OCC-
2020-804) (discussing OCC's revolving credit facility); Securities 
Exchange Act Release No. 89039 (Jun. 10, 2020), 85 FR 36444 (Jun. 
16, 2020) (File No. SR-OCC-2020-803) (discussing OCC's non-bank 
liquidity facility).
    \12\ See OCC Rule 1104.
    \13\ See 17 CFR 39.15 (requiring a derivatives clearing 
organization to comply with the segregation requirements section 4d 
of the Commodity Exchange Act).
    \14\ See OCC By-Laws Art. VI, Sec. 3(f) (providing for 
maintenance of segregated futures accounts).
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    With regard to investments, the Policy would provide that OCC's 
investment strategy is to preserve principal and maintain adequate 
liquidity. OCC outlines its specific investments in internal 
procedures, but will publish its investment strategy in its Qualitative 
Disclosures posted to OCC's public website.\15\ Under the proposed 
Policy, OCC will invest only with counterparties that meet the 
financial and operational standards outlined in OCC's procedures 
concerning its banking relationships.\16\
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    \15\ OCC's Qualitative Disclosures are available at https://www.theocc.com/Risk-Management/PFMI-Disclosures.
    \16\ Additionally, OCC's Third-Party Risk Management Framework 
describes the basis for evaluating financial institutions based on 
financial resources and operational capacity, such as whether a 
relationship is structured to allow prompt access to assets and 
whether a 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. See Securities Exchange Act Release No. 90797 (Dec. 23, 
2021), 85 FR 86592, 86593 (Dec. 30, 2021).
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    The Policy would affirm OCC's current practice of not investing 
Clearing Fund cash, which is instead maintained in accounts at a 
Federal Reserve Bank or a commercial bank. The Policy would also limit 
the investment of margin cash to instruments that provide liquidity to 
OCC by the following business day. In contrast, the Policy would not 
limit the investment of OCC cash in excess of 110 percent of its Target 
Capital Requirement \17\ to overnight transactions. Further, the Policy 
would require procedures to ensure that end-of-day margin cash balances 
remain above the aggregate level of any Required Cash Deposits to 
support OCC's management of liquidity risk.\18\ Under the Policy, 
interest or gain received on investments will belong to OCC except as 
otherwise provided for in OCC's Rules.\19\
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    \17\ OCC's Target Capital Requirement is the amount of 
shareholders' equity recommended by OCC management and approved by 
the Board to ensure compliance under both the Commission and 
Commodity Futures Trading Commission rules and to keep such 
additional amount the Board may approve for capital expenditures. 
See OCC Rule 101(T)(1).
    \18\ Under its Liquidity Risk Management Framework, OCC may 
require a Clearing Member Group to post cash collateral to 
supplement OCC's Available Liquidity Resources when stressed 
liquidity demands for that Clearing Member Group are above 
established thresholds or until the settlement demand is met. See 
Exchange Act Release No. 89014 (Jun. 4, 2020), 85 FR 35446, 35449 
(Jun. 10, 2020) (File No. SR-OCC-2020-003).
    \19\ See e.g., Securities Exchange Act Release No. 82502 (Jan. 
12, 2018), 82 FR 2825, 2826 (Jan. 19, 2018) (File No. SR-OCC-2017-
009) (stating that OCC would pass interest income earned on Clearing 
Fund cash deposited at a Federal Reserve Bank through to its 
Clearing Members).
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B. Access to Clearing Fund Contributions

    OCC's current Rules define the conditions under which OCC may use 
Clearing Fund assets to make good losses or expenses suffered by OCC or 
by the Clearing Fund with regard to borrowings made by OCC.\20\ OCC's 
Rules also define the conditions under which OCC may borrow Clearing 
Fund assets.\21\ OCC's Rules address OCC's authority to access Clearing 
Fund assets related to the failure of a bank or clearing organization 
to perform its obligations to OCC, but not the failure of an investment 
counterparty. OCC proposes a series of changes to its Rules,

