[Federal Register: April 12, 2010 (Volume 75, Number 69)]
[Notices]
[Page 18521-18522]
[DOCID:fr12ap10-84]

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DEPARTMENT OF HOMELAND SECURITY

Federal Emergency Management Agency

[Internal Agency Docket No. FEMA-1894-DR; Docket ID FEMA-2010-0002]

Rhode Island; Major Disaster and Related Determinations

AGENCY: Federal Emergency Management Agency, DHS.

ACTION: Notice.

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SUMMARY: This is a notice of the Presidential declaration of a major
disaster for the State of Rhode Island (FEMA-1894-DR), dated March 29,
2010, and related determinations.

DATES: Effective Date: March 29, 2010.

FOR FURTHER INFORMATION CONTACT: Peggy Miller, Recovery Directorate,
Federal Emergency Management Agency, 500 C Street, SW., Washington, DC
20472,<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION: Notice is hereby given that, in a letter
dated March 29, 2010, the President issued a major disaster declaration
under the authority of the Robert T. Stafford Disaster Relief and
Emergency Assistance Act, 42 U.S.C. 5121 et seq. (the ``Stafford
Act''), as follows:

    I have determined that the damage in certain areas of the State
of Rhode Island resulting from severe storms and flooding beginning
on March 12, 2010, and continuing, is of sufficient severity and
magnitude to warrant a major disaster declaration under the Robert
T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C.
5121 et seq. (the ``Stafford Act''). Therefore, I declare that such
a major disaster exists in the State of Rhode Island.
    In order to provide Federal assistance, you are hereby
authorized to allocate from funds available for these purposes such
amounts as you find necessary for Federal disaster assistance and
administrative expenses.
    You are authorized to provide Individual Assistance in the
designated areas and Hazard Mitigation throughout the State.
Consistent with the requirement that Federal assistance is
supplemental, any Federal funds provided under the Stafford Act for
Hazard Mitigation and Other Needs Assistance will be limited to 75
percent of the total eligible costs.
    Further, you are authorized to make changes to this declaration
for the approved assistance to the extent allowable under the
Stafford Act.

    The time period prescribed for the implementation of section
310(a), Priority to Certain Applications for Public Facility and Public
Housing Assistance, 42 U.S.C. 5153, shall be for a period not to exceed
six months after the date of this declaration.
    The Federal Emergency Management Agency (FEMA) hereby gives notice
that pursuant to the authority vested in the Administrator, under
Executive Order 12148, as amended, Craig A. Gilbert, of FEMA is
appointed to act as the Federal Coordinating Officer for this major
disaster.
    The following areas of the State of Rhode Island have been
designated as adversely affected by this major disaster:

    Kent, Newport, Providence, and Washington Counties for
Individual Assistance.

All counties within the State of Rhode Island are eligible to apply
for assistance under the Hazard Mitigation Grant Program.

The following Catalog of Federal Domestic Assistance Numbers (CFDA)
are to be used for reporting and drawing funds: 97.030, Community
Disaster Loans; 97.031, Cora Brown Fund; 97.032, Crisis Counseling;
97.033, Disaster Legal Services; 97.034, Disaster Unemployment
Assistance (DUA); 97.046, Fire Management Assistance Grant; 97.048,
Disaster Housing Assistance to Individuals and Households In
Presidentially Declared Disaster Areas; 97.049, Presidentially
Declared Disaster Assistance--Disaster Housing Operations for
Individuals and Households; 97.050, Presidentially Declared Disaster
Assistance to Individuals and Households--Other Needs; 97.036,
Disaster Grants--Public Assistance (Presidentially Declared
Disasters); 97.039, Hazard Mitigation Grant.

W. Craig Fugate,
Administrator, Federal Emergency Management Agency.
[FR Doc. 2010-8271 Filed 4-9-10; 8:45 am]
BILLING CODE 9111-23-P


[Federal Register Volume 83, Number 15 (Tuesday, January 23, 2018)]
[Notices]
[Pages 3244-3253]
[FR Doc No: 2018-01070]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82513; File No. SR-OCC-2017-809]

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

January 17, 2018.
    Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, entitled Payment, Clearing
and Settlement Supervision Act of 2010 (``Clearing Supervision Act'')
\1\ and Rule 19b-4(n)(1)(i) under the Securities Exchange Act of 1934
(``Act''),\2\ notice is hereby given that on December 8, 2017, The
Options Clearing Corporation (``OCC'') filed with the Securities and
Exchange Commission (``Commission'') an advance notice as described in
Items I, II and III below, which Items have been prepared by OCC. The
Commission is publishing this notice to solicit comments on the advance
notice from interested persons.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
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I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice

    This advance notice is filed in connection with a proposed change
to make certain revisions to OCC's Rules and By-Laws to enhance OCC's
existing tools to address the risks of liquidity shortfalls and credit
losses and to establish new tools by which OCC could re-establish a
matched book following a default. Each of the tools proposed herein is
contemplated to be deployed by OCC in an extreme stress event that has
placed OCC into a recovery or orderly wind-down scenario.
    The proposed changes to OCC's By-Laws and Rules were submitted as
Exhibits 5A and 5B of the filing, and proposed changes to OCC's Default
Management Policy were submitted as confidential Exhibit 5C of the
filing.\3\ The proposed change is described in detail in Item II below.
All terms with initial capitalization not defined herein have the same
meaning as set forth in OCC's By-Laws and Rules.\4\
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    \3\ OCC has filed a proposed rule change with the Commission in
connection with the proposed change. See SR-OCC-2017-017.
    \4\ OCC's By-Laws and Rules can be found on OCC's public
website: http://optionsclearing.com/about/publications/bylaws.jsp.

