[Federal Register Volume 83, Number 105 (Thursday, May 31, 2018)]
[Notices]
[Pages 25087-25093]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-11611]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83321; File No. SR-OCC-2018-007]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Amendment No. 1 and Order Approving Proposed Rule
Change, as Modified by Amendment No. 1, Related to The Options Clearing
Corporation's Trade Acceptance and Novation Rules
May 24, 2018.
On March 23, 2018, the Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission''), pursuant
to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ proposed rule change SR-
OCC-2018-007. The proposed rule change was published for comment in the
Federal Register on April 9, 2018.\3\ The Commission did not receive
any comments on the proposed rule change. On April 19, 2018, OCC filed
Amendment No. 1 to the proposed rule change.\4\ The Commission is
publishing this notice to solicit comment on Amendment No. 1 from
interested persons and is approving the proposed rule change, as
modified by Amendment No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 82984 (April 3, 2018),
83 FR 15181 (April 9, 2018) (SR-OCC-2018-007) (``Notice'').
\4\ OCC submitted Amendment No. 1 to correct an error in Exhibit
5B of the Notice, which did not accurately reflect the text of
existing OCC Rule 2202(c) and erroneously contained proposed changes
to that inaccurate text. Amendment No. 1 clarifies that the rule
text for existing Rule 2202(c) would remain unchanged and would not
be affected by the proposed rule change.
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I. Description of the Proposed Rule Change 5
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\5\ The subsequent description of the proposed rule change is
substantially excerpted from OCC's description in the Notice. See
Notice, 83 FR 15181-15186.
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OCC proposed to amend OCC's By-Laws (``By-Laws'') and Rules to: (1)
Clarify the time at which OCC accepts and novates \6\ 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.
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\6\ 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.
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[[Page 25088]]
Background
Acceptance and Novation Timing
Clearly stating the specific time at which OCC accepts transactions
for clearance and settlement is important to Clearing Members because
it signifies the time under the 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,\7\ including as a guarantor of
the settlement obligations associated with transactions that OCC
accepts and novates.\8\
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\7\ See, e.g., Article VI, Section 5 of the By-Laws.
\8\ See generally 15 U.S.C. 78q-1; 17 CFR 240.17Ad-22.
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Current Acceptance and Novation of Confirmed Trades
While most trades are functionally novated upon proper submission
to OCC for clearing, OCC's current By-Laws and Rules require a user to
parse through a number of provisions and definitions in various
locations to identify the time at which acceptance and novation occur.
For example, the term Confirmed Trade \9\ is defined to include all of
the products for which OCC currently provides clearance and settlement
services, with the exception of certain Stock Loan \10\ transactions. A
Confirmed Trade is novated upon OCC's acceptance of the trade, 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 one section 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.\11\ Another section of the By-Laws
(regarding the reporting of Confirmed Trades) specifies that 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.\12\
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\9\ Under the 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.''
\10\ 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 are addressed separately below.
\11\ Article VI, Section 5 of the By-Laws. This typically occurs
at the end of each business day.
\12\ Article VI, Section 7 of the By-Laws.
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Under yet another section 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.\13\ 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.\14\
OCC proposed the changes herein to reflect this reality.
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\13\ See Article VI, Section 8 of the By-Laws.
\14\ 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 By-Laws. This authority would be
preserved and relocated into OCC's Rules in connection with the
proposed changes described herein.
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Different Commencement Times and Rejection Rights for Certain Confirmed
Trades
Certain categories of Confirmed Trades 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, while setting forth the following alternate
definitions of Commencement Time:
(1) For futures issued in exchange-for-physical transactions,\15\
block trades,\16\ 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; \17\
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\15\ 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.
\16\ 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.
\17\ See Article XII, Section 7 of the By-Laws.
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(2) For 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; \18\ and
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\18\ See Articles XX, Section 1 and XXIII, Section 1 of the By-
Laws.
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(3) For 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.\19\
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\19\ See Article VI, Section 5 of the By-Laws.
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That same section of the By-Laws specifies that, for Backloaded OTC
Options, the transaction is not accepted for clearing until the Selling
Clearing Member has met its regular morning settlement obligation on
the business day following the reporting of the trade to OCC.\20\
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\20\ Id.
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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.\21\
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:
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\21\ See generally Article VI, Section 8 of the By-Laws
identifying these exceptions.
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(1) For 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; \22\
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\22\ See Article XII, Section 7 of the By-Laws.
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(2) For 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; \23\ and
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\23\ See Article XX, Section 5, Article XXIII, Section 7 of the
By-Laws.
