[Federal Register Volume 81, Number 169 (Wednesday, August 31, 2016)]
[Notices]
[Pages 60099-60108]
[FR Doc No: 2016-20882]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78675; File No. SR-OCC-2016-009]

Self-Regulatory Organizations; the Options Clearing Corporation;
Notice of Filing of Proposed Rule Change Concerning the Options
Clearing Corporation's Escrow Deposit Program

August 25, 2016.
    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 August 15, 2016, 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. 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.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change

    The purpose of this proposed rule change by OCC is to improve the
resiliency of OCC's escrow deposit program. OCC is proposing changes
that are designed to: (1) Increase OCC's visibility into and control
over collateral deposits made under the escrow deposit program; (2)
strengthen clearing members' rights to collateral in the escrow deposit
program in the event of a customer default to the clearing member; (3)
provide more specificity concerning the manner in which OCC or clearing
members would take possession of collateral in OCC's escrow deposit
program; and (4) improve the readability of the rules governing OCC's
escrow deposit program by consolidating all such rules into a single
location in OCC's Rulebook.

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
    The purpose of this proposed rule change is to improve the
resiliency of OCC's escrow deposit program. The changes would: (1)
Increase OCC's visibility into and control over collateral deposits
made under the escrow deposit program; (2) provide more specificity
concerning the manner in which OCC would take possession of collateral
in OCC's escrow deposit program in the event of a clearing member or
custodian bank default; (3) clarify clearing members' rights to
collateral in the escrow deposit program in the event of a customer
default to the clearing member; and (4) improve the readability of the
rules governing OCC's escrow deposit program by consolidating all such
rules into a single location in OCC's Rulebook. Upon implementation of
the proposed rule change, all securities collateral in OCC's escrow
deposit program would be held at the Depository Trust Company
(``DTC''), and custodian banks would only be allowed to hold cash
collateral.
    The narrative below is comprised of four sections. The first
section provides a background of OCC's current escrow deposit program
as well as an overview of the proposed changes to the rules and
agreements that govern the escrow deposit program. The second section
discusses the changes associated with: (1) Increasing OCC's visibility
into and control over collateral deposits made under the escrow deposit
program; (2) providing more specificity concerning the manner in which
OCC would take possession of collateral in OCC's escrow deposit program
in the event of a clearing member or custodian bank default; and, (3)
clarifying clearing members' rights to collateral in the escrow deposit
program in the event of a customer default to the clearing member as
well as providing additional detail concerning the manner in which
clearing members may take possession of such collateral. The third
section discusses proposed technical and conforming changes to the
rules and agreements governing the current escrow deposit program that
would allow OCC to consolidate all such terms into a single location in
OCC's Rulebook. The second and third sections also discuss changes that
improve the readability of the rules governing OCC's escrow deposit
program, which is primarily achieved by consolidating all such rules
into a single location in OCC's Rulebook. The fourth section discusses
the manner in which OCC proposes to transition from the current escrow
deposit program to the new escrow deposit program, including the
removal of certain rules and contractual provisions that would no
longer be applicable to the new escrow deposit program.
Section 1: Background and Overview of Proposed Rule Changes
Background/Current Escrow Deposit Program
    Each day OCC collects collateral from its clearing members in order
to protect OCC and the markets it serves from potential losses stemming
from a clearing member default. Approximately half of the collateral
deposited by clearing members at OCC is deposited through OCC's escrow
deposit program. Users of OCC's escrow deposit program are customers of
clearing members who, through the escrow deposit program, are permitted
to collateralize eligible positions directly with OCC (instead of with
the relevant clearing member who would, in turn, deposit margin at
OCC). Currently, collateral deposits made through OCC's escrow deposit
program are characterized as either ``specific deposits'' or ``escrow
deposits.'' Specific deposits are deposits of the security underlying a
given options position and are made through DTC by a clearing member on
behalf of its customer (at the direction of the customer).\3\ Escrow
deposits are deposits of cash or securities made by a custodian bank on
behalf of a customer of an OCC clearing member in support of an
eligible options position. OCC's Rules currently contemplate two forms
of escrow deposits: ``third-party escrow deposits'' and ``escrow
program deposits.'' Third-party escrow deposits are substantially
similar to specific deposits except for the fact that third-party
escrow deposits are made by a custodian bank, and not a clearing
member. Third-party escrow deposits consist entirely of securities and,
like specific deposits, are made through DTC. In order to effect third-
party specific deposits, custodian banks must be DTC members. Escrow
program deposits are bank deposits of eligible securities or cash,
which are held at the custodian bank (versus third-party escrow
deposits and specific deposits, which are held at DTC).
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    \3\ For example, if customer XYZ holds a short position of
options on AAPL, customer XYZ could, through its clearing member's
DTC account, pledge shares of AAPL to OCC in order to collateralize
such options position and not be charged margin by OCC.
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    When a customer of a clearing member makes a deposit in lieu of
margin through OCC's escrow deposit program, the relevant positions are
excluded from the clearing member's margin requirement at OCC. The
escrow deposit program therefore provides users of OCC's services with
a means to more efficiently use cash or securities they may have
available.
Overview of Rule Changes (Including Terminology Changes) and New
Agreements
Rule Consolidation and Terminology Changes
    Currently, the rules concerning OCC's escrow deposit program are
located in OCC Rules 503, 610, 613 and 1801. Additionally, OCC and
custodian banks participating in OCC's escrow deposit program enter
into an Escrow Deposit Agreement (``EDA''), which also contains
substantive provisions governing the program. OCC is proposing to
consolidate all of the rules concerning the escrow deposit program,
including the provisions of the EDA relevant to the revised escrow
deposit program, into proposed Rules 610, 610A, 610B and 610C.\4\ OCC
believes that consolidating the many rules governing the escrow deposit
program into a single location would significantly enhance the
understandability and transparency of the rules concerning the escrow
deposit program for current users of the program as well as any persons
that may be interested in using the program in the future.
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    \4\ As described herein, OCC is proposing to eliminate the EDA
based on such consolidation. When appropriate, and as described in
more detail below, conforming changes were made to certain Rules as
a result of OCC proposing to require that all non-cash deposits in
the escrow deposit program be made through DTC (and not held at
custodian banks).
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    In connection with the above described rule consolidation, OCC is
also proposing to rename the types of escrow deposits available within
the escrow deposit program, as well as rename the term ``approved
depository'' to ``approved custodian.'' Specific deposits would now be
called ``member specific deposits,'' which are equity securities
deposited by clearing members at DTC at the direction of their
customers; third-party escrow deposits would now be called ``third-
party specific deposits,'' which are equity securities deposited by
custodian banks at DTC at the direction of their customers; and, escrow
program deposits would now be called, ``escrow deposits,'' which are
either cash deposits held at a custodian bank for the benefit of OCC,
or Government securities deposited at DTC by custodian banks at the
direction of their

