[Federal Register Volume 85, Number 107 (Wednesday, June 3, 2020)]
[Notices]
[Pages 34257-34262]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-11917]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88971; File No. SR-OCC-2020-804]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Advance Notice of and No Objection to The Options
Clearing Corporation's Proposal To Enter Into a New Credit Facility
Agreement
May 28, 2020.
Pursuant to Section 806(e)(1) of 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'' or ``Act''),\3\ notice is hereby given that on
April 27, 2020, the Options Clearing Corporation (``OCC'') filed with
the Securities and Exchange Commission (``Commission'') an advance
notice as described in Items I, II and III below, which Items have been
prepared by OCC. The Commission is publishing this notice to solicit
comments on the advance notice from interested persons, and to provide
notice that the Commission does not object to the changes set forth in
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.
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I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice
This advance notice is submitted in connection with a proposed
change to OCC's operations in the form of the replacement of a
revolving credit facility that OCC maintains for a 364-day term and
that it may use: (i) In anticipation of a potential default by or
suspension of a Clearing Member; (ii) to meet obligations arising out
of the default or suspension of a Clearing Member; (iii) to meet
reasonably anticipated liquidity needs for same-day settlement as a
result of the failure of any bank or securities or commodities clearing
organization to achieve daily settlement; or (iv) to meet obligations
arising out of the failure of a bank or securities or commodities
clearing organization to perform its obligations due to its bankruptcy,
insolvency, receivership or suspension of operations. OCC has provided
a summary of the terms and conditions of the proposed renewal in
confidential Exhibit 3 to File No. SR-OCC-2020-804.
The advance notice is available on OCC's website at https://
[[Page 34258]]
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.\4\
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\4\ 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 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. OCC has prepared summaries, set forth in sections A and B below,
of the most significant aspects of these statements.
A. Clearing Agency's Statement on Comments on the Advance Notice
Received From Members, Participants or Others
Written comments were not and are not intended to be solicited with
respect to the advance notice and none have been received. OCC will
notify the Commission of any written comments received by OCC.
B. Advance Notices Filed Pursuant to Section 806(e) of the Payment,
Clearing, and Settlement Supervision Act
Description of Proposed Change
Background
This advance notice is being filed in connection with a proposed
change in the form of the replacement of a revolving credit facility
that OCC maintains for a 364-day term and that it may use: (i) In
anticipation of a potential default by or suspension of a Clearing
Member; (ii) to meet obligations arising out of the default or
suspension of a Clearing Member; (iii) to meet reasonably anticipated
liquidity needs for same-day settlement as a result of the failure of
any bank or securities or commodities clearing organization to achieve
daily settlement; or (iv) to meet obligations arising out of the
failure of a bank or securities or commodities clearing organization to
perform its obligations due to its bankruptcy, insolvency, receivership
or suspension of operations (``Permitted Use Circumstances''). In any
such Permitted Use Circumstance, OCC has certain conditional authority
under its By-Laws and Rules to borrow or otherwise obtain funds from
third parties using Clearing Member margin deposits and/or Clearing
Fund contributions.\5\
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\5\ See generally Article VIII of OCC's By-Laws and OCC Rules
1006(f), 1102, and 1104(b).
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OCC's existing credit facility (``Existing Facility'') was
implemented as of June 26, 2019, through the execution of a credit
agreement among OCC, the administrative agent, the collateral agent,
and the lenders that are parties to the agreement from time to time.
The Existing Facility provides short-term secured borrowings in an
aggregate principal amount of $2 billion but may be increased to $3
billion if OCC so requests and sufficient commitments from lenders are
received and accepted.\6\ To obtain a loan under the Existing Facility,
OCC must pledge as collateral: (i) U.S. dollars; (ii) securities issued
or guaranteed by the U.S. Government, the Government of Canada, the
Federal Republic of Germany, the Republic of France, Japan or the
United Kingdom; (iii) S&P 500 Market Index equities; (iv) Exchange-
Traded Funds (``ETFs''); (v) American Depositary Receipts (``ADRs'');
or (vi) certain government-sponsored enterprise (``GSE'') debt
securities. Certain mandatory prepayments or deposits of additional
collateral are required depending on changes in the collateral's market
value. In connection with OCC's past implementation of the Existing
Facility, OCC filed an advance notice with the Commission on April 26,
2019, and the Commission published a Notice of No Objection on June 24,
2019.\7\
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\6\ OCC notes that it previously exercised this accordion
feature under the Existing Facility to increase the commitment
amount from $2 billion to $2.5 billion, and then subsequently
reduced the commitment amount back to $2 billion. As a result, OCC
may only increase the commitment amount under the Existing Facility
by another $500 million (to a total of $2.5 billion).
