[Federal Register Volume 85, Number 90 (Friday, May 8, 2020)]
[Notices]
[Pages 27470-27488]
[FR Doc No: 2020-09872]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88792; File No. SR-OCC-2020-802]

Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Advance Notice Related To Proposed Changes to The
Options Clearing Corporation's Framework for Liquidity Risk Management

May 1, 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 (``Act'' or ``Exchange Act''),\3\ notice is hereby given that on
April 6, 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice

    This advance notice is submitted in in connection with proposed
changes to amend OCC's Rules, adopt a new Liquidity Risk Management
Framework (``LRMF''), and revise OCC's Clearing Fund and stress testing
methodology (``Methodology Description'') to enhance OCC's management
of liquidity risk and the sizing and monitoring of OCC's liquidity
resources. Specifically, the proposed changes would:
    (1) Establish a new LRMF document to provide a comprehensive
overview of OCC's liquidity risk management practices and govern OCC's
policies and procedures as they relate to liquidity risk management;
    (2) enhance OCC's Methodology Description to describe OCC's
approach to stress testing and determining the adequacy, sizing and
sufficiency of its liquidity resources;
    (3) modify OCC's authority to set and increase the Clearing Fund
Cash Requirement;
    (4) implement a new two-day notice period for substitutions for
Clearing Fund cash in excess of a Clearing Member's minimum
requirement;
    (5) enhance OCC's Rules and Contingency Funding Plan for collecting
additional liquidity resources when a Clearing Member Group's projected
or actual liquidity risk exceeds certain defined thresholds;
    (6) amend Chapter VI of the Rules to allow OCC to require cash
margin as a protective measure if a Clearing Member is determined to
present increased credit risk and is subject to enhanced monitoring and
surveillance under the Corporation's watch level reporting process;
    (7) amend Chapter X of the Rules to clarify OCC's authority to
borrow Clearing Fund assets for liquidity risk management purposes;
    (8) amend Chapter III of the Rules regarding the financial
requirements applicable to Clearing Members to require that Clearing
Members maintain adequate procedures and controls to ensure that it can
meet its obligations when owed in connection with membership; and
    (9) make a number of other clarifying, conforming, and
organizational changes to OCC's Rules, Risk Management Framework Policy
(``RMF Policy''), Clearing Fund Methodology Policy (``CFM Policy''),
Collateral Risk Management Policy, Counterparty Credit Risk Management
Policy (``CCRM Policy''), and Default Management Policy as described
herein.
    The proposed amendments to OCC's Rules can be found in Exhibit 5A.
The proposed LRMF and Methodology Description have been submitted in
confidential Exhibits 5B and 5C, respectively. Proposed changes to the
RMF Policy, CFM Policy, Collateral Risk Management Policy, CCRM Policy,
and Default Management Policy (collectively, ``Risk Policies'') have
been submitted in confidential Exhibits 5D-5H. Material proposed to be
added to the Rules, Methodology Description, and OCC Risk Policies as
currently in effect is marked by underlining, and material proposed to
be deleted is marked in strikethrough text. The LRMF has been submitted
without marking to facilitate review and readability of the document as
it is being submitted in its entirety as new rule text.
    All terms with initial capitalization not defined herein have the
same meaning as set forth in OCC's By-Laws and Rules.\4\
---------------------------------------------------------------------------

    \4\ OCC's By-Laws and Rules can be found on OCC's public
website: http://optionsclearing.com/about/publications/bylaws.jsp.
---------------------------------------------------------------------------

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 the Proposed Change
Background
    As a central counterparty (``CCP''), OCC is exposed to liquidity
risk, which is the risk that a counterparty, whether a participant or
other entity, will have insufficient funds to meet its financial
obligations as and when expected, although it may be able to do so in
the future.\5\ OCC's primary liquidity demands in a Clearing Member
default originate from settlement obligations related to mark-to-market
settlements on securities financing and futures transactions, expiring
options, and liquidation of the Clearing Member's portfolio. Given the
critical role OCC plays within the U.S. financial markets, it is vital
that OCC maintains a robust framework for managing its liquidity risks.
Such a framework should set forth the manner in which OCC effectively
identifies, measures, monitors, and manages its liquidity risk. This
includes, but is not limited to, how

OCC: (1) Maintains sufficient liquid resources in all relevant
currencies that enable OCC to meet its intraday, same-day, and multiday
settlement obligations; (2) maintains a reliable and diverse set of
committed liquidity resources with the flexibility and capacity to
increase those resources should circumstances warrant; (3) conducts
daily stress testing of potential liquidity demands under a wide range
of historical and hypothetical scenarios; (4) maintains a contingent
funding plan that allows OCC to collect additional liquidity resources
when potential liquidity demands exceed liquidity resources; and (5)
maintains a reliable and diverse set of liquidity providers and
settlement banks that are risk managed through a comprehensive
onboarding and monitoring process.
---------------------------------------------------------------------------

    \5\ See Committee on Payment and Settlement Systems and
Technical Committee of the International Organization of Securities
Commissions, Principles for financial market infrastructures (April
16, 2012), available at http://www.bis.org/publ/cpss101a.pdf.
---------------------------------------------------------------------------

    OCC maintains liquidity resources in the form of its ``committed
liquidity facilities'' \6\ and a minimum cash contribution requirement
for its Clearing Fund to ensure that it can meet its daily forecasted
settlement obligations. From a committed liquidity facility
perspective, OCC currently endeavors to maintain immediate liquid
resources to meet observed peak settlements generated by any Clearing
Member Group with a high degree of confidence. OCC also requires its
Clearing Members to collectively contribute $3 billion in cash to the
Clearing Fund to provide an additional source of committed liquidity to
OCC.
---------------------------------------------------------------------------

    \6\ OCC's committed liquidity facilities may be comprised of
both bank and non-bank committed facilities.
---------------------------------------------------------------------------

    OCC sizes its liquidity resources based on historically observed
liquidity demands and analysis of potential large forecasted liquidity
demands. In certain cases, OCC's primary liquidity demands can be
forecasted, and as a result, OCC currently establishes certain limits
to ensure that it can detect aggregations of risk approaching its risk
tolerances and mitigates these risks by requiring that the Clearing
Member(s) driving the risk fulfill a specified portion of their margin
requirement in cash (as discussed in further detail below). OCC
forecasts its future daily settlement activity under normal market
conditions (e.g., mark-to-market settlements and settlements resulting
from the expiration of derivatives contracts) and compares such demands
to its resources to ensure that it will maintain a positive liquidity
position to meet settlement obligations.
Proposed Changes
    OCC is proposing a number of enhancements to its rules intended to
strengthen its overall resiliency, particularly with respect to OCC's
management of liquidity risk and the sizing and monitoring of OCC's
liquidity resources. Specifically, the proposed changes would:
    (1) Establish a new LRMF document to provide a comprehensive
overview of OCC's liquidity risk management practices and govern OCC's
policies and procedures as they relate to liquidity risk management;
    (2) enhance OCC's Methodology Description to describe OCC's
approach to stress testing and determining the adequacy, sizing and
sufficiency of its liquidity resources;
    (3) modify OCC's authority to set and increase the Clearing Fund
Cash Requirement;
    (4) implement a new two-day notice period for substitutions for
Clearing Fund cash in excess of a Clearing Member's minimum
requirement;
    (5) enhance OCC's Rules and Contingency Funding Plan for collecting
additional liquidity resources when a Clearing Member Group's projected
or actual liquidity risk exceeds certain defined thresholds;
    (6) amend Chapter VI of the Rules to allow OCC to require cash
margin as a protective measure if a Clearing Member is determined to
present increased credit risk and is subject to enhanced monitoring and
surveillance under the Corporation's watch level reporting process;
    (7) amend Chapter X of the Rules to clarify OCC's authority to
borrow Clearing Fund assets for liquidity risk management purposes;
    (8) amend Chapter III of the Rules regarding the financial
requirements applicable to Clearing Members to require that Clearing
Members maintain adequate procedures and controls to ensure that it can
meet its obligations when owed in connection with membership; and
    (9) make a number of other clarifying, conforming, and
organizational changes to the OCC Rules and Risk Policies as described
herein.
1. Liquidity Risk Management Framework
    OCC proposes to adopt a new LRMF to set forth the manner in which
OCC effectively measures, monitors, and manages its liquidity risks,
including how OCC measures, monitors, and manages its settlement and
funding flows on an ongoing and timely basis, and its use of intraday
liquidity. Specifically, the LRMF would describe: (1) The
identification of OCC's liquidity risks; (2) the categories and types
of OCC's liquidity resources; (3) the stress testing and sizing of
OCC's liquidity resources; (4) OCC's Contingency Funding Plan for
collecting additional liquidity resources from Clearing Members; (5)
the risk management of supporting institutions (e.g., settlement banks,
custodian banks, and liquidity providers) that may present liquidity
risks to OCC; and (6) the governance and reporting requirements
concerning OCC's liquidity risk management. The proposed LRMF would
govern OCC's policies and procedures as they relate to liquidity risk
management and is described in further detail below.
Identification of Liquidity Risk
    The LRMF would describe the primary liquidity risks OCC faces,
which occur between the point of a Clearing Member default and the
completion of the liquidation and settlement of the defaulted Clearing
Member's obligations. OCC collects its credit resources with an
assumption of a two-day margin period of risk, and potential liquidity
obligations are evaluated using that same concept and assuming the
liquidation processes detailed in OCC's Default Management Policy.\7\
If the liquidity demands result from a Clearing Member as part of an
external cross-margin relationship, then potential liquidity
obligations are evaluated in accordance with the provisions of the
applicable cross-margin agreement. The potential liquidity obligations
arising from a Clearing Member default that may require OCC to make
same-day settlement obligations during the period between default and
the conclusion of a liquidation of a defaulting Clearing Member's
portfolio are included when estimating the size of OCC's liquidity
demands for purposes of sizing its liquidity resources. These
obligations may include mark-to-market obligations on futures and stock
loan positions, trade premiums, cash-settled exercise and assignment
(``E&A'') activity, auction payments, settlements resulting from the
E&A of physically-settled options, and funding of OCC's liquidation
agents.
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 82310 (December 13,
2017), 82 FR 60265 (December 19, 2017) (SR-OCC-2017-010) (Order
Approving Proposed Rule Change Relating to The Options Clearing
Corporation's Default Management Policy).
---------------------------------------------------------------------------

    The LRMF would describe other factors and considerations identified
by OCC that are not part of its liquidity resource determinations, such
as margin deficits and other payments associated with a liquidation
(e.g., brokerage, bank, and legal fees). These factors are not included
in OCC's liquidity resource determinations because, by their nature,
they do not generally create immediate

liquidity demands that could impede settlement. OCC also does not
consider hedging costs in its liquidity resource determinations because
OCC's primary goal is to liquidate positions prior to the need for
hedging, and hedging would only be employed if OCC's liquidation
activities were unexpectedly delayed. In addition, the LRMF would
identify other liquidity risks that are not included in its liquidity
resource sizing evaluation but have a potential impact on the
management of liquidity risk, such as liquidity provider failures,
custodian or settlement bank failures or operational disruptions, and
concentration risks from settlement banks and liquidity providers.
These risks are mitigated through various tools and processes discussed
further below.
Liquidity Resources
    The proposed LRMF would describe the various categories and types
of liquidity resources maintained by OCC, including the qualifying
liquid resources (as defined in Exchange Act Rule 17Ad-22(a)(14)) \8\
maintained by OCC to meet its minimum liquidity resource requirement
for effecting same-day, intraday and multiday settlement of OCC's
payment obligations. Under the proposed LRMF, OCC would maintain the
following categories of liquidity resources: (1) ``Base Liquidity
Resources,'' (2) ``Available Liquidity Resources,'' (3) ``Required
Liquidity Resources,'' and (4) ``Other Liquidity Resources.'' The
proposed LRMF would set forth OCC's requirements for Base Liquidity
Resources, which are comprised of qualifying liquid resources in the
form of assets that are readily available and convertible into cash
through prearranged funding arrangements \9\ and required Clearing Fund
cash on deposit.\10\ Base Liquidity Resources would be set at an amount
determined by OCC's Board of Directors (``Board'') based on
comprehensive analysis including stress testing so that OCC maintains
sufficient liquid resources at the minimum in all relevant currencies
to effect same-day and, where appropriate, intraday and multiday
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. The LRMF would also describe how OCC
ensures that it is continuously able to access the full amount of its
committed liquidity facilities. Further, the LRMF would require that
any borrowing from Base Liquidity Resources must be approved by OCC's
Executive Chairman, Chief Executive Officer, or Chief Operating Officer
(collectively referred to as the ``Office of the Chief Executive
Officer,'' ``Office of the CEO,'' or ``OCEO'').
---------------------------------------------------------------------------