customers. The term ``approved depository'' would also be changed to
``approved custodian'' to eliminate any potential confusion with the
term ``Depository,'' which is defined in the Rules, to mean DTC.
New Rule Organization
    With respect to the rules governing the escrow deposit program,
proposed Rule 610 would set forth general terms and conditions common
to all types of deposits permitted under the escrow deposit program.
Specifically, proposed Rule 610: (1) Sets forth the different types of
eligible positions for which a deposit in lieu of margin may be used,
(2) sets forth operational aspects of the escrow deposit program such
as the days and the times during which a deposit in lieu of margin may
be made and where the different types of deposits in lieu of margin
must be maintained (either DTC or a custodian bank), (3) provides the
conditions under which OCC may take possession of a deposit in lieu of
margin (from DTC or a custodian bank), and (4) describes OCC's security
interest in deposits in lieu of margin.\5\ Proposed Rule 610 is
supplemented by: (1) Proposed Rule 610A for member specific deposits,
(2) proposed Rule 610B for third-party specific deposits, and (3)
proposed Rule 610C for escrow deposits. Proposed Rules 610A, 610B and
610C provide further guidance and specificity on the topics initially
addressed in proposed Rule 610 (and delineated above) as they relate to
member specific deposits, third-party specific deposits and escrow
deposits, respectively.
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    \5\ OCC would continue to maintain a perfected security interest
in deposits in the escrow deposit program under the proposed Rules
notwithstanding changes to the location of the rules that perfect
such security interest. OCC's security interest in securities
deposits in the escrow deposit program, which are held at DTC, is
perfected by operation of DTC's rules. OCC's security interest in
cash deposits in the escrow deposit program is perfected under
proposed Rules 610C(i), 610C(j) and 610C(k), which replace Sections
3.3, 3.4, 4.3, 4.4, 5.3, 5.4 and 21 of the EDA. Proposed Rule 610(g)
also concerns OCC's security interest in deposits in escrow deposit
program.
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    The new rule structure differs from the existing rule structure in
that existing Rules 503, 610, 613 and 1801 discuss topics concerning
deposits in lieu of margin (such as withdrawal, roll-over \6\ and
release) in general terms and without regard to the type of deposit in
lieu of margin. The existing rule structure also does not provide
operational details of the escrow deposit program. The new rule
structure discusses each aspect of OCC's escrow deposit program by type
of deposit in lieu of margin (member specific deposits, third-party
specific deposit or escrow deposits) as well as provides operational
details concerning the program. OCC believes that the more detailed
presentation of the new rules concerning the escrow deposit program
enhances the understandability of the program to all users, and
potential users, of the program because all such persons will be able
to better understand how topics apply by type of deposit in lieu of
margin and with regard to the operational differences between each type
of deposit in lieu of margin.
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    \6\ A ``roll-over'' occurs when a customer chooses to maintain
an existing escrow deposit after the options supported by the escrow
deposit expires, or are closed-out, and the customer re-allocates
the escrow deposit to a new options position.
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Agreements Concerning the Escrow Deposit Program
    In addition to the above-described Rule changes, many provisions of
the EDA would be moved into the Rules. Accordingly, OCC is proposing to
eliminate the EDA and replace it with a simplified agreement entitled
the ``Participating Escrow Bank Agreement.'' \7\ The Participating
Escrow Bank Agreement would provide that custodian banks are subject to
all terms of the Rules governing the revised escrow deposit program,\8\
as they may be amended from time to time.\9\ The Participating Escrow
Bank Agreement would contain eligibility requirements for custodian
banks, including representations regarding the custodian bank's Tier 1
Capital,\10\ and provide OCC with express representations concerning
the bank's authority to enter into the Participating Escrow Bank
Agreement.\11\ Moreover, standard contractual provisions concerning
topics such as assignment, governing law and limitation of liability
have been enhanced in the Participating Escrow Bank Agreement when
compared to the EDA.\12\ OCC is also proposing to move notification
requirements into proposed Rule 610C(l), which is an enhancement of
Section 7 of the EDA that requires custodian banks to provide notice to
OCC only when there are changes to the ``authorized persons'' and
changes to the address of the bank. Proposed Rule 610C(l) would require
escrow banks to provide OCC with notices of material changes to the
bank (in additional to items such as changes of authorized persons and
the address of bank, as currently required under Section 7 of the EDA).
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    \7\ The Participating Escrow Bank Agreement is attached to this
filing as Exhibit 5A, with changes from the EDA marked. Custodian
banks participating in the revised escrow deposit program are
defined as ``Participating Escrow Banks'' in the Participating
Escrow Bank Agreement, and such banks must also be an Approved
Custodian pursuant to proposed Section 1.A(13) of OCC's By-Laws. In
addition, and as described above, certain provisions of the EDA are
proposed to be incorporated into OCC's Rules; however, no rights or
obligations of either OCC or a custodian bank would change solely as
a result of such an incorporation.
    \8\ The Rules governing the revised escrow deposit program are
proposed Rules 610, 610A, 610B and 610C.
    \9\ Under the Participating Escrow Bank Agreement, however, OCC
will agree to provide custodian banks with advance notice of
material amendments to the Rules relating to deposits in lieu of
margin and custodian banks will have the opportunity to withdraw
from the escrow deposit program if they object to the amendments. As
a general matter, the Participating Escrow Bank Agreement will not
be negotiable, although OCC may determine to vary certain non-
material terms in limited circumstances.
    \10\ OCC recently enhanced the measurement it uses--Tier 1
Capital instead of shareholders' equity--to establish minimum
capital requirements for banks approved to issue letters of credit
that may be deposited by clearing members as a form of margin asset.
See Securities Exchange Act Release No. 74894 (May 7, 2015), 80 FR
27431 (May 13, 2015) (SR-OCC-2015-007). For the reasons set forth in
SR-OCC-2015-007, OCC is proposing to adopt the same standard with
respect to custodian bank escrow deposits.
    \11\ These provisions include, but are not limited to, Sections
1.1 and 1.2 of the EDA.
    \12\ Sections 2.1, 2.2, 3.5, 3.6, 3.8, 4.7, and 5.6, 6 and 7 of
the EDA would be removed entirely since they are no longer needed
under OCC's revised escrow deposit program. These provisions concern
a custodian bank's movement of securities escrow collateral; such
collateral would be deposited at DTC under the revised escrow
deposit program (as described below). Section 2.3 of the EDA would
also be removed in its entirety because escrow deposits would not be
permitted for equity calls in the revised escrow deposit program.
Additionally, the concept of cash settlements concerning escrow
deposits would not be included in the revised escrow deposit program
and, as a result, Sections 15, 16, 17 and 18(b) to 18(d) would be
removed in their entirety.
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    OCC, under Proposed Rule 610C(b), would also require customers
wishing to deposit cash collateral and custodian banks holding escrow
deposits comprised of cash to enter into a tri-party agreement
involving OCC, the customer and the applicable custodian bank (``Tri-
Party Agreement,'' attached hereto as Exhibit 5B). The Tri-Party
Agreement governs the customer's use of cash in the program, confirms
the grant of a security interest in the customer's account to OCC and
the relevant clearing member, as set forth in proposed Rule 610C(f),
and causes customers of clearing members to be subject to all terms of
the Rules governing the revised escrow deposit program.\13\ Each
custodian bank entering into the Tri-Party Agreement (``Tri-Party
Custodian Bank''), would agree to follow the directions of OCC