\7\ See Securities Exchange Act Release No. 86182 (June 24,
2019), 84 FR 31128 (June 28, 2019) (SR-OCC-2019-803).
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Description of the Proposal
Renewal. The Existing Facility is set to expire on June 24, 2020.
OCC is currently negotiating the terms of a new credit facility (``New
Facility'') on substantially similar terms as the Existing Facility,
and the definitive documentation concerning the New Facility is
expected to be substantially similar to the definitive documentation
concerning the Existing Facility. The proposed terms and conditions
that are expected to be applicable to the New Facility, subject to
agreement by the lenders, are set forth in the Summary of Terms and
Conditions, which is not a public document.\8\ The New Facility would
include changes to the list of joint lead arrangers and bookrunners,
the back-up administrative agent, the back-up collateral agent, and the
syndication agents. The New Facility would also include changes to
certain commercial terms, such as the interest rate, commitment fee,
and upfront fees, which OCC believes are generally aligned with current
market rates for this type of facility. In addition, the New Facility
would update language concerning European Union (``EU'') bail-in
provisions to recognize the United Kingdom (``UK'') bail-in regime now
that the UK is no longer part of the EU. Finally, the Summary of Terms
and Conditions would be updated to include provisions that are
currently included in the credit agreement for the Existing Facility
but not previously included as part of the Summary of Terms and
Conditions. For example, the Summary of Terms and Conditions would
contain updates regarding the lenders' ability to assign and sell
participations in their loans and commitments to eligible banks. It
would also be updated to clarify the timing requirements for
calculating the market value of certain pledged equities.
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\8\ OCC has separately submitted a request for confidential
treatment to the Commission regarding the Summary of Terms and
Conditions, which OCC has provided in Exhibit 3 to File No. SR-OCC-
2020-804.
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The conditions regarding the availability of the New Facility,
which OCC anticipates will be satisfied on or about June 23, 2020,
include the execution and delivery of: (i) A credit agreement between
OCC and the administrative agent, collateral agent and various lenders
under the New Facility; (ii) a pledge agreement between OCC and the
administrative agent or collateral agent; and (iii) such other
documents as may be required by the parties. The definitive
documentation concerning the New Facility is expected to be consistent
with the Summary of Terms and Conditions that is provided in
confidential Exhibit 3, although it may include certain changes to
business terms as may be necessary to obtain the agreement of lenders
with sufficient funding commitments and certain changes as may be
necessary regarding administrative and operational terms being
finalized between the parties.
Future Renewals. OCC expects to continue to renew its revolving
credit facility annually on substantially similar terms and conditions
as the New Facility. The terms and conditions of any such future
renewal (each a ``Future Renewal'') would be specified in subsequent
credit agreements among
[[Page 34259]]
OCC, the lenders that are parties thereto, the administrative agent,
and the collateral agent. To provide OCC and market participants with
greater certainty regarding a continuing source of committed liquidity
to meet OCC's settlement obligations, and thus mitigate OCC's liquidity
risk, OCC proposes to be able to enter Future Renewals without an
additional advance notice provided that the terms of the Future Renewal
adhere to certain conditions specified in (a) and (b) and (1) through
(4) below (collectively, ``Evergreen Provisions''). OCC believes these
Evergreen Provisions would be consistent with similar terms regarding
committed credit facility renewals by other registered clearing
agencies, for which the Commission issued a Notice of No Objection.\9\
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\9\ See Securities Exchange Act Release No. 80605 (May 5, 2017),
82 FR 21850 (May 10, 2017) (SR-DTC-2017-802; SR-NSCC-2017-802).
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Evergreen Provisions
OCC does not currently expect to make changes to:
(a) The financial institution acting as lead administrative agent;
or
(b) the commitment period (which would continue to be 364 calendar
days unless changes are necessary to avoid the expiration of the term
falling on a weekend or other day that is not a business day) in
connection with Future Renewals, but OCC would treat any such change in
a Future Renewal as subject to the requirement to file an advance
notice pursuant to Section 806(e)(1) of the Clearing Supervision
Act.\10\
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\10\ 12 U.S.C. 5465(e)(1).
