[Federal Register Volume 82, Number 246 (Tuesday, December 26, 2017)]
[Notices]
[Pages 61107-61116]
[FR Doc No: 2017-27691]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82351; File No. SR-OCC-2017-020]

Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of a Proposed Rule Change Concerning Enhanced and New
Tools for Recovery Scenarios

December 19, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that
on December 18, 2017, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by OCC. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change

    This proposed rule change by the OCC would make certain revisions
to OCC's Rules and By-Laws to enhance OCC's existing tools to address
the risks of liquidity shortfalls and credit losses and to establish
new tools by which OCC could re-establish a matched book following a
default. Each of the tools proposed herein is contemplated to be
deployed by OCC in an extreme stress event that has placed OCC into a
recovery or orderly wind-down scenario.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

    In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. OCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements. All terms with initial capitalization not defined here have
the same meaning set forth in OCC's By-Laws and Rules.\3\
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    \3\ OCC's By-Laws and Rules can be found on OCC's public
website: http://optionsclearing.com/about/publications/bylaws.jsp.
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(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

1. Purpose
Background
    The purpose of this proposed rule change is to make certain
revisions to OCC's Rules and By-Laws Laws that are designed to enhance
OCC's existing tools to address the risks of liquidity shortfalls and
credit losses and to establish tools by which OCC could re-establish a
matched book following a default. Each of the tools proposed herein is
contemplated to be deployed by OCC in an extreme stress event that has
placed OCC into a recovery or orderly wind-down scenario. Each of the
proposed revisions also is designed to further OCC's compliance, in
whole or in part, with the provisions of the Commission's rules
identified immediately below.
    On September 28, 2016, the Commission adopted amendments to

Rule 17Ad-22 \4\ and added new Rules 17Ad-22(e)(3)(ii), (e)(4)(viii),
(e)(4)(ix), (e)(7)(ix), (e)(13), (e)(23)(i) and (e)(23)(ii) \5\
pursuant to Section 17A of the Securities Exchange Act of 1934 \6\ and
the Payment, Clearing, and Settlement Supervision Act of 2010
(``Payment, Clearing and Settlement Supervision Act'').\7\ In relevant
part, these new rules collectively require a covered clearing agency
(``CCA''), as defined by Rule 17Ad-22(a)(5),\8\ to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to: (1) Maintain a risk management framework
including plans for recovery and orderly wind-down necessitated by
credit losses, liquidity shortfalls, general business risk losses or
any other losses, (2) effectively identify, measure, monitor and manage
its credit exposures to participants and those arising from its
payment, clearing and settlement processes, including by addressing the
allocation of credit losses a CCA might face if its collateral and
other resources are insufficient to fully cover its credit exposures,
(3) effectively identify, measure, monitor and manage credit exposures,
including by describing the process to replenish any financial resource
that a CCA may use following a default event or other event in which
use of such resource is contemplated, (4) effectively identify,
measure, monitor and manage liquidity risks that arises or is borne by
the CCA by, at a minimum, describing the process for replenishing any
liquid resource that a CCA may employ during a stress event, (5) ensure
it has the authority and operational capacity to take timely action to
contain losses and liquidity demands and continue to meet its
obligations, (6) publicly disclose relevant rules and material
procedures, including key aspects of its default rules and procedures,
and (7) provide sufficient information to enable participants to
identify and evaluate the risks, fees, and other material costs they
incur by participating in the CCA. The relevant portions of each of
these new requirements is restated below:
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    \4\ 17 CFR 240.17Ad-22.
    \5\ 17 CFR 240.17Ad-22(e)(3)(ii), (e)(4)(viii), (e)(4)(ix),
(e)(7)(ix), (e)(13), (e)(23)(i) and (e)(23)(ii).
    \6\ 15 U.S.C. 78q-1.
    \7\ 12 U.S.C. 5461 et. seq.
    \8\ 17 CFR 240.17Ad-22(a)(5).
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     Rule 17Ad-22(e)(3)(ii) requires that each CCA ``establish,
implement, maintain and enforce written policies and procedures
reasonably designed to . . . [m]aintain a sound risk management
framework for comprehensively managing legal, credit, liquidity,
operational, general business, investment, custody, and other risks
that arise in or are borne by the [CCA], which . . . [i]ncludes plans
for the recovery and orderly wind-down of the [CCA] necessitated by
credit losses, liquidity shortfalls, losses from general business risk,
or any other losses.'' \9\
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    \9\ 17 CFR 240.17Ad-22(e)(3)(ii).
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     Rule 17Ad-22(e)(4)(viii) requires that each CCA
``establish, implement, maintain and enforce written policies and
procedures reasonably designed to . . . [e]ffectively identify,
measure, monitor, and manage its credit exposures to participants and
those arising from its payment, clearing, and settlement processes,
including by . . . [a]ddressing allocation of credit losses the [CCA]
may face if its collateral and other resources are insufficient to
fully cover its credit exposures, including the repayment of any funds
the [CCA] may borrow from liquidity providers.'' \10\
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    \10\ 17 CFR 240.17Ad-22(e)(v)(viii).
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     Rule 17Ad-22(e)(4)(ix) requires that each CCA ``establish,
implement, maintain and enforce written policies and procedures
reasonably designed to . . . [e]ffectively identify, measure, monitor,
and manage its credit exposures to participants and those arising from
its payment, clearing, and settlement processes, including by . . .
[d]escribing the [CCA's] process to replenish any financial resources
it may use following a default or other event in which use of such
resources is contemplated.'' \11\
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    \11\ 17 CFR 240.17Ad-22(e)(4)(ix).
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     Rule 17Ad-22(e)(7)(ix) requires that each CCA ``establish,
implement, maintain and enforce written policies and procedures
reasonably designed to . . . [e]ffectively measure, monitor, and manage
the liquidity risk that arises in or is borne by the [CCA], including
measuring, monitoring, and managing its settlement and funding flows on
an ongoing and timely basis, and its use of intraday liquidity by, at a
minimum, doing the following . . . [d]escribing the [CCA's] process to
replenish any liquid resources that the clearing agency may employ
during a stress event.'' \12\
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    \12\ 17 CFR 240.17Ad-22(e)(7)(ix).
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     Rule 17Ad-22(e)(13) requires that each CCA ``establish,
implement, maintain and enforce written policies and procedures
reasonably designed to. . . [e]nsure the covered clearing agency has
the authority and operational capacity to take timely action to contain
losses and liquidity demands and continue to meet its obligations . .
.'' \13\
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    \13\ 17 CFR 240.17Ad-22(e)(13).
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     Rule 17Ad-22(e)(23)(i) requires that each CCA ``establish,
implement, maintain and enforce written policies and procedures
reasonably designed to . . . [p]ublicly disclos[e] all relevant rules
and material procedures, including key aspects of its default rules and
procedures.'' \14\
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    \14\ 17 CFR 240.17Ad-22(e)(23)(i).
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     Rule 17Ad-22(e)(23)(ii) requires that each CCA
``establish, implement, maintain and enforce written policies and
procedures reasonably designed to . . . [p]rovid[e] sufficient
information to enable participants to identify and evaluate the risks,
fees, and other material costs they incur by participating in the
covered clearing agency.'' \15\
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    \15\ 17 CFR 240.17Ad-22(e)(23)(ii).
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    OCC meets the definition of a CCA and is therefore subject to the
requirements of the CCA rules, including new Rules 17Ad-22(e)(3)(ii),
(e)(4)(viii), (e)(4)(ix), (e)(7)(ix), (e)(13), (e)(23)(i) and
(e)(23)(ii).\16\
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    \16\ 17 CFR 240.17Ad-22(e)(3)(ii), (e)(4)(viii), (e)(4)(ix) and
(e)(7)(ix).
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Proposed Changes
Summary of Proposed Changes
    In order to enhance OCC's existing tools to address the risks of
liquidity shortfalls and credit losses and to establish new tools by
which OCC could re-establish a matched book following a default, OCC is
proposing to make the following revisions to its Rules and By-Laws:
    (1) Revise the existing assessment powers in Section 6 of Article
VIII of OCC's By-Laws, specifically to:
    (a) Establish a rolling ``cooling-off period'' that would be
triggered by the payment of a proportionate charge against the Clearing
Fund (``triggering proportionate charge''), during which period the
aggregate liability of a Clearing Member to replenish the Clearing Fund
(inclusive of assessments) would be 200% of the Clearing Member's
required contribution as of the time immediately preceding the
triggering proportionate charge;
    (b) Clarify that a Clearing Member that chooses to terminate its
membership status during a cooling-off period will not be liable for
replenishment of the Clearing Fund immediately following the expiration
of such cooling-off period, provided that the withdrawing Clearing
Member satisfies enumerated criteria, including providing notice of
such termination by no later than the end of the cooling-off period and
by closing-out and/or transferring of all its open positions with OCC
by no later than the last day of the cooling-off period; and

