[Federal Register Volume 82, Number 230 (Friday, December 1, 2017)]
[Notices]
[Pages 57015-57019]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-25857]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82156; File No. SR-OCC-2017-019]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of a Proposed Rule Change, as Modified by Amendment
No. 1, Concerning the Adoption of a New Minimum Cash Requirement for
the Clearing Fund
November 27, 2017.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that
on November 14, 2017, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule
[[Page 57016]]
change as described in Items I, II and III below, which Items have been
prepared primarily by OCC. On November 22, 2017, OCC filed Amendment
No. 1 to the proposed rule change.\3\ The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, OCC modified the proposed change to
Article VIII, Section 4(a) of the By-Laws to clarify that interest
earned on Clearing Fund cash deposits held at a Federal Reserve Bank
accruing to the benefit of Clearing Members would be calculated
daily based on each Clearing Member's pro rata share of Clearing
Fund cash deposits. OCC did not propose any other changes to the
filing in Amendment No. 1.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
This proposed rule change by the OCC would (1) revise OCC's By-Laws
to adopt a new minimum cash requirement for the Clearing Fund; (2)
revise OCC's By-Laws to provide for the pass-through of interest earned
on Clearing Fund cash held in OCC's Federal Reserve bank account; (3)
enact changes to OCC's Fee Policy that reflect the pass-through of
interest earned on Clearing Fund cash held in OCC's Federal Reserve
bank account; and (4) make certain conforming changes to OCC's Rules
and By-Laws to affect the aforementioned changes.\4\ All terms with
initial capitalization not defined here have the same meaning set forth
in OCC's By-Laws and Rules.\5\
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\4\ OCC has filed an advance notice with the Commission in
connection with this proposal. See SR-OCC-2017-808.
\5\ OCC's By-Laws and Rules can be found on OCC's public Web
site: http://optionsclearing.com/about/publications/bylaws.jsp.
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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
OCC proposes to establish a minimum cash contribution requirement
for its Clearing Fund in order to increase the amount of qualifying
liquid resources available to OCC to account for extreme scenarios that
may result in liquidity demands exceeding OCC's current Cover 1
liquidity resources, as calculated under the current historically-based
methodology, and provide for a more consistent level of cash resources
in its available prefunded financial resources. The proposed rule
change also would provide for the pass-through of interest income
earned on such deposits to its Clearing Members. OCC's current
practices and the proposed changes to such practices are described in
more detail below.
Current Practice
Presently, Article VIII, Section 3(a) of OCC's By-Laws provides
that Clearing Fund contributions shall be in the form of cash and
Government securities, but neither OCC's By-Laws nor Rules provides a
minimum cash requirement for contributions in the Clearing Fund.
Article VIII, Section 4(a) of OCC's By-Laws allows for OCC to invest
cash contributions to the Clearing Fund, partially or wholly, in OCC's
account in Government securities, and to the extent that such
contributions are not so invested they shall be deposited by OCC in a
separate account or accounts for Clearing Fund contributions in
approved custodians. Article VIII, Section 4(a) of OCC's By-Laws,
however, presently does not account for the treatment of interest
earned on cash deposits held in the OCC's Federal Reserve bank account.
Proposed Change
1. Minimum Cash Clearing Fund Requirement
OCC proposes to establish a minimum cash contribution requirement
for its Clearing Fund in order to increase the amount of highly liquid
resources available to OCC to account for extreme scenarios that may
result in liquidity demands exceeding OCC's current Cover 1 liquidity
resources, as calculated under the current historically-based
methodology, and provide for a more consistent level of cash resources
in its available prefunded financial resources.\6\ Specifically, the
proposed rule change would require that Clearing Members collectively
contribute $3 billion in cash to the Clearing Fund (``Cash Clearing
Fund Requirement''). Each Clearing Member's proportionate share of the
Cash Clearing Fund Requirement shall be equal in percentage to its
proportionate share of the Clearing Fund as determined by the Clearing
Fund allocation methodology in current Rule 1001.
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\6\ OCC's Current Cover 1 liquidity resources are sized based on
the liquidity needed to address exposures derived solely from
historical results. Introducing the Cash Clearing Fund Requirement
would increase OCC's liquidity resources to address the exposures
observed in a stress liquidity analysis performed using proposed
sizing stress tests for OCC's Clearing Fund.