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OCC may consider changes to:
(1) The aggregate and potential additional commitment amounts that
it may seek, so long as such amounts considered:
(i) Increase by no more than $500 million in total (whether in the
initial commitment amount, additional commitment amount, or both) above
the amount being sought by OCC under the New Facility, or
(ii) decrease by no more than $500 million below the amount being
sought by OCC under the New Facility, provided that any decrease in the
initial commitment amount is replaced by other qualifying liquid
resources (as defined in Exchange Act Rule 17Ad-22(a)(14)) \11\ of an
equal amount; \12\
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\11\ 17 CFR 240.17Ad-22(a)(14).
\12\ For example, this may include an increase in OCC's Cash
Clearing Fund Requirement as required under Rule 1002(a) or other
committed liquidity resources for which the Commission has issued a
Notice of No Objection. See, e.g., Securities Exchange Act Release
No. 88317 (March 4, 2020), 85 FR 13681 (March 9, 2020) (SR-OCC-2020-
801).
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(2) the syndicate so long as all lenders party to future credit
facilities are subject to the same credit review as those lenders that
are party to the New Facility;
(3) pricing and collateral haircuts,\13\ so long as such terms are
consistent with the then current market practice; or
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\13\ ``Collateral haircuts'' with respect to the collateral for
any borrowing under the credit facility refers to the schedule of
percentages of market value by type of collateral, determining the
collateral value of that type of collateral, for purposes of
securing a borrowing.
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(4) representations, warranties, covenants, and terms of events of
default,\14\ so long as any modifications are immaterial to OCC as a
borrower and do not impair materially OCC's ability to borrow under the
line of credit consistent with the Evergreen Provisions. OCC would not
consider changes to the Evergreen Provisions within these specified
parameters as materially altering the terms and conditions of the New
Facility or Future Renewals.
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\14\ ``Events of default'' refers to those events or conditions
which trigger or constitute a default of OCC under the credit
agreement.
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So long as any Future Renewal adheres to the conditions specified
in the Evergreen Provisions, as described above, OCC would consider
such Future Renewal as being on substantially the same terms and
conditions as the New Facility such that it would not need to be
subject to the requirement to file an advance notice filing pursuant to
Section 806(e)(1) of the Clearing Supervision Act.\15\ In the event
that any annual Future Renewal of the New Facility is not on terms and
conditions that adhere to the Evergreen Provisions, such renewal would
be subject to an advance notice filing pursuant to Section 806(e)(1) of
the Clearing Supervision Act. If OCC determines to address Future
Renewals in such a filing, it would include in that filing the proposed
conditions to the terms of any subsequent renewals that could be done
without an additional advance notice.
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\15\ 12 U.S.C. 5465(e)(1).
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Anticipated Effect on and Management of Risk
Completing timely settlement is a key aspect of OCC's role as a
clearing agency performing central counterparty services. Overall, the
New Facility and Future Renewals would continue to promote the
reduction of risks to OCC, its Clearing Members, and the markets OCC
serves in general because it would allow OCC to obtain short-term funds
in the Permitted Use Circumstances. The existence of the New Facility
and Future Renewals would therefore help OCC minimize losses in the
event of a Permitted Use Circumstance by allowing it to obtain funds on
extremely short notice to ensure clearance and settlement of
transactions in options and other contracts without interruption. OCC
believes that the reduced settlement risk presented by OCC resulting
from the New Facility and Future Renewals would correspondingly reduce
systemic risk and promote the safety and soundness of the clearing
system. By drawing on the New Facility or under any Future Renewals,
OCC would also be able to avoid liquidating margin deposits or Clearing
Fund contributions in what would likely be volatile market conditions,
which would preserve funds available to cover any losses resulting from
the failure of a Clearing Member, bank, or other clearing organization.
