[Federal Register Volume 88, Number 54 (Tuesday, March 21, 2023)]
[Notices]
[Pages 17046-17065]
[FR Doc No: 2023-05689]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97150; File No. SR-OCC-2023-002]

Self-Regulatory Organizations; the Options Clearing Corporation;
Notice of Filing of Proposed Rule Change by the Options Clearing
Corporation Concerning the Amendment of Its Clearing Membership
Standards

March 15, 2023.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on March 6, 2023, the Options Clearing Corporation
(``OCC'') filed with the Securities and Exchange Commission (``SEC'' or
``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 would concern proposed changes to OCC's
Clearing Membership Standards. The proposed rule change is submitted in
Exhibits 5A and 5B to SR-OCC-2023-002. Material proposed to be added to
OCC's By-Laws or Rules is marked by underlining and material proposed
to be deleted is marked by strikethrough text. All terms with initial
capitalization that are not otherwise defined herein have the same
meaning as set forth in OCC's By-Laws and Rules.\3\
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    \3\ OCC's current By-Laws and Rules can be found on OCC's public
website: https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

    In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. OCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

(1) Purpose
    The Options Clearing Corporation (``OCC'') acts as the central
counterparty clearing house (``CCP'') for all U.S. option exchanges and
certain U.S. futures exchanges. OCC provides clearing services for
options on equities, indices, Exchange Traded Funds (``ETFs'') and for
certain futures products and options on futures products. Organizations
become OCC Clearing Members to facilitate the clearing and settlement
of their customer transactions or proprietary transactions through OCC.
OCC also provides certain Clearing Members with the ability to novate
stock loan transactions by acting as the counterparty to both sides of
the transactions, guaranteeing that these obligations are fulfilled.
    Over the past two decades, industry best practices as well as
financial, operational, and systems/data obligations applicable to
market participants and financial entities have continuously evolved.
As part of this evolution, OCC was designated in 2012 as a systemically
important financial market utility, or ``SIFMU,'' and along with this
designation came heightened regulatory expectations. With these
heightened expectations, there has been an increased focus on OCC and
Clearing Member liquidity resources and uses, the ability to meet
obligations during stressed market conditions, the ability to meet
larger margin and Clearing Fund obligations due to growth in options
trading, and a requirement to have a documented and robust risk
management framework. After a comprehensive review of OCC's By-Laws and
Rules in conjunction with changes in regulations, member risk practices
and processes as well as other CCP Clearing Member standards, OCC
determined it was necessary to amend, enhance and reorganize certain
Clearing Member requirements to keep pace with these changes and ensure
OCC continues to maintain a high level of market stability.
    OCC's proposed changes to membership standards comprehensively
address the heightened expectations around financial, operational and
systems/data obligations. More specifically, the proposed rule changes
would amend OCC's By-Laws and Rules addressing OCC's membership
standards, including but not limited to regulation and regulatory
authorization, governance, financial condition, financial reporting,
staffing, third-party arrangements, general operational capabilities,
statutory disqualifications, notification requirements and protective
measures, as well as the minor rule violation framework. The proposed
rule changes would improve OCC's existing financial and operational
membership standards to further mitigate counterparty credit risk
introduced by Clearing Members.
    The proposed rule changes take a holistic review of existing
membership standards, as opposed to one-off changes in response to new
regulatory requirements. The proposed rule changes will enhance OCC's
risk mitigation processes and practices by, for example, requiring
Clearing Members to meet higher standards intended to mitigate risk,
e.g., through increased minimum capital requirements and heightened
requirements around the qualification of financial, operational, and
risk management personnel. Additionally, by proposing rules to expand
OCC membership to new entity types and in additional jurisdictions, OCC
will have the potential to increase the diversity of its Clearing
Member population. Furthermore, proposing more robust notification
requirements and expanded protective measures will allow more assurance
that OCC is able to protect itself, its members, and the general public
from emerging counterparty risks. OCC also believes that the proposed
rule changes will provide greater clarity to Clearing Members and the
broader public through the consolidation and simplification of OCC's
membership requirements in OCC's By-Laws and Rules.
    In particular, while the membership standards that OCC proposes to
change are described in further detail herein, thematically, they
consist of the following:
     expanding the list of institutions that may be eligible
for membership as a Clearing Member; \4\
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    \4\ See infra description of proposed Rule 201.
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     expanding the available regulatory authorizations that may
be granted to each type of institution that has been admitted to become
a Clearing Member; \5\
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    \5\ Id.
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     streamlining the membership application review and
admission procedures; \6\
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    \6\ See infra descriptions of proposed Rules 203 and 204.
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     amending the financial responsibility standards by
consolidating initial and ongoing standards, raising the capital floor
for existing categories of institutions and

adopting capital standards for new categories of institutions; \7\
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    \7\ See infra description of proposed Rule 301.
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     amending the event-based and periodic reporting
requirements for Clearing Members; \8\
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    \8\ See infra descriptions of proposed Rules 306, 306A and 306B.
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     amending Clearing Member staffing requirements; \9\
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    \9\ See infra descriptions of proposed Rules 302 and 303.
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     amending books and records requirements; \10\
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    \10\ See infra description of proposed Rule 208.
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     amending operational capability standards; \11\
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    \11\ See infra description of proposed Rule 302 and 303.
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     revising the process by which OCC reviews a notification
that the Clearing Member is subject to statutory disqualification; \12\
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    \12\ See infra descriptions of proposed Rules 204, 306A and 308.
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     updating the minor rule violation disciplinary process;
\13\ and
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    \13\ See infra description of proposed Rule 1203.
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     providing various other clarifying changes.
    The proposed rule change generally would reflect each of these
changes in the By-Laws and the Rules by modifying the provisions
currently set forth in Article V of the By-Laws and Chapters II and III
of the Rules and consolidating such provisions in new Chapters II and
III of the Rules.\14\ Below is a description of the proposed changes
under the section headers reflecting the proposed new rules in Chapters
II and III.\15\
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    \14\ In addition, a minor subset of the changes would appear in
various other portions of the Rules, including Rules 101, 609, 1006,
1203, and 2201. The proposed rule change would eliminate Article V
of the By-Laws.
    \15\ Id.
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Proposed Rule 201--Eligibility
Paragraphs (a) and (b)--Types of Memberships and Activities
    Types of Clearing Members. Existing Article V of the By-Laws
currently permits three different types of institutions to be eligible
for clearing membership: (i) a broker-dealer registered in such
capacity under section 15(b)(1) or (2) of the Exchange Act (a ``fully
registered broker-dealer''); (ii) a futures commission merchant (an
``FCM'') registered in such capacity under section 4f(a)(1) of the
Commodity Exchange Act (the ``CEA'') (a ``fully registered FCM''); and
(iii) a Non-U.S. Securities Firm,\16\ including but not limited to a
Canadian investment dealer authorized and regulated in such capacity by
the Investment Industry Regulatory Organization of Canada
(``IIROC'').\17\
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    \16\ Existing Article I of the By-Laws presently defines ``Non-
U.S. Securities Firm,'' in relevant part, as a ``securities firm:
(1) formed and operating under the laws of a country other than the
United States; (2) with its principal place of business in that
country; and (3) that is subject to the regulatory authority of that
country's government or an agency or instrumentality thereof, or
subject to the regulatory authority of an independent organization
or exchange in that country. The term ``Non-U.S. Securities Firm''
shall not include any broker-dealer registered, or required to be
registered, with the Securities and Exchange Commission pursuant to
section 15 of the Securities Exchange Act of 1934, as amended or any
futures commission merchant registered, or required to be
registered, as such pursuant to section 4d of the Commodity Exchange
Act, as amended.'' Under the proposed rule change, the provisions of
this definition would be moved to Rule 101. See infra discussion on
Additional Proposed Changes to Terms.
    \17\ The proposed rule change would incorporate in Rule 101 the
definition of ``Canadian Investment Dealer'' as a Non-U.S.
Securities Firm formed and operating under the laws of Canada or a
province or territory thereof that is investment dealer under such
laws, that is a dealer member of IIROC, and that has its principal
place of business in Canada.
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    The proposed rule change would relocate the list of eligible
institutions from Article V of the By-Laws to new Rule 201(a)(1)
through (a)(3) (including a minor clarification to specifically
reference Canadian Investment Dealers in proposed subparagraph (a)(3))
and expand the list of eligible institutions to include certain banks.
Specifically with respect to banks, proposed Rule 201(a)(4) would
provide that the following banks are eligible to become a Clearing
Member: (i) a U.S. national bank registered with the Office of the
Comptroller of the Currency for full-service operations; (ii) a U.S.
state-chartered bank that is a member of the Federal Reserve System;
and (iii) a similar non-U.S. bank registered with its home country
national regulatory authority that conducts its activity with OCC
through a Federal or State Branch or Agency (as defined in the
International Banking Act of 1978) located in the United States
(collectively, the ``eligible banks''). In order to be eligible, the
bank must provide adequate assurance to OCC that it does not engage in
activity that would require registration as a broker-dealer, FCM or any
other relevant registration status. Such assurance would help ensure
that an eligible bank is not violating applicable laws with respect to
failing to register as a financial intermediary or any otherwise.
Likewise, the bank must provide adequate assurance to OCC that it is
not prohibited from contributing to OCC's Clearing Fund. Additionally,
as a result of the relocation of Section 1 of Article V to proposed
Rules, removal of reference to the first two sentences of Section 1 of
Article V must be moved from Section 1 of Article XI.\18\
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    \18\ Section 1 of Article XI, which requires approval of holders
of OCC Common Stock for amendment to certain By-Law provisions as
named in that section, states that stockholder approval is required
to amend the first two sentences of Section 1 of Article V of OCC's
By-Laws. With the relocation of Section 1 of Article V to proposed
OCC Rules, shareholder consent to amend the first two sentences of
Section 1 of Article V will no longer be required and therefore
Section 1 of Article XI must be amended to remove reference to the
first two sentences of Section 1 of Article V.
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    Types of Activities. Various provisions in Article V of the By-Laws
set forth the categories of products and other regulatory
authorizations that each type of institution that is a Clearing Member
may engage in. As a general matter, the proposed rule change would
incorporate such provisions in new Rule 201(b) (and Rule 302(e) with
respect to Stock Loan programs), subject to minor modifications. More
specifically:
     proposed Rule 201(b)(1) would provide that transactions in
options other than over-the-counter (``OTC'') index options, futures
options or commodity options may be cleared by a Clearing Member that
is (i) a fully-registered broker-dealer, (ii) a Canadian Investment
Dealer or other Non-U.S. Securities Firm, or (iii) an eligible bank;
     proposed Rule 201(b)(2) would provide that transactions in
commodity futures, options and commodity futures options may be cleared
by a Clearing Member that is (i) a fully registered FCM or (ii)
otherwise exempt from such registration under the CEA and regulations
of the Commodity Futures Trading Commission (the ``CFTC'');
     proposed Rule 201(b)(3) would provide that security
futures transactions may be cleared by a Clearing Member that is (i) a
fully registered broker-dealer that is also (A) a fully registered FCM,
(B) a notice-registered as an FCM under section 4f(a)(2) of the CEA (a
``notice-registered FCM'') or (C) not required to register as an FCM
under the CEA and the regulations of the CFTC, (ii) a fully registered
FCM that is notice-registered as a broker-dealer under section
15(b)(11)(A) of the Exchange Act (a ``notice-registered broker-
dealer''), (iii) a Canadian Investment Dealer or other Non-U.S.
Securities Firm, or (iv) an eligible bank;
     proposed Rule 201(b)(6) would provide that OTC index
options transactions may be cleared by a Clearing Member that (i) is a
fully registered broker-dealer, a Canadian Investment Dealer or other
Non-U.S. Securities Firm or an eligible bank, (ii) executes and
maintains in effect the relevant agreements and other