with respect to cash escrow deposits without further consent by the
customer.\14\ As discussed in greater detail below, use of the Tri-
Party Agreement significantly enhances OCC's rights concerning cash
escrow deposits, and provides OCC with greater certainty regarding its
rights to cash escrow deposits in the event of a customer or clearing
member default.
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    \13\ The Rules governing the revised escrow deposit program are
proposed Rules 610, 610A, 610B and 610C.
    \14\ OCC has determined to use this cash account structure as a
result of a series of discussions with certain custodian banks
involved in the cash portion of the escrow deposit program, as
described in Item 5 below. The intended structure would permit a
greater number of customers to participate in the escrow deposit
program than, for example, a commingled ``omnibus'' account
structure at each custodian bank, which would preclude the
participation of customers subject to restrictions under the
Investment Company Act of 1940 requiring segregation of a registered
investment company's funds.
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Section 2: Transparency and Controls, Taking Possession of Collateral,
and Clearing Member Rights to Collateral
Transparency and Control Over Collateral Included in Escrow Deposits
    Currently, securities deposits in the escrow deposit program are
held at either DTC or a custodian bank, and cash deposits in the escrow
deposit program are held at a custodian bank. In the case of either
cash or securities held at a custodian bank, OCC relies on the
custodian bank to verify the value and control of collateral since OCC
does not have any visibility into relevant accounts. OCC is proposing
to require that all securities deposited within the escrow deposit
program, regardless of the type of deposit, be held at DTC.\15\
Additionally, OCC is proposing to require Tri-Party Custodian Banks to
provide OCC with view access into the account in which the deposit is
held.
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    \15\ OCC has discussed the proposed rule changes to the escrow
deposit program with DTC and, based on feedback from DTC, no
concerns were communicated to OCC by DTC regarding the proposed rule
changes. DTC has also indicated that the proposed rule changes to
the escrow deposit program are consistent with DTC's operations.
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    Holding securities escrow deposit program collateral at DTC would
provide OCC with increased visibility into the collateral within the
escrow deposit program because OCC would be able to use its existing
interfaces with DTC to view, validate and value collateral within the
escrow deposit program in real time, allowing OCC to perform the
controls for which it currently relies on the custodian banks. It would
also provide OCC with the ability to obtain possession of deposited
securities upon a clearing member default by issuing a demand of
collateral instruction through DTC's systems, without the need for
custodian bank involvement. Furthermore, a clearing member would have
the ability to obtain possession of deposited securities upon a
customer default in a similar manner by notifying OCC of such customer
default and submitting a request for delivery of such deposited
securities (OCC's and clearing members' ability to take possession of a
deposit within the escrow deposit program is discussed in greater
detail below). OCC does not believe that requiring use of DTC to
deposit securities escrow collateral presents a material change for
users of OCC's escrow deposit program because such users currently use
DTC to effect certain types of deposits in lieu of margin under the
current escrow deposit program.\16\
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    \16\ Specifically, users of OCC's escrow deposit program would
use DTC's Collateral Loan Services, which is described at: http://www.dtcc.com/products/training/helpfiles/settlement/settlement_help/help/collateral_loans.htm.
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    Cash collateral pledged to support an escrow deposit would continue
to be facilitated through the existing program interfaces; however, for
increased security, any pledges of cash would be required to be made in
a customer's account at the Tri-Party Custodian Bank that is used
solely for the purpose of making escrow deposits. As described above,
under the proposed changes OCC would require Tri-Party Custodian Banks
and customers to enter into a Tri-Party Agreement in order to provide
legal certainty concerning this arrangement. Further, and as set forth
in the Tri-Party Agreement, each Tri-Party Custodian Bank would agree
to disburse funds from the pledged account only at OCC's direction.
From an operational perspective, each Tri-Party Custodian Bank would
provide OCC with online view access to each customer's cash account
designated for the escrow deposit program, allowing visibility into
transactional activity and account balances. OCC would not process a
cash escrow deposit in its systems until it sees the appropriate amount
of cash deposited in the designated bank account at the Tri-Party
Custodian Bank. This process ensures that OCC does not rely on a third
party to value, or warrant the existence of, collateral within the
escrow deposit program. The Tri-Party Agreement, in connection with the
new cash collateral structure, would provide OCC with additional
transparency and control over cash collateral under the revised escrow
deposit program.
    In order to effect the foregoing, OCC is proposing to adopt
proposed Rules 610A(a), 610B(a), 610C(b) and 610C(c). Proposed Rules
610A(a) and 610B(a), Effecting a Member Specific Deposit and Effecting
a Third-Party Specific Deposit, respectively, require that member
specific deposits and third-party specific deposits must be made
through DTC, and are largely based upon existing Rule 610(e), which
discusses effecting deposits in lieu or margin generally. Language has
been added to each proposed rule to more accurately articulate that
member specific deposits and third-party specific deposits must be made
through DTC and the party that is required to effect each type of
deposit (i.e., a clearing member or a third-party depository). In the
case of member specific deposits and third-party specific deposits,
which are already made through DTC, OCC believes that proposed Rules
610A(a) and Rule 610B(a) are rules that clarify existing practices and
provide additional operational detail to users of the escrow deposit
program (i.e., member specific deposits and third-party specific
deposits must be made through DTC's EDP Pledge System and clearing
members are required to maintain records of such deposits). Proposed
Rules 610C(b) and 610C(c), Manner of Holding and Method of Effecting
Escrow Deposits, respectively, are largely based upon existing Rules
610(d), 610(g), 1801(d) and 1801(g), as well as Section 8 of the EDA
with language added to more accurately articulate that securities
escrow deposits must be made through DTC and cash must be deposited
through a Tri-Party Custodian Bank, and provide operational detail
concerning effecting escrow deposits. Moreover, OCC is proposing to
adopt new Rule 610(e) in order to specify that all types of deposits in
the escrow deposit program may be made only during the time specified
by OCC. The purpose of specifying the time frames in which participants
are allowed to effect deposits in the escrow deposit program is to
facilitate OCC daily margin processing and ensure that all of the
positions it guarantees are timely collateralized.\17\
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    \17\ In the event a deposit in the escrow deposit program is not
timely made, OCC would collect margin from the relevant clearing
member.
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    In addition to the above, and with respect to escrow deposits only,
OCC is proposing enhancements to its process of ensuring that customers
meet initial and maintenance minimums.\18\ Specifically, under the
revised escrow deposit program, in the event a customer falls below the
maintenance minimum, the custodian bank, pursuant

