[Federal Register Volume 81, Number 149 (Wednesday, August 3, 2016)]
[Notices]
[Pages 51220-51237]
[FR Doc No: 2016-18320]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78438; File No. SR-OCC-2016-002]

Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change Concerning Enhancements to The
Options Clearing Corporation's Governance Arrangements

July 28, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 15, 2016, The Options Clearing Corporation (``OCC'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change as described in Items I, II and III below, which Items have
been prepared by OCC. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change

    This proposed rule change by The Options Clearing Corporation
(``OCC'') concerns modifications and enhancements to OCC's governance
arrangements. OCC is proposing to amend its Certificate of
Incorporation, By-Laws, and Board of Directors (``Board'') Charter to
require that only one Management Director serve on OCC's Board (as
opposed to the current requirement of two Management Directors).
Moreover, OCC is proposing to amend its By-Laws and Rules to delete all
references to the title and responsibilities of the Management Vice
Chairman. In addition, OCC is proposing to amend its By-Laws to: (i)
Provide that the Compensation and Performance Committee (``CPC'') \3\
and

the Audit Committee (``AC'') each will be chaired by a Public Director;
(ii) modify the composition requirements of the Risk Committee (``RC'')
to, among other things, provide that an Exchange Director be a member
of the Risk Committee; (iii) provide for action by the OCC Board in the
nomination process for Member Directors and Public Directors; (iv)
eliminate term limits for Public Directors; and (v) consolidate By-Law
sections that identify the committees of the Board into a single
section of the By-Laws. Finally, OCC is proposing amendments to the
Charters of the Board and the AC, CPC, Governance and Nominating
Committee (``GNC''), RC, and Technology Committee (``TC'')
(collectively, ``Board Committees'' or ``Committees'' and each a
``Board Committee'' or ``Committee'') that stem from scheduled reviews
of such documents.
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    \3\ As described below, the Performance Committee would be
renamed as the Compensation and Performance Committee.
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    All capitalized terms not defined herein have the same meaning as
set forth in the OCC By-Laws and Rules.

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

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

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

1. Purpose
    The purpose of this proposed rule change is to implement a number
of modifications and enhancements to OCC's governance arrangements.
Specifically, as a result of the Board's continual evaluation of OCC's
governance arrangements, OCC is proposing to change the composition
requirements of its Board to require that one Management Director
serves on OCC's Board (as opposed to two) and to eliminate the role of
Management Vice Chairman to provide more clarity and transparency
regarding the status of these roles at OCC. In addition, OCC is
proposing to amend its By-Laws to, among other things: (i) Provide that
the CPC and the AC each will be chaired by a Public Director to
underscore and reinforce the independence of those committees and align
with governance best practices and practices of other self-regulatory
organizations; (ii) modify the composition requirements of the RC,
including to provide that an Exchange Director be a member of the RC to
provide the RC with additional expertise and unique perspective on
matters such as market risk and special risks arising from trading
practices and strategies, and new products; (iii) provide for Board
action in the nomination process for Member Directors and Public
Directors of OCC's Board to ensure an appropriate level of oversight
and participation by the Board in determining its own composition and
that the composition of the Board fulfils its needs for particular
skills and qualifications; (iv) eliminate term limits for Public
Directors in the interest of ensuring that OCC has access to the full
benefits of a Public Director's understanding and learning, with
respect to OCC and the markets OCC serves, as that knowledge develops
over time; and (v) consolidate By-Laws sections that identify the
committees of the Board into a single section of the By-Laws to provide
more clarity and transparency to OCC's participants regarding the
existence and composition of such Committees.
    OCC is also proposing amendments to the Charters of OCC's Board,
AC, CPC, GNC, RC, and TC that stem from scheduled reviews of such
documents. The proposed amendments to the Board and Committee Charters
are designed, in general, to provide more clarity and transparency
around the oversight functions and responsibilities of the Board and
each of its Committees and provide for a more comprehensive and robust
oversight framework for the financial reporting, audit and compliance,
compensation and performance, governance and nomination, risk, and
technology functions at OCC.
    The proposed amendments to OCC's Certificate of Incorporation, By-
Laws, Rules, Board and Committee Charters, and Amended and Restated
Stockholders Agreement are described in detail below.
Proposed Amendments to OCC's Certificate of Incorporation
    OCC is proposing to amend its Certificate of Incorporation to state
that the number of Management Directors serving on OCC's Board shall be
such number as shall be fixed by or pursuant to OCC's By-Laws.\4\ The
purpose of this proposed change is ultimately to require that only one
Management Director shall serve on OCC's Board as OCC is also proposing
to amend its By-Laws to state that one Management Director shall serve
on OCC's Board (as discussed in more detail below). The proposed
amendments would also ensure consistency between all of OCC's governing
documents concerning the number of Management Directors on OCC's Board.
OCC's Certificate of Incorporation and By-Laws currently state that
OCC's Board shall be composed of Members Directors, Exchange Directors,
Public Directors, and two Management Directors. Recently, however,
there has been a vacancy for one Management Director position and only
one Management Director is serving on the Board at this time.\5\ OCC's
Board continually evaluates the leadership structure at OCC, including
the appropriate number of Management Directors for OCC's Board, and in
light of recent experience since the vacancy of the second Management
Director position, believes that amending the Board composition to
require one Management Director on OCC's Board would continue to
provide an appropriate level of management representation in the Board-
level oversight of OCC. The Executive Chairman, as Management Director,
would continue to represent management's viewpoint on OCC's Board.
Moreover, the Board has access to OCC's management team, which ensures
that the Board has continued access to management's perspectives on the
business and affairs of OCC. Furthermore, OCC notes that, prior to the
addition of a second Management Director seat in 2013, OCC has
historically had only one Management Director serving on its Board.\6\
Accordingly, OCC believes that the

proposed amendments would continue to provide for prudent governance
arrangements at OCC. OCC is also proposing conforming changes to the
Board Charter as described below.
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    \4\ The number of Management Directors required to serve on
OCC's Board would be stipulated by Article III, Section 1 of OCC's
By-Laws. Article XI, Section 1 of OCC's By-Laws states that Article
III of the By-Laws may not be amended by action of the Board without
the approval of the holders of all of the outstanding Common Stock
of the Corporation entitled to vote thereon. Accordingly, any
proposed change in the number of Management Directors required to
serve on OCC's Board would continue to be subject to stockholder
approval.
    \5\ In 2014, the Commission approved a proposed rule change
providing that OCC's President would not be considered a Management
Director and, therefore, only one Management Director (the Executive
Chairman) currently serves on the Board. See Securities Exchange Act
Release No. 73785 (December 8, 2014), 79 FR 73915 (December 12,
2014) (SR-OCC-2014-18).
    \6\ In 2013, the Commission approved a proposed rule change by
OCC to provide for the separation of the powers and duties combined
in the office of OCC's Chairman of the Board of Directors into two
offices, Chairman and President, and to create an additional
directorship to be occupied by the President. See Securities
Exchange Act Release No. 34-[sic]70076 (July 30, 2013), 78 FR 47449
(August 5, 2013) (SR-OCC-2013-09).
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Proposed Amendments to OCC's By-Laws and Rules
Number of Management Directors on OCC's Board
    OCC is proposing to amend Article III, Section 1 of its By-Laws to
state that only one Management Director will serve on OCC's Board (as
opposed to the current requirement of two). As noted above, OCC's Board
continually evaluates the leadership structure at OCC, including the
appropriate number of Management Directors for OCC's Board, and
believes that amending the Board composition to require one Management
Director on OCC's Board would continue to provide an appropriate level
of management representation in the Board-level oversight of OCC. OCC
is also proposing conforming changes to Article III, Sections 10
(Resignations) and 12 (Filling of Vacancies and Newly Created
Directorships) of the By-Laws to reflect that only one Management
Director, the Executive Chairman, would be serving on OCC's Board.
Elimination of Management Vice Chairman Role
    OCC proposes to amend its By-Laws and Rules to eliminate the role
of Management Vice Chairman. The office of Management Vice Chairman has
been vacant for a number of years and has not been included in the
Board's current discussions regarding management succession planning.
During that time, the thought process surrounding leadership roles at
OCC has evolved. OCC believes that any of the responsibilities of the
Management Vice Chairman are already appropriately handled by other
officers of OCC, primarily the Executive Chairman and President (or
where applicable, other officers such as the Secretary or Directors
such as the Member Vice Chairman) \7\ and as a result, this role is
being eliminated from OCC's By-Laws and Rules. OCC believes the
proposed amendments would more accurately reflect the current state of
affairs regarding the office, ensure consistency across all of OCC's
governing documents, and provide more clarity and transparency
regarding OCC's intended governance arrangements.
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    \7\ For example, under proposed revisions to Article IV, Section
7, the Member Vice Chairman would preside over Board and stockholder
meetings in the absence of the Executive Chairman.
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    In particular, OCC is proposing to amend (i) By-Laws Article
I.A.(13); Article II, Section 4; Article III, Section 15; Article IV;
Article V, Sections 1 and 3; Article VI, Section 17; Article VIII,
Section 5; Article IX, Sections 12 and 14 and (ii) Rules 305, 309,
309A, 505, 609A, 801, 804, 805, 901, 903, 1104, 1106, 1309, 1402, 1405,
1604, 1610, 2104, 2110, and 2408 to remove all references to and
responsibilities of the role of Management Vice Chairman.
Committee Descriptions and Other Conforming By-Law Amendments
    OCC is proposing to amend Article III of its By-Laws in order to
provide descriptions of the AC, CPC, GNC, RC, and TC in a single
section of the By-Laws. Specifically, OCC is proposing to consolidate
existing Article III, Section 4 (which concerns the GNC) and existing
Article III, Section 9 (which concerns the RC,\8\ the TC,\9\ and the
Board's ability to designate persons to serve on Committees,
generally), into Article III, Section 4 and add descriptions of the CPC
and AC to Article III, Section 4 of its By-Laws in order to provide a
more transparent, centralized, and unified statement describing all of
the Board Committees. In addition, OCC proposes to make a non-
substantive drafting clarification to existing language being relocated
from Article III, Section 9 to the introductory section of Article III,
Section 4 to clarify that the Board is required to designate persons to
serve on the specifically enumerated Committees therein.
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    \8\ The description of the RC in proposed Article III, Section
4(d) of the By-Laws would reflect changes to OCC's existing policy
regarding the composition of the RC in order to conform the By-Law
provision to changes recommended as a result of the annual review of
the RC Charter (as discussed below). See infra note 15, and related
text.
    \9\ The Commission recently approved a proposed rule change by
OCC to adopt a Technology Committee of the Board of Directors. See
Securities Exchange Act Release No. 77042 (February 3, 2016), 81 FR
6915 (February 9, 2016) (SR-OCC-2015-018).
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    The proposed description of the AC would reflect existing
requirements in the AC and GNC Charters that, on an annual basis, the
Board of Directors shall appoint an AC selected from among the
directors recommended by the then-constituted GNC after consultation
with the Executive Chairman and shall serve at the pleasure of the
Board, provided that no Management Director may serve on the Audit
Committee. The proposed description of the AC would also include a new
requirement that the chairman of the AC shall be designated by the
Board from among the Public Director member(s) of the Committee (as
described further below).
    The proposed description of the CPC would reflect the existing
requirement that, on an annual basis, the Board of Directors shall
appoint a CPC and that the CPC generally consists of the Executive
Chairman, the Member Vice Chairman, and at least one Public
Director.\10\ Consistent with the preceding sentence, all of the CPC
members will be selected by the Board from among the directors
recommended by the then-constituted GNC after consultation with the
Executive Chairman and shall serve at the pleasure of the Board. The
proposed description would also include a new requirement that the
chairman of the CPC shall be designated by the Board from among the
Public Director member(s) of the Committee (as described further
below). OCC believes that consolidating the descriptions of all Board
Committees into Article III, Section 4 of its By-Laws would provide
more clarity and transparency to OCC's participants regarding the
existence and composition of such Committees.
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    \10\ The proposed description of the CPC in the By-Laws includes
the general requirement that CPC shall include the Executive
Chairman, the Member Vice Chairman, and at least one Public
Director. The proposed description is not intended to change the
more specific CPC composition requirements in the CPC Charter that
the committee consist of a Public Director chair, the Executive
Chairman, the Member Vice Chairman, and three or more other
directors appointed annually by the Board.
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    OCC is proposing amendments to Article IV, Section 1 of the By-Laws
to provide that the Board will elect the Executive Chairman and Vice
Chairman of the Board upon the nomination of the GNC and also elect the
President of OCC (in addition to the Secretary and Treasurer). In
addition, OCC proposes amendments to Article IV, Section 7 to delete a
requirement that the Member Vice Chairman preside at the meetings of
any Committee of the Board of Directors charged with the responsibility
for evaluating the performance and compensation of officers as the CPC
would now be chaired by a Public Director. OCC also proposes amendments
to clarify that the Member Vice Chairman would preside over meetings of
the Board and stockholders in the absence of the Executive Chairman
because the President cannot preside over meetings of the Board.\11\
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    \11\ See OCC's By-Laws Article IV, Section 8.
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Compensation and Performance Committee and Audit Committee Independence
    In addition to the proposed changes described above, OCC is also
proposing