[[Page 11778]]

described below, to broaden OCC's authority to access Clearing Fund 
assets to address the potential failure of an investment counterparty 
to meet its obligations to OCC.
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    \20\ See OCC Rule 1006(a) and (c).
    \21\ See OCC Rule 1006(f).
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    OCC proposes to amend its Rules 1006(a) and (c) to add ``investment 
counterparty'' to the list of counterparties whose failure to perform 
any obligation to OCC when due because of its bankruptcy, insolvency, 
receivership, suspension of operations, or any similar event that 
causes OCC to sustain a loss. OCC also proposes to amend its Rule 
1006(f) to authorize OCC to take possession of cash or securities 
deposited by Clearing Members as contributions to the Clearing Fund and 
securities in which the OCC has invested Clearing Fund cash 
contributions if OCC reasonably believes it necessary to borrow to meet 
its liquidity needs for same-day settlement as a result of the failure 
of an investment counterparty. However, the proposed changes to Rules 
1006(a), (c), and (f) would limit access to failures with respect to 
cash invested under Rules 604(a) and 1002(c), which deal with margin 
cash and Clearing Fund cash contributions, respectively.
    OCC is also proposing to restate and reorganize Rule 1006(f), which 
currently consists of a single paragraph, into four subparagraphs with 
the following headings: (1) Conditions; (2) Uses; (3) Term; Clearing 
Fund Charge; and (4) Substitution Requests. To eliminate a potential 
inconsistency with Rule 1006(c), OCC would revise the condition 
triggering OCC's access to the Clearing Fund from failure ``to achieve 
daily settlement'' to failure ``to perform any obligation to the 
Corporation when due.'' The proposed changes to 1006(f) also include 
the removal of a gendered pronoun and other administrative changes.

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.\22\ 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)(A) of the Exchange Act,\23\ and Rule 17Ad-22(e)(13) 
\24\ and Rule 17Ad-22(e)(16) \25\ thereunder, as described in detail 
below.
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    \22\ 15 U.S.C. 78s(b)(2)(C).
    \23\ 15 U.S.C. 78q-1(b)(3)(A).
    \24\ 17 CFR 240.17Ad-22(e)(13).
    \25\ 17 CFR 240.17Ad-22(e)(16).
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A. Consistency With Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Exchange Act requires, among other 
things, that the rules of a clearing agency be designed to promote the 
prompt and accurate clearance and settlement of securities transactions 
and, to the extent applicable, derivative agreements, contracts, and 
transactions as well as to ensure the safeguarding of securities and 
funds which are in the custody or control of the clearing agency.\26\ 
Based on its review of the record, and for the reasons described below, 
the Commission finds the proposal is consistent with Section 
17A(b)(3)(F) of the Exchange Act.
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    \26\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission believes that the proposed adoption of the Cash and 
Investment Management Policy would be consistent with the the 
safeguarding of securities and funds because the proposed changes would 
build on OCC's current Rules for managing cash and investments. The 
Policy, which OCC proposes to add to its Rules, includes standards for 
safeguarding OCC Cash and Clearing Member Cash through the application 
of OCC's counterparty standards, such as allowing OCC Cash and Clearing 
Member Cash to be deposited only in a Federal Reserve Bank or in demand 
deposit accounts with institutions that meet the standards set out in 
OCC's current risk management strategy to minimize the risk of loss or 
delay in access to such funds. Further, to support OCC's liquidity risk 
management practices, the Policy includes limitations on the permitted 
tenure of investments. The Commission believes, therefore, that adding 
the Policy to OCC's Rules is consistent with the safeguarding of 
securities and funds in OCC's custody or control.
    The Commission believes that the proposed changes to broaden OCC's 
authority to access Clearing Fund contributions are consistent with 
promoting the prompt and accurate clearance and settlement of 
securities transactions. The proposed changes will increase OCC's 
authority to access Clearing Fund contributions to address losses or 
shortfalls arising out of the failure of an investment counterparty to 
perform with regard to investments, margin cash or Clearing Fund cash. 
In the event that a counterparty with whom OCC has invested Clearing 
Member Cash has failed, the proposed rule change is designed to allow 
OCC to access the Clearing Fund to meet OCC's payment obligations. 
Ensuring that OCC is able to meet its payment obligations would, in 
turn, reduce the likelihood of a disruption to the timely settlement of 
derivates contracts and related transactions, such as the payment of 
premiums or cash settlements arising out of exercise and assignment 
activities. The Commission believes, therefore, that allowing OCC 
access to the Clearing Fund contributions in the event of a failure of 
an investment counterparty would promote the prompt and accurate 
clearance and settlement of securities transactions and, to the extent 
applicable, derivative agreements, contracts, and transactions.
    The Commission believes, therefore, that the proposal to add OCC's 
policy regarding cash and related investments to its Rules, and amend 
OCC's Rules governing the use of Clearing Fund contributions to ensure 
access in the event of the failure of an investment counterparty with 
whom OCC has invested cash collateral, is consistent with the 
requirements of Section 17A(b)(3)(F) of the Exchange Act.\27\
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    \27\ 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, among other 
things, 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 to take timely 
action to contain losses and liquidity demands and continue to meet its 
obligations.\28\
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    \28\ 17 CFR 240.17Ad-22(e)(13).
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    As the Commission has observed previously, OCC relies on the 
resources in its Clearing Fund to manage the potential losses arising 
out of the default of a Clearing Member under extreme but plausible 
market conditions.\29\ OCC also relies on such resources to manage 
potential liquidity shortfalls arising out of the default of a Clearing 
Member under extreme but plausible market conditions.\30\ In the event 
of a Clearing

