[Federal Register Volume 83, Number 68 (Monday, April 9, 2018)]
[Notices]
[Pages 15181-15187]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-07111]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82983; File No. SR-OCC-2018-007]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change Related to The Options
Clearing Corporation's Trade Acceptance and Novation Rules
April 3, 2018.
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 March 23, 2018, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared 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)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
[[Page 15182]]
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change by OCC concerns modifications to OCC's By-
Laws and Rules to: (1) Clarify the time at which OCC accepts and
novates the transactions that it clears; (2) streamline provisions in
the By-Laws and Rules related to acceptance, novation and trade
reporting; and (3) delete provisions that apply only to certain dormant
products that OCC no longer clears and settles or that are no longer
applicable to OCC's current clearing processes.
The proposed amendments to OCC's By-Laws and Rules can be found in
Exhibits 5A and 5B to the filing, respectively. Material proposed to be
added to OCC's By-Laws and Rules as currently in effect is marked by
underlining and material proposed to be deleted is marked with
strikethrough text. Because proposed Rules 403 through 406 in Chapter
IV are new and are based on provisions relocated from Article VI of
OCC's By-Laws, underlining and strikethrough text have been omitted
with respect to those rules in order to enhance their readability.
All terms with initial capitalization that are not otherwise
defined herein have the same meaning as set forth in the By-Laws and
Rules.\3\
---------------------------------------------------------------------------
\3\ OCC's By-Laws and Rules can be found on OCC's public
website: http://optionsclearing.com/about/publications/bylaws.jsp.
---------------------------------------------------------------------------
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
The purpose of this proposed rule change is to amend OCC's By-Laws
and Rules to: (1) Clarify the time at which OCC accepts and novates \4\
the transactions that it clears; (2) streamline provisions in the By-
Laws and Rules related to trade reporting and novation; and (3) delete
provisions that apply only to certain dormant products that OCC no
longer clears and settles or that are no longer applicable to OCC's
current clearing processes.
---------------------------------------------------------------------------
\4\ In this context, novation is the process through which OCC
is substituted as the buyer to the seller and the seller to the
buyer for each cleared contact.
---------------------------------------------------------------------------
Background
Acceptance and Novation Timing
Specifying a clear time at which OCC accepts transactions for
clearance and settlement is important to Clearing Members because that
is the time under OCC's By-Laws and Rules at which the following events
occur: (1) OCC is substituted through novation as the central
counterparty (``CCP'') to each Clearing Member that was an initial
party to the transaction; (2) the rights of the initial Clearing Member
parties to the transaction become solely as against OCC; and (3) OCC
becomes obligated to each Clearing Member in accordance with the By-
Laws and Rules.\5\ Acceptance of transactions is important to Clearing
Members because, among other things, settlement obligations associated
with transactions that OCC accepts and novates are generally guaranteed
by OCC based upon certain financial safeguards it maintains as a CCP
consistent with its responsibilities under the Act and relevant
regulations thereunder.\6\
---------------------------------------------------------------------------
\5\ See, e.g., Article VI, Section 5 of the By-Laws.
\6\ See generally 15 U.S.C. 78q-1; 17 CFR 240.17Ad-22.
---------------------------------------------------------------------------
Current Acceptance and Novation of Confirmed Trades
Under OCC's current By-Laws and Rules, a user must parse through a
number of definitions and provisions in various locations to identify
that time at which acceptance and novation occur. The term Confirmed
Trade is defined in OCC's By-Laws to include all of the products for
which OCC currently provides clearance and settlement services, with
the exception of certain Stock Loan \7\ transactions. Under OCC's
current By-Laws, a Confirmed Trade \8\ is novated upon OCC's
acceptance, but acceptance is not deemed to occur until a designated
Commencement Time. Commencement Time is defined differently for
different products that meet the definition of a Confirmed Trade, but
Article VI, Section 5 of the By-Laws (regarding OCC's obligations)
generally defines it as the time at which OCC makes available to
Clearing Members a Daily Position Report reflecting the Confirmed
Trade.\9\ Pursuant to Article VI, Section 7 of the By-Laws (regarding
the reporting of Confirmed Trades) this acceptance is subject to the
condition that the Exchange or OTC Trade Source on which the
transaction occurred has reported to OCC, during such times as OCC has
prescribed, certain information regarding the Confirmed Trade and that
such information passes OCC's initial validation checks.
