[Federal Register Volume 77, Number 198 (Friday, October 12, 2012)]
[Notices]
[Pages 62308-62310]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-25088]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68002; File No. AN-OCC-2012-03]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Advance Notice and Notice of No Objection To
Replace The Options Clearing Corporation's Credit Facility
October 5, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4(n)(1)(i),\2\ notice is hereby
given that on September 26, 2012, The Options Clearing Corporation
(``OCC'') filed with the Securities and Exchange Commission
(``Commission'') an advance notice 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 change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4(n)(i).
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I. Clearing Agency's Statement of the Terms of Substance for the
Advance Notice
In connection with a change to its operations (the ``Change''), OCC
proposes to replace its credit facility designed to be used to meet
obligations of OCC arising out of the default or suspension of a
clearing member of OCC or the insolvency of any bank or clearing
organization doing business with OCC.
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Advance Notice
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed change and
discussed any comments it received on the proposed change. The text of
these statements may be examined at the places specified in Item IV
below. OCC has prepared a summary, set forth in section (A) below, of
the most significant aspects of such statements.\3\
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\3\ The Commission has modified the text of the summaries
prepared by OCC.
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Advance Notices Filed Pursuant to Section 806(e) of the Payment,
Clearing, and Settlement Supervision Act of 2010 (``Clearing
Supervision Act'')
Description of Change
The Change involves the replacement of a credit facility that OCC
maintains for the purposes of meeting obligations arising out of the
default or suspension of a clearing member or the failure of a bank or
securities or commodities clearing organization to perform its
obligations due to its bankruptcy, insolvency, receivership or
suspension of operations. OCC's existing credit facility (the
``Existing Facility'') was implemented on October 13, 2011 through the
execution of a Credit Agreement among OCC, JPMorgan Chase Bank, N.A.
(``JPMorgan''), as administrative agent, and the lenders that are
parties to the agreement from time to time, which provides short-term
secured borrowings in an aggregate principal amount of up to $2
billion.
The Existing Facility is set to expire on October 11, 2012, and OCC
is therefore currently negotiating the terms of a new credit facility
(the ``New Facility'') on substantially similar terms as the Existing
Facility. On September 4, 2012, OCC received a commitment letter with
regard to the New Facility from: JPMorgan, the administrative agent,
euro administrative agent and collateral agent, and a lender, for the
New Facility; JPMorgan Securities LLC (``JPMorgan Securities''), the
joint lead arranger for the New Facility; Merrill Lynch, Pierce, Fenner
& Smith Incorporated (``MLPF&S''), the joint lead arranger for the New
Facility; and Bank of America, N.A. (``BANA''), the syndication agent
and a lender for the New Facility. The terms and conditions applicable
to the New Facility are set forth in the commitment letter and a
Summary of Terms and Conditions attached as an exhibit to the
commitment letter. One of the
[[Page 62309]]
conditions to the availability of the New Facility is the execution and
delivery of a credit agreement and pledge agreement between OCC,
JPMorgan, JPMorgan Securities, MLPF&S, BANA and the various lenders
under the New Facility, which OCC anticipates will occur on or before
October 11, 2012. Another condition is the successful syndication of
the facility to a group of lenders who will in the aggregate provide
commitments of at least $2 billion.
Under the New Facility, a syndicate of banks, financial
institutions and other entities will make loans to OCC on request. The
New Facility includes a tranche that may be drawn in dollars or euros
and a dollar-only tranche. The aggregate amount of loans available
under the facility, subject to the value of eligible collateral, is up
to $2 billion. The dollar equivalent of the total loans denominated in
euros under the euro/dollar tranche of the New Facility may not exceed
$100 million. During the term of the New Facility, the amount of the
New Facility may be increased to up to $3 billion if OCC so requests
and if sufficient commitments from lenders are received and accepted.
The New Facility is available on a revolving basis for a 364-day
term. OCC may request a loan under the New Facility on any business day
by providing a notice to JPMorgan, as administrative agent, which will
then notify the lenders, who will be required to fund their pro rata
share of any requested loan within a specified period of time after
receiving notice from JPMorgan. The funding deadline is designed to
permit OCC to obtain funds on the date of the request, subject to a
cutoff time after which funding will occur on the next business day.