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OCC has historically sized its liquidity resources based on
historically observed liquidity demands and analysis of potential large
forecasted liquidity demands over at least the next twelve months. OCC
forecasts its future daily settlement activity under normal market
conditions (e.g., mark-to-market settlements, and settlements resulting
from the expiration of derivatives contracts) and compares such demands
to its resources to ensure that at all times it will maintain a
positive liquidity position to meet settlement obligations.
OCC has performed an analysis of its stress liquidity demands based
on a 1-in-70 year hypothetical market event. OCC started its analysis
by selecting the largest historical peak monthly settlements that
occurred over the historical look back period of data generated by the
stress test system. It then also selected certain large non-expiration
days to supplement the analysis. From this it estimated the mark-to-
market and cash settled exercise and assignment obligations for the
members driving the historical peak demand under the proposed stress
tests scenario to determine the stressed peak demand. Through this
analysis, OCC observed that peak stressed liquidity demands of the
largest 1 or 2 members, which normally occur in conjunction with
certain monthly expirations, can exceed the size OCC's committed
liquidity facilities (which currently total $3 billion). In these
cases, while OCC did have cash in the Clearing Fund to supplement its
liquidity resources, and the total of credit facilities and cash in the
Clearing Fund did cover these peak stressed liquidity demands, OCC is
unable to rely on these cash contributions to be present at any given
time since there is no obligation on members to maintain any amount of
their contribution in cash. As a result, OCC believes it is necessary
to increase or otherwise ensure the availability of highly liquid
resources in the Clearing Fund to account for extreme scenarios that
may result in liquidity demands exceeding OCC's Cover 1 liquidity
resources, as calculated under the current historically-based
methodology. The proposed Cash Clearing Fund Requirement, when taken
together with OCC's $3 billion in committed liquidity facilities, would
provide liquidity resources sufficient to cover 100% of
[[Page 57017]]
the peak stressed liquidity demands of the largest 1 or 2 members
observed in OCC's analysis.
In addition, the proposed changes would allow OCC's Executive
Chairman, Chief Administrative Officer (``CAO''), or Chief Operating
Officer (``COO''), upon providing notice to the Risk Committee, to
temporarily increase the amount of cash required to be maintained in
the Clearing Fund up to an amount that includes the size of the
Clearing Fund as determined in accordance with Rule 1001 for the month
in question for the protection of OCC, clearing members or the general
public. Any determination by the Executive Chairman, CAO and/or COO to
implement a temporary increase in Clearing Fund size would (i) be based
upon then-existing facts and circumstances, (ii) be in furtherance of
the integrity of OCC and the stability of the financial system, and
(iii) take into consideration the legitimate interests of Clearing
Members and market participants.
The proposed rule change would require that any temporary increase
in the Cash Clearing Fund Requirement be reviewed by the Risk Committee
as soon as practicable, but in any event within 20 calendar days of the
increase. In its review, the Risk Committee shall determine whether (1)
the increase in the minimum Cash Clearing Fund Requirement is no longer
required or (2) OCC's Clearing Fund contribution requirements and other
related rules should be modified to ensure that OCC continues to
maintain sufficient liquid resources to cover its largest aggregate
payment obligations in extreme but plausible market conditions. In the
event that the Risk Committee would determine to permanently increase
the Cash Clearing Fund Requirement, OCC would initiate any regulatory
approval process required to effect such a change.\7\ A Clearing Member
will be required to satisfy any increase in its required cash
contribution pursuant to an increase in the Cash Clearing Fund
Requirement no later than one hour before the close of the Fedwire on
the business day following OCC's issuance of an instruction to increase
cash contributions.
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\7\ However, OCC will not decrease the Cash Clearing Fund
Requirement while the regulatory approvals for a change in the Cash
Clearing Fund Requirement are being obtained to ensure that OCC
continues to maintain sufficient liquid resources to cover its
liquidity demands during that time.
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These changes would be reflected in new paragraph (a)(i) of Section
3 of Article VIII of OCC's By-Laws, as well as in new Interpretation
and Policy .04 to Section 3 of Article VIII.