    (c) Delineate between the obligation of a Clearing Member to
replenish its contributions to the Clearing Fund and its obligations to
meet additional ``assessments'' that may be levied following a
proportionate charge to the Clearing Fund.
    (2) Adopt a new Rule 1009 that would provide OCC with discretionary
authority to call for voluntary payments from non-defaulting Clearing
Members in a circumstance where one or more Clearing Members has
already defaulted and OCC has determined that it may not have
sufficient resources to satisfy its obligations and liabilities
resulting from such default. Rule 1009 also would establish that OCC
would prioritize compensation of Clearing Members that made voluntary
payments from any amounts recovered from the defaulted Clearing
Members.
    (3) Adopt a new Rule 1111 that would provide authority to:
    (a) Allow OCC to call for voluntary tear-ups (``Voluntary Tear-
Up,'' as defined below) of non-defaulting Clearing Member and/or
customer positions at any time following the suspension or default of a
Clearing Member, with the scope of any such Voluntary Tear-Ups being
determined by the Risk Committee of OCC's Board (``Risk Committee'');
    (b) Allow OCC's Board to vote to tear-up the ``Remaining Open
Positions'' (defined below) of a defaulted Clearing Member, as well as
any ``Related Open Positions'' (defined below) in a circumstance where
OCC has attempted one or more auctions of such defaulted Clearing
Member's remaining open positions and OCC has determined that it may
not have sufficient resources to satisfy its obligations and
liabilities resulting from such default with the scope of any such
tear-up (``Partial Tear-Up'') being determined by the Risk Committee;
and
    (c) Allow OCC's Board to vote to re-allocate losses, costs and fees
imposed upon holders of positions extinguished in a Partial Tear-Up
through a special charge levied against remaining non-defaulting
Clearing Members.
    (4) Revise the descriptions and authorizations in Article VIII of
OCC's By-Laws concerning the use of the Clearing Fund to reflect the
discretion of OCC to use remaining Clearing Fund contributions to re-
allocate losses imposed on non-defaulting Clearing Members and
customers from a Voluntary Tear-Up or a mandatory tear-up (``Partial
Tear-Up,'' as defined below).
Discussion of Proposed Changes
    Each of the proposed revisions to OCC's Rules and By-Laws is
described in more detail in the following sub-sections:
1. Proposed Changes to OCC's Assessment Powers
a. Current Assessment Powers
    OCC's current assessment powers are described in Section 6 of
Article VIII of OCC's By-Laws. Section 6 establishes a general
requirement for each Clearing Member to promptly make good any
deficiency in its required contribution to the Clearing Fund whenever
an amount is paid out of its Clearing Fund contribution (whether by
proportionate charge or otherwise).\17\ In this regard, a Clearing
Member's obligation to replenish the Clearing Fund is not currently
subject to any pre-determined limit. Notwithstanding the foregoing, a
Clearing Member can limit the amount of its liability for replenishing
the Clearing Fund (at an additional 100% of the amount of its then-
required Clearing Fund contribution) by winding-down its clearing
activities and terminating its status as a Clearing Member. Any
Clearing Member seeking to so limit its liability for replenishing the
Clearing Fund must: (i) Notify OCC in writing not later than the fifth
business day after the proportionate charge that it is terminating its
status as a Clearing Member, (ii) not initiate any opening purchase or
opening writing transaction, and, if the Clearing Member is a Market
Loan Clearing Member or a Hedge Clearing Member, not initiate any Stock
Loan transaction, through any of its accounts, and (iii) close out or
transfer all of its open positions as promptly as practicable after
giving notice to OCC. Thus, withdrawal from clearing membership is the
only means by which a Clearing Member currently can limit its liability
for replenishing the Clearing Fund.
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    \17\ Under Article VIII, Section 6 of OCC's By-Laws, OCC
currently has authority to assess proportionate charges against
Clearing Members' contributions to the Clearing Fund in certain
enumerated situations. For example, Section 6 generally provides
that if the conditions regarding a Clearing Member default specified
in subparagraphs (a)(i) through (vi) of Article VIII, Section 5 of
OCC's By-Laws are satisfied, OCC will make good resulting losses or
expenses that are suffered by OCC by applying the defaulting
Clearing Member's Clearing Fund contribution after first applying
other funds available to OCC in the accounts of the Clearing Member.
If the sum of the obligations, however, exceeds the total Clearing
Fund contribution and other funds of the defaulting Clearing Member
available to OCC, then OCC will charge the amount of the remaining
deficiency on a proportionate basis against all non-defaulting
Clearing Members' required contributions to the Clearing Fund at the
time. Section 5(b) of Article VIII of OCC's By-Laws similarly
provides for proportionate charges against Clearing Members'
contributions to the Clearing Fund when certain conditions are met
that involve a failure by a bank or a securities or commodities
clearing organization to perform obligations to OCC when they are
due.
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b. Proposed Changes to Assessment Powers
    OCC proposes to amend Section 6 of Article VIII of OCC's By-Laws to
make three primary modifications regarding its existing authority to
assess proportionate charges against Clearing Members' contributions to
the Clearing Fund. First, the proposal introduces an automatic minimum
fifteen calendar day ``cooling-off'' period that begins when a
proportionate charge is assessed by OCC against Clearing Members'
Clearing Fund contributions. While the cooling-off period will continue
for a minimum of fifteen consecutive calendar days, if one or more of
the events described in clauses (i) through (iv) of Article VIII,
Section 5(a) of OCC's By-Laws occur(s) during that fifteen calendar day
period and result in one or more proportionate charges against the
Clearing Fund, the cooling-off period shall be extended through either
(i) the fifteenth calendar day from the date of the most recent
proportionate charge resulting from the subsequent event, or (ii) the
twentieth day from the date of the proportionate charge that initiated
the cooling-off period, whichever is sooner.
    During a cooling-off period, each Clearing Member would have its
aggregate liability to replenish the Clearing Fund capped at 200% of
the Clearing Member's then-required contribution to the Clearing Fund.
Once the cooling-off period ends each remaining Clearing Member would
be required to replenish the Clearing Fund in the amount necessary to
meet its then-required contribution. Once the cooling-off period ends,
any remaining losses or expenses suffered by OCC as a result of any
event described in clauses (i) through (iv) of Article VIII, Section
5(a) of OCC's By-Laws that occurred during such cooling-off period
could not be charged against the amounts Clearing Members have
contributed to replenish the Clearing Fund upon the expiration of the
cooling-off period.\18\
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    \18\ After a cooling-off period has ended, the occurrence of any
event described in clauses (i) through (iv) of Article VIII, Section
5(a) of OCC's By-Laws that results in a proportionate charge against
the Clearing Fund would trigger a new cooling off period, and
thusly, a cap of 200% of each Clearing Member's then-required
contribution would again apply.
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    Second, in connection with the cooling-off period, the proposal
would

