[Federal Register Volume 78, Number 135 (Monday, July 15, 2013)]
[Pages 42125-42127]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-16864]



[Release No. 34-69955; File No. SR-OCC-2013-804]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of an Advance Notice in Connection With a Proposed 
Change to its Operations in the Form of a Private Offering by OCC of 
Senior Unsecured Debt Securities

July 10, 2013.
    Pursuant to Section 806(e)(1) of the Payment, Clearing, and 
Settlement Supervision Act of 2010 (``Clearing Supervision Act'') \1\ 
and Rule 19b-4(n)(1)(i) \2\ of the Securities Exchange Act of 1934 
(``Exchange Act'') notice is hereby given that on June 10, 2013, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') the advance notice as described in 
Items I and II below, which Items have been substantially prepared by 
OCC.\3\ The Commission is publishing this notice to solicit comments on 
the advance notice from interested persons.

    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ OCC is a designated financial market utility and is required 
to file advance notices with the Commission. See 12 U.S.C. 5465(e).

I. Clearing Agency's Statement of the Terms of Substance of the Advance 

    OCC is proposing to change its operations in the form of a private 
offering of senior unsecured debt securities (``Offering'').

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the advance notice and 
discussed any comments it received on the advance notice. The text of 
these statements may be examined at the places specified in Item IV 
below. The clearing agency has prepared summaries, set forth in section 
A below, of the most significant aspects of such statements.\4\

    \4\ The Commission has modified the text of the summaries 
prepared by the clearing agency.

(A) Advance Notices Filed Pursuant to Section 806(e) of the Clearing 
Supervision Act

Description of Change
    OCC states that the proposed Offering would provide OCC with access 
to additional liquidity for working capital needs and general corporate 
purposes. The aggregate principal amount of the senior unsecured debt 
securities placed in the Offering is expected to be up to $100 million. 
The proceeds of the Offering would be among the financial resources 
used to satisfy the requirements applicable to OCC under CFTC 
    Among other things, OCC states that CFTC regulation Section 
39.11(a)(2) \5\ requires a derivatives clearing organization (``DCO'') 
to hold an amount of financial resources that, at a minimum, exceeds 
the total amount that would enable the DCO to cover its operating costs 
for a period of at least one year, calculated on a rolling basis. In 
turn, CFTC regulation Section 39.11(e)(2) \6\ provides that these 
financial resources must include unencumbered, liquid financial assets 
(i.e., cash and/or highly liquid securities), equal to at least six 
months' operating costs. OCC states that the Offering is intended to 
contribute to OCC's compliance with the financial resources requirement 
under CFTC regulation Section 39.11(a)(2) \7\ and the liquidity 
requirements prescribed by CFTC regulation Section 39.11(e)(2).\8\ OCC 
states that the proceeds of the offering would be invested in 
instruments such as reverse repurchase agreements in which working 
capital may be invested under OCC's By-Laws.

    \5\ 17 CFR 39.11(a)(2).
    \6\ 17 CFR 39.11(e)(2).
    \7\ 17 CFR 39.11(a)(2).
    \8\ 17 CFR 39.11(e)(2).

    Under the proposal, OCC would issue senior unsecured debt 
securities through the Offering, which would be structured as a private 
placement for which a broker-dealer registered with the Securities and 
Exchange Commission under the Exchange Act would act as the exclusive 
placement agent. Under the terms of the Offering, OCC would be required 
to use any capital raised to finance its working capital needs or for 
general corporate purposes.
    According to OCC, one of the conditions of OCC's proposed Offering 
is the execution of definitive agreements. These agreements are 
expected to include a number of conditions related to OCC's performance 
under such agreements including, without limitation, certain covenants 
and default provisions.
    OCC states that the Offering would involve a variety of customary 
fees and expenses payable by OCC to the placement agent and the 
noteholders, including but not limited to: (1) A placement agent fee 
calculated as a

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percentage of the aggregate principal amount of debt securities sold in 
the Offering; and (2) other costs and expenses incurred by the 
placement agent in relation to its activities in connection with the 
Offering including, but not limited to, travel expenses and reasonable 
fees of counsel. These fees and expenses may be paid out of the 
proceeds of the Offering.
Anticipated Effect on and Management of Risk
    OCC states that any impact of the Offering on the risks presented 
by OCC would be to reduce such risks by providing an additional source 
of liquidity for the protection of OCC, its clearing members, and the 
options market in general. OCC states that the Offering would provide 
OCC with additional liquidity for working capital needs and general 
corporate purposes and thereby assist OCC in satisfying the CFTC's 
requirements with respect to liquidity under CFTC regulation Section 

    \9\ 17 CFR 39.11.