[[Page 11779]]

Member default, unless it has access to the Clearing Fund contributions 
of non-defaulting Clearing Members, OCC's inability to access the 
defaulter's cash collateral due to the failure of an investment 
counterparty could inhibit OCC's ability to contain losses and 
liquidity demands. The Commission also believes that the proposed 
changes to restate and reorganize Rule 1006(f) would enhance the rule's 
clarity, and therefore help ensure OCC's authority to access Clearing 
Fund contributions to address losses or shortfalls arising out of the 
failure of an investment counterparty to perform with regard to 
investments of margin cash or Clearing Fund cash.
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    \29\ See Securities Exchange Act Release No. 87717 (Dec. 11, 
2019), 84 FR 68985, 68987 (Dec. 17, 2019) (File No. SR-OCC-2019-
009).
    \30\ See Securities Exchange Act Release No. 89014 (Jun. 4, 
2020), 85 FR 35446, 35450 (Jun. 10, 2020) (File No. SR-OCC-2020-003) 
(stating that cash contributions to the Clearing fund serve as an 
important source of liquidity and that non-cash contributions 
provide a source of collateral necessary for OCC to access sources 
of liquidity).
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    The Commission believes, therefore, that the proposed changes to 
broaden OCC's authority to access to Clearing Fund contributions are 
consistent with Rule 17Ad-22(e)(13) under the Exchange Act.\31\
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    \31\ 17 CFR 240.17Ad-22(e)(13).
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C. Consistency With Rule 17Ad-22(e)(16) Under the Exchange Act

    Rule 17Ad-22(e)(16) under the Exchange Act requires that a covered 
clearing agency establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to safeguard its own and 
its participants' assets, minimize the risk of loss and delay in access 
to these assets, and invest such assets in instruments with minimal 
credit, market and liquidity risks.\32\ In adopting Rule 17Ad-
22(e)(16), the Commission provided guidance for consideration by 
covered clearing agencies.\33\ Such guidance included the consideration 
of whether a covered clearing agency's investment strategy is 
consistent with its overall risk management strategy and fully 
disclosed to participants.\34\
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    \32\ 17 CFR 240.17Ad-22(e)(16).
    \33\ Covered Clearing Agency Standards, 81 FR at 70837.
    \34\ Id.
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    The Commission believes that the proposed Cash and Investment 
Management Policy would support and enhance OCC's current Rules 
regarding the investment of its and its participants' cash assets. As 
described above, the Policy outlines safeguarding standards, such as 
allowing OCC Cash and Clearing Member cash to be deposited only in a 
Federal Reserve Bank or in demand deposit accounts with institutions 
that meet the standards set out in OCC's current risk management 
strategy (e.g., OCC's Third Party Risk Management Framework) to 
minimize the risk of loss or delay in access to such funds. The 
Commission believes further that limiting the investment of cash to 
Government Securities, and specifically limiting the investment of 
Clearing Member Cash to instruments that provide liquidity to OCC by 
the following business day, is consistent with investing in assets with 
minimal credit, market, and liquidity risks.\35\
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    \35\ The Policy would allow OCC to invest its own cash in 
longer-tenured instruments only where such cash is in excess of 110 
percent of OCC's Target Capital Requirement.
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    The Commission believes, therefore, that the addition of the Cash 
and Investment Management Policy to OCC's Rules is consistent with Rule 
17Ad-22(e)(16) under the Exchange Act.\36\
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    \36\ 17 CFR 240.17Ad-22(e)(16).
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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 \37\ and the rules and regulations thereunder.
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    \37\ 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,\38\ that the Proposed Rule Change (SR-OCC-2021-014) be, 
and hereby is, approved.
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    \38\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
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    \39\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2022-04330 Filed 3-1-22; 8:45 am]
BILLING CODE 8011-01-P