extend the time frame within which a Clearing Member may provide a
termination notice to OCC to avoid liability for replenishment of the
Clearing Fund after the cooling-off period and would modify the
obligations of such a terminating Clearing Member for closing-out and
transferring its remaining open positions. Specifically, to effectively
terminate its status as a Clearing Member and not be liable for
replenishing the Clearing Fund after the cooling-off period, a Clearing
Member would be required to: (i) Notify OCC in writing of its intent to
terminate not later than the last day of the cooling-off period, (ii)
not initiate any opening purchase or opening writing transaction, and,
if the Clearing Member is a Market Loan Clearing Member or a Hedge
Clearing Member, not initiate any Stock Loan transaction, through any
of its accounts, and (iii) close-out or transfer all of its open
positions by no later than the last day of the cooling-off period. If a
Clearing Member fails to satisfy all of these conditions by the end of
a given cooling-off period, it would not have completed all of the
requirements necessary to terminate its status as a Clearing Member
under Article VIII, Section 6 of OCC's By-Laws and therefore it would
remain subject to the obligation to replenish the Clearing Fund after
the end of the cooling-off period.
    Third, the proposal would clarify the distinction between
``replenishment'' of the Clearing Fund and a Clearing Member's
obligation to answer ``assessments.'' In this context, the term
``replenish'' (and its variations) shall to refer to a Clearing
Member's standing duty, following any proportionate charge against the
Clearing Fund, to return its Clearing Fund contribution to the amount
required from such Clearing Member for the month in question.\19\ The
term ``assessment'' (and its variations) shall refer to the amount,
during any cooling-off period, that a Clearing Member would be required
to contribute to the Clearing Fund in excess of the amount of the
Clearing Member's pre-funded required Clearing Fund contribution.
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    \19\ This assumes that the proportionate charge resulted in the
Clearing Member's actual Clearing Fund contribution dropping below
the amount of its required contribution (i.e., that the Clearing
Member did not have excess above its required contribution that was
sufficient to cover the amount of the proportionate charge allocated
to such Clearing Member).
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Proposed Addition of Ability To Request Voluntary Payments
    OCC proposes to add new Rule 1009, which will provide a framework
by which OCC could receive voluntary payments in a circumstance where a
Clearing Member has defaulted and OCC has determined that,
notwithstanding the availability of any remaining resources under OCC
Rules 707, 1001, 1104 through 1107, 2210 and 2211,\20\ OCC may not have
sufficient resources to satisfy its obligations and liabilities
resulting from such default. Under new Rule 1009, OCC will initiate a
call for voluntary payments by issuing a ``Voluntary Payment Notice''
inviting all non-defaulting Clearing Members to make payments to the
Clearing Fund in addition to any amounts they are otherwise required to
contribute pursuant to Rule 1001. The Voluntary Payment Notice would
specify the terms applicable to any voluntary payment, including but
not limited to, that any voluntary payment may not be withdrawn once
made, that no Clearing Member shall be obligated to make a voluntary
payment and that OCC shall retain full discretion to accept or reject
any voluntary payment. Rule 1009 specifies that if OCC subsequently
recovers from the defaulted Clearing Member or the estate(s) of the
defaulted Clearing Member(s), OCC would seek to compensate first from
such recovery all non-defaulting Clearing Members that made voluntary
payments (and if the amount recovered from the defaulted Clearing
Member(s) is less than the aggregate amount of voluntary payments, non-
defaulting Clearing Members that made voluntary payments each would
receive a percentage of the recovery that corresponds to that Clearing
Member's percentage of the total amount of voluntary payments
received).
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    \20\ Rule 707 addresses the treatment of funds in a Clearing
Member's X-M accounts. Rule 1001 addresses the size of OCC's
Clearing Fund and the amount of a Clearing Member's contribution.
Rules 1104 through 1107 concern the treatment of the portfolio of a
defaulted Clearing Member. Rules 2210 and 2211 concern the treatment
of Stock Loan positions of a defaulted Clearing Member.
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Proposed Addition of Ability To Conduct Voluntary Tear-Ups
    OCC proposes to add new Rule 1111, which, in relevant part, will
establish a framework by which non-defaulting Clearing Members and non-
defaulting customers of Clearing Members could be given an opportunity
to voluntarily extinguish (i.e., voluntarily tear-up) their open
positions at OCC in a circumstance where a Clearing Member has
defaulted and OCC has determined that, notwithstanding the availability
of any remaining resources under OCC Rules 707, 1001, 1104 through
1107, 2210 and 2211, OCC may not have sufficient resources to satisfy
its obligations and liabilities resulting from such default.
    While Risk Committee approval is not needed to commence a voluntary
tear-up, the Risk Committee would be responsible for determining the
appropriate scope of each voluntary tear-up. To ensure OCC retains
sufficient flexibility to effectively deploy this tool in an extreme
stress event, proposed Rule 1111(c) is drafted to provide the Risk
Committee with discretion to determine the appropriate scope of each
voluntary tear-up.\21\ New Rule 1111(c) also would impose standards
designed to circumscribe the Risk Committee's discretion, requiring
that any determination regarding the scope of a voluntary tear-up shall
(i) be based on 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.
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    \21\ Notwithstanding the discretion that would be afforded by
the text of proposed Rule 1111(c), OCC anticipates that the scope of
voluntary tear-ups likely would be dictated by the cleared contracts
remaining in the portfolio(s) of the defaulted Clearing Member(s).
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    Once the Risk Committee has determined the scope of the Voluntary
Tear-Up, OCC will initiate the call for voluntary tear-ups by issuing a
``Voluntary Tear-Up Notice.'' The Voluntary Tear-Up Notice shall inform
all non-defaulting Clearing Members of the opportunity to participate
in a Voluntary Tear-Up.\22\ The Voluntary Tear-Up Notice would specify
the terms applicable to any voluntary tear-up, including but not
limited to, that no Clearing Member or customers of a Clearing Member
shall be obligated to participate in a voluntary tear-up and that OCC
shall retain full discretion to accept or reject any voluntary tear-up.
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    \22\ Since OCC does not know the identities of Clearing Members'
customers, OCC would depend on each Clearing Member to notify its
customers with positions in scope of the Voluntary Tear-Up of the
opportunity to participate in such tear-up.
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    OCC is not proposing a tear-up process that would require the
imposition of ``gains haircutting'' (i.e., the reduction of unpaid
gains) on a portion of OCC's cleared contracts.\23\