---------------------------------------------------------------------------
\7\ See Article I, Section 1.S.(21) of the By-Laws. The term
Stock Loan may refer to either a Hedge Loan that is part of OCC's
Stock Loan/Hedge Program or a Market Loan that is part of OCC's
Market Loan Program. Matters regarding the acceptance and novation
of these products is addressed separately below.
\8\ Under OCC's By-Laws, a Confirmed Trade is defined as ``a
transaction for the purchase, writing, or sale of a cleared
contract, or for the closing out of a long or short position in a
cleared contract, that is (i) effected on or through the facilities
of an Exchange and submitted to the Corporation for clearance or
(ii) affirmed through the facilities of an OTC Trade Source and
submitted to the Corporation for clearance.''
\9\ This typically occurs at the end of each business day.
---------------------------------------------------------------------------
Under Article VI, Section 8 of the By-Laws, OCC generally has no
right (other than regarding certain types of Confirmed Trades discussed
below) to reject a Confirmed Trade due to the failure of the Purchasing
Clearing Member to pay any amount due to OCC at or before the
settlement time. This means that transactions in most products that are
Confirmed Trades will inevitably be accepted for clearing and novated
at the Commencement Time simply due to the passage of time.\10\
Therefore, most Confirmed Trades are functionally novated under the
current By-Laws and Rules upon proper submission to OCC for clearing.
---------------------------------------------------------------------------
\10\ An Exchange or OTC Trade Source, however, may instruct OCC
to disregard a transaction that it previously reported as a
Confirmed Trade ``because of a subsequent determination that (i) the
trade information submitted by the Purchasing Clearing Member and
Selling Clearing Member did not agree, (ii) the trade information
did not contain all the information required by the Corporation as
set forth in the By-Laws and Rules, or (iii) new or revised trade
information was required to properly clear the transaction.'' See
Article VI, Section 7 of the OCC By-Laws. This authority would be
preserved and relocated into OCC's Rules in connection with the
proposed changes described herein.
---------------------------------------------------------------------------
Different Commencement Times and Rejection Rights for Certain Confirmed
Trades
Certain categories of Confirmed Trades, however, are not subject to
the general Commencement Time described above, and OCC retains certain
rights to reject such transactions. Specifically, Article VI, Section 5
of the By-Laws excludes the products described below from the general
Commencement Time and alternate definitions of Commencement Time are
set forth as follows:
[[Page 15183]]
(1) Futures issued in exchange-for-physical transactions,\11\ block
trades,\12\ or other trades designated as non-competitively executed--
the time after the transaction is reported to OCC that OCC receives the
first variation settlement payment; \13\
---------------------------------------------------------------------------
\11\ An exchange-for-physical transaction (or ``EFP'') is a
transaction between two parties in which a futures contract on a
commodity or security is exchanged for the actual physical good.
\12\ A block trade is a trade involving a large number of shares
being traded at an arranged price between parties, outside of the
open markets, in order to lessen the impact of such a large trade
being made public.
\13\ See Article XII, Section 7 of the OCC By-Laws.
---------------------------------------------------------------------------
(2) Cross-rate FX options and FX index options--the time that is
three hours following the settlement time of the Confirmed Trade in
which such contract was purchased; \14\ and
---------------------------------------------------------------------------
\14\ See Articles XX, Section 1 and XXIII, Section 1 of the OCC
By-Laws.
---------------------------------------------------------------------------
(3) OTC Options (other than Backloaded OTC Options)--the time when
a report of OCC's acceptance is made available to Clearing Members
through OCC's clearing system.\15\
---------------------------------------------------------------------------
\15\ See Article VI, Section 5 of the OCC By-Laws.
---------------------------------------------------------------------------
For Backloaded OTC Options, the transaction is not accepted until
the Selling Clearing Member has met its regular morning settlement
obligation on the business day following the reporting of the trade to
OCC.\16\
---------------------------------------------------------------------------
\16\ Id.
---------------------------------------------------------------------------
In addition to the separate Commencement Times for these types of
Confirmed Trades, OCC also currently has certain authority to reject
such trades due to the failure of the Purchasing Clearing Member to pay
an amount due to OCC at or before the applicable settlement time.\17\
In contrast to most other types of Confirmed Trades, this means that
OCC continues to have authority to reject these transactions even after
they are properly submitted for clearing. OCC's authority to reject
these types of Confirmed Trades arises under the following
circumstances:
---------------------------------------------------------------------------
\17\ See generally Article VI, Section 8 of the OCC By-Laws
identifying these exceptions.
