[Federal Register Volume 85, Number 116 (Tuesday, June 16, 2020)]
[Notices]
[Pages 36442-36444]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-12893]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89037; File No. SR-OCC-2020-006]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Make Administrative Updates to The Options Clearing Corporation's Risk
Management Policies
June 10, 2020.
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 May 27, 2020, 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. OCC filed the proposed rule change pursuant
to Section 19(b)(3)(A)(iii) \3\ of the Act and Rule 19b-4(f)(6) \4\
thereunder so that the proposal was effective upon filing with the
Commission. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change by OCC would make conforming edits to the
following policies: OCC's Risk Management Framework Policy, OCC's
Default Management Policy and OCC's Clearing Fund Methodology Policy.
In each case, the conforming edits would ensure that descriptions of
OCC's process for replenishing operating capital and OCC's waterfall of
default resources are aligned with changes that took effect with the
approval of OCC's Capital Management Policy.\5\ Further conforming
edits to the Risk Management Framework Policy would establish that the
Capital Management Policy must detail the principles used to determine,
monitor, and measure OCC's capital levels such that OCC maintains
liquid net assets funded by equity (``LNAFBE'') consistent with the
requirements of Rule 17Ad-22(e)(15),\6\ aligned with the current
Capital Management Policy.\7\ The proposed rule change would also add
one footnote to the Clearing Fund Methodology Policy, which would
simply clarify that the Capital Management Policy's changes to OCC's
waterfall of default resources would not change OCC's definition of
``pre-funded financial resources,'' as used for purposes of the
calculating OCC's Clearing Fund.
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\5\ Exchange Act Release No. 88029 (Jan. 24, 2020), 85 FR 5500
(Jan. 30, 2020) (SR-OCC-2019-007).
\6\ 17 CFR 240.17Ad-22(e)(15).
\7\ See supra note 5.
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The Risk Management Framework Policy, Default Management Policy and
Clearing Fund Methodology Policy are included as confidential Exhibits
5A, 5B and 5C, respectively. Material proposed to be added is marked by
underlining and material proposed to be deleted is marked by
strikethrough text. The proposed rule change is available on OCC's
website at https://www.theocc.com/about/publications/bylaws.jsp. All
terms with initial capitalization that are not otherwise defined herein
have the same meaning as set forth in the OCC By-Laws and Rules.\8\
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\8\ OCC's By-Laws and Rules can be found on OCC's public
website: http://optionsclearing.com/about/publications/bylaws.jsp.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. OCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
(1) Purpose
Background
On February 13, 2019, the Commission disapproved OCC's Capital
Plan.\9\ The Capital Plan had provided for OCC's operating capital
structure and had included a contingency for replenishing OCC's
operating capital, if necessary, by raising additional capital from the
options exchanges that have equity ownership interests in OCC.\10\ As a
result of the disapproval of the Capital Plan, OCC subsequently
proposed its ``Capital Management Policy,'' which proposed a new
operating capital structure, a new process for replenishing OCC's
operating capital and certain changes to OCC's ``default waterfall''
(i.e., the resources available to OCC in the event of a Clearing
Member's suspension).\11\ On January 24, 2020, the Commission approved
OCC's Capital Management Policy.\12\
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\9\ Exchange Act Release No. 85121 (Feb. 13, 2019), 84 FR 5157
(Feb. 20, 2019) (SR-OCC-2015-02).
\10\ Exchange Act Release No. 74452 (Mar. 6, 2015), 80 FR 13058
(Mar. 12, 2015) (SR-OCC-2015-02). The contingency in the Capital
Plan for replenishing OCC's operating capital was referred to as
``Replenishment Capital.''
\11\ Exchange Act Release No. 86725 (Aug. 21, 2019), 84 FR 44944
(Aug. 27, 2019) (SR-OCC-2019-007).
\12\ See supra note 5.
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OCC's Risk Management Framework Policy, Default Management Policy
and Clearing Fund Methodology Policy each include discrete references
to aspects of the disapproved Capital Plan or to OCC's default
waterfall prior to the changes implemented by the Capital Management
Policy. Specifically, OCC's Risk Management Framework Policy contains a
paragraph summarizing the disapproved Capital Plan and its appendix
includes two references to the disapproved Capital Plan. OCC's Default
Management Policy includes a summary of the default waterfall predating
the approval of the Capital Management Policy and a list of OCC's
``Recovery Tools'' for default scenarios, which includes Replenishment
Capital. OCC's Clearing Fund Methodology Policy contains two paragraphs
that summarize OCC's default waterfall as it existed prior to the
approval of the Capital Management Policy. Each of these now-outdated
references needs to be revised to conform to the changes implemented by
the Capital Management Policy.