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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Advance Notice

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

(A) Clearing Agency's Statement on Comments on the Advance Notice
Received From Members, Participants or Others

    Written comments were not and are not intended to be solicited with
respect to the proposed rule change and none have been received. OCC
will notify the Commission of any written comments received by OCC.

(B) Advance Notices Filed Pursuant to Section 806(e) of the Payment,
Clearing, and Settlement Supervision Act

Purpose of the Proposed Change
Background
    The purpose of this proposed rule change is to make certain
revisions to OCC's Rules and By-Laws Laws that are designed to enhance
OCC's existing tools to address the risks of liquidity shortfalls and
credit losses and to establish tools by which OCC could re-establish a
matched book following a default. Each of the tools proposed herein is
contemplated to be deployed by OCC in an extreme stress event that has
placed OCC into a recovery or orderly wind-down scenario. Each of the
proposed revisions also is designed to further OCC's compliance, in
whole or in part, with the provisions of the Commission's rules
identified immediately below.
    On September 28, 2016, the Commission adopted amendments to Rule
17Ad-22 \5\ and added new Rules 17Ad-22(e)(3)(ii), (e)(4)(viii),
(e)(4)(ix), (e)(7)(ix), (e)(13), (e)(23)(i) and (e)(23)(ii) \6\
pursuant to Section 17A of the Securities Exchange Act of 1934 \7\ and
the Payment, Clearing, and Settlement Supervision Act of 2010
(``Payment, Clearing and Settlement Supervision Act'').\8\ In relevant
part, these new rules collectively require a covered clearing agency
(``CCA''), as defined by Rule 17Ad-22(a)(5),\9\ to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to: (1) Maintain a risk management framework
including plans for recovery and orderly wind-down necessitated by
credit losses, liquidity shortfalls, general business risk losses or
any other losses, (2) effectively identify, measure, monitor and manage
its credit exposures to participants and those arising from its
payment, clearing and settlement processes, including by addressing the
allocation of credit losses a CCA might face if its collateral and
other resources are insufficient to fully cover its credit exposures,
(3) effectively identify, measure, monitor and manage credit exposures,
including by describing the process to replenish any financial resource
that a CCA may use following a default event or other event in which
use of such resource is contemplated, (4) effectively identify,
measure, monitor and manage liquidity risks that arises or is borne by
the CCA by, at a minimum, describing the process for replenishing any
liquid resource that a CCA may employ during a stress event, (5) ensure
it has the authority and operational capacity to take timely action to
contain losses and liquidity demands and continue to meet its
obligations, (6) publicly disclose relevant rules and material
procedures, including key aspects of its default rules and procedures,
and (7) provide sufficient information to enable participants to
identify and evaluate the risks, fees, and other material costs they
incur by participating in the CCA. The relevant portions of each of
these new requirements is restated below:
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    \5\ 17 CFR 240.17Ad-22.
    \6\ 17 CFR 240.17Ad-22(e)(3)(ii), (e)(4)(viii), (e)(4)(ix),
(e)(7)(ix), (e)(13), (e)(23)(i) and (e)(23)(ii).
    \7\ 15 U.S.C. 78q-1.
    \8\ 12 U.S.C. 5461 et seq.
    \9\ 17 CFR 240.17Ad-22(a)(5).
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     Rule 17Ad-22(e)(3)(ii) requires that each CCA ``establish,
implement, maintain and enforce written policies and procedures
reasonably designed to . . . [m]aintain a sound risk management
framework for comprehensively managing legal, credit, liquidity,
operational, general business, investment, custody, and other risks
that arise in or are borne by the [CCA], which . . . [i]ncludes plans
for the recovery and orderly wind-down of the [CCA] necessitated by
credit losses, liquidity shortfalls, losses from general business risk,
or any other losses.'' \10\
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    \10\ 17 CFR 240.17Ad-22(e)(3)(ii).
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     Rule 17Ad-22(e)(4)(viii) requires that each CCA
``establish, implement, maintain and enforce written policies and
procedures reasonably designed to . . . [e]ffectively identify,
measure, monitor, and manage its credit exposures to participants and
those arising from its payment, clearing, and settlement processes,
including by . . . [a]ddressing allocation of credit losses the [CCA]
may face if its collateral and other resources are insufficient to
fully cover its credit exposures, including the repayment of any funds
the [CCA] may borrow from liquidity providers.'' \11\
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    \11\ 17 CFR 240.17Ad-22(e)(v)(viii).
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     Rule 17Ad-22(e)(4)(ix) requires that each CCA ``establish,
implement, maintain and enforce written policies and procedures
reasonably designed to . . . [e]ffectively identify, measure, monitor,
and manage its credit exposures to participants and those arising from
its payment, clearing, and settlement processes, including by . . .
[d]escribing the [CCA's] process to replenish any financial resources
it may use following a default or other event in which use of such
resources is contemplated.'' \12\
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    \12\ 17 CFR 240.17Ad-22(e)(4)(ix).
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     Rule 17Ad-22(e)(7)(ix) requires that each CCA ``establish,
implement, maintain and enforce written policies and procedures
reasonably designed to . . . [e]ffectively measure, monitor, and manage
the liquidity risk that arises in or is borne by the [CCA], including
measuring, monitoring, and managing its settlement and funding flows on
an ongoing and timely basis, and its use of intraday liquidity by, at a
minimum, doing the following...[d]escribing the [CCA's] process to
replenish any liquid resources that the clearing agency may employ
during a stress event.'' \13\
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    \13\ 17 CFR 240.17Ad-22(e)(7)(ix).
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     Rule 17Ad-22(e)(13) requires that each CCA ``establish,
implement, maintain and enforce written policies and procedures
reasonably designed to . . . [e]nsure the covered clearing agency has
the authority and operational capacity to take timely action to contain
losses and liquidity demands and continue to meet its obligations . .
.'' \14\
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    \14\ 17 CFR 240.17Ad-22(e)(13).
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     Rule 17Ad-22(e)(23)(i) requires that each CCA ``establish,
implement, maintain and enforce written policies and procedures
reasonably designed to . . . [p]ublicly disclos[e] all relevant rules
and material procedures, including key aspects of its default rules and
procedures.'' \15\
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    \15\ 17 CFR 240.17Ad-22(e)(23)(i).
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     Rule 17Ad-22(e)(23)(ii) requires that each CCA
``establish, implement, maintain and enforce written policies and
procedures reasonably designed to . . . [p]rovid[e] sufficient
information to enable participants to identify and evaluate the risks,
fees, and other material costs they incur by