OCC believes that the proposed change would not otherwise affect or
alter the management of risk at OCC because the New Facility would
generally preserve the same terms and conditions as the Existing
Facility.
Consistency With the Payment, Clearing and Settlement Supervision Act
The stated purpose of the Clearing Supervision Act is to mitigate
systemic risk in the financial system and promote financial stability
by, among other things, promoting uniform risk management standards for
systemically important financial market utilities and strengthening the
liquidity of systemically important financial market utilities.\16\
Section 805(a)(2) of the Clearing Supervision Act \17\ also authorizes
the Commission to prescribe risk management standards for the payment,
clearing and settlement activities of designated clearing entities,
like OCC, for which the Commission is the supervisory agency. Section
805(b) of the Clearing Supervision Act \18\ states that the objectives
and principles for risk management standards prescribed under Section
805(a) shall be to:
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\16\ 12 U.S.C. 5461(b).
\17\ 12 U.S.C. 5464(a)(2).
\18\ 12 U.S.C. 5464(b).
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Promote robust risk management;
promote safety and soundness;
reduce systemic risks; and
support the stability of the broader financial system.
The Commission has adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act and the Exchange Act in
furtherance of these objectives and principles.\19\
[[Page 34260]]
Rule 17Ad-22 requires registered clearing agencies, like OCC, to
establish, implement, maintain, and enforce written policies and
procedures that are reasonably designed to meet certain minimum
requirements for their operations and risk management practices on an
ongoing basis.\20\ Therefore, the Commission has stated \21\ that it
believes it is appropriate to review changes proposed in advance
notices against Rule 17Ad-22 and the objectives and principles of these
risk management standards as described in Section 805(b) of the
Clearing Supervision Act.\22\
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\19\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release
Nos. 68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-
08-11) (``Clearing Agency Standards''); 78961 (September 28, 2016),
81 FR 70786 (October 13, 2016) (S7-03-14) (``Standards for Covered
Clearing Agencies'').
\20\ 17 CFR 240.17Ad-22.
\21\ See supra note 7.
\22\ 12 U.S.C. 5464(b).
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OCC believes that the proposed changes are consistent with Section
805(b)(1) of the Clearing Supervision Act \23\ because the New Facility
and Future Renewals would provide OCC with continued access to a stable
and reliable source of committed liquidity that can be accessed in a
timely manner to meet its settlement obligations, contain losses and
liquidity pressures, and mitigate OCC's liquidity risk. Accordingly,
OCC believes that the proposed changes: (i) Are designed to promote
robust risk management; (ii) are consistent with promoting safety and
soundness; and (iii) are consistent with reducing systemic risks and
promoting the stability of the broader financial system.
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\23\ 12 U.S.C. 5464(b)(1).
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OCC believes that the New Facility and Future Renewals that adhere
to the Evergreen Provisions are also consistent with the requirements
of Rule 17Ad-22(e)(7) under the Act.\24\ Rule 17Ad-22(e)(7) requires
OCC to establish, implement, maintain and enforce written policies and
procedures reasonably designed to effectively measure, monitor, and
manage liquidity risk that arises in or is borne by OCC, including
measuring, monitoring, and managing its settlement and funding flows on
an ongoing and timely basis, and its use of intraday liquidity, as
specified in the rule.\25\ In particular, Rule 17Ad-22(e)(7)(i) under
the Act \26\ directs that OCC meet this obligation by, among other
things, ``[m]aintaining sufficient liquid resources at the minimum in
all relevant currencies to effect same-day . . . settlement of payment
obligations with a high degree of confidence under a wide range of
foreseeable stress scenarios that includes, but is not limited to, the
default of the participant family that would generate the largest
aggregate payment obligation for [OCC] in extreme but plausible market
conditions.'' As described above, the New Facility would provide OCC
with a readily available liquidity resource that would enable it to,
among other things, continue to meet its obligations in a timely
fashion in a Permitted Use Circumstance and as an alternative to
selling Clearing Member collateral under what may be stressed and
volatile market conditions. Additionally, because the Evergreen
Provisions would ensure that any Future Renewals that adhere to those
terms would be substantially similar to the New Facility, such Future
Renewals also would provide OCC with a readily available liquidity
resource that would enable it to, among other things, continue to meet
its obligations in a timely fashion in a Permitted Use Circumstance,
thereby helping to contain losses and liquidity pressures. Allowing OCC
to enter Future Renewals pursuant to the Evergreen Provisions without
filing an additional advance notice would also reduce the risk of gaps
in liquidity coverage and better allow OCC to continually maintain
sufficient liquidity resources. For these reasons, OCC believes that
the proposal is consistent with Rule 17Ad-22(e)(7)(i).\27\
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\24\ 17 CFR 240.17Ad-22(e)(7).
