[Federal Register Volume 87, Number 67 (Thursday, April 7, 2022)]
[Notices]
[Pages 20495-20497]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-07342]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94583; File No. SR-OCC-2022-005]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Concerning Revisions to OCC's 
Partial Tear-Up Rules

April 1, 2022.
    Pursuant to Section 19(b) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on March 22, 2022, 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 primarily by 
OCC. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change would: (i) Amend OCC Rule 1111(e) to 
clarify the nature of the claim issued to Clearing Members that receive 
a pro rata payment as a result of a Partial Tear-Up; and (ii) amend OCC 
Rule 1111(g) to impose a limit on the amount of the special charge that 
can be levied on Clearing Members to re-allocate losses, costs and fees 
among resulting from a Partial Tear-Up among all non-defaulting 
Clearing Members. The proposed changes to OCC Rules are included in 
Exhibit 5 of File No. SR-OCC-2022-005. Material proposed to be added to 
OCC's Rules as currently in effect is underlined and material proposed 
to be deleted is marked in strikethrough text. All capitalized terms 
not defined herein have the same meaning as set forth in the OCC By-
Laws and Rules.\3\
---------------------------------------------------------------------------

    \3\ OCC's By-Laws and Rules can be found on OCC's public 
website: https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
---------------------------------------------------------------------------

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
    In 2018, OCC adopted enhanced and new tools for recovery scenarios, 
including a Partial Tear-Up process designed to return OCC to a matched 
book by extinguishing positions that remain open after OCC has 
attempted one or more auctions.\4\ The process for determining and 
terminating Partial Tear-Up Positions is set forth in OCC Rule 1111(e). 
In adopting Rule 1111(e), OCC noted that its Partial Tear-Up process 
would be initiated if OCC determined that potential losses from 
remaining positions of the defaulting member would exceed OCC's 
financial resources and that the process was designed to be initiated 
in advance of the exhaustion of OCC's financial resources in order to 
maintain its ability to meet obligations to non-defaulting members.\5\ 
OCC also acknowledged that the process may be used to allocate losses 
in the event OCC's resources are insufficient to pay the Partial Tear-
Up Price.\6\ When the Partial Tear-Up process is used to allocate 
losses, Rule 1111(e)(iii) currently provides that each Clearing Member 
will receive a pro rata payment based on OCC's remaining resources and 
an unsecured claim against OCC for the difference between the pro rata 
amount received and the Partial Tear-Up Price.
---------------------------------------------------------------------------

    \4\ See Exchange Act Release No. 34-83916 (August 23, 2018); 83 
FR 44076 (August 29, 2018) (File No. SR-OCC-2017-020).
    \5\ 83 FR at 44078.
    \6\ Id.
---------------------------------------------------------------------------

    An unsecured claim issued pursuant to Rule 1111(e) provides a 
mechanism for OCC to compensate Clearing Members that receive a pro 
rata payment when warranted by particular circumstances (e.g., when 
funds are subsequently recovered from a defaulted Clearing Member or 
the estate of the defaulted Clearing Member). However, OCC Rules do not 
specify a specific payment obligation for these claims. The purpose of 
the proposed amendment to Rule 1111(e) is to provide clarity regarding 
the nature of the claim issued following a Partial Tear-Up. More 
specifically, the revisions to Rule 1111(e) would clarify that: (i) A 
Clearing Member receiving a pro rata payment following a partial tear-
up will have a claim for the value of the difference between the pro 
rata amount received and the Partial Tear-Up Price; and (ii) such a 
claim shall be an unsecured claim on any recovery from a suspended or 
defaulted Clearing Member (or from the estate of a suspended or 
defaulted Clearing Member). Clarification of the nature of the claim 
arising out of Rule 1111(e) would, in turn, clarify that such claims 
would not provide a basis for triggering close-out netting under 
Article VI, Section 27 of OCC's By-Laws.\7\
---------------------------------------------------------------------------

    \7\ OCC By-Laws Art. VI, Section 27(a)(i), regarding default or 
insolvency of OCC, requires OCC to notify various stakeholders if 
OCC fails to comply with an undisputed obligation to pay money or 
deliver property to a Clearing Member under the By-Laws or Rules for 
a period of thirty days from the date that OCC receives notice from 
the Clearing Member of the past due obligation.
---------------------------------------------------------------------------