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(3) For 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.\24\
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\24\ 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.
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[[Page 25089]]
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 proposed to amend the
substance of Article VI, Section 5 of the By-Laws \25\ 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.
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\25\ 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.
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To accomplish this, OCC proposed 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).\26\ 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 \27\ and is provided to OCC at such time as OCC
prescribes. This change is intended to provide a more definitive
indication of the point after which OCC no longer has authority to
reject such transactions for clearing.\28\ Eliminating the concept of
Commencement Time also necessitates deleting the term from the defined
terms 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. To do this, OCC proposed to
amend the following provisions of its By-Laws: Article I (definition of
``American; American-style''); Sections 5, 6, and 12 of Article VI;
\29\ and Section 7 of Article XII.
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\26\ 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.
\27\ 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, including but not limited to the trade source,
symbol, expiration, strike, call or put, quantity, price, and
Clearing Member details of both sides of the trade.
\28\ 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.
\29\ 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.
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OCC also proposed to amend Rule 401 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,
amended 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, new Rule 401(a)(1)(ii) would provide that OCC
may also request certain optional trade information that is not
required as a condition for acceptance.\30\
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\30\ 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.
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For futures transactions, Rule 401(a)(2)(i) would be amended to
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, new 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.
Taken together, these changes are designed to provide a uniform
approach for nearly all Confirmed Trades regarding acceptance and
novation. OCC believes the changes will reduce the complexity of its
Rules and By-Laws, while at the same time providing 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. OCC believes that adopting
this uniform approach regarding acceptance and novation will neither
functionally change the time at which OCC becomes obligated regarding
Confirmed Trades nor otherwise alter the credit risk OCC faces with
respect to such Confirmed Trades.
First, providing 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
OCC currently has no right to reject Confirmed Trades, upon proper
submission, due to the failure of a Purchasing Clearing Member to pay
any amount due to OCC at or before the settlement time. Second, OCC
generally does not collect margin with respect to such Confirmed Trades
until 9:00 a.m. Central the following business day.\31\ OCC, therefore,
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 does not anticipate that moving the novation
time from the general Commencement Time to earlier in the day as
described above--at the point of acceptance--would 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
[[Page 25090]]
necessary through intra-day margin collection.\32\
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\31\ 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).
\32\ See OCC Rule 609 (addressing OCC's authority to require
intra-day margin).
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Further, OCC believes that it would be appropriate to also apply
the uniform acceptance and novation time to OTC Options that are not
Backloaded OTC Options. OTC Options currently are subject to an
alternative Commencement Time, designated for OTC Options that are not
Backloaded OTC Options as the time when a report of OCC's acceptance is
made available to Clearing Members through OCC's clearing system.\33\
In practice, OCC automatically makes a report of its acceptance of such
OTC Options available to Clearing Members in its clearing system,
provided the OTC Option is properly reported to OCC, the contract
passes OCC's validation process, and the contract is not rejected, all
of which generally is completed immediately upon submission of the
contract to OCC.\34\ This is consistent with the new uniform approach
OCC proposed, which would 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. Accordingly, OCC believes
there is no operational, risk management, or other reason to exclude
OTC Options that are not Backloaded OTC Options from the proposed
uniform acceptance and novation timing.
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\33\ Article VI, Section 5 of the By-Laws.
\34\ 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).
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Proposed Exceptions to the Uniform Acceptance and Novation Timing
For other categories of Confirmed Trades that currently are not
subject to the general definition of Commencement Time (i.e., Confirmed
Trades in futures issued in exchange-for-physical transactions, block
trades, or other trades designated as non-competitively executed), OCC
proposed to preserve the existing structure under which OCC has
authority to reject the transactions even after they are properly
submitted for clearing by creating an exception to the uniform
acceptance and novation timing for such trades. OCC believes that
delayed novation continues to be 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.\35\
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\35\ 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.
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As proposed, an exception to the uniform acceptance and novation
timing also would 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.\36\ OCC believes that an exception for Backloaded
OTC Options remains necessary because their ``backloaded'' nature means
that the premium payment has already been made. Backloaded OTC Options
also are subject to being non-competitively executed and therefore
present the same heightened settlement default risk regarding other
non-competitively executed transactions discussed above. In addition,
because OCC is not able to immediately validate a Backloaded OTC
Options transaction or check its price reasonability upon submission,
OCC believes that it remains appropriate to continue its existing
practice of delaying 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.
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\36\ See Article I, Section 1.B.(1) of the By-Laws.