documents required by OCC, (iii) is a user of or participant in an OTC
Trade Source for the purpose of affirming and submitting confirmed
trades to OCC for clearance and (iv) meets such other requirements as
OCC may specify;
     proposed Rule 201(b)(5) would provide that Stock Loans
(which includes both Hedge Loans and Market Loans under the Stock Loan/
Hedge Program and the Loan Market program, respectively) may be cleared
by a Clearing Member that is (i) a fully-registered broker-dealer, (ii)
a Canadian Investment Dealer or other Non-U.S. Securities Firm or (iii)
an eligible bank;
     proposed Rule 302(f)(1) would provide that a Clearing
Member participating in the Stock Loan/Hedge Program must (i) be a
member of The Depository Trust Company (``DTC'') or be a Canadian
Clearing Member on behalf of which the CDS Clearing and Depository
Services Inc. (``CDS'') maintains an identifiable sub-account in a CDS
account at the DTC and (ii) execute such agreements and other documents
required by OCC; \19\ and
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    \19\ See infra discussion on proposed Rule 302.
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     proposed Rule 302(f)(2) would provide that a Clearing
Member participating in the Loan Market program must meet the Stock
Loan/Hedge Program participation requirements set forth above and (i)
be a U.S. Clearing Member or Clearing Member from any foreign country
or jurisdiction approved by the Risk Committee, (ii) be a subscriber to
such Loan Market with full access to services provided by the Loan
Market, (iii) be a member of the DTC that has provided the DTC with
written authorization to honor instructions issued by OCC against such
Clearing Member's account at the DTC and (iv) execute such agreements
and other documents required by OCC.\20\
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    \20\ Id.
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    Importantly, proposed Rule 201 would provide additional
clarifications. In particular, proposed Rule 201(a)(4)(i) and (a)(5)(i)
would restrict eligible banks to clear the products and participate in
the programs listed above on a proprietary basis only. In addition,
proposed Rule 201(b) would continue to require that Clearing Members be
in compliance with all registration and other regulatory requirements
applicable to clearing particular product types. Similarly, proposed
Rule 201(b)(4) would maintain the existing requirement (relocated from
Article V, Section 1(b) of the By-Laws) that no notice-registered
broker-dealer may clear transactions or carry positions in cleared
securities other than security futures. These clarifications are
intended, in part, to help prevent a Clearing Member from violating the
Exchange Act, the CEA or other applicable laws by acting as an
unregistered intermediary on OCC.
    Separately, similar to existing Article V, Section 1, paragraph (d)
of the By-Laws, proposed Rule 201(b)(2) would require a Clearing Member
that holds positions in physically settled futures or futures options
other than security futures to be a member of the Exchange on which the
products are traded.
Paragraph (c)--Approval Required for Each Type of Product
    The proposed rule change would adopt as new Rule 201(c) the
provisions currently set forth in existing Article V, Section 1,
paragraph (c) of the By-Laws without any changes. Specifically, new
Rule 201(c) would provide that the procedures of OCC may provide that a
Clearing Member may not clear transactions in a particular type of
product unless, in addition to satisfying any specific requirements
applicable to such type of product set forth in the By-Laws and Rules,
OCC has specifically approved the Clearing Member to clear such type of
product.
Paragraphs (d) and (e)--Additional Standards
    The proposed rule change would adopt as new Rules 201(d) and (e) a
portion of the provisions currently set forth in existing Article V,
Section 1, paragraph (a) and Interpretation and Policy .04 of the By-
Laws with minor changes to reflect that the provisions apply to all
Clearing Members (and not simply to applicants). The proposed rule
change also would modify the provisions to specifically reference risk
management capabilities and other standards as set forth in the Rules
or such other qualifications and standards as OCC may promulgate.
    Proposed Rule 201(d) would require each Clearing Member to meet
such non-discriminatory standards of financial responsibility,
operational capability, risk management capability, experience and
competence as may from time to time be prescribed in the rules of OCC.
Proposed paragraph (e) also would provide that in addition to the
standards of financial responsibility, operational capability, risk
management capability, and experience and competence, OCC will consider
the criteria of the Fitness Standards for Directors, Clearing Members
and Others, as adopted or amended by the Board of Directors from time
to time, before approving any application for clearing membership and
other standards as set forth in the Rules or such other qualifications
and standards as OCC may promulgate.
Proposed Rule 202--Non-U.S. Entities and Foreign Financial Institution
(``FFI'') Clearing Members
    The proposed rule change would relocate existing Article V, Section
1, paragraph (e) of the By-Laws and Rule 310(d) to new Rule 202 with
certain modifications designed to accommodate the admission of Non-U.S.
Clearing Members other than Canadian Clearing Members. New Rule 202(a)
and (b)(1) would amend existing Article V, Section 1, paragraph (e) of
the By-Laws and Rule 310(d)(1) to more generally require that an
applicant that, if admitted, would meet the definition of an FFI
Clearing Member, must not conduct transactions or activities with or
through OCC unless such transaction and activities will not result in
the imposition of taxes or withholding or reporting obligations with
respect to amounts paid or received by OCC (other than U.S. federal and
state income taxes imposed on the net income of OCC), and if such taxes
or obligations would be imposed with respect to amounts paid or
received by OCC but for the qualification of the applicant for a
special U.S. or foreign tax status, such as a FATCA Compliant Qualified
Intermediary Assuming Primary Withholding Responsibility, then the
applicant's initial and ongoing membership will be conditioned on the
applicant or Member qualifying for, maintaining, and documenting such
status to the satisfaction of OCC. Under appropriate circumstances,
where the applicant's regulatory and financial requirements are closely
related to U.S. regulations, an applicant meeting the requirements of
this section for the purposes of some products, such as stock loan or
for give-up execution, but not others, or for transactions or
activities in a specific capacity, such as an intermediary, may be
admitted to conduct transactions or activities under limitations
imposed by OCC. OCC also proposes to relocate existing Rules 310(d)(2)-
(5) to new Rules 202(b)(2)-(5) with minor conforming changes. In
addition, OCC would remove references to the defined terms Section
871(m) Effective Date and Section 871(m) Implementation Date as these
Section 871(m) phase-in dates are no longer required in OCC's
Rules.\21\
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    \21\ IRS Notice 2016-76 provides for staged implementation of
Section 871(m). A copy of the Notice can be found here: (https://www.irs.gov/pub/irs-drop/n-16-76.pdf). The OCC issued Information
Memo #40288 which announces the Section 871(m) Implementation Date
as December 23, 2016. The information memo can be found on OCC's
website: (https://infomemo.theocc.com/infomemo/search-memo).

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    OCC also proposes to add new Rule 202(d) to require that OCC will
only admit Clearing Members that are non-U.S. entities from foreign
jurisdictions that have been approved by the Risk Committee.\22\ The
proposed rule change would also adopt new paragraph (c) of Rule 202,
which would require every Non-U.S. Clearing Member to provide all
communications (oral or written), financial reports and other
information requested by OCC in English, and to state monetary amounts
in U.S. dollar equivalents indicating the conversion rate and date
used.
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    \22\ Risk Committee review and approval would be based on the
recommendation of OCC management after completing a non-U.S.
jurisdiction review of regulatory, legal, and tax issues for each
jurisdiction and product type.
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Proposed Rule 203--Admission Procedures
    The proposed rule change would consolidate in new Rule 203 the
admission procedures and requirements currently set forth in existing
Article V, Section 2 and Article V, Section 1, Interpretation and
Policy .03, clause (e) of the By-Laws and modify such admission
procedures and requirements. More specifically, similar to existing
Article V, Section 2, paragraph (a), proposed Rule 203(a) would require
Clearing Member applications to be in the form and contain such
information as prescribed by OCC. Likewise, similar to existing Article
V, Section 2, paragraph (a), proposed Rule 203(a) would authorize the
Risk Committee or its designated delegates or agents to examine the
books, records and workpapers of an applicant, take such evidence as
they may deem necessary or employ such other means as they may deem
desirable or appropriate to ascertain relevant facts bearing upon the
applicant's qualifications.
    Proposed Rule 203(a) also would designate the Risk Committee with
responsibility to approve or disapprove applications for clearing
membership. As set forth in proposed Rule 203(a), the procedures for
disapproving an application would be the same as described in existing
Article V, Section 2, paragraph (a). Specifically, if the Risk
Committee proposes to disapprove an application, then OCC must adhere
to the following procedures:
    i. the Risk Committee must first furnish the applicant with a
written statement of its proposed recommendation and the specific
grounds for proposing to disapprove the application;
    ii. the Risk Committee must give the applicant an opportunity to be
heard and to present evidence on its own behalf;
    iii. if the Risk Committee determines to disapprove the
application, written notice of its decision, accompanied by a statement
of the specific grounds for disapproval, must be mailed or delivered to
the applicant;
    iv. the applicant must have the right to present evidence as it may
deem relevant to its application; and
    v. a verbatim record must be kept of any hearing held pursuant
hereto.
    However, in contrast with existing Article V, Section 2, paragraph
(a), the proposed rule change would remove the automatic delegation of
authority to the CEO and COO to approve Clearing Member applications.
This change is intended to help streamline the application review
process and permit the Risk Committee to maintain discretion on which
person(s) to delegate authority for purposes of review. The proposed
rule change also would remove the requirement in existing Article V,
Section 2, paragraph (c) to inform the Board of Directors of all
applications for membership at its regularly scheduled meeting as all
applications would now be approved by the Risk Committee as opposed to
delegation to OCC management.
    The proposed rule change also would adopt a new process for
approving an applicant on an expedited basis under limited
circumstances. Specifically, proposed Rule 203(b) would provide that
the Risk Committee may approve an application on an expedited basis as
appropriate for the protection of investors and the public interest. In
connection with an expedited approval process, certain exceptions may
be granted (i) for the applicant's compliance with OCC's membership
standards for a reasonable period of time and/or (ii) from the general
requirements set forth in OCC's internal policies, procedures and due
diligence processes in reviewing Clearing Member applicants. This
expedited approval process is intended to grant OCC flexibility under
various unforeseen circumstances. Furthermore, because of the
infrequent nature of these types of scenarios, OCC cannot envision or
describe all events in which expedited approval would be required.
Nevertheless, the use of expedited approval would be limited to
scenarios in which time is of the essence for the protection of OCC,
other OCC Clearing Members, and the public. For example, expedited
approval would be appropriate in a circumstance where a suitable non-
Clearing Member candidate seeks to take on the entire business of an
existing Clearing Member that is in distress. In this example,
expedited approval would serve to protect OCC, other OCC Clearing
Members, and the public against the ramifications from the likely
default of the Clearing Member in distress. In the event there was a
significant financial impact in one of these scenarios, the ability to
provide expedited approval would make it less likely that OCC would
have to employ the resources--OCC's Minimum Contribution and other OCC
liquid assets, the Clearing Fund, the EDCP Unvested Balance--that
otherwise would have been used in the event the Clearing Member in
distress defaulted. Additionally, the customers of the Clearing Member
in distress would have certainty around the status and security of
their accounts.
    In addition, the proposed rule change would modify the provisions
applicable to Clearing Members seeking to engage in clearing activities
beyond the scope of their current authorizations with OCC. In
particular, under proposed Rule 203(c), a Clearing Member's business
expansion request may be reviewed and approved or disapproved by the
CEO or the COO pursuant to OCC procedures. The Risk Committee must be
notified at least ten business days in advance of any such approval/
disapproval to determine whether the business expansion request should
be reviewed by the Risk Committee.
Proposed Rule 204--Conditions to Admission
    The proposed rule change would consolidate in new Rule 204 the
conditions to admission provisions currently set forth in existing
Article V, Section 3 and various other portions of Article V of the By-
Laws. Each paragraph of proposed Rule 204 is described below.
Paragraph (a)--General Statement
    Proposed Rule 204(a) would clarify that the Risk Committee will not
approve any application for clearing membership if the applicant fails
to meet the membership requirements and standards set forth in the
Rules. This clarifying statement would replace many of the similar
statements currently set forth in Article V of the By-Laws, including
Section 1, Interpretations and Policies .01, .02, .03.
Paragraph (b)--Initial Contribution and Agreements
    Proposed Rule 204(b) would adopt the provisions currently set forth
in Article V, Section 3 of the By-Laws with only minor clarifying
changes. Specifically,