Proposed Changes
Proposed Changes to the Risk Management Framework Policy
OCC's Risk Management Framework Policy includes a paragraph
summarizing the disapproved Capital Plan and its appendix includes two
references to the disapproved Capital Plan. Accordingly, the
disapproval of the Capital Plan and adoption of the Capital Management
Policy requires that conforming changes be made to OCC's Risk
Management Framework Policy. The proposed rule change would effectively
replace in its entirety a short paragraph that summarizes the
disapproved Capital Plan with a short paragraph summarizing the Capital
Management Policy. Specifically, the
[[Page 36443]]
revised paragraph would require that OCC maintain a Capital Management
Policy that details the principles used to determine, monitor, and
manage OCC's capital levels such that OCC maintains sufficient LNAFBE
in a manner consistent with the requirements of Rule 17Ad-
22(e)(15).\13\ The proposed rule change also would amend the appendix
of the Risk Management Framework Policy to replace two references to
the Capital Plan with references to the Capital Management Policy.
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\13\ 17 CFR 240.17Ad-22(e)(15).
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Proposed Changes to the Default Management Policy
OCC's Default Management Policy includes a summary of the default
waterfall and a list of OCC's ``Recovery Tools,'' each of which
predates the approval of the Capital Management Policy. Accordingly,
the implementation of the Capital Management Policy requires conforming
changes to OCC's Default Management Policy. The proposed rule change
would revise a list in the Default Management Policy that summarizes
the default waterfall. As revised, the list would: (1) Include a
summary description--immediately following the use of margin, deposits
in lieu of margin and the Clearing Fund deposits of the suspended
Clearing Member--of OCC's use of current and retained earnings greater
than 110% of OCC's annually-established Target Capital Requirement, as
implemented by the Capital Management Policy, and (2) describe the
contribution of unvested portions of OCC's EDCP, in proportion to any
charges against the mutualized portion of OCC's Clearing Fund, as
implemented by the Capital Management Policy.
Also, the proposed rule change would revise a list in the Default
Management Policy that summarizes OCC's Recovery Tools. As revised, the
list would delete the use of OCC's current and/or retained earnings
from the list of OCC's Recovery Tools. As implemented by the Capital
Management Policy, OCC's current and retained earnings greater than
110% of OCC's annually-established Target Capital Requirement would be
mandatorily contributed in advance of any charges against the
mutualized portion of OCC's Clearing Fund, and thusly, would not be
available as a recovery tool for the purpose of managing a Clearing
Member default after OCC charges a loss to the Clearing Fund.
Proposed Changes to the Clearing Fund Methodology Policy
The Clearing Fund Methodology Policy contains two paragraphs
summarizing the process for levying charges against OCC's Clearing Fund
and for Clearing Member's to replenish OCC's Clearing Fund, as each
process existed prior to the implementation of the Capital Management
Policy. Accordingly, the adoption of the Capital Management Policy
requires conforming changes to OCC's Clearing Fund Methodology Policy.
As revised, the first paragraph would describe OCC's use of current and
retained earnings greater than 110% of OCC's annually-established
Target Capital Requirement before OCC levies charges against its
Clearing Fund, as implemented by the Capital Management Policy (this
paragraph would continue to immediately follow a reference to the use
of the margin and Clearing Fund deposits of the suspended Clearing
Member). The second paragraph would be revised to describe the
contribution of unvested portions of OCC's EDCP, in proportion to any
charges against the mutualized portion of OCC's Clearing Fund, as
implemented by the Capital Management Policy.
In addition to the foregoing revisions, the proposed rule change
also would add a footnote making clear that OCC does not consider
assessment powers, available current and retained earnings exceeding
110% of the Target Capital Requirement or available unvested portions
of OCC's EDCP to be ``pre-funded financial resources'' for purposes of
sizing or measuring the sufficiency of the Clearing Fund. This change
would simply clarify that the Capital Management Policy's changes to
OCC's waterfall of default resources would not change OCC's definition
of ``pre-funded financial resources,'' as used for purposes of the
calculating OCC's Clearing Fund.
(2) Statutory Basis
OCC believes that the proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act \14\ because the proposed change to
update OCC's Risk Management Framework Policy, Default Management
Policy and Clearing Fund Methodology Policy ultimately would protect
investors and the public interest. OCC's Risk Management Framework
Policy is designed to enable OCC to identify, measure, monitor and
manage the range of risks that arise in or are borne by OCC. OCC's
Default Management Policy is designed to facilitate OCC's authority and
operational capacity to take timely action to contain losses arising
from the suspension of a Clearing Member. OCC's Clearing Fund
Methodology Policy is designed to summarize the manner by which OCC
determines the level of Clearing Fund resources to cover a wide range
of foreseeable stress scenarios. OCC believes that making conforming
edits to the Risk Management Framework Policy, Default Management
Policy and Clearing Fund Methodology Policy would improve the
possibility of OCC effectively addressing a variety of potential risks.