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Provisional Information Regarding Confirmed Trades
OCC proposed that its acceptance and novation time would no longer
be tied to publication of a Daily Position Report, given that OCC's
acceptance of a Confirmed Trade would instead be reflected in the
position information that OCC makes available to Clearing Members
throughout the business day. Accordingly, OCC proposed 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
proposed to amend its rules for both programs to better describe its
process for accepting Hedge Loans and Market Loans and to appropriately
harmonize certain provisions governing each type of Stock Loan.\37\
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\37\ See OCC Rules 2202(b); 2202A(b), (c).
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Stock Loan/Hedge Loan Program. Hedge Loans are initiated as stock
lending transactions that are negotiated and settled between Clearing
Members at The Depository Trust Company (``DTC'') 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 DTC that
shows a completed transaction.\38\ 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 DTC
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.\39\
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\38\ OCC is not obligated to accept the stock lending
transactions of a Clearing Member that has been suspended by DTC.
See OCC Rule 2210(a). The same condition applies regarding Market
Loans. See OCC Rule 2210A(a).
\39\ See Rule 2202, Interpretation and Policy .01.
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OCC proposed to amend Rule 2202(b) to clarify that OCC receives and
accepts completed transaction information from DTC throughout the day,
and it 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;
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(2) one or both account numbers specified are invalid; or (3) the
information provided contains unresolved errors or omissions. OCC
believes that these changes will help clarify the time at which Hedge
Loans are accepted and the specific circumstances in which Hedge Loans
will be rejected. As discussed more fully below, the change also would
ensure consistency between parallel provisions in the Stock Loan/Hedge
Program and Market Loan Program regarding the initiation process, which
OCC believes should apply equally across both programs. Finally, a
reference to the Stock Loan Mark 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.
Market Loan Program. In connection with the Market Loan Program
initiation process, DTC 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 DTC, 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
proposed to clarify that OCC receives and accepts completed transaction
information from DTC throughout the day. OCC also proposed 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 also would 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 effort to streamline its By-Laws and
Rules, OCC proposed to relocate certain provisions from Article VI,
Sections 4 through 8 of the By-Laws to Chapter IV of the Rules. This
change would promote a centralized location for provisions that address
trade reporting and novation. OCC also proposed to consolidate certain
provisions in Chapter IV of the Rules to eliminate redundancy. These
proposed organizational changes are summarized below.
OCC would relocate Article VI, Section 4 of OCC's By-Laws regarding
a Purchasing Clearing Member's obligations with respect to a Confirmed
Trade, without amendment, to a new Rule 403. As described above, OCC
would amend Article VI, Section 5 of the By-Laws regarding OCC's
obligations with respect to a Confirmed Trade, and it would be
incorporated into existing Rule 401 and new Rule 404. As described
above, OCC would amend Article VI, Section 6 of the By-Laws regarding
the issuance of cleared contracts, and it would be relocated to a new
Rule 405. OCC would relocate Article VI, Section 7 of the By-Laws
regarding the reporting of confirmed trades incorporate it 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. As described above, OCC would amend Article
VI, Section 8 of the By-Laws regarding payments made to OCC and
relocate it 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 also would 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, to create a more centralized trade reporting rule,
OCC proposed to delete existing Rule 404 regarding the reporting of
confirmed trades in OTC Options and to incorporate its substance into
Rule 401. This 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).
Elimination of Dormant Products and Rules
OCC no longer clears and settles cross-rate foreign currency
options and flexibly-structured index options denominated in a foreign
currency. Accordingly, OCC proposed to delete certain provisions from
its By-Laws and Rules that only apply to such products. When OCC still
actively cleared and settled these products they were subject to
delayed novation. OCC therefore believes that eliminating the rules
governing these products at this time would avoid confusion and enhance
clarity regarding OCC's proposed uniform approach to trade acceptance
and novation timing. Consequently, OCC proposed to delete Articles XX
and XXIII of its By-Laws, which governs cross-rate foreign currency
options, and Chapters XXI and XXIV of its Rules, which govern flexibly-
structured index options denominated in a foreign currency.
Additionally, OCC proposed 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 proposed to delete Rule 402 concerning the supplementary
reporting of Confirmed Trades. Rule 402 grants OCC the discretion to,
in certain extraordinary circumstances, 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.\40\ 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. OCC adopted Rule 402 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 proposed 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.
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\40\ 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).
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[[Page 25092]]
II. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization.\41\ After carefully considering the proposed rule change,
the Commission believes that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to OCC. More specifically, the Commission
believes that the proposal is consistent with Section 17A(b)(3)(F) of
the Act \42\ and Rule 17Ad-22(e)(1) under the Act.\43\
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\41\ 15 U.S.C. 78s(b)(2)(C).