changes to the Board Committee descriptions in proposed Article III,
Sections 4(a) and (b) of the By-Laws to reflect the requirement that a
Public Director \12\ chair the AC and the CPC. The GNC recently
performed a review of governance trends and best practices among self-
regulatory organizations as they relate to board-level compensation
committees.\13\ The review was undertaken in order to further the
Board's oversight of employee compensation and benefits, recognizing
that the CPC primarily functions as a compensation committee (although
it also has broad oversight responsibilities for financial and budget
matters). The review highlighted that having the CPC chaired by a
Public Director (rather than a Member Director,\14\ which is currently
the case) would be more consistent with governance best practices and
practices of other self-regulatory organizations. Moreover, such a
change would ensure that compensation and related decisions are
undertaken in a way that is likely to support objective judgment and
independence unfettered by potential conflicts that may exist by having
a Member Director chair the CPC given OCC's self-regulatory
responsibilities. The Board agreed with the GNC's recommendation.
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    \12\ See Article III Section 6A of OCC's By-Laws regarding
Public Directors.
    \13\ The GNC Charter provides, in relevant part, that the
purpose of the GNC is to review on a regular basis the overall
corporate governance of OCC and recommend improvements to the Board
when necessary.
    \14\ See OCC's By-Laws Article III, Section 3 and Section 5.
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    Additionally, the GNC reviewed proposed regulatory standards for
audit committees of self-regulatory organizations that would require
such audit committees to be independent based on facts determined by a
given self-regulatory organization's board of directors. Such review
caused the GNC to recommend to the Board that a Public Director should
be required to chair the AC in order to align with governance best
practices for audit committees and to support the objectivity of the
AC. The Board agreed with the GNC's recommendation. Moreover, and in
furtherance of the goal of AC independence, any currently serving
Management Director(s) would not be eligible to serve on the AC.
Risk Committee Membership
    OCC is proposing to amend Article III of its By-Laws to modify the
composition requirements of OCC's RC. Existing Article III, Section 9
of OCC's By-Laws currently requires that the RC shall consist of the
Executive Chairman, the Member Vice Chairman, at least three other
Member Directors selected on a basis that shall not discriminate
against any Exchange, and one or more Public Directors. OCC is
proposing to replace this description of the RC with new Article III,
Section 4(d), which would relocate and modify the RC composition
requirements to (i) provide that an Exchange Director \15\ be a member
of the RC and (ii) require that at least one Member Director serve on
the RC (as opposed to the current minimum requirement of four Member
Directors) and (iii) remove a specific requirement that one of the
Member Directors on the RC be the Member Vice Chairman.
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    \15\ See Article III Section 6 of OCC's By-Laws regarding
Exchange Directors.
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    The GNC reviewed the membership composition of the RC and
determined that one Exchange Director should be a member of the RC.
Historically, the RC did not include Exchange Directors because Member
Directors were much more directly concerned with the risk management
and membership function of OCC due to the mutualization of risk among
Clearing Members as well as the fact that Clearing Members are
responsible for the contribution of margin and clearing fund deposits.
Given the evolution of the markets for which OCC provides clearance and
settlement services, OCC now believes that an Exchange Director should
be a member of the RC. Exchange Directors have expertise and unique
perspective on matters such as market risk as well as sophistication as
to special risks arising from trading practices, strategies and new
products.
    In addition, the GNC recommended, and the Board approved, a
reduction in the minimum composition requirement for Member Directors
on the RC to allow for greater flexibility in the selection of
Directors with the requisite skills and expertise to serve on the RC.
OCC believes that Member Director participation on the RC is vital and
would therefore continue to require that at least one Member Director
serves on the RC. OCC also believes, however, that it is necessary and
appropriate to maintain flexibility to ensure that the RC is comprised
of those Directors that have the appropriate mix of knowledge and
expertise necessary to provide for the prudent oversight of risk
matters at OCC.
Nomination Process for Member Directors and Public Directors
    OCC is proposing to make amendments to Article III, Sections 5 and
6A; Article IV, Section 1; and adopt Amendment No. 1 to Amended and
Restated Stockholders Agreement to provide for Board action in the
nomination process for Member Directors, Public Directors, the
Executive Chairman, and Member Vice Chairman in conformance with the
process set forth in the GNC Charter.\16\ Currently, Board action is
not a part of the annual election process for Member Directors and
Public Directors as described in the By-Laws and the Amended and
Restated Stockholders Agreement. The proposed amendments would provide
that such persons would be nominated by the GNC for purposes of the
Board's annual election process and then confirmed by the Board. OCC
believes that the proposed rule change would help ensure an appropriate
level of oversight and participation by the full Board in determining
its own composition and that the composition of the Board fulfils its
needs for particular skills and qualifications.
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    \16\ The GNC Charter had already been reviewed by OCC in 2014
and approved by the Commission. See Securities Exchange Act Release
No. 72564 (July 8, 2014), 79 FR 40824 (July 14, 2014) (SR-OCC-2014-
09).
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Elimination of Public Director Term Limits
    OCC is proposing to amend Article III, Section 6A of its By-Laws,
Section IV.1. of the GNC Charter, and Section II.D. of the Board
Charter in order to remove term limits for Public Directors. OCC
believes it is appropriate to eliminate term limits for Public
Directors because the learning curve for directors of OCC is
significant. It is generally recognized that it often takes several
years for directors who come from outside the industry to achieve the
particularized degree of knowledge and understanding about the business
that is necessary to provide significant value. Additionally, the GNC
reviewed OCC's term limit policy for Public Directors in light of
benchmark data and governance trends and determined that the
elimination of term limits for Public Directors is consistent with
governance arrangements at large corporations.\17\ Therefore, OCC is
proposing to remove its term limits for Public Directors in the
interest of assuring that OCC has access to the full benefit of a
Public Director's understanding and learning, with respect to OCC and
the markets OCC serves, as it develops over time.
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    \17\ According to the 2014 Spence Stuart Board Index, among S&P
500 companies, very few boards (only 3%--or 16 companies) specify
director term limits. Of these, none imposes a term limit that is
less than 10 years. The most common term limit is 15 years, and the
longest term limit is 30 years.

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Proposed Amendments to Board and Board Committee Charters
Amendments to the Board Charter and the Fitness Standards
    OCC proposes amendments to the Board Charter that are intended to:
(i) Harmonize the description of the Board's obligations in the Board
Charter with the description of the Board's obligations in OCC's By-
Laws and Rules; (ii) better align the Board Charter with the Board's
Corporate Governance Principles and By-Laws; (iii) reflect recent
changes involving Board Committee Charters; (iv) in general, restate
the Board's oversight responsibilities in a manner designed to provide
for prudent governance arrangements in light of OCC's role as a
systemically important financial market utility; and (v) make certain
non-substantive administrative changes to the Charter. The proposed
amendments are described in more detail below.
Membership and Organization
    OCC proposes amendments to Section II of the Board Charter
regarding membership and organization requirements to reflect the
elimination of the role of Management Vice Chairman as described above.
As a result, in the event that the Executive Chairman is absent or
disabled, the Member Vice Chairman shall preside over meetings of the
Board. OCC also proposes amendments that would allow for additional
meetings of the Board being called as the Board deems appropriate (such
meetings shall be called by the Executive Chairman or his designee) and
to specify that the Executive Chairman shall consult with the Corporate
Secretary (in addition to other directors or officers) when
establishing Board meeting agendas.
    OCC also proposes amendments intended to strengthen the Board's
governance framework and practices surrounding meetings in executive
sessions by providing added structure regarding the convening and
attendance of executive sessions and promoting the enhanced recordation
of important meeting events and discussions. In particular, the
proposed amendments would: (i) Require that the Board meet in executive
session at each regular meeting of the Board; (ii) allow the Board to
determine who will participate in such sessions; (iii) provide for the
exclusion of management, invited guests, and individual directors from
executive sessions where discussions may involve certain sensitive
matters or conflicts of interest; and (iv) require the Board to select
a Director to chair executive sessions in the absence of the Executive
Chairman. The proposed amendments would also require that Board meeting
minutes reflect, at least in summary fashion, the general matters
discussed in an executive session. Specifically, the chair of the
executive session would determine whether separate minutes of the
executive sessions are to be recorded as well as determine the level of
detail to be included in such minutes, provided that Board meeting
minutes must, at a minimum, reflect that an executive session was
convened and broadly describe the topic(s) discussed.
    In addition, OCC proposes to amend the Board Charter to state that
the Board is comprised of one Management Director, rather than two
Management Directors, in conformance with the proposed Certificate of
Incorporation and By-Laws changes described above. The Board Charter
would also be amended to reflect an increase in the number of Public
Directors serving on the Board from three to five.\18\
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    \18\ The Commission approved the increase in the minimum number
of Public Directors on OCC's Board from three to five in July 2014.
See Securities Exchange Act Release No. 72564 (July 8, 2014), 79 FR
40824 (July 14, 2014) (SR-OCC-2014-09).
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    Additionally, in order to achieve a balanced representation on the
Board among Member Directors, OCC proposes amendments to the Board
Charter to state that the considerations involved in determining the
nomination of Member Directors should include the volume of business
transacted with OCC during the prior year and the mix of Member
Directors that are primarily engaged in agency trading on behalf of
retail customers or individual investors. The proposed amendments
reinforce the existing requirement in Article III, Section 5 of OCC's
By-Laws that the GNC shall endeavor to achieve balanced representation
among Clearing Members on the Board of Directors to assure that: (i)
Not all Member Directors are representatives of the largest Clearing
Member Organizations based on the prior year's volume, and (ii) the mix
of Member Directors includes representatives of Clearing Member
Organizations that are primarily engaged in agency trading on behalf of
retail customers or individual investors. OCC proposes to remove
geographic location of Clearing Members as a factor for consideration
as OCC believes that location is no longer a significant consideration
given modern technology and the evolution of the industry.
    OCC also proposes to add language to the Board Charter to
discourage Directors from attending meetings of the Board by telephone
as currently provided in the Code of Conduct for OCC Directors.
Attendance by telephone would be generally discouraged because OCC
believes the Board may be less likely to have the kind of interaction
that leads to fully informed discussions and decisions than if Board
members were to meet in person.
Responsibilities of the Board
    OCC proposes amendments to the Board Charter that are primarily
intended to: (i) Harmonize the description of the Board's obligations
in the Board Charter with the description of the Board's obligations in
OCC's By-Laws and Rules as well as the Board's Corporate Governance
Principles \19\ and (ii) restate the Board's oversight responsibilities
in a manner designed to provide for prudent governance arrangements in
light of OCC's position as a designated systemically important
financial market utility.
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    \19\ The purpose of the Board's Corporate Governance Principles
is to assist OCC's Board in monitoring the effectiveness of policy
and decision making at the Board and management levels. In
particular, the Board's Corporate Governance Principles are meant to
address OCC's obligations as a systemically important financial
market utility to have policies and procedures in place that promote
sound governance, including those policies and procedures identified
in the Principles for Financial Market Infrastructures published by
the Committee on Payment and Settlement Systems and the
International Organization of Securities Commissions.
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    In cases when an obligation of the Board is expressed in both the
Board Charter and OCC's By-Laws and Rules, OCC is proposing to remove
the obligation from the Board Charter. These charter provisions would
be replaced by a general statement that the Board would perform those
functions as the Board believes appropriate or necessary, or as
otherwise prescribed by rule or regulation, including OCC's By-Laws and
Rules.\20\
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    \20\ The proposed change would remove from the Board Charter
some of the more specific obligations of the Board as already set
forth in the By-Laws and Rules in favor of a more general statement
intended to reflect that the Board would perform such functions as
necessary or appropriate under OCC's Rules, By-Laws and other rules
or regulations. The Board Charter provisions in question can
generally be identified by footnote citations to By-Law provisions
included in the Board Charter in Exhibit 5C.
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    OCC also proposes amendments to Section IV of the Board Charter
designed to provide for prudent governance arrangements emphasizing
that the Board's oversight role should operate in a manner consistent
with its responsibilities as a designated systemically important
financial market utility. Specifically, OCC proposes to amend the
Charter to state that the responsibilities of the Board include: (i)
Overseeing management's activities in managing, operating and
developing