    \8\ 17 CFR 240.17Ad-22(a)(14).
    \9\ As noted above, OCC endeavors to maintain committed
liquidity facilities with both bank and non-bank counterparties. OCC
currently maintains a committed credit facility syndicated among
various commercial banks. OCC also attempts to maintain committed
repurchase agreements, which may be with both bank and non-bank
counterparties. Under the proposed LRMF, OCC would endeavor to enter
into agreements with liquidity providers (i.e., committed lines of
credit and committed repurchase agreements) that do not contain
material adverse change (``MAC'') provisions. In the event OCC is
unable to obtain an agreement without a MAC provision, OCC would
attempt to enter into other prearranged funding agreements. In order
to qualify as Base Liquidity Resources, these other arrangements
must be highly reliable in extreme but plausible market conditions,
as determined by OCC's Board, following a review conducted prior to
execution, and on an ongoing basis, but not less than annually.
    \10\ OCC Rule 1002(a)(i) currently requires Clearing Members to
collectively contribute $3 billion in U.S. dollar cash, the currency
of all OCC liquidity obligations, to the Clearing Fund, which is
held at either the Federal Reserve Bank of Chicago or a commercial
bank approved as an OCC cash custodian. Cash held at a commercial
bank may be invested in overnight reverse repurchase agreements.
---------------------------------------------------------------------------

    The LRMF would further describe how OCC uses the Clearing Fund as a
source of liquidity (either directly or by using Clearing Fund assets
to borrow or obtain funds from third parties) in the event a Clearing
Member defaults on an obligation to OCC, in the event any bank or
securities or commodities clearing organization defaults on its
obligations to OCC, or to facilitate OCC's completion of same-day
settlement obligations in the event of an operational disruption at a
bank or securities or commodities clearing organization, consistent
with OCC's Rules.\11\
---------------------------------------------------------------------------

    \11\ See Securities Exchange Release No. 82296 (December 12,
2017), 82 FR 59685 (December 15, 2017) (SR-OCC-2017-806). See also
Securities Exchange Release No. 82501 (January 12, 2018), 83 FR 2843
(January 19, 2018) (SR-OCC-2017-808).
---------------------------------------------------------------------------

    The proposed LRMF also defines OCC's Available Liquidity Resources,
which are comprised of OCC's Base Liquidity Resources plus Clearing
Fund cash deposits in excess of the minimum required amount.\12\ These
resources are intended to supplement OCC's Base Liquidity Resources and
are included in the calculation to determine liquidity resources
available to OCC on a given day. As described further below, OCC would
generally require a two-day notification period if a Clearing Member
requests to substitute Government Securities for cash deposits above
their minimum requirement. Once the substitution request is made, OCC
would remove the cash deposits in question from subsequent Contingency
Funding Plan calculations.
---------------------------------------------------------------------------

    \12\ These excess amounts are only included in Available
Liquidity Resources by the amount the required Clearing Fund size
exceeds the minimum Clearing Fund sized as determined by OCC Rule
1001(b). Cash deposits in excess of a Clearing Member's total
Clearing Fund requirement would not be included.
---------------------------------------------------------------------------

    The proposed LRMF would describe OCC's Required Liquidity
Resources, which are comprised of OCC's Available Liquidity Resources
plus any amount of cash margin deposits of a Clearing Member Group
required under the Contingency Funding Plan (described in further
detail below). These required cash margin deposits supplement OCC's
Base Liquidity Resources and are only included as a Required Liquidity
Resource for the Clearing Member Group from which they are called.
    In addition, the LRMF would describe Other Liquidity Resources,
which are those liquid resources that may or may not be available to
OCC in a default situation (e.g., non-compulsory cash deposits of the
defaulting Clearing Member; other margin deposits of the defaulting
Clearing Member, including letters of credit, Government Securities,
and Government Sponsored Entity securities that may be liquidated for
same-day or next day settlement). Other Liquidity Resources are not
committed resources; therefore, they are not included in OCC's Base,
Available, or Required Liquidity Resource calculations. These resources
may, however, be available in a default situation and could be used to
address foreseeable liquidity shortfalls that would not be covered by
OCC's committed resources and help OCC seek to avoid unwinding,
revoking, or delaying the same-day settlement of payment obligations.
    In addition, the LRMF would describe generally how OCC would
utilize its liquidity resources in accordance with its Default
Management Policy and the actions OCC would take if it needs to
increase its liquidity resources to respond to changing business or
market conditions (such as increasing the Clearing Fund Cash
Requirement pursuant to Rule 1002(a) or using any uncommitted accordion
\13\ features embedded in any syndicated credit facility).
---------------------------------------------------------------------------

    \13\ An accordion is an uncommitted expansion of the credit
facility generally on the same terms as the credit facility.

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

Stress Testing and Liquidity Resource Sizing
    The proposed LRMF would describe OCC's overall approach to
liquidity stress testing and liquidity resource sizing. Under the
proposed LRMF, OCC would perform daily stress testing using standard
and predetermined parameters and assumptions. The proposed approach to
liquidity stress testing would rely on the stressed scenarios and
prices generated under OCC's current stress testing and Clearing Fund
methodology.\14\ The scenarios used are pre-identified by OCC's Stress
Test Working Group (``STWG'') and the output of these scenarios would
be used for liquidity resource evaluation and would be reviewed daily
by OCC's Financial Risk Management department (``FRM'').\15\ The stress
tests in question consider a range of relevant stress scenarios and
possible price changes in liquidation periods, including but not
limited to: (1) Relevant peak historic price volatilities; (2) shifts
in other market factors including, as appropriate, price determinants
and yield curves; (3) the default of one or multiple members; (4)
forward-looking stress scenarios; and (5) reverse stress tests aimed at
identifying extreme default scenarios and extreme market conditions for
which the OCC's resources would be insufficient.
---------------------------------------------------------------------------

    \14\ See infra notes 22 and 23 and associated text.
    \15\ Under the proposed LRMF and Methodology Description, the
output of these stress test scenarios would assume that the National
Securities Clearing Corporation (``NSCC'') accepts and guarantees
all E&A activity under the Stock Options and Futures Settlement
Agreement by and between OCC and NSCC. See OCC Rule 901 and
Securities Exchange Act Release No. 81266 (July 31, 2017), 82 FR
36484 (August 4, 2017) (SR-OCC-2017-013) (Order Approving Proposed
Rule Changes Concerning the Adoption of a New Stock Options and
Futures Settlement Agreement Between the National Securities
Clearing Corporation and The Options Clearing Corporation) and
Securities Exchange Act Release No. 81260 (July 31, 2017), 82 FR
36476 (August 4, 2017) (SR-OCC-2017-804) (Notice of No Objection to
Advance Notices Concerning the Adoption of a New Stock Options and
Futures Settlement Agreement Between the National Securities
Clearing Corporation and The Options Clearing Corporation). OCC
plans to submit separate regulatory filings to address liquidity
risk that may be posed by limited scenarios where NSCC may not
accept and guaranty all E&A transactions associated with a defaulted
Clearing Member.
---------------------------------------------------------------------------

    Under the proposed LRMF, the minimum amount of OCC's Base Liquidity
Resources would be determined by OCC's Board based on a recommendation
from OCC's Risk Committee. On an annual basis (or more frequently as
needed),\16\ FRM would present to the Board and Risk Committee an
analysis summarizing the projected liquidity demands OCC may face under
a variety of stress scenarios, including the sufficiency of OCC's Base
Liquidity Resources against OCC's liquidity risk tolerance, extreme
historical scenarios such as a 1987 historical market event and 2008
historical market event, and certain scenarios used to size OCC's
Clearing Fund.\17\ This analysis may also include the results of a
comprehensive review of any parameters and assumptions used by OCC's
stress testing system, the output of which is used to project potential
liquidity demands under stressed market conditions.\18\ In addition,
the analysis may include the current composition of OCC's various
liquidity resources and recommended changes, if applicable.
---------------------------------------------------------------------------

    \16\ See the ``Governance and Reporting'' section below, which
discusses the proposed process for reporting and escalating material
issues identified with respect to the adequacy of OCC's liquidity
resources.
    \17\ Given the different coverage standards used by OCC to
calculate its credit and liquidity resources (i.e., Cover 2 versus
Cover 1, respectively) and the potential limitations on the
frequency with which OCC would be able to adjust the size of certain
of its liquidity resources (e.g., its committed credit facilities
and repurchase agreements), the Board and Risk Committee could
consider the analysis provided in part, or its entirety, for the
purposes of determining the size of Base Liquidity Resources.
    \18\ These parameters and assumptions are routinely reviewed by
STWG, on at least a monthly basis.
---------------------------------------------------------------------------

    OCC's approach to liquidity stress testing and the proposed changes
to OCC's Methodology Description are discussed in further detail below.
Contingency Funding Plan
    The proposed LRMF would describe OCC's Contingency Funding Plan,
which enables OCC to: (1) Collect additional liquidity resources from a
Clearing Member Group when that Clearing Member Group's projected or
actual liquidity risk exceeds certain thresholds or (2) quickly
supplement OCC's Available Liquidity Resources outside of the annual
sizing process, should the circumstances warrant. The Contingency
Funding Plan and associated OCC Rule changes are discussed in more
detail in the ``Contingency Funding Plan'' section below.
Supporting Institutions
    OCC's management of liquidity risk is dependent on a number of
supporting institutions, such as settlement banks, custodian banks,
central banks, and liquidity providers. The LRMF would describe OCC's
overall framework for monitoring, managing, and limiting its risks and
exposures to theses supporting institutions, which is primarily
governed by OCC's CCRM Policy.\19\ This includes rigorous onboarding
and monitoring processes, including but not limited to: (1) Conducting
initial and ongoing due diligence to confirm each commercial
institution meets OCC's financial and operational standards; (2)
confirming that each commercial institution has access to liquidity to
meet its commitments to OCC; (3) monitoring and managing direct,
affiliated, and concentrated exposures; and (4) meeting with these
commercial institutions and conducting operational reviews as required
by OCC's policies and procedures. The proposed LRMF would also set
forth OCC's requirements for performing due diligence to confirm it has
a reasonable basis to believe each of its liquidity providers has (1)
sufficient information to understand and manage the potential liquidity
demands of OCC and its associated liquidity risk and (2) the capacity
to perform as required under its commitments, including the execution
of periodic test borrows no less than once every 12 months to measure
the performance and reliability of the liquidity facilities. The
proposed LRMF would also describe OCC's use of accounts and services at
the Federal Reserve Bank of Chicago, and in particular, its use of
accounts at the Federal Reserve Bank of Chicago to custody funds to
reduce counterparty credit risks.
---------------------------------------------------------------------------

    \19\ See Securities Exchange Act Release No. 82312 (December 13,
2017), 82 FR 60242 (December 19, 2017) (SR-OCC-2017-009) (Order
Approving Proposed Rule Change Relating to The Options Clearing
Corporation's Counterparty Credit Risk Management Policy).
---------------------------------------------------------------------------

Governance and Reporting
    The proposed LRMF would set forth the governance, review,
monitoring, and reporting activities performed by OCC with respect to
liquidity risk management. On a daily basis, FRM would be responsible
for reviewing the results of OCC's liquidity stress test exposures and
the sufficiency of OCC's Base Liquidity Resources and Required
Liquidity Resources, including the adequacy of such resources in
covering OCC's risk tolerance. The chair of the STWG or the Executive
Vice President of FRM would immediately escalate any material issues
identified with respect to the adequacy of OCC's liquidity resources to
the Credit and Liquidity Risk Working Group (``CLRWG'') \20\ to
determine if it would be appropriate to recommend a change the size of
OCC's Base Liquidity Resources in accordance with relevant
procedure(s).
---------------------------------------------------------------------------

    \20\ If escalation to the CLRWG is not practical, issues would
be escalated to OCC's Management Committee.
---------------------------------------------------------------------------