---------------------------------------------------------------------------
(1) Futures issued in exchange-for-physical transactions, block
trades, or other trades designated as non-competitively executed--in
the event OCC fails to receive any variation payment due in the
accounts of the Clearing Members;\18\
---------------------------------------------------------------------------
\18\ See Article XII, Section 7 of the By-Laws.
---------------------------------------------------------------------------
(2) Cross-rate FX options and FX index options--in the event OCC
fails to receive from the Purchasing Clearing Member premiums
denominated in the proper trading currency in the account in which the
transaction is effected; \19\ and
---------------------------------------------------------------------------
\19\ See Article XX, Section 5, Article XXIII, Section 7 of the
By-Laws.
---------------------------------------------------------------------------
(3) Backloaded OTC Options--in the event the Selling Clearing
Member does not meet its regular morning settlement obligation on the
business day following the reporting of the trade to OCC.\20\
---------------------------------------------------------------------------
\20\ See Article VI, Section 8 of the By-Laws. In addition, OCC
will not accept a Backloaded OTC Option for clearing if OCC receives
it from the OTC Trade Source after 4 p.m. Central on the business
day that is four business days prior to its expiration.
---------------------------------------------------------------------------
Proposed Changes to Acceptance and Novation Rules
Proposed Uniform Acceptance and Novation Timing for Nearly All
Confirmed Trades
To provide greater certainty and clarity to Clearing Members and
other interested parties regarding the acceptance and novation timing
for transactions that OCC clears and settles, OCC is proposing to amend
the substance of Article VI, Section 5 of the By-Laws \21\ to set forth
a uniform acceptance and novation time for nearly all Confirmed Trades.
As described in more detail below, OCC would retain exceptions from the
uniform acceptance and novation time for Confirmed Trades in Backloaded
OTC Options and Confirmed Trades in futures issued in exchange-for-
physical transactions, block trades, or other trades designated as non-
competitively executed.
---------------------------------------------------------------------------
\21\ As described below under the heading Reorganization, OCC
also proposes to relocate the provisions currently in Article VI,
Section 5 of the By-Laws to Rules 401 and 404.
---------------------------------------------------------------------------
To accomplish this, OCC proposes to eliminate the concept of
Commencement Time and instead deem nearly all Confirmed Trades to be
accepted and simultaneously novated when they are reported to OCC and
the related position information has been recorded in OCC's clearing
system (which occurs on a real-time basis).\22\ This would, however, be
subject to the condition that the required transaction information
reported to OCC by the Exchange or OTC Trade Source first passes OCC's
validation procedures \23\ and is provided to OCC at such time as OCC
prescribes. OCC believes this change provides a more clear indication
of the point after which OCC does not have authority to reject such
transactions for clearing.\24\ Eliminating the concept of Commencement
Time also necessitates the deletion of the term from the defined terms
that appear in Article I, Section 1 of the By-Laws and replacing all
references to Commencement Time with references to the time at which
OCC accepts a transaction for clearing. This change requires amendments
to OCC's By-Laws, specifically, amendments to the Article I definition
of ``American; American-style,'' Article VI, Sections 5 and 6,\25\
Section 12 of Article VI, and Section 7 of Article XII.
---------------------------------------------------------------------------
\22\ OCC notes that upon acceptance and recording of position
information in OCC's ENCORE clearing system, Clearing Members have
the ability to see the trades they are responsible for via position
information screens in the ENCORE system and through real-time
messaging.
\23\ All inbound trades to OCC are subject to coded validation
of the required fields for trades. These fields contain the critical
details of the trade. These details include, but are not limited to,
the trade source, symbol, expiration, strike, call or put, quantity,
price, and Clearing Member details of both sides of the trade.
\24\ As described above, an Exchange or OTC Trade Source would
continue to have the authority to instruct OCC to disregard a
Confirmed Trade. See supra 10.
\25\ As described in more detail below, OCC proposes to relocate
Article VI, Sections 5 and 6 to Rules 401, 404 and 405 to help
streamline and reorganize provisions addressing trade reporting and
novation.