proposed paragraph (b) would provide that, prior to admission as a
Clearing Member, an applicant must deposit with OCC its initial
contribution to the Clearing Fund in the amount required by the Risk
Committee in accordance with Chapter X of the Rules. As compared to the
provisions set forth in existing Article V, Section 3 of the By-Laws,
proposed Rule 204(b) would clarify the Risk Committee's role in
requiring the initial contribution.
    In addition, proposed Rule 204(b) would require the applicant to
sign and deliver to OCC an agreement:
    i. to clear through OCC, either directly or through another
Clearing Member, all of its confirmed trades and all other transactions
which the By-Laws or the Rules may require to be cleared through OCC;
    ii. to abide by all provisions of the By-Laws and the Rules and by
all policies and procedures adopted pursuant thereto;
    iii. that the By-Laws and the Rules constitute a part of the terms
and conditions of every confirmed trade or other contract or
transaction which the applicant, while a Clearing Member, may make or
have with OCC, or with other Clearing Members in respect of cleared
contracts, or which may be cleared or required to be cleared through
OCC;
    iv. to grant OCC all liens, rights and remedies set forth in the
By-Laws and the Rules;
    v. to pay to OCC all fees and other compensation provided by or
pursuant to the By-Laws and the Rules for clearance and for all other
services rendered by OCC to the applicant while a Clearing Member;
    vi. to pay such fines as may be imposed on it in accordance with
the By-Laws and the Rules;
    vii. to permit inspection of its books, records, and workpapers at
all times by the representatives of OCC and to furnish OCC with all
information in respect of the applicant's business and transactions as
OCC or its officers may require;
    viii. to make such payments to or in respect of the Clearing Fund
as may be required from time to time;
    ix. to comply, in the case of Canadian Investment Dealers and other
Non-U.S. Securities Firms, with the guidelines and restrictions imposed
on domestic broker-dealers regarding the extension of credit, as
provided by Section 7 of the Exchange Act and Regulation T promulgated
thereunder by the Board of Governors of the Federal Reserve System,
with respect to any customer account that includes cleared contracts
issued by OCC; and
    x. to comply, in the case of Canadian Investment Dealers and other
Non-U.S. Securities Firms, with the Rules of the Financial Industry
Regulatory Authority (``FINRA'') governing maintenance margin and cut-
off times for the submission of exercise notices by customers.
    As compared to the provisions set forth in existing Article V,
Section 3 of the By-Laws, proposed Rule 204(b) would explicitly
reference Canadian Investment Dealers in items ix and x above. In
addition, OCC would eliminate the requirement in Article V, Section 3
of the By-Laws that Non-U.S. Securities Firms consent to the
jurisdiction of Illinois courts and to the application of United States
law in connection with any dispute with OCC arising from membership
because this requirement is already addressed in Article IX, Section 10
of the By-Laws.
Paragraph (c)--Statutory Disqualifications
    Proposed paragraph (c) would adopt and modify the statutory
disqualification membership requirements currently set forth in
existing Article V, Section 1(a). Specifically, proposed paragraph (c)
would provide that the Risk Committee may disapprove an application of
any applicant or person of the applicant subject to a ``Statutory
Disqualification.'' In turn, the proposed rule change would revise Rule
101 to define the term ``Statutory Disqualification'' as (i) in the
case of a fully registered broker-dealer, a statutory disqualification
as defined in section 3 of the Exchange Act, (ii) in the case of a
fully registered FCM, the applicant or Clearing Member or a principal
thereof, as defined in CEA section 8a(2), is subject to statutory
disqualification under CEA section 8a(2)-(4), or (iii) in the case of a
Non-U.S. Securities Firm or bank, any similar provision of the laws or
regulations applicable to such applicant or Clearing Member. In
addition, similar to existing Article V, Section 1, paragraph (a) of
the By-Laws, proposed Rule 204(c)(1) would provide that in cases in
which the SEC, by order, directs as appropriate in the public interest,
OCC will disapprove an application for clearing membership by any
applicant or person of the applicant subject to a statutory
disqualification. Separately, proposed subparagraph (c)(2) would
obligate every applicant to notify OCC in writing if the applicant is
or becomes subject to a statutory disqualification in accordance with
the requirements of new Rule 306A(c).\23\
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    \23\ See infra discussion on proposed Rule 306A.
---------------------------------------------------------------------------

Paragraph (d)--Just and Equitable Principles of Trade
    Proposed paragraph (d) would adopt with no substantive changes the
provisions currently set forth in existing Article V, Section 1,
Interpretation and Policy .03, clause (b). Specifically, proposed
paragraph (d) would permit the Risk Committee to disapprove an
application if the applicant or any natural person associated with the
applicant has engaged and there is a reasonable likelihood he will
again engage in acts or practices inconsistent with just and equitable
principles of trade.
Paragraph (e)--Satisfaction of Conditions
    Proposed Rule 204(e) would provide that an applicant that has been
approved for clearing membership subject to satisfaction of specified
conditions must meet all conditions applicable to its admission within
nine months from the date on which its application was approved, unless
the Risk Committee prescribed an earlier date at the time the applicant
was approved for clearing membership. As compared to Article V, Section
3, Interpretation and Policy .01, this proposed paragraph (e) would
increase the maximum number of months from six months to nine months.
The proposed rule change also would eliminate the authority to extend
the deadline to no later than one year from the date on which the
application originally was approved. These changes are intended to
standardize and streamline the application process.
Paragraph (f)--Information From Other Regulators
    Proposed paragraph (f) would permit the Risk Committee to take into
consideration information provided by an applicant's Designated
Examining Authority, designated self-regulatory organization (in the
case of an applicant primarily regulated as an FCM), and other self-
regulatory organizations to which an applicant is a member or has
applied for membership when considering an applicant's compliance with
OCC's membership requirements and standards and overall fitness to be a
Clearing Member. As compared with existing Article V, Section 1,
Interpretation and Policy .02, clause (c) of the By-Laws, proposed
paragraph (f) would clarify that the Risk Committee may take such
information into consideration irrespective of whether the Designated
Examining Authority, designated self-regulatory organization or other
self-regulatory organization

objects to the application. Proposed paragraph (f) also would clarify
that the Risk Committee may take into consideration information from a
self-regulatory organization that is not the applicant's Designated
Examining Authority or designated self-regulatory organization, as the
case may be.
Paragraph (g)--Additional Temporary Requirements
    Proposed paragraph (g) would provide that if the Risk Committee
determines an applicant's financial condition, operational capability,
risk management capability, or experience and competence in relation to
the business that the applicant is expected to transact with OCC, makes
it necessary or advisable, for the protection of OCC, Clearing Members,
or the general public, the Risk Committee may impose additional,
temporary requirements for membership including, but not limited to,
the imposition of protective measures pursuant to Rule 307.\24\
Proposed paragraph (g) also would clarify that additional membership
criteria may be imposed until the heightened risk presented by the
Clearing Member is sufficiently reduced. In contrast with existing
Article V, Section 1, Interpretation and Policy .06, proposed paragraph
(g) and proposed Rule 307 \25\ would set forth OCC's rights to impose
protective measures under a uniform standard applicable to both
applicants and existing Clearing Members.
---------------------------------------------------------------------------

    \24\ See infra description of proposed Rule 307.
    \25\ Id.
---------------------------------------------------------------------------

Proposed Rule 205--Evidence of Authority
    The proposed rule change would move the provisions set forth in
existing Rule 202 to new Rule 205 and modify the language to clarify
that OCC may rely on an electronic (or similar means) signature rather
than relying on an original signature. Such a signature will have the
same effect as a valid and binding original signature. This change is
intended to better reflect evolving technology and the means by which
signatures generally may be accepted.
Proposed Rule 206--Bank Accounts
    The proposed rule change would move the provisions set forth in
existing Rule 203 to new Rule 206 with no substantive changes.
Proposed Rule 207--Submission to and Retrieval of Items to the
Corporation
    The proposed rule change would combine and modify the provisions
currently set forth in existing Rules 205 and 206 and move such
provisions to new Rule 207. Specifically, the provisions in existing
paragraphs (a) and (b) of Rules 205 and 206 would be combined and
modified in proposed Rule 207(a), which would require Clearing Members
to submit and retrieve instructions, notices, reports, data, and other
items to or from OCC in accordance with procedures prescribed or
approved by OCC. As compared to existing Rules 205(a)-(b) and 206(a)-
(b), proposed Rule 207(a) would apply uniformly to items submitted or
retrieved via electronic and non-electronic means. In addition,
proposed paragraph (a) would clarify that items submitted to or
retrieved by OCC by electronic data entry will be deemed to constitute
``writings'' for purposes of any applicable law. Similar to the changes
to the provisions in proposed Rule 205, the changes in this proposed
Rule 207(a) are intended to better reflect evolving technology.
    Similarly, existing paragraphs (c) and (d) of Rule 205 would be
combined and modified in proposed Rule 207(b), which would require
timely submissions to OCC and permit OCC to disregard any untimely
submission or correction. In addition, proposed paragraph (b) would
provide that if unusual or unforeseen conditions prevent a Clearing
Member from making a timely submission to OCC, then OCC may in its
discretion (i) require the Clearing Member to submit the item by other
means, and/or (ii) extend the applicable cut-off time by such period as
OCC deems reasonable, practicable, and equitable under the
circumstances. As compared to existing Rule 205(d), proposed Rule
207(b) would further clarify that it applies to any unusual or
unforeseen conditions that, in fact, prevent a Clearing Member from
making a timely submission via electronic or non-electronic means.
Proposed paragraph (b) also would clarify that cut-off times for
submission of exercise notices at expiration are governed by Rule 805,
and by Article VI, Section 18 of the By-Laws.
    Finally, existing Rule 206(c) would be modified and moved to
proposed Rule 207(c), which would provide that if unusual or unforeseen
conditions (including but not limited to power failures or equipment
malfunctions) prevent OCC from making any timely submission or other
notification to a Clearing Member, then OCC may in its discretion (i)
make such item available to such Clearing Member by other means, and/or
(ii) extend the applicable time frame by such period as OCC deems
reasonable, practicable, and equitable under the circumstances. As
compared to existing Rule 206(c), proposed Rule 207(c) would apply to
submissions or other notifications via electronic or non-electronic
means.
Proposed Rule 208--Records
    The proposed rule change would move the provisions set forth in
existing Rule 207 to new Rule 208 and streamline such provisions to
clarify that the Clearing Member records retention requirements apply
to all confirmed trade data required pursuant to the By-Laws and Rules,
including confirmed trade information reported to OCC under Rule 401.
The remaining provisions currently set forth in existing Rule 207 would
remain unchanged (aside from relocating to new Rule 208).
Proposed Rule 209--Security Measures
    The proposed rule change would move the provisions set forth in
existing Rule 212 to new Rule 209 with modifications to remove
references to authorization stamps, including the deletion of existing
paragraph (b) and the removal of authorization stamp references in
existing paragraph (c) as they are no longer used by OCC. The remaining
provisions presently set forth in existing Rule 212 would remain
unchanged (aside from relocating to new Rule 209).
Proposed Rule 210--Payment of Fees and Charges
    The proposed rule change would move the provisions set forth in
existing Rule 209 to new Rule 210 with modifications to clarify that
any fine levied by OCC for a minor rule violation that has not been
timely contested, as described in new Rule 1203(a), or fine levied
pursuant to Chapter XII of the Rules will be due and payable
immediately upon notice as opposed to within five business days
following the end of each calendar month. The remaining provisions
currently set forth in existing Rule 209 would remain unchanged (aside
from relocating to new Rule 210).
Proposed Rule 211--Reports and Notices by the Corporation
    The proposed rule change would combine and modify the provisions
currently set forth in existing Rules 208, 211 and 213 and move such
provisions to new Rule 211. Specifically, the provisions set forth in
existing Rule 208 would be moved to proposed Rule 211(a) without any
changes.
    The provisions set forth in existing Rule 211 (including the
Interpretation and Policy) would be moved to proposed Rule 211(b) and
modified to clarify that OCC will provide all