OCC and evaluating OCC management's performance in executing its
responsibilities; (ii) selecting, overseeing and, where appropriate,
replacing the Executive Chairman of the Board and the President,
providing counsel and advice to the Executive Chairman and the
President as well as oversight of the performance of each such officer
and of OCC in order to evaluate whether the business is being
appropriately managed; (iii) setting expectations about the tone and
ethical culture of OCC, and reviewing management's efforts to instill
an appropriate tone and culture throughout OCC; (iv) providing
oversight of risk assessment and risk management monitoring processes,
including with respect to systemic risk and reviewing risk tolerances
submitted to the Board for approval by its Risk Committee; (v)
performing an annual self-evaluation of its performance, the
performance of its Committees, the performance of individual directors
and Committee members; and evaluating the Corporate Governance
Principles and Fitness Standards; (vi) reviewing the amount of
compensation for the Board's Public Directors (i.e., directors who are
not affiliated with any national securities exchange or national
securities association or with any broker or dealer) as well as
reviewing the annual study and evaluation of OCC's system of internal
accounting controls; (vii) providing oversight of internal and external
audit processes and financial reporting, including approving major
changes in auditing and accounting principles and practices; and (viii)
oversight of OCC's information technology strategy, infrastructure,
resources and risks.
    In addition, OCC proposes to modify certain existing Board Charter
provisions related to the responsibilities of the Board. Specifically,
OCC propose [sic] amendments that would specify that, in addition to
overseeing major capital expenditures and approving the annual budget
and corporate plan, the Board is responsible for reviewing and
approving OCC's financial objectives and strategies, capital plan and
capital structure, OCC's fee structure, and major corporate plans and
actions, as well as periodically reviewing the types and amounts of
insurance coverage available in light of OCC's clearing operations. OCC
also proposes amendments to specify that the Board's responsibility for
fostering OCC's compliance with applicable laws and regulations
includes compliance with banking, securities and corporation laws and
other applicable regulatory guidance and standards. Additionally, OCC
proposes amendments to provisions related to the oversight of
succession planning and executive compensation to state more
specifically that the Board is responsible for evaluating and fixing
the compensation of the Executive Chairman and President; overseeing
succession planning, human resource programs, and talent management
processes; and overseeing the development and design of employee
compensation, incentive and benefit programs.\21\ The proposed
amendments would also remove a statement that OCC's Board is
responsible for overseeing OCC's processes and framework for assessing,
managing and monitoring strategic, financial and operational risk as
this function is performed by the RC (as reflected in its Charter) with
oversight from the Board.
---------------------------------------------------------------------------

    \21\ OCC notes that a deleted reference to the evaluation of
senior management is now covered by point (i) described in the
paragraph above.
---------------------------------------------------------------------------

    OCC is also proposing non-substantive organizational changes in
Section IV of the Board Charter. Specifically, OCC proposes amendments
that would combine provisions related to the Board's responsibilities
for approving and overseeing OCC's business strategies and monitoring
OCC's performance of clearance and settlement services.
Other Conforming, Administrative and Non-Substantive Changes
    In addition to the changes described above, certain of the proposed
amendments to the Board Charter are meant to address non-substantive,
administrative issues. For example, certain amendments are being
proposed to Section III of the Board Charter to reflect the adoption of
the TC \22\ the GNC, and renaming of the Performance Committee to the
CPC, as described herein. In addition OCC is proposing to amend Section
I of the Board Charter to more accurately state that the Board is
responsible for providing direction to and overseeing the conduct of
the affairs of OCC (as opposed to just managing the business and
affairs) and to remove an unnecessarily specific list of OCC
stakeholders. OCC also proposes amendments that would require an annual
(as opposed to the less specific ``periodic'') review of the Board
Charter, including the Corporate Governance Principles and Fitness
Standards.
---------------------------------------------------------------------------

    \22\ See supra note 9.
---------------------------------------------------------------------------

Fitness Standards for Directors, Clearing Members and Others
    OCC also proposes to amend the Fitness Standards to remove
descriptions of the categories of directors represented on the Board
and the process by which they are nominated for Board service as these
descriptions are already maintained in Article III of OCC's By-Laws and
the relevant Committee Charters. Eliminating these redundant
descriptions in the Fitness Standards would promote efficiency and
clarity by eliminating the need to ensure consistency of the same
information across multiple documents. The proposed amendments would
also underscore that the Fitness Standards are intended to facilitate
the performance of OCC's role as a systemically important financial
market utility.
Common Amendments to Each Committee Charter
    OCC is proposing to make conforming amendments to the Committee
Charters as a result of the Commission approving certain changes to the
GNC Charter.\23\ Specifically, OCC proposes to amend each Committee
Charter to confirm that each Board Committee has access to all books,
records, facilities and personnel of OCC in carrying out the respective
Board Committee's purpose and responsibilities. This amendment to the
Committee Charters would make explicit a longstanding principle under
which each Committee has operated. Additionally, references to the
``Governance Committee'' in each Committee Charter would be changed to
the ``Governance and Nominating Committee'' to reflect the formation of
the GNC.
---------------------------------------------------------------------------

    \23\ See supra note 16.
---------------------------------------------------------------------------

    Furthermore, OCC proposes to delete a provision from each Committee
Charter which granted the Chair of each Board Committee the authority
to act on behalf of the respective Board Committee in situations in
which immediate action was required and convening a Board Committee
meeting was impractical. Although this provision also required each
Chair to report such actions to the respective Board Committee for
ratification as soon as practicable, OCC believes that removing this
provision is appropriate from a governance perspective because it
supports deliberation and action by a Board Committee as a whole rather
than action by a Chair. In addition, historically, each Board Committee
has been able to convene when necessary.
    In addition, OCC is proposing a number of common changes across its
Committee Charters to strengthen OCC's Board Committee governance
framework and practices surrounding

meetings in executive sessions by providing added structure regarding
the convening and attendance of executive sessions and promoting the
enhanced recordation of important meeting events and discussions.
Specifically, each Committee Charter would be amended to: (i) Require
that each Committee meet in executive session at each regular meeting
of the Committee; (ii) allow the Committee to determine who will
participate in such sessions; and (iii) provide for the exclusion of
management, invited guests, and individual directors from executive
sessions where discussions may involve certain sensitive matters or
conflicts of interest. The proposed amendments would also require that
each Committee's meeting minutes reflect, at least in summary fashion,
the general matters discussed in an executive session. In particular,
the Chair (or Acting Chair) would determine whether separate minutes of
the executive sessions are to be recorded as well as determine the
level of detail to be included in such minutes, provided that Committee
meeting minutes must, at a minimum, reflect that an executive session
was convened and broadly describe the topic(s) discussed.
    Additionally, the Committee Charters would be amended to permit any
Board Committee to engage specialists or advisors to assist it in
carrying out its delegated responsibilities without prior Board
approval. Generally speaking, Committees must obtain pre-approval from
the Board to hire advisors. While not universal, OCC's understanding is
that public company board committees frequently are authorized to
engage advisors without board pre-approval at the company's expense to
preserve autonomy and independence and to assist them in the execution
of their responsibilities as deemed necessary. Under the proposed
amendments, each Committee's engagement of an advisor, including fees
and expenses, would be referenced in its annual report to the Board.
These proposed amendments are intended to foster Committee independence
as well as timely Committee access to expertise relevant to the
discharge of its delegated responsibilities while preserving Board
oversight via the application of existing reporting mechanisms.
    OCC is also proposing amendments to its Committee Charters to
specify that that [sic] each Committee should evaluate its and its
individual member's performance on an annual basis (as opposed to
regularly) to provide more clarity and specificity regarding the timing
of each Committee's self-assessment process.
Amendments to the Audit Committee Charter
    OCC proposes amendments to the AC Charter intended to, among other
things: (i) Reinforce the independence of the AC; (ii) more accurately
memorialize and expand upon the activities of the AC with respect to
the oversight of OCC's financial reporting processes and enhance the
independence and objectivity in connection therewith; and (iii) in
general, provide more explicit descriptions of the AC's functions and
responsibilities. The proposed changes are described in more detail
below.
Purpose, Membership and Authority
    OCC proposes changes to Sections I, II and III of the AC Charter
related to the purpose, membership and organization, and authority of
the AC. In Section I of the AC Charter, OCC proposes to make
organizational changes to certain statements regarding the AC's
responsibility to serve as an independent and objective party to
oversee OCC's system of internal control, compliance environment and
processes. These changes are non-substantive in nature. OCC is also
proposing to make various non-substantive clarifying and textual
changes in Section I, including, for example, replacing the term
``independent accountants'' with ``external auditors'' and replacing
``Corporation'' with ``OCC,'' which would extend throughout the entire
AC Charter. The proposed amendments to change ``independent
accountants'' to ``external auditors'' are not intended to signify a
change in roles or responsibilities but to more accurately state that
the activities described in the AC Charter as being performed by
``independent accountants'' are actually performed by a party acting in
its capacity as OCC's ``external auditor.''
    OCC also proposes amendments to Section II of the AC Charter that
are intended to reinforce the independence of the AC. Specifically, the
amendments provide that all members of the AC be independent from OCC's
management, as determined by the Board from time to time, and that the
Chair of the AC be a Public Director.\24\ Additionally OCC proposes an
amendment that would clarify that the Management Director, as described
in Section 7 of Article III of OCC's By-Laws, is ineligible to serve on
the AC.\25\ OCC also proposes to revise the AC Charter to state that
the AC will meet regularly, and no less than once annually (as opposed
to ``at least annually''), with management, OCC's Chief Financial
Officer, Chief Audit Executive (``CAE'') and Chief Compliance Officer
(``CCO'') in executive sessions to discuss certain private matters. The
purpose of this change is to signify that these meetings and
interactions occur more than once per year. Section II of the AC
Charter would also be amended to explicitly provide the authority for
the CAE and CCO to communicate directly with the Chair of the AC, with
respect to any of the responsibilities of the AC, outside of regular
meetings to further underscore their independence. Further, OCC
proposes an amendment to Section II of the AC Charter under which
attendance at an AC meeting by telephone is discouraged. Attendance by
telephone would be generally discouraged because OCC believes the
Committee may be less likely to have the kind of interaction that leads
to fully informed discussions and decisions than if Committee members
were to meet in person.
---------------------------------------------------------------------------

    \24\ The change concerning the AC Chair would conform the AC
Charter to proposed Article III, Section 4(a) of OCC's By-Laws, as
described above.
    \25\ In the event OCC has a Non-Executive Chairman, such
individual would not be considered a Management Director.
---------------------------------------------------------------------------

    OCC also proposes to amend the AC Charter to provide that the AC
shall make such reports to the Board as deemed necessary or advisable.
This proposed change would promote effective communication between the
AC and the Board is in line with requirements in other Committee
Charters.
    OCC proposes to amend Section III of the AC Charter to confirm that
the AC's authority to hire advisors includes the authority to approve
the related fee and retention terms.\26\ In addition to more accurately
reflecting current Committee practice, it would conform the AC charter
to OCC's other Committee Charters (i.e., the CPC, GNC, RC and TC
Charters) with respect their authority to hire advisors and approve
related fees and retention terms. As noted above, each of OCC's
Committee Charters would be amended to permit any Board Committee to
engage specialists or advisors to assist it in carrying out its
delegated responsibilities without prior Board approval in order to
foster Committee independence as well as timely access to relevant
expertise from outside specialists or advisors. The proposed amendments
would clarify that this authority also extends to the approval of
related fee and retention terms.
---------------------------------------------------------------------------

    \26\ OCC is also proposing to remove a statement concerning the
AC's authority to obtain advice from independent counsel,
accountants or others as such statement would be replaced by a
broader expression of the AC's authority to hire advisors.