participating in the covered clearing agency.'' \16\
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    \16\ 17 CFR 240.17Ad-22(e)(23)(ii).
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    OCC meets the definition of a CCA and is therefore subject to the
requirements of the CCA rules, including new Rules 17Ad-22(e)(3)(ii),
(e)(4)(viii), (e)(4)(ix), (e)(7)(ix), (e)(13), (e)(23)(i) and
(e)(23)(ii).\17\
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    \17\ 17 CFR 240.17Ad-22(e)(3)(ii), (e)(4)(viii), (e)(4)(ix) and
(e)(7)(ix).
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Proposed Changes
Summary of Proposed Changes
    In order to enhance OCC's existing tools to address the risks of
liquidity shortfalls and credit losses and to establish new tools by
which OCC could re-establish a matched book following a default, OCC is
proposing to make the following revisions to its Rules and By-Laws:
    (1) Revise the existing assessment powers in Section 6 of Article
VIII of OCC's By-Laws, specifically to:
    (a) Establish a rolling ``cooling-off period'' that would be
triggered by the payment of a proportionate charge against the Clearing
Fund (``triggering proportionate charge''), during which period the
aggregate liability of a Clearing Member to replenish the Clearing Fund
(inclusive of assessments) would be 200% of the Clearing Member's
required contribution as of the time immediately preceding the
triggering proportionate charge;
    (b) Clarify that a Clearing Member that chooses to terminate its
membership status during a cooling-off period will not be liable for
replenishment of the Clearing Fund immediately following the expiration
of such cooling-off period, provided that the withdrawing Clearing
Member satisfies enumerated criteria, including providing notice of
such termination by no later than the end of the cooling-off period and
by closing-out and/or transferring of all its open positions with OCC
by no later than the last day of the cooling-off period; and
    (c) Delineate between the obligation of a Clearing Member to
replenish its contributions to the Clearing Fund and its obligations to
meet additional ``assessments'' that may be levied following a
proportionate charge to the Clearing Fund.
    (2) Adopt a new Rule 1009 that would provide OCC with discretionary
authority to call for voluntary payments from non-defaulting Clearing
Members in a circumstance where one or more Clearing Members has
already defaulted and OCC has determined that it may not have
sufficient resources to satisfy its obligations and liabilities
resulting from such default. Rule 1009 also would establish that OCC
would prioritize compensation of Clearing Members that made voluntary
payments from any amounts recovered from the defaulted Clearing
Members.
    (3) Adopt a new Rule 1111 that would provide authority to:
    (a) Allow OCC to call for voluntary tear-ups (``Voluntary Tear-
Up,'' as defined below) of non-defaulting Clearing Member and/or
customer positions at any time following the suspension or default of a
Clearing Member, with the scope of any such Voluntary Tear-Ups being
determined by the Risk Committee of OCC's Board (``Risk Committee'');
    (b) Allow OCC's Board to vote to tear-up the ``Remaining Open
Positions'' (defined below) of a defaulted Clearing Member, as well as
any ``Related Open Positions'' (defined below) in a circumstance where
OCC has attempted one or more auctions of such defaulted Clearing
Member's remaining open positions and OCC has determined that it may
not have sufficient resources to satisfy its obligations and
liabilities resulting from such default with the scope of any such
tear-up (``Partial Tear-Up'') being determined by the Risk Committee;
and
    (c) Allow OCC's Board to vote to re-allocate losses, costs and fees
imposed upon holders of positions extinguished in a Partial Tear-Up
through a special charge levied against remaining non-defaulting
Clearing Members.
    (4) Revise the descriptions and authorizations in Article VIII of
OCC's By-Laws concerning the use of the Clearing Fund to reflect the
discretion of OCC to use remaining Clearing Fund contributions to re-
allocate losses imposed on non-defaulting Clearing Members and
customers from a Voluntary Tear-Up or a mandatory tear-up (``Partial
Tear-Up,'' as defined below).
Discussion of Proposed Changes
    Each of the proposed revisions to OCC's Rules and By-Laws is
described in more detail in the following sub-sections:
1. Proposed Changes to OCC's Assessment Powers
a. Current Assessment Powers
    OCC's current assessment powers are described in Section 6 of
Article VIII of OCC's By-Laws. Section 6 establishes a general
requirement for each Clearing Member to promptly make good any
deficiency in its required contribution to the Clearing Fund whenever
an amount is paid out of its Clearing Fund contribution (whether by
proportionate charge or otherwise).\18\ In this regard, a Clearing
Member's obligation to replenish the Clearing Fund is not currently
subject to any pre-determined limit. Notwithstanding the foregoing, a
Clearing Member can limit the amount of its liability for replenishing
the Clearing Fund (at an additional 100% of the amount of its then-
required Clearing Fund contribution) by winding-down its clearing
activities and terminating its status as a Clearing Member. Any
Clearing Member seeking to so limit its liability for replenishing the
Clearing Fund must: (i) Notify OCC in writing not later than the fifth
business day after the proportionate charge that it is terminating its
status as a Clearing Member, (ii) not initiate any opening purchase or
opening writing transaction, and, if the Clearing Member is a Market
Loan Clearing Member or a Hedge Clearing Member, not initiate any Stock
Loan transaction, through any of its accounts, and (iii) close out or
transfer all of its open positions as promptly as practicable after
giving notice to OCC. Thus, withdrawal from clearing membership is the
only means by which a Clearing Member currently can limit its liability
for replenishing the Clearing Fund.
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    \18\ Under Article VIII, Section 6 of OCC's By-Laws, OCC
currently has authority to assess proportionate charges against
Clearing Members' contributions to the Clearing Fund in certain
enumerated situations. For example, Section 6 generally provides
that if the conditions regarding a Clearing Member default specified
in subparagraphs (a)(i) through (vi) of Article VIII, Section 5 of
OCC's By-Laws are satisfied, OCC will make good resulting losses or
expenses that are suffered by OCC by applying the defaulting
Clearing Member's Clearing Fund contribution after first applying
other funds available to OCC in the accounts of the Clearing Member.
If the sum of the obligations, however, exceeds the total Clearing
Fund contribution and other funds of the defaulting Clearing Member
available to OCC, then OCC will charge the amount of the remaining
deficiency on a proportionate basis against all non-defaulting
Clearing Members' required contributions to the Clearing Fund at the
time. Section 5(b) of Article VIII of OCC's By-Laws similarly
provides for proportionate charges against Clearing Members'
contributions to the Clearing Fund when certain conditions are met
that involve a failure by a bank or a securities or commodities
clearing organization to perform obligations to OCC when they are
due.
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b. Proposed Changes to Assessment Powers
    OCC proposes to amend Section 6 of Article VIII of OCC's By-Laws to
make three primary modifications regarding its existing authority to
assess proportionate charges against Clearing Members' contributions to
the Clearing Fund. First, the proposal introduces an automatic minimum
fifteen calendar day ``cooling-off'' period that begins

