[Federal Register Volume 85, Number 46 (Monday, March 9, 2020)]
[Notices]
[Pages 13681-13684]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-04771]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88317; File No. SR-OCC-2020-801]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of No Objection to Advance Notice Concerning a Master Repurchase
Agreement as Part of OCC's Overall Liquidity Plan
March 4, 2020.
I. Introduction
On January 10, 2020, the Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'')
advance notice SR-OCC-2020-801 (``Advance Notice'') 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'') \3\ to enter into a committed master repurchase
agreement with a bank counterparty to access a committed source of
liquidity to meet its settlement obligations.\4\ The Advance Notice was
published for public comment in the Federal Register on February 11,
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.
---------------------------------------------------------------------------
\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 7812.
\5\ Securities Exchange Act Release No. 88120 (Feb. 5, 2020), 85
FR 7812 (Feb. 11, 2020) (SR-OCC-2020-801) (``Notice of Filing'').
---------------------------------------------------------------------------
II. Background \6\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
OCC maintains cash and other liquid resources to help it ensure
that it can meet its obligations in the event of a Clearing Member
default. OCC's liquid resources have included access to a diverse set
of funding sources, including a syndicated credit facility, a committed
master repurchase program with institutional investors such as pension
funds (the ``Non-Bank Liquidity Facility''), and Clearing Member
minimum cash Clearing Fund requirements.\7\ The confirmations \8\ under
the Non-Bank Liquidity Facility, totaling $1 billion, expired on
January 6, 2020.\9\ To help ensure that OCC's total committed liquidity
resources did not decrease following expiration of the $1 billion Non-
Bank Repo Facility, OCC previously sourced an additional $500 million
by exercising the accordion feature of its syndicated bank credit
facility.\10\ In addition to that, OCC exercised its existing authority
to temporarily increase the cash funding requirement in its Clearing
Fund from $3 billion to $3.5 billion, which Clearing Members were
obligated to fund by January 6, 2020.\11\ Taken together, these two
liquidity sources fully replaced the $1 billion Non-Bank Repo Facility
prior to its expiration on January 6, 2020. Now, OCC proposes to access
an additional committed source of liquidity to meet its settlement
obligations by entering into a committed
[[Page 13682]]
master repurchase agreement (``MRA'') with a bank counterparty with
confirmations totaling $500 million (the ``Bank Repo Facility'').\12\
---------------------------------------------------------------------------
\7\ See Notice of Filing, 85 FR at 7812 (citations omitted).
\8\ A confirmation under a master repurchase agreement describes
the terms of a transaction, including the purchased securities,
purchase price, purchase date, repurchase date, and any additional
terms or conditions not inconsistent with the master repurchase
agreement.
\9\ See Notice of Filing, 85 FR at 7814 n. 19.
\10\ See Notice of Filing, 85 FR at 7814 n. 20.
\11\ See OCC Information Memo #46287, Revised Cash Requirement
in Clearing Fund (Jan. 3, 2020), available at https://www.theocc.com/webapps/infomemos?number=46287&date=202001&lastModifiedDate=01%2F03%2F202000%3A00%3A00.
\12\ Because the counterparty may be a bank with which OCC has
existing relationships, in which case the proposed Bank Repo
Facility could materially increase OCC's exposure to the bank, the
Commission requested and reviewed information about existing
relationships and exposures. See Notice of Filing, 85 FR at 7812, n.
9 (stating that OCC provided additional information in a
confidential Exhibit 3b). The Commission also reviewed information
regarding OCC's processes for monitoring such exposures. Id.
---------------------------------------------------------------------------
The Commission previously reviewed and did not object to OCC's
execution of the Non-Bank Repo Facility, which was based on the same
standard form master repurchase agreement as the MRA governing the
proposed Bank Repo Facility.\13\ As with the Non-Bank Repo Facility,
under the MRA, the securities eligible for transactions under the MRA
would include U.S. government securities. Specifically, OCC would use
securities included in the margin deposits of a suspended Clearing
Member as well as Clearing Fund contributions to access the Bank Repo
Facility. The market value of the securities supporting each
transaction under the Bank Repo Facility would be determined daily, and
OCC would be obligated to provide additional securities as necessary in
response to a fall in the market value of purchased securities.
Similarly, the standard terms addressing an event of default under the
MRA would be substantially similar to the terms of the agreement
underlying the Non-Bank Liquidity Facility. Further, as part of
establishing the Bank Repo Facility, OCC would review and monitor its
counterparty's ability to meet obligations under the MRA.
---------------------------------------------------------------------------
\13\ See e.g., Securities Exchange Act Release No. 76821 (Jan.