to the Participating Escrow Bank Agreement, would be required to ensure
that the customer deposits additional collateral or escalate the matter
to OCC. In addition to such notification requirement, OCC would also
implement automated processes to ensure that escrow deposits meet
required initial and maintenance minimums. In the event the matter is
escalated to OCC or OCC's systems identify a shortfall, OCC would: (1)
Demand that the relevant clearing member post additional margin to
cover the margin requirement on the applicable position, and (2) if the
relevant clearing member fails to satisfy such a demand for additional
margin, OCC would close-out the applicable position and demand the
escrow deposit from DTC or the Tri-Party Custodian Bank, as applicable,
under its existing authority pursuant to Rule 1106. This process is
much more robust than the current process concerning maintenance
minimums in that OCC currently relies entirely on custodian banks
holding escrow deposits to ensure the customer deposits additional
collateral, as necessary, to meet initial and maintenance minimums. OCC
believes that the proposed new process is more streamlined and
efficient because OCC would not have to rely entirely on a custodian
bank to ensure customers comply with initial and maintenance minimums.
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    \18\ Initial and maintenance minimums do not apply to member
specific deposits and third-party specific deposits since the
clearing member or custodian bank, as applicable, is pledging the
security that is deliverable upon exercise of the germane options
position.
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    In order to implement the foregoing within the new rules concerning
the escrow deposit program, OCC is proposing to adopt Rules 610C(g) and
610C(h) that concern the initial and maintenance minimum escrow deposit
values required by OCC as well as actions OCC is permitted to take in
the event an escrow deposit falls below a required amount. These
proposed rules are based on existing Rules 1801(c) and 1801(e) as well
as Sections 3.2, 4.2, 5.2, 3.7, 4.8 and 5.7 of the EDA.\19\ With
respect to the computation of initial and maintenance minimums,
proposed Rules 610C(g) and 610C(h) would explain the formula through
which OCC computes the initial and maintenance minimum for a given
options position, with the specific percentage applicable to such
calculation provided to participants in the escrow deposit program in a
schedule posted on OCC's Web site. With respect to the effects of a
failure to meet maintenance minimums, proposed Rule 610C(h) sets forth
the conditions under which OCC would close out a given escrow deposit
should it fall below the requisite maintenance minimum. Proposed Rule
610C(h) would also provide OCC with the authority to use the cash and
securities included within the escrow deposit to reimburse itself for
costs incurred in connection with the close-out. OCC believes that by
virtue of their proposed new location in the rules, as well as the
additional detail provided in the proposed rules, all participants, and
potential participants, in OCC's escrow deposit program would better
understand the rules concerning initial and maintenance minimums, as
they relate to escrow deposits, under the enhanced escrow deposit
program (versus under the current escrow deposit program).
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    \19\ OCC is proposing to eliminate the concept of
``substitutions'' of escrow deposit collateral (located in Sections
4.7 and 5.6 of the EDA)--instead a given escrow deposit must at all
times must meet the minimum amount (as set forth in proposed Rules
610(g)(1) and (2)) and OCC would permit any excess amount to be
withdrawn.
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OCC's Rights to Collateral in the Escrow Deposit Program in the Event
of a Clearing Member or Bank Default
    The proposed Rules would enhance OCC's default management regime as
it relates to the escrow deposit program by more specifically
delineating the conditions under, and the process through which, OCC
would take possession of collateral within the escrow deposit program
should a clearing member or custodian bank default. Specifically,
proposed Rules 610A(b), 610B(f), 610C(q) and 610C(r) provide that in
the event of a clearing member or custodian bank default OCC would have
the right to direct DTC to deliver the securities included in a member
specific deposit, third-party specific deposit or escrow deposit to
OCC's DTC participant account for the purpose of satisfying the
obligations of the clearing member or reimbursing itself for losses
incurred as a result of the failure, as applicable. Similarly, pursuant
to proposed Rules 610C(q) and 610C(r) OCC would have the right in the
event of a Tri-Party Custodian Bank default to take possession of cash
included within an escrow deposit for the same purposes. In the event
of a custodian bank default, pursuant to proposed Rule 610C(r) OCC
would have the right to remove the custodian bank from the escrow
deposit program, prohibit the custodian bank from making new escrow
deposits, disallow withdrawals with respect to existing deposits, close
out short positions covered by escrow deposits at the defaulted
custodian bank and use such escrow deposits to reimburse itself for the
costs of the close-out, or disregard or require the withdrawal of
existing escrow deposits.
    Proposed Rules 610A(b), 610B(f) and 610C(q) concern OCC's rights to
member specific deposits, third-party specific deposits and escrow
deposits, respectively, in the event of a clearing member default. They
would provide a more specific description of OCC's rights to a third-
party specific deposit during a default than existing Rule 610(k) and
Section 18 of the EDA. However, the additional specificity that would
be provided in proposed Rules 610A(b), 610B(f) and 610C(q) would not
change OCC's nor clearing members' rights or obligations regarding
member specific, third-party specific or escrow deposits in the event
of a clearing member default. Proposed Rule 610C(r) addresses OCC's
rights in the event of a custodian bank default and is based on
existing Rules 613(h) and 1801(k). Proposed Rule 610C(r) would clarify
OCC's existing operational practices when a custodian defaults (i.e.,
demand monies, not allow new deposits, etc., as described immediately
above), but does not change any of the rights of OCC, clearing members
or custodian banks set forth in existing Rules 613(h) and 1801(k).
    In addition to the above-described proposed rule changes, OCC is
proposing to amend Rule 1106 to set forth the treatment of deposits in
the escrow deposit program in the event of a suspension of a clearing
member. Rule 1106(b)(2) would be amended to provide that OCC may close
out a short position of a suspended clearing member covered by a member
specific, third-party specific or escrow deposit, subject to the
ability of the suspended clearing member or its representative to
transfer the short position to another clearing member under certain
circumstances. Further, current Rule 1106(b)(3) would be combined with
Rule 1106(b)(2) and amended to set forth OCC's right to take possession
of the cash and/or securities included within an escrow, member
specific or third-party specific deposit for the purpose of reimbursing
itself for costs incurred in connection with the close-out of a short
position covered by the deposit. These proposed amendments to Rule 1106
are consistent with proposed Rules 610B(f), 610C(q) and 610C(r).
Clearing Members' Rights to Collateral in the Escrow Deposit Program
    Clearing members' rights to escrow deposits and third-party
specific deposits would be clarified under the proposed rules. While
clearing members have secondary lien rights to the escrow deposits of
their customers under the current escrow deposit program, OCC is
proposing to add several rules that

