[Federal Register Volume 85, Number 116 (Tuesday, June 16, 2020)]
[Notices]
[Pages 36444-36447]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-12900]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89039; File No. SR-OCC-2020-803]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of No Objection To Advance Notice Related to Changes to the
Options Clearing Corporation's Non-Bank Repo Facility Program as Part
of Its Overall Liquidity Plan
June 10, 2020.
I. Introduction
On April 15, 2020, the Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') advance
notice SR-OCC-2020-803 (``Advance Notice'') pursuant to Section
806(e)(1) of
[[Page 36445]]
Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection
Act, entitled Payment, Clearing and Settlement Supervision Act of 2010
(``Clearing Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) \2\ under
the Securities Exchange Act of 1934 (``Exchange Act'') \3\ concerning
OCC's overall program and requirements for executing one or more
committed repurchase arrangements with non-bank, non-clearing
institutional investors.\4\ The Advance Notice was published for public
comment in the Federal Register on May 22, 2020,\5\ and the Commission
has received no comments regarding the changes proposed in the Advance
Notice. The Commission is hereby providing notice of no objection to
the Advance Notice.
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\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ 15 U.S.C. 78a et seq.
\4\ See Notice of Filing infra note 5, at 85 FR 31235.
\5\ Securities Exchange Act Release No. 88906 (May 19, 2020), 85
FR 31235 (May 22, 2020) (File No. SR-OCC-2020-803) (``Notice of
Filing'').
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II. Background \6\
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\6\ Capitalized terms used but not defined herein have the
meanings specified in OCC's Rules and By-Laws, available at https://www.theocc.com/about/publications/bylaws.jsp.
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Currently, OCC's liquidity plan provides it with access to a
diverse set of funding sources to help it manage its daily settlement
obligations, including in the event of a default of a Clearing Member.
Those sources include (i) a syndicated credit facility,\7\ (ii) a
master repurchase agreement with a bank counterparty (``Bank Repo
Facility''),\8\ and (iii) Clearing Members' Cash Clearing Fund
Requirement.\9\ In addition, as a fourth funding source, OCC's
liquidity plan also includes a program for executing one or more
committed repurchase arrangements with non-bank, non-clearing
institutional investors (i.e., no counterparty may be a Clearing Member
or affiliated bank). Those arrangements, taken together, constitute
OCC's ``Non-Bank Repo Facility.'' \10\
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\7\ See Exchange Act Release No. 85924 (May 23, 2019), 84 FR
25089 (May 30, 2019) (SR-OCC-2019-803).
\8\ See Exchange Act Release No. 88317 (Mar. 4, 2020), 85 FR
13681 (Mar. 9, 2020) (SR-OCC-2020-801).
\9\ See OCC Rule 1002 (requiring Clearing Members to
collectively contribute $3 billion in cash to the Clearing Fund),
available at https://www.theocc.com/components/docs/legal/rules_and_bylaws/occ_rules.pdf.
\10\ See Exchange Act Release No. 73979 (Jan. 2, 2015), 80 FR
1062 (Jan. 8, 2015) (SR-OCC-2014-809) (``Notice of No Objection to
2014 Advance Notice''); Exchange Act Release No. 76821 (Jan. 4,
2016), 81 FR 3208 (Jan. 20, 2016) (SR-2015-805) (``Notice of No
Objection to 2015 Advance Notice'').
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As noted, OCC relies on its funding sources, including the
commitments under the Non-Bank Repo Facility, as potential sources of
liquidity to manage the default of a Clearing Member. In the event that
one funding source changes, OCC has flexibility to adjust its other
sources accordingly. For example, if one of OCC's Non-Bank Repo
Facility commitments expires, OCC would have several options to replace
that commitment within OCC's liquidity plan, including (i) executing
one or more other commitments under the Non-Bank Repo Facility, (ii)
exercising the accordion feature under the syndicated credit
facility,\11\ (iii) temporarily increasing the Cash Clearing Fund
Requirement, and (iv) executing a new master repurchase agreement with
other bank counterparties, similar to the current Bank Repo Facility.