Instead, OCC has determined that its tear-up process--for both
Voluntary Tear-Ups as well as Partial Tear-Ups--should be initiated on
a date sufficiently in advance of the exhaustion of OCC's financial
resources such that OCC would be expected to have adequate remaining
resources to cover the amount it must pay to extinguish the positions
of Clearing Members and customers without haircutting gains.\24\
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    \23\ In general, forced gains haircutting is a tool that can be
more easily applied to products whose gains are settled at least
daily, like futures through an exchange of variation margin, and by
central counterparties with comparatively large daily settlement
flows. Listed options, which constitute the vast majority of the
contracts cleared by OCC, do not have daily settlement flows and any
attempt to reduce the ``unrealized gains'' of a listed options
contract would require the reduction of the option premium that is
embedded within the required margin (such a process would
effectively require haircutting the listed option's initial margin).
    \24\ OCC anticipates that it would determine the date on which
to initiate Partial Tear-Ups by monitoring its remaining financial
resources against the potential exposure of the remaining
unauctioned positions from the portfolio(s) of the defaulted
Clearing Member(s).
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    In OCC's proposed tear-up process, the holders of torn-up positions
would be assigned a Tear-Up Price and OCC would draw on its remaining
financial resources in order to extinguish the torn-up positions at the
assigned Tear-Up Price without forcing a reduction in the amount unpaid
gains on such positions. The proposed changes would provide OCC with
two separate and non-exclusive means of equitably re-allocating the
losses, costs or expenses imposed upon the holders of torn-up positions
as a result of the tear-up(s). First, the proposed changes to Article
VIII would provide OCC discretion to use remaining Clearing Fund
contributions to re-allocate losses imposed on non-defaulting Clearing
Members and customers from such tear-up(s). Second, Rule 1111(a) would
provide that if OCC subsequently recovers from the defaulted Clearing
Member or the estate(s) of the defaulted Clearing Member(s) and the
amount of such recovery exceeds the amount OCC received in voluntary
payments, then non-defaulting Clearing Members and non-defaulting
customers that voluntarily tore-up open positions and incurred losses
from such tear-ups would be repaid from the amount of the recovery in
excess of the amount OCC received in voluntary payments.\25\ If the
amount recovered is less than the aggregate amount of Voluntary Tear-
Up, each non-defaulting Clearing Member and non-defaulting customer
that incurred losses from voluntarily torn-up positions would be repaid
in an amount proportionate to the percentage of its total amount of
losses, costs and fees imposed on Clearing Members or customers as a
result of the Voluntary Tear-Ups.
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    \25\ In order to effect re-allocation of the losses, costs or
expenses imposed upon the holders of torn-up positions, OCC expects
that after it has completed its tear-up process and re-established a
matched book, holders of both voluntarily torn-up and mandatorily
torn-up positions would be provided with a limited opportunity to
re-establish positions in the contracts that were voluntarily or
mandatorily extinguished. After the expiration of such period, OCC
would seek to collect the information on the losses, costs or
expenses that had been imposed on the holders of torn-up positions.
Based on the information collected, OCC would determine whether it
can reasonably determine the losses, costs and expenses sufficiently
to re-allocate such amounts.
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    With respect to Voluntary Tear-Ups, new Rule 1111(h) would clarify
that no action or omission by OCC pursuant to and in accordance with
Rule 1111 shall constitute a default by OCC.
Proposed Addition of Ability To Conduct Partial Tear-Ups
    OCC proposes to add new Rule 1111, which, in relevant part, will
provide the Board with discretion to extinguish the remaining open
positions of any defaulted Clearing Member or customer of such
defaulted Clearing Member(s) (such positions, ``Remaining Open
Positions''), as well as any related open positions as necessary to
mitigate further disruptions to the markets affected by the Remaining
Open Positions (such positions, ``Related Open Positions''), in a
circumstance where a Clearing Member has defaulted and OCC has
determined that, notwithstanding the availability of any remaining
resources under OCC Rules 707, 1001, 1104 through 1107, 2210 and 2211,
OCC may not have sufficient resources to satisfy its obligations and
liabilities resulting from such default (such tear-ups hereinafter
collectively referred to as ``Partial Tear-Ups''). Like the
determination for Voluntary Tear-Ups, the Risk Committee shall
determine the appropriate scope of each Partial Tear-Up and such
determination shall (i) be based on 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.
Once the Risk Committee has determined the scope of the Partial Tear-
Up, OCC will initiate the Partial Tear-Up process by issuing a
``Partial Tear-Up Notice.'' The Partial Tear-Up Notice shall (i)
identify the Remaining Open Positions and Related Open Positions
designated for tear-up, (ii) identify the open positions of non-
defaulting Clearing Members and non-defaulting customers that will be
subject to Partial Tear-Up (such positions, ``Tear-Up Positions''),
(iii) specify the termination price (``Partial Tear-Up Price'') for
each position to be torn-up, and (iv) list the date and time as of
which the Partial Tear-Up will occur.\26\ With regard to the date and
time of a Partial Tear-Up, Rule 1111(d) specifies that the Risk
Committee shall set the date and time. With regard to the Partial Tear-
Up Price, OCC anticipates that it is likely to use the last established
end-of-day settlement price, in accordance with its existing practices
concerning pricing and valuation. However, given that it is not
possible to know in advance the precise circumstances that would cause
OCC to conduct a tear-up, Rule 1111(f) has been drafted to allow OCC to
exercise reasonable discretion, if necessary, in establishing the
Partial Tear-Up Price by some means other than its existing practices
concerning pricing and valuation. Specifically, Rule 1111(f) would
require that OCC, in exercising any such discretion, would act in good
faith and in a commercially reasonable manner to adopt methods of
valuation expected to produce reasonably accurate substitutes for the
values that would have been obtained from the relevant market if it
were operating normally, including but not limited to the use of
pricing models that use the market price of the underlying interest or
the market prices of its components. Rule 1111(f) further specifies
that OCC may consider the same information set forth in subpart (c) of
Section 27, Article VI of OCC's By-Laws.\27\
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    \26\ Since OCC does not know the identities of Clearing Members'
customers, OCC would depend on each Clearing Member to notify its
customers with positions in scope of the Partial Tear-Up of the
possibility of tear-up.
    \27\ In relevant part, subpart (c) reads as follows: ``In
determining a close-out amount, the Corporation may consider any
information that it deems relevant, including, but not limited to,
any of the following: (1) Prices for underlying interests in recent
transactions, as reported by the market or markets for such
interests; (2) quotations from leading dealers in the underlying
interest, setting forth the price (which may be a dealing price or
an indicative price) that the quoting dealer would charge or pay for
a specified quantity of the underlying interest; (3) relevant
historical and current market data for the relevant market, provided
by reputable outside sources or generated internally; and (4) values
derived from theoretical pricing models using available prices for
the underlying interest or a related interest and other relevant
data. Amounts stated in a currency other than U.S. Dollars shall be
converted to U.S. Dollars at the current rate of exchange, as
determined by the Corporation. A position having a positive close-
out value shall be an `asset position' and a position having a
negative close-out value shall be a `liability position.' ''
---------------------------------------------------------------------------

