
[Federal Register Volume 88, Number 222 (Monday, November 20, 2023)]
[Notices]
[Pages 80781-80783]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-25545]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98932; File No. SR-OCC-2023-007]


Self-Regulatory Organizations; Options Clearing Corporation; 
Notice of Filing of Partial Amendment No. 1 and Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change, as Modified by Partial Amendment No. 1, Concerning 
Modifications to the Amended and Restated Stock Options and Futures 
Settlement Agreement Between The Options Clearing Corporation and the 
National Securities Clearing Corporation

November 14, 2023.

I. Introduction

    On August 10, 2023, the Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2023-007 (``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 modify the 
Amended and Restated Stock Options and Futures Settlement Agreement 
dated August 5, 2017, between OCC and National Securities Clearing 
Corporation, OCC's rules related to liquidity risk management, and 
OCC's rules related to default management in connection with the 
proposed modifications to the Existing Accord.\3\ The Proposed Rule 
Change was published for public comment in the Federal Register on 
August 30, 2023.\4\ The Commission has received no comments regarding 
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, at 88 FR 59976.
    \4\ Securities Exchange Act Release No. 98215 (Aug. 24, 2023), 
88 FR 59976 (Aug. 30, 2023) (File No. SR-OCC-2023-007) (``Notice of 
Filing''). OCC also filed a related advance notice (SR-OCC-2023-801) 
(``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 August 30, 2023. Securities Exchange Act Release 
No. 98214 (Aug. 24, 2023), 88 FR 59988 (Aug. 30, 2023) (File No. SR-
OCC-2023-801).
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    On September 25, 2023, pursuant to Section 19(b)(2) of the Exchange 
Act,\5\ the Commission designated a longer period within which to 
approve, disapprove, or institute proceedings to determine whether to 
approve or disapprove the Proposed Rule Change.\6\ On November 8, 2023, 
OCC filed a Partial Amendment No. 1 to the Proposed Rule Change.\7\ The 
Commission is publishing this notice to solicit comments on Partial 
Amendment No. 1 from interested persons and is instituting proceedings, 
pursuant to Section 19(b)(2)(B) of the Exchange Act,\8\ to determine 
whether to approve or disapprove the proposed rule change, as modified 
by the Partial Amendment No. 1 (hereinafter defined as ``Proposed Rule 
Change'').
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    \5\ 15 U.S.C. 78s(b)(2).
    \6\ Securities Exchange Act Release No. 98508 (Sep. 25, 2023), 
88 FR 67407 (Sep. 29, 2023) (File No. SR-OCC-2023-007).
    \7\ Partial Amendment No. 1 delays implementation of the 
proposed change. As amended, OCC would implement the proposed rule 
change within 90 days of receiving all necessary regulatory 
approvals and would announce the specific date of implementation on 
its public website at least 14 days prior to implementation. The 
delay is proposed in light of the technical system changes that are 
required to implement the liquidity stress testing enhancements and 
to be able to provide sufficient notice to Clearing Members 
following receipt of approval.
    \8\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposed Rule Change

    NSCC is a clearing agency that provides clearing, settlement, risk 
management, and central counterparty services for trades involving 
equity securities. OCC is the sole clearing agency for standardized 
equity options

[[Page 80782]]