In turn, OCC believes this would improve its ability to ultimately
maintain market and public confidence during a time of unprecedented
stress. In this regard, OCC believes the proposed rule change
ultimately would protect investors and the public interest in a manner
consistent with Section 17A(b)(3)(F) of the Act.\15\
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\14\ 15 U.S.C. 78q-1(b)(3)(F).
\15\ 15 U.S.C. 78q-1(b)(3)(F).
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OCC also believes that the proposed rule change is consistent with
Rules 17Ad-22(e)(3)(i) \16\ and 17Ad-22(e)(13).\17\ The proposed
conforming edits to the Risk Management Framework Policy would improve
the accuracy of the policy's descriptions of OCC's capital structure
and replace outdated references to the Capital Plan. Each of these
conforming changes would improve the accuracy of OCC's Risk Management
Framework Policy. In this regard, OCC believes its proposed rule change
is consistent with Rule 17Ad-22(e)(3)(i).\18\ Similarly, proposed
conforming edits to the Default Management Policy would improve the
accuracy of the policy's descriptions of OCC's default waterfall and
recovery tools. The improved accuracy of the Default Management Policy
would facilitate OCC's operational capacity to take timely action to
contain losses arising from the suspension of a Clearing Member. In
this regard, OCC believes its proposed rule change is consistent with
Rule 17Ad-22(e)(13).\19\
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\16\ 17 CFR 240.17Ad-22(e)(3)(i).
\17\ 17 CFR 240.17Ad-22(e)(13).
\18\ 17 CFR 240.17Ad-22(e)(3)(i).
\19\ 17 CFR 240.17Ad-22(e)(13).
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OCC also believes that the proposed rule change is consistent with
Rule 17Ad-22(e)(4).\20\ The proposed conforming edits to the Clearing
Fund Methodology Policy would improve the accuracy of the policy's
descriptions of OCC's default waterfall and would clarify the resources
that would be counted as ``pre-funded financial resources'' in
determining the sizing
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and sufficiency of OCC's Clearing Fund. Together, the improved accuracy
and clarification of these proposed conforming edits would facilitate
OCC's ability to, among other things, effectively manage its credit
exposures to participants. In this regard, OCC believes its proposed
rule change is consistent with Rule 17Ad-22(e)(4).\21\
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\20\ 17 CFR 240.17Ad-22(e)(4).
\21\ Id.
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The proposed rule change is not inconsistent with the existing
rules of OCC, including any other rules proposed to be amended.
(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \22\ 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.\23\ The proposed rule change would update OCC's Risk
Management Framework Policy, Default Management Policy and Clearing
Fund Methodology Policy. The proposed changes to the Risk Management
Framework Policy, Default Management Policy and Clearing Fund
Methodology Policy would simply recognize the disapproval of OCC's
Capital Plan and its subsequent replacement with the adopted Capital
Management Policy, and in the case of the Clearing Fund Methodology
Policy, add a clarifying footnote. None of the proposed updates to the
Risk Management Framework Policy, Default Management Policy or Clearing
Fund Methodology Policy would affect Clearing Members' access to OCC's
services or impose any direct burdens on clearing members. Accordingly,
the proposed rule change would not unfairly inhibit access to OCC's
services or disadvantage or favor any particular user in relationship
to another user.
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\22\ 15 U.S.C. 78q-1(b)(3)(I).
\23\ Id.
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For the foregoing reasons, OCC believes that 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.
(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
Pursuant to Section 19(b)(3)(A)(iii) of the Act, \24\ and Rule 19b-
4(f)(6) \25\ thereunder, the proposed rule change is filed for
immediate effectiveness because it does not: (i) Significantly affect
the protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) by its terms would not
become operative for 30 days after the date of the filing, or such
shorter time as the Commission may designate. Additionally, OCC
provided the Commission with written notice of its intent to file the
proposed rule change, along with a brief description and text of the
proposed rule change, at least five business days prior to the date of
filing of the proposed rule change or such shorter time as designated
by the Commission.
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\24\ 15 U.S.C. 78s(b)(3)(A)(iii).
\25\ 17 CFR 240.19b-4(f)(6).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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-2020-006 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-2020-006. 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-2020-006 and
should be submitted on or before July 7, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-12893 Filed 6-15-20; 8:45 am]
BILLING CODE 8011-01-P