    The scope of any Partial Tear-Up will be determined in accordance
with Rule 1111(e). With respect to the extinguishment of Remaining Open
Positions, OCC will designate Tear-Up Positions in identical Cleared
Contracts and Cleared Securities on the opposite side of the market and
in an aggregate amount equal to that of the Remaining

Open Positions. OCC will only designate Tear-Up Positions in the
accounts of non-defaulting Clearing Members (inclusive of such Clearing
Members' customer accounts) with an open position in the applicable
Cleared Contract or Cleared Security and of non-defaulted customers of
a defaulted Clearing Member. Tear-Up Positions shall be designated and
applied by OCC on a pro rata basis across all the identical positions
in Cleared Contracts and Cleared Securities on the opposite side of the
market in the accounts of non-defaulted Clearing Members and non-
defaulted customers (including the non-defaulted customers of defaulted
Clearing Members).
    Rule 1111(e)(iii) provides that every Partial Tear-Up position is
automatically terminated upon and with effect from the Partial Tear-Up
Time, without the need for any further step by any party to such
Cleared Contract or Cleared Security, and that upon termination, either
OCC or the relevant Clearing Member (as the case may be) shall be
obligated to pay the other the applicable Partial Tear-Up Price. Rule
1111(e)(iii) further provides that the corresponding open position
shall be deemed terminated at the Partial Tear-Up Price.
    Rule 1111(g) provides that to the extent losses imposed upon non-
defaulting Clearing Members and non-defaulting customers resulting from
a Partial Tear-Up can reasonably be determined, the Board may elect to
re-allocate such losses among all non-defaulting Clearing Members
through a special charge to all non-defaulting Clearing Members in an
amount corresponding to each such non-defaulting Clearing Member's
proportionate share of the variable amount of the Clearing Fund at the
time such Partial Tear-Up is conducted.\28\
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    \28\ For the avoidance of doubt, the special charge would be
distinct and separate from a Clearing Member's obligation to satisfy
Clearing Fund assessments, and therefore, would not be subject to
the aforementioned assessment cap in the amount of 200% of a
Clearing Member's then-required contribution to the Clearing Fund.
---------------------------------------------------------------------------

    With respect to Partial Tear-Ups, new Rule 1111(h) would clarify
that no action or omission by OCC pursuant to and in accordance with
Rule 1111 shall constitute a default by OCC.
2. Statutory Basis
    Section 17A(b)(3)(F) of the Securities Exchange Act of 1934
(``Act''),\29\ requires, among other things, that the rules of a
clearing agency be designed to foster cooperation and coordination with
persons engaged in the clearance and settlement of securities
transactions, to remove impediments to and perfect the mechanism of a
national system for the prompt and accurate clearance and settlement of
securities transactions, and, in general, to protect investors and the
public interest. OCC believes that the proposed rule change is
consistent with the requirements of Section 17A(b)(3)(F) of the Act
\30\ and the rules thereunder applicable to OCC for the reasons set
forth below.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78q-1(b)(3)(F).
    \30\ Id.
---------------------------------------------------------------------------

    As stated above, each of the changes is designed to provide OCC
with tools to address the risks OCC might confront in a recovery and
orderly wind-down scenario. In this regard, the proposed changes are
designed to further address the risks of liquidity shortfalls and
credit losses resulting from a Clearing Member default or certain other
loss events and to establish tools to enable OCC to re-establish a
matched book and limit OCC's potential exposure to losses from a
Clearing Member default, in each case as might result from an
unprecedented loss scenario that exceeds OCC's standard risk management
and default management procedures. OCC's process in crafting the
proposed changes was informed by published guidance from OCC's primary
regulators (the Commission and the Commodity Futures Trading
Commission), the publications of key international organizations
(including the Bank for International Settlements, the International
Organization of Securities Commissions and the Financial Stability
Board) and the publications of key industry trade organizations. OCC's
proposal was further informed by conversations with, among others,
OCC's Board, OCC's Risk Committee, Clearing Members and market
participants.
    Informed by these perspectives, OCC has crafted the proposed
changes with the aim of enhancing its ability to address an
unprecedented loss event but also, to the extent possible, providing a
reasonable amount of certainty to Clearing Members, customers and other
stakeholders about the potential consequences of such an event and the
resources and tools that would be expected to be available to OCC in
support of its clearing operations.\31\ Accordingly, the proposed
changes should leave Clearing Members, customers and other stakeholders
in a position to better evaluate the risks and benefits of clearing in
order to facilitate their own risk management, and to the extent
applicable, their own regulatory and capital considerations. The
proposed changes also seek to avoid a result that would force only
particular clearing participants to shoulder certain losses in an
extreme stress scenario (i.e., holders of positions extinguished in
Partial Tear-Ups),\32\ and instead leaves OCC and its Board with
discretionary tools that could provide a more equitable method of
allocating the losses from such an event more broadly, consistent with
the general principle of mutualized loss upon which central clearing
rests. In this regard, OCC believes the proposed changes foster
cooperation and coordination with participants in the clearing system,
consistent with Section 17A(b)(3)(F) of the Act.\33\
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    \31\ OCC notes that the very nature of an extreme stress and
unprecedented loss event means that its impact is difficult to
predict and quantify in advance.
    \32\ Absent a means of re-allocating the potential losses, costs
and fees imposed upon holders of positions extinguished during tear-
ups, the holders of such positions would be left to individually
address such losses, costs and fees.
    \33\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As stated above, the proposed changes are designed to enable OCC to
further address the risks of liquidity shortfalls and credit losses
resulting from a Clearing Member default or certain other loss events
and to re-establish a matched book and limit OCC's potential exposure
to losses from a Clearing Member default, in each case as might result
from an unprecedented loss scenario that exceeds OCC's standard risk
management and default management procedures. OCC believes that the
proposed changes will facilitate its ability to fully allocate, and
ultimately extinguish, the loss so that it has a better opportunity of
withstanding an extreme stress scenario without sacrificing its
viability as a going concern or its ability to continue to provide its
critical clearing services. In this regard, OCC believes that the
proposed changes remove impediments to and perfect the mechanism of a
national system for the prompt and accurate clearance and settlement of
securities transactions, consistent with Section 17A(b)(3)(F) of the
Act.\34\
---------------------------------------------------------------------------