---------------------------------------------------------------------------
As part of this proposed rule change, OCC also proposes to clarify
the trade information required to be submitted by the participant
Exchange to OCC as a condition to acceptance and novation. For options
transactions, Rule 401(a)(1)(i) would provide that these terms include:
(a) The identity of the Purchasing Clearing Member and Writing Clearing
Member to the transaction; (b) the clearing date; (c) the transaction
time; (d) the trade source; (e) the trade quantity; (f) the trade
price; (g) the security type; (h) the ticker symbol; (i) the series/
contract date; (j) whether the trade is a put or a call; (k) the strike
price; (l) whether the trade is a purchase or a sale; (m) the account
type; (n) the allocation indicator, if applicable; (o) the CMTA
indicator, if applicable; (p) the Give-Up Clearing Member, if
applicable; (q) the trade type, including, in the case of futures
options, whether the transaction is a block trade, exchange-for-
physical, or any other trade designated by the futures market or
security futures market reporting the trade as a non-competitively
executed trade; (r) in the case of OTC options transactions in a
securities customers' account, a unique customer ID for the customer
for whom the trade was executed; and (s) in the case of OTC options,
such other variable terms as provided in Section 6 of Article XVII of
the By-Laws. In addition to the foregoing information that is required
as a condition to OCC's acceptance of the confirmed trade, Rule
401(a)(1)(ii) would provide that OCC may also request certain optional
trade
[[Page 15184]]
information that is not required as a condition for acceptance.\26\
---------------------------------------------------------------------------
\26\ OCC makes available to its participant Exchanges and
Clearing Members the complete list of required and optional trade
information in an inbound reference guide for Exchange trades.
---------------------------------------------------------------------------
For futures transactions, Rule 401(a)(2)(i) would provide that the
required terms for acceptance and novation include: (a) The identity of
the Purchasing Clearing Member and the Selling Clearing Member to the
transaction; (b) the clearing date; (c) the transaction time; (d) the
trade source; (e) the trade quantity; (f) the trade price; (g) the
security type; (h) the ticker symbol; (i) the series/contract date; (j)
whether the trade is a purchase or a sale; (k) the account type; (l)
the allocation indicator, if applicable; (m) the CMTA indicator, if
applicable; (n) the Give-Up Clearing Member, if applicable; and (o)
whether the trade is an exchange-for-physical or block trade or any
other trade designated by the futures market or security futures market
reporting the trade as a non-competitively executed trade. In addition
to the foregoing information that is required as a condition to OCC's
acceptance of the confirmed trade, Rule 401(a)(2)(ii) would provide
that OCC may also request certain optional trade information that is
not required as a condition for acceptance.
Reasons the Uniform Acceptance and Novation Timing for Nearly All
Confirmed Trades is Appropriate
OCC believes that using a uniform approach for nearly all Confirmed
Trades regarding acceptance and novation and reducing the complexity of
related provisions would provide significantly greater clarity and
transparency in OCC's legal framework for Clearing Members and other
interested parties concerning the point at which OCC does not have
authority to reject a transaction after it has been properly submitted
to and validated by OCC. As described above, amending OCC's By-Laws and
Rules to provide that nearly all Confirmed Trades are accepted and
novated upon proper submission functionally would not change the time
at which OCC becomes obligated regarding such Confirmed Trades because,
upon proper submission, OCC has no right today to reject such
transactions due to the failure of a Purchasing Clearing Member to pay
any amount due to OCC at or before the settlement time. OCC generally
does not collect margin with respect to such Confirmed Trades until
9:00 a.m. Central the following business day,\27\ and therefore OCC
already faces this same credit risk between the acceptance of the
Confirmed Trades and the time that it collects margin from Clearing
Members. Accordingly, OCC believes that moving the novation time from
the general Commencement Time to earlier in the day as described
above--at the point of acceptance--would not alter the credit risk OCC
faces with respect to such Confirmed Trades. In addition, OCC would
continue to have the same authority that it does today to address any
credit risk as necessary through intra-day margin collection.\28\
---------------------------------------------------------------------------
\27\ See Article I, Section 1.S.(16) of the By-Laws (defining
the term ``settlement time'' in respect of a Clearing Member's
obligation to pay amounts owed to OCC).
\28\ See OCC Rule 609 (addressing OCC's authority to require
intra-day margin).