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

Functions and Responsibilities
    OCC also proposes a number of amendments to Section IV of the AC
Charter intended to reinforce and expand upon the activities of the AC
with respect to the oversight of OCC's financial reporting processes,
to enhance the independence and objectivity in connection therewith,
and to more explicitly describe the AC's functions and
responsibilities. These proposed amendments are described in more
detail below.
Oversight of External Auditor and Financial Reporting
    OCC proposes amendments to the AC Charter regarding the AC's
oversight of financial reporting and external auditors. The proposed
amendments to the AC Charter are intended to more accurately
memorialize and expand upon the AC's role with respect to financial
reporting at OCC. With respect to financial statements and financial
reporting, the proposed amendments explicitly state that the AC is
responsible for: (i) Discussing with management and external auditors
OCC's audited and unaudited financial statements; (ii) upon
management's recommendation, approving OCC's financial statements after
reviewing with management and external auditors prior to issuance; \27\
(iii) reviewing with management, external auditors and OCC's Internal
Audit Department significant financial reporting issues and judgments
made in connection with the preparation of financial statements,
critical accounting policies and estimates, any major issues regarding
accounting principles and financial statement presentation and the
effect of regulatory and accounting initiatives; (iv) approving
material changes to OCC's accounting policies; (v) resolving
disagreements between management and external auditors regarding
financial reporting; and (vi) reviewing and discussing with external
auditors any audit problems or difficulties, and management's response
thereto.
---------------------------------------------------------------------------

    \27\ This proposed amendment is intended to restate, clarify,
and expand upon an existing statement in the AC Charter regarding
the AC's review of annual audited financial statements, which OCC is
proposing to delete.
---------------------------------------------------------------------------

    Additionally, to improve the AC's oversight and evaluation of
external auditors, OCC proposes amendments to the AC Charter to state
that the AC is required to: (i) Discuss with management the timing and
process for implementing a rotation of the engagement partner of the
external auditor and any other active audit engagement team partner;
(ii) monitor and evaluate the qualifications of both the external
auditor and engagement partner; (iii) consider whether there should be
a regular rotation of the audit firm itself; and (iv) pre-approve all
services provided by the external auditor (as opposed to only non-audit
services).
Oversight of Internal Audit, Compliance and Compliance-Related Matters
    OCC is proposing to amend Section IV of the AC Charter in order to
more clearly articulate the AC's responsibility for the oversight of
Internal Audit. Specifically, OCC proposes amendments to state that the
AC's responsibilities include reviewing and approving the Internal
Audit Policy on an annual basis and monitoring ongoing internal audit
activities. OCC also proposes amendments to state that the AC is
responsible for approving OCC's annual internal audit plan and
approving any CAE recommendations for removing or deferring any audits
from a previously approved internal audit plan to explicitly codify
these existing AC practices in the AC Charter. OCC believes that the
AC, which serves as an independent and objective party tasked with the
oversight of OCC's system of internal control, auditing, accounting,
and compliance processes, is the appropriate body to approve OCC's
internal audit plan and any CAE recommendations for removing or
deferring any audits from a previously approved internal audit plan.
The proposed amendments would provide more clarity and transparency
regarding OCC's governance arrangements by codifying these
responsibilities in the AC Charter.
    OCC also proposes amendments to Section IV of the Charter to more
clearly articulate the AC's responsibility for oversight of compliance
and compliance-related matters, including: (i) Annually reviewing and
approving OCC's Compliance Policy and employee Code of Conduct; (ii)
reviewing and approving the Compliance Department's process for
establishing the risk-based annual Compliance Testing Plan, monitoring
progress against the annual Compliance Testing Plan, and approving
changes to the Compliance Testing Plan recommend by the CCO; and (iii)
monitoring ongoing compliance activities by reviewing reports and other
communications prepared by the Compliance Department, including updates
from the CCO, and inquiring of management regarding steps taken to
address items raised.
    In addition, OCC proposes amendments to clarify the AC's
responsibilities with respect to: (i) Reviewing on a regular basis the
significant deficiencies and material weaknesses in the design or
operation of OCC's internal controls (as such issues are identified by
or presented to the AC); (ii) reviewing fraud involving OCC's
management or other employees; and (iii) reviewing and approving (as
opposed to just establishing) OCC's ``whistleblower'' procedures that
govern reporting of illegal or unethical conduct, accounting
irregularities and similar matters and discussing any substantive
issues identified through such procedures with relevant parties.
Oversight of OCC's Chief Audit Executive and Chief Compliance Officer
    OCC proposes amendments to Section IV of the AC Charter to provide
that the CAE and CCO would each report functionally to the AC and
administratively to the Executive Chairman.\28\ The proposed amendments
would make more explicit the reporting lines for these functions and
underscore the independence of the CAE and CCO. In addition OCC
proposes to eliminate provisions of the AC Charter that relate to the
AC's assessment of the performance of the CAE and Internal Audit
Department, the AC's approval of the compensation of the CAE, and the
AC's assessment of the Compliance function and replace them with
provisions that take into account the involvement of the Executive
Chairman in those functions. Specifically, as amended, the AC Charter
would state that the AC, in consultation with the Executive Chairman,
would review the performance of the Internal Audit function and the
CAE, the Compliance function and the CCO, and determine whether to
accept or modify the Executive Chairman's recommendations with respect
to the performance assessment and annual compensation for each. The
proposed changes related to the performance and compensation setting
regime for the CAE and CCO are intended to reflect the fact that the
CAE and CCO report administratively to the Executive Chairman while
reporting functionally to the AC.
---------------------------------------------------------------------------

    \28\ This change would explicitly note existing reporting lines
in the AC Charter, but would not revise those reporting lines. These
provisions mirror a comparable provision in the RC Charter with
respect to the Chief Risk Officer.
---------------------------------------------------------------------------

Amendments to the Compensation and Performance Committee Charter
    OCC is proposing changes to its CPC Charter to explicitly describe
the Committee's functions and responsibilities with respect to OCC's
human resources, compensation and employee benefit programs, and

insurance programs. The proposed amendments would also provide for CPC
oversight of OCC's Capital Plan in recognition of the importance of
providing for Board-level oversight to ensure OCC's capital and Capital
Plan meet or exceed minimum regulatory standards. The proposed changes
are described in more detail below.
Purpose, Membership, and Authority
    OCC is proposing to rename the Performance Committee to the CPC in
order to more accurately reflect its role. OCC is also proposing to
amend Section I of the CPC Charter to more clearly articulate that the
CPC is tasked with assisting the Board in the oversight of OCC's
overall performance in promptly and accurately delivering clearance,
settlement and other designated industry services and in the
accomplishment of other periodically-established corporate goals and
objectives in light of OCC's systemically important status. The CPC
Charter would further delineate that the CPC is also tasked with (i)
recommending the compensation of OCC's Executive Chairman and President
and approving the compensation of certain other officers, as
appropriate; (ii) overseeing OCC's Capital Plan and financial
performance; (iii) overseeing OCC's Human Resources program; (iv)
overseeing the structure and design of the employee compensation,
incentive and benefit programs; and (v) assisting the Board in
reviewing OCC's leadership development and succession planning.
    Additionally, OCC proposes amendments to Section II of the CPC
Charter related to the membership and organization of the CPC.
Specifically, OCC proposes amendments to conform the CPC Charter to
proposed Article III, Section 4(b) of OCC's By-Laws to state that the
Chair of the CPC shall be a Public Director. In addition, OCC proposes
changes to Section II of the CPC Charter to elaborate on the CPC's
responsibility to discuss and review the performance and compensation
levels (including benefits and perquisites such as sign-on bonuses,
retention arrangements, relocation arrangements and other financial
commitments of OCC) of members of the Management Committee and certain
other key officers, as appropriate.
    OCC also proposes administrative amendments to Section II to
clarify that the CPC would meet at least four times per year, which
reflects the minimum number of regular meetings in a year in a manner
consistent with the charters of other Board Committees, and to delete a
provision of the CPC Charter that requires the CPC Chair to meet in
private session with the GNC Chair to discuss performance of key
officers as well as a provision stating that the Chairs of the AC and
RC would be invited to attend the annual meeting to discuss
compensation of key officers, including the Chief Risk Officer
(``CRO'') and CAE.\29\ The CPC Charter would also be amended to require
that minutes of Committee meetings be circulated to the Board in
conformance with general requirements applicable to all Board
Committees.\30\
---------------------------------------------------------------------------

    \29\ These changes are being made to reflect a consultative
process as between the Executive Chairman and, as applicable, the RC
and Board to discuss the performance of key officers including the
CRO and CAE.
    \30\ This requirement is already included in the AC, GNC, RC,
and TC Charters.
---------------------------------------------------------------------------

    OCC also proposes an amendment to the CPC Charter under which
attendance at a CPC meeting by telephone is discouraged. Attendance by
telephone would be generally discouraged because OCC believes the
Committee may be less likely to have the kind of interaction that leads
to fully informed discussions and decisions than if Committee members
were to meet in person. In addition, other clarifying and textual
changes would be made including, for the reasons stated above, removal
of references to the Management Vice Chairman.
    Additionally, OCC proposes non-substantive organizational changes
in Section III regarding the delegation of authority to the
Administrative Committee that do not change the meaning of the rule
text.
Functions and Responsibilities
    OCC is proposing amendments to Section IV of the CPC Charter to
provide explicit descriptions of the Committee's responsibilities with
respect to OCC's capital structure, financial planning and corporate
goals and objectives; human resources and compensation programs; and
employee benefits programs in order to provide a more robust framework
for the CPC's oversight functions. The proposed changes are described
in more detail below.
    Additionally, OCC proposes to remove explicit requirements in
Section IV that the CPC review the Corporate Plan and Budget and OCC's
performance under the Corporate Plan at each regularly scheduled
meeting in favor of more general descriptions regarding the CPC's
responsibilities for the oversight of the corporate financial planning
process, including the corporate budget, and corporate goals and
objectives. The proposed amendments are intended to accommodate CPC
review of annual Corporate Plans and Budgets and performance thereunder
(as currently contemplated by the CPC Charter) as well as consideration
of longer-term horizons and implications in the strategic planning
process.
Oversight of OCC's Capital Plan
    OCC proposes amendments to Section IV of the CPC Charter to
explicitly provide for the CPC's responsibilities in connection with
overseeing OCC's capital structure, financial planning, and corporate
goals and objectives. Specifically, the proposed amendments would state
that the CPC's responsibilities include oversight of management's
processes for determining, monitoring and evaluating OCC's Capital
Plan,\31\ including maintenance of required regulatory capital, and
recommending approval of such plan to the Board. These amendments would
also specify that the CPC is responsible for the annual review of OCC's
Fee, Refund and Dividend Policies and making recommendations to the
Board for changes to such policies and payments, if any, under the
Refund and Dividend Policies. In addition, OCC proposes amendments to
provide that the CPC's responsibilities include the review and approval
of fee changes pursuant to the Capital Plan, review and recommendation
to the Board of changes to OCC's fee structure, and oversight of OCC's
corporate financial planning process (including reviewing the corporate
budget). Moreover, the proposed amendments provide for the CPC's
responsibility to review OCC's annual corporate goals and objectives
and recommend approval thereof to the Board and routinely receive
reports regarding progress in achieving such goals and objectives. The
amendments also provide that the CPC is responsible for the periodic
review of OCC's insurance program.
---------------------------------------------------------------------------