Each loan issued pursuant to the New Facility matures and is payable 30
days after the borrowing date. Proceeds of these loans must be used to
meet the obligations of OCC arising out of the default or suspension of
a clearing member or the failure of a bank or securities or commodities
clearing organization to perform its obligations to OCC. In order to
obtain a loan under the facility, OCC must pledge as collateral cash or
government securities that are margin deposits of suspended members or
that are held in OCC's clearing fund, and that in either case are not
otherwise subject to liens, security interests or other encumbrances.
OCC has the authority to pledge these assets in connection with
borrowings under Section 5(e) of Article VIII of its By-Laws and Rule
1104(b).
The amount available under the New Facility at any given point in
time is equal to the lesser of (i) $2 billion, or the increased size of
the facility, if applicable, and (ii) the sum of (A) 90% of the value
of OCC's clearing fund that is not subject to liens or encumbrances
granted by OCC other than in connection with the New Facility and (B)
90% of the value of unencumbered margin deposits of suspended clearing
members that are not subject to liens or encumbrances granted by OCC
other than in connection with the New Facility. If the aggregate
principal amount of loans under the New Facility exceeds the amount
available under this formula, OCC must prepay loans, obtain the release
of liens and/or require additional margin and/or clearing fund deposits
to cure the deficiency. A condition to the making of any loan under the
New Facility is that, after giving effect to the loan, the sum of 100%
of the dollar-denominated loans and 105% of the euro-denominated loans
under the New Facility may not exceed the ``borrowing base.'' The
borrowing base is determined by adding the value of all collateral
pledged in connection with all loans under the New Facility, after
applying ``haircuts'' to government securities based on their remaining
maturity. If the borrowing base is less than the sum of 100% of the
dollar-denominated loans and 105% of the euro-denominated loans under
the New Facility, OCC must repay loans or pledge additional collateral
to cure the deficiency. There are additional customary conditions to
the making of any loan under the New Facility, including that OCC is
not in default. Importantly, however, the absence of a material adverse
change affecting OCC is not a condition to the making of a loan. Loans
may be prepaid at any time without penalty.
Events of default by OCC under the New Facility include, but are
not limited to, non-payment of principal, interest, fees or other
amounts when due; non-compliance with a daily borrowing base when loans
are outstanding; material inaccuracy of representations and warranties;
bankruptcy events; fundamental changes; and failure to maintain a first
priority perfected security interest in collateral. In the event of a
default, the interest rate applicable to outstanding loans would
increase by 2.00%. The New Facility also includes customary defaulting
lender provisions, including provisions that restrict the defaulting
lender's voting rights, permit set-offs of payments against the
defaulting lender and suspend the defaulting lender's right to receive
commitment fees.
The New Facility involves a variety of customary fees payable by
OCC, including: (1) A one-time arrangement fee payable to JPMorgan
Securities and MLPF&S; (2) a one-time administrative and collateral
agent fee payable to JPMorgan if the New Facility closes; (3) a one-
time euro administrative fee payable to JPMorgan if the New Facility
closes; (4) upfront commitment fees payable to the lenders based on the
amount of their commitments; and (5) an ongoing quarterly commitment
fee based on the unused amount of the New Facility.
Anticipated Effect on and Management of Risk
Overall, the New Facility reduces the risks to OCC, its clearing
members and the options market in general because it will allow OCC to
obtain short-term funds to address liquidity demands arising in
connection with the default or suspension of clearing members or the
insolvency of a bank or another securities or commodities clearing
organization. The existence of the New Facility could enable OCC to
minimize losses in the event such a default, suspension or insolvency,
by allowing it to obtain funds on extremely short notice to ensure that
the clearance of transactions in options and other contracts occurs
without interruption. By drawing on the facility OCC would be able to
avoid liquidating margin or clearing fund assets in what would likely
be volatile market conditions, which would preserve funds available to
cover any losses resulting from the failure of a clearing member, bank
or another clearing organization. OCC's entering into the New Facility
will not increase the risks associated with its clearing function
because it is entered into on substantially the same terms as the
Existing Facility.