\25\ Id.
\26\ 17 CFR 240.17Ad-22(e)(7)(i).
\27\ Id.
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Rule 17Ad-22(e)(7)(ii) under the Act requires OCC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to hold qualifying liquid resources sufficient to
satisfy payment obligations owed to Clearing Members.\28\ Rule 17Ad-
22(a)(14) defines ``qualifying liquid resources'' to include, among
other things, lines of credit without material adverse change
provisions, that are readily available and convertible into cash.\29\
As with the Existing Facility, the New Facility would not be subject to
any material adverse change provision and would continue to be designed
to permit OCC to, among other things, help ensure that OCC has
sufficient, readily-available qualifying liquid resources to meet the
cash settlement obligations of its largest Clearing Member Group.
Similarly, because the Evergreen Provisions would ensure that any
Future Renewals that adhere to them would be substantially similar to
the New Facility, such Future Renewals also would permit OCC to enter
into a future credit facility designed to, among other things, help
ensure that OCC has sufficient, readily-available qualifying liquid
resources to meet the cash settlement obligations of its largest
Clearing Member Group. Therefore, OCC believes that the proposal is
consistent with Rule 17Ad-22(e)(7)(ii).\30\
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\28\ 17 CFR 240.17Ad-22(e)(7)(ii).
\29\ 17 CFR 240.17Ad-22(a)(14).
\30\ 17 CFR 240.17Ad-22(e)(7)(ii).
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For the foregoing reasons, OCC believes that the proposed changes
are consistent with Section 805(b)(1) of the Clearing Supervision Act
\31\ and Rule 17Ad-22(e)(7) \32\ under the Act.
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\31\ 12 U.S.C. 5464(b)(1).
\32\ 17 CFR 240.17Ad-22(e)(7).
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Accelerated Commission Action Requested
Pursuant to Section 806(e)(1)(I) of the Clearing Supervision
Act,\33\ OCC requests that the Commission notify OCC that it has no
objection to the New Facility not later than Friday, June 19, 2020,
which shall be two business days prior to the expected June 23, 2020,
availability of the New Facility. OCC requests Commission action by
this date to ensure that there is no period that OCC operates without
this essential liquidity resource, given its importance to OCC's
borrowing capacity in connection with its management of liquidity and
settlement risk and timely completion of clearance and settlement.
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\33\ 12 U.S.C. 5465(e)(1)(I).
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III. Date of Effectiveness of the Advance Notice and Timing for
Commission Action
The proposed change may be implemented if the Commission does not
object to the proposed change within 60 days of the later of (i) the
date the proposed change was filed with the Commission or (ii) the date
any additional information requested by the Commission is received. OCC
shall not implement the proposed change if the Commission has any
objection to the proposed change.
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 the advance notice is filed, or the date further
information requested by the Commission is received, 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
[[Page 34261]]
earlier date, subject to any conditions imposed by the Commission.
OCC shall post notice on its website of proposed changes that are
implemented. The proposal shall not take effect until all regulatory
actions required with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the advance
notice is consistent with the Clearing Supervision 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-2020-804 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to File Number SR-OCC-2020-804. 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 website (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 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 the filing also will be available for inspection
and copying at the principal office of the self-regulatory
organization.
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-2020-804 and
should be submitted on or before June 18, 2020.
V. Commission Findings and Notice of No Objection
Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, its stated purpose is instructive: To
mitigate systemic risk in the financial system and promote financial
stability by, among other things, promoting uniform risk management
standards for systemically important financial market utilities and
strengthening the liquidity of systemically important financial market
utilities.\34\ Section 805(a)(2) of the Clearing Supervision Act
authorizes the Commission to prescribe risk management standards for
the payment, clearing, and settlement activities of designated clearing
entities and financial institutions engaged in designated activities
for which it is the supervisory agency or the appropriate financial
regulator.\35\ Section 805(b) of the Clearing Supervision Act \36\
states that the objectives and principles for the risk management
standards prescribed under Section 805(a) shall be to:
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\34\ 12 U.S.C. 5461(b).