when a proportionate charge is assessed by OCC against Clearing
Members' Clearing Fund contributions. While the cooling-off period will
continue for a minimum of fifteen consecutive calendar days, if one or
more of the events described in clauses (i) through (iv) of Article
VIII, Section 5(a) of OCC's By-Laws occur(s) during that fifteen
calendar day period and result in one or more proportionate charges
against the Clearing Fund, the cooling-off period shall be extended
through either (i) the fifteenth calendar day from the date of the most
recent proportionate charge resulting from the subsequent event, or
(ii) the twentieth day from the date of the proportionate charge that
initiated the cooling-off period, whichever is sooner.
    During a cooling-off period, each Clearing Member would have its
aggregate liability to replenish the Clearing Fund capped at 200% of
the Clearing Member's then-required contribution to the Clearing Fund.
Once the cooling-off period ends each remaining Clearing Member would
be required to replenish the Clearing Fund in the amount necessary to
meet its then-required contribution. Once the cooling-off period ends,
any remaining losses or expenses suffered by OCC as a result of any
event described in clauses (i) through (iv) of Article VIII, Section
5(a) of OCC's By-Laws that occurred during such cooling-off period
could not be charged against the amounts Clearing Members have
contributed to replenish the Clearing Fund upon the expiration of the
cooling-off period.\19\
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    \19\ After a cooling-off period has ended, the occurrence of any
event described in clauses (i) through (iv) of Article VIII, Section
5(a) of OCC's By-Laws that results in a proportionate charge against
the Clearing Fund would trigger a new cooling off period, and
thusly, a cap of 200% of each Clearing Member's then-required
contribution would again apply.
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    Second, in connection with the cooling-off period, the proposal
would extend the time frame within which a Clearing Member may provide
a termination notice to OCC to avoid liability for replenishment of the
Clearing Fund after the cooling-off period and would modify the
obligations of such a terminating Clearing Member for closing-out and
transferring its remaining open positions. Specifically, to effectively
terminate its status as a Clearing Member and not be liable for
replenishing the Clearing Fund after the cooling-off period, a Clearing
Member would be required to: (i) Notify OCC in writing of its intent to
terminate not later than the last day of the cooling-off period, (ii)
not initiate any opening purchase or opening writing transaction, and,
if the Clearing Member is a Market Loan Clearing Member or a Hedge
Clearing Member, not initiate any Stock Loan transaction, through any
of its accounts, and (iii) close-out or transfer all of its open
positions by no later than the last day of the cooling-off period. If a
Clearing Member fails to satisfy all of these conditions by the end of
a given cooling-off period, it would not have completed all of the
requirements necessary to terminate its status as a Clearing Member
under Article VIII, Section 6 of OCC's By-Laws and therefore it would
remain subject to the obligation to replenish the Clearing Fund after
the end of the cooling-off period.
    Third, the proposal would clarify the distinction between
``replenishment'' of the Clearing Fund and a Clearing Member's
obligation to answer ``assessments.'' In this context, the term
``replenish'' (and its variations) shall to refer to a Clearing
Member's standing duty, following any proportionate charge against the
Clearing Fund, to return its Clearing Fund contribution to the amount
required from such Clearing Member for the month in question.\20\ The
term ``assessment'' (and its variations) shall refer to the amount,
during any cooling-off period, that a Clearing Member would be required
to contribute to the Clearing Fund in excess of the amount of the
Clearing Member's pre-funded required Clearing Fund contribution.
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    \20\ This assumes that the proportionate charge resulted in the
Clearing Member's actual Clearing Fund contribution dropping below
the amount of its required contribution (i.e., that the Clearing
Member did not have excess above its required contribution that was
sufficient to cover the amount of the proportionate charge allocated
to such Clearing Member).
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Proposed Addition of Ability To Request Voluntary Payments
    OCC proposes to add new Rule 1009, which will provide a framework
by which OCC could receive voluntary payments in a circumstance where a
Clearing Member has defaulted and OCC has determined that,
notwithstanding the availability of any remaining resources under OCC
Rules 707, 1001, 1104 through 1107, 2210 and 2211,\21\ OCC may not have
sufficient resources to satisfy its obligations and liabilities
resulting from such default. Under new Rule 1009, OCC will initiate a
call for voluntary payments by issuing a ``Voluntary Payment Notice''
inviting all non-defaulting Clearing Members to make payments to the
Clearing Fund in addition to any amounts they are otherwise required to
contribute pursuant to Rule 1001. The Voluntary Payment Notice would
specify the terms applicable to any voluntary payment, including but
not limited to, that any voluntary payment may not be withdrawn once
made, that no Clearing Member shall be obligated to make a voluntary
payment and that OCC shall retain full discretion to accept or reject
any voluntary payment. Rule 1009 specifies that if OCC subsequently
recovers from the defaulted Clearing Member or the estate(s) of the
defaulted Clearing Member(s), OCC would seek to compensate first from
such recovery all non-defaulting Clearing Members that made voluntary
payments (and if the amount recovered from the defaulted Clearing
Member(s) is less than the aggregate amount of voluntary payments, non-
defaulting Clearing Members that made voluntary payments each would
receive a percentage of the recovery that corresponds to that Clearing
Member's percentage of the total amount of voluntary payments
received).
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    \21\ Rule 707 addresses the treatment of funds in a Clearing
Member's X-M accounts. Rule 1001 addresses the size of OCC's
Clearing Fund and the amount of a Clearing Member's contribution.
Rules 1104 through 1107 concern the treatment of the portfolio of a
defaulted Clearing Member. Rules 2210 and 2211 concern the treatment
of Stock Loan positions of a defaulted Clearing Member.
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Proposed Addition of Ability To Conduct Voluntary Tear-Ups
    OCC proposes to add new Rule 1111, which, in relevant part, will
establish a framework by which non-defaulting Clearing Members and non-
defaulting customers of Clearing Members could be given an opportunity
to voluntarily extinguish (i.e., voluntarily tear-up) their open
positions at OCC in a circumstance where a Clearing Member has
defaulted and OCC has determined that, notwithstanding the availability
of any remaining resources under OCC Rules 707, 1001, 1104 through
1107, 2210 and 2211, OCC may not have sufficient resources to satisfy
its obligations and liabilities resulting from such default.
    While Risk Committee approval is not needed to commence a voluntary
tear-up, the Risk Committee would be responsible for determining the
appropriate scope of each voluntary tear-up. To ensure OCC retains
sufficient flexibility to effectively deploy this tool in an extreme
stress event, proposed Rule 1111(c) is drafted to provide the Risk
Committee with discretion to determine the appropriate