2. Interest Pass Through for Clearing Fund Cash Held at the Federal
Reserve
In connection with the proposed Cash Clearing Fund Requirement,
substantially all of OCC's Clearing Fund deposits consisting of cash
would be held in an account established by OCC at a Federal Reserve
Bank.\8\ OCC proposes that it would pass the interest income earned in
such account through to its Clearing Members. As a result, OCC proposes
to revise Article VIII, Section 4(a) of OCC's By-Laws to include a
sentence to provide that any interest earned on cash deposits held at a
Federal Reserve Bank shall accrue to the benefit of Clearing Members
(calculated daily based on each Clearing Member's pro rata share of
Clearing Fund cash deposits), provided that such Clearing Members have
provided OCC with all tax documentation as OCC may from time to time
require in order to effectuate such payment.\9\
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\8\ OCC notes that it would retain the discretion to maintain a
small portion of Clearing Fund cash deposits in other accounts
(e.g., accounts with commercial banks) for various reasons,
including facilitating normal substitution activity by its Clearing
Members.
\9\ Article VIII, Section 4(a) currently states that all
interest gained on cash Clearing Fund deposits belongs to OCC.
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3. Changes to the Fee Policy To Accommodate Interest Passed Through to
Clearing Members
In order to accommodate the pass through of interest income, OCC
would also amend its Fee Policy to add definitions for ``Pass-Through
Interest Revenue'' and ``Operating Expenses'' to exclude from the
calculation of the Business Risk Buffer projected interest revenue and
expense, respectively, related to the pass-through of earned interest
from OCC to Clearing Members.\10\ OCC also proposes to add a new
example of the Business Risk Buffer calculation reflecting this change
and make clarifying changes throughout the Policy to incorporate the
use of the new defined terms. In addition, OCC proposes to amend the
Fee Policy to remove references to ``Proposed Rule 17Ad-22(e)(15)'' to
reflect the adoption of the Commission's Covered Clearing Agency
Standards.
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\10\ While interest income earned by OCC from its Federal
Reserve bank account would be passed on to its Clearing Members, OCC
anticipates that it would charge a cash management fee to cover
associated costs (i.e., administrative and similar costs). OCC would
file a separate proposed rule change with the Commission, subject to
receiving all necessary regulatory approvals for the proposed
changes described herein, prior to implementing any cash management
fee.
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4. Conforming Changes
In conjunction with the aforementioned changes, OCC is also
proposing to make four related conforming changes. First, OCC proposes
to revise Interpretation and Policy .01 of Rule 1001 to reflect that
the new minimum Clearing Fund size is $3 billion (instead of $1
billion) plus 110% of the size of OCC's committed liquidity facilities,
which conforms to the proposed new minimum cash requirement for the
Clearing Fund. Second, OCC proposes to amend the definition of
``Approved Custodian'' in Article I, Section 1 of the By-Laws to
clarify that the Federal Reserve Bank may also be an Approved
Custodian, to the extent it is available to OCC. Third, OCC is
proposing to delete existing Article VIII, Section 4(b), regarding the
establishment of a segregated funds account for cash contributions to
the Clearing Fund. The segregated funds account allows a Clearing
Member to contribute cash to a bank or trust company account maintained
in the name of OCC, subject to OCC's exclusive control, but the account
also includes the name of the Clearing Member and any interest accrues
to the Clearing Member rather than OCC. OCC proposes to eliminate the
account type because Clearing Members have not expressed interest in
using such an account, no such accounts are in use today, and moving
forward, substantially all cash Clearing Fund contributions will be
held in OCC's account at the Federal Reserve Bank. Fourth, OCC proposes
to introduce new language to Article VIII, Section 4(a) to clarify that
cash contributions to the Clearing Fund that are deposited at approved
custodians may be commingled with the Clearing Fund contributions of
different Clearing Members.
2. Statutory Basis
Section 17A(b)(3)(F) of the Act,\11\ 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,
in general, to protect investors and the public interest. The proposed
rule change is designed to improve the resiliency of OCC's liquidity
resources by establishing a new $3 billion minimum cash requirement for
the Clearing Fund and by providing OCC authority to temporarily
increase the Cash Clearing Fund Requirement from $3 billion up to an
amount that includes the size of the
[[Page 57018]]
Clearing Fund as determined in accordance with Rule 1001 for the month
in question. The proposed rule change also is designed to improve the
position of OCC's Clearing Members by permitting OCC to pass through
interest earned on Clearing Fund cash deposits held at OCC's account
with the Federal Reserve. In this regard, OCC believes the proposed
rule change is designed to promote the prompt and accurate clearance
and settlement of securities transactions and to protect investors and
the public interest, in accordance with the requirements of Section
17A(b)(3)(F) of the Act.\12\
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\11\ 15 U.S.C. 78q-1(b)(3)(F).
\12\ Id.