4, 2016), 81 FR 3208 (Jan. 20, 2016) (SR-OCC-2015-805); Securities
Exchange Act Release No. 73979 (Jan. 2, 2015), 80 FR 1062 (Jan. 8,
2015) (SR-OCC-2014-809). Similar to the agreement underlying the
Non-Bank Liquidity Facility, the materials terms of the MRA would be
based on a standard form master repurchase agreement published by
the Securities Industry and Financial Markets Association.
---------------------------------------------------------------------------
Many of the terms of the MRA specifically tailored to the Bank Repo
Facility would nonetheless be substantially similar to the terms of the
agreement underlying the Non-Bank Liquidity Facility, including (1) the
duration of the agreement; (2) the buyer's obligation to fund
regardless of a material adverse change, such as the failure of a
Clearing Member; (3) availability of funds within 60 minutes of OCC
providing securities to the buyer; (4) a prohibition against
rehypothecation of the purchased securities by the buyer; (5) OCC's
option to terminate a transaction early and to specify a new repurchase
date;\14\ (6) OCC's right to substitute any eligible securities for
purchased securities; and (7) the use of a ``mini-default'' in lieu of
declaring an event of default at the discretion of the non-defaulting
party.\15\
---------------------------------------------------------------------------
\14\ The buyer would not have a similar right, but rather, would
be permitted to terminate a transaction early only upon the
occurrence of an event of default with respect to OCC.
\15\ For example, if the buyer fails to transfer purchased
securities on the applicable repurchase date, rather than declaring
an event of default, OCC may (1) if OCC has already paid the
repurchase price, require the buyer to repay the repurchase price,
(2) if there is a margin excess, require the buyer to pay cash or
deliver purchased securities in an amount equal to the margin
excess, or (3) declare that the applicable transaction, and only
that transaction, will be immediately terminated, and apply default
remedies under the MRA to only that transaction.
---------------------------------------------------------------------------
Where necessary and appropriate, however, certain terms of the
proposed MRA would differ from the terms of the agreement underlying
the Non-Bank Liquidity Facility. For example, the Bank Repo Facility
would include confirmations totaling $500 million rather than $1
billion.\16\ Other differences between the MRA and the agreement
underlying the Non-Bank Liquidity Facility relate to the fact that
OCC's counterparty for the Bank Repo Facility is a commercial bank
rather than a pension fund. Specifically, unlike the terms underlying
the Non-Bank Liquidity Facility, OCC would not require the Bank Repo
Facility counterparty to maintain cash and investments in a designated
account into which OCC has visibility.\17\ Such a designated account
was necessary to facilitate prompt funding for the Non-Bank Liquidity
Facility counterparties because they, unlike the Bank Repo Facility
counterparty, were not commercial banks and therefore were not in the
business of daily funding.\18\ Similarly, the MRA would not include
terms related to a custodian other than the Bank Repo Facility
counterparty because OCC's counterparty, as a commercial bank, would be
capable of acting as custodian of the purchased securities.\19\
---------------------------------------------------------------------------
\16\ As described above, OCC has already sourced additional
liquid resources through its syndicated credit facility that would
cover the other half of the Non-Bank Liquidity Facility.
Additionally, the establishment of the Bank Repo Facility would not
preclude OCC from establishing other arrangements with different
liquidity providers in the future.
\17\ See Notice of Filing, 85 FR at 7813 n. 16.
\18\ See id.
\19\ Based on information provided by OCC, the Commission
understands that OCC's counterparty to the Bank Repo Facility, as a
commercial bank, would custody the purchased securities, and would
provide to OCC information regarding purchased securities similar to
what was required of a third-party custodian under the Non-Bank Repo
Facility. See Notice of Filing, 85 FR at 7812, n. 9 (stating that
OCC provided additional information in a confidential Exhibit 3b).
---------------------------------------------------------------------------
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 systemically
important financial market utilities (``SIFMUs'') and strengthening the
liquidity of SIFMUs.\20\
---------------------------------------------------------------------------
\20\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------
Section 805(a)(2) of the Clearing Supervision Act \21\ 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. Section 805(b) of the
Clearing Supervision Act \22\ provides the following objectives and
principles for the Commission's risk-management standards prescribed
under Section 805(a):
---------------------------------------------------------------------------
\21\ 12 U.S.C. 5464(a)(2).
\22\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
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.\23\
---------------------------------------------------------------------------
\23\ 12 U.S.C. 5464(c).
---------------------------------------------------------------------------
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'').\24\ 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.\25\ As such, it is appropriate for the
[[Page 13683]]
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,\26\ and in
the Clearing Agency Rules, in particular Rules 17Ad-22(e)(7).\27\
---------------------------------------------------------------------------
\24\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No.