---------------------------------------------------------------------------
OTC Options that are not Backloaded OTC Options are not currently
subject to the general Commencement Time; however, OCC believes that
applying the uniform acceptance and novation time to those transactions
is appropriate. This is because under the current approach, acceptance
and the Commencement Time both occur when a report is made available to
Clearing Members within OCC's clearing system, and therefore this
approach is already consistent with the proposed approach described
herein. In practice, OCC automatically makes a report available to
Clearing Members in its clearing system regarding an OTC Option
provided that it is properly reported to OCC, the contract passes OCC's
validation process, and the contract is not rejected. All of this is
generally completed immediately upon submission and therefore OCC does
not believe there is any operational, risk management, or other reason
for excluding OTC Options that are not Backloaded OTC Options from the
proposed uniform acceptance and novation timing.\29\
---------------------------------------------------------------------------
\29\ See Securities Exchange Act Release No. 68434 (December 14,
2012), 77 FR 75243 (December 19, 2012) (SR-OCC-2012-14 and AN-OCC-
2012-01) (discussing the trade submission mechanics for OTC
Options).
---------------------------------------------------------------------------
Proposed Exceptions to the Uniform Acceptance and Novation Timing
For other categories of Confirmed Trades that are not subject to
the general definition of Commencement Time, OCC proposes to preserve
the existing structure under which OCC has authority to reject the
transactions even after they are properly submitted for clearing. An
exception to the uniform acceptance and novation timing would be made
for Confirmed Trades in futures issued in exchange-for-physical
transactions, block trades, or other trades designated as non-
competitively executed. OCC believes that delayed novation is still
appropriate for such non-competitively executed transactions because
there is a heightened risk that non-competitive execution may cause
them to be effected at off-market prices, which could lead to
significant losses if a Clearing Member defaults on the related
settlement obligations.\30\
---------------------------------------------------------------------------
\30\ OCC also proposes to add new Interpretation and Policy .05
to provide that OCC will not treat an EFP or block trade as a
noncompetitively executed trade subject to Article XII, Section 7 of
the By-Laws if the Exchange on which such trade is executed has made
representations satisfactory to OCC that the Exchange has rules,
policies or procedures that require each EFP and block trade that is
submitted to OCC to be executed at a reasonable price and that such
price is validated by the Exchange. This new Interpretation and
Policy to Rule 401 would reiterate current Interpretation and Policy
.04 to Article XII, Section 7 of the By-Laws to provide additional
clarity in the Rules around the acceptance and novation time for
competitively executed EFPs and block trades.
---------------------------------------------------------------------------
As proposed, an exception to the uniform acceptance and novation
timing would also be made for Confirmed Trades that are Backloaded OTC
Options, which are defined as OTC Options for which the premium payment
date is prior to the business day on which the transaction is submitted
to OCC for clearing.\31\ OCC believes an exception for Backloaded OTC
Options remains necessary because of their ``backloaded'' nature, which
means that the premium payment has already been made. In addition,
Backloaded OTC Options are subject to being non-competitively executed
and therefore present the same heightened settlement default risk that
is discussed above regarding other non-competitively executed
transactions. However, in contrast to those other types of non-
competitively executed transactions, OCC is not able to immediately
validate a Backloaded OTC Options transaction or check its price
reasonability upon submission. Therefore, OCC believes it remains
appropriate to delay acceptance and novation for these contracts until
the selling Clearing Member has met its regular morning settlement
obligations on the business day following trade reporting.
---------------------------------------------------------------------------
\31\ See Article I, Section 1.B.(1) of the OCC By-Laws.
---------------------------------------------------------------------------
Provisional Information Regarding Confirmed Trades
OCC proposes that its acceptance and novation time would no longer
be tied to publication of a Daily Position Report as OCC's acceptance
of a Confirmed Trade would instead be reflected in the position
information that OCC makes available to Clearing Members
[[Page 15185]]
throughout the business day. OCC therefore proposes to amend
Interpretation and Policy .01 to Rule 501 to: (1) Clarify that OCC
makes updated position data reflecting accepted and novated trades
available to its Clearing Members throughout the day; and (2) remove
from that provision a statement that Clearing Members must rely on the
Daily Position Report for definitive information regarding their
positions.