Clearing Members and other registered clearing agencies with the text
or a description of any proposed rule change filed with the SEC or the
CFTC and a statement of its purpose and effect on Clearing Members by
posting proposed rule changes on its website. As compared to existing
Rule 211 (including the Interpretation and Policy), proposed Rule
211(b) would eliminate the requirement to post the proposed rule change
prior to filing the proposed rule change with the SEC or the CFTC, or
as soon as possible thereafter.
    Finally, the provisions in existing Rule 213 would be moved to
proposed Rule 211(c) and modified to clarify that OCC will make
available (rather than furnish) to each Clearing Member the audited
financial statements and independent public accountant's report
described in proposed paragraph (c). The remaining provisions currently
set forth in existing Rules 211 and 213 would remain unchanged (aside
from relocating to new Rule 211(b) and (c)).
Proposed Rule 212--Voluntary Termination of Membership
    The proposed rule change would adopt new Rule 212 to address
circumstances in which a Clearing Member may elect to voluntarily
terminate its membership. Proposed paragraph (a) would provide that a
Clearing Member may elect to voluntarily terminate its membership by
providing written notice to OCC (``Voluntary Termination Notice'') that
specifies a desired date for its withdrawal from membership
(``Termination Date''). The terminating Clearing Member must close out
or transfer all open positions with OCC by the Termination Date.
Pursuant to proposed paragraph (c), if the Clearing Member does not
close out or transfer all open positions by the specified Termination
Date, the terminating Clearing Member must notify OCC of a new
Termination Date, unless otherwise agreed upon by OCC.
    With respect to the treatment of Clearing Fund deposits, proposed
paragraph (b) would provide that OCC will retain the terminating
Clearing Member's Clearing Fund contribution at least until final
billing is complete during the calendar month immediately following the
Termination Date. During this time, OCC may debit from the terminating
Clearing Member's Clearing Fund contribution any outstanding payment
obligations owed and not paid to OCC.
    Proposed paragraph (b) also would clarify that a terminating
Clearing Member's Clearing Fund contribution may be subject to a
proportionate charge or use for purposes of a borrowing pursuant to
Rule 1006 until the next monthly or intra-month sizing of the Clearing
Fund. In such instance, OCC may retain the Clearing Member's Clearing
Fund contribution until such time as it is no longer needed to satisfy
its purpose and use under Rule 1006. However, a terminating Clearing
Member will not be subject to replenishment or assessments under Rule
1006(h).
    Finally, proposed paragraph (d) would clarify that any Voluntary
Termination Notice provided during a cooling-off period implemented
pursuant to Rule 1006(h) would be subject to the requirements of Rule
1006(h). Separately, the proposed rule change would revise Rule 1006(h)
to specifically refer to ``Voluntary Termination Notice'' and make
other administrative clean up changes.
Proposed Rule 301--Financial Responsibility
    OCC's capital standards applicable to Clearing Members currently
are set forth in existing Chapter III of the Rules. More specifically,
existing Rule 301 sets forth the initial capital requirements that must
be met by applicants for clearing membership, whereas existing Rule 302
sets forth the ongoing capital requirements that must be met by each
Clearing Member.
    The proposed rule change would replace existing Rules 301 and 302
with new Rule 301 and eliminate the distinction between initial and
ongoing capital requirements. The proposed rule change also would
modify the capital requirements for existing types of Clearing Members
and introduce capital requirements for the new types of Clearing
Members. Below is a description of each of the paragraphs in proposed
Rule 301.
Paragraph (a)--General
    Paragraph (a) of proposed Rule 301 would adopt a new general
statement that clarifies that each Clearing Member, including an
applicant for clearing membership, is required to meet the financial
resource and responsibility requirements set forth in these Rules and
such other qualifications and standards as OCC may promulgate. In
addition, proposed paragraph (a) would provide that dollar amounts in
Rule 301 refer to U.S. dollars.
Paragraph (b)--Minimum Capital
    Proposed paragraph (b) would require Clearing Members to maintain
the applicable minimum capital requirements set forth in subparagraphs
(b)(1) through (b)(5). Proposed paragraph (b) also would incorporate
the language currently set forth in existing Rule 302(a) that prohibits
a Clearing Member with capital below its respective minimum capital
requirement to clear an opening purchase transaction or opening sale
transaction or enter into a Stock Loan. To provide time for existing
Clearing Members to meet the proposed changes, OCC will provide a six-
month grace period upon approval by the SEC of the proposal.
    Below is a description of the minimum capital requirements that
would be applicable to each type of Clearing Member. The proposed
minimum capital requirements are intended to balance fair and open
access to OCC with prudent financial qualifications for members and
enhance the overall strength and resiliency of OCC and its ability to
mitigate risk as a systemically important financial market utility.
    Fully Registered Broker-Dealers. Existing Rule 301 sets forth
initial requirements for fully registered broker-dealers to maintain
minimum net capital equal to or greater than (i) $2.5 million, (ii) in
the case of a broker-dealer not electing to operate pursuant to the
alternative net capital requirements, 12\1/2\ percent of its aggregate
indebtedness, or (iii) in the case of a broker-dealer electing to
operate pursuant to the alternative net capital requirements, 5 percent
of its aggregate debit items. Existing Rule 301 also sets forth an
initial requirement that the aggregate principal amount of a Clearing
Member's satisfactory subordination agreements (excluding those treated
as equity capital) cannot initially exceed 70% of its debt equity
total. The initial requirements apply until the later of (1) three
months after the firm's admission to as a clearing member, or (2)
twelve months after the firm commenced doing business as a broker-
dealer. Separately, existing Rule 302 sets forth ongoing requirements
for fully registered broker-dealers to maintain minimum net capital
equal to or greater than (i) $2 million, (ii) in the case of a broker-
dealer not electing to operate pursuant to the alternative net capital
requirements, 6\2/3\ percent of its aggregate indebtedness, or (iii) in
the case of a broker-dealer electing to operate pursuant to the
alternative net capital requirements, 2 percent of its aggregate debit
items.
    Under proposed Rule 301(b)(1), there would be no differentiation
between initial and ongoing standards. The single standard, applicable
on both an initial and ongoing basis, would provide

that every Clearing Member that is a fully registered broker-dealer
must maintain minimum net capital at least equal to the greater of (i)
$10 million, (ii) in the case of a broker-dealer not electing to
operate pursuant to the alternative net capital requirements, 6\2/3\
percent of its aggregate indebtedness (i.e., aggregate indebtedness
cannot exceed 1500% of net capital), or (iii) in the case of a broker-
dealer electing to operate pursuant to the alternative net capital
requirements, 2 percent of its aggregate debit items. OCC determined
that the proposed minimum net capital requirement of $10 million was an
appropriate amount based on OCC's clearance and risk management of non-
linear products where volatility strongly influences margin and
settlement obligation of Clearing Members. OCC selected an amount that
provided greater security to ensure that Clearing Members have
sufficient capital to meet margin, liquidity, and clearing fund
obligations, but that also avoided creating an overly burdensome
requirement on the vast majority of the existing OCC Clearing Member
population.
    Fully Registered FCMs. Existing Rule 301 sets forth initial
requirements for fully registered FCMs to maintain minimum net capital
at least equal to the greater of (i) $2.5 million, or (ii) any
additional minimum financial requirements as are established by CFTC
regulations. The initial standards apply until the later of (1) three
months after the firm's admission as a clearing member, or (2) twelve
months after the firm commenced doing business as an FCM. Separately,
existing Rule 302 sets forth ongoing requirements for fully registered
FCMs to maintain minimum net capital at least equal to the greater of
(i) $2 million, or (ii) any additional minimum financial requirements
as are established under the CEA.
    Under proposed Rule 301(b)(2), there would be no differentiation
between initial and ongoing standards. The single standard, applicable
on both an initial and ongoing basis, would provide that every Clearing
Member that is a fully registered FCM must maintain minimum net capital
equal to the greater of (i) $10 million or (ii) any other minimum
financial requirements established by regulation of the CFTC.
    Canadian Investment Dealers. Existing Rule 301 sets forth initial
requirements for Canadian Clearing Members to maintain an early warning
reserve at least equal to (i) $2.5 million or (ii) such other amount
determined by OCC. This initial standard applies until the later of (1)
three months after the firm's admission as a clearing member, or (2)
twelve months after the firm commenced doing business as a broker or
dealer, as applicable. Separately, existing Rule 302 sets forth ongoing
requirements for Canadian Clearing Members to maintain an early warning
reserve at least equal to the greater of (i) $2 million or (ii) 2% of
the Clearing Member's total margin required.
    Under proposed Rule 301(b)(3)(i), there would be no differentiation
between initial and ongoing standards. The single standard, applicable
on both an initial and ongoing basis, would provide that every Clearing
Member that is a Canadian Investment Dealer must maintain risk adjusted
capital equal to the greater of (i) $10 million or (ii) 2% of total
margin required.
    Other Non-U.S. Securities Firms. Existing Rules 301 and 302 provide
that each exempt Non-U.S. Clearing Member must comply with initial and
ongoing requirements for the ratio of net capital to aggregate
indebtedness as OCC may specify.
    Proposed Rule 301(b)(3)(ii) would set forth a single standard,
applicable on both an initial and ongoing basis, that requires every
Non-U.S. Securities Firm that is not a Canadian Investment Dealer to
maintain capital substantially similar to (adjusted) net capital
required for fully-registered broker-dealers or fully-registered
futures commission merchants equal to the greater of (i) $10 million or
(ii) the amount required by the firm's applicable regulatory minimum
requirements, including any and all required buffers, established by
the regulatory authority of that country's government or an agency or
instrumentality thereof. Further, proposed Rule 301(b)(3)(ii) would
provide that if the Risk Committee prohibits the use of the non-U.S.
jurisdiction's regulatory minimum requirements or chooses to supplement
a non-U.S. jurisdiction's regulatory minimum requirements, then the
Non-U.S. Securities Firm must maintain total equity greater than $25
million.
    OCC initially intends to limit the admission of Non-U.S. Clearing
Members to entities located in three Group of 7 jurisdictions--the
United Kingdom, France, and Germany--because of the robust regulatory
frameworks in each of those jurisdictions. However, in the future OCC
may reevaluate whether it should consider admitting Non-U.S. Clearing
Members from other jurisdictions, provided that if, after conducting a
review of any such jurisdiction, OCC determines the jurisdiction
supports a rigorous regulatory framework similar to the three countries
mentioned above and satisfies any other risk related jurisdiction
reviews undertaken during the member application process.
    Banks. Existing OCC rules do not have minimum capital requirements
for Clearing Members that are banks. Pursuant to the proposed rule
change, new Rule 301(b)(4) would require each Clearing Member that is a
U.S. bank (i) to maintain Tier 1 Capital of at least $500 million, (ii)
to maintain a Tier 1 Capital Ratio greater than 6%, and (iii) be
``adequately-capitalized'' as measured by prompt corrective action
(``PCA'') capital category ratios for National Banks and Federal
Savings Associations. In addition, every U.S. branch of a non-U.S. bank
that is a Clearing Member must be a branch of a non-U.S. bank that
maintains (1) Tier 1 Capital of at least $500 million (or its
equivalent in the relevant home country currency), (ii) a Tier 1
Capital Ratio greater than 6%, and (iii) that remains at least
adequately capitalized as calculated or defined pursuant to the
regulatory capital rules of the applicable banking regulatory authority
of its home country.
Paragraph (c)--Dually Registered Clearing Members
    Proposed paragraph (c) would clarify that if a Clearing Member is
registered as a broker-dealer under section 15(b)(1) of the Exchange
Act and also as an FCM under CEA section 4f(a)(1), the Clearing Member
must comply with all applicable capital requirements.
Paragraph (d)--Extreme but Plausible Events and Contingency Planning
    Existing Article V, Section 1, Interpretation and Policy .01
requires an applicant (i) to meet the initial financial requirements
set forth in the Rules, (ii) to not have sustained certain pre-tax
losses, (iii) to not be listed in a special surveillance list with the
Securities Investor Protection Corporation (or not be subject to
similar special financial surveillance procedures in accordance with
the CEA), and (iv) to have access to sufficient financial resources to
meet obligations arising from clearing membership in extreme but
plausible market conditions, as determined by OCC. Existing Rule 301(d)
also requires every Clearing Member to have access to sufficient
financial resources to meet obligations arising from clearing
membership in extreme but plausible market conditions and 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.