68080 (October 22, 2012), 77 FR 66220 (Nov. 2, 2012) (S7-08-11). See
also Securities Exchange Act Release No. 78961 (September 28, 2016),
81 FR 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing Agency
Standards''). 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).
\25\ 17 CFR 240.17Ad-22.
\26\ 12 U.S.C. 5464(b).
\27\ 17 CFR 240.17Ad-22(e)(7).
---------------------------------------------------------------------------
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.\28\
---------------------------------------------------------------------------
\28\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
The Commission believes that the proposed changes are consistent
with promoting robust risk management, in particular management of
liquidity risk presented to OCC. OCC is a SIFMU.\29\ As a SIFMU, it is
imperative that OCC have adequate resources to be able to satisfy its
counterparty settlement obligations, including in the event of a
Clearing Member default.\30\ As described above, OCC proposes to
implement the Bank Repo Facility, in part, to address the expiration of
the Non-Bank Facility and ensure that OCC's committed liquid resources
remain at or above the amount that OCC has determined it needs to
ensure that it has adequate resource to be able to satisfy its
counterparty settlement obligations, after the Non-Bank Repo Facility
expired on January 6, 2020. In addition, implementing the Bank Repo
Facility would help OCC maintain its access to liquid resources through
a committed repurchase agreement, which would have the additional
advantage of helping to maintain diversity among the liquidity
resources that OCC may use to resolve a Clearing Member default.\31\ As
such, the Commission believes that the proposal would promote robust
risk management practices at OCC, consistent with Section 805(b) of the
Clearing Supervision Act.\32\
---------------------------------------------------------------------------
\29\ See Financial Stability Oversight Council (``FSOC'') 2012
Annual Report, Appendix A, available at https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
\30\ See Securities Exchange Act Release No. 73979 (Jan. 2,
2015), 80 FR 1062, 1065 (Jan. 8, 2015) (SR-OCC-2014-809).
\31\ OCC maintains access to a diverse set of funding sources in
addition to the Bank and Non-Bank Repo Facilities, including a
syndicated credit facility and Clearing Member minimum cash Clearing
Fund requirements.
\32\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
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 Bank Repo Facility would
provide OCC with another liquidity resource in the event of a Clearing
Member default, in addition to the existing syndicated credit facility
and Clearing Member minimum cash Clearing Fund requirements. This would
promote safety and soundness for Clearing Members because it would
provide OCC with diversity among resources and a readily available
liquidity resource that could enable OCC to continue to meet its
settlement obligations in a timely fashion in the event of a Clearing
Member default, thereby helping to contain losses and liquidity
pressures from such a default. Maintaining adequate and diversified
resources to help manage a Clearing Member default, in turn, enhances
OCC's ability to manage systemic risk and to support 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.\33\
---------------------------------------------------------------------------
\33\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
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.\34\
---------------------------------------------------------------------------
\34\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
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) \35\ in each relevant
currency for which the covered clearing agency has payment obligations
owed to clearing members.\36\ For any covered clearing agency,
``qualifying liquid resources'' means 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.\37\
---------------------------------------------------------------------------
\35\ 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).
\36\ 17 CFR 240.17Ad-22(e)(7)(ii).
\37\ 17 CFR 240.17Ad-22(a)(14)(ii)(3).
---------------------------------------------------------------------------
As described above, implementation of the Bank Repo Facility would
provide OCC with a committed funding arrangement that would give OCC
access to $500 million of committed liquid resources through an MRA
with a bank counterparty. Under the terms of the MRA, OCC's bank
counterparty would be required to provide OCC with funding subject to a
number of conditions, including an obligation to fund regardless of any
material adverse change at OCC, such as the failure of a Clearing
Member. Taken together, the Commission believes that the Bank Repo
Facility provides OCC with $500 million of ``qualifying liquid
resources'' as that term is defined in Rule 17Ad-22(e)(14) of the
Exchange Act,\38\ and therefore is consistent with the requirements of
Rule 17Ad-22(e)(7)(ii) under the Exchange.
---------------------------------------------------------------------------
\38\ 17 CFR 240.17Ad-22(a)(14)(ii)(3).
---------------------------------------------------------------------------
Accordingly, the Commission believes that implementation of the
Bank Repo Facility would be consistent with Rule 17Ad-22(e)(7)(ii)
under the Exchange Act.\39\
---------------------------------------------------------------------------
\39\ 17 CFR 240.17Ad-22(e)(7)(ii).
---------------------------------------------------------------------------
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
[[Page 13684]]
(SR-OCC-2020-801) and that OCC is AUTHORIZED to implement the proposed
change as of the date of this notice.
By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-04771 Filed 3-6-20; 8:45 am]
BILLING CODE 8011-01-P