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\11\ An accordion is an uncommitted expansion of a credit
facility generally on the same terms as the credit facility. See
Securities Exchange Act Release No. 88690 (Apr. 20, 2020), 85 FR
23095, 23098 n. 12] (Apr. 24, 2020) (File No. SR-OCC-2020-003). For
example, the existing master confirmations under OCC's Non-Bank Repo
Facility, totaling $1 billion, expired on January 2, 2020 and
January 6, 2020. In anticipation of their expiration, OCC exercised
an accordion feature under its syndicated credit facility to
increase the amount from $2 billion to $2.5 billion. See Notice of
Filing, 85 FR at 31236.
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Each counterparty that participates in OCC's Non-Bank Repo Facility
executes an industry standard master repurchase agreement (``MRA'') as
well as an individual confirmation containing the tailored terms and
conditions of transactions executed between OCC and that specific
counterparty.\12\ The specific parameters that OCC may accept in an
individual confirmation are limited as part of the Non-Bank Repo
Facility program. As discussed in more detail below, OCC now proposes
to modify those parameters so that the Non-Bank Repo Facility could
encompass confirmations for committed repurchase transactions of
different funding commitment amounts with a range of commitment term
periods, something that is not permitted under the current Non-Bank
Repo Facility program.
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\12\ While the form and content of the MRAs signed by all
counterparties would include the same terms, the individual
confirmation signed by a specific counterparty would vary in that it
would set forth the term and maximum dollar amounts of the
transactions permitted under the relevant MRA.
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Current Non-Bank Repo Facility program. Commitments under the
current Non-Bank Repo Facility program reduce the concentration of
OCC's counterparty exposure by diversifying its lender base. OCC may
only enter into confirmations with institutional investors that are not
Clearing Members or affiliated banks, such as pension funds or
insurance companies, which commits OCC to obtaining funding without
further concentrating its exposure to funding sources such as banks,
broker/dealers, or futures commission merchants that are affiliated
with Clearing Members. Further, commitments provided as part of the
existing Non-Bank Repo Facility program are required to include certain
terms and conditions. For example, an institutional investor
participating in the Non-Bank Repo Facility is obligated to enter into
repurchase transactions even if OCC experiences a material adverse
change.\13\ Additionally, a counterparty is required to make funds
available to OCC within 60 minutes of OCC's delivering eligible
securities, and the counterparty is not permitted to rehypothecate
purchased securities.\14\ None of these existing requirements would
change in connection with OCC's proposed modifications to the Non-Bank
Repo Facility program. The parameters of the current Non-Bank Repo
Facility program also include the aggregate funding commitment amount
that OCC may seek as well as the duration of commitments made under the
Non-Bank Repo Facility.\15\ Currently, under the Non-Bank Repo Facility
program, OCC may seek aggregate commitment amounts of no less than $1
billion and no greater than $1.5 billion.\16\ Confirmations under the
current Non-Bank Repo Facility program are limited to a commitment term
greater than or equal to 364-days. These parameters--aggregate
commitment amount and commitment term -are the primary subject of the
Advance Notice.
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\13\ When included in a contract, a ``material adverse change''
is typically defined as a change that would have a materially
adverse effect on the business or financial condition of a company.
\14\ See Notice of No Objection to 2014 Advance Notice, 80 FR at
1064.
\15\ See Notice of No Objection to 2015 Advance Notice, 81 FR at
3208.
\16\ The parameter under the facility was initially $1 billion.
OCC altered the parameters of the facility to allow it to seek
aggregate commitment amounts between $1 billion and $1.5 billion.
See Notice of No Objection to 2015 Advance Notice, 81 FR at 3208.
The increase to the aggregate commitment amount was made as part of
OCC's plan to transition from a single $1 billion confirmation to
two confirmations of $500 million with staggered expiration dates.
See id. at 3209 (discussing the extension of the existing
confirmation and the execution of a second confirmation).