    Proposed Rule 301(d) would replace existing Article V, Section 1,
Interpretation and Policy .01 and Rule 301(d) and set forth a single
standard, applicable on both an initial and ongoing basis, that
requires every Clearing Member to have access to sufficient financial
resources to meet obligations arising from clearing membership in
extreme but plausible market conditions, as determined by OCC for such
purposes, and 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. Proposed Rule 301(d) would also be revised to
clarify that contingency planning includes maintaining alternate
settlement bank arrangements.
Interpretations and Policies
    Existing Rule 307 sets forth definitions for the terms ``net
capital,'' ``aggregate indebtedness,'' ``aggregate debit items,''
``Examining Authority'' and ``customer.'' Proposed Rule 301,
Interpretation and Policy .01 would adopt these definitions. Existing
Rule 307 also sets forth definitions for the terms ``debt-equity
total,'' ``satisfactory subordination agreement,'' and ``alternative
net capital.'' Proposed Rule 306A, Interpretation and Policy .01, would
adopt the definitions of ``debt-equity total'' and ``satisfactory
subordination agreement.'' The term ``alternative net capital'' is not
referenced in any OCC Rules and therefore, the definition of
``alternative net capital'' is being removed from OCC Rules due to the
lack of any reference to this term.
    Separately, proposed Rule 301, Interpretation and Policy .02 would
adopt the provisions presently set forth in existing Rule 307,
Interpretation and Policy .01 but strike the reference to Clearing
Members that were Clearing Members on June 13, 2005 as no longer
relevant.
Proposed Rule 302--Operational Capability
    Clearing Members currently are subject to operational capability,
experience, and competence standards set forth in various provisions in
the By-Laws and the Rules, including Article V, Section 1,
Interpretations and Policies .02, .07 and .07A of the By-Laws and Rule
201. The proposed rule change would consolidate these provisions in new
Rule 302 and modify the provisions as described below.
Paragraph (a)--General
    Paragraph (a) of proposed Rule 302 would adopt a new general
statement that clarifies that each Clearing Member, including
applicants for clearing membership, is required to meet the operational
capability, experience, and competence standards set forth in the Rules
and such other qualifications and standards as OCC may promulgate.
Paragraph (b)--Offices
    Proposed paragraph (b) would incorporate the language currently set
forth in existing Rule 201(a) to require each Clearing Member to
maintain facilities for conducting business with OCC. Proposed
paragraph (b) also would modify the language currently set forth in
existing Rule 201(a) to eliminate the requirement that the
representative must be at the Clearing Member's facilities and to
reference regular and overnight business hours. Taken together,
proposed paragraph (b) would require each Clearing Member to make
available during hours specified by OCC, a representative of the
Clearing Member authorized in the name of the Clearing Member to take
all action necessary for conducting business with OCC during regular
and overnight business hours. As revised, this provision is intended to
reflect the realities and needs of Clearing Members and OCC by
permitting the representative to work remotely during regular and
overnight business hours.
Paragraph (c)--Books and Records
    Proposed paragraph (c) would amend the language currently set forth
in existing Article V, Section 1, Interpretation and Policy .02, clause
(a) and simplify and standardize (to the extent possible) the
recordkeeping requirements applicable to each type of Clearing Member.
Under proposed paragraph (c), each Clearing Member would be required to
maintain books and records in accordance with the requirements of its
applicable regulatory agency, including but not limited to any
applicable requirements under the Exchange Act, the CEA, or the
requirements of any non-U.S. regulatory agency, and with such
additional requirements as OCC may impose. Taken together, this
proposed paragraph (c) is intended to prevent unnecessary regulatory
burdens by permitting each Clearing Member to maintain applicable
records in accordance with its existing regulatory requirements, as
applicable.
Paragraph (d)--Ability To Discharge Responsibilities
    Proposed paragraph (d) would adopt the language currently set forth
in existing Article V, Section 1, Interpretation and Policy .02, clause
(b) with minor changes to clarify that the provision applies to the
facilities, systems and procedures of each Clearing Member. Proposed
paragraph (d) also would clarify that each Clearing Member must be able
to participate in applicable operational and default management
activities.
    Specifically, under proposed paragraph (d), each Clearing Member
would be required to maintain facilities, systems and procedures that
are operationally sufficient to discharge its functions as a Clearing
Member in a timely and efficient manner, including (i) the ability to
process expected volumes and values of transactions cleared by the
Clearing Member within required time frames, including at peak times
and on peak days; (ii) the ability to fulfill collateral, payment, and
delivery obligations as required by OCC; and (iii) the ability to
participate in applicable operational and default management
activities, including auctions, as may be required by OCC and in
accordance with applicable laws and regulations.
Paragraph (e)--Physically-Settled Equity Options and Stock Futures
    OCC Rule 901(a) requires that every Stock Clearing Member and every
Clearing Member that effects transactions in physically-settled stock
futures be a participant in good standing of the correspondent clearing
corporation,\26\ however this does not apply to (i) an Appointing
Clearing Member that has an effective agreement with an Appointed
Clearing Member, or (ii) a Canadian Clearing Member on behalf of which
CDS maintains an identifiable subaccount in a CDS account at the
correspondent clearing corporation. OCC proposes to relocate Rule
901(a) to proposed paragraph (e) with minor modifications. OCC would
also make conforming updates throughout the Rules to update cross-
references to various provisions of revised Rule 901.
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    \26\ Article I, Section I.C(33) of the OCC By-Laws defines
``correspondent clearing corporation'' to mean the National
Securities Clearing Corporation or any successor thereto which, by
agreement with the Corporation, provides facilities for settlements
in respect of exercised option contracts or BOUNDs or in respect of
delivery obligations arising from physically-settled stock futures.
---------------------------------------------------------------------------

Paragraph (f)--Stock Loan Programs
    Proposed paragraph (f) would adopt the language currently set forth
in existing Article V, Section 1, Interpretations and Policies .07 and
.07A and modify the language to refer to

Clearing Members ``participating in the Stock Loan/Hedge Program'' or
``participating in the Market Loan Program,'' as the case may be,
rather than referring to ``Hedge Clearing Members'' and ``Market Loan
Clearing Members.'' Proposed paragraph (e) also would clarify that each
Clearing Member participating in OCC's Stock Loan programs must meet
the additional operational requirements set forth in subparagraph
(e)(1) and/or (e)(2), as applicable. The proposed change would also
clarify that participants in the Market Loan Program must be either a
U.S. Clearing Member or be located in any other foreign country or
jurisdiction approved by the Risk Committee. The proposed change would
allow OCC to approve Non-U.S. Clearing Members for the Market Loan
Program provided that the Risk Committee has completed a comprehensive
review of regulatory, legal, and tax issues for the relevant non-U.S.
jurisdiction.\27\
---------------------------------------------------------------------------

    \27\ See supra note 20.
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Proposed Rule 303--Financial, Operations, and Risk Management Personnel
    OCC's financial, operations and risk management personnel
requirements currently are set forth in various provisions of the By-
Laws and the Rules, including existing Article V, Section 1,
Interpretations and Policies .03 and .05 of the By-Laws and Rule 214.
The proposed rule change would consolidate and modify these
requirements in new Rule 303. Below is a description of each of the
paragraphs in proposed Rule 303.
Paragraph (a)--Substantial Experience
    Proposed paragraph (a) would adopt certain of the provisions
currently set forth in existing Article V, Section 1, Interpretations
and Policies .03 and .05 of the By-Laws and modify the provisions to
reference both applicants and Clearing Members. In addition, proposed
paragraph (a) would contemplate ``third-party service providers'' more
generally and eliminate references to facilities management agreements
and Managing/Managed Clearing Members.
    More specifically, proposed paragraph (a) would provide that every
applicant and Clearing Member must employ personnel or maintain
contractual arrangements with third-party service providers acceptable
to OCC with substantial experience in clearing the kind(s) of cleared
contracts applicable to the applicant or Clearing Member. Proposed
paragraph (a) also would require every Clearing Member to maintain
supervisory authority over all internal staff conducting business with
the Corporation and over the activities and functions performed by
third-party vendors.
    The elimination of references to facilities management agreements
and Managing/Managed Clearing Members is intended to provide greater
flexibility on the provision of third-party services. However,
notwithstanding this greater flexibility, Clearing Members are required
to maintain supervisory authority over any third-party arrangements. In
addition, such arrangements would be subject to the additional
requirements set forth in proposed paragraph (d) of Rule 303.
Paragraph (b)--FinOps, CFOs and Similar Personnel
    Proposed paragraph (b) would adopt certain of the provisions
currently set forth in existing Article V, Section 1, Interpretation
and Policy .03 and further specify the roles required for each type of
Clearing Member. More specifically, proposed paragraph (b) would
require each Clearing Member to employ personnel who are responsible
for such Clearing Member's compliance with applicable net capital,
recordkeeping, and other financial, operational, and risk management
rules or maintain contractual arrangements with third-party service
providers to perform such activities or functions. The employed
personnel are:
     in the case of a fully registered broker-dealer, an
individual registered with FINRA as a ``Limited Principal--Financial
and Operations'';
     in the case of a fully registered FCM or other registrant
registered under CEA section 4f that is not a fully registered broker-
dealer, an individual serving as chief financial officer (``CFO'') or
otherwise has the appropriate qualifications and is responsible for
supervising the preparation of the applicant's financial reports; and
     in the case of a bank, Canadian Investment Dealer or other
Non-U.S. Securities Firm, an individual serving as CFO or otherwise has
the appropriate qualifications and is responsible for supervising the
preparation of the applicant's financial reports.
    Relatedly, the proposed rule change would remove the more
prescriptive requirements currently set forth in Article V, Section 1,
Interpretation and Policy .03, clause (d) relating to associated
persons and/or key operations personnel serving as full-time employees.
These amendments are intended to provide greater flexibility and reduce
administrative burdens for OCC and its Clearing Members.\28\
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    \28\ For example, the proposed change would eliminate the need
for certain staffing exemptions/waivers currently contemplated by
Article V, Section 1, Interpretation and Policy .03.
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Paragraph (c)--Clearing Operations Personnel
    Proposed paragraph (c) would adopt certain of the provisions
currently set forth in existing Rule 214(c) and (d) and modify the
provisions to refer to both clearing operations personnel and adequate
contractual arrangements with third-party service providers. Proposed
paragraph (c) also would clarify that a Clearing Member must be able to
discharge its functions in a timely and efficient manner. More
specifically, proposed paragraph (c) would require each Clearing Member
to ensure that it employs an appropriate number of clearing operations
personnel or maintains adequate contractual arrangements with third-
party service providers with the requisite capability, experience, and
competency such that the Clearing Member can reasonably ensure that it
is able to discharge its functions as a Clearing Member in a timely and
efficient manner, including the ability to process expected volumes and
values of transactions cleared by the Clearing Member within required
time frames, including at peak times and on peak days; the ability to
fulfill collateral, payment, and delivery obligations as required by
OCC, and the ability to participate in applicable operational and
default management activities, including auctions, as may be required
by OCC and in accordance with applicable laws and regulations. Proposed
paragraph (c) also would require that each Clearing Member must submit
to the OCC a list of the clearing operations personnel it employs in
such form as is acceptable to OCC, including, without limitation, the
names, titles, primary offices, email addresses, and business phone
numbers for all such personnel.
Paragraph (d)--Contractual Arrangements With Third-Party Personnel
    Proposed paragraph (d) would adopt certain of the provisions
currently set forth in existing Article V, Section 1, Interpretation
and Policy .05 and further provide for ``third-party service
providers'' more generally, beyond the facilities management
arrangements as currently described in OCC's By-Laws and Rules, and
require related arrangements to permit due diligence by OCC. Proposed
paragraph (d) also

would clarify that it applies to contractual arrangements with third-
party service providers used to satisfy the requirements of Rule 302
and this Rule 303. Under proposed paragraph (d), any such arrangement
must (1) clearly set forth the specific services to be performed by the
third-party service providers on behalf of a Clearing Member and the
respective duties and obligations of the third-party service provider
and Clearing Member, (2) provide that the agreement will not be
terminated until 30 days after written notice of such termination is
provided by the Clearing Member to OCC and (3) provide OCC with the
authority and ability to perform initial and ongoing due diligence on
the service provider.
Paragraph (e)--Replacing Relevant Personnel and Other Arrangements
    Proposed paragraph (e) would adopt certain of the provisions
currently set forth in existing Rule 214, Interpretation and Policy .02
and clarify that it applies to the separation or termination of
personnel and third-party service providers. In particular, proposed
paragraph (e) would provide that upon a separation or termination of
agreement with a third-party service provider between the only
personnel or third-party service provider who meets the requirements of
Rule 303(b) and the Clearing Member, then the Clearing Member is
granted a grace period of three months to return to compliance with the
Rule.
Proposed Rule 304--Operational and Default Management Testing
    Existing Rule 218 sets forth various requirements relating to
business continuity and disaster recovery testing and default
management testing. The proposed rule change would move the provisions
in existing Rule 218 to new Rule 304 with only minor changes.
Specifically, proposed Rule 304(a) would contain a new introductory
sentence that clarifies that OCC will periodically designate Clearing
Members required to participate in business continuity and disaster
recovery testing. The remaining provisions contained in proposed Rule
304(a) would be substantively identical to the provisions contained in
existing Rule 218(a) and (b). Similarly, the provisions contained in
proposed Rule 304(b) would be substantively identical to the provisions
currently set forth in existing Rule 218(c).
    Proposed Rule 304(c) would set forth a new paragraph that provides
that OCC may require Clearing Members to participate in other
operational and connectivity testing and related reporting requirements
(such as reporting the test results to OCC in a manner specified by
OCC) that OCC deems necessary to ensure the continuing operational
capability of the Clearing Members and the continuing ability of OCC to
perform its clearing, settlement, and risk management activities.
Proposed Rule 305--Clearing Member Risk Management
    Existing Rule 311 sets forth requirements pertaining to the risk
management program obligations of Clearing Members. The proposed rule
change would move the provisions in existing Rule 311 to new Rule 305
and modify the provisions consistent with CFTC Rule
39.13(h)(5)(ii).\29\ More specifically, similar to existing Rule
311(a), proposed Rule 305(a) would require each Clearing Member to
maintain current written risk management policies and procedures that
address the risks the Clearing Member may pose to OCC. In addition,
proposed Rule 305(a) would contain an additional provision that is not
contained in existing Rule 311(a), which clarifies that OCC may review
the risk management policies, procedures, and practices of each
Clearing Member on a periodic basis and may take appropriate action to
address concerns identified in such reviews, including but not limited
to the imposition of protective measures pursuant to Rule 307. This
additional provision would be added to better address the requirements
applicable to registered derivatives clearing organizations under CFTC
Rule 39.13(h)(5)(ii).
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    \29\ 17 CFR 39.13(h)(5(ii).
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    Proposed Rule 305(b) would require each Clearing Member to provide
to OCC such information and documentation as may be requested by OCC
from time to time regarding such Clearing Member's risk management
policies, procedures, and practices. As compared to existing Rule
311(b), the language in proposed Rule 305(b) would be streamlined to
not include any examples of such information and documentation
addressed by this paragraph.
    Proposed Rule 305(c) would be identical to the provisions set forth
in existing Rule 311(c).
Proposed Rule 306--Notification and Reporting Requirements
    OCC's notification and reporting requirements currently are set
forth in various provisions of the By-Laws and the Rules, including
existing Article V, Section 1, Interpretations and Policies .03 and .07
of the By-Laws and Rules 201(b), 215, 216, 217(b), 303, 306, 308 and
310(a)-(c). The proposed rule change would consolidate and modify these
requirements in new Rules 306, 306A and 306B.
    Proposed Rule 306 would set forth a broad statement clarifying that
each Clearing Member must provide to OCC such notices, reports,
documentation, or other information required in the Rules and any other
requirements promulgated by OCC.
    Proposed Rules 306A and 306B are described below.
Proposed Rule 306A--Event-Based Reporting
    Proposed Rule 306A would set forth the event-based reporting
requirements and incorporate and modify the provisions currently set
forth in existing Article V, Section 1, Interpretations and Policies
.03 (clause (c)) and .07 of the By-Laws and existing Rules 201(b), 215,
217(b) and 303. Each paragraph in proposed Rule 306A is described
below.
Paragraph (a)--Early Warning Notices
    Proposed paragraph (a) would adopt many of the provisions in
existing Rule 303 and set forth the early warning notice requirements
for Clearing Members. Under proposed paragraph (a), a Clearing Member
would be required to notify an officer of OCC promptly, and in any
event, prior to 3:00 p.m. Central Time (4:00 p.m. Eastern Time) of the
next business day in writing, if any of the circumstances described in
subparagraphs (a)(1) through (a)(6) are met, as applicable. As compared
to existing Rule 303(a), proposed Rule 306A(a) would simplify the
notification requirement by specifying that one (rather than two)
notices must be provided to an officer of OCC prior to the applicable
deadline.
    Proposed subparagraph (a)(1) would apply broadly to all types of
Clearing Members, whereas proposed subparagraphs (a)(2) through (a)(6)
would apply to specific types of Clearing Members. Each proposed
subparagraph is described in greater detail below.
    All Clearing Members. Proposed subparagraph (a)(1) would apply to
all Clearing Members and is mostly identical to existing Rule 303(a).
Under proposed subparagraph (a)(1), the early warning notice
requirement would be triggered if a Clearing Member notifies, is
required to notify, or receives notice from, any regulatory
organization (as currently defined in the Rule 303, Interpretation and
Policy .01 and would be relocated to Chapter I of the Rules) of any
financial difficulty affecting the