Hedge Loans and Market Loans
In addition to its clearance and settlement of Confirmed Trades,
OCC also acts as a CCP for certain stock lending transactions that are
part of its Stock Loan/Hedge Program and Market Loan Program. OCC
proposes to amend its Stock Loan/Hedge Program and Market Loan Program
Rules to better describe OCC's process for accepting Hedge Loans and
Market Loans and to appropriately harmonize certain provisions
governing each type of Stock Loan.\32\
---------------------------------------------------------------------------
\32\ See OCC Rules 2202(b); 2202A(b), (c).
---------------------------------------------------------------------------
Hedge Loans are initiated as stock lending transactions that are
negotiated and settled between Clearing Members at The Depository Trust
Company (``Depository'') before they are reported to OCC. Rule 2202(b)
provides that OCC must generally accept these stock lending
transactions upon receipt of a report from the Depository that shows a
completed transaction.\33\ However, OCC may reject a transaction if it
determines that it is: (1) Not in accordance with OCC's By-Laws or
Rules; (2) one or both account numbers specified are invalid for Hedge
Loans; or (3) the information provided by the Depository contains
errors or omissions. Moreover, Rule 2202(b) provides that if OCC does
not affirmatively reject a reported transaction by such a time as OCC
is authorized to specify from time to time then the transaction is
deemed accepted as a Hedge Loan. Upon acceptance, OCC becomes the
lender to the Borrowing Clearing Member and the borrower to the Lending
Clearing Member. Although OCC has discretion during each business day
to make provisional information available to Clearing Members regarding
their lending and borrowing activity, only the Stock Loan Mark to
Market Activity Report is recognized as providing definitive Hedge Loan
positions.\34\
---------------------------------------------------------------------------
\33\ OCC is not obligated to accept the stock lending
transactions of a Clearing Member that has been suspended by the
Depository. See OCC Rule 2210(a). The same condition applies
regarding Market Loans. See OCC Rule 2210A(a).
\34\ See Rule 2202, Interpretation and Policy .01.
---------------------------------------------------------------------------
OCC proposes to amend Rule 2202(b) to clarify that OCC receives and
accepts completed transaction information from the Depository
throughout the day and would delete the statement that a transaction is
deemed accepted by a particular cut off time if OCC does not
affirmatively notify Clearing Members of a rejection. Rule 2202(b)
would instead state that OCC generally accepts completed transactions
reported to it unless: (1) OCC is otherwise required to reject a
transaction because it is not in accordance with the By-Laws or Rules;
(2) one or both account numbers specified are invalid; or (3) the
information provided contains unresolved errors or omissions. OCC
believes these changes would help clarify the time at which Hedge Loans
are accepted and the specific circumstances in which Hedge Loans will
be rejected. As described below, the change would also ensure
consistency between parallel provisions in the Stock Loan/Hedge Program
and Market Loan Program regarding the initiation process that OCC
believes should apply equally. Finally, a reference to the Stock Loan
Market to Market Activity Report being the only definitive statement of
positions would be deleted because Hedge Loan positions would be
definitive upon acceptance in OCC's clearing system.
In connection with the Market Loan Program initiation process, the
Depository also sends information to OCC regarding completed stock
lending transactions. Rule 2202A(b) provides that upon OCC's receipt of
an end of day stock loan activity file from the Depository OCC must
accept the transactions as Market Loans unless it is required to reject
them for the same reasons described above concerning Hedge Loans. The
Rule further provides that, upon OCC's affirmative acceptance, OCC
becomes the lender to the Borrowing Clearing Member and the borrower to
the Lending Clearing Member.
As with the proposed changes to the Stock Loan Hedge Program, OCC
proposes to clarify that OCC receives and accepts completed transaction
information from the Depository throughout the day. OCC also proposes
to delete a reference to affirmative acceptance in Rule 2202A(b)
because the other proposed changes would clarify that acceptance will
generally take place automatically unless OCC is specifically required
to reject transactions due to the deficiencies described above. A
conforming change would also be made in this regard in Rule 2202A(c).
References to the definitive nature of the Stock Loan Mark to Market
Activity Report would be deleted for the same reasons described above
regarding Hedge Loans.
Streamlining and Reorganization
As part of its continued efforts to streamline its By-Laws and
Rules, OCC proposes to relocate certain provisions from Article VI,
Sections 4 through 8 of the By-Laws to Chapter IV of the Rules. This
would promote a centralized location for provisions that address trade
reporting and novation. OCC also proposes to consolidate certain
provisions in Chapter IV of the Rules to eliminate redundancy. These
proposed organizational changes are summarized below.