    \31\ See Securities Exchange Act Release No. 74387 (February 26,
2015), 80 FR 12232 [sic] (March 6, 2015) (SR-OCC-2014-813). See also
Securities Exchange Act Release No. 74452 (March 6, 2015), 80 FR
13058 (March 12, 2015) (SR-OCC-2015-02).
---------------------------------------------------------------------------

Oversight of Human Resources and Compensation Programs
    OCC proposes amendments to Section IV of the CPC Charter to
explicitly state that the CPC's responsibilities include review of
OCC's Human Resources programs and policies, including OCC's talent
acquisition, performance management, training, benefits and succession
planning processes and review and approval of the structure, design,
and funding as applicable, of employee compensation, incentive and

benefit programs. This proposed amendment ensures Board Committee
oversight for management's processes for hiring, retaining and
developing qualified staff and is consistent with the CPC's oversight
of overall succession planning processes. Additionally, OCC is
proposing to amend the CPC Charter to clarify that the CPC annually
reviews and approves the goals and objectives of the Executive Chairman
and President.
    Further, OCC is proposing amendments to the CPC Charter that would
require the CPC to periodically (not less than annually) review and
approve the general strategy, policies and programs with respect to
salary compensation (including management compensation) and incentive
compensation and seek to ensure compensation policies meet evolving
compensation practices so that such policies remain effective to
attract, motivate and retain executive officers and other key
personnel. The proposed amendments would also require the CPC to review
and approve the performance and compensation of key employees, such as
members of OCC's Management Committee, at the end of each year and to
make recommendations to the Board regarding the compensation of the
Executive Chairman and the President. Additionally the proposed
amendments would require the CPC to review proposed material changes to
executive management benefits and to periodically review the
compensation of Public Directors and make recommendations to the Board
with respect thereto.
    OCC proposes to remove from the CPC Charter certain statements
regarding the review of OCC's performance under the Corporate Plan and
the oversight of the administration of OCC's compensation plans as
these responsibilities would be covered under the newly proposed
descriptions contained therein. OCC believes that it is prudent and
appropriate to provide for CPC oversight in the areas of human
resources, performance, and compensation and that the proposed
amendments will enhance OCC's overall governance arrangements with
respect to the oversight and review of performance and compensation at
OCC.
Oversight of Employee Benefit Programs and Other Responsibilities
    OCC also proposes amendments to Section IV of the CPC Charter
related to the CPC's oversight responsibilities for employee benefit
programs. Specifically, OCC would make amendments to the CPC Charter to
specify the CPC's responsibilities for oversight, administration, and
operation of employee benefit, retiree and welfare benefit plans,
including the review of funding plan obligations. The proposed
amendments also specify the scope of employee welfare plans that the
CPC reviews and the CPC's right to adopt new compensation, retirement
and welfare benefit plans or to terminate existing plans other than
such plans that require Board action to amend or terminate. In
addition, the proposed amendments would provide more clarity regarding
the CPC's responsibilities for monitoring the Administrative
Committee's duties in connection with retirement and retirement savings
plans, investment strategy and performance, plan design and compliance,
prudent selection of investment managers and compensation and benefits
consultants, and performing such other oversight duties as called for
in retirement, retirement and savings, and welfare plan documents.
    OCC further proposes amendments that state that the CPC is
responsible for providing updates to the Board periodically regarding:
(i) Actions taken by the CPC with respect to its review of OCC's
compensation, retirement and employee welfare plans; (ii) the financial
position and performance of these plans; and (iii) adherence to
investment guidelines, in each case, where applicable.
Amendments to the Risk Committee Charter
    OCC is proposing amendments to its RC Charter which are primarily
intended to enhance OCC's governance arrangements with respect to the
RC's oversight functions and responsibilities. OCC also proposes
amendments to better align the RC Charter with the OCC By-Laws,
including changes in the composition requirements of the RC (as
described above) and to reflect the adoption of the TC. The proposed
changes are described as follows.
Purpose, Membership and Authority
    OCC proposes amendments to Section I of the RC Charter to provide
that the RC would be responsible for coordinating risk oversight with
other Board Committees tasked with overseeing certain risks (e.g., the
TC, which assists the Board in overseeing OCC's information technology
risks) in order to achieve comprehensive and holistic oversight of
OCC's risk-related matters. The proposed amendments would also provide
that the RC is responsible for the review of material policies and
processes associated with risks related to new initiatives.
    In Section II of the RC Charter, OCC proposes amendments to provide
that attendance at a RC meeting by telephone is discouraged. Attendance
by telephone would be generally discouraged because OCC believes the
Committee may be less likely to have the kind of interaction that leads
to fully informed discussions and decisions than if Committee members
were to meet in person. OCC also proposes to remove from the RC
Charter, and by extension its rules, a requirement that a RC member
shall recuse himself from any matter in which his firm has an interest,
other than a common interest shared with Clearing Members generally or
a particular class of Clearing Members. OCC believes that the
identification and handling of conflicts of interest are already
appropriately addressed in its Code of Conduct for OCC Directors,\32\
which governs the conduct of all directors equally regardless of
category or committee assignment. Furthermore, OCC notes that, as a
corporation incorporated in the state of Delaware, OCC's Directors have
a fiduciary duty to protect the interests of the corporation and to act
in the best interests of its shareholders \33\ and are bound by a duty
of loyalty to OCC, which demands that there be no conflict between duty
and self-interest and that the best interest of the corporation and its
shareholders takes precedence over any interest possessed by a
director.\34\
---------------------------------------------------------------------------

    \32\ See Code of Conduct for OCC Directors available at http://www.optionsclearing.com/components/docs/about/corporate-information/occ-code-of-conduct.pdf.
    \33\ See Cede & Co. v. Technicolor, 634 A.2d 345, 360-361 (Del.
1993).
    \34\ See Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939).
---------------------------------------------------------------------------

    With respect to RC meetings, OCC proposes amendments to state that
the RC shall meet regularly, and no less than once annually, (rather
than ``at least annually'') with the CRO and members of management (as
opposed to other appropriate corporate officers) in separate executive
sessions to discuss certain private matters. The purpose of the
proposed change is to signify that these meetings occur more frequently
than once per year. The proposed changes would also more specifically
require that the RC meet in executive session regularly with members of
management. The RC would continue to have the discretion to invite any
other officers it deems appropriate to meetings in executive session
pursuant to the proposed common charter amendments described above.
Moreover, and in order to enhance the independence and functional
reporting relationship of the CRO to the RC, OCC

proposes revisions to explicitly state that the CRO is authorized to
communicate with the RC Chair outside of regular meetings. OCC also
proposes to amend the RC composition requirements in Section II in
order to conform to the proposed By-Law changes discussed above.
Specifically, the RC Charter would be revised to state that the RC
shall consist of the Executive Chairman, at least one Exchange
Director, at least one Member Director, and at least one Public
Director. OCC is also proposing an amendment to Section II to require
that the RC meet at least six times a year (as opposed to seven) in
recognition of the fact that the time allotted for each individual RC
meeting has been expanded. Furthermore, OCC proposes to amend Section
II of the RC Charter to state that, unless a Chair is elected by the
full Board, the members of the RC shall designate a Chair by majority
vote. This proposed amendment is in conformance with OCC's current
practices for electing Committee Chairs and as described in other
Committee Charters.
    OCC also proposes to amend Section III of the RC Charter to provide
that, in addition to RC subcommittees, the RC may also delegate
authority to OCC's Management Committee or Enterprise Risk Management
Committee. As described herein, the RC is responsible for assisting the
Board in overseeing OCC's policies and processes for identifying and
addressing strategic, operational, and financial risks and for
overseeing the overall enterprise risk management framework implemented
by management. The proposed amendment would allow the RC to delegate
authority to the Management Committee and Enterprise Risk Management
Committee to carry out certain tasks and responsibilities in the day-
to-day risk management of OCC and to implement proposals that have been
approved in concept by the RC where the RC deems such delegation of
authority to be appropriate.
Risk Committee Functions and Responsibilities
    OCC proposes amendments to Section IV of the RC Charter to enhance
its governance arrangements in connection with the oversight of
membership requirements, margin requirements, the Enterprise Risk
Management Program, and a number of other responsibilities.
Oversight of Membership and Margin Requirements
    OCC proposes amendments to the RC Charter to provide a broader
description of the RC's oversight of the adequacy and effectiveness of
OCC's framework for clearing membership. In general, these changes are
not intended to substantively change or eliminate any of the RC's
existing responsibilities with respect to its oversight of OCC's
clearing membership framework and would continue to encompass the
responsibilities currently enumerated in the charter.\35\ Specifically,
the RC Charter provisions related to the RC's oversight role with
respect to clearing membership issues would be replaced with a more
general statement that the RC is responsible for the oversight of OCC's
framework for clearing membership, including: (i) Periodically
reviewing and revising, as appropriate, OCC's initial and ongoing
requirements for clearing membership; \36\ (ii) overseeing the
processes established for reviewing and monitoring clearing membership
(including in respect of the continuance of potentially problematic
members); \37\ and (iii) making recommendations to the Board, as
applicable, for final determination in respect the foregoing.
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    \35\ For example, individual provisions related to specific
types of membership categories and requirements would be replaced by
a broader restatement of the RC's responsibilities, which is
intended to capture all of the responsibilities enumerated in the
deleted provisions.
    \36\ This proposed provision is a restatement of an existing RC
responsibility for periodically reviewing and recommending changes
to the initial and ongoing requirements for membership and would
also replace and encompass the responsibilities in an existing
provision of the RC Charter stating that the RC is responsible for
recommending to the Board membership requirements for non-broker-
dealers.
    \37\ This proposed provision would replace and encompass the
RC's responsibilities contained in existing RC Charter provisions
related to the conducting of hearings for applicants proposed to be
disapproved by the RC, the review and approval/disapproval of
requests to participate in the Stock Loan Programs, and the
approval/disapproval of the continued membership of managed Clearing
Members.
---------------------------------------------------------------------------

    In addition, OCC proposes to modify certain provisions related to
the surveillance of Clearing Members and contingency planning for
Clearing Member failures. Specifically, OCC proposes to consolidate
these provisions to restate that the RC is responsible for the
oversight of the adequacy and effectiveness of OCC's contingency plan
for Clearing Member failures, including: (i) Reviewing Clearing Member
surveillance criteria; (ii) overseeing the management processes for
managing Clearing Members that are subject to closer than normal
surveillance or are otherwise in or approaching financial or
operational difficulty; (iii) imposing and modifying restrictions and
requirements already imposed on Clearing Members in a manner consistent
with the By-Laws and Rules; \38\ and (iv) making recommendations to the
Board in respect of the foregoing.
---------------------------------------------------------------------------

    \38\ This proposed provision would replace and encompass the
responsibilities in an existing RC Charter provision related to the
RC's responsibility for reviewing and modifying or reversing
restrictions or additional requirements imposed on Clearing Members
pursuant to Rule 305.
---------------------------------------------------------------------------