Clearing Member or of any failure by the Clearing Member to be in
compliance with the financial responsibility rules or capital
requirements of any regulatory organization. The new rule would be
revised to clarify that it would apply to operational difficulty/
responsibilities in addition to financial. Further, proposed
subparagraph (a)(1) would clarify that any notice, whether written or
otherwise, from a regulatory organization informing a Clearing Member
that it may fail to be in compliance with the financial responsibility
rules or capital requirements of the regulatory organization unless it
takes corrective action, or informing it that it has triggered any
provision in the nature of an early warning provision contained in any
such rule or regulation, constitutes a notice for purposes of this
subparagraph. The early warning notification to OCC must include a copy
of any written notice provided or received by the Clearing Member from
the regulatory organization.
Fully Registered Broker-Dealers
    Proposed subparagraph (a)(2) would apply to fully registered
broker-dealer Clearing Members and adopt many of the provisions set
forth in existing Rule 303(b). Under proposed subparagraph (a)(2)(A),
the early warning notice requirement would be triggered if the Clearing
Member's net capital becomes less than the greater of (i) $12 million,
(ii) in the case of a Clearing Member electing to operate pursuant to
the aggregate indebtedness standard, 10 percent of its aggregate
indebtedness (i.e., aggregate indebtedness exceeds 1000% of net
capital), or (iii) in the case of a Clearing Member electing to operate
pursuant to the alternative standard, 5% of its aggregate debit items.
As compared to existing Rule 303(b)(1), proposed Rule 306A(a)(2)(A)(i)
would require early warning notification to the extent that net capital
becomes less than $12 million (rather than $2.5 million) to reflect the
change in net capital requirements as described in the description of
proposed Rule 301 above.
    Under proposed subparagraph (a)(2)(B), the early warning notice
requirement would be triggered if the aggregate principal amount of
such Clearing Member's satisfactory subordination agreements (other
than such agreements which qualify as equity capital under SEC Rule
15c3-1(d)) exceeds 70% of such Clearing Member's debt-equity total.
This new subparagraph (a)(2)(B) would be substantively identical to
existing Rule 303(b)(2).
    Under proposed subparagraph (a)(2)(C), the early warning notice
requirement would be triggered if the Clearing Member carries accounts
of listed options specialists in accordance with SEC Rule 15c3-
1(c)(2)(x) or has elected to operate pursuant to SEC Rule 15c3-1(a)(6),
and the sum of deductions and required equity, as applicable, exceeds
1000% of such Clearing Member's net capital. This new subparagraph
(a)(2)(C) would replace the provisions currently set forth in existing
Rule 303(b)(3)-(4).
    Under proposed subparagraph (a)(2)(E), the early warning notice
requirement would be triggered if the Clearing Member's Examining
Authority has granted to such Clearing Member, pursuant to SEC Rule
15c3-1(c)(2)(v)(C), an extension of any time period provided for
resolving short securities differences under SEC Rule 15c3-
1(c)(2)(v)(A). This new subparagraph (a)(2)(E) would be substantively
identical to existing Rule 303(b)(5).
    Under proposed subparagraph (a)(2)(F), the early warning notice
requirement would be triggered if the Clearing Member has provided any
notice as required by SEC Rule 15c3-1(e)(1)(iv). Proposed subparagraph
(a)(2)(F) also would require the Clearing Member to provide OCC with a
copy of the notice so provided. This new subparagraph (a)(2)(F) would
be substantively identical to existing Rule 303(b)(6).
    Fully Registered FCMs. Proposed subparagraph (a)(3) would apply to
fully registered FCM Clearing Members and replace the provisions set
forth in existing Rule 303(c). Under proposed subparagraph (a)(3)(A),
the early warning notice requirement would be triggered if the Clearing
Member's adjusted net capital becomes less than the greater of $12
million or the early warning adjusted net capital requirements
established by CFTC Rule 1.12(b). Under proposed subparagraph
(a)(3)(B), the early warning notice requirement would be triggered if
the Clearing Member has provided any notice as required by CFTC Rule
1.12(c), (d), (f)(3), (f)(4), (g) or (m). Proposed subparagraph
(a)(3)(B) also requires the Clearing Member to provide OCC with a copy
of the notice so provided.
    Canadian Investment Dealers. Proposed subparagraph (a)(4)(A) would
apply to Canadian Investment Dealer Clearing Members and (together with
proposed subparagraph (a)(4)(B)) replace the provisions set forth in
existing Rule 303(d). Under proposed subparagraph (a)(4)(A), the early
warning notice requirement would be triggered if the Clearing Member's
risk adjusted capital is less than $12 million or 5% of total margin
required or if it subject to an early warning designation under the
financial and operational rules established by IIROC.
    Other Non-U.S. Securities Firms. Proposed subparagraph (a)(4)(B)
would apply to all other Non-U.S. Securities Firm (i.e., non-Canadian
Investment Dealer) Clearing Members and (together with proposed
subparagraph (a)(4)(A)) replace the provisions set forth in existing
Rule 303(d). Under proposed subparagraph (a)(4)(B)(i), the early
warning notice requirement would be triggered if the Clearing Member's
net capital equivalent is less than the greater of (a) $12 million or
(b) the early warning amount required by the firm's applicable
regulatory requirements established by the regulatory authority of that
country's government or an agency or instrumentality thereof.
    Under proposed subparagraph (a)(4)(B)(ii), the early warning notice
requirement would be triggered if the Clearing Member's total equity is
less than $30 million and the Risk Committee has prohibited the
Clearing Member from using its non-U.S. jurisdiction's regulatory
minimum and early warning requirements or otherwise requires the
Clearing Member to supplement its non-U.S. jurisdiction's regulatory
minimum or early warning requirements.
All Non-U.S. Securities Firms
    Under proposed subparagraph (a)(4)(C), the early warning notice
requirement would be triggered if the Clearing Member violates any rule
or regulation relating to financial responsibility or protection of
customer property of its Non-U.S. Regulatory Agency (or any other
governmental agency or instrumentality or independent organization or
exchange to whose authority it is subject).
    Under proposed subparagraph (a)(4)(D), the early warning notice
requirement would be triggered if the Clearing Member receives any
notice (whether written or otherwise) from its Non-U.S. Regulatory
Agency (or any other agency, instrumentality, organization or exchange)
(a) alleging a violation of any such rule or regulation, (b) informing
it that it may violate any such rule or regulation unless it takes
corrective action, or (c) informing it that it has triggered any
provision in the nature of an early warning provision contained in any
such rule or regulation.
    Finally, proposed subparagraph (a)(4)(D) would permit OCC to
specify other events that may trigger an early warning notice
requirement.

    Banks. Proposed subparagraph (a)(5) would apply to all Clearing
Members that are Banks. Under proposed subparagraph (a)(5)(A), the
early warning notice requirement would be triggered if the Clearing
Member's Tier 1 Capital is less than $600 million. Under proposed
subparagraph (a)(5)(B), the early warning notice requirement would be
triggered if the Clearing Member's Tier 1 Capital Ratio is less than
the greater of (i) 7% or (ii) its Tier 1 Capital Ratio regulatory
requirement plus 1%, or if the Clearing Member is deemed
undercapitalized as calculated or defined pursuant to the regulatory
capital rules of the applicable banking regulatory authority of its
home country. Under proposed subparagraph (a)(5)(C), the early warning
notice requirement would be triggered if the Clearing Member violates
any rule or regulation relating to financial responsibility or
protection of customer property of its regulatory agency (or any other
governmental agency or instrumentality or independent organization or
exchange to whose authority it is subject). Under proposed subparagraph
(a)(5)(D), the early warning notice requirement would be triggered if
the Clearing Member receives any notice (whether written or otherwise)
from such agency (or any other agency, instrumentality, organization or
exchange) (a) alleging a violation of any such rule or regulation, (b)
informing it that it may violate any such rule or regulation unless it
takes corrective action, or (c) informing it that it has triggered any
provision in the nature of an early warning provision contained in any
such rule or regulation. Finally, proposed subparagraph (a)(5)(E) would
permit OCC to specify other events that may trigger an early warning
notice requirement. In addition, the provisions of existing Rule 303,
Interpretation and Policy .01 would be relocated to Chapter I of the
Rules. Existing Rule 303, Interpretation and Policy .02 would be
removed given that OCC no longer maintains different standards for
exempt Non-U.S. Clearing Members.
Paragraph (b)--Notice of Material Changes and Information Requests
    Proposed paragraph (b) would adopt many of the provisions in
existing Rule 215 and set forth the notice requirements for material
changes and other information requests. New subparagraphs (b)(1)
through (b)(6) are described in greater detail below.
    Subparagraph (b)(1). Proposed subparagraph (b)(1) would adopt the
provisions currently set forth in existing Rule 215(a) without any
changes. Under proposed subparagraph (b)(1), each Clearing Member would
be required to provide OCC with prompt prior written notice of any
enumerated material change in its form of organization or ownership
structure.
    Subparagraph (b)(2). Proposed subparagraph (b)(2) would modify and
expand on the provisions currently set forth in existing Rule 215(b).
Specifically, proposed subparagraph (b)(2) would require each Clearing
Member to give OCC prompt written notice \30\ of material operational
or financial changes, including: (A) a change in location of clearing
operations; \31\ (B) a change in location of its facilities or offices
maintained pursuant to Rule 302; \32\ (C) a change in any personnel of
the Clearing Member responsible for ensuring that the Clearing Member
is able to fulfill its obligations as a Clearing Member pursuant to
Rule 303(c); \33\ (D) a new or revoked stock settlement relationship
with another Clearing Member or CDS; (E) a change in the Clearing
Member's independent public accountant; (F) a change in Non-U.S.
Clearing Member's regulatory capital standards; (G) experiencing
operational difficulties or is non-compliant with operational
capability requirements; (H) current or hindsight customer reserve or
customer segregation deficiencies; (I) a change in registration status
or regulatory authorization; (J) current or hindsight net capital
deficiencies; (K) a change in date for its fiscal year-end; or (L) if a
Canadian Clearing Member participating in the Stock Loan/Hedge Program
knows or reasonably expects that CDS will cease, or if CDS has ceased,
to act on behalf of the Canadian Clearing Member with respect to
effecting delivery orders for stock loan and stock borrow
transactions.\34\
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    \30\ As compared to existing Rule 215(b), proposed Rule
306A(b)(2) would require ``prompt'' written notice (rather than 30-
day prior written notice). This change is intended to grant greater
flexibility and reduce burdens associated with providing advance
notice. Moreover, OCC believes certain changes that currently
require prior notice (i.e., planned changes) generally are not
planned so prior notice is not practical.
    \31\ As compared to existing Rule 215(b)(1), proposed Rule
306A(b)(2)(A) would not require advance notification of planned
changes. This change is intended to grant greater flexibility and
reduce burdens associated with providing advance notice. Also, in
OCC's experience, these changes are generally not planned so prior
notice is not practical.
    \32\ As compared to existing Rule 215(b)(2), proposed Rule
306A(b)(2)(B) would not require advance notification of planned
changes. This change is intended to grant greater flexibility and
reduce burdens associated with providing advance notice. Also, in
OCC's experience, these changes are generally not planned so prior
notice is not practical. Proposed Rule 306A(b)(2)(B) also would
clarify that it applies to both facilities and offices, and
therefore would replace existing Rule 201(b) and existing Rule
215(b)(2).
    \33\ As compared to existing Rule 215(b)(3), proposed Rule
306A(b)(2)(C) would not require advance notification of planned
changes. This change is intended to grant greater flexibility and
reduce burdens associated with providing advance notice. Also, in
OCC's experience, these changes are generally not planned so prior
notice is not practical.
    \34\ Proposed Rule 306A(b)(2)(L) would modify and replace a
portion of existing Article V, Section 1, Interpretation and Policy
.07.
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    Subparagraph (b)(3). Proposed subparagraph (b)(3) (together with
proposed subparagraph (b)(4)) would replace existing Rule 215(c). Under
proposed subparagraph (b)(3), each Clearing Member must give OCC prompt
prior written notice of its intention to enter into, terminate, or
alter its outsourcing activities.
    Subparagraph (b)(4). Proposed subparagraph (b)(4) (together with
proposed subparagraph (b)(3)) would replace existing Rule 215(c). Under
proposed subparagraph (b)(4), each Clearing Member must give OCC prompt
written notice if separation or termination of an agreement occurs
between the only personnel, associated person, or third-party provider
who performs activities necessary to meet the requirements of the Rules
or is otherwise critical to ensuring that the Clearing Member is able
to clear and settle confirmed trades in account types for which it is
approved.
    Subparagraph (b)(5). Proposed subparagraph (b)(5) would add a new
event-based reporting requirement that each Clearing Member notify OCC
within 30 days (i) of its independent auditor issuing a qualified
opinion of its financial statements or (ii) of notification by its
independent auditor that the independent auditor has identified a
material weakness in an internal control over financial reporting.
    Subparagraph (b)(6). Proposed subparagraph (b)(6) would modify
existing Rule 215(d) to provide that each Clearing Member must, within
the time period reasonably prescribed by OCC, furnish to OCC such
documents and information as OCC may from time to time require pursuant
to Chapters II and III of the Rules.
Paragraph (c)--Statutory Disqualifications
    Proposed paragraph (c) would adopt and modify the provisions in
existing Rule 217(b) and set forth the statutory disqualification
notification requirements for Clearing Members. Under proposed
paragraph (c), a Clearing Member, or applicant for clearing membership,
that is or becomes subject to a statutory disqualification