would clarify these rights and provide additional guidance to clearing
members regarding operational steps that would need to be taken in
order to exercise their secondary lien rights. Specifically, OCC is
proposing to add Rules 610B(c) and 610C(f) to delineate the rights of a
clearing member as they relate to third-party specific deposits and
escrow deposits. Proposed Rules 610B(c) and 610C(f) would provide for
the grant of a security interest by the customer to the clearing member
with respect to any given third-party specific deposit and escrow
deposit, as applicable. The Rules would further provide that any such
security interest of a clearing member in an escrow deposit would be
subordinated to OCC's interest. For purposes of perfecting a clearing
member's security interest under the Uniform Commercial Code (``UCC''),
OCC would obtain control over the security both on its own behalf and
on behalf of the relevant clearing member, with clear subordination of
the clearing member's interest to OCC's interest. In the event OCC had
to direct delivery of the security to the clearing member, OCC would do
so on the clearing member's behalf. Proposed Rules 610B(c) and 610C(f)
would better codify clearing members' secondary lien rights to third-
party specific deposits and escrow deposit than they are currently
codified in Section 21 of the EDA, without changing any clearing member
rights or obligations. OCC believes that such a codification would
provide more transparency regarding clearing members' secondary lien
rights under the enhanced escrow deposit program because all users and
potential users of OCC's escrow deposit program would be able to easily
identify and understand the rules concerning clearing members'
secondary lien rights in a single location within OCC's publicly
available Rulebook.
    Additionally, OCC is proposing to add several procedural rules that
would set forth the process by which clearing members could exercise
their secondary lien rights in a given deposit in the escrow deposit
program. Proposed Rules 610C(d), 610C(o), 610C(p) and 610C(s), relating
to escrow deposits, and proposed Rules 610B(d) and 610B(e), relating to
third-party specific deposits, would provide that, in the event of a
customer default to a clearing member, the clearing member would have
the right to request a ``hold'' on a deposit. The hold would prevent
the withdrawal of deposited securities or cash by a custodian bank or
the release of a deposit that would otherwise occur in the ordinary
course. Subsequent to placing a hold instruction on a deposit, a
clearing member would have the right to request that OCC direct
delivery of the deposit to the clearing member through DTC's systems in
the case of securities, or an instruction to the Tri-Party Custodian
Bank in the case of cash. Providing clearing members with transparent
instructions regarding how to place a hold instruction on, and direct
delivery of a deposit within the escrow deposit program, would
significantly enhance the current escrow deposit program.
    OCC is also proposing to adopt Rules 610B(e) and 610C(s), which
would protect OCC in the event that it delivers a third-party specific
deposit or escrow deposit to a clearing member. Under proposed Rules
610B(e) and 610C(s), a clearing member making a request for delivery
would be deemed to have made the appropriate representations to OCC
that the clearing member has a right to take possession of the
deposited securities or cash and would agree to indemnify OCC against
losses resulting from a breach of these representations or the delivery
of the deposit. A clearing member would also be required to provide
documentation regarding its right to possession of the securities or
cash as OCC may reasonably request.
Section 3: Techincal[sic] and Conforming Changes to OCC'S Rules
    OCC also proposes a number of technical, conforming and structural
changes in order to move the majority of the terms governing the escrow
deposit program into one section in its Rulebook. OCC believes that
changes to proposed Rules 610, 610A, 610B and 610C, described in
greater detail below, are either non-substantive or conforming changes
that do not alter the current rights or obligations of OCC, clearing
members or participants in the escrow deposit program.
Proposed Rule 610--Deposits in Lieu of Margin (General Provisions)
    Proposed Rule 610 contains general provisions applicable to the
escrow deposit program. Specifically, proposed Rule 610(a) replaces
existing Rule 610(a) and sets forth general provisions of the escrow
deposit program including: (1) Who may participate in the escrow
deposit program, (2) the types of positions included in the escrow
deposit program, (3) the types of deposits in the escrow deposit
program, and (4) the collateral that is eligible for the escrow deposit
program. Proposed Rule 610(b) replaces existing Rule 610(b) and
provides further specificity with respect to the types of options
positions included within OCC's escrow deposit program.\20\ This
additional specificity clarifies OCC's existing rules and provides more
transparency to users and potential users of OCC's escrow deposit
program. Proposed Rule 610(c), which is not derived from an existing
rule, clarifies OCC's existing practice that OCC will disregard a
member specific deposit or a third-party specific deposit if such
deposit is no longer eligible to be delivered upon the exercise of the
associated stock option contract. Proposed Rule 610(d), which replaces
existing Rules 610(c) and 1801(l), requires that deposits within the
escrow deposit program be made in accordance with applicable laws and
regulations, and be appropriately authorized. Proposed Rule 610(f),
which replaces existing Rule 610(l), would clarify OCC's right to use
deposits within the escrow deposit program until such deposits are
withdrawn. Proposed Rule 610(f) is supplemented by proposed Rules 610A,
610B and 610C with respect to member specific, third-party specific and
escrow deposits. Proposed Rule 610(g) codifies OCC's security interest
in deposits within the escrow deposit program.
---------------------------------------------------------------------------