    OCC proposes similar amendments to the RC Charter to restate the
RC's responsibilities in connection with its oversight of margin and
clearing fund requirements. OCC proposes to remove certain existing
provisions related to the oversight of margin and clearing fund
requirements and replace them with a more high level description that
would provide that the RC oversees OCC's processes for establishing,
monitoring and adjusting margin consistent with the protection of OCC,
Clearing Members, or the general public, including: (i) Reviewing and
modifying OCC's margin formula, the methodologies used for determining
margin and clearing fund requirements, and making recommendations to
the Board, as applicable, in respect thereof; \39\ (ii) evaluating
(including increasing) the amount of margin required in respect of any
contract or position; (iii) establishing and reviewing guidelines for
requiring the deposit of additional margin; and (iv) reviewing and
approving determinations about assets eligible for deposit as margin or
clearing fund as provided in the By-Laws and Rules.\40\ In general, the
proposed amendments are not intended to substantively change the RC's
responsibilities in the deleted provisions but would instead replace
them with a broader description intended to encompass those
responsibilities. OCC is proposing, however, to delete an existing RC
Charter provision specifically requiring the RC to periodically review
the inputs to OCC's margin formula and modify them to the extent it
deems such action to be consistent with the protection of OCC, Clearing
Members, or the general public. While this specific requirement is
being removed from the Charter, OCC believes that the Charter continues
to provide an adequate and appropriate oversight framework for the
monitoring

and development of OCC's margin formula and would provide the RC with
continued authority to modify margin formula inputs if it deems such
modification to be appropriate.\41\
---------------------------------------------------------------------------

    \39\ This proposed provision would include language from an
existing Charter provision stating that the RC will review
methodologies used for calculating margin and clearing fund
requirements.
    \40\ This proposed provision would replace and encompass the
RC's responsibilities contained in existing Charter provisions
related to the oversight of acceptable margin and clearing fund
assets, including the approval of classes of GSE securities for
deposit as margin, prescribing intervals for revaluing debt
securities deposited as margin of clearing fund, and specifying
haircuts for securities provided as margin.
    \41\ As noted above, the proposed amendments to the RC Charter
provide that the RC is responsible for overseeing the processes
established for establishing, monitoring and adjusting margin
consistent with the protection of OCC, Clearing Members, or the
general public, including reviewing and modifying OCC's margin
formula.
---------------------------------------------------------------------------

    OCC also proposes to delete a provision stating that the RC is
responsible for making determinations regarding approval of non-U.S.
institutions to issue letters of credit as a form of margin asset
because this provision does not accurately reflect the RC's
responsibilities. While the RC is responsible for overseeing standards
used to admit non-U.S. institutions, OCC's President and Executive
Chairman have general responsibility for approving financial
institutions seeking to become non-U.S. letter of credit banks and that
meet the requirements of OCC Rule 604, Interpretation and Policy .01
(with the exception of certain ``equivalent country'' and ``equivalent
institution'' determinations that are required to be made by the RC
pursuant to OCC Rule 604, Interpretations and Policies .01(b)(3) and
.01(b)(4)(b)).
Oversight of OCC's Enterprise Risk Management Program and Risk
Tolerances
    OCC proposes amendments to restate and expand upon the RC's
responsibility for overseeing OCC's Enterprise Risk Management program.
Currently, the RC is responsible for overseeing the structure, staffing
and resources of the Enterprise Risk Management program, reviewing
periodic reports regarding the Enterprise Risk Management program, and
annually reviewing and assessing the overall program. OCC proposes
amendments to the RC Charter that would restate these existing
responsibilities and add new responsibilities designed to enhance the
risk oversight framework for the Enterprise Risk Management program.
Specifically, the proposed amendments would state that the RC is
responsible for overseeing OCC's Enterprise Risk Management program,
including (in addition to the existing responsibilities noted above),
reviewing the systems and procedures that management has developed to
manage the risks to OCC's business operations and regularly discussing
these systems and procedures with management, reviewing with management
the interrelated nature of OCC's risks, and annually approving the
Enterprise Risk Management program's goals and objectives. OCC believes
that explicitly incorporating these responsibilities into the RC
Charter will provide for a more comprehensive oversight framework for
the Enterprise Risk Management program.
    OCC also proposes amendments to restate and expand upon the RC's
responsibility for the oversight of OCC's risk appetite and risk
tolerances. Currently, the RC Charter provides that the RC is
responsible for reviewing and recommending for Board approval the OCC
Risk Appetite Statement and reviewing and monitoring OCC's risk profile
for consistency with OCC's Risk Appetite Statement. The proposed
amendments to the RC Charter would state that, in addition to these
responsibilities, the RC would be responsible for reviewing and
monitoring determinations regarding appropriate risk tolerances,
including reviewing with management on a regular basis management's
view of appropriate risk tolerances and assessing whether this view is
appropriate, and recommending risk tolerance parameters to the Board.
OCC believes that explicitly incorporating these responsibilities into
the RC Charter will provide for a more comprehensive oversight
framework for OCC's risk appetite and risk tolerances.
Other Oversight Responsibilities
    Section I of the RC Charter currently provides that the RC is
responsible for the oversight and review of material policies and
processes relating to member and other counterparty risk exposure
assessments. OCC proposes amendments to Section IV that would further
specify that the RC oversees the adequacy and effectiveness of OCC's
processes for setting, monitoring and acting on risk exposures to OCC
presented by banks, depositories, financial market utilities and trade
sources. OCC believes that the oversight of such risk exposures is
critical to ensuring the safety and soundness of OCC and that
specifically including this responsibility in the RC Charter will
provide for greater clarity and transparency regarding the RC's role in
overseeing these risks. Section I of the RC Charter also currently
provides that the RC is responsible for the oversight and review of
material policies and processes (i) for identifying liquidity risks and
(ii) relating to liquidity requirements and the maintenance of
financial resources. The proposed amendments to Section IV would
further specify that the RC oversees the processes established by OCC
for setting, monitoring and managing liquidity needs necessary for OCC
to perform its obligations as a systemically important financial market
utility. OCC believes that comprehensive oversight of liquidity risks
and liquidity risk management is critical to ensuring the safety,
soundness, and resilience of OCC and that providing more specificity
regarding the RC's responsibilities with respect to liquidity risk will
provide for greater clarity and transparency regarding the RC's role in
such oversight. In addition, the RC Charter would be amended to provide
that the RC and management would discuss on a regular basis the impact
on systemic stability that may arise as a result of OCC's actions in
responding to an extraordinary market event, including the impending or
actual failure of a Clearing Member, and the development of strategies
to mitigate these effects. OCC believes it is prudent for management
and the RC to engage in regular discussions concerning OCC's actions in
extreme market events and the potential impacts on systemic stability
given OCC's role as a systemically important financial market utility.
    OCC also proposes to elaborate on the statement that the RC would
perform the responsibilities delegated to it by the Board under OCC's
By-Laws and Rules by specifying that this would include the
authorization of the filing of regulatory submissions pursuant to such
delegation. Additionally, OCC proposes amendments to state that the RC
would oversee management's responsibility for handling financial (i.e.,
credit, market, liquidity and systemic) risks, including the structure,
staffing and resources of OCC's Financial Risk Management department.
In addition, OCC proposes amendments to state that the RC's oversight
responsibilities include: (i) Identifying issues relating to strategic,
credit, market, operational, liquidity and systemic risks that should
be escalated to the Board for final action and (ii) reviewing,
approving and reassessing reporting metrics reflecting the risks for
which the RC has oversight.
    Further, the proposed amendments would specify that the RC oversees
OCC's model risk management process, policies and controls, including:
(i) Overseeing model risk governance; (ii) reviewing the findings of
any third party engaged by management to evaluate OCC's risk models;
and (iii) annually reviewing and approving the Model Validation Plan
and receiving periodic reports thereunder. Moreover, the amendments
would provide that the RC is responsible for reviewing the results

of any audits (internal and external), regulatory examinations and
supervisory examination reports as to significant risk items or any
other matter relating to the areas that the RC oversees, as well as
management's responses pertaining to matters that are subject to the
oversight of the RC.
Conforming, Administrative and Non-Substantive Changes
    In order to conform the RC Charter to the GNC Charter and AC
Charter, OCC proposes amendments to the RC Charter that would eliminate
provisions under which the RC Chair attends the year-end CPC meeting to
discuss the performance and compensation levels of the CRO. Rather,
under the proposed amended RC Charter, the RC, in consultation with the
Executive Chairman, would review the performance of the Enterprise Risk
Management and Model Validation programs as well as the CRO and
determine whether to accept or modify the Executive Chairman's
recommendations with respect to the performance assessment and annual
compensation for the CRO.\42\ This change reflects the reporting of the
CRO to the Executive Chairman for administrative purposes, while
preserving functional reporting to the Committee.
---------------------------------------------------------------------------

    \42\ This change is consistent with comparable changes to the AC
Charter with respect to the annual compensation of the CAE and CCO,
respectively.
---------------------------------------------------------------------------

    Further, the proposed amendments confirm that the RC has the
responsibility for ratifying, modifying, or reversing action taken by
OCC officers that have been delegated authority to consider requests by
Clearing Members to expand clearing activities to include additional
account types and/or products. Moreover, OCC proposes amendments to the
RC Charter to clarify that the RC has the authority to authorize the
filing of a regulatory submission pursuant to authority delegated to it
by the Board.
Amendments to the Governance and Nominating Committee Charter
    OCC proposes amendments to the GNC Charter to reflect the
elimination of term limits for Public Directors as discussed above and
to state that attendance of GNC meetings by telephone is discouraged.
Attendance by telephone would be generally discouraged because OCC
believes the Committee may be less likely to have the kind of
interaction that leads to fully informed discussions and decisions than
if Committee members were to meet in person. OCC also proposes to
delete a provision stating that a designated officer of management
shall serve to assist the Committee and act as a liaison between staff
and the Committee because OCC believes that experience has shown that
designating a formal role for a liaison was unnecessary. Deleting this
requirement would also maintain uniformity across all Committee
Charters, as no other Committee has a formally designated liaison.
    OCC also proposes amendments to the GNC Charter to specify that the
Chair (or the Chair's designee) shall consult with the Corporate
Secretary, in addition to management, to prepare an agenda in advance
of each GNC meeting as the Corporate Secretary is responsible for
coordinating the preparation and distribution of Board and Board
Committee meeting agendas. In addition, OCC is proposing non-
substantive drafting changes regarding: (i) The numbering of certain
provisions in Section I of the GNC Charter and (ii) the requirements
for GNC Committee reports to the Board in Section II of the Charter.
Amendments to the Technology Committee Charter
    OCC is proposing amendments to its TC Charter to require that the
Committee meet regularly, and no less than once annually, with OCC's
Chief Security Officer (``CSO'') and to provide that the CSO is
authorized to communicate with directly with [sic] the Chair of the TC
in between meetings of the Committee in order to strengthen the
autonomy and independence of the CSO role at OCC. OCC also proposes to
amend the TC Charter to provide that the TC shall make such reports to
the Board as deemed necessary or advisable. This proposed change would
promote effective communication between the TC and the Board is in line
with requirements in other Committee Charters. OCC also proposes non-
substantive amendments to Section III of the TC Charter to eliminate a
provision that referenced approval of non-audit services which appeared
to be an inadvertent carry-over from the Audit Committee Charter and to
Section IV of the Charter to change the term ``the Company'' to ``OCC''
and ``Board of Directors'' to ``Board.''
2. Statutory Basis
    OCC believes that the proposed rule change is consistent with
Section 17A of the Act \43\ and the rules thereunder applicable to OCC.
OCC's governance arrangements, which include, but are not limited to,
OCC's Certificate of Incorporation, By-Laws, the Board Charter, and the
Committee Charters promote the effectiveness of OCC's Board and Board
Committees' oversight on OCC's business, risk management, and
operational processes. OCC believes that the proposed changes to its
governance arrangements would enhance the effectiveness of the Board
and Board Committees' oversight on such matters and are designed to
provide more clarity and transparency with respect to OCC's governance
arrangements, thereby promoting the prompt and accurate clearance and
settlement of securities transactions, and in general, protecting
investors and the public interest in accordance with Section
17A(b)(3)(F) of the Act \44\ and ensuring that OCC has clear and
transparent governance arrangements consistent with Rule 17Ad-22(d)(8)
\45\ thereunder. The proposed rule change is not inconsistent with the
existing rules of OCC, including any other rules proposed to be
amended. The statutory basis for the proposed amendments is discussed
in more detail below.
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 78q-1.
    \44\ 15 U.S.C. 78q-1(b)(3)(F).
    \45\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