listed on national securities exchanges registered with the Commission, 
including options that contemplate the physical delivery of equities 
cleared by NSCC in exchange for cash (``physically settled'' 
options).\9\ OCC also clears certain futures contracts that, at 
maturity, require the delivery of equity securities cleared by NSCC in 
exchange for cash. As a result, the exercise and assignment of certain 
options or maturation of certain futures cleared by OCC effectively 
results in stock settlement obligations to be cleared by NSCC (``E&A 
Activity''). NSCC and OCC maintain a legal agreement, generally 
referred to by the parties as the ``Accord'' agreement, that governs 
the processing of such E&A Activity for firms that are members of both 
OCC and NSCC (``Common Members'').
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    \9\ The term ``physically-settled'' as used throughout the OCC 
Rulebook refers to cleared contracts that settle into their 
underlying interest (i.e., options or futures contracts that are not 
cash-settled). When a contract settles into its underlying interest, 
shares of stock are sent (i.e., delivered) to contract holders who 
have the right to receive the shares from contract holders who are 
obligated to deliver the shares at the time of exercise/assignment 
in the case of an option and maturity in the case of a future.
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    Under certain circumstances, the Accord currently allows NSCC not 
to guaranty the settlement of securities arising out of E&A Activity 
for a defaulted Common Member. To the extent NSCC chooses not to 
guaranty such transactions, OCC would have to engage in an alternate 
method of settlement outside of NSCC to manage the default of the 
Common Member, which presents two issues. First, based on historical 
data, the cash required for such alternative settlement could be as 
much as $300 billion.\10\ Second, settlement outside of NSCC introduces 
significant operational complexities.\11\
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    \10\ See Notice of Filing, 88 FR at 59977.
    \11\ See id.
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    OCC proposes to revise the Accord to address the liquidity and 
operational issues that arise under the current Accord. Specifically, 
the proposed changes to the Accord would require NSCC to guaranty the 
positions of a defaulting Common Member if OCC makes a payment to cover 
the incremental risk posed by such positions (the ``Guaranty 
Substitution Payment'' or ``GSP''). Based on historical data, the GSP 
could be as much as $6 billion (in contrast with the potential $300 
billion required for alternative settlement).\12\
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    \12\ See id.
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    The total amount owed by the Common Member would be a combination 
of the member's unpaid deposit to the NSCC Clearing Fund (``Required 
Fund Deposit'') \13\ and Supplemental Liquidity Deposit.\14\ The SLD 
portion of the GSP would be the unpaid SLD associated with any E&A 
Activity. The Required Fund Deposit portion of the GSP, however, would 
be estimated by reference to the day-over-day change in gross market 
value of the Common Member's positions at NSCC as a proxy for 
estimating what percentage of the member's Required Fund Deposit is 
attributable to E&A Activity. OCC acknowledges that this methodology 
overestimates or underestimates the Required Fund Deposit attributable 
to a Common Member's E&A activity, but states that current technology 
constraints prohibit NSCC from performing a precise calculation of the 
GSP on a daily basis for every Common Member.\15\
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    \13\ The Required Fund Deposit is calculated pursuant to Rule 4 
(Clearing Fund) and Procedure XV (Clearing Fund Formula and Other 
Matters) of the NSCC Rules. See Notice of Filing, 88 FR at 59979, 
n.27.
    \14\ Under the NSCC Rules, NSCC collects additional cash 
deposits from those Members who would generate the largest 
settlement debits in stressed market conditions, referred to as 
``Supplemental Liquidity Deposits'' or ``SLD.'' See Rule 4A of the 
NSCC Rules. See also Notice of Filing, 88 FR at 59979, n.28.
    \15\ See Notice of Filing, 88 FR at 59979-80. OCC and NSCC have 
agreed that performing the necessary technology build at this time 
would delay the implementation of this proposal. Therefore, NSCC 
would consider incorporating those technology updates into future 
revisions to the Accord, for example in connection with a move to a 
shorter settlement cycle in the U.S. equities markets. See Notice of 
Filing, 88 FR at 59980, n.31.
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    In addition to revising the Accord, OCC also proposes changes to 
its rules in connection with the proposed changes to the Accord. For 
example, OCC proposes to change its rules to permit payment of the GSP 
to NSCC. OCC further proposes to revise its rules related to liquidity 
risk management to account for the potential need to make such a 
payment to NSCC. OCC proposes to incorporate the GSP into its stress 
testing framework as a liquidity demand and would estimate the 
potential demand based on the peak GSP observed over a one-year 
lookback.\16\ Such stress testing would be based on the total GSP, 
rather than the portion estimated to arise out of E&A activity.
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    \16\ Because not all types of expirations are the same with 
respect to the notional amount of activity sent by OCC to NSCC, OCC 
proposes to use five separate categories of expirations with 
potentially different GSP amounts to apply. See Notice of Filing, 88 
FR at 59986 (defining the following five categories: standard 
monthly expiration, end of week expirations, end of month 
expiration, bank holiday expirations, and daily expirations).
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III. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act to determine whether the Proposed Rule 
Change should be approved or disapproved.\17\ Institution of 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the Proposed Rule Change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to comment on the Proposed Rule Change, 
which would provide the Commission with arguments to support the 
Commission's analysis as to whether to approve or disapprove the 
Proposed Rule Change.
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    \17\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\18\ the 
Commission is providing notice of the grounds for disapproval under 
consideration. The Commission is instituting proceedings to allow for 
additional analysis of, and input from commenters with respect to, the 
Proposed Rule Change's consistency with Section 17A of the Exchange Act 
\19\ and the rules thereunder, including the following provisions:
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    \18\ Id.
    \19\ 15 U.S.C. 78q-1.
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     Section 17A(b)(3)(F) of the Exchange Act,\20\ which 
requires, among other things, that the rules of a clearing agency are 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions and derivative agreements, contracts, and 
transactions; to assure the safeguarding of securities and funds which 
are in the custody or control of the clearing agency or for which it is 
responsible; to foster cooperation and coordination with persons 
engaged in the clearance and settlement of securities transactions; 
and, in general, to protect investors and the public interest;
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    \20\ 15 U.S.C. 78q-1(b)(3)(F).
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     Rule 17Ad-22(e)(1) under the Exchange Act,\21\ which 
requires that a covered clearing agency establish, implement, maintain, 
and enforce written policies and procedures reasonably designed to 
provide for a well-founded, clear, transparent, and enforceable legal 
basis for each aspect of its activities in all relevant jurisdictions;
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    \21\ 17 CFR 240.17Ad-22(e)(1).
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     Rule 17Ad-22(e)(7) under the Exchange Act,\22\ which 
requires, in part,