    As part of its Partial Tear-Up process, OCC also adopted Rule 
1111(g), which provides the Board with discretionary authority to levy 
a special charge against remaining non-defaulting Clearing Members for 
the purpose of re-allocating the losses, costs and fees imposed on 
holders of torn-up positions. Following the adoption of OCC Rule 1111, 
OCC received a letter from the Futures Industry Association (``FIA'') 
requesting that OCC limit the amount of the special charge that could 
be levied by the Board pursuant to Rule 1111(g) to the amount of a 
Clearing Member's required contribution to the Clearing Fund.\8\ OCC 
has considered this request and proposes to amend Rule 1111(g) to cap 
the amount of the special charge levied under the rule to the amount of 
the Clearing Members required contribution to the Clearing Fund at the 
time of the special charge. The purpose of this change is to improve 
Clearing Members' ability to measure, monitor and manage their 
potential exposure to OCC.
---------------------------------------------------------------------------

    \8\ The letter OCC received from the FIA has been provided as 
Exhibit 3A to File No. SR-OCC-2022-005.

---------------------------------------------------------------------------

[[Page 20496]]

(2) Statutory Basis
    Section 17A(b)(3)(F) \9\ of the Exchange Act requires, among other 
things, that the rules of a clearing agency be designed, in general, to 
protect investors and the public interest. OCC believes that the 
proposed rule change is consistent with Section 17A(b)(3)(F) of the 
Act.\10\ As noted above, the proposed revisions to OCC Rule 1111(e) 
protect investors and the public interest by more clearly describing 
the nature of the claim issued to Clearing Members that receive a pro 
rata payment following a Partial Tear-Up. The clarity provided by these 
amendments would protect investors and the public interest by 
eliminating the potential for ambiguity or uncertainty regarding the 
nature of a claim issued under Rule 1111(e), which could undermine 
OCC's resiliency. The proposal to limit the amount of the special 
charge levied under Rule 1111(g) would also improve Clearing Members' 
ability to measure and monitor their potential exposure to OCC allowing 
Clearing Members to more effectively manage their risk. Accordingly, 
OCC believes the proposed revisions to Rule 1111(g) would protect 
investors and the public interest by enhancing Clearing Members' 
ability to measure, monitor and manage their risk. The proposed rule 
change is not inconsistent with the existing rules of OCC, including 
any other rules proposed to be amended.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78q-1(b)(3)(F).
    \10\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    In addition, SEC Rule 17Ad-22(e)(23)(ii) \11\ provides that a 
clearing agency must establish, implement, maintain and enforce written 
policies and procedures reasonably designed to provide sufficient 
information to enable participants to identify and evaluate the risks, 
fees, and other material costs they incur by participating in the 
covered clearing agency. The proposed revisions to both Rule 1111(e) 
and Rule 1111(g) would provide additional clarity that would help 
Clearing Members identify and evaluate the risks, fees and other costs 
that they may incur as a result of the participation in OCC's services. 
The proposed revisions to Rule 1111(e) clarify the nature of the claim 
that would be issued to Clearing Members if a Partial Tear-Up was used 
to allocate losses, and the change to Rule 1111(g) would implement a 
cap on the charge that could be levied under this provision. Both of 
these changes should improve Clearing Members' ability to assess the 
potential risks, fees and costs that they may incur by participating in 
OCC. Accordingly, OCC believes that the proposed rule change is 
reasonably designed to provide participants sufficient information to 
identify and evaluate the risks, fees, and other material costs of 
participating in OCC's services, in accordance with SEC Rule 17Ad-
22(e)(23)(ii).\12\
---------------------------------------------------------------------------

    \11\ 17 CFR. 240.17AD-22(e)(23)(ii).
    \12\ 17 CFR. 240.17AD-22(e)(23)(ii).
---------------------------------------------------------------------------

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

    Section 17A(b)(3)(I) of the Act \13\ 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 proposal to clarify the nature of the claim issued to 
a Clearing Member that received a pro rata payment following a Partial 
Tear-Up would impose any burden on competition because it would merely 
confirm the current meaning of OCC's rules as opposed to changing it. 
The proposed clarification would not inhibit access to OCC's services 
in any way, applies to all Clearing Members and does not disadvantage 
or favor any particular user in relationship to another user. OCC does 
not believe that the proposed limit to the amount of the special charge 
that can be levied under Rule 1111(g) would impose any burden on 
competition. All Clearing Members would benefit from the improved 
clarity provided by the proposed limit, which would in no way inhibit 
access to OCC's services and does not disadvantage or favor any 
particular user in relationship to another user. Accordingly, OCC does 
not believe that the proposed rule change would have any impact or 
impose a burden on competition.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments on the proposed rule change 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 [email protected]. Please include 
File Number SR-OCC-2022-005 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-2022-005. 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.

[[Page 20497]]

    All submissions should refer to File Number SR-OCC-2022-005 and 
should be submitted on or before April 28, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-07342 Filed 4-6-22; 8:45 am]
BILLING CODE 8011-01-P