    On at least a monthly basis, FRM would prepare reports that provide

details and trend analysis of daily stress tests with respect to the
Base Liquidity Resources, including the results of daily stress tests
and a review of the adequacy of OCC's liquidity resources, and provide
these reports to the STWG. The STWG would perform a comprehensive
review of the existing stress test results and scenarios, and their
underlying parameters and assumptions, the output of which is used to
project liquidity demands, and consequently evaluate their
appropriateness for determining the level of liquidity resources that
OCC must maintain under current and evolving market conditions and
consider proposed enhancements to the scenarios used for stress testing
based on the results of this comprehensive review. Such an analysis
would be conducted more frequently than monthly when products cleared
or markets served display high volatility or become less liquid, or
when the size or concentration of positions held by OCC's participants
increases significantly.\21\ In addition, FRM would be responsible for
preparing a summary of the adequacy of OCC's Base and Available
Liquidity Resources, as well as actions taken under the Continency
Funding Plan, and results from its monthly comprehensive review to
provide to OCC's Management Committee and Risk Committee to demonstrate
compliance with OCC's minimum liquidity resource requirements. If
needed, any issues that are detected with respect to the adequacy of
OCC's Base Liquidity Resources would be promptly escalated to the
Management Committee intra-month pursuant to FRM procedures. In the
performance of monthly review of liquidity results and analysis, and
when considering whether escalation is appropriate, due consideration
would be given to the intended purpose of the proposed LRMF to: (1)
Assess the adequacy of, and adjust as necessary, OCC's Base Liquidity
Resources; (2) support compliance with the minimum requirements under
applicable regulations; and (3) and any other relevant aspects of OCC's
liquidity risk management.
---------------------------------------------------------------------------

    \21\ FRM would maintain procedures for determining whether, and
in what circumstances, such intra-month reviews shall be conducted,
and which officers have responsibility for making the determination.
---------------------------------------------------------------------------

    On at least an annual basis, FRM would assesses the adequacy of
OCC's stress testing methodology, the output of which is used to
evaluate OCC's liquidity resource risks. Proposed changes resulting
from such review would be sent to the Risk Committee for approval. In
addition, the CLRWG would be responsible for reviewing the LRMF and any
and liquidity resource sizing recommendations, with proposed changes
resulting from such review being sent to the Risk Committee for
approval. Finally, on at least an annual basis, OCC's Model Validation
Group would perform a review of risk methodologies and the usage of any
models to inform the management of liquidity risk.
2. Liquidity Stress Testing
    OCC proposes to enhance its management of liquidity risk by
introducing a new approach to stress testing and determining the
adequacy, sizing, and sufficiency of its liquidity resources. OCC's
liquidity stress testing would be based on output of its current stress
testing and Clearing Fund methodology,\22\ which would be used to
project OCC's potential liquidity demands under stressed market
conditions.
---------------------------------------------------------------------------

    \22\ See Securities Exchange Act Release No. 83714 (July 26,
2018), 83 FR 37570 (August 1, 2018) (SR-OCC-2018-803) (Notice of No
Objection to Advance Notice, as Modified by Amendments No. 1 and 2,
Concerning Proposed Changes to The Options Clearing Corporation's
Stress Testing and Clearing Fund Methodology) and Securities
Exchange Act Release No. 83735 (July 27, 2018), 83 FR 37855 (August
2, 2018) (SR-OCC-2018-008) (Order Approving Proposed Rule Change, as
Modified by Amendments No. 1 and 2, Related to The Options Clearing
Corporation's Stress Testing and Clearing Fund Methodology).
---------------------------------------------------------------------------

Current Stress Testing Approach for Clearing Fund
    OCC determines its Clearing Fund size based on the results of
stress tests conducted daily using standard predetermined parameters
and assumptions. These daily stress tests consider a range of relevant
stress scenarios and possible price changes in liquidation periods,
including but not limited to: (1) Relevant peak historic price
volatilities; (2) shifts in other market factors including, as
appropriate, price determinants and yield curves; and (3) the default
of one or multiple Clearing Members. OCC also conducts reverse stress
tests for informational purposes aimed at identifying extreme default
scenarios and extreme market conditions for which the OCC's financial
resources may be insufficient.
    As set forth in the Methodology Description, the methodology
includes two primary types of scenarios: ``Historical Scenarios'' and
``Hypothetical Scenarios.'' Historical Scenarios attempt to replicate
historical events in current market conditions, which includes the set
of currently existing securities, their prices, and volatility levels.
These scenarios provide OCC with information regarding pre-defined
reference points determined to be relevant benchmarks for assessing
OCC's exposure to Clearing Members and the sufficiency of its financial
resources. Hypothetical Scenarios represent events in which market
conditions change in ways that have not yet been observed. The
Hypothetical Scenarios are derived using statistical methods (e.g.,
draws from estimated multivariate distributions) or created based on a
mix of statistical techniques and expert judgment (e.g., a 15% decline
in market prices and 50% increase in volatility). These scenarios give
OCC the ability to change the distribution and level of stress in ways
necessary to produce an effective forward-looking stress testing
methodology. OCC uses these pre-determined stress scenarios in stress
tests, conducted on a daily basis, to determine OCC's risk exposure to
each Clearing Member Group by simulating the profits and losses of the
positions in their respective account portfolios under each such stress
scenario.
    OCC performs daily stress testing using a wide range of scenarios,
both Hypothetical and Historical, designed to serve multiple purposes.
OCC's stress testing inventory contains scenarios designed to: (1)
Determine whether the financial resources collected from all Clearing
Members collectively are adequate to cover OCC's risk tolerance (``CF
Adequacy Scenarios''); (2) establish the monthly size of the Clearing
Fund necessary for OCC to maintain sufficient pre-funded financial
resources to cover losses arising from the default of the two Clearing
Member Groups that would potentially cause the largest aggregate credit
exposure to OCC as a result of a 1-in-80 year hypothetical market event
(``CF Sizing Scenarios''); (3) measure the exposure of the Clearing
Fund to the portfolios of individual Clearing Member Groups, and
determine whether any such exposure is sufficiently large as to
necessitate OCC calling for additional resources so that OCC continues
to maintain sufficient financial resources to guard against potential
losses under a wide range of stress scenarios, including extreme but
plausible market conditions (``CF Sufficiency Scenarios''); \23\ and
(4)

monitor and assess the size of OCC's pre-funded financial resource
against a wide range of stress scenarios that may include extreme but
implausible and reverse stress testing scenarios (``CF Informational
Scenarios'').
---------------------------------------------------------------------------

    \23\ Under OCC Rule 609, the Policy, and the Methodology
Description, if a CF Sufficiency Stress Test identifies exposures
that exceed 75% of the current Clearing Fund requirement less
deficits (the ``75% threshold'' or ``Sufficiency Stress Test
Threshold 1''), OCC may require additional margin deposits from the
Clearing Member Group(s) driving the breach. All such margin calls
must be approved by a Vice President (or higher) of FRM; however, if
the margin call imposed on an individual Clearing Member exceeds
$500 million, OCC's Stress Testing and Liquidity Risk Management
group (``STLRM'') must provide written notification to the Office of
the CEO.
---------------------------------------------------------------------------

Proposed Liquidity Stress Testing
    OCC proposes to revise its Methodology Description to enable OCC to
use the output of its current stress testing methodology to determine
the adequacy, sizing, and sufficiency of OCC's liquidity resources. The
proposed revisions to the Methodology Description would primarily
address the construction and aggregation of stress test portfolios and
add a new section to discuss how OCC would calculate its stressed
liquidity demands.
Portfolio Construction and Aggregation
    The revised Methodology Description would describe how OCC
endeavors to construct Clearing Member portfolios and aggregate results
consistent with business practices that would be followed in an actual
liquidation of a defaulter's portfolio. Currently, the Methodology
Description describes OCC's process for creating the ``Synthetic
Accounts'' used in credit stress testing. When aggregating results for
credit purposes, the focus is on calculating the liquidating value of
the portfolio. OCC would revise the Methodology Description to describe
OCC's process for portfolio construction and aggregation for liquidity
stress testing purposes under the proposed LRMF. Specifically, the
Methodology Description would be revised to highlight the importance of
the timing of the cashflows from the liquidation since an offsetting
debit and credit may occur on different days thus creating a liquidity
demand when there is no credit demand. The Methodology Description
would also be revised to clarify that Clearing Member positions are
held in accounts based on a business type classification and/or by
cross margining relationships with other clearing houses, and in many
instances, Clearing Members maintain several accounts of the same
business type.
    OCC also proposes to revise the Methodology Description to
streamline the description of how OCC aggregates positions into stress
test accounts and closes certain positions out to account for
differences in aggregation for credit and liquidity purposes. For
example, Rule 1106(d) provides that, in lieu of closing long positions
and short positions in the same series of cleared contract carried by a
suspended Clearing Member through closing transactions on an Exchange,
OCC is permitted to close long and short positions of a suspended
Clearing Member in the same series by offset. OCC refers to this
process of closing long and short positions in the same series in the
same account type as ``netting'' \24\ and closing long and short
positions in the same series between account types as
``internalization.'' \25\ For internalization, proceeds associated with
the close out would be debited and credited, as applicable, between the
account types involved and the proceeds would be tracked and included
in subsequent calculations of the liquidating value associated with
each account type.\26\ The aggregation of results from an account to a
Clearing Member or Clearing Member Group level is designed to follow
how OCC would account for the proceeds during an actual Clearing Member
liquidation. For instance, positions and collateral credited to a
particular type of Clearing Member account (e.g., customer, firm or
market-maker) are, depending on the account type, potentially subject
to a lien \27\ in favor of OCC. Specifically, OCC's By-Laws and Rules
contemplate that the positions and collateral in an account may be
subject to a ``general lien'' \28\ or a ``restricted lien'' \29\ in
favor of OCC. It is also the case that in some instances there is no
lien in favor of OCC (e.g., segregated long options positions in the
customers' account).\30\ These liens (or the absence of any lien) are
respected when summing results from a business account type level to
the Clearing Member level, and then all Clearing Member results are
summed to a Clearing Member Group level; however, OCC may not use a
credit of one legal entity to offset losses of another affiliated legal
entity.
---------------------------------------------------------------------------

    \24\ For example, a customer account may be long 10 contracts
and short 5 contracts in the same series. After netting, the
customer account will be long 5 contracts in the series, but there
is no need to transfer a marking price associated with the effective
sale of the 5 long contracts because the closure by offset is
accomplished within the same account type.
    \25\ For example, if the customer account is long 10 contracts
in a particular series and the firm account is short 5 contracts in
the same series, OCC would effectively create an ``internalized
transaction'' to sell 5 contracts in the series from the customer
account and purchase 5 contracts in the series from the firm
account. OCC would debit the firm account for the marking price
associated with the sale of the 5 contracts and credit the customer
account in connection with the purchase. As a matter of the
positions in the series maintained in each account, after the
internalization, there would be 5 contracts remaining in the
customer account and no positions in the firm account.
    \26\ Id.
    \27\ Pursuant to Article I, Section 1L(3) of OCC's By-Laws, a
``lien'' is a ``security interest'' as defined in applicable
provisions of the Uniform Commercial Code as in effect in the
relevant jurisdictions and, where used in respect of OCC's security
interest in cleared contracts carried in the account of Clearing
Members, shall include an ``issuer's lien'' within the meaning of
the 1977 amendments to the Uniform Commercial Code.
    \28\ ``General lien'' means that OCC has a security interest in
all or specified assets in a Clearing Member account as security for
all of the Clearing Member's obligations to OCC regardless of the
source or nature of such obligations. See Article I, Section 1G(1)
of OCC's By-Laws.
    \29\ A ``restricted lien'' is a security interest of OCC in
specified assets (including any proceeds thereof) in an account of a
Clearing Member with OCC as security for the Clearing Member's
obligations arising from such account or, to the extent so provided
in the By-Laws or Rules, a specified group of accounts that includes
such account including, without limitation, obligations in respect
of all confirmed trades effected through such account or group of
accounts, short positions maintained in such account or group of
accounts, and exercise notices assigned to such account or group of
accounts. See Article I, Section 1R(7) of OCC's By-Laws.
    \30\ See Article VI, Section 3(e) of OCC's By-Laws.
---------------------------------------------------------------------------

Liquidity Stress Testing
    OCC proposes to revise the Methodology Description to describe how
OCC would use the output from its current stress testing system to
measure and monitor the sufficiency of OCC's liquidity resources. The
Methodology Description would be revised to generally summarize OCC's
LRMF and to set forth key assumptions in the construction of its
liquidity calculations. For example, for purposes of its liquidity
calculations, OCC would assume: (1) A liquidation horizon of two days
(which aligns with its two-day margin period of risk); (2) that a
Clearing Member default occurs sometime after the collection of
collateral on the day before the default (D-1) up to or at settlement
on day of default (D); (3) that cash-settled option liquidity demands
due on the morning of default are conservatively calculated using gross
positions; (4) NSCC normally guarantees the settlement of any E&A
transactions; \31\ (5) OCC accounts for liquidity demands as required
by relevant cross-margin agreements; (6) that auction bids are

represented by stressed prices at the contract level; (7) that credits
that occur on the first day of a liquidation persist and are available
to offset debits on subsequent days; (8) that auction proceeds settle
on D+2; (9) liquidity demands associated with Specific Wrong Way Risk
(``SWWR'') positions are included in the appropriate calculations; and
(10) early exercise is not assumed in estimating liquidity demands.\32\
---------------------------------------------------------------------------