Article VI, Section 4 of OCC's By-Laws regarding a Purchasing
Clearing Member's obligations with respect to a Confirmed Trade would
be relocated, without amendment, to a new Rule 403. Article VI, Section
5 of the By-Laws regarding OCC's obligations with respect to a
Confirmed Trade would be amended, as described above, and incorporated
into existing Rule 401 and new Rule 404. Article VI, Section 6 of the
By-Laws regarding the issuance of cleared contracts would be amended as
described above and relocated to a new Rule 405. Article VI, Section 7
of the By-Laws regarding the reporting of confirmed trades would be
relocated and incorporated into Rule 401. More specifically, Article
VI, Section 7(b) of the By-Laws would become Rule 401(e), Section 7(c)
would become Rule 401(f), and Interpretation and Policy .01 to Section
7 would become Interpretation and Policy .03 to Rule 401. Article VI,
Section 8 of the By-Laws regarding payments made to OCC would be
amended as described above and relocated to new Rule 406. To
accommodate these new rules in Chapter IV, current Rule 403 would be
renumbered as 407, and current Rule 405 would be renumbered as Rule
408. Cross-references would also be updated to reflect this renumbering
throughout Chapter IV of the Rules, as well as in Article I, Section
1.G.(3) and (4), Article VI, Section 2, and Article XVII, Sections 2(a)
and 2(c)(1) of the By-Laws, and Rules 504(e), 504(g), and 611(a).
Additionally, OCC proposes to delete existing Rule 404 regarding
the reporting of confirmed trades in OTC Options and to incorporate its
substance into Rule 401 in order create a more centralized trade
reporting rule. This incorporation of Rule 404 into Rule 401 would
require the addition of references to OTC Trade Sources in Rule 401(a)
and (b), and the merger of language from Rule 404(b) into Rule 401(b)
and from Rule 404(c) into Rule 401(d).
[[Page 15186]]
Elimination of Dormant Products and Rules
OCC proposes to delete certain provisions from its By-Laws and
Rules that only apply to cross-rate foreign currency options and
flexibly-structured index options denominated in a foreign currency
because OCC no longer clears and settles such products. These products,
when they were still actively cleared and settled, were subject to
delayed novation, so OCC believes eliminating the rules governing these
products at this time would reduce confusion related to the adoption of
the proposed changes described herein concerning trade acceptance and
novation timing. Consequently, OCC proposes to delete Articles XX and
XXIII of its By-Laws and Chapters XXI and XXIV of its Rules, which
govern each of those products, respectively. Additionally, OCC proposes
to eliminate all other references to such products throughout its By-
Laws and Rules, including in Section 1(d) of Article V, and
Interpretation and Policy .03 to Section 1 of Article V of the By-Laws
and Rules 607, 1107(a)(3) and 1107(a)(4), as well as in the definitions
of Option Contract, Trading Currency and Underlying Currency in Article
I of the By-Laws.
OCC also proposes to delete Rule 402 concerning the supplementary
reporting of Confirmed Trades. Under Rule 402, in certain extraordinary
circumstances, OCC may in its discretion accept from an Exchange after
the cut-off time for receiving Confirmed Trade information for a
particular business day (``trade date'') supplementary Confirmed Trade
information reflecting the comparison of additional trades executed on
or before the trade date that remained unconfirmed at the cut-off time.
Rule 402 was adopted at a time when OCC received matched trade
information from Exchanges for a given trade date in a single batch
submission after the close of the trading day.\35\ Under this old
process, trades that remained unmatched when an Exchange prepared its
nightly trade tape to OCC were omitted from the tape and, if a trade
was subsequently matched, the Exchange reported the trade to OCC the
following night to be processed as if it had not been executed until
the date when it was reported. Rule 402 was adopted to accommodate the
late submission of trades that had not been matched in time to be
submitted on the Exchange's original trade tape, thereby allowing those
trades to be processed as if they were submitted on their original
trade date. OCC is proposing to delete Rule 402 because it is no longer
applicable to OCC's current clearing processes, whereby OCC
continuously receives matched trade information from Exchanges on a
real-time basis.