While the New Facility will, in general, reduce the risks
associated with OCC's clearing function, like any lending arrangement
the New Facility involves risks. One of the primary risks to OCC and
its clearing function associated with the New Facility is the risk that
a lender fails to fund when OCC requests a loan, because of the
lender's insolvency or otherwise. This risk is mitigated through the
use of a syndicated facility, which does not depend on the
creditworthiness of a small number of lenders. In addition, the New
Facility has lender default provisions designed to discourage lenders
from failing to fund loans. Moreover, OCC has the ability under the New
Facility to replace a defaulting lender. Finally, in the event a
particular lender fails to fund its portion of the requested loan, the
New Facility includes provisions pursuant to which
[[Page 62310]]
OCC may request ``covering'' loans from non-defaulting lenders to make
up the shortfall, or OCC may simply make a second borrowing request for
the shortfall amount that lenders are committed to make, subject to
OCC's satisfying the borrowing conditions for the second loan, although
in either case the total amount available for borrowing under the New
Facility would be reduced by the unfunded commitment of the defaulting
lender. The failure by one or more lenders to fund the first loan does
not relieve the lenders of their commitment to fund the second loan.
A second risk associated with the New Facility is the risk that OCC
is unable to repay a loan within 30 days, which would allow the lenders
to seize the pledged collateral and liquidate it, potentially at
depressed prices that would result in losses to OCC. OCC believes that
this risk is at a manageable level, because 30 days should be an
adequate period of time to allow OCC to generate funds to repay the
loans under the New Facility, such as by liquidating clearing fund
assets other than those pledged to secure the loans. As provided in
Section 5(e) of Article VIII of its By-Laws, if the loans have not been
repaid within 30 days, the amount of clearing fund assets used to
secure the loans will be considered to be an actual loss to the
clearing fund, which will be allocated in accordance with Section 5 of
Article VIII, and the proceeds of such allocation can be used to repay
the loans.
III. Date of Effectiveness of the Advance Notice and Timing for
Commission Action
The proposed change may be implemented if the Commission does not
object to the proposed change within 60 days of the later of (i) the
date that the proposed change was filed with the Commission or (ii) the
date that any additional information requested by the Commission is
received. The clearing agency shall not implement the proposed change
if the Commission has any objection to the proposed change.
The Commission may extend period for review by an additional 60
days if the proposed change raises novel or complex issues, subject to
the Commission or the Board of Governors of the Federal Reserve System
providing the clearing agency with prompt written notice of the
extension. A proposed change may be implemented in less than 60 days
from the date the advance notice is filed, or the date further
information requested by the Commission is received, if the Commission
notifies the clearing agency in writing that it does not object to the
proposed change and authorizes the clearing agency to implement the
proposed change on an earlier date, subject to any conditions imposed
by the Commission.
The clearing agency shall post notice on its Web site of proposed
changes that are implemented.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed
change is consistent with the Exchange 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 AN-OCC-2012-03 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number AN-OCC-2012-03. 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed change that are filed
with the Commission, and all written communications relating to the
proposed 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 Web site viewing and printing in
the Commission's Public Reference Section, 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 filings will also be available
for inspection and copying at the principal office of OCC and on OCC's
Web site: (http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/an_occ_12_03.pdf).
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number AN-OCC-2012-03
and should be submitted on or before November 2, 2012.
V. Commission's Findings and Notice of No Objection
Section 806(e)(1)(G) of the Clearing Supervision Act provides that
a designated financial market utility may implement a change if it has
not received an objection by the Commission within 60 days of an
advanced notice.\4\ Section 806(e) of the Clearing Supervision Act
allows the Commission to act prior to the 60th day.\5\ If the
Commission chooses to not object prior to the 60th day, it must notify
the designated financial market utility in writing that it does not
object and authorize implementation of the change on an earlier
date.\6\ If the Commission chooses to object prior to the 60th day, it
must similarly notify the designated financial market utility.\7\
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\4\ 12 U.S.C. 5465(e)(1)(G).
\5\ 12 U.S.C. 5465(e).
\6\ 12. U.S.C. 5465(e)(1)(I).
\7\ 12. U.S.C. 5465(e)(1)(E).
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In its filing with the Commission, OCC requested that the
Commission notify OCC that it has no objection to the Change no later
than October 9, 2012, which is two days prior to the October 11, 2012
effective date of the New Facility. OCC requested Commission action two
days in advance of the effective date to ensure that there is no period
of time that OCC operates without a credit facility, given the
importance of the borrowing capacity in connection with OCC's risk
management.
For the reasons set forth above, the Commission does not object to
the proposed change.
VI. Conclusion
Pursuant to Section 806(e)(1)(I) of the Clearing Supervision Act,
the Commission does not object to the proposed change and authorizes
OCC to implement the change (AN-OCC-2012-03) as of the date of this
notice.\8\
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\8\ 12 U.S.C. 5465(e)(1)(I).
By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25088 Filed 10-11-12; 8:45 am]
BILLING CODE 8011-01-P