    \31\ OCC also projects liquidity demands for using a liquidation
agent to act as a ``substitute broker'' for informational purposes.
``Substitute broker'' refers to the use of another OCC clearing
member that remains in good standing at NSCC and that, on OCC's
behalf, will facilitate settlement of OCC's delivery obligations of
the E&A transactions at NSCC.
    \32\ OCC recognizes that early exercises may potentially be
incentivized by certain situations, such as a favorable present
value of interest income that can be earned on strike premium over
the remaining life of a contract for deep in-the-money puts or with
dividend capture strategies on call contracts, where the dividend
amount exceeds the costs associated with purchasing the underlying
stock and a related put contract having an identical strike and
expiration. However, OCC believes standard expiration is generally
more meaningful than early exercise risk when calculating the
liquidity risk associated with E&A activity. For example, OCC
reviewed early exercises during a period of market stress,
specifically, the days leading up to, and immediately following, the
events of February 5, 2018. In comparison to all long equity put
option open interest during this period, OCC found that less than
one percent of equity put contracts were exercised early on February
5, 2018 and February 6, 2018, as opposed to the standard monthly
February expiration, where a total of approximately six percent of
equity calls and five percent of equity puts were exercised on
February 16, 2018.
---------------------------------------------------------------------------

    Under the proposed approach, OCC would assume that positions \33\
with an expiration date of D+1 or greater will be liquidated via
auction. With respect to collateral positions, accounts with excess
collateral would be evaluated and adjusted since excess collateral may
be withdrawn prior to default. If there is excess collateral, the
portfolio would be adjusted by removing excess cash, letters of credit,
government securities, and valued securities in that order until no
excess collateral remains. In addition, any option positions expiring
on D-1 or D would be evaluated for moneyness,\34\ and then assumed to
be liquidated through normal OCC cash settlement processes or through
physical settlement at NSCC. Moreover, under the proposed approach,
credits from earlier dates would only reduce debits for later dates
when evaluating liquidity demands.
---------------------------------------------------------------------------

    \33\ Neither stock loan nor futures would be included in this
calculation. Stock loan positions are handled through a separate
buy-in/sell-out process. Futures positions are included in the
auction portfolio, but mark-to-market calculations capture the
liquidity risk that arises from futures.
    \34\ The term ``moneyness'' refers to the relationship between
the current market price of the underlying interest and the exercise
price.
---------------------------------------------------------------------------

    As discussed above, the proposed approach to liquidity stress
testing would assume that NSCC accepts and guarantees all E&A activity
under the Stock Options and Futures Settlement Agreement by and between
OCC and NSCC.\35\ In the unlikely event there is a rejection by NSCC,
OCC would attempt to use a liquidation agent acting as a substitute
broker to settle the E&A activity through NSCC. This method of
settlement would not be used in OCC's liquidity resource sizing
assumptions, but OCC would monitor the potential liquidity demands
through the use of informational stress test scenarios, which would be
part of OCC's daily stress testing and monitored and reported regularly
to the STWG.
---------------------------------------------------------------------------

    \35\ See supra note 15.
---------------------------------------------------------------------------

    OCC's proposed approach to liquidity stress testing would utilize
output from its current stress testing methodology, and the same
scenarios would be used for Sufficiency and Adequacy stress testing.
OCC would perform daily liquidity risk stress testing using standard
and predetermined parameters and assumptions, and the output of these
scenarios would be used for liquidity resource evaluation and reviewed
daily by FRM. Specifically OCC's proposed liquidity stress tests would
consist of a range of Historical and Hypothetical Scenarios, and the
output would be used to: (1) Assess OCC's projected liquidity demands
under stressed scenarios against OCC's Base and Available Liquidity
Resources; (2) assess OCC's Base and Available Liquidity Resources
against OCC's liquidity risk tolerance (``Adequacy Scenarios''); (3)
measure the sufficiency of potential exposures in excess of OCC's
liquidity resources to determine if additional risk mitigation is
needed when those exposures indicate potential breaches of certain
thresholds under OCC's Contingency Funding Plan (``Sufficiency
Scenarios''); and (4) monitor and assess OCC's liquidity resources
under a variety of stress conditions, which may include extreme but
implausible scenarios and reverse stress test scenarios
(``Informational Scenarios''). Under the proposed LRMF, Adequacy
Scenarios would be used to evaluate OCC's Base Liquidity Resources
against OCC's risk tolerance of a 1-in-50-year market event at a 99.5%
confidence interval over a two-year look back period. The output of
Sufficiency Scenarios would be used to assess potential liquidity
exposures in excess of OCC's Available Liquidity Resources under a wide
range of historical and hypothetical stress scenarios, including but
not limited to, a 1987 historical market event and a 2008 historical
market event, and if a Clearing Member Group's exposures breach certain
thresholds, OCC would require the breaching Clearing Member Group to
maintain cash deposits in lieu of other forms of acceptable collateral
to supplement OCC's Available Liquidity Resources pursuant to the
Contingency Funding Plan (discussed further below). The output of
Informational Scenarios would be used to assess OCC's liquidity under a
variety of extreme stress conditions, both plausible and implausible,
as well as reverse stress tests.\36\
---------------------------------------------------------------------------

    \36\ Under the LRMF, the output of Informational Scenarios may
inform decisions about the adequacy of OCC's liquidity resources but
would not be directly used to make decisions regarding the size of
OCC's liquidity resources. Informational Scenarios may, however, be
re-categorized as Adequacy or Sufficiency upon the approval of the
Risk Committee.
---------------------------------------------------------------------------

    OCC also proposes to make other conforming and organizational
changes to the Methodology Description to reflect the implementation of
the new liquidity stress testing approach and make other non-
substantive clarifications to the document. For example, OCC would
reorganize the document to relocate content specific to credit stress
testing to sections of the document focused only on credit stress
testing. OCC would also make clarifying and conforming changes to
differentiate the usage of Adequacy, Sizing, Sufficiency, and
Informational Scenarios for credit and liquidity purposes. OCC also
proposes changes to more accurately describe the scope of volatility
instruments cleared by OCC. In addition, OCC would clarify that in most
SWWR stress test scenarios, SWWR Equity and ETN charges computed for
margins are added to stress scenario profit and loss calculations in
order to account for SWWR in the stress testing system.\37\ OCC would
also remove duplicative language regarding Idiosyncratic Scenarios,
Sizing Scenarios, and certain key assumptions from the executive
summary of the Methodology Description as this information is covered
in greater detail later in later sections of the document.
---------------------------------------------------------------------------

    \37\ See Securities Exchange Act Release No. 87673 (December 6,
2019), 84 FR 67981 (December 12, 2019) (SR-OCC-2019-807) (Notice of
No Objection To Advance Notice Related to Proposed Changes to The
Options Clearing Corporation's Rules, Margin Policy, Margin
Methodology, Clearing Fund Methodology Policy, and Clearing Fund and
Stress Testing Methodology To Address Specific Wrong-Way Risk) and
Securities Exchange Act Release No. 87718 (December 11, 2019), 84 FR
68992 (December 17, 2019) (SR-OCC-2019-010) (Order Approving
Proposed Rule Change Related to Proposed Changes to the Options
Clearing Corporation's Rules, Margin Policy, Margin Methodology,
Clearing Fund Methodology Policy, and Clearing Fund and Stress
Testing Methodology To Address Specific Wrong-Way Risk).

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

3. Clearing Fund Cash Requirement
Current Rules
    Pursuant to OCC Rule 1002(a), Clearing Members are required to
collectively contribute $3 billion in cash to the Clearing Fund. In
addition, OCC's Executive Chairman, Chief Executive Officer, and Chief
Operating Officer each have the authority, upon providing notice to the
Risk Committee, to temporarily increase the amount of cash required to
be maintained in the Clearing Fund up to an amount that includes the
size of the Clearing Fund for the protection of OCC, Clearing Members
or the general public. Any such determination must (i) be based upon
then-existing facts and circumstances, (ii) be in furtherance of the
integrity of OCC and the stability of the financial system, and (iii)
take into consideration the legitimate interests of Clearing Members
and market participants. Moreover, any temporary increase in the Cash
Clearing Fund Requirement must be reviewed by the Risk Committee as
soon as practical (but in any event, such review must occur within 20
calendar days of such increase) and, if such temporary increase is
still in effect, the Risk Committee shall determine whether (A) the
increase in the Cash Clearing Fund Requirement is no longer required,
or (B) OCC's rules should be modified to ensure that OCC continues to
maintain sufficient liquidity resources.
    In addition, Interpretation and Policy .03 to Rule 1002 Clearing
Fund currently requires that any increase in the Cash Clearing Fund
Requirement be satisfied no later than one hour before the close of the
Fedwire on the business day following the issuance of an instruction to
increase cash contributions.
Proposed Changes
    OCC proposes to amend Rule 1002(a) to modify its authority to set
and to temporarily increase the minimum amount of cash required in its
Clearing Fund.\38\ The proposed change is intended to provide OCC with
the flexibility to periodically set its Base Liquidity Resources and to
adjust Base Liquidity Resources in response to changing market and
business conditions to ensure that OCC maintains sufficient liquidity
resources to cover its liquidity risk exposures at all times. OCC's
Board would have the authority to periodically adjust the Clearing Fund
Cash Requirement (typically during the annual review of OCC's Base
Liquidity Resources as required under the proposed LRMF based on
analysis of OCC's projected liquidity demands under a variety of stress
scenarios.\39\ However, revised Rule 1002(a) would require that the
Clearing Fund Cash Requirement never be at set at an amount lower than
$3 billion.
---------------------------------------------------------------------------

    \38\ OCC also proposes non-substantive revisions to its Rules
and OCC Risk Policies to redefine this requirement as the ``Clearing
Fund Cash Requirement.''
    \39\ OCC's Risk Committee has initially determined that OCC's
Clearing Fund Cash Requirement should be increased to $3.5 billion
based on an analysis of stress test results demonstrating that this
amount, combined with OCC's committed liquidity facilities, should
be sufficient to cover OCC's liquidity risk tolerance of a 1-in-50
year statistical market event at a 99.5% confidence level over a
two-year look back period. In evaluating the proposed size of the
Clearing Fund Cash Requirement, OCC analyzed stress test results for
the period January 2017-June 2019. This analysis has been provided
in confidential Exhibit 3 to File No. SR-OCC-2020-802. OCC would
inform Clearing Members of any change in the Clearing Fund Cash
Requirement through Information Memoranda and Clearing Fund sizing
reports.
---------------------------------------------------------------------------

    In addition, OCC proposes to remove the description of the specific
OCC officers authorized to temporarily increase the size of the
Clearing Fund as this authority is already discussed in OCC's CFM
Policy and will also be described in the proposed LRMF.\40\ Rule
1002(a)(i) would be revised to instead state that ``the Corporation''
shall have the authority to increase the amount of cash required to be
maintained in the Clearing Fund. OCC believes the internal governance
process for temporary increases in the Clearing Fund Cash Requirement
are appropriately documented in its filed policies (and proposed LRMF)
and that the proposed change would reduce the risk of potential
inconsistencies between OCC's Rules and its filed policies.
---------------------------------------------------------------------------

    \40\ OCC also proposes similar changes to Rule 1001(d)
concerning temporary increases to the overall Clearing Fund Size.
This authority is also discussed in OCC's CFM Policy.
---------------------------------------------------------------------------