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Proposed changes. OCC has determined that it is necessary to amend
the terms of the Non-Bank Repo Facility to give itself more flexibility
in negotiating and obtaining a broader range of funding arrangements
across a broader range of counterparties. Those amendments would result
in two changes to the parameters of the Non-
[[Page 36446]]
Bank Repo Facility. First, OCC proposes to set the new aggregate
commitment amount it may seek under the Non-Bank Repo Facility program
at $1 billion, lowered from $1.5 billion, so that OCC may negotiate
individual commitment amounts, each less than $1 billion, with multiple
counterparties. OCC's Board has consistently authorized OCC to seek
commitment amounts up to an aggregate amount of $1 billion since 2016
even though the Non-Bank Repo Facility gives OCC discretion to seek
aggregate commitment amounts of up to $1.5 billion. OCC proposes to
modify the Non-Bank Repo Facility program to align the program's
parameters with the commitment amount approved by OCC's Board (i.e., $1
billion). The proposal would allow OCC to seek commitments even if such
commitments would not bring the aggregate commitment amount of the Non-
Bank Repo Facility up to $1 billon.
Second, OCC proposes to provide more flexibility in its ability to
negotiate different terms for different individual commitments that
make up the Non-Bank Repo Facility. Based on negotiations with
potential institutional investors, OCC believes there would be an
interest from OCC's potential counterparties for committing to a term
of less than one year.\17\ OCC proposes to provide itself flexibility
to execute different commitments with different terms that could be
less than 364 days, as opposed to the current uniform 364-day term
period, so that OCC can negotiate to obtain funding commitment from a
given counterparty. For example, such a term could be for a fixed
duration of less than one year or an open-ended term that allows for
termination subject to a notice period.
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\17\ See Notice of Filing, 85 FR at 31237 n. 18. OCC provided
information about the current status of negotiations with potential
counterparties in a confidential Exhibit 3b to File No. SR-OCC-2020-
803. See id.
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The proposal would require that, to execute or renew a transaction
under the Non-Bank Repo Facility, the OCC Board would review the
proposed commitment term and authorize OCC management to enter into or
renew such transactions. The length of the term or notice period OCC
would be willing to accept would be conditioned on factors including,
but not limited to, the initial committed length of the term, market
conditions, and OCC's liquidity needs. OCC represented that it would be
unlikely to accept a fixed term shorter than three months or a rolling
term with a notice period shorter than six months.\18\
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\18\ In 2019, OCC's only counterparty under the Non-Bank Repo
Facility decided not to renew its commitments, and two master
confirmations totaling $1 billion expired on January 2, 2020 and
January 6, 2020. Based on this experience, OCC believes that a six-
month notice period provides sufficient time to allow OCC to
reallocate liquidity resources to address a confirmation's
termination. See Notice of Filing, 85 FR at 31237.
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Other than these two amendments OCC is not proposing changes to any
other parameters or requirements of the Non-Bank Repo Facility.
III. Commission Findings and Notice of No Objection
Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, the stated purpose of the Clearing
Supervision Act is instructive: To mitigate systemic risk in the
financial system and promote financial stability by, among other
things, promoting uniform risk management standards for SIFMUs and
strengthening the liquidity of SIFMUs.\19\
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\19\ See 12 U.S.C. 5461(b).
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Section 805(a)(2) of the Clearing Supervision Act authorizes the
Commission to prescribe regulations containing risk management
standards for the payment, clearing, and settlement activities of
designated clearing entities engaged in designated activities for which
the Commission is the supervisory agency.\20\ Section 805(b) of the
Clearing Supervision Act provides the following objectives and
principles for the Commission's risk management standards prescribed
under Section 805(a): \21\
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\20\ 12 U.S.C. 5464(a)(2).
\21\ 12 U.S.C. 5464(b).
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To promote robust risk management;
to promote safety and soundness;
to reduce systemic risks; and
to support the stability of the broader financial system.
Section 805(c) provides, in addition, that the Commission's risk
management standards may address such areas as risk management and
default policies and procedures, among other areas.\22\
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\22\ 12 U.S.C. 5464(c).