Amendments to OCC's Certificate of Incorporation, By-Laws, and Rules
    OCC is proposing to amend its Certificate of Incorporation and By-
Laws to modify the composition requirements for OCC's Board to require
that only one Management Director shall serve on OCC's board.
Currently, there is a vacancy for one Management Director position on
the Board (OCC also notes that, prior to the addition of a second
Management Director seat in 2013, OCC has historically had only one
Management Director serving on its Board). OCC's Board continually
evaluates the leadership structure at OCC, including the appropriate
number of Management Directors for OCC's Board, and in light of recent
experience with the current Management Director vacancy, the Board
believes that amending the Board composition to require one Management
Director would continue to provide an appropriate level of management
representation in the Board-level oversight of OCC. The Executive
Chairman, as Management Director, would continue to represent
management's viewpoint on OCC's Board. Moreover, the Board has access
to OCC's management team, which ensures that the Board has continued
access to management's perspectives on the business and affairs of OCC.
Accordingly, OCC believes that the proposed amendments to OCC's
governance arrangements are designed,

in general, to protect investors and the public interest in accordance
with Section 17A(b)(3)(F) of the Act \46\ and are reasonably designed
to be clear and transparent to fulfill the public interest requirements
in Section 17A of the Act \47\ applicable to clearing agencies in
accordance with Rule 17Ad-22(d)(8) \48\ thereunder.
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78q-1(b)(3)(F).
    \47\ 15 U.S.C. 78q-1.
    \48\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

    OCC is also proposing to amend its By-Laws and Rules to eliminate
the role of Management Vice Chairman. The office of Management Vice
Chairman has been vacant for a number of years and has not been
included in the Board's current discussions regarding management
succession planning. OCC believes that the responsibilities of the
Management Vice Chairman are appropriately handled by other officers of
OCC (and are currently handled by such officers), primarily the
Executive Chairman and President, or where applicable, other officers
such as the Secretary or directors such as the Member Vice Chairman,
and as a result, the title is being eliminated from OCC's By-Laws and
Rules. OCC believes the proposed amendments would more accurately
reflect the current state of affairs regarding the office of Member
Vice Chairman, ensure consistency across all of OCC's governing
documents, provide more clarity and transparency regarding OCC's
intended governance arrangements, and continue to provide for
appropriate and prudent governance arrangements at OCC. Accordingly,
OCC believes the proposed amendments are designed in general, to
protect investors and the public interest in accordance with Section
17A(b)(3)(F) of the Act \49\ and are reasonably designed to be clear
and transparent to fulfill the public interest requirements in Section
17A of the Act \50\ applicable to clearing agencies in accordance with
Rule 17Ad-22(d)(8) \51\ thereunder.
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78q-1(b)(3)(F).
    \50\ 15 U.S.C. 78q-1.
    \51\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

    The proposed amendments to OCC's By-Laws also would require that
the CPC and AC each be chaired by a Public Director, which will help to
ensure the objectiveness and independence of those committees. It would
also eliminate term limits for Public Directors, allowing OCC's Public
Directors the time necessary to develop the particularized degree of
knowledge and understanding of OCC's business to ensure that they are
able to provide significant value in the governance process. OCC
therefore believes that the proposed changes are designed, in general,
to protect investors and the public interest in accordance with Section
17A(b)(3)(F) of the Act \52\ and are reasonably designed to be clear
and transparent to fulfill the public interest requirements in Section
17A of the Act \53\ applicable to clearing agencies in accordance with
Rule 17Ad-22(d)(8) \54\ thereunder.
---------------------------------------------------------------------------

    \52\ 15 U.S.C. 78q-1(b)(3)(F).
    \53\ 15 U.S.C. 78q-1.
    \54\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

    In addition, the proposed rule change would require that at least
one Exchange Director be a member of the RC and would reduce the
minimum composition requirement for Member Directors on the RC to allow
for greater flexibility in the selection of Directors with the
requisite skills and expertise to serve on the RC. The addition of an
Exchange Director to the RC will enhance the RC's oversight
capabilities by providing additional expertise and unique perspectives
on matters such as market risk as well as sophistication as to special
risks arising from trading practices, strategies, and new products.
Moreover, the reduction in the minimum number of Member Directors
serving on the RC would provide OCC with greater flexibility to ensure
that the RC is comprised of those Directors that have the appropriate
mix of knowledge and expertise necessary to provide for the prudent
oversight of risk matters at OCC. It would also continue to ensure the
fair representation of Member Directors on OCC's RC as the minimum
number Member Directors would be consistent with requirements that the
Executive Chairman (as the lone Management Director), one Exchange
Director, and at least one Public Director serve on the RC. OCC
therefore believes that the proposed amendments are designed, and in
general, to protect investors and the public interest in accordance
with Section 17A(b)(3)(F) of the Act,\55\ are reasonably designed to be
clear and transparent to promote the effectiveness of OCC's risk
management procedures in accordance with Rule 17Ad-22(d)(8) \56\
thereunder, and are designed to ensure a fair representation of OCC's
members and participants in the administration of its affairs (as they
pertain to the oversight of risk matters at OCC) in accordance with
Section 17A(b)(3)(C) of the Act.\57\
---------------------------------------------------------------------------

    \55\ 15 U.S.C. 78q-1(b)(3)(F).
    \56\ 17 CFR 240.17Ad-22(d)(8).
    \57\ 15 U.S.C. 78q-1(b)(3)(C).
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    OCC is also proposing a number of other amendments to better align
its By-Laws and Board and Board Committee Charters and to provide more
clarity and transparency with respect to OCC's governance arrangements.
In particular, OCC proposes amendments to Article IV, Section 7 to: (i)
Delete a requirement that the Member Vice Chairman preside at the
meetings of any committee of the Board charged with reviewing and
evaluating the performance and compensation of officers as the CPC
would now be chaired by a Public Director and (ii) clarify that the
Member Vice Chairman would preside over meetings of the Board and
stockholders in the absence of the Executive Chairman because the
President cannot preside over meetings of the Board. OCC believes that
the proposed changes would provide more clarity, transparency, and
accuracy regarding its governance arrangements with respect to the
responsibilities of the Member Vice Chairman and President and are
therefore designed to ensure that OCC's governance arrangements are
clear and transparent to fulfill the public interest requirements in
Section 17A of the Act \58\ in accordance with Rule 17Ad-22(d)(8).\59\
---------------------------------------------------------------------------

    \58\ 15 U.S.C. 78q-1.
    \59\ 17 CFR 240.17Ad-22(d)(8).
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Amendments to the Board Charter and the Fitness Standards
    The proposed rule change would amend the Board Charter, as
described in detail above, to: (i) Harmonize the description of the
Board's obligations in the Board Charter with the description of the
Board's obligations in OCC's By-Laws and Rules; (ii) reflect recent
changes involving Board Committee Charters; (iii) reflect recent
changes to the Board's composition; and (iv) in general, restate the
responsibilities of the Board in overseeing the management of the
affairs of OCC in light of its role as a systemically important
financial market utility. The proposed amendments would provide more
clarity around the responsibilities of the Board, specifically with
respect to its role in: (i) Overseeing management's activities in
managing, operating and developing OCC, including the selection,
oversight and replacement of key positions (i.e., Executive Chairman,
CEO, and the President) as well as evaluating their performance and
compensation awards; (ii) setting expectations about the tone and
ethical culture at OCC and its ability to ensure compliance with
applicable laws and regulations; (iii) reviewing and approving
financial objectives and strategies, capital plan and capital
structure, fee structure, capital expenditures and budgets; (iv) the
oversight of governance processes,

including performing annual self-evaluations on a group and individual
level; and (v) the oversight of risk assessment and risk tolerances.
OCC believes the proposed changes would provide for prudent governance
arrangements with respect to the Board's oversight role over OCC as a
systemically important financial market utility and are therefore
reasonably designed to ensure that OCC has governance arrangements
that, in general, protect investors and the public interest consistent
with Section 17A(b)(3)(F) of the Act \60\ and are clear and transparent
to fulfill the public interest requirements in Section 17A of the Act
\61\ applicable to clearing agencies and to support the objectives of
owners and participants in accordance with Rule 17Ad-22(d)(8)
thereunder.\62\
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    \60\ 15 U.S.C. 78q-1(b)(3)(F).
    \61\ 15 U.S.C. 78q-1.
    \62\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

    In addition, OCC proposes to amend the Board Charter to state that
the Board is comprised of one Management Director, rather than two
Management Directors, in conformance with the proposed amendments to
the Certificate of Incorporation and By-Laws described above. OCC also
proposes amendments to the Fitness Standards to remove redundant
descriptions of Board composition and the nomination process and to
underscore that the Fitness Standards are intended to facilitate the
performance of OCC's role as a systemically important financial market
utility. OCC believes that the proposed changes provide additional
clarity and transparency regarding its governance arrangements and are
therefore designed to ensure that OCC's governance arrangements are
clear and transparent to fulfill the public interest requirements in
Section 17A of the Act \63\ applicable to clearing agencies in
accordance with Rule 17Ad-22(d)(8).\64\
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    \63\ 15 U.S.C. 78q-1.
    \64\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

    Additionally, OCC proposes amendments that would allow for
additional meetings of the Board to be called as the Board deems
appropriate (such meetings being be called by the Executive Chairman or
his designee), which will provide the Board with increased flexibility
in performing its oversight functions. Accordingly, OCC believes the
proposed amendments to its governance arrangements are designed, in
general, to protect investors and the public interest in accordance
with Section 17A(b)(3)(F) of the Act \65\ and are reasonably designed
to be clear and transparent to fulfill the public interest requirements
in Section 17A of the Act \66\ applicable to clearing agencies in
accordance with Rule 17Ad-22(d)(8) \67\ thereunder.
---------------------------------------------------------------------------

    \65\ 15 U.S.C. 78q-1(b)(3)(F).
    \66\ 15 U.S.C. 78q-1.
    \67\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

Common Amendments to the Committee Charters
    OCC is proposing to make a number of common amendments to the
Committee Charters as a result of the Commission approving certain
changes to the GNC Charter.\68\ Specifically, OCC proposes to amend
each Committee Charter to confirm that each Committee has access to all
books, records, facilities and personnel of OCC in carrying out the
respective Board Committee's purpose and responsibilities and to delete
a provision from each Committee Charter which granted the Chair of each
Board Committee the authority to act on behalf of the respective Board
Committee in situations in which immediate action was required and
convening a Board Committee meeting was impractical. The proposed
amendments would ensure that each Committee has access to all books,
records, facilities and personnel of OCC in carrying out its respective
responsibilities and would support deliberation and action by a Board
Committee as a whole, rather than action by solely its Chair, and as a
result, would help to ensure that each Committee is able to make fully
informed, collective decisions regarding the governance of OCC. OCC
therefore believes the proposed amendments are designed in general, to
protect investors and the public interest in accordance with Section
17A(b)(3)(F) of the Act \69\ and are reasonably designed to be clear
and transparent to fulfill the public interest requirements in Section
17A of the Act \70\ applicable to clearing agencies in accordance with
Rule 17Ad-22(d)(8) \71\ thereunder.
---------------------------------------------------------------------------

    \68\ See supra note 16.
    \69\ 15 U.S.C. 78q-1(b)(3)(F).
    \70\ 15 U.S.C. 78q-1.
    \71\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