    OCC also proposes to modify Rule 1002(a)(i)(A) to provide that the
Clearing Fund Cash Requirement may be temporarily increased ``to
respond to changing business or market conditions'' for the protection
of OCC, Clearing Members or the general public and to move certain
existing criteria (i.e., that any determination to implement a
temporary increase in the Clearing Fund Cash Requirement (i) be based
upon then-existing facts and circumstances, (ii) be in furtherance of
the integrity of OCC and the stability of the financial system, and
(iii) take into consideration the legitimate interests of Clearing
Members and market participants) to be applied to the Risk Committees
review of any such increase. The proposed change would provide
flexibility for OCC's executive management to increase liquidity
resources as circumstances warrant and put into place more detailed
criteria for the Risk Committee's review of such an increase when
determining whether changes should be made on a more permanent basis.
    Under the requirements of the proposed LRMF, the Risk Committee's
review would include a determination as to whether the increase was
appropriately made on a temporary basis or whether OCC's Liquidity Risk
Management Framework, stress testing methodology, Base Liquidity
Resources, or Contingency Funding Plan should be modified to ensure
that OCC continues to maintain sufficient liquidity resources to meet
its regulatory obligations. This determination would (1) be based upon
then-existing facts and circumstances, (2) be in furtherance of the
integrity of OCC and the stability of the financial system, and (3)
take into consideration the legitimate interests of Clearing Members
and market participants. In addition, the Risk Committee would maintain
sole authority to decrease the amount of the Clearing Fund Cash
Requirement, incrementally or in full, to any amount greater than or
equal to the amount set during the last yearly sizing process.\41\ The
LRMF would also clarify that any such increase may occur during the
monthly Clearing Fund sizing process, or on an intra-month basis. The
proposed change is designed to ensure that OCC maintains appropriate
flexibility to manage its liquidity risks in response to changing
market and business conditions while also providing an appropriate
governance structure for making such decisions on a temporary basis
(i.e., through authority limited to OCC's executive management team)
and for reviewing such decisions and making determinations on further
enhancements to OCC's framework for managing liquidity risk (i.e.,
through oversight and ultimate decision-making authority by OCC's
Board-level Risk Committee).
---------------------------------------------------------------------------

    \41\ OCC notes that the Clearing Fund Cash Requirement would
initially be set at $3.5 billion.
---------------------------------------------------------------------------

    OCC also proposes to amend Interpretation and Policy .03 to Rule
1002 to require that any increase in the Clearing Fund Cash Requirement
be satisfied no later than the second business day following
notification unless the Clearing Member is notified by an officer of
OCC an alternative time to satisfy such obligation. Interpretation and
Policy .03 to Rule 1002 currently requires Clearing Members to fund an
increase in Clearing Fund Cash

Requirement no later than one hour before the close of Fedwire on the
business day following notification by OCC. The proposed change is
intended to more closely align timeframes for meeting an increase in
the Clearing Fund Cash Requirement with the timing for satisfying
Clearing Fund deficits in the monthly and intra-month sizing processes.
OCC believes that standardizing these timeframes would provide more
clarity and simplicity in OCC's Rules and would help Clearing Members
better understand and manage their obligations to OCC.
4. Two-Day Notice Period for Substitutions Involving Excess Clearing
Fund Cash
    Under OCC's current operational practices, Clearing Members may
substitute Government Securities for cash deposits in the Clearing Fund
in excess of their minimum cash requirements, and such substitutions
are generally completed on the same day of the request. OCC proposes to
adopt new Rule 1002(a)(iv) to introduce a two-day notice period for any
Clearing Member requesting to substitute Government Securities for cash
deposits in excess of such Clearing Member's proportionate share of the
Clearing Fund Cash Requirement. For purposes of determining permitted
substitution amounts and eligible cash withdrawals during any two-day
notification period, deposits of Government Securities or any other
non-cash collateral transactions that result in excess Clearing Fund
contributions of the Clearing Member will not be deemed to be excess
until the completion of the two-day notification period. The proposed
change is intended to provide additional certainty around the level of
liquidity resources available to OCC at any given time by fixing the
amount of cash in the Clearing Fund, and thereby fixing the amount of
OCC's Available Liquid Resources, for any given two-day liquidation
horizon. Under the proposed LRMF, once the substitution request is
made, OCC would remove the cash deposits in question from subsequent
Contingency Funding Plan calculations (discussed below). OCC believes
that the proposed change would also eventually result in a natural
equilibrium of excess cash in Clearing Fund as Clearing Members
determine how best to fund their Clearing Fund requirement. OCC notes
that Clearing Members would continue to be able to immediately withdraw
cash deposits that are above their Clearing Fund Cash Requirement
provided that they have an equivalent amount of excess Clearing Fund
deposits (as provided under Rule 1008).
    Proposed Rule 1002(a)(iv) would also provide OCC with the
discretion to waive the two-day notification period if the substitution
would not result in any Clearing Member's settlement obligations,
including potential settlement obligations under stressed market
conditions, exceeding the liquidity resources available to satisfy such
settlement obligations.
5. Contingency Funding Plan
    OCC proposes several enhancements to its Contingency Funding Plan,
which would be described in the proposed Rules, LRMF, and Methodology
Description. OCC's current Contingency Funding Plan and proposed
changes thereto are discussed in detail below.
Current Process
    OCC's Contingency Funding Plan primarily consists of a process by
which OCC monitors and evaluates the reasonably anticipated settlement
obligations of its Clearing Members against OCC's liquidity resources
and calls for cash margin deposits in circumstances where such
settlement obligations may exceed OCC's liquidity resources. In 2014,
OCC filed a proposed rule change for immediate effectiveness that,
among other things, required OCC to issue an intra-day margin call \42\
in situations in which a Clearing Member's reasonably anticipated
settlement obligations to OCC exceeded the liquid financial resources
available to satisfy such obligations.\43\ The filing made it clear
that such action would be taken even if OCC has made no adverse
determination as to the financial condition of the Clearing Member, the
market risk of the Clearing Member's positions or the adequacy of the
Clearing Member's total margin deposit in the accounts in question. One
primary circumstance in which such action may be required is the
``unwinding'' of a ``box spread'' position.\44\ Box spreads can be used
as financing transactions, and they may require very large fixed
payments upon expiration. In this situation, if the margin deposited by
a Clearing Member participating in such a box spread is in the form of
common stock, and if the Clearing Member failed to make the settlement
payment, OCC's available liquid financial resources may be insufficient
to cover the settlement obligation. In anticipation of such a
settlement, OCC requires the Clearing Member to deposit intra-day
margin in the form of cash so that OCC's liquid financial resources
would be sufficient to cover the Clearing Member's obligations.\45\
---------------------------------------------------------------------------

    \42\ OCC Rule 609 provides OCC with the discretion to require
the deposit of additional margin by any Clearing Member in any
account at any time during a given business day.
    \43\ See Securities Exchange Act Release No. 72266 (May 28,
2014), 79 FR 32009 (June 3, 2014) (SR-OCC-2014-10) (Notice of Filing
and Immediate Effectiveness of Proposed Rule Change to Require That
Intraday Margin be Collected and Margin Assets Not be Withdrawn When
a Clearing Member's Reasonably Anticipated Settlement Obligations to
OCC Would Exceed the Liquidity Resources Available to OCC to Satisfy
Such Settlement Obligations).
    \44\ A box spread position involves a combination of two long
and two short options on the same underlying interest with the same
expiration date that results in an amount to be paid or received
upon settlement that is fixed regardless of fluctuations in the
price of the underlying interest. See http://www.cboe.com/learncenter/glossary.aspx#b.
    \45\ In advance of such margin call being made, a Clearing
Member may elect to deposit margin in the form of cash, thereby
increasing liquid resources available to OCC. If a margin deposit in
the form of cash is made by the Clearing Member before the call is
issued, it may obviate the need for the call altogether.
---------------------------------------------------------------------------

    Currently, OCC generally monitors for potential liquidity
shortfalls beginning thirty days prior to a given settlement. For
purposes of determining whether the reasonably anticipated settlement
obligations of a Clearing Member Group may exceed the liquid financial
resources available to satisfy such obligations, OCC compares the
forecasted liquidity amount against the drawable amount of its
committed liquidity facilities.\46\
---------------------------------------------------------------------------

    \46\ See supra note 6.
---------------------------------------------------------------------------

Proposed Changes
    OCC proposes to make several enhancements to its Contingency
Funding Plan, which are discussed in detail below.
Stress Test-Based Forecasting
    As discussed above, OCC's proposed approach to liquidity stress
testing would include the use of certain Sufficiency Scenarios designed
to assess potential liquidity exposures in excess of OCC's Available
Liquidity Resources. OCC proposes to use the output of these
Sufficiency Scenarios in place of its current process for forecasting
reasonably anticipated settlement obligations to determine whether to
require additional cash deposits from its Clearing Members. These
Sufficiency Scenarios may include a range of Historical and
Hypothetical Scenarios, including but not limited to, a 1987 historical
market event and a 2008 historical market event. OCC notes that the
proposed change would involve assessing OCC's projected settlement
obligations against OCC's Available Liquidity Resources as opposed to
its

committed liquidity facilities in order to fully account for the amount
of cash committed to OCC beyond its liquidity facilities (e.g., the
Clearing Fund Cash Requirement). The proposed change would allow OCC to
more appropriately monitor its liquidity exposures under a variety of
foreseeable stress scenarios, including the default of the Clearing
Member Group that would generate the largest aggregate payment
obligation to OCC in extreme but plausible market conditions, and to
call for additional liquid resources in the form of cash deposits to
ensure that OCC continues to maintain sufficient liquid resources to
meet its settlement obligations with a high degree of confidence.
Required Cash Deposits
    Under the proposed LRMF, OCC would produce projections of near-term
potential liquidity demands using its Sufficiency Scenarios for each
Clearing Member Group. In the event OCC projects that a Clearing Member
Group's projected liquidity demands exceed 80% of OCC's Available
Liquidity Resources, FRM would initiate enhanced monitoring of the
Clearing Member Group's liquidity demand. If any stressed liquidity
demand from a Sufficiency Scenario is greater than, or equal to, 90% of
Available Liquidity Resources, OCC may require the Clearing Member
Group to post deposits or substitute collateral in the form of cash
(``Required Cash Deposits'') to supplement OCC's Available Liquidity
Resources.\47\ In addition, the proposed LRMF would establish other
thresholds designed to monitor the impact of Required Cash Deposits on
individual Clearing Members. Specifically, if a Required Cash Deposit
for an individual Clearing Member exceeds $500 million or 75% of the
Clearing Member's excess net capital, STLRM would be required to notify
the OCEO. If the Required Cash Deposit imposed on an individual
Clearing Member would exceed 100% of an individual Clearing Member's
net capital, the Required Cash Deposit shall be escalated to the OCEO,
and any member of the OCEO would have the authority individually to
determine whether OCC should continue calling for additional liquidity
resources in excess of 100% of the net capital amount. OCC believes
that this notification and escalation process would enable OCC to
appropriately require those Clearing Members that bring elevated
liquidity exposures to OCC to bear the costs of those risks in the form
of Required Cash Deposits while also allowing OCC to take into
consideration a particular Clearing Member's ability to meet the call
based on its financial condition and the amount of collateral it has
available to pledge when certain pre-identified thresholds have been
exceeded.
---------------------------------------------------------------------------

    \47\ The amount of any Required Cash Deposit would be determined
by calculating the value of 90% of the total Available Liquidity
Resources for the Clearing Member Group in question less amount of
the largest stressed liquidity demand for that member resulting from
OCC's Sufficiency Scenarios. Required Cash Deposits would be re-
calculated daily and remain in place until the projected demand no
longer exceeds 90% of Available Liquidity Resources.
---------------------------------------------------------------------------

    These thresholds and any recommend changes thereto would be
reviewed by the CLRWG and sent to the Risk Committee for approval
during an annual review. Under the proposed LRMF, each member of OCC's
Office of the Chief Executive Officer would maintain separate authority
to approve temporary changes to the thresholds outside of the annual
review process due to changing market or business conditions. Any
temporary change in Contingency Funding Plan thresholds shall be
reviewed by the Risk Committee within 20 calendar days of such increase
to determine whether the increase was appropriate on a temporary basis,
or whether OCC's Liquidity Risk Management Framework, stress testing
methodology, Base Liquidity Resources, or Contingency Funding Plan
should be modified to ensure that OCC continues to maintain sufficient
liquidity resources to meet its regulatory obligations. Such a
determination would (i) be based upon then-existing facts and
circumstances, (ii) be in furtherance of the integrity of OCC and the
stability of the financial system, and (iii) take into consideration
the legitimate interests of Clearing Members and market participants.
If the Risk Committee determines that a permanent change is required to
OCC's Liquidity Risk Management Framework, stress testing methodology,
Base Liquidity Resources, or Contingency Funding Plan, OCC would
continue to maintain any temporary changes in Contingency Funding Plan
thresholds through the completion of any necessary regulatory filings
to ensure that it maintains sufficient liquidity resources during the
regulatory review and approval process.
    Pursuant to procedures maintained by OCC's FRM department, a
Clearing Member Group would be required to maintain a Required Cash
Deposit in the account(s) where the demand is being generated until the
stressed liquidity demand falls below established thresholds or until
the settlement demand is met. OCC would generally require funding of
Required Cash Deposits five business days before the date of the
projected demand but may require funding up to 20 business days before
the projected date as facts and circumstances may warrant.
Increases to Base Liquidity Resources
    Under the proposed LRMF, the Contingency Funding Plan would also
include increases in OCC's Base Liquidity Resources through an increase
in the Clearing Fund Cash Requirement pursuant to proposed Rule 1002(a)
as discussed above.\48\ Additionally, OCC endeavors to have an
uncommitted accordion \49\ feature embedded in any syndicated credit
facility, potentially allowing OCC to borrow additional funds from
existing or new bank syndicate liquidity providers. The availability of
an accordion is based on the willingness and ability of the syndicate
members to fund the additional borrowing request. OCC can initiate a
request to utilize an accordion at any time and it can be expected that
it would take a period of weeks to exercise this feature.
---------------------------------------------------------------------------