\35\ 12 U.S.C. 5464(a)(2).
\36\ 12 U.S.C. 5464(b).
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Promote robust risk management;
promote safety and soundness;
reduce systemic risks; and
support the stability of the broader financial system.\37\
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\37\ Id.
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The Commission has adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act \38\ and Section 17A of the
Exchange Act (``Rule 17Ad-22'').\39\ Rule 17Ad-22 requires registered
clearing agencies to establish, implement, maintain, and enforce
written policies and procedures that are reasonably designed to meet
certain minimum requirements for their operations and risk management
practices on an ongoing basis.\40\ Therefore, it is appropriate for the
Commission to review changes proposed in advance notices against Rule
17Ad-22 and the objectives and principles of the risk management
standards described in Section 805(b) of the Clearing Supervision
Act.\41\ As discussed below, the Commission believes that the proposal
in the Advance Notice is consistent with the objectives and principles
described in Section 805(b) of the Clearing Supervision Act,\42\ and in
Rule 17Ad-22 under the Exchange Act, particularly Rule 17Ad-
22(e)(7).\43\
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\38\ 12 U.S.C. 5464(a)(2).
\39\ See 17 CFR 240.17Ad-22.
\40\ Id.
\41\ 12 U.S.C. 5464(b).
\42\ Id.
\43\ See 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, including in the area of liquidity risk, promoting safety
and soundness, reducing systemic risks, and supporting the stability of
the broader financial system.\44\
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\44\ 12 U.S.C. 5464(b).
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The Commission believes that the changes proposed in the Advance
Notice are consistent with promoting robust risk management, in
particular management of liquidity risk presented to OCC. Renewing and
maintaining a credit facility for this purpose and in the manner
proposed by OCC would provide OCC with continued access to a stable and
reliable source of committed liquidity that can be accessed in a timely
manner to meet its settlement obligations, contain losses and liquidity
pressures, and mitigate OCC's liquidity risk, while also helping to
maintain the current diversity of liquidity resources that OCC may use
to resolve a Clearing Member default.\45\ Additionally, allowing OCC
annually to renew the credit facility under certain specified
circumstances without an additional advance notice and subject to the
Evergreen Provisions described above would facilitate OCC's ability to
secure a continuing source of committed liquidity to meet its
settlement obligations. Further, because the Evergreen Provisions would
ensure that any such annual renewals would be substantially similar to
the currently proposed credit facility, the Commission believes that
any such renewals would promote robust risk management by diversifying
the liquidity resources that OCC may use to resolve a Clearing Member
default in the same manner as the currently proposed credit facility.
As such, the Commission believes that the proposal would
[[Page 34262]]
promote robust risk management practices at OCC, consistent with
Section 805(b) of the Clearing Supervision Act.\46\
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\45\ OCC also maintains a minimum amount of cash in its Clearing
Fund as well as a non-bank liquidity facility. See Securities
Exchange Act Release No. 82501 (Jan. 12, 2018), 83 FR 2843 (Jan. 19,
2018) (File No. SR-OCC-2017-808) and Securities Exchange Act Release
No. 76821 (Jan. 4, 2016), 81 FR 3208 (Jan. 20, 2016) (File No. SR-
OCC-2015-805), respectively.
\46\ 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. As
described above, the New Facility would maintain OCC's access to a
significant liquidity resource in the event of a Clearing Member
default. The Evergreen Provisions would preserve access to this
resource by ensuring that any annual renewals implemented without
filing an advance notice would be substantially similar to the
currently proposed credit facility, the Commission believes that any
such annual renewals can be expected to promote safety and soundness
for the same reasons. Further, by ensuring the continuity and
consistency of any subsequent renewals, the Advance Notice would
support OCC's continued access to a readily available liquidity
resource that could enable OCC to continue to meet its obligations to
Clearing Members in a timely fashion in the event of a Clearing Member
default, thereby helping to contain losses and liquidity pressures from
that default. As such, the Commission believes it is consistent with
promoting safety and soundness as contemplated in Section 805(b) of the
Clearing Supervision Act.\47\
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\47\ Id.