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The Commission has adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act and Section 17A of the
Exchange Act (the ``Clearing Agency Rules'').\23\ The Clearing Agency
Rules require, among other things, each covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures that are reasonably designed to meet certain minimum
requirements for its operations and risk management practices on an
ongoing basis.\24\ As such, it is appropriate for the Commission to
review advance notices against the Clearing Agency Rules and the
objectives and principles of these risk management standards as
described in Section 805(b) of the Clearing Supervision Act. As
discussed below, the Commission believes the changes proposed in the
Advance Notice are consistent with the objectives and principles
described in Section 805(b) of the Clearing Supervision Act,\25\ and in
the Clearing Agency Rules, in particular Rule 17Ad-22(e)(7).\26\
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\23\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No.
68080 (Oct. 22, 2012), 77 FR 66220 (Nov. 2, 2012) (S7-08-11). See
also Covered Clearing Agency Standards, 81 FR 70786. The Commission
established an effective date of December 12, 2016 and a compliance
date of April 11, 2017 for the Covered Clearing Agency Standards.
OCC is a ``covered clearing agency'' as defined in Rule 17Ad-
22(a)(5).
\24\ 17 CFR 240.17Ad-22.
\25\ 12 U.S.C. 5464(b).
\26\ 17 CFR 240.17Ad-22(e)(7).
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A. Consistency With Section 805(b) of the Clearing Supervision Act
The Commission believes that the proposal contained in OCC's
Advance Notice is consistent with the stated objectives and principles
of Section 805(b) of the Clearing Supervision Act. Specifically, as
discussed below, the Commission believes that the changes proposed in
the Advance Notice are consistent with promoting robust risk management
in the area of liquidity risk, promoting safety and soundness, reducing
systemic risks, and supporting the stability of the broader financial
system.\27\
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\27\ 12 U.S.C. 5464(b).
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The Commission believes that the proposed changes are consistent
with promoting robust risk management, in particular the management of
liquidity risk presented to OCC. As a central counterparty and a
SIFMU,\28\ it is imperative that OCC have adequate resources to be able
to satisfy liquidity needs arising from its settlement obligations,
including in the event of a Clearing Member default.\29\ To support
this objective, OCC proposes to amend the existing provisions of the
Non-Bank Repo Facility in two ways. First, OCC proposes to reduce the
aggregate commitment amount it may seek under the Non-Bank Repo
Facility program so that OCC may negotiate individual commitment
amounts, each less than $1 billion, with multiple counterparties rather
than being effectively required to coordinate negotiations to obtain
one or more funding commitment amounts--all executed concurrently--
totaling at
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least $1 billion. Second, OCC proposes to expand the scope of the
permissible commitment term for confirmations executed under the Non-
Bank Repo Facility program to offset institutional investors'
reservations about committing liquidity for extended periods of time.
The Commission believes that approving these two changes would give OCC
greater flexibility under the Non-Bank Repo Facility to obtain
additional liquidity resources in the form of commitments under the
Non-Bank Repo Facility. Further, the Commission believes that the
flexibility to obtain resources specifically through the Non-Bank Repo
Facility would help OCC maintain diversity among its liquidity
resources because a counterparty under the Non-Bank Repo Facility could
not be a Clearing Member or affiliated bank. Therefore, the Commission
believes that the Advance Notice enhances and further diversifies OCC's
access to liquidity resources, which in turn would strengthen OCC's
overall ability to manage its liquidity risk exposures. As such, the
Commission believes that the proposal would promote robust liquidity
risk management at OCC consistent with Section 805(b) of the Clearing
Supervision Act.\30\
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\28\ See Financial Stability Oversight Council (``FSOC'') 2012
Annual Report, Appendix A, available at https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
\29\ See Notice of No Objection to 2014 Advance Notice, 80 FR at
1065.
\30\ 12 U.S.C. 5464(b).
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The Commission also believes that the changes proposed in the
Advance Notice are consistent with promoting safety and soundness,
reducing systemic risks, and promoting the stability of the broader
financial system. As described above, the proposal would give OCC more
flexibility to negotiate liquidity commitments across a range of
potential counterparties that are not otherwise Clearing Members. As
previously discussed, to address liquidity needs arising from a
Clearing Member default, OCC maintains as liquidity resources the Bank
Repo Facility (where the counterparty is an affiliate of two Clearing
Members), the syndicated credit facility (where many of the lenders are
Clearing Members), and the Cash Clearing Fund Requirement (which is
funded exclusively by Clearing Members).\31\ Giving OCC more
flexibility to diversify liquidity providers in the form of new funding
commitments under the Non-Bank Repo Facility reduces the potential
concentration of liquidity pressure that OCC, the Clearing Members and
their clients could face in the event of a Clearing Member default.