must notify OCC in writing as soon as practicable upon learning of such
statutory disqualification and in any event within 20 business days
thereafter. As compared to existing Rule 217(b), proposed Rule 306A(c)
would require notification within 20 business days (rather than 5
business days).
    Proposed paragraph (c) also would require the Clearing Member to
further accompany such notification with information and forms,
including amendments thereto, related to the statutory disqualification
received from or provided to the SEC, the CFTC or any self-regulatory
organization and clarify that this includes (i) a copy of the order,
judgment, letter of acceptance, waiver and consent, or other document
evidencing the event that gave rise to the statutory disqualification,
and (ii) any amended Form BD, FINRA Form MC-400A, any written response
to a National Futures Association (``NFA'') Rule 504 Notice of Intent
or other written request for relief addressed to such self-regulatory
organization. Clearing Members that are not members of FINRA or NFA are
required to provide OCC with, at a minimum, the information contained
in FINRA Form MC-400A in addition to any forms filed with any self-
regulatory organization or regulatory agency with respect to a
statutory disqualification or similar provision of the laws or
regulations applicable to such Clearing Member or applicant. OCC would
eliminate the requirement that the member or applicant provide OCC
notification of whether or not the Clearing Member is seeking to
continue being a Clearing Member notwithstanding the statutory
disqualification as this is assumed in most cases.
Proposed Rule 306B--Periodic Reporting
    Proposed Rule 306B would set forth the periodic reporting
requirements and incorporate and modify the provisions presently set
forth in existing Rules 216, 306, 308 and 310(a)-(c). Each paragraph in
new Rule 306B is described below.
Paragraph (a)--Financial Reports
    Proposed paragraph (a) would replace existing portions of Rules 306
and 310(a)-(c) with a more concise set of requirements applicable to
each type of Clearing Member. Proposed paragraph (a) also would clarify
that OCC has broad discretion in requiring each Clearing Member to
submit statements of its financial condition at such times and in such
manner as shall be prescribed by OCC. Below are the requirements
applicable to each type of Clearing Member.
    Fully Registered Broker-Dealers. Every Clearing Member that is a
fully registered broker-dealer would be required to file with OCC a
true and complete copy of Part II, IIA, or any other variation of SEC
Form X-17A-5 within 20 business days after the end of each month
(regardless of whether or not such Clearing Member is required to
prepare or file such report on a monthly basis with another regulatory
or self-regulatory organization). As compared to existing Rule 306,
proposed Rule 306B(a) would include a 20-business-day filing deadline
that is standardized for Clearing Members that are fully registered
broker-dealers, FCMs or Canadian Investment Dealers.
    Fully Registered FCMs. Every Clearing Member that is a fully
registered FCM would be required to file with OCC a true and complete
copy of CFTC Form 1-FR-FCM within 20 business days after the end of
each month (regardless of whether or not such Clearing Member is
required to prepare or file such report on a monthly basis with another
regulatory or self-regulatory organization). As noted above, proposed
Rule 306B(a) would include a 20-business-day filing deadline that is
standardized for Clearing Members that are fully registered broker-
dealers, FCMs or Canadian Investment Dealers.
    Canadian Investment Dealers. Every Clearing Member that is a
Canadian Investment Dealer would be required to file with OCC a true
and complete copy of its Form 1 of the International Financial
Reporting Standards within the later of (i) 20 business days after the
end of each month or (ii) monthly deadlines established by IIROC. As
noted above, proposed Rule 306B(a) would include a 20-business-day
filing deadline that is standardized for Clearing Members that are
fully registered broker-dealers, FCMs or Canadian Investment Dealers.
    Other Non-U.S. Securities Firms. Every Clearing Member that is a
Non-U.S. Securities Firm (excluding Canadian Investment Dealers) would
be required to file with OCC true and complete copies of such financial
reports specified by OCC at the same time such report is filed with a
primary regulatory authority. The financial reports must be prepared in
accordance with its non-U.S. regulatory requirement.
    U.S. Banks. Every Clearing Member that is a U.S. national bank or
state-chartered bank would be required to file with OCC a copy of its
Consolidated Report of Condition and Income (``Call Report'') and (to
the extent not contained within such Call Reports) information
containing each of its capital levels, ratios, and requirements due at
same time it is filed with primary regulatory authority. If the
Clearing Member is not required to file a Call Report, then it must
file with OCC a copy of its unaudited quarterly financial statements as
provided to the state regulatory authority having jurisdiction over the
participant, containing each of its capital levels, ratios, and
requirements.
    Non-U.S. Banks. Every Clearing Member that is a non-U.S. bank would
be required to file with OCC true and complete copies of such financial
reports specified by OCC at the same time such report is filed with a
primary regulatory authority. The financial reports must be prepared in
accordance with its non-U.S. regulatory requirements. OCC would also
relocate Rule 306, Interpretation and Policy .03, which requires that
OCC deliver to the CFTC upon request any financial report provided to
OCC pursuant to Rule 306 by a Clearing Member that is not an FCM, to
new Rule 306B(a)(8).
Paragraph (b)--Annual Audited Financial Statements
    Proposed paragraph (b) would replace existing Rule 308 with an
annual requirement that is standardized across types of Clearing
Members. Specifically, proposed paragraph (b) would require each
Clearing Member to provide to OCC a complete copy of its annual audited
financial statements, including reports on material inadequacies and
internal control, prepared in accordance with its regulatory
requirements and with generally accepted auditing standards of the
country in which such Clearing Member has its principal place of
business within 60 calendar days of the end of its fiscal year.
Paragraph (c)--Early or More Frequent Reporting
    Proposed paragraph (c) would replace portions of existing Rule 306
with standardized requirements relating to early and more frequent
reporting. Specifically, if a Clearing Member is required to file a
financial report on an earlier date or on a more frequent basis than is
required under Rule 306B, then the Clearing Member is required to file
with OCC a true and complete copy of each such report at the same time
it is filed with its relevant regulatory authority. In addition,
proposed paragraph (c) would provide that OCC may, in its discretion,
require more frequent financial reporting in such form as OCC may
specify or other financial statements in such form or detail as may be
prescribed by OCC, including for purposes of assessing

whether the Clearing Member is meeting the financial requirements for
clearing membership on an ongoing basis.
Paragraph (d)--Extensions
    Proposed paragraph (d) would replace a portion of existing Rule
308(e) with a standardized provision that permits OCC, in its
discretion, to recognize an extension or later deadline granted by the
Clearing Member's relevant regulatory authority for financial reports
required under Rule 306B, provided that such extension is not issued on
a permanent basis and a copy of such extension is filed with OCC in a
timely manner.
Paragraph (e)--Large Trader Reports
    Proposed paragraph (e) would adopt the provisions set forth in
existing Rule 216 with no substantive changes.
Proposed Rule 307--Protective Measures
    Existing Rules 304 and 305 set forth certain restrictions on
distributions, transactions, positions and activities. The proposed
rule change would adopt a more comprehensive set of protective measures
in proposed Rules 307, 307A, 307B and 307C and incorporate, as
appropriate, the provisions presently set forth in existing Rules 304
and 305.
    Proposed Rule 307 would grant broad authority to OCC to impose
protective measures on any Clearing Member or applicant for clearing
membership that (i) is approaching or does not meet OCC's minimum
membership standards or fails to provide information required under
Chapters II and III of the Rules such that OCC is unable to determine
whether it meets the minimum membership standards, (ii) presents
increased credit or liquidity risk to OCC, (iii) is subject to enhanced
monitoring and surveillance under OCC's watch level reporting process,
or (iv) whose financial condition, operational capability, or risk
management capability otherwise makes it necessary or advisable, for
the protection of OCC, other Clearing Members, or the general public.
    Below is a description of proposed Rules 307A, 307B and 307C.
Rule 307A--Restrictions on Distributions
    The provisions in existing Rule 304 have been moved to new Rule
307A and modified to clarify that it applies to all qualified
regulatory capital and to eliminate separate distribution restriction
requirements for Non-U.S. Clearing Members. Proposed Rule 307A(a) would
prohibit a Clearing Member from withdrawing qualified regulatory
capital (by dividend, distribution, or otherwise) without the prior
written authorization of OCC if, after giving effect to such
withdrawal, an early warning condition specified in Rule 306A(a)(2),
through (6) would exist with respect to such Clearing Member, or such
withdrawal would be inconsistent with a Clearing Member's regulatory
requirements. In turn, proposed Rule 307A(b) would provide that OCC may
prohibit Clearing Members from withdrawing qualified regulatory capital
(by dividend, distribution, or otherwise) if such Clearing Member is
subject to enhanced monitoring and surveillance under OCC's watch level
reporting process or the distribution in question could result in
increased credit or liquidity risk to OCC.
    Existing Rule 304C(c) and Rule 304, Interpretations and Policies
.01 through .03, which set forth provisions applicable to exempt Non-
U.S. Clearing Members, have been removed given the broad applicability
of new Rule 307B(a) and (b) to all Clearing Members and the elimination
of the concept of ``exempt Non-U.S. Clearing Members'' in OCC's Rules.
OCC believes that proposed changes would simplify and clarify its Rules
concerning restrictions on distributions and ensure that these
protective measures are being applied consistently for all Clearing
Members.
Rule 307B--Restrictions on Certain Transactions, Positions and
Activities
    The provisions in existing Rule 305 would be moved to proposed Rule
307B and modified to improve general readability and to further clarify
OCC's broad authority to impose protective measures with respect to
transactions, open positions and related activities. In particular, the
provisions in existing Rule 305(a) and (b) would be combined in
proposed Rule 307B(a) and streamlined to provide that if circumstances
warrant the imposition of protective measures under Rule 307, then the
CEO or COO (or if unavailable, a Designated Officer) may impose the
following restrictions on a Clearing Member:
    i. prohibit or impose limitations on clearing transactions that
increase credit or liquidity risk;
    ii. require such Clearing Member to reduce, eliminate, or hedge any
existing positions presenting increased credit, liquidity or
operational risk to OCC;
    iii. require such Clearing Member to transfer any existing
positions or accounts maintained or carried by such Clearing Member to
another Clearing Member; and/or
    iv. restrict such Clearing Member's outsourced activities or
activities as an Appointed Clearing Member or prohibit such Clearing
Member from engaging in such activities or to impose such limitations
on such activities as such officer deems necessary or appropriate in
the circumstances.
    The provisions set forth in existing Rule 305(c) and (d) have been
moved to new Rule 307B(b) and (c) with no substantive changes.
Separately, existing Rule 305, Interpretations and Policies .01 through
.12, which provide a non-exhaustive list of examples of situations in
which OCC may take protective measures under existing Rule 305, have
been removed to improve general readability of the Rule and to further
clarify the breadth of OCC's authority to impose protective measures
with respect to transactions, open positions and related activities.
Rule 307C--Additional Operational, Personnel, Financial Resource and
Risk Management Requirements
    The proposed rule change would adopt new Rule 307C to permit OCC to
impose protective measures in the form of additional operational,
personnel, financial resource or risk management requirements. Proposed
Rule 307C also sets forth a non-exclusive list of such protective
measures, including:
    i. requiring Clearing Members to maintain higher minimum capital
amounts than those required by Rule 301;
    ii. requiring Clearing Members to adjust the amount or composition
of margin or Clearing Fund deposits, including but not limited to
requiring the deposit of additional margin or requiring Clearing
Members to satisfy a specified portion of their margin or Clearing Fund
requirements in cash or other assets with comparatively less risk; \35\
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    \35\ This proposed change would in part incorporate authority in
existing Rule 604(g), which allows OCC to require Clearing Members
to deposit a specified amount of cash to satisfy its margin
requirements as a protective measure if such Clearing Member is
determined to present increased credit risk and is subject to
enhanced monitoring and surveillance under OCC's watch level
reporting process. As a result, Rule 604(g) would be deleted from
OCC's Rules.
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    iii. requiring Clearing Members to add new personnel or provide
additional training to existing personnel to enhance the capability,
experience, and competence of operational, financial reporting, or risk
management personnel;
    iv. requiring Clearing Members to execute an agreement with a
third-party service provider determined to be acceptable to OCC that
will be in effect