scope of each voluntary tear-up.\22\ New Rule 1111(c) also would impose
standards designed to circumscribe the Risk Committee's discretion,
requiring that any determination regarding the scope of a voluntary
tear-up shall (i) be based on then-existing facts and circumstances,
(ii) be in furtherance of the integrity of OCC and the stability of the
financial system, and (iii) take into consideration the legitimate
interests of Clearing Members and market participants.
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    \22\ Notwithstanding the discretion that would be afforded by
the text of proposed Rule 1111(c), OCC anticipates that the scope of
voluntary tear-ups likely would be dictated by the cleared contracts
remaining in the portfolio(s) of the defaulted Clearing Member(s).
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    Once the Risk Committee has determined the scope of the Voluntary
Tear-Up, OCC will initiate the call for voluntary tear-ups by issuing a
``Voluntary Tear-Up Notice.'' The Voluntary Tear-Up Notice shall inform
all non-defaulting Clearing Members of the opportunity to participate
in a Voluntary Tear-Up.\23\ The Voluntary Tear-Up Notice would specify
the terms applicable to any voluntary tear-up, including but not
limited to, that no Clearing Member or customers of a Clearing Member
shall be obligated to participate in a voluntary tear-up and that OCC
shall retain full discretion to accept or reject any voluntary tear-up.
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    \23\ Since OCC does not know the identities of Clearing Members'
customers, OCC would depend on each Clearing Member to notify its
customers with positions in scope of the Voluntary Tear-Up of the
opportunity to participate in such tear-up.
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    OCC is not proposing a tear-up process that would require the
imposition of ``gains haircutting'' (i.e., the reduction of unpaid
gains) on a portion of OCC's cleared contracts.\24\ Instead, OCC has
determined that its tear-up process--for both Voluntary Tear-Ups as
well as Partial Tear-Ups--should be initiated on a date sufficiently in
advance of the exhaustion of OCC's financial resources such that OCC
would be expected to have adequate remaining resources to cover the
amount it must pay to extinguish the positions of Clearing Members and
customers without haircutting gains.\25\
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    \24\ In general, forced gains haircutting is a tool that can be
more easily applied to products whose gains are settled at least
daily, like futures through an exchange of variation margin, and by
central counterparties with comparatively large daily settlement
flows. Listed options, which constitute the vast majority of the
contracts cleared by OCC, do not have daily settlement flows and any
attempt to reduce the ``unrealized gains'' of a listed options
contract would require the reduction of the option premium that is
embedded within the required margin (such a process would
effectively require haircutting the listed option's initial margin).
    \25\ OCC anticipates that it would determine the date on which
to initiate Partial Tear-Ups by monitoring its remaining financial
resources against the potential exposure of the remaining
unauctioned positions from the portfolio(s) of the defaulted
Clearing Member(s).
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    In OCC's proposed tear-up process, the holders of torn-up positions
would be assigned a Tear-Up Price and OCC would draw on its remaining
financial resources in order to extinguish the torn-up positions at the
assigned Tear-Up Price without forcing a reduction in the amount unpaid
gains on such positions. The proposed changes would provide OCC with
two separate and non-exclusive means of equitably re-allocating the
losses, costs or expenses imposed upon the holders of torn-up positions
as a result of the tear-up(s). First, the proposed changes to Article
VIII would provide OCC discretion to use remaining Clearing Fund
contributions to re-allocate losses imposed on non-defaulting Clearing
Members and customers from such tear-up(s). Second, Rule 1111(a) would
provide that if OCC subsequently recovers from the defaulted Clearing
Member or the estate(s) of the defaulted Clearing Member(s) and the
amount of such recovery exceeds the amount OCC received in voluntary
payments, then non-defaulting Clearing Members and non-defaulting
customers that voluntarily tore-up open positions and incurred losses
from such tear-ups would be repaid from the amount of the recovery in
excess of the amount OCC received in voluntary payments.\26\ If the
amount recovered is less than the aggregate amount of Voluntary Tear-
Up, each non-defaulting Clearing Member and non-defaulting customer
that incurred losses from voluntarily torn-up positions would be repaid
in an amount proportionate to the percentage of its total amount of
losses, costs and fees imposed on Clearing Members or customers as a
result of the Voluntary Tear-Ups.
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    \26\ In order to effect re-allocation of the losses, costs or
expenses imposed upon the holders of torn-up positions, OCC expects
that after it has completed its tear-up process and re-established a
matched book, holders of both voluntarily torn-up and mandatorily
torn-up positions would be provided with a limited opportunity to
re-establish positions in the contracts that were voluntarily or
mandatorily extinguished. After the expiration of such period, OCC
would seek to collect the information on the losses, costs or
expenses that had been imposed on the holders of torn-up positions.
Based on the information collected, OCC would determine whether it
can reasonably determine the losses, costs and expenses sufficiently
to re-allocate such amounts.
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    With respect to Voluntary Tear-Ups, new Rule 1111(h) would clarify
that no action or omission by OCC pursuant to and in accordance Rule
1111 shall constitute a default by OCC.
Proposed Addition of Ability To Conduct Partial Tear-Ups
    OCC proposes to add new Rule 1111, which, in relevant part, will
provide the Board with discretion to extinguish the remaining open
positions of any defaulted Clearing Member or customer of such
defaulted Clearing Member(s) (such positions, ``Remaining Open
Positions''), as well as any related open positions as necessary to
mitigate further disruptions to the markets affected by the Remaining
Open Positions (such positions, ``Related Open Positions''), in a
circumstance where a Clearing Member has defaulted and OCC has
determined that, notwithstanding the availability of any remaining
resources under OCC Rules 707, 1001, 1104 through 1107, 2210 and 2211,
OCC may not have sufficient resources to satisfy its obligations and
liabilities resulting from such default (such tear-ups hereinafter
collectively referred to as ``Partial Tear-Ups''). Like the
determination for Voluntary Tear-Ups, the Risk Committee shall
determine the appropriate scope of each Partial Tear-Up and such
determination shall (i) be based on then-existing facts and
circumstances, (ii) be in furtherance of the integrity of OCC and the
stability of the financial system, and (iii) take into consideration
the legitimate interests of Clearing Members and market participants.
Once the Risk Committee has determined the scope of the Partial Tear-
Up, OCC will initiate the Partial Tear-Up process by issuing a
``Partial Tear-Up Notice.'' The Partial Tear-Up Notice shall (i)
identify the Remaining Open Positions and Related Open Positions
designated for tear-up, (ii) identify the open positions of non-
defaulting Clearing Members and non-defaulting customers that will be
subject to Partial Tear-Up (such positions, ``Tear-Up Positions''),
(iii) specify the termination price (``Partial Tear-Up Price'') for
each position to be torn-up, and (iv) list the date and time as of
which the Partial Tear-Up will occur.\27\ With regard to the date and
time of a Partial Tear-Up, Rule 1111(d) specifies that the Risk
Committee shall set the date and time. With regard to the Partial Tear-
Up Price, OCC anticipates that it is likely to use the last established
end-of-day settlement price, in accordance with its existing practices
concerning pricing and valuation. However, given that it is not
possible to know in advance the precise circumstances that would cause