    \20\ As described in greater detail below, proposed Rules 610(a)
and 610(b) are supplemented by proposed Rules 610A, 610B and 610C.
---------------------------------------------------------------------------

Proposed Rule 610A--Member Specific Deposits
    Proposed Rule 610A clarifies many of the current rules concerning
the escrow deposit program as they relate to member specific deposits.
For example, proposed 610A(c) describes the process by which a clearing
member may withdraw a member specific deposit (i.e., effecting a
withdrawal or release through DTC's EDP Pledge System and ensuring that
its margin requirement at OCC is met). While this issue is addressed in
existing Rule 610(j) in general terms, OCC believes that the additional
operational details regarding its existing processes in proposed Rule
610A(c), along with its inclusion in proposed Rule 610A, further
clarify how those existing processes apply to member specific deposits
as opposed to other types of deposits in lieu of margin in existing
Rule 610.\21\ Proposed Rule 610A(d) also establishes that member
specific deposits may be ``rolled-over,'' a concept that is not
specifically set forth in existing Rule 610 but has historically
applied in connection with member specific deposits (formerly specific
deposits).
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    \21\ Proposed Rule 610A(c) supplements proposed Rule 610(f).

---------------------------------------------------------------------------

Proposed Rule 610B--Third-Party Specific Deposits
    Proposed Rule 610B clarifies many of the current rules concerning
third-party specific deposits. For example, Proposed Rule 610B(b)
addresses rollovers of a third-party specific deposit and replaces
existing Rules 613(a) and Section 9 of the EDA, and articulates how to
rollover third-party specific deposits by its inclusion within Rule
610B. Withdrawals and releases of third-party specific deposits are
addressed in proposed Rule 610B(d), which is based on existing Rules
613(b) and 613(f). Specifically, releases and withdrawals of third-
party specific deposits would be effected through DTC's EDP Pledge
System, subject to the clearing member's margin requirement being met,
the clearing member's approval of the release or withdrawal, and the
absence of a ``hold'' instruction. In addition, proposed Rule 610B(g)
seeks to provide a more detailed description of the effect of a release
of a third-party specific deposit than the applicable portions of
existing Rule 613(i).
Proposed Rule 610C--Escrow Deposits
    Proposed Rule 610C, which is based on existing Rule 1801(a), would
clarify the current rules concerning escrow deposits. For example, the
introductory paragraph of proposed Rule 610C would provide a more
detailed overview of a custodian bank's role in the escrow deposit
program, specifying such a bank's role in effecting escrow deposits,
and would describe eligible positions as they relate to escrow
deposits. Proposed Rules 610C(a) through 610C(e) and proposed Rule
610C(t) concern eligible collateral, the manner in which escrow
deposits are to be held, and withdrawing an escrow deposit and rolling
over an escrow deposit. These operational rules are based on: (1)
Existing Rules 610(g) and 1801(b) and Sections 3.1, 4.1 and 5.1 of the
EDA with respect to eligible collateral (proposed Rule 610C(a)); (2)
existing Rules 610(j) and 1801(i), and Sections 10 and 20 of the EDA
with respect to withdrawing an escrow deposit (proposed Rule 610C(d));
(3) existing Rule 613(i) with respect to the effect of a release or
withdrawal of an escrow deposit (proposed Rule 610C(t)); and (4)
existing Rule 613(a) and Section 9 of the EDA with respect to rollovers
of an escrow deposit (Proposed Rule 610C(e)).
    In order to provide additional transparency concerning
representations that custodian banks are deemed to make when effecting
an escrow deposit, OCC is proposing to move several contractual
provisions of the EDA into proposed Rules 610C(i), 610C(j) and 610C(k).
Specifically: (1) Proposed Rule 610C(i), which concerns agreements and
representations a custodian bank is deemed to have made when effecting
an escrow deposit, is based upon Sections 1.6 and 4.6 of the EDA; (2)
proposed Rule 610C(j), which concerns representations and warranties a
custodian bank is deemed to make when giving an instruction to OCC and
is based upon Sections 1.3, 1.4, 1.5, 1.6, 1.7 and 1.8 of the EDA; and
(3) proposed Rule 610C(k), which concerns agreements a custodian bank
is deemed to make when giving an instruction to OCC and is based upon
Sections 4, 5 and 21 of the EDA. Moreover, and in addition to locating
deemed representations of custodian banks in the Rules, proposed Rules
610C(i), 610C(j) and 610C(k) contain language that perfects OCC's
security interest in escrow deposits under Section 9 of the UCC, and
replace Sections 3.3, 3.4, 4.3, 4.4, 5.3 and 5.4 of the EDA.\22\ OCC
believes that by locating the above-described provisions in the Rules,
all users and potential users of OCC's escrow deposit program would
better understand the relationship between OCC and custodian banks.
---------------------------------------------------------------------------

    \22\ The primary UCC-related provisions in the proposed Rules
include Rules 610C(j)(1), 610C(j)(9) and 610C(k)(1), which provide
for the perfection of OCC's security interest in deposits consisting
of securities under UCC Sections 9-106 and 9-314; Rules 610C(j)(1),
610C(j)(10), and 610C(k)(2), which provide for the perfection of
OCC's security interest in deposits consisting of cash under UCC
Sections 9-104, 9-312 and 9-314; and Rules 610C(i)(1), 610C(i)(2)
and 610C(j)(3), which support the first priority of OCC's security
interest by preventing competing liens or claims.
---------------------------------------------------------------------------