until such time that the Clearing Member is able to comply with OCC's
operational, personnel or risk management standards;
    v. requiring Clearing Members to enhance its risk management
policies, procedures and practices;
    vi. requiring alternate methods of electronic connection (e.g.,
lease line) due to operational risk concerns; and
    vii. requiring additional reporting of its financial or operational
condition at such intervals and in such detail as determined by OCC.
    OCC believes the proposed protective measures are necessary and
appropriate to ensure that OCC is able to manage the range of risks
(including credit risk, liquidity risk, and operational risk) that may
be presented by Clearing Members that do not comply, or are in danger
of no longer complying, with OCC's minimum membership standards,
present increased credit or liquidity risk to OCC, or are otherwise
experiencing difficulties in their financial condition, operational
capability, or risk management capability.
Rule 308--Statutory Disqualification
    Existing Rule 217 sets forth OCC's requirements with respect to
Clearing Members (or their principals in the case of CFTC-registered
FCMs) subject to a statutory disqualification. The proposed rule change
would relocate or otherwise eliminate the provisions set forth in Rule
217 as follows:
     The provisions set forth in existing Rule 217(a) would be
moved to proposed Rule 308(a) and revised to further provide that in
the event a Clearing Member is or becomes subject to a Statutory
Disqualification,\36\ OCC may impose protective measures under Rule 307
or conduct a hearing or institute a disciplinary proceeding in
accordance with Chapter XII of the Rules to determine whether to no
longer permit such Clearing Member to continue its membership. Proposed
paragraph (a) also would clarify that OCC will not permit such Clearing
Member to continue its membership if so ordered by the SEC.
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    \36\ As noted above in the description of proposed Rule 204,
Rule 101 has been revised to define the term ``Statutory
Disqualification'' as (i) in the case of a fully registered broker-
dealer, a statutory disqualification as defined in section 3 of the
Exchange Act, (ii) in the case of a fully registered FCM, the
applicant or Clearing Member or a principal thereof, as defined in
CEA section 8a(2), is subject to statutory disqualification under
CEA section 8a(2)-(4), or (iii) in the case of a Non-U.S. Securities
Firm or bank, any similar provision of the laws or regulations
applicable to such applicant or Clearing Member.
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     As discussed in the description of proposed Rule 306A, the
provisions in existing Rule 217(b) would be moved to proposed Rule
306A(c) with modifications.
     The provisions in existing Rule 217(f) would be moved to
proposed Rule 308(b) and modified to clarify that OCC may ``delay a
final decision regarding a Clearing Member's Statutory
Disqualification'' (rather than waiving provisions of existing Rule
217) until any proceeding before another self-regulatory organization
is concluded. The remaining portions of existing Rule 217(f) would
remain unchanged (aside from relocating to proposed Rule 308(b)).
     The provisions in existing Rule 217(c)-(e) and (g) would
be removed as unnecessary for two reasons: (1) proposed paragraph (a)
provides broad authority to conduct a hearing or institute a
disciplinary proceeding in accordance with Chapter XII of the Rules to
determine whether to no longer permit such Clearing Member to continue
its membership; and (2) OCC's minor rule violation plan in proposed
Rule 1203 would include any failure to timely notify OCC of any
Statutory Disqualification under new Rule 306A(c).
Proposed Changes to Rule 609--Intra-Day Margin
    OCC proposes minor modifications to Rule 609, including conforming
changes to clarify that OCC may require the deposit of intra-day margin
in response to changes in a Clearing Member's operational or risk
management condition in addition to its financial condition. The
proposed change is intended to reflect the more expansive protective
measure rules proposed in new Rule 307C. OCC would also remove
references to unspecified ``officers'' of OCC as these details are
included in OCC's internal policies and procedures.
Proposed Rule 1203--Minor Rule Violations
    The rules applicable to minor rule violations currently are set
forth primarily in existing Rule 1201(b), Rule 215(f), and
Interpretation and Policy .01 of Rule 215(f). Existing Rule 1201(b)
sets forth OCC's ``plan'' (within the meaning of Rule 19d-1(c)(2)) for
the disposition of ``minor rule violations'' and generally provides
that OCC may impose a fine of $2,500 or less for any violation
designated in the By-Laws or the Rules as a minor rule violation. Any
such fine for a minor rule violation would be in lieu of commencing a
disciplinary proceeding pursuant to Rule 1201(a). Existing Rule 1201(b)
also sets forth processes for imposing and contesting fines for minor
rule violations. The proposed rule change would move the provisions set
forth in existing Rule 1201(b) to new Rule 1203(a) with no substantive
changes.
    The proposed rule change also would remove existing Rule 215,
Interpretation and Policy .01 and replace it with new Rule 1203(b) and
(c), which modify the list of violations that may constitute a minor
rule violation to include the following:
     a violation of Rule 205 (relating to the filing of a
certified list of authorized signatories);
     a violation of Rule 208 (relating to maintaining records
of confirmed trade data);
     a violation of Rule 210 (relating to the payment of fees
and charges);
     a violation of Rule 302(b)-(d) (relating to the
operational capability to maintain offices, books and records and the
ability to appropriately discharge responsibilities);
     a violation of Rule 303(c) (relating to the timely
provision of information concerning personnel);
     a violation of Rule 306A(a)(2)(e) (relating to providing
OCC with a copy of any notice required under paragraph (e)(1)(iv) of
Rule 15c3-1);
     a violation of Rule 306A(b) (relating to providing notice
of material changes and information requests);
     a violation of Rule 306A(c) (relating to providing notice
of any statutory disqualification);
     a violation of Rule 306B (relating to the filing of
periodic reports); and
     any failure to provide such other requested documents and
information in connection with the requirements of Chapters II and III
of the Rules, including, but not limited to, financial, regulatory and
other information, as OCC may in its discretion require.
    In addition, proposed Rule 1203(e) would stipulate that OCC may
institute disciplinary proceedings against a Clearing Member pursuant
to Chapter XII of the Rules for a violation of any of the requirements
listed above.
    The proposed rule change also would replace the existing fine
schedule with a simplified fine schedule in new Rule 1203(c) that
imposes $1,500 for the first minor rule violation and $2,500 for a
second violation occurring within a rolling 24-month period.
Additionally, three or more violations within a rolling 24-month period
would result in a disciplinary proceeding in accordance with Chapter
XII of the Rules. Proposed paragraph (d) also would clarify that fines
will be levied for offenses within a rolling 24-month period beginning
with the first occasion.

Proposed Rule 1204--Discipline by Other Self-Regulatory Organizations
    Under the proposed rule change, existing Rule 1203 would be
renumbered as Rule 1204 with no other substantive changes.
Proposed Rule 2201--Instructions to the Corporation
    Portions of existing Article V, Section 1, Interpretation and
Policy .07 currently set forth requirements applicable to Canadian
Hedge Clearing Members on behalf of which CDS maintains an identifiable
sub-account at DTC. The proposed rule change would move these
provisions to new paragraphs (c) and (d) of Rule 2201 and eliminate
references to ``Canadian Hedge Clearing Member'' given that term would
no longer be defined. There are no other substantive changes to these
provisions.
Additional Proposed Changes to Terms
    The proposed rule change would move various defined terms from the
By-Laws to Chapter I of the Rules, including Canadian Clearing Member,
FATCA, FATCA Compliant, FFI Clearing Member, Non-U.S. Regulatory
Agency, Non-U.S. Securities Firm, Qualified Intermediary Assuming
Primary Withholding Responsibility, Qualified Derivatives Dealer. The
defined terms Section 871(m) Effective Date and Section 871(m)
Implementation Date would be removed because these dates have passed so
the defined terms are no longer necessary.
    The proposed rule change also would adopt a new definition for the
term Statutory Disqualification.\37\
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    \37\ See supra discussion on proposed Rule 204.
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    Finally, the proposed rule change would eliminate various distinct
categories of Clearing Members and their respective definitions or
other usage from the By-Laws, including, Canadian Hedge Clearing
Member, Domestic Clearing Member, exempt Non-U.S. Clearing Member,
futures-only affiliated Clearing Member, Hedge Clearing Member, Managed
Clearing Member, Managing Clearing Member and Market Loan Clearing
Member. References to these terms in the text of the By-Laws or the
Rules would be replaced with general references to ``Clearing Member''
and all Clearing Members would be subject to the consistent standards
set forth in the proposed rule change.
    OCC would continue to maintain the concept of Appointing Clearing
Members and Appointed Clearing Members; however, these members would no
longer be subject to distinct or different membership standards.
Additional Proposed Deletions
Existing Rule 204
    The proposed rule change would remove existing Rule 204, which
pertains to designating physical locations as clearing offices of the
Clearing Member. As a practical matter, this Rule is no longer relevant
to the operations of OCC or its Clearing Members given the migration of
trading, clearance and settlement activities to electronic means.
Existing Rule 309
    The proposed rule change would remove existing Rule 309, which sets
forth certain requirements for Managed Clearing Members and Managing
Clearing Members. More generally, the proposed rule change would remove
references to facilities management agreements, Managing Clearing
Members and Managed Clearing Members. These rules would be replaced by
the more general rules proposed for outsourcing to third-party service
providers.\38\
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    \38\ See supra discussion on proposed Rule 303.
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Existing Rule 309A
    The proposed rule change would remove existing Rule 309A, which
sets forth minimum capital and other requirements for Appointed
Clearing Members. The concept of Appointing and Appointed Clearing
Members would remain in OCC's rules, but they would no longer be a
distinct ``membership type.'' Any Clearing Member serving an Appointed
Clearing Member capacity would be subject to the same minimum capital
requirements as all other Clearing Members (as set forth in proposed
Rule 301).\39\ OCC would also revise the definition of Appointed
Clearing Member to clarify that an Appointed Clearing Member must be
authorized to clear physically-settled equity options and stock futures
to ensure they have the appropriate operational capability and
expertise to settle such transactions on behalf of other Clearing
Members.
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