[[Page 80783]]

that a covered clearing agency establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to 
effectively measure, monitor, and manage the liquidity risk that arises 
in or is borne by the covered clearing agency, including measuring, 
monitoring, and managing its settlement and funding flows on an ongoing 
and timely basis, and its use of intraday liquidity; and
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    \22\ 17 CFR 240.17Ad-22(e)(7).
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     Rule 17Ad-22(e)(20) under the Exchange Act,\23\ which 
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.
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    \23\ 17 CFR 240.17Ad-22(e)(17)(i).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the Proposed Rule Change. In particular, the Commission invites 
the written views of interested persons concerning whether the Proposed 
Rule Change is consistent with Section 17A(b)(3)(F) \24\ and Rules 
17Ad-22(e)(1), (e)(7), and (e)(20) \25\ of the Exchange Act, or any 
other provision of the Exchange Act, or the rules and regulations 
thereunder. Although there do not appear to be any issues relevant to 
approval or disapproval that would be facilitated by an oral 
presentation of views, data, and arguments, the Commission will 
consider, pursuant to Rule 19b-4(g) under the Exchange Act,\26\ any 
request for an opportunity to make an oral presentation.\27\
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    \24\ 15 U.S.C. 78q-1(b)(3)(F).
    \25\ 17 CFR 240.17Ad-22(e)(1), 17 CFR 240.17Ad-22(e)(7), and 17 
CFR 240.17Ad-22(e)(20).
    \26\ 17 CFR 240.19b-4(g).
    \27\ Section 19(b)(2) of the Exchange Act grants to the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    The Commission asks that commenters address the sufficiency of 
OCC's statements in support of the Proposed Rule Change, which are set 
forth in the Notice of Filing \28\ in addition to any other comments 
they may wish to submit about the Proposed Rule Change.
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    \28\ See OCC Notice of Filing, supra note 4.
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    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-2023-007 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-2023-007. 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 (https://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 
a.m. and 3 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.
    Do not include personal identifiable information in submissions; 
you should submit only information that you wish to make available 
publicly. We may redact in part or withhold entirely from publication 
submitted material that is obscene or subject to copyright protection.
All submissions should refer to File Number SR-OCC-2023-007 and should 
be submitted on or before December 11, 2023. Rebuttal comments should 
be submitted by December 26, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(31).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-25545 Filed 11-17-23; 8:45 am]
BILLING CODE 8011-01-P