    OCC states that, like any debt offering, the Offering would involve 
risks. According to OCC, one risk associated with the Offering relates 
to the need for OCC to maintain sufficient cash flow to support ongoing 
interest payments to the noteholders. OCC states this risk is mitigated 
by its conservative fiscal practices under which clearing and other 
fees are assessed at a level designed to ensure that OCC has more than 
sufficient funds to operate and satisfy liabilities, and refunds are 
paid to clearing members only when it is clear that excess funds are 
available. Clearing member refunds would be effectively subordinated to 
interest payments on the notes sold in the Offering.
    OCC states that the Offering involves a risk of OCC's defaulting by 
failing to make timely payment of principal or interest or to comply 
with financial covenants, which would allow the noteholders to take 
legal action against OCC to recover any losses resulting from a 
default. However, OCC states that the risk of default from a payment 
failure is mitigated because, as discussed above, OCC does not expect 
to have difficulty making interest payments. Similarly, OCC states that 
the tests included in the financial covenants will be established at 
reasonable levels, making it unlikely that OCC would default by 
violating these covenants. In addition, because the Offering would 
involve the issuance of unsecured notes, OCC states that it would not 
be at risk of the noteholders' liquidating OCC assets in the event of 
OCC's default.
    The agreement with noteholders also requires OCC to make the 
noteholders ``whole'' in the event OCC elects to prepay any outstanding 
principal. According to OCC, this ``make-whole'' covenant poses risk to 
the extent OCC is unable to immediately pay the outstanding interest 
payments. OCC would mitigate the risk of having to make a large make-
whole payment by either electing not to call the notes prior to 
termination or by waiting to call the notes until the make-whole 
premium has been reduced by the passage of time to a smaller amount. 
OCC expects to need the additional liquidity for the term of the notes 
and to issue the notes at a time of favorable market conditions, and 
accordingly OCC does not expect to call the notes prior to termination.
    According to OCC, one risk of obtaining capital through the 
Offering as opposed to an unsecured line of credit is that OCC will 
incur more expense in connection with the Offering given that it must 
pay interest expense on the entire outstanding note balance as opposed 
to a comparatively smaller commitment fee on a line of credit. However, 
OCC states that this risk is justified by the difficulty in obtaining 
an unsecured line of credit of a size comparable to that of the 
Offering. Moreover, OCC states the risk is mitigated by OCC's 
investment of the proceeds, which generates income to offset the 
interest expense. In addition, by obtaining capital through the 
Offering OCC avoids the funding risk associated with a line of credit.

III. Date of Effectiveness of the Advance Notice and Timing for 
Commission Action

    OCC may implement the proposed change pursuant to Section 
806(e)(1)(G) of the Clearing Supervision Act \10\ if it has not 
received an objection to the proposed change within 60 days of the 
later of (i) the date that the Commission received the advance notice 
or (ii) the date the Commission receives any further information it 
requested for consideration of the notice. The clearing agency shall 
not implement the proposed change if the Commission has any objection 
to the proposed change.

    \10\ 12 U.S.C. 5465(e)(1)(G).

    The Commission may extend the period for review by an additional 60 
days if the proposed change raises novel or complex issues, subject to 
the Commission providing the clearing agency with prompt written notice 
of the extension. A proposed change may be implemented in less than 60 
days from the date of receipt of the advance notice, or the date the 
Commission receives any further information it requested, if the 
Commission notifies the clearing agency in writing that it does not 
object to the proposed change and authorizes the clearing agency to 
implement the proposed change on an earlier date, subject to any 
conditions imposed by the Commission.
    The clearing agency shall post notice on its Web site of proposed 
changes that are implemented.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.\11\

    \11\ OCC also filed the proposals contained in this advance 
notice as a proposed rule change under Section 19(b)(1) of the 
Exchange Act and Rule 19b-4 thereunder. See supra note 3.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. 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 rule-comments@sec.gov. Please include 
File Number SR-OCC-2013-804 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2013-804. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the advance notice that are filed 
with the Commission, and all written communications relating to the 
advance notice between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE., Washington, 
DC 20549 on official business days between the hours of

[[Page 42127]]

10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of OCC and on OCC's 
Web site (http://theocc.com/about/publications/bylaws.jsp). All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-OCC-2013-804 and should be 
submitted on or before August 5, 2013.

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-16864 Filed 7-12-13; 8:45 am]