OCC to conduct a tear-up, Rule 1111(f) has been drafted to allow OCC to
exercise reasonable discretion, if necessary, in establishing the
Partial Tear-Up Price by some means other than its existing practices
concerning pricing and valuation. Specifically, Rule 1111(f) would
require that OCC, in exercising any such discretion, would act in good
faith and in a commercially reasonable manner to adopt methods of
valuation expected to produce reasonably accurate substitutes for the
values that would have been obtained from the relevant market if it
were operating normally, including but not limited to the use of
pricing models that use the market price of the underlying interest or
the market prices of its components. Rule 1111(f) further specifies
that OCC may consider the same information set forth in subpart (c) of
Section 27, Article VI of OCC's By-Laws.\28\
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    \27\ Since OCC does not know the identities of Clearing Members'
customers, OCC would depend on each Clearing Member to notify its
customers with positions in scope of the Partial Tear-Up of the
possibility of tear-up.
    \28\ In relevant part, subpart (c) reads as follows: ``In
determining a close-out amount, the Corporation may consider any
information that it deems relevant, including, but not limited to,
any of the following: (1) Prices for underlying interests in recent
transactions, as reported by the market or markets for such
interests; (2) quotations from leading dealers in the underlying
interest, setting forth the price (which may be a dealing price or
an indicative price) that the quoting dealer would charge or pay for
a specified quantity of the underlying interest; (3) relevant
historical and current market data for the relevant market, provided
by reputable outside sources or generated internally; and (4) values
derived from theoretical pricing models using available prices for
the underlying interest or a related interest and other relevant
data. Amounts stated in a currency other than U.S. Dollars shall be
converted to U.S. Dollars at the current rate of exchange, as
determined by the Corporation. A position having a positive close-
out value shall be an `asset position' and a position having a
negative close-out value shall be a `liability position.' ''
---------------------------------------------------------------------------