    \48\ See supra notes 37-41 and associated text.
    \49\ An accordion is an uncommitted expansion of a credit
facility generally on the same terms as a credit facility.
---------------------------------------------------------------------------

Changes to OCC's Rules
    OCC proposes changes to Chapters VI (Margins) and X (Clearing Fund)
of its Rules to implement the proposed enhancements to its Contingency
Funding Plan. OCC proposes to adopt new Rule 601(g) and Rule 609(b) to
provide that, in cases when OCC forecasts that a Clearing Member's
potential settlement obligations, including potential settlement
obligations under stressed market conditions, could be in excess of
OCC's committed liquidity resources available to satisfy such
obligations, OCC may impose Required Cash Deposits either as part of
the Clearing Member's normal daily margin requirement under Rule 601 or
through the deposit of intra-day margin in the form of cash under Rule
609. Proposed Rules 601(g) and 609(b) would also provide that OCC would
generally require funding of Required Cash Deposits five business days
before the date of the projected demand but may require funding up to
20 business days before the projected date as facts and circumstances
may warrant. Rule 609(b) would further provide that any such deposit of
intra-day margin must be satisfied within one hour of the issuance of
an instruction debiting the applicable bank account of the Clearing
Member unless the Clearing Member is notified by an officer of OCC of
an alternative time to satisfy such obligation, which is generally
consistent

with OCC's current intra-day margin authority under Rule 609 (and newly
amended Rule 609(a)). OCC believes the proposed changes would provide
additional clarity and transparency around its authority to impose
Required Cash Deposits.
    OCC also proposes clarifying changes to Rule 608 concerning
withdrawals of margin to provide that the existing prohibition on
withdrawing margin for liquidity purposes would now be based on
liquidity demands forecasted by OCC that may include potential
settlement obligations under stressed market conditions. OCC also would
adopt new Interpretation and Policy .08 to Rule 601 and amend
Interpretation and Policy .02 to Rule 608 and Interpretation and Policy
.01 to Rule 609 to clarify that, for purposes of determining whether a
Clearing Member's forecasted settlement obligations to the Corporation
could exceed the liquidity resources available to satisfy such
obligations, OCC would consider, as forecasted settlement obligations,
the settlement obligations of the Clearing Member and any Member
Affiliates of the Clearing Member, as well as consider as liquidity
resources the margin assets remaining on deposit with respect to such
accounts that are in the form of U.S. dollars.
6. Required Cash Deposits for Clearing Members on Watch Level
    In addition to the proposed enhancements to the Contingency Funding
Plan discussed above, OCC proposes to add new Rule 604(g) to provide
OCC with authority to require Clearing Members to deposit a specified
amount of cash to satisfy its margin requirements as a protective
measure if the Clearing Member is determined to present increased
credit risk and is subject to enhanced monitoring and surveillance
under OCC's watch level reporting process.\50\ Under the proposed rule,
Clearing Members may be required to satisfy such required cash deposits
through their daily margin requirements under Rule 601 or through
intra-day margin calls under Rule 609. The proposed change is designed
to provide OCC with an additional tool to mitigate potential liquidity
risks of those Clearing Members identified as presenting increased risk
to OCC through its ongoing monitoring processes outside of the
forecasting process in the Contingency Funding Plan.
---------------------------------------------------------------------------

    \50\ OCC's watch level reporting process is outlined in its CCRM
Policy. See supra note 19.
---------------------------------------------------------------------------

7. Enhancements to Rules Concerning the Borrowing of Clearing Fund
Assets
    Under Chapter X of OCC's Rules, OCC has authority in certain
circumstances to take possession of cash or securities contributed to
the Clearing Fund and to use such assets for borrowings. OCC also
generally requires Clearing Members to collectively contribute a
minimum of $3 billion in cash to the Clearing Fund, which is intended
to provide OCC with a reliable amount of qualifying liquid resources to
account for the event that there is an extreme scenario in the
financial markets and OCC has to address any resultant liquidity
demands. In addition to providing OCC with sufficient pre-funded
financial resources to cover potential credit losses, these Clearing
Fund contributions serve as an important source of liquidity for OCC to
manage potential liquidity risks associated with a Clearing Member
default or the failure or operational disruption of a bank or
securities or commodities clearing organization. OCC is proposing
several changes to its rules to clarify its authority to borrow
Clearing Fund contributions to address potential liquidity needs.
Authority To Borrow Cash Clearing Fund Contributions for Liquidity
Purposes
    OCC Rule 1006(f) describes OCC's use of the Clearing Fund for
liquidity purposes, specifically, the use of Clearing Fund for
borrowing or otherwise obtaining funds to be used for liquidity
purposes. Rule 1006(f) primarily discusses the use of Clearing Fund
securities to borrow or otherwise obtain funds from third parties to
meet its settlement obligations; however, OCC would be unlikely to use
Clearing Fund cash deposits to borrow collateral from a third party in
the same, fungible form, incur costs associated with the borrowing, and
then use that fungible collateral to meet OCC's obligations. Rather,
OCC would directly borrow Clearing Fund cash under the same general
terms and conditions as it would to effect a borrowing pursuant to Rule
1006(f). This is further reinforced by OCC's Default Management Policy,
which provides that ``[i]n order to meet financial resource obligations
as a result of a clearing member suspension. OCC is able to utilize the
following resources . . . Clearing Fund deposits of the suspended
member. OCC may utilize any cash, convert Clearing Fund deposits to
cash, or effect borrowing or other transactions using such deposits.
Clearing Fund deposits of non-defaulting members. OCC may utilize any
cash, convert Clearing Fund deposits to cash, or effect borrowing or
other transactions using such deposits.'' (emphasis in original).\51\
---------------------------------------------------------------------------

    \51\ See supra note 7.
---------------------------------------------------------------------------

    OCC proposes to amend Rules 1006(a) and (f) to clarify that, where
the Clearing Fund is already allowed to be used for borrowings, OCC has
authority to borrow cash directly instead of pledging Clearing Fund
cash or securities to a third party to borrow or otherwise obtain
funds. Making this authority explicit will provide OCC with clear and
transparent flexibility to access cash contributions to the Clearing
Fund in relevant circumstances rather than pledging Clearing Fund
securities to borrow on a secured basis. Consistent with OCC's current
rules applicable to using Clearing Fund assets to effect borrowings,
OCC would be permitted to borrow Clearing Fund cash directly for any
means determined to be reasonable by the Executive Chairman, Chief
Executive Officer, or Chief Operating Officer in his discretion and
shall not be deemed to be a charge against the Clearing Fund for a
period not to exceed thirty days, and, during said period, shall not
affect the amount or timing of any charges otherwise required to be
made against the Clearing Fund pursuant to Chapter X of the Rules. OCC
believes the proposed change would provide additional clarity and
transparency to its Clearing Members regarding OCC's use of Clearing
Fund cash as a liquidity resource and would help Clearing Members
better understand their and OCC's rights and obligations as they relate
to the Clearing Fund.
Authority To Reject Substitution Requests for Clearing Fund Collateral
    OCC proposes to amend Rule 1006(f) to permit OCC to reject a
Clearing Member's substitution request regarding a security contributed
to the Clearing Fund where OCC has already used the security to borrow
or otherwise obtain funds. OCC's current By-Laws and Rules do not
explicitly address its right to reject a request by a Clearing Member
to substitute Government Securities that have been pledged to its
liquidity facilities; however, OCC's Rules provide it with plenary
authority to use such securities for the purposes of borrowing from its
liquidity facilities without restriction or limitation on OCC regarding
any obligation or timing for making a substitution. Specifically, Rule
1006(f) provides OCC with broad authority to take possession of cash or
securities deposited by Clearing Members as contributions to the

Clearing Fund and use such assets to borrow or otherwise obtain funds,
including through its committed liquidity facilities, to meet
obligations arising out of the default or suspension of a Clearing
Member, the failure of a bank or securities or commodities clearing
organization to meet its obligations, or where OCC believes it
necessary to borrow to meet its liquidity needs for same-day settlement
as a result of the failure of any bank or securities or commodities
clearing organization. Rule 1006(f) further provides OCC with the
authority to pledge such cash and securities to borrow from its
liquidity facilities for a period of up to thirty days.\52\
---------------------------------------------------------------------------

    \52\ OCC notes that while the terms of its committed liquidity
facilities may generally permit OCC to substitute pledged collateral
during the course of a borrowing, nothing in the agreements requires
OCC to make such a substitution at the request of a Clearing Member.
---------------------------------------------------------------------------

    OCC proposes to amend Rule 1006(f) to explicitly permit OCC to
reject a Clearing Member's substitution request regarding a security
contributed to the Clearing Fund where OCC has already used the
security to borrow or otherwise obtain funds. OCC believes that
providing this discretion will strengthen OCC's access to liquidity
through secured borrowing arrangements by ensuring OCC is able to
preserve the pledge of particular securities where necessary or
appropriate.
Timeframe To Determine Losses Resulting From Borrowing
    OCC Rule 1006(f) currently provides, in part, that funds obtained
by OCC through a borrowing shall not be deemed to be charges against
the Clearing Fund for a period not to exceed thirty days, and, during
that period, shall not affect the amount or timing of any charges
otherwise required to be made against the Clearing Fund; however, if
all or a part of any transaction effected by OCC under Rule 1006(f)
remains outstanding after thirty days, OCC shall consider the amount of
Clearing Fund assets used to support its obligations under the
outstanding transaction as an actual loss to the Clearing Fund and
immediately allocate such loss in accordance with Chapter X of the
Rules.
    OCC proposes to amend Rule 1006(f) to clarify that OCC is not
required to wait thirty days prior to determining that any borrowing
represents an actual loss to the Clearing Fund. Making this authority
more explicit will help ensure that OCC is able to make proportionate
charges against Clearing Member contributions to the Clearing Fund in a
timely manner to make good the related losses and replenish its credit
and liquidity resources.
8. Requirement for Clearing Members To Maintain Contingency Plans for
Settlement
    OCC Rule 301(d) currently requires that every Clearing Member have
access to sufficient financial resources to meet obligations arising
from clearing membership in extreme but plausible market conditions.
OCC rules do not address circumstances in which a Clearing Member has
sufficient resources to meet its obligations but is unable to meet
settlement obligations due to, for example, a failure or operational
issue at its primary settlement bank. As a result, OCC proposes to
amend Rule 301(d) to further require that every Clearing Member
maintain adequate procedures, including but not limited to contingency
funding, to ensure that it is able to meet its obligations arising in
connection with clearing membership when such obligations arise. OCC
believes that it is important that OCC and its members maintain
processes that are resilient to a variety of potential operational and
financial disruptions and that Clearing Members maintain robust
contingency plans designed to effect timely settlement of their
obligations to reduce the likelihood member would be unable to satisfy
their settlement obligations, risking possible suspension. Examples of
such arrangements could include maintaining ability to wire funds
directly to OCC via Fedwire or by providing instructions to another
bank to effect the movement of funds.
9. Other Clarifying and Conforming Changes
    OCC also proposes to make conforming changes to the OCC Risk
Policies to replace references to OCC's Liquidity Risk Management
Policy with references to the LRMF, align descriptions of OCC's
liquidity risk management practices with the proposed LRMF, and make
other non-substantive administrative changes to enhance the accuracy
and clarity of the Risk Policies. In addition, OCC would revise the
definition of Committed Liquidity Facilities to better align that term
with (1) the discussion of such facilities in the LRMF and (2) the
definition of ``qualifying liquid resources'' (as defined in Exchange
Act Rule 17Ad-22(a)(14)).\53\
---------------------------------------------------------------------------