    \34\ Id.
---------------------------------------------------------------------------

    The proposed changes are designed to enhance the stability of the
clearing system generally and are aimed at ensuring that OCC has
adequate tools and resources to better protect market participants from
the risks of extreme stress scenarios and unprecedented loss events. In
this regard, OCC believes that the proposed changes are reasonably
designed to protect investors and the public interest, consistent with
Section 17A(b)(3)(F) of the Act.\35\
---------------------------------------------------------------------------

    \35\ Id.

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

    The proposed changes also are designed to further OCC's compliance,
in whole or in part, with the provisions of the Commission's rules
discussed immediately below:
Recovery and Orderly Wind-Down
    In relevant part, Rule 17Ad-22(e)(3)(ii) requires that each CCA
``establish, implement, maintain and enforce written policies and
procedures reasonably designed to . . . plan[ ] for the recovery and
orderly wind-down of the [CCA] necessitated by credit losses, liquidity
shortfalls, losses from general business risk, or any other losses.''
\36\ As stated above, each of the proposed changes is designed to
provide OCC with tools to address the risks OCC might confront in a
recovery and orderly wind-down scenario.\37\ Consistent with the
requirements of Rule 17Ad-22(e)(3)(ii), the proposed tools would enable
OCC to better address the risks of liquidity shortfalls and credit
losses resulting from a Clearing Member default or certain other loss
events and, if necessary, to ultimately re-establish a matched book in
a recovery or orderly wind-down scenario.\38\ In this context, the
proposed changes serve as a critical component of OCC's recovery and
orderly wind-down plan. As a result, in OCC's view, the proposed
changes are consistent with the requirements of Rule 17Ad-22(e)(3)(ii)
as to the recovery and orderly wind-down plan.\39\
---------------------------------------------------------------------------

    \36\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \37\ Indeed, the OCC's separately filed recovery and orderly
wind-down plan identifies OCC's assessment powers, ability to call
for voluntary payments, ability to call for Voluntary Tear-Ups and
ability to impose Partial Tear-Ups among its ``Recovery Tools.'' OCC
has filed a proposed rule change with the Commission in connection
with this proposal. See SR-OCC-2017-021.
    \38\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \39\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------

Allocation of Credit Losses Above Available Resources
    In relevant part, Rule 17Ad-22(e)(4)(viii) requires that each CCA
``establish, implement, maintain and enforce written policies and
procedures reasonably designed to . . . [a]ddress[ ] allocation of
credit losses the [CCA] may face if its collateral and other resources
are insufficient to fully cover its credit exposures . . .'' \40\ The
proposed changes would provide OCC with three distinct tools that could
be used to allocate any credit losses OCC may face in excess of
collateral and other resources available to OCC. First, new Rule 1009
would provide a framework by which OCC could receive voluntary payments
in a circumstance where a Clearing Member has defaulted and OCC has
determined that, notwithstanding the availability of any remaining
resources under OCC Rules 707, 1001, 1104 through 1107, 2210 and
2211,\41\ OCC may not have sufficient resources to satisfy its
obligations and liabilities resulting from such default. Second, new
Rule 1111 would establish a framework by which non-defaulting Clearing
Members and non-defaulting customers of Clearing Members could be given
an opportunity to participate in Voluntarily Tear-Ups in a circumstance
where a Clearing Member has defaulted and OCC has determined that,
notwithstanding the availability of any remaining resources under OCC
Rules 707, 1001, 1104 through 1107, 2210 and 2211, OCC may not have
sufficient resources to satisfy its obligations and liabilities
resulting from such default. Finally, new Rule 1111 also would provide
the Board with discretion to mandatorily tear-up Remaining Open
Positions and Related Open Positions, in a circumstance where a
Clearing Member has defaulted and OCC has determined that,
notwithstanding the availability of any remaining resources under OCC
Rules 707, 1001, 1104 through 1107, 2210 and 2211, OCC may not have
sufficient resources to satisfy its obligations and liabilities
resulting from such default.\42\ In OCC's view, each of these tools
could be deployed by OCC, if necessary, to allocate credit losses in
excess of the collateral and other resources available to OCC, in
accordance with Rule 17Ad-22(e)(4)(viii).\43\
---------------------------------------------------------------------------

    \40\ 17 CFR 240.17Ad-22(e)(v)(viii).
    \41\ Rule 707 addresses the treatment of funds in a Clearing
Member's X-M accounts. Rule 1001 addresses the size of OCC's
Clearing Fund and the amount of a Clearing Member's contribution.
Rules 1104 through 1107 concern the treatment of the portfolio of a
defaulted Clearing Member. Rules 2210 and 2211 concern the treatment
of Stock Loan positions of a defaulted Clearing Member.
    \42\ Rule 1111(g), which would provide the Board authority to
equitably re-allocate losses, costs and fees directly imposed as a
result of a Partial Tear-Up among all non-defaulting Clearing
Members through a special charge, would serve as a discretionary
tool to redistribute the credit losses allocated through Partial
Tear-Up.
    \43\ 17 CFR 240.17Ad-22(e)(v)(viii).
---------------------------------------------------------------------------

Replenishment of Financial Resources Following a Default
    In relevant part, Rule 17Ad-22(e)(4)(ix) requires that each CCA
``establish, implement, maintain and enforce written policies and
procedures reasonably designed to . . . [d]escrib[e] the [CCA's]
process to replenish any financial resources it may use following a
default or other event in which use of such resources is
contemplated.'' \44\ OCC's Clearing Members have a standing obligation
to replenish the Clearing Fund following any proportionate charge. The
proposed changes would establish a rolling cooling-off period,
triggered by the payment of a proportionate charge against the Clearing
Fund, during which period the aggregate liability of a Clearing Member
to replenish the Clearing Fund (inclusive of assessments) would be 200%
of the Clearing Member's required contribution as of the time
immediately preceding the triggering proportionate charge. Compared to
the current requirement under which a Clearing Member may cap its
liability to proportionate charges at an additional 100% of its then-
required contribution, a Clearing Member would instead be permitted to
cap its liability for proportionate charges at an additional 200% of
its then-required Clearing Fund contribution.
---------------------------------------------------------------------------