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In addition, the Commission believes that the changes proposed in
the Advance Notice are consistent with reducing systemic risks and
promoting the stability of the broader financial system. As mentioned
above, allowing OCC to enter into the New Facility would enable OCC,
which has been designated a systemically important FMU,\48\ to maintain
an additional liquidity resource that OCC may access to help manage a
Clearing Member default. In addition, as noted above, because the
Evergreen Provisions would ensure that any annual renewals entered into
without filing an advance notice would be on substantially similar
terms to the currently proposed credit facility, such future renewals
also would enable OCC to maintain an additional liquidity resource that
OCC may access to help manage a Clearing Member default. Moreover,
allowing the annual renewal of the credit facility under the proposed
Evergreen Provisions without filing an additional advance notice would
facilitate the continued availability of this liquidity resource. These
provisions would provide heightened certainty and stability for OCC and
market participants that OCC would be able to maintain access to
liquidity resources to help manage a Clearing Member default and would
have flexibility to increase the size of its liquidity resources in
response to market developments. Accordingly, the Commission believes
that the proposal would help to reduce the systemic risk of OCC, which
in turn would help to support the stability of the broader financial
system, consistent with Section 805(b) of the Clearing Supervision
Act.\49\
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\48\ The Financial Stability Oversight Council designated OCC a
systemically important financial market utility on July 18, 2012.
See Financial Stability Oversight Council 2012 Annual Report,
Appendix A, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
\49\ Id.
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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.\50\
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\50\ 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) requires, in part, OCC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to effectively measure, monitor, and manage
liquidity risk that arises in or is borne by OCC, 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) \51\ in each
relevant currency for which the covered clearing agency has payment
obligations owed to Clearing Members.\52\ Rule 17Ad-22(a)(14) of the
Exchange Act defines ``qualifying liquid resources'' to include, among
other things, lines of credit without material adverse change
provisions that are readily available and convertible into cash.\53\
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\51\ Rule 17Ad-22(e)(7)(i) requires OCC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to effectively measure, monitor, and manage liquidity risk
that arises in or is borne by OCC, 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,
maintaining sufficient liquid resources at the minimum in all
relevant currencies to effect same-day settlement of payment
obligations with a high degree of confidence under a wide range of
foreseeable stress scenarios that includes, but is not limited to,
the default of the participant family that would generate the
largest aggregate payment of obligation for the covered clearing
agency in extreme but plausible conditions. 17 CFR 240.17Ad-
22(e)(7)(i).
\52\ 17 CFR 240.17Ad-22(e)(7)(ii).
\53\ 17 CFR 240.17Ad-22(a)(14).
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As described above, the implementation of the New Facility would
provide OCC with continued access to a $2 billion revolving credit
facility on substantially similar terms to the Existing Facility. As
the Commission noted previously, the Existing Facility provides OCC
with access to a single credit facility designed to help ensure that
OCC has sufficient, readily available qualifying liquid resources to
meet the cash settlement obligations of its largest family of
affiliated members.\54\ Implementation of the New Facility on
substantially similar terms to the Existing Facility would ensure that
OCC maintains continued access to such a credit facility. Because the
Evergreen Provisions would ensure that any annual renewals also would
be substantially similar to both the Existing Facility and the New
Facility, the provisions would help ensure that OCC has sufficient,
readily-available qualifying liquid resources to meet the cash
settlement obligations of its largest family of affiliated members.
Therefore, the Commission believes that the proposal is consistent with
Rule 17Ad-22(e)(7)(ii).
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\54\ Securities Exchange Act Release No. 83529 (Jun. 27, 2018),
83 FR 31237, 31241 (Jul. 3, 2018) (SR-OCC-2018-802).
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VI. Conclusion
It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act, that the Commission does not object to the
Advance Notice SR-OCC-2020-804 and OCC can and hereby is authorized to
implement the change as of the date of this notice.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-11917 Filed 6-2-20; 8:45 am]
BILLING CODE 8011-01-P