    The scope of any Partial Tear-Up will be determined in accordance
with Rule 1111(e). With respect to the extinguishment of Remaining Open
Positions, OCC will designate Tear-Up Positions in identical Cleared
Contracts and Cleared Securities on the opposite side of the market and
in an aggregate amount equal to that of the Remaining Open Positions.
OCC will only designate Tear-Up Positions in the accounts of non-
defaulting Clearing Members (inclusive of such Clearing Members'
customer accounts) with an open position in the applicable Cleared
Contract or Cleared Security and of non-defaulted customers of a
defaulted Clearing Member. Tear-Up Positions shall be designated and
applied by OCC on a pro rata basis across all the identical positions
in Cleared Contracts and Cleared Securities on the opposite side of the
market in the accounts of non-defaulted Clearing Members and non-
defaulted customers (including the non-defaulted customers of defaulted
Clearing Members).
    Rule 1111(e)(iii) provides that every Partial Tear-Up position is
automatically terminated upon and with effect from the Partial Tear-Up
Time, without the need for any further step by any party to such
Cleared Contract or Cleared Security, and that upon termination, either
OCC or the relevant Clearing Member (as the case may be) shall be
obligated to pay the other the applicable Partial Tear-Up Price. Rule
1111(e)(iii) further provides that the corresponding open position
shall be deemed terminated at the Partial Tear-Up Price.
    Rule 1111(g) provides that to the extent losses imposed upon non-
defaulting Clearing Members and non-defaulting customers resulting from
a Partial Tear-Up can reasonably be determined, the Board may elect to
re-allocate such losses among all non-defaulting Clearing Members
through a special charge to all non-defaulting Clearing Members in an
amount corresponding to each such non-defaulting Clearing Member's
proportionate share of the variable amount of the Clearing Fund at the
time such Partial Tear-Up is conducted.\29\
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    \29\ For the avoidance of doubt, the special charge would be
distinct and separate from a Clearing Member's obligation to satisfy
Clearing Fund assessments, and therefore, would not be subject to
the aforementioned assessment cap in the amount of 200% of a
Clearing Member's then-required contribution to the Clearing Fund.
---------------------------------------------------------------------------