    \44\ 17 CFR 240.17Ad-22(e)(4)(ix).
---------------------------------------------------------------------------

    OCC believes that the proposed approach improves predictability for
OCC and for Clearing Members regarding the size of Clearing Fund
contributions that are likely to be subject to assessments for
proportionate charges. Additionally, replacing the five business day
withdrawal period with the withdrawal period commensurate with the
cooling-off period (which, as proposed would be a minimum of fifteen
calendar days) would give Clearing Members a more reasonable period in
which to meet the wind-down and termination requirements necessary to
cap their liability. OCC believes that this would afford them greater
certainty regarding their maximum liability with respect to the
Clearing Fund during extreme stress events, which in turn, facilitates
Clearing Members' management of their own risk management, and to the
extent applicable, regulatory capital considerations. And OCC believes
this increased predictability would also be beneficial to OCC by
helping it to more reliably understand the amount of Clearing Fund
contributions that will likely be available to it after a proportionate
charge is assessed.\45\
---------------------------------------------------------------------------

    \45\ Under the existing approach, it is less certain from OCC's
standpoint regarding whether Clearing Members would reasonably be
able to cap their liability to proportionate charges within five
business days.
---------------------------------------------------------------------------

    OCC believes that the relative certainty provided by the proposed
cooling-off period and 200% cap on assessments ultimately could reduce
the risks of successive or ``cascading'' defaults, in which the
financial demands on remaining non-defaulting Clearing Members to
continually replenish OCC's Clearing Fund (and similar guaranty funds
at other CCPs to

which such Clearing Members might belong) have the effect of further
weakening such Clearing Members to the point of default. In this
regard, the proposed changes are designed to provide OCC, Clearing
Members and other stakeholders with sufficient time to manage the
ongoing default(s) without further aggravating the extreme stresses
facing market participants.
    OCC recognizes that the proposed changes would limit the maximum
amount of Clearing Fund resources that could be available to OCC in an
extreme stress scenario, which introduces the possibility, however
remote, that the proposed 200% cap ultimately could be reached. If
during any cooling-off period the amount of aggregate proportionate
charges against the Clearing Fund approaches the 200% cap, the amount
remaining in the Clearing Fund may no longer be sufficient to comply
with the applicable minimum regulatory financial resources requirements
in the CCAs. In any such event, OCC's existing authority under Rule 603
would permit OCC to call on participants for additional initial margin,
which could ensure that OCC's minimum financial resources remain in
excess of applicable CCA requirements.\46\ OCC recognizes that the
imposition of increased margin requirements could have an immediate
pro-cyclical impact on participants (and consequential impacts on the
broader financial system) that is potentially greater than the impact
of replenishing the Clearing Fund. These risks would be limited to a
specific extreme stress event and could be mitigated by certain
factors. First, OCC, in coordination with its regulators, would
carefully evaluate any potential increase in the context of then-
existing facts and circumstances. Second, during the cooling-off
period, Clearing Members and their customers will have the opportunity
to reduce or rebalance their respective portfolios in order to mitigate
their exposures to stress losses and initial margin increases. Finally,
since initial margin is not designed to be subject to mutualized loss,
the risk of loss faced by Clearing Members for amounts posted as
additional margin would be substantially less than for replenishments
of the Clearing Fund.
---------------------------------------------------------------------------

    \46\ Rule 603 provides that ``[t]he Risk Committee may, from
time to time, increase the amount of margin which may be required in
respect of a cleared contract, open short position or exercised
contract if, in its discretion, it determines that such increase is
advisable for the protection of [OCC], the Clearing Members or the
general public.''
---------------------------------------------------------------------------

    Given the products cleared by OCC and the composition of its
clearing membership, OCC has determined that a minimum 15-calendar day
cooling-off period, rolling up to a maximum of 20 calendar days, is
likely to be a sufficient amount of time for OCC to manage the ongoing
default(s) and take necessary steps in furtherance of stabilizing the
clearing system. Further, through conversations with Clearing Members,
OCC believes that the proposed cooling-off period is likely to be a
sufficient amount for Clearing Members (and their customers) to orderly
reduce or rebalance their positions, in an attempt to mitigate stress
losses and exposure to potential initial margin increases as they
navigate the stress event. Through conversations with Clearing Members,
OCC also believes that the proposed cooling-off period is likely to be
a sufficient amount for certain Clearing Members to orderly close-out
their positions and transfer customer positions as they withdraw from
clearing membership. OCC believes the proposed cooling-off period,
coupled with the other proposed changes to OCC's assessment powers, is
likely to provide Clearing Members with an adequate measure of
stability and predictability as to the potential use of Clearing Fund
resources, which OCC believes removes the existing incentive for
Clearing Members to withdraw following a proportionate charge.\47\
---------------------------------------------------------------------------

    \47\ OCC initially considered a fixed 15-calendar day cooling-
off period; however, OCC concluded that a fixed 15-calendar day
cooling-off period may increase the risks of successive or cascading
Clearing Member defaults and may perversely incentivize Clearing
Members to seek to withdraw from clearing membership. Through
conversations with Clearing Members, OCC believes that these
potentially disruptive consequences are mitigated by the proposed
rolling cooling-off period.
---------------------------------------------------------------------------

    In light of the foregoing, OCC believes that the proposed changes
would enhance and strengthen its process to replenish the Clearing Fund
following a default or other event in which use of the Clearing Fund is
contemplated, in accordance with Rule 17Ad-22(e)(4)(ix).\48\
---------------------------------------------------------------------------

    \48\ 17 CFR 240.17Ad-22(e)(4)(ix).
---------------------------------------------------------------------------

Replenishment of Liquid Resources
    In relevant part, Rule 17Ad-22(e)(7)(ix) requires that each CCA
``establish, implement, maintain and enforce written policies and
procedures reasonably designed to . . . [d]escrib[e] the [CCA's]
process to replenish any liquid resources that the clearing agency may
employ during a stress event.'' \49\ Since the use any part of the cash
portion of OCC's Clearing Fund would constitute a depletion of one of
OCC's liquid resources, OCC's assessment power, discussed above, is the
primary means of replenishing the Clearing Fund cash that OCC used to
address the stress event. For the same reasons stated above, OCC
believes that the proposed changes enhance and strengthen its process
to replenish the Clearing Fund, as necessary, following a default or
other stress event in which the Clearing Fund is used, and therefore,
OCC views the proposed changes as consistent with Rule 17Ad-
22(e)(7)(ix).\50\
---------------------------------------------------------------------------

    \49\ 17 CFR 240.17Ad-22(e)(7)(ix).
    \50\ 17 CFR 240.17Ad-22(e)(7)(ix).
---------------------------------------------------------------------------