    Proposed Rules 610C(m), 610C(n), 610C(o) and 610C(p) concern the
exercise of options positions collateralized by escrow deposits and the
release of escrow deposits upon expiration. As with other parts of
proposed Rule 610C, OCC believes that the location of proposed Rules
610C(m), 610C(n), 610C(o) and 610C(p) provides all users and potential
users of OCC's escrow deposit program with a more transparent
understanding of how exercises of options positions affect escrow
deposits as well as the manner in which OCC would release an escrow
deposit upon the expiration of an options position. Similar to other
parts of Rule 610C, proposed Rules 610C(m), 610C(n), 610C(o) and
610C(p) are based on existing Rules of OCC as well as the EDA.\23\
Proposed Rule 610C(m) concerns reports OCC provides regarding escrow
deposits and is based upon existing Rules 613(d) and 613(e) as well as
Sections 11, 12 and 13 of the EDA. Proposed Rules 610C(n), 610C(o) and
610C(p), which concern assignments of exercises and releases of escrow
deposits upon expiration is based upon existing Rules 613(f) and
1801(j) and Section 14 of the EDA.
---------------------------------------------------------------------------

    \23\ As discussed in Section 3 above, Rules 610C(n) and 610C(p)
contain language that prevents the release of an escrow deposit in
the event such deposit is subject to a hold instruction, which is a
proposed enhancement to the escrow deposit program.
---------------------------------------------------------------------------

Section 4: Transition Period
    For the administrative convenience of clearing members, custodian
banks and customers, the existing Rules governing deposits in lieu of
margin would remain in effect, in parallel with the proposed Rules, for
a transition ending November 30, 2017. During this transition period,
deposits in lieu of margin could be made under either the existing
Rules or the proposed Rules. This will eliminate the need of all
clearing members to provide new collateral on a single date in the
absence of a transition period. After the transition period, proposed
Rules 610, 610A, 610B and 610C would provide the sole means of making
deposits in lieu of margin and existing Rules 613 and 1801 would be
removed from the Rulebook. In connection with the transition, existing
Rule 610 would be re-designated as 610T to indicate that it is a
temporary rule, and would become ineffective and removed after the
transition period. Furthermore, following the transition period,
existing Rule 503, which addresses instructions that call for the
payment of a premium by or to the clearing member for whose account the
deposit is made, would be removed from the Rules because these
instructions would no longer be permitted under the revised escrow
deposit program since this aspect of the program has not been used for
a number of years.\24\ In addition, Government securities would be
given full market value under the revised escrow deposit program and
therefore existing Rule 610(h) would be removed from the Rules after
the transition period.
---------------------------------------------------------------------------

    \24\ For the purposes of clarity, existing Rules 613(c), 613(g),
613(h), 613(j) address the same topic and would be removed from
OCC's Rulebook following the transition period without being
migrated into a proposed Rule.
---------------------------------------------------------------------------

2. Statutory Basis
    OCC believes that the proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act \25\ because it would ensure the
safeguarding of securities and funds which are in the custody and
control of OCC. As described above, the proposed rule

change would increase OCC's visibility into and control over cash and
securities deposits made in OCC's escrow deposit program. Deposits in
OCC's escrow deposit program collateralize open securities positions
guaranteed by OCC and protect OCC and market participants from the risk
associated with a default of a clearing member. The proposed rule
change would better ensure that OCC could verify that deposits of both
cash and securities within OCC's escrow deposit program sufficiently
collateralize germane short options position(s). In addition, OCC
would: (1) Be able to use its existing functionality with DTC to more
quickly take possession of such deposits without involving custodian
banks in the event of a clearing member default, and (2) obtain a
contractual commitment from [sic] Tri-Party Custodian Bank that they
would disperse cash within the escrow deposit program to OCC at OCC's
direction. OCC believes that these features of the revised escrow
deposit program would reduce potential losses that may occur as a
result of a clearing member default. As a result of the foregoing, the
proposed rule change would better ensure the safeguarding of securities
and funds that are in the custody and control of OCC.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    OCC also believes that the proposed rule change is consistent with
Rule 17Ad-22(d)(3), which requires OCC to hold assets in a manner that
minimizes risk of loss or delay or in access to them.\26\ Specifically,
and with respect to non-cash collateral, all non-cash collateral in the
escrow deposit program would be held at DTC thereby allowing OCC to
validate and value collateral in real time and quickly obtain
possession of deposited securities by issuing a transfer instruction
through DTC's systems in an event of default without involving
custodian banks. With respect to cash collateral, all such collateral
would be held in an escrow deposit program specific account at a Tri-
Party Custodian Bank, OCC would have view access into such account, and
OCC would obtain a contractual commitment from the Tri-Party Custodian
Banks that they would disperse cash within the escrow deposit program
to OCC at OCC's direction. By more widely utilizing its existing
infrastructure for non-cash collateral in the escrow deposit program,
as well as by obtaining specific agreements regarding its right to take
possession of cash collateral, OCC will be able to more quickly take
possession of collateral in the escrow deposit program in the event of
a clearing member default that would, in turn, reduce potential losses
to OCC, other clearing members and market participants. Moreover, OCC
believes that the proposed rule change is consistent with the
requirement in Rule 17Ad-22(d)(11) \27\ that clearing agencies
establish, implement, maintain and enforce policies and procedures
reasonably designed to make key aspects of their default procedures
publicly available, because the substantive terms of the escrow deposit
program, and specifically the rules concerning default management,
would be incorporated into OCC's Rules, which are publicly available on
OCC's Web site, rather than in private agreements.
---------------------------------------------------------------------------

    \26\ 17 CFR 240.17Ad-22(d)(3)
    \27\ 17 CFR 240.17Ad-22(d)(11).
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    The proposed rule change would reflect changes to the Rules
governing OCC's escrow deposit program and, more generally, amend the
Rules to more clearly identify the three forms of deposits in lieu of
margin: (1) Escrow deposits, (2) third-party specific deposits and (3)
member specific deposits. The proposed rule change would impose a
burden on competition that is necessary and appropriate in furtherance
of the Act.\28\ In particular, a burden would be imposed on Tri-Party
Custodian Bank[sic] in light of the requirement that cash included
within an escrow deposit be held in an account of the relevant customer
at the Tri-Party Custodian Bank pursuant to a Tri-Party Agreement. This
requirement may limit certain custodian banks' participation in the
escrow deposit program because the escrow deposit program would now
require a Tri-Party Custodian Bank to have the technological capability
to allow both OCC and customers of clearing members to have view access
into bank accounts within the escrow deposit program. However, OCC
believes that the resulting burden on competition is both necessary and
appropriate in furtherance of the Act because OCC's view access into
bank accounts within the escrow deposit program provides OCC additional
transparency over cash collateral. As described in Item 3 above, by
obtaining view access into bank accounts within the escrow deposit
program OCC would not have to rely on Tri-Party Custodian Bank[sic] to
value, or warrant the existence of, cash collateral within the escrow
deposit program. OCC believes that obtaining such additional
transparency over cash collateral is necessary and appropriate in
furtherance of the Act.
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others