    \53\ 17 CFR 240.17Ad-22(a)(14).
---------------------------------------------------------------------------

    Finally, OCC proposes to revise the policy exception and violation
reporting requirements in the Risk Policies and make other
administrative updates to policy cross-references. OCC's Compliance
Department is responsible for maintaining OCC's internal policy
concerning the governance and content of OCC's policies and procedures.
This includes the development of standard templates for OCC policy
documentation and ensuring that those templates include appropriate and
consistent requirements for the reporting and escalation of policy
exceptions and violations. OCC proposes to revise the Risk Policies to
incorporate new, standardized policy exception and violation reporting
requirements, which apply to all internal OCC policies and procedures.
The proposed change would simplify and centralize the escalation path
for policy document owners and ensure that OCC's Compliance department,
and if appropriate the Enterprise Risk Management department, is
notified in a consistent manner of any exceptions or violations. OCC
does not believe the proposed change would have a material impact on
operations under the Risk Policies. The proposed change is intended to
ensure that the administration of policy exception and violation
reporting is done in a consistent manner throughout OCC's policies.
Clearing Member Outreach
    To inform Clearing Members of the proposed changes, OCC has
provided an overview of the proposed changes to the Financial Risk
Advisory Council (``FRAC''), a working group comprised of exchanges,
Clearing Members and indirect participants of OCC and the OCC
Roundtable, which was established to bring Clearing Members, exchanges
and OCC together to discuss industry and operational issues.\54\ OCC
will also provide parallel testing prior to implementation and perform
direct outreach to Clearing Members most likely to be materially
impacted by the proposed changes and answer any questions Clearing
Members may have. To-date, OCC has not received any material objections
or concerns in response to this outreach.
---------------------------------------------------------------------------

    \54\ The OCC Roundtable is comprised of representatives of the
senior OCC staff, participant exchanges and Clearing Members,
representing the diversity of OCC's membership in industry segments,
OCC-cleared volume, business type, operational structure and
geography.
---------------------------------------------------------------------------

Implementation Timeframe
    OCC expects to implement the proposed changes within sixty (60)
days after the date that OCC receives all necessary regulatory
approvals for the proposed changes. OCC will announce the
implementation date of the

proposed change by an Information Memorandum posted to its public
website at least two (2) weeks prior to implementation.
Expected Effect on and Management of Risk
    The proposed changes are designed to enhance OCC's overall
framework for managing liquidity risk. OCC believes the proposed
changes would mitigate the risks presented to and by OCC and improve
OCC's resilience as a systemically important financial market utility
for the reasons set forth below.
1. Liquidity Risk Management Framework
    The proposed LRMF would set forth the manner in which OCC
effectively measures, monitors, and manages its liquidity risks,
including how OCC measures, monitors, and manages its settlement and
funding flows on an ongoing and timely basis, and its use of intraday
liquidity. Specifically, the LRMF would describe: (1) The
identification of OCC's liquidity risks; (2) the categories and types
of OCC's liquidity resources; (3) the stress testing and sizing of
OCC's liquidity resources; (4) OCC's Contingency Funding Plan for
collecting additional liquidity resources from Clearing Members; (5)
the risk management of supporting institutions (e.g., settlement banks,
custodian banks, and liquidity providers) that may present liquidity
risks to OCC; and (6) the governance and reporting requirements
concerning OCC's LRMF. Taken together, the proposed LRMF is designed to
ensure that OCC comprehensively manages its liquidity risks and
maintains sufficient liquid resources to allow OCC to continue the
prompt and accurate clearance and settlement of securities and assure
the safeguarding of securities and funds which are in its custody or
control or for which it is responsible, notwithstanding a default of
the Clearing Member Group that would generate the largest aggregate
payment obligation for OCC in extreme but plausible market conditions.
2. Liquidity Stress Testing
    OCC proposes to adopt a liquidity stress testing approach to
effectively measure and monitor the sufficiency of OCC's liquidity
resources. OCC would perform daily liquidity risk stress testing using
standard and predetermined parameters and assumptions, and the output
of these scenarios would be used for liquidity resource evaluation.
OCC's proposed liquidity stress tests would consist of a range of
Historical and Hypothetical Scenarios, and the output would be used to:
(1) Assess OCC's projected liquidity demands under stressed scenarios
against OCC's Base and Available Liquidity Resources; (2) assess OCC's
liquidity resources against OCC's liquidity risk tolerance; (3) measure
the sufficiency of potential exposures in excess of OCC's liquidity
resources to determine if additional risk mitigation is needed when
those exposures indicate potential breaches in scenarios including but
not limited to, a 1987 historical market event and a 2008 historical
market event; and (4) monitor and assess OCC's liquidity resources
under a variety of stress conditions, which may include extreme but
implausible scenarios and reverse stress test scenarios. The proposed
change is designed to ensure that OCC comprehensively manages its
liquidity risks and maintains sufficient liquid resources to allow OCC
to continue the prompt and accurate clearance and settlement of
securities and assure the safeguarding of securities and funds which
are in its custody or control or for which it is responsible,
notwithstanding a default of the Clearing Member Group that would
generate the largest aggregate payment obligation for OCC in extreme
but plausible market conditions.
3. Clearing Fund Cash Requirement
    The proposed changes to OCC's Clearing Fund Cash Requirement are
designed to improve the resiliency of OCC's liquidity resources by
providing OCC with the flexibility to periodically set its Base
Liquidity Resources and to adjust Base Liquidity Resources in response
to changing market and business conditions to ensure that OCC maintains
sufficient liquidity resources to meet its settlement obligations in a
timely manner. Specifically, the proposed changes would provide OCC's
Risk Committee with the authority to initially reset the Clearing Fund
Cash Requirement to $3.5 billion based on an analysis of stress test
results demonstrating that this amount, in combination with OCC's
committed liquidity facilities, should be sufficient to cover OCC's
liquidity risk tolerance of a 1-in-50 year statistical market event at
a 99.5% confidence level over a two-year look back period.\55\ It would
also allow the Risk Committee to further adjust OCC's Base Liquidity
Resources based on future stress test results in a timely manner. In
addition, it would allow OCC's executive management team to adjust
OCC's Base Liquidity Resources on a temporary basis, subject to
notification and review by the Risk Committee, in response to changing
market and business conditions.
---------------------------------------------------------------------------

    \55\ See supra note 39.
---------------------------------------------------------------------------

4. Two-Day Notice Period for Substitutions Involving Excess Clearing
Fund Cash
    OCC proposes to introduce a two-day notice period for any Clearing
Member requesting to substitute Government Securities for cash deposits
in excess of such Clearing Member's proportionate share of the Clearing
Fund Cash Requirement. The proposed change is intended to provide
additional certainty around the level of liquidity resources available
to OCC at any given time by fixing the amount of cash in the Clearing
Fund, and thereby fixing the amount of OCC's Available Liquid
Resources, for any given two-day liquidation horizon.\56\ The proposed
change would enhance OCC's management of liquidity risk by providing
additional certainty around its liquidity resource calculations and
thereby help to ensure that OCC maintains sufficient liquidity
resources to continue the prompt and accurate clearance and settlement
of securities and assure the safeguarding of securities and funds which
are in its custody or control or for which it is responsible in the
event of a default of the Clearing Member Group that would generate the
largest aggregate payment obligation for OCC in extreme but plausible
market conditions.
---------------------------------------------------------------------------

    \56\ OCC notes that Clearing Members would continue to be able
to immediately withdraw cash deposits that are above their Clearing
Fund Cash Requirement provided that they have equivalent amount of
excess Clearing Fund deposits (as provided under Rule 1008).
---------------------------------------------------------------------------

5. Contingency Funding Plan
    The proposed enhancements to the Contingency Funding Plan would
include the use of certain Sufficiency Scenarios designed to assess
potential liquidity exposures in excess of OCC's Available Liquidity
Resources in place of OCC's current process for forecasting reasonably
anticipated settlement obligations to determine whether to require
additional cash deposits from its Clearing Members. The proposed
changes would allow OCC to more appropriately monitor its liquidity
exposures under a variety of foreseeable stress scenarios, and to call
for additional liquid resources in the form of cash deposits to ensure
that OCC continues to maintain sufficient liquid resources to meet its
settlement obligations with a high degree of confidence, or to respond
to a reduction in the amount of OCC's Base Liquidity Resources in an
extreme event, such as the potential failure of a liquidity

provider. OCC's Contingency Funding Plan is designed to enable OCC to
meet its settlement obligations in all relevant currencies when OCC
experiences or projects a liquidity shortfall exceeding its financial
resources without unwinding, revoking, or delaying same-day and where
appropriate, intraday and multiday, settlement obligations. The
proposed changes are designed to ensure that OCC comprehensively
manages its liquidity risks and maintains sufficient liquid resources
to allow OCC to continue the prompt and accurate clearance and
settlement of securities and assure the safeguarding of securities and
funds which are in its custody or control or for which it is
responsible.
6. Required Cash Deposits for Clearing Members on Watch Level
    OCC proposes to add new Rule 604(g) to provide OCC with authority
to require Clearing Members to deposit a specified amount of cash to
satisfy its margin requirements as a protective measure if the Clearing
Member is determined to present increased credit risk and is subject to
enhanced monitoring and surveillance under OCC's watch level reporting
process. Under the proposed rule, Clearing Members may be required to
satisfy such required cash deposits through their daily margin
requirements under Rule 601 or through intra-day margin calls under
Rule 609. The proposed change is designed to provide OCC with an
additional tool to mitigate potential liquidity risks of those Clearing
Members identified as presenting increased risk to OCC through its
ongoing monitoring processes outside of the forecasting process in the
Contingency Funding Plan. The proposed change would allow OCC to
collect additional liquid resources from a Clearing Member
demonstrating potentially increasing levels of risk through the watch
level review process so that OCC can continue the prompt and accurate
clearance and settlement of securities and assure the safeguarding of
securities and funds which are in its custody or control or for which
it is responsible in the event such a Clearing Member defaults.
7. Enhancements to Rules Concerning the Borrowing of Clearing Fund
Assets
    OCC is proposing several changes to its rules to clarify its
authority to use Clearing Fund assets to address potential liquidity
needs. First, OCC proposes to amend Rules 1006(a) and (f) to clarify
that, where the Clearing Fund is already allowed to be used for
borrowings, OCC has authority to borrow cash directly instead of
pledging Clearing Fund cash or securities to a third party to borrow or
otherwise obtain funds. The proposed change would provide additional
clarity and transparency to OCC's Clearing Members regarding OCC's use
of Clearing Fund cash as a liquidity resource and would help Clearing
Members better understand their and OCC's rights and obligations as
they relate to the Clearing Fund.\57\ Second, OCC proposes to amend
Rule 1006(f) to permit OCC to reject a Clearing Member's collateral
substitution request concerning a security contributed to the Clearing
Fund where OCC has already used the security to borrow or otherwise
obtain funds. Explicitly providing this discretion in OCC's Rules will
strengthen OCC's access to liquidity through secured borrowing
arrangements by ensuring OCC is able to preserve the pledge of
particular securities where necessary or appropriate. Finally, OCC
proposes to amend Rule 1006(f) to clarify that OCC is not required to
wait thirty days prior to determining that any borrowing represents an
actual loss to the Clearing Fund. Making this authority more explicit
will help ensure that OCC is able to make proportionate charges against
Clearing Member contributions to the Clearing Fund in a timely manner
and make good the related losses. OCC believes that these proposed
changes provide important clarity around its ability to borrow and use
Clearing Fund assets for liquidity risk management purposes, and to
replenish such resources in a timely fashion.
---------------------------------------------------------------------------

    \57\ OCC notes that the proposed changes to Rule 1006 are
aligned with OCC's existing Default Management Policy, which
provides that ``[i]n order to meet financial resource obligations as
a result of a clearing member suspension. OCC is able to utilize the
following resources . . . Clearing Fund deposits of the suspended
member. OCC may utilize any cash, convert Clearing Fund deposits to
cash, or effect borrowing or other transactions using such deposits.
Clearing Fund deposits of non-defaulting members. OCC may utilize
any cash, convert Clearing Fund deposits to cash, or effect
borrowing or other transactions using such deposits.'' (emphasis in
original). See supra note 51 and associated text.
---------------------------------------------------------------------------