    In addition, OCC is proposing a number of common changes across its
Committee Charters to strengthen OCC's Board Committee governance
framework and practices surrounding meetings in executive sessions by
providing added structure regarding the convening and attendance of
executive sessions (and specifically requiring that each Committee meet
in executive session at each regular meeting of the Committee) and by
promoting the enhanced recordation of important meeting events and
discussions by requiring that each Committee's meeting minutes reflect,
at a minimum, that an executive session was convened and broadly
describe the topic(s) discussed. OCC believes that meetings in
executive session are an important tool for Board Committees to discuss
matters of a sensitive nature or for which certain persons may have
conflicts of interest; however, OCC also believes that it is important
that these sessions be documented, at least in summary fashion, in the
interest of transparency. OCC therefore believes the proposed
amendments providing for added structure regarding the convening,
attendance, and recordation of executive sessions are designed, in
general, to protect investors and the public interest in accordance
with Section 17A(b)(3)(F) of the Act \72\ and are reasonably designed
to be clear and transparent to fulfill the public interest requirements
in Section 17A of the Act \73\ applicable to clearing agencies in
accordance with Rule 17Ad-22(d)(8) \74\ thereunder.
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    \72\ 15 U.S.C. 78q-1(b)(3)(F).
    \73\ 15 U.S.C. 78q-1.
    \74\ 17 CFR 240.17Ad-22(d)(8).
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    Additionally, the Committee Charters would be amended to permit any
Board Committee to engage specialists or advisors to assist it in
carrying out its delegated responsibilities without requiring pre-
approval from the Board. Under the proposed amendments, each
Committee's engagement of an advisor, including fees and expenses,
would be referenced in its annual report to the Board. These proposed
amendments are intended to foster Committee independence as well as
timely Committee access to expertise relevant to the discharge of its
delegated responsibilities while preserving Board oversight via the
application of existing reporting mechanisms. Accordingly, OCC believes
that the proposed amendments are designed, in general, to protect
investors and the public interest in accordance with Section
17A(b)(3)(F) of the Act \75\ and are reasonably designed to be clear
and transparent to fulfill the public interest requirements in Section
17A of the Act \76\ applicable to clearing agencies in accordance with
Rule 17Ad-22(d)(8) \77\ thereunder.
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    \75\ 15 U.S.C. 78q-1(b)(3)(F).
    \76\ 15 U.S.C. 78q-1.
    \77\ 17 CFR 240.17Ad-22(d)(8).
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    OCC is also proposing amendments to its Committee Charters to
specify that that [sic] each Committee should evaluate its and its
individual member's performance on an annual basis (as opposed to
regularly) to provide more clarity and specificity regarding the timing
of each Committee's self-

assessment process. OCC believes the proposed amendments are therefore
reasonably designed to be clear and transparent to fulfill the public
interest requirements in Section 17A of the Act \78\ applicable to
clearing agencies in accordance with Rule 17Ad-22(d)(8) \79\
thereunder.
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    \78\ 15 U.S.C. 78q-1.
    \79\ 17 CFR 240.17Ad-22(d)(8).
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Amendments to the Audit Committee Charter
    The proposed amendments to the AC Charter are designed to: (i)
Underscore the independence of the AC; (ii) underscore and expand upon
the activities of the AC with respect to the oversight of OCC's
financial reporting processes and enhance the independence and
objectivity in connection therewith; (iii) promote effective
communication between the CAE, CCO, CFO and the AC and between the AC
and the Board; and (iv) in general, provide more explicit descriptions
of the AC's functions and responsibilities. Specifically, the proposed
changes would underscore the independence of the AC by providing that
all members of the AC be independent from OCC's management, as
determined by the Board from time to time; that the Chair of the AC be
a Public Director; and clarify that the Management Director is
ineligible to serve on the AC. The proposed changes would also require
the AC to meet regularly, and no less than once annually, (as opposed
to at least annually) with management, the CAE, CCO, and CFO in
executive sessions to discuss certain private matters and provide the
authority for the CAE and CCO to communicate directly with the Chair of
the AC with respect to any of the responsibilities of the AC outside of
regular meetings to further underscore the independence these roles at
OCC. In addition, the proposed changes underscore and expand upon the
AC's oversight role in connection with OCC's financial reporting
processes, enhance the independence and objectivity in connection
therewith, and more explicitly describe the AC's functions and
responsibilities with respect to its oversight of external auditors as
well as OCC's internal audit and compliance functions (as described in
detail above). The proposed amendments would also provide that the AC
shall make such reports to the Board as deemed necessary or advisable.
    OCC believes that by underscoring and reinforcing the independence
of the AC in OCC's governance framework, promoting effective
communication between certain officers, the AC, and the Board, and
providing further clarity around the AC's functions and
responsibilities, the proposed changes are reasonably designed to
ensure that OCC's governance arrangements with respect to the role of
the AC are designed to protect investors and the public interest in
accordance with Section 17A(b)(3)(F) of the Act \80\ and are clear and
transparent to fulfill the public interest requirements in Section 17A
of the Act \81\ applicable to clearing agencies and to support the
objectives of owners and participants consistent with Rule 17Ad-
22(d)(8).\82\
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    \80\ 15 U.S.C. 78q-1(b)(3)(F).
    \81\ 15 U.S.C. 78q-1.
    \82\ 17 CFR 240.17Ad-22(d)(8).
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Amendments to the Compensation and Performance Committee Charter
    OCC proposes amendments to the CPC Charter intended to more clearly
articulate that the CPC is tasked with assisting the Board in the
oversight of OCC's overall performance in promptly and accurately
delivering clearance, settlement and other designated industry services
and in the accomplishment of other periodically-established corporate
goals and objectives in light of OCC's systemically important status.
The proposed amendments would provide a more robust framework for the
CPC's oversight functions by clearly stating the CPC's role in: (i)
Recommending the compensation of OCC's Executive Chairman and President
and approving the compensation of certain other officers, as
appropriate; (ii) overseeing OCC's Capital Plan, capital structure,
financial planning and corporate goals and objectives; (iii) overseeing
OCC's Human Resources program; (iv) overseeing the structure and design
of the employee compensation, incentive and benefit programs; and (v)
assisting the Board in reviewing OCC's leadership development and
succession planning. Accordingly, OCC believes that the proposed
changes to the CPC Charter are reasonably deigned [sic] to ensure that
OCC's governance arrangements with respect to the CPC are designed to
protect investors and the public interest in accordance with Section
17A(b)(3)(F) of the Act \83\ and are clear and transparent to fulfill
the public interest requirements in the Act applicable to clearing
agencies and to support the objectives of owners and participants
consistent with Rule 17Ad-22(d)(8).\84\
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    \83\ 15 U.S.C. 78q-1(b)(3)(F).
    \84\ 17 CFR 240.17Ad-22(d)(8).
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Amendments to the Risk Committee Charter
    OCC proposes amendments to its RC Charter primarily intended to
better align the RC Charter with the OCC By-Laws (including, for
example, changes in the composition requirements of the RC and to
reflect the adoption of the TC), to restate and elaborate on the
responsibilities of the RC, and to replace more granular descriptions
with general statements regarding the RC's functions and
responsibilities, as described in detail above. In particular, the
amendments would restate and expand on the RC's functions and
responsibilities with respect to the oversight of membership
requirements, margin requirements, the Enterprise Risk Management
Program, and OCC's risk appetite and risk tolerances. The proposed
amendments also elaborate on the RC's role in overseeing the adequacy
and effectiveness of OCC's processes for setting, monitoring and acting
on risk exposures to OCC presented by banks, depositories, and
financial market utility counterparties and the processes established
by OCC for setting, monitoring and managing liquidity needs necessary
for OCC to perform its obligations as a systemically important
financial market utility. Additionally, in recognition of OCC's role as
a systemically important financial market utility, the RC Charter would
provide that the RC and management would discuss on a regular basis the
impact on systemic stability that may arise as a result of OCC's
actions in responding to an extraordinary market event, including the
impending or actual failure of a clearing member, and the development
of strategies to mitigate these effects. OCC believes that the proposed
amendments to the RC Charter provide for comprehensive and robust
governance arrangements with respect to the RC's oversight role at OCC
and are therefore designed to promote the prompt and accurate clearance
and settlement of securities transactions, to assure the safeguarding
of securities and funds, and in general, to protect investors and the
public interest in accordance with Section 17A(b)(3)(F) of the Act \85\
and are reasonably designed to ensure that OCC's governance
arrangements are clear and transparent to fulfill the public interest
requirements of Section 17A of the Act \86\ applicable to clearing
agencies, to support the objectives of owners and participants, and to
promote the effectiveness of the clearing agency's

risk management procedures as required under Rule 17Ad-22(d)(8).\87\
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    \85\ 15 U.S.C. 78q-1(b)(3)(F).
    \86\ 15 U.S.C. 78q-1.
    \87\ 17 CFR 240.17Ad-22(d)(8).
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    Additionally, OCC proposes to delete an existing RC Charter
provision specifically requiring the RC to periodically review and
modify the inputs to OCC's margin formula and would amend the RC
Charter to state that the RC is generally responsible for overseeing
the processes established for establishing, monitoring and adjusting
margin consistent with the protection of OCC, Clearing Members, or the
general public, including reviewing and modifying OCC's margin formula.
OCC believes that the proposed amendments continue to provide an
adequate and appropriate oversight framework for the monitoring and
development of OCC's margin formula and would provide the RC with the
continued authority to modify margin formula inputs if it deems such
modification to be appropriate. OCC also proposes to delete a provision
stating that the RC is responsible for making determinations regarding
the approval of non-U.S. institutions to issue letters of credit as a
form of margin asset because this provision does not accurately reflect
the RC's responsibilities. Accordingly, OCC believes that the proposed
changes are reasonably designed to be clear and transparent to promote
the effectiveness of the clearing agency's risk management procedures
as required under Rule 17Ad-22(d)(8).\88\
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    \88\ Id.
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    In addition, OCC proposes amendments to state that the RC shall
meet regularly, and no less than once annually, (rather than ``at least
annually'') with the CRO and members of management (as opposed to other
appropriate corporate officers) in separate executive sessions to
discuss certain private matters to provide more specificity regarding
the frequency of these meetings (i.e., that these meetings occur more
frequently than once per year). The proposed changes would also more
specifically require that the RC meet in executive session regularly
with members of management. The RC would continue to have the
discretion to invite any other officers it deems appropriate to
meetings in executive session pursuant to the proposed common charter
amendments described above. OCC believes that the proposed amendments
provide more clarity and transparency with respect to RC meetings in
executive session and are therefore reasonably designed to be clear and
transparent to promote the effectiveness of the clearing agency's risk
management procedures as required under Rule 17Ad-22(d)(8).\89\
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    \89\ Id.
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    Finally, OCC proposes to remove from the RC Charter certain
mandatory recusal requirements designed to apply to Member Directors of
the RC. OCC believes that the identification and handling of conflicts
of interest are already appropriately addressed in its Code of Conduct
for OCC Directors, which is a publicly available document that governs
the conduct of all directors equally regardless of category or
committee assignment. Furthermore, as discussed above, OCC's Directors
have a fiduciary duty under Delaware law to protect the interests of
the corporation and to act in the best interests of its shareholders
and are bound by a duty of loyalty to OCC, which demands that there be
no conflict between duty and self-interest and that the best interest
of the corporation and its shareholders takes precedence over any
interest possessed by a director. OCC believes that this specific
recusal requirement contained in the RC charter is unnecessary in light
of the existing requirements under Delaware law and OCC's Code of
Conduct for OCC Directors. Accordingly, OCC believes that its
governance arrangements with respect to conflicts of interest for RC
members continue to be designed, in general, to protect investors and
the public interest in accordance with Section 17A(b)(3)(F) of the Act
\90\ and are reasonably designed to ensure that OCC's governance
arrangements are clear and transparent to fulfill the public interest
requirements of Section 17A of the Act \91\ applicable to clearing
agencies, to support the objectives of owners and participants, and to
promote the effectiveness of the clearing agency's risk management
procedures as required under Rule 17Ad-22(d)(8).\92\
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    \90\ 15 U.S.C. 78q-1(b)(3)(F).
    \91\ 15 U.S.C. 78q-1.
    \92\ 17 CFR 240.17Ad-22(d)(8).
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Amendments to the Governance and Nominating Committee Charter
    OCC proposes amendments to the GNC Charter to reflect the
elimination of term limits for Public Directors as discussed above, to
state that attendance of GNC meetings by telephone is discouraged, and
to delete a provision stating that a designated officer of management
shall serve to assist the Committee and act as a liaison between staff
and the Committee. The proposed amendments are primarily intended to
conform the GNC Charter with proposed changes to the By-Laws and
existing practices contained in other Committee Charters and would
continue to provide for appropriate governance arrangements with
respect to the GNC's oversight role. OCC therefore believes the
proposed changes are reasonably designed to ensure that OCC's
governance arrangements are clear and transparent to fulfill the public