\42\ 15 U.S.C. 78q-1(b)(3)(F).
\43\ 17 CFR 240.17Ad-22(e)(1).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act \44\ 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. As described above,
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
specifying the time at which novation occurs and when Confirmed Trades
and Stock Loans may no longer be rejected by OCC. Under the 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 passes OCC's
validation procedures and is provided to OCC at such time as OCC's
rules prescribe. In addition, the proposed rule change would eliminate
certain dormant rules no longer applicable to OCC's clearance and
settlement services and processes.
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\44\ 15 U.S.C. 78q-1(b)(3)(F).
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The Commission believes that these changes 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. Instead of parsing through
multiple different definitions and provisions in various locations
throughout OCC's By-Laws and Rules to identify the different times at
which acceptance and novation occurs for different transactions, users
and other interested parties will be able to refer to more uniform
approach set forth in a single chapter of OCC's Rules. This, in turn,
will help avoid potential confusion and ambiguity. Accordingly, the
Commission believes that, taken together, these changes will help
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 consistent with Section 17A(b)(3)(F) of the Act.\45\
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\45\ Id.
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B. Consistency with Rule 17Ad-22(e)(1)
Rule 17Ad-22(e)(1) \46\ 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. The Commission believes the
proposed changes are consistent with Rule 17Ad-22(e)(1) for the reasons
set forth below.
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\46\ 17 CFR 240.17Ad-22(e)(1).
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First, by modifying the current process so that all Confirmed
Trades, subject to limited exceptions, would be deemed accepted and
simultaneously novated when they are reported to OCC and the related
position information has been recorded in OCC's clearing system, 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.
The Commission believes this would bring clarity and transparency to
OCC's By-Laws and Rulebook and help simplify the process of reporting
transactions, acceptance, and novation, which in turn will help ensure
that OCC has a well-founded, clear, transparent, and enforceable legal
basis regarding the rights and obligations of OCC and Clearing Members
regarding Confirmed Trades, consistent with Rule 17Ad-22(e)(1).
Second, the Commission believes that the streamlining and
reorganizing all of the provisions concerning transaction reporting,
acceptance, and novation and consolidating them in Chapter IV of the
Rules would promote consistency and readability and help avoid
potential confusion and ambiguity, and therefore allow the provisions
to be more easily understood. For example, enumerating the trade
information required to be submitted by participant Exchanges to OCC
for options and futures transactions would allow for greater clarity of
the information required and that may be requested by OCC. Similarly,
by better describing the process by which Hedge Loans and Market Loans
are accepted, OCC would harmonize the relevant provisions of its
Rulebook governing each type of Stock Loan. In addition, the Commission
believes eliminating provisions related to processes no longer
supported by OCC and dormant products that are no longer cleared and
settled by OCC would improve the clarity and transparency of its By-
Laws and Rules. Accordingly, the Commission believes that the changes
proposed in the proposed rule change are consistent with Rule 17Ad-
22(e)(1) under the Act.\47\
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\47\ Id.
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III. Solicitation of Comments on Amendment No. 1
Interested persons are invited to submit written data, views and
arguments concerning whether Amendment No. 1, 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
[[Page 25093]]
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 June 15, 2018.
IV. Approval of Proposed Rule Change, as Modified by Amendment No. 1
As discussed above, OCC submitted Amendment No. 1 to accurately
reflect existing Rule 2202(c), which would not be affected by the
proposed rule change. The Commission believes that Amendment No. 1 does
not raise any novel issues or alter the proposed changes in any way. In
addition, the Commission finds that the proposed rule change, as
modified by Amendment No. 1, is consistent with Act and applicable
rules thereunder for the reasons discussed above. Accordingly, the
Commission finds good cause to approve the proposed rule change, as
modified by Amendment No. 1 pursuant to Section 19(b)(2) of the
Act.\48\
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\48\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change, as modified by Amendment No. 1, is consistent
with the requirements of the Act, in particular with the requirements
of Section 17A of the Act \49\ and Rule 17Ad-22(e)(1) thereunder.
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\49\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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It is therefore ordered, pursuant to Section 19(b)(2) \50\ of the
Act, that the proposed rule change (SR-OCC-2018-007) be, and it hereby
is, approved.
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\50\ 15 U.S.C. 78s(b)(2).
\51\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\51\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-11611 Filed 5-30-18; 8:45 am]
BILLING CODE 8011-01-P