8. Requirement for Clearing Members To Maintain Contingency Plans for
Settlement
    OCC proposes to amend Rule 301(d) to require that every Clearing
Member maintain adequate procedures, including but not limited to
contingency funding, to ensure that it is able to meet its obligations
arising in connection with clearing membership when such obligations
arise. The proposed change is intended to reduce liquidity risk at OCC
by requiring that Clearing Members have adequate contingency planning
designed to effect timely settlement of their obligations with OCC
despite a disruption by their primary settlement bank. OCC believes
that it is important that OCC and its members maintain processes that
are resilient to a variety of potential operational and financial
disruptions and that Clearing Members maintain robust contingency plans
designed to effect timely settlement of their obligations to reduce the
likelihood member would be unable to satisfy its settlement
obligations, risking possible suspension.
9. Other Clarifying and Conforming Changes
    OCC proposes to make a number of other clarifying, conforming, and
organizational changes to the OCC Rules and Risk Policies to ensure the
accuracy and consistency of its liquidity risk management rules and
practices. The proposed changes are therefore designed to ensure that
OCC is able to effectively manage its liquidity risks and maintain
sufficient liquid resources to allow OCC to continue the prompt and
accurate clearance and settlement of securities and assure the
safeguarding of securities and funds which are in its custody or
control or for which it is responsible, notwithstanding a default of
the Clearing Member Group that would generate the largest aggregate
payment obligation for OCC in extreme but plausible market conditions.
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.\58\
Section 805(a)(2) of the Clearing Supervision Act \59\ 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 \60\ states that the objectives
and principles for risk management standards prescribed under Section
805(a) shall be to:
---------------------------------------------------------------------------

    \58\ 12 U.S.C. 5461(b).
    \59\ 12 U.S.C. 5464(a)(2).
    \60\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

     promote robust risk management;
     promote safety and soundness;
     reduce systemic risks; and

     support the stability of the broader financial system.
    OCC believes that the proposed changes described herein are
consistent with the objectives and principles of Section 805(b) of the
Clearing Supervision Act \61\ and the risk management standards adopted
by the Commission in Rule 17Ad-22 under the Act for the reasons set
forth below.\62\
---------------------------------------------------------------------------

    \61\ Id.
    \62\ 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''). OCC is a ``covered clearing agency'' (or
``CCA'') as defined in Rule 17Ad-22(a)(5) and therefore must comply
with the requirements of Rule 17Ad-22(e).
---------------------------------------------------------------------------

Consistency With Objectives and Principles of the Clearing Supervision
Act
    OCC believes the proposed changes are consistent with the
objectives and principles of Section 805(b) of the Clearing Supervision
Act.\63\ The proposed changes are generally designed to enhance OCC's
overall framework for managing liquidity risk. As described above, OCC
proposes to adopt a new LRMF to set forth the manner in which OCC
effectively measures, monitors, and manages its liquidity risks,
including how OCC measures, monitors, and manages its settlement and
funding flows on an ongoing and timely basis, and its use of intraday
liquidity. Specifically, the LRMF would describe: (1) The
identification of OCC's liquidity risks; (2) the categories and types
of OCC's liquidity resources; (3) the stress testing and sizing of
OCC's liquidity resources; (4) OCC's Contingency Funding Plan for
collecting additional liquidity resources from Clearing Members; (5)
the risk management of supporting institutions (e.g., settlement banks,
custodian banks, and liquidity providers) that may present liquidity
risks to OCC; and (6) the governance and reporting requirements
concerning OCC's liquidity risk management.
---------------------------------------------------------------------------

    \63\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    OCC also proposes to enhance its management of liquidity risk by
introducing a new approach to stress testing and determining the
adequacy, sizing, and sufficiency of its liquidity resources. OCC's
liquidity stress testing would be based on output of its current stress
testing and Clearing Fund methodology, which would be used to project
OCC's potential liquidity demands under stressed market conditions.
OCC's proposed liquidity stress tests would consist of a range of
Historical and Hypothetical Scenarios, and the output would be used to:
(1) Assess OCC's projected liquidity demands under stressed scenarios
against OCC's Base and Available Liquidity Resources; (2) assess OCC's
liquidity resources against OCC's liquidity risk tolerance; (3) measure
the sufficiency of potential exposures in excess of OCC's liquidity
resources to determine if additional risk mitigation is needed when
those exposures indicate potential breaches in scenarios including but
not limited to, a 1987 historical market event and a 2008 historical
market event; and (4) monitor and assess OCC's liquidity resources
under a variety of stress conditions, which may include extreme but
implausible scenarios and reverse stress test scenarios. The proposed
change is designed to ensure that OCC comprehensively manages its
liquidity risks and maintains sufficient liquid resources to allow OCC
to continue the prompt and accurate clearance and settlement of
securities and assure the safeguarding of securities and funds which
are in its custody or control or for which it is responsible,
notwithstanding a default of the Clearing Member Group that would
generate the largest aggregate payment obligation for OCC in extreme
but plausible market conditions.
    In addition, the proposed changes to OCC's Clearing Fund Cash
Requirement are designed to improve the resiliency of OCC's liquidity
resources by providing OCC with the flexibility to periodically set and
adjust its Base Liquidity Resources in response to changing market and
business conditions, and the proposed two-day notice period
substitutions of Government Securities for excess Clearing Fund cash
deposits would provide additional certainty around the level of
liquidity resources available to OCC at any given for any given two-day
liquidation horizon.
    Moreover, the proposed enhancements to the Contingency Funding Plan
would include Sufficiency Scenarios designed to assess potential
liquidity exposures in excess of OCC's Available Liquidity Resources to
determine whether to require additional cash deposits from its Clearing
Members. The proposed changes would allow OCC to more appropriately
monitor its liquidity exposures under a variety of foreseeable stress
scenarios, and to call for additional liquid resources in the form of
cash deposits to ensure that OCC continues to maintain sufficient
liquid resources to meet its settlement obligations with a high degree
of confidence, or to respond to a reduction in the amount of OCC's Base
Liquidity Resources in an extreme event, such as the potential failure
of a liquidity provider.
    In addition, OCC proposes to mitigate its liquidity risk by
adopting new rules to require its Clearing Members to deposit a
specified amount of cash to satisfy its margin requirements as a
protective measure if a Clearing Member is determined to present
increased credit risk and is subject to enhanced monitoring and
surveillance under OCC's watch level reporting process and to require
that every Clearing Member maintain adequate procedures, including but
not limited to contingency funding, to ensure that it is able to meet
its obligations arising in connection with clearing membership when
such obligations arise. OCC would also revise its Rules to clarify its
authority to use Clearing Fund assets to address potential liquidity
needs.
    Taken together, OCC believes that the proposed enhancements to its
overall framework for managing liquidity risk would improve OCC's
resilience as a systemically important market utility by promoting
robust risk management and safety and soundness and thereby reducing
systemic risks and supporting the stability of the broader financial
system. This is further evidenced by their consistency with the risk
management standards adopted by the Commission in Rule 17Ad-22 under
the Act, which is discussed in detail below.
Consistency With Risk Management Standards in Exchange Act Rule 17Ad-22
    OCC also believes the proposed changes are consistent with the risk
management standards adopted by the Commission in Rule 17Ad-22 under
the Act for the reasons set forth below.
1. Liquidity Risk Management Framework
    Rules 17Ad-22(e)(7)(i) and (ii) \64\ require a CCA to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to maintain sufficient liquid resources at the
minimum in all relevant currencies to effect same-day and, where
appropriate, intraday and multiday 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 the CCA in extreme but plausible market
conditions and to maintain such resources in the form of qualifying

liquid resources and in each relevant currency for which the CCA has
payment obligations owed to clearing members. The proposed LRMF would
describe: (1) OCC's approach to liquidity stress testing; (2) OCC's
process for determining the size of OCC's liquidity resources based on
analyses of projected liquidity demands under a variety of stress
scenarios (e.g., stress scenarios representing OCC's liquidity risk
tolerance, extreme historical scenarios such as a 1987 historical
market event and 2008 historical market event, and certain scenarios
used to size OCC's Clearing Fund); (3) OCC's process for testing the
sufficiency of its liquidity resources and Contingency Funding Plan for
collecting additional liquidity resources when necessary; and (4) the
various categories and types of liquidity resources maintained by OCC,
including the qualifying liquid resources maintained by OCC to meet its
minimum liquidity resource requirement for effecting same-day, intraday
and multiday settlement of OCC's payment obligations. OCC therefore
believes the proposed LRMF is reasonably designed to comply with the
requirements of Rules 17Ad-22(e)(7)(i) and (ii).\65\
---------------------------------------------------------------------------

    \64\ 17 CFR 240.17Ad-22(e)(7)(i) and (ii).
    \65\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(7)(iii) \66\ requires that a CCA establish,
implement, maintain and enforce written policies and procedures
reasonably designed to use access to accounts and services at a Federal
Reserve Bank, or other relevant central bank, when available and where
determined to be practical by the board of directors of the CCA, to
enhance its management of liquidity risk. The proposed LRMF would
describe OCC's use of accounts and services at the Federal Reserve Bank
of Chicago in accordance with this requirement.
---------------------------------------------------------------------------

    \66\ 17 CFR 240.17Ad-22(e)(7)(iii).
---------------------------------------------------------------------------

    Rules 17Ad-22(e)(7)(iv) and (v) \67\ require that a CCA establish,
implement, maintain and enforce written policies and procedures
reasonably designed to: (1) Undertake due diligence to confirm that it
has a reasonable basis to believe each of its liquidity providers has
sufficient information to understand and manage the liquidity
provider's liquidity risks and the capacity to perform as required
under its commitments to provide liquidity to the CCA and (2) maintain
and test with each liquidity provider, to the extent practicable, the
CCA's procedures and operational capacity for accessing each type of
relevant liquidity resource at least annually. The proposed LRMF would
set forth OCC's requirements for performing due diligence to confirm it
has a reasonable basis to believe each of its liquidity providers has
sufficient information to understand and manage OCC's liquidity risk
profile and the capacity to perform as required under its commitments.
The proposed LRMF would also require the execution of periodic test
borrows no less than once every 12 months to measure the performance
and reliability of the liquidity facilities. As a result, OCC believes
the proposed LRMF is consistent with Rules 17Ad-22(e)(7)(iv) and
(v).\68\
---------------------------------------------------------------------------

    \67\ 17 CFR 240.17Ad-22(e)(7)(iv) and (v).
    \68\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(7)(vi)(A) \69\ requires that a CCA establish,
implement, maintain and enforce written policies and procedures
reasonably designed to determine the amount and regularly test the
sufficiency of the liquid resources held for purposes of meeting the
minimum liquid resource requirement by conducting stress testing of its
liquidity resources at least once each day using standard and
predetermined parameters and assumptions. Under the proposed LRMF, OCC
would perform daily stress tests using its Sufficiency Scenarios to
assess potential liquidity exposures in excess of OCC's Available
Liquidity Resources under a range of stress scenarios, including but
not limited to, a 1987 historical market event and a 2008 historical
market event, and if a Clearing Member Group's exposures breach certain
thresholds, OCC would require the breaching Clearing Member Group to
maintain cash deposits in lieu of other forms of acceptable collateral
to supplement OCC's Available Liquidity Resources pursuant to the
Contingency Funding Plan.\70\ OCC therefore believes that the proposed
LRMF is reasonably designed to comply with the requirements of Rule
17Ad-22(e)(7)(vi)(A).\71\
---------------------------------------------------------------------------

    \69\ 17 CFR 240.17Ad-22(e)(7)(vi)(A).
    \70\ OCC also would perform daily stress tests using Adequacy
and Informational Scenarios to evaluate the sufficiency of its
liquidity resources under a wide range of historical and
hypothetical stress scenarios.
    \71\ 17 CFR 240.17Ad-22(e)(7)(vi)(A).
---------------------------------------------------------------------------

    Rules 17Ad-22(e)(7)(vi)(B)-(D) \72\ further require a CCA to
maintain policies and procedures for: (1) Conducting a comprehensive
analysis on at least a monthly basis of the existing stress testing
scenarios, models, and underlying parameters and assumptions used in
evaluating liquidity needs and resources, and considering modifications
to ensure they are appropriate for determining the clearing agency's
identified liquidity needs and resources in light of current and
evolving market conditions; (2) conducting a comprehensive analysis
more frequently than monthly when the products cleared or markets
served display high volatility or become less liquid, when the size or
concentration of positions held by the clearing agency's participants
increases significantly, or in other appropriate circumstances
described in such policies and procedures; and (3) reporting the
results of such analyses to appropriate decision makers at the CCA,
including but not limited to, its risk management committee or board of