This reduced reliance upon the Clearing Members as the primary source
of liquidity resources available to OCC to manage a Clearing Member
default in turn enhances OCC's overall ability to manage the liquidity
needs arising from such an event or other events that could arise
contemporaneously. Therefore, the Commission believes that the Advance
Notice promotes the safety and soundness of OCC, enhances OCC's ability
to manage systemic risk that could arise in the event of a Clearing
Member default, and thus supports the broader financial system. As
such, the Commission believes it is consistent with promoting safety
and soundness, reducing systemic risks, and promoting the stability of
the broader financial system as contemplated in Section 805(b) of the
Clearing Supervision Act.\32\
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\31\ See Exchange Act Release No. 88120 (Feb. 5, 2020), 85 FR
7812, 7814 n. 19 (Feb. 11, 2020) (File No. SR-OCC-2020-801) (stating
that OCC exercised an accordion feature under its syndicated credit
facility in anticipation of the expiration of confirmations under
the Non-Bank Repo Facility).
\32\ 12 U.S.C. 5464(b).
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Accordingly, and for the reasons stated above, the Commission
believes the changes proposed in the Advance Notice are consistent with
Section 805(b) of the Clearing Supervision Act.\33\
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\33\ 12 U.S.C. 5464(b).
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B. Consistency With Rule 17Ad-22(e)(7) Under the Exchange Act
Rule 17Ad-22(e)(7)(ii) under the Exchange Act requires that a
covered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to effectively
measure, monitor, and manage the liquidity risk that arises in or is
borne by the covered clearing agency, including measuring, monitoring,
and managing its settlement and funding flows on an ongoing and timely
basis, and its use of intraday liquidity by, at a minimum, holding
qualifying liquid resources sufficient to meet the minimum liquidity
resource requirement under Rule 17Ad-22(e)(7)(i) in each relevant
currency for which the covered clearing agency has payment obligations
owed to clearing members.\34\ The term ``qualifying liquid resources''
includes assets that are readily available and convertible into cash
through prearranged funding arrangements, such as, committed
arrangements without material adverse change provisions, including,
among others, repurchase agreements.\35\
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\34\ 17 CFR 240.17Ad-22(e)(7)(ii).
\35\ 17 CFR 240.17Ad-22(a)(14)(ii)(3).
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Because the Non-Bank Repo Facility provides OCC with prearranged
commitments to convert assets into cash even if OCC experiences a
material adverse change, the Commission believes that the Non-Bank Repo
Facility provides OCC access to qualifying liquid resources to the
extent that OCC has sufficient collateral to access the facility.\36\
The Commission believes, therefore, that the proposed changes to the
aggregate commitment level of and potential term of commitments under
the Non-Bank Repo Facility program are reasonably designed to support
OCC's ability to hold qualifying liquid resources to meet its liquidity
resource requirements consistent with the requirements of Rule 17Ad-
22(e)(7)(ii) under the Exchange Act.\37\
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\36\ OCC would use U.S. government securities that are included
in Clearing Fund contributions by Clearing Members and margin
deposits of any Clearing Member that has been suspended by OCC for
the repurchase arrangements. See Notice of Filing, 85 FR at 31235 n.
9.
\37\ 17 CFR 240.17Ad-22(e)(7)(ii).
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Accordingly, the Commission believes that implementation of the
Non-Bank Repo Facility would be consistent with Rule 17Ad-22(e)(7)
under the Exchange Act.\38\
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\38\ 17 CFR 240.17Ad-22(e)(7).
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IV. Conclusion
It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act, that the Commission DOES NOT OBJECT to
Advance Notice (SR-OCC-2020-803) and that OCC is AUTHORIZED to
implement the proposed change as of the date of this notice.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-12900 Filed 6-15-20; 8:45 am]
BILLING CODE 8011-01-P