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Additionally, Rule 17Ad-22(e)(7) \13\ requires that a covered
clearing agency (``CCA'') establish, implement, maintain and enforce
written policies and procedures reasonably designed to effectively
measure, monitor and manage liquidity risk that arises in or is borne
by the CCA. Rule 17Ad-22(e)(7)(i) \14\ requires CCAs to 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 OCC by maintaining
sufficient liquid resources at the minimum in all relevant currencies
to effect same-day settlement, and where appropriate, intraday and
multiday settlement of payment obligations with a high degree of
confidence under a wide range of stress scenarios, that includes but is
not limited to, the default of the participant family that would
generate the largest aggregate payment obligation for OCC in extreme
but plausible market conditions. As explained above, OCC has performed
an analysis of its stress liquidity demands using proposed sizing
stress tests for the Clearing Fund and has observed that peak stressed
liquidity demands of the largest 1 or 2 members, which normally occur
in conjunction with certain monthly expirations, can exceed the size of
OCC's committed liquidity facilities (which currently total $3
billion). OCC believes that the proposed minimum $3 billion Cash
Clearing Fund Requirement will adjust OCC's available liquidity
resources to account for extreme scenarios that may result in liquidity
demands exceeding OCC's Cover 1 liquidity resources. In this regard,
OCC believes the proposed Cash Clearing Fund Requirement is designed to
satisfy the requirements of Rule 17Ad-22(e)(7)(i).\15\
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\13\ 17 CFR 240.17Ad-22(e)(7).
\14\ 17 CFR 240.17Ad-22(e)(7)(i).
\15\ 17 CFR 240.17Ad-22(e)(7)(i).
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Further, Rule 17Ad-22(e)(7)(viii) \16\ requires that a CCA address
foreseeable liquidity shortfalls that would not be covered by its
liquid resources and Rule 17Ad-22(e)(7)(ix) \17\ requires that a CCA
describe its process to replenish any liquid resources that it may
employ during a stress event. OCC believes that the proposed authority
to temporarily increase the minimum cash requirement from $3 billion up
to an amount that includes the size of the Clearing Fund (as determined
in accordance with Rule 1001 for the month in question) would provide
OCC with an additional means of addressing liquidity shortfalls that
otherwise would not be covered by OCC's liquid resources. Further,
because the Clearing Fund is a resource that is replenished in
accordance with Section 6 of Article VIII of OCC's By-Laws, to the
extent that Clearing Members are required to replenish their required
contributions--in whole or in part--with cash following a proportionate
charge during, the proposed change would provide a form of
replenishment of OCC's liquid resources. In this regard, OCC believes
the proposed authority to require up to an all cash Clearing Fund
requirement is designed to satisfy the requirements of Rules 17Ad-
22(e)(7)(viii) and (ix).\18\
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\16\ 17 CFR 240.17Ad-22(e)(7)(viii).
\17\ 17 CFR 240.17Ad-22(e)(7)(ix).
\18\ 17 CFR 240.17Ad-22(e)(7)(viii) and (ix).
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The proposed rule change is not inconsistent with the existing
rules of OCC, including any other rules proposed to be amended.
(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \19\ 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 the proposed rule change would have any impact or impose any
burden on competition. The primary purpose of the proposed rule change
is to enhance OCC's liquidity resources by establishing a $3 billion
Cash Clearing Fund Requirement, which requirement could be temporarily
increased up to an amount that includes the size of the Clearing Fund
as determined in accordance with Rule 1001 for the month in question.
Further, the proposed rule change is designed to revise Article VIII,
Section 4(a) of OCC's By-Laws and the Fee Policy to enable OCC to pass
through interest earned on Clearing Fund cash held in OCC's Federal
Reserve bank account. The proposed rule change would apply equally to
all Clearing Members and would not affect Clearing Members' access to
OCC's services or disadvantage or favor any particular user in
relationship to another user. As such, OCC believes that the proposed
changes would not have any impact or impose any burden on competition.
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\19\ 15 U.S.C. 78q-1(b)(3)(I).
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments 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-2017-019 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2017-019. 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
[[Page 57019]]
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 Web site 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 Web site at
https://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_17_019.pdf.
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. All
submissions should refer to File Number SR-OCC-2017-019 and should be
submitted on or before December 22, 2017.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
Eduardo A. Aleman,
Assistant Secretary.
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\20\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2017-25857 Filed 11-30-17; 8:45 am]
BILLING CODE 8011-01-P