---------------------------------------------------------------------------
\35\ See Filing and Order Granting Accelerated Approval of
Proposed Rule Change of Options Clearing Corporation, Securities
Exchange Act Release No. 21233 (August 10, 1984) (SR-OCC-84-12).
---------------------------------------------------------------------------
(2) Statutory Basis
Section 17A(b)(3)(F) of the Act \36\ requires, among other things,
that the rules of a clearing agency be designed to foster cooperation
and coordination with persons engaged in the clearance and settlement
of securities transactions, promote the prompt and accurate clearance
and settlement of securities and derivatives transactions, and, in
general, protect investors and the public interest. The proposed rule
change is intended to provide a clear and uniform acceptance and
novation time for nearly all Confirmed Trades and to clarify the
acceptance and novation timing regarding Stock Loans by creating
greater certainty regarding the time at which novation occurs and such
Confirmed Trades and Stock Loans may no longer be rejected by OCC.
Under the newly proposed uniform acceptance time, OCC would deem nearly
all Confirmed Trades to be accepted and simultaneously novated when
they are reported to OCC, provided that the transaction information
reported to OCC by the Exchange or OTC Trade Source first passes OCC's
validation procedures and is provided to OCC at such time as OCC
prescribes. In addition, the proposed rule change also would eliminate
certain dormant rules that are no longer applicable to OCC's clearance
and settlement services and processes. As a result, OCC believes that
the proposed rule change would provide greater clarity and transparency
to Clearing Members, other users of OCC, and the general public
regarding OCC's processes for the reporting of transactions,
acceptance, and novation. OCC therefore believes that the proposed rule
change is designed to foster cooperation and coordination with persons
engaged in the clearance and settlement of securities transactions,
promote the prompt and accurate clearance and settlement of securities
and derivatives transactions, and, in general, protect investors and
the public interest in accordance with Section 17A(b)(3)(F) of the
Act.\37\
---------------------------------------------------------------------------
\36\ 15 U.S.C. 78q-1(b)(3)(F).
\37\ Id.
---------------------------------------------------------------------------
In addition, Rule 17Ad-22(e)(1) \38\ requires a covered clearing
agency to 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. First, the proposed rule
change would provide a clear and uniform time regarding OCC's
acceptance and novation for nearly all Confirmed Trades and clarify
OCC's acceptance and novation process regarding Stock Loans. Achieving
this outcome by, among other things, eliminating the use of the term
Commencement Time and the current structure in which users must parse
through a number of By-Law and Rule provisions to identify the time at
which novation occurs would help ensure that OCC has a well-founded,
clear, transparent, and enforceable legal basis regarding the rights
and obligations of OCC and Clearing Members in respect of the reporting
of transactions, acceptance, and novation. Second, OCC also believes
that the proposal to streamline and reorganize provisions concerning
transaction reporting, acceptance, and novation is consistent with Rule
17Ad-22(e)(1) \39\ because consolidating them in Chapter IV of the
Rules would promote readability and therefore allow the provisions to
be more easily understood. OCC believes this same purpose of promoting
clarity and readability would also be furthered by eliminating By-Law
and Rule provisions that concern certain dormant products that are no
longer cleared and settled by OCC or that concern processes no longer
supported by OCC.
---------------------------------------------------------------------------
\38\ 17 CFR 240.17Ad-22(e)(1).
\39\ Id.
---------------------------------------------------------------------------
(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \40\ 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 proposed rule change would impact or impose any burden
on competition. The proposed rule change is designed to provide more
clarity and transparency to, and therefore foster cooperation and
coordination among, Clearing Members, other users of OCC, and the
general public regarding OCC's processes regarding the reporting of
transactions, acceptance and novation. This proposed rule change would
not inhibit access to OCC's services or
[[Page 15187]]
disadvantage or favor any particular user in relationship to another,
and it would be applied uniformly to all Clearing Members. For the
foregoing reasons, OCC believes the proposed rule change is in the
public interest, would be consistent with the requirements of the Act
applicable to clearing agencies and would not impact or impose a burden
on competition.
---------------------------------------------------------------------------
\40\ 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-2018-007 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-2018-007. 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 (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/about/publications/bylaws.jsp.
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-2018-007 and
should be submitted on or before April 30, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\41\
---------------------------------------------------------------------------
\41\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-07111 Filed 4-6-18; 8:45 am]
BILLING CODE 8011-01-P