Communications With Custodian Banks
    In light of the substantial changes proposed to the escrow deposit
program, OCC has sought to keep custodian banks informed regarding the
proposed rule changes. These communications began in January and
February 2012, when OCC notified each custodian bank of the proposal to
restructure the escrow deposit program. As part of this notification,
OCC informed each custodian bank of (1) OCC's intention to require that
security pledges be made through DTC, (2) the percentage of cash used
in the escrow deposit program and (3) the potential elimination of cash
deposits.\29\
---------------------------------------------------------------------------

    \29\ While it was ultimately determined in April 2014 that cash
collateral would remain in the escrow deposit program, prior
discussions with participating escrow banks reflected the evolution
of OCC's decision on this point. For example, the PowerPoint
presentation given to banks during June-August 2012 indicated that
cash collateral would not be permitted in the escrow deposit
program, while the PowerPoint presentation given during April-May
2013, as well as the draft rules distributed to participating escrow
banks for comment in July-August 2013, indicated that it would be
included. A number of current participants in the escrow deposit
program use cash, some to a substantial degree, and OCC determined
that the use of cash collateral should remain an essential aspect of
the escrow deposit program.
---------------------------------------------------------------------------

    In June through August 2012, OCC provided a PowerPoint presentation
to each custodian bank summarizing proposed rule changes to the escrow
deposit program. This presentation included an explanation of the
reasons for the proposed rule changes, including the desire to enhance
and strengthen the escrow deposit program and increase collateral
transparency. The presentation also included a discussion of changes to
the validation and valuation of collateral, and the calculation of
contract quantities based on the collateral that has been pledged.
    In April and May 2013, OCC provided each custodian bank with an
operational overview of the restructured escrow deposit program in the
form of a PowerPoint presentation. This presentation covered: Eligible
option types, types of eligible supporting collateral, required
collateral value calculations for option contact coverage, valuation of
supporting collateral, asset management locations/processing of
supporting collateral, and validation and valuation of supporting
collateral

and calculation of option contract coverage.
    In July and August 2013, OCC distributed a draft Participating
Escrow Bank Agreement (as described below) and the related proposed OCC
Rules to custodian banks along with a request for feedback. Following
the receipt of questions and comments, OCC distributed ``FAQ''
responses to custodian banks.
    During September 2013, OCC provided a walkthrough of the functions
of its ENCORE \30\ system applicable to the enhanced escrow deposit
program for custodian banks in order to provide an orientation of such
functionality. In connection with the restructured escrow deposit
program, clearing members will continue to use ENCORE to view member
specific deposits, and custodian banks will use ENCORE to view third-
party specific deposits and make escrow deposits consisting of cash.
Moreover, OCC sent requests to custodian banks for validation of the
DTC pledgor accounts to be used for the restructured escrow deposit
program. In October 2013, OCC distributed escrow deposit program
eligible securities file details to custodian banks.
---------------------------------------------------------------------------

    \30\ ENCORE is OCC's real-time clearing and settlement system
that allows clearing members to, among other things, post and view
margin collateral as well as deposits in lieu of margin.
---------------------------------------------------------------------------

    In February and March 2014, OCC arranged a series of calls with
custodian banks to solicit feedback on a term sheet detailing cash
account structures. Following the receipt of questions and comments,
OCC distributed ``FAQ'' responses to custodian banks.
Comments Received From Custodian Banks
    As described above, OCC discussed the proposed rule changes to its
escrow deposit program with custodian banks several times since 2012.
While these discussions were generally informational in nature,
custodian banks provided OCC with comments and questions in two
instances: The July/August 2013 discussions and the February/March 2014
discussion. The primary focus of the comments in both sets of
discussions was the manner in which custodian banks would be required
to hold cash under the new escrow rules: In an omnibus structure or in
a tri-party structure. The omnibus structure would provide OCC with an
account in OCC's name and thereby perfect OCC's right under the UCC to
take possession of cash escrow deposits in the event of a clearing
member default. This would also eliminate the need for a separate tri-
party agreement. However, the omnibus structure was less desirable to
custodian banks since all of a custodian bank's OCC escrow deposit
program clients' assets would be comingled in a single account. From an
operational perspective, a single omnibus account at a custodian bank
is easier for OCC to manage since OCC would only need to have ``view
access'' into one account at a custodian bank. On the other hand,
custodian banks expressed privacy concerns with respect to several
clients having view access into a single account.
    Eventually, OCC decided to use a tri-party account structure for
cash escrow deposits, with certain controls to alleviate the concerns
on both sides. Specifically, custodian banks agreed to facilitate the
execution of a form tri-party agreement with each of its clients that
participates in OCC's escrow deposit program, which perfects OCC's
security interest in cash escrow deposits. Additionally, custodian
banks agreed to establish an escrow specific cash account for each
client so that OCC does not need to differentiate a client's OCC escrow
cash from the client's non-escrow cash. OCC believes that the proposed
structure for cash accounts strikes the appropriate balance between
OCC's desire for legal certainty as to its right to take possession of
cash escrow deposits in the event of a clearing member default, and the
operational desire to only have view access to a client's OCC escrow
deposit program cash account balance at a custodian bank.
    Additional comments OCC received from the July/August 2013
discussions with custodian banks centered on administrative items such
as the escrow deposit program documentation structure and the manner in
which custodian banks would post escrow deposits in OCC's clearing
system, ENCORE. As discussed above, OCC moved the substantial majority
of its Amended and Restated On-Line Escrow Deposit Agreement into
proposed Rule 610C in order to have the majority of escrow rules in one
place. Custodian banks did not express any concerns regarding the
operational steps necessary to post an escrow deposit in ENCORE once
OCC provided custodian banks with a ``walkthrough'' of the operational
process.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self- regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule
change should be disapproved.

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_ADDRESS>Please include
File Number SR-OCC-2016-009 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-2016-009. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the 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 Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filings also will be available
for inspection and copying at the principal office of OCC and on OCC's
Web site at http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_16_009.pdf.
    All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You

should submit only information that you wish to make available
publicly.
    All submissions should refer to File Number SR-OCC-2016-009 and
should be submitted on or before September 21, 2016.
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    \31\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-20882 Filed 8-30-16; 8:45 am]
 BILLING CODE 8011-01-P