    With respect to Partial Tear-Ups, new Rule 1111(h) would clarify
that no action or omission by OCC pursuant to and in accordance Rule
1111 shall constitute a default by OCC.
Expected Effect on and Management of Risk
    OCC believes that the proposed changes would reduce the nature and
level of risk presented to OCC in three primary ways: (i) By providing
greater certainty regarding what financial resources will be available
to OCC after a proportionate charge is assessed; (ii) by providing
additional tools by which to allocate credit losses in excess of OCC's
available financial resources; and (iii) by enhancing OCC's ability to
re-establish a matched book. First, OCC believes the imposition of a
200% cap on OCC's assessment powers during any cooling-off period
provides Clearing Members with greater certainty regarding their
maximum liability with respect to the Clearing Fund during extreme
stress events, which in turn, facilitates Clearing Members' management
of their own risks, and to the extent applicable, regulatory capital
considerations. Further, OCC believes that extending the window for
Clearing Member withdrawal following a proportionate charge to be
equivalent with the cooling-off period would afford a Clearing Member a
more reasonable period in which to evaluate whether the withdrawal from
clearing membership would be necessary to cap its liability for
proportionate charges at 200% of its then-required Clearing Fund
contributions. With this change, OCC believes the increased
predictability would help it to more reliably understand the amount of
Clearing Fund contributions that will likely be available to it after a
proportionate charge is assessed. Second, the introduction of rules to
allow for voluntary payments, Voluntary Tear-Ups and Partial Tear-Ups
would provide OCC with three distinct tools that could be used to
allocate any credit losses OCC may face in excess of collateral and
other resources available to OCC. Finally, in the event that OCC
believes its obligations and liabilities arising from remaining
positions in the portfolio of a defaulted Clearing Member may exceed
its remaining available financial resources, the proposed changes
ultimately would enable OCC to extinguish those positions, thereby re-
establishing a matched book.
    The risks of a Partial Tear-Up are extremely remote; nonetheless,
OCC believes that the express authority to conduct a Partial Tear-Up
may be viewed as increasing Clearing Members' and customers' exposure
to an extreme stress scenario. As explained above, the proposed Partial
Tear-Up authority is consistent with regulatory requirements, as well
as with the expectations of CCPs of various international
organizations. OCC further believes that its proposed Partial Tear-Up
authority strikes an appropriate balance between seeking to protect the
interests of Clearing Members and customers and the need to have
appropriate tools to stabilize a systemically important financial
market utility and minimize the risk of disruption to the broader
financial system. To address the potential impact of a Partial Tear-Up
on Clearing Members and customers, OCC has proposed two tools that
would enable it to equitably re-allocate the losses, costs and fees
imposed upon holders of torn-up positions.
Consistency With the Clearing Supervision Act
    The stated purpose of the Clearing Supervision Act is to mitigate
systemic risk in the financial system and promote financial stability
by, among other

things, promoting uniform risk management standards for systemically
important financial market utilities and strengthening the liquidity of
systemically important financial market utilities.\30\ Section
805(a)(2) of the Clearing Supervision Act \31\ also authorizes the
Commission to prescribe risk management standards for the payment,
clearing and settlement activities of designated clearing entities,
like OCC, for which the Commission is the supervisory