Timely Action To Contain Losses
    In relevant part, Rule 17Ad-22(e)(13) requires that each CCA
``establish, implement, maintain and enforce written policies and
procedures reasonably designed to . . . [e]nsure the [CCA] has the
authority and operational capacity to take timely action to contain
losses and liquidity demands and continue to meet its obligations . .
.'' \51\ The proposed changes would provide OCC with the authority to
call for Voluntary Tear-Ups and OCC's Board with the discretion to
impose Partial Tear-Ups, which would provide OCC with authority
necessary to extinguish certain losses (and attendant liquidity
demands) thereby potentially enabling OCC to continue to meet its
remaining obligations to participants. As designed, Voluntary Tear-Ups
and Partial Tear-Ups would be initiated on a date sufficiently in
advance of the exhaustion of OCC's financial resources such that OCC is
expected to have adequate resources remaining to cover the amount it
must pay to extinguish the positions of Clearing Members and customers
without haircutting gains. Accordingly, OCC believes that its authority
and capacity to conduct a Partial Tear-Up should be timely, relative to
the adequacy of OCC's remaining financial resources. Finally, OCC
believes it has the operational and systems capacity sufficient to
support the proposed changes, and OCC's policies and procedures will be
updated accordingly to reflect the existence of these new tools. As a
result, OCC believes that the proposed changes conform to the relevant
requirements in Rule 17Ad-22(e)(13).\52\
---------------------------------------------------------------------------

    \51\ 17 CFR 240.17Ad-22(e)(13).
    \52\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------

Public Disclosure of Key Aspects of Default Rules
    In relevant part, Rule 17Ad-22(e)(23)(i) requires that each CCA
``establish, implement, maintain and enforce written policies and
procedures reasonably designed to . . . [p]ublicly disclos[e] all
relevant rules and material procedures, including key aspects of its
default rules and procedures.'' \53\ As

stated above, each of the tools discussed herein are contemplated to be
deployed by OCC if an extreme stress event has placed OCC into a
recovery or orderly wind-down scenario, and therefore, the tools
discussed herein constitute key aspects of OCC's default rules. By
incorporating the proposed changes into OCC's Rules and By-Laws, as
further supplemented by the discussion in OCC's public rule filing, OCC
believes that proposed changes would conform to the relevant
requirements in Rule 17Ad-22(e)(23)(i).\54\
---------------------------------------------------------------------------

    \53\ 17 CFR 240.17Ad-22(e)(23)(i).
    \54\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------

Sufficient Information Regarding the Risks, Fees and Costs of Clearing
    In relevant part, Rule 17Ad-22(e)(23)(ii) requires that each CCA
``establish, implement, maintain and enforce written policies and
procedures reasonably designed to . . . [p]rovid[e] sufficient
information to enable participants to identify and evaluate the risks,
fees, and other material costs they incur by participating in the
covered clearing agency.'' \55\ The proposed changes would clearly
explain to Clearing Members and market participants that an extreme
stress scenario could result in the use--and theoretically the
exhaustion--of OCC's financial resources, inclusive of OCC's proposed
assessment powers. Proposed changes to Section 6, Article VIII of OCC's
By-Laws would explain Clearing Members' replenishment obligation and
liability for assessments. The proposed changes also would clearly
explain, through proposed Rules 1009 and 1111, that as OCC nears the
exhaustion of its assessment powers, Clearing Members may be asked for
voluntary payments and, if necessary, Clearing Members and customers
may be asked to participate in a Voluntary Tear-Up and/or subject to a
Partial Tear-Up. Proposed Rules 1009(b) and 1111(a)(ii) also would make
clear that Clearing Members that made voluntary payments and Clearing
Members and customers whose tendered positions were extinguished in the
Voluntary Tear-Up would be prioritized in the distribution of any
recovery from the defaulted Clearing Member(s). Proposed changes to
Article VIII would clarify that the Clearing Fund contributions
remaining after OCC has conducted a Voluntary Tear-Up or Partial Tear-
Up could be used to compensate the non-defaulting Clearing Members and
non-defaulting customers for the losses, costs or fees imposed upon
them as a result of such Voluntary Tear-Up or Partial Tear-Up. Proposed
Rule 1111(g) would make clear that, following a Partial Tear-Up, OCC's
Board may seek to equitably re-allocate losses, costs and fees directly
imposed as a result of a Partial Tear-Up among all non-defaulting
Clearing Members through a special charge. By incorporating the
proposed changes into OCC's Rules and By-Laws, as further supplemented
by the discussion in OCC's public rule filing, OCC believes that is has
provided sufficient information to enable participants to identify and
evaluate the risks, fees, and other material costs they could incur by
participating OCC, consistent with the requirements in Rule 17Ad-
22(e)(23)(ii).\56\
---------------------------------------------------------------------------

    \55\ 17 CFR 240.17Ad-22(e)(23)(ii).
    \56\ 17 CFR 240.17Ad-22(e)(23)(ii).
---------------------------------------------------------------------------

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

    Section 17A(b)(3)(I) of the Act \57\ requires that the rules of a
clearing agency not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act. OCC does not
believe the proposed rule change would have any impact or impose any
burden on competition. The primary purpose of the proposed changes is
to make certain revisions to OCC's Rules and By-Laws Laws that are
designed to enhance OCC's existing tools to address the risks of
liquidity shortfalls and credit losses and to establish tools by which
OCC could re-establish a matched book following a default. As explained
above, each of the tools proposed herein is contemplated to be deployed
by OCC in an extreme stress event that has placed OCC into a recovery
or orderly wind-down scenario. The proposed rule change is intended to
provide Clearing Members, market participants and other stakeholders
with greater certainty as to their liabilities and potential exposure
to OCC in the event of an unprecedented loss scenario. OCC does not
believe that the proposed changes would discriminatorily impact any
Clearing Member's access to OCC's services or unnecessarily
disadvantage or favor any particular user in relationship to another
user. OCC recognizes that the nature of a Partial Tear-Up means that
only particular Clearing Members and market participants holding
certain positions may be impacted; however, the risk of Partial Tear-
Ups is extremely remote, and even then, the proposed changes seek to
provide means of equitably re-allocating the losses, costs and fees
imposed by Voluntary Tear-Up or Partial Tear-Up. Therefore, OCC
believes that the proposed changes would not have any impact or impose
any burden on competition.
---------------------------------------------------------------------------

    \57\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

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

    Written comments were not and are not intended to be solicited with
respect to the proposed rule change, and none have been received.

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

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commissions internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include
File Number SR-OCC-2017-020 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2017-020. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the

Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for website viewing and printing in the Commission's Public
Reference Room, 100 F Street NE, Washington, DC 20549, on official
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of
such filing also will be available for inspection and copying at the
principal office of OCC and on OCC's website at https://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_17_020.pdf.
    All comments received will be posted without change. Persons
submitting comments are cautioned that we do not redact or edit
personal or identifying information from comment submissions. You
should submit only information that you wish to make available
publicly.
    All submissions should refer to File Number SR-OCC-2017-020 and
should be submitted on or before January 16, 2018.

    For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\58\
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    \58\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-27691 Filed 12-22-17; 8:45 am]
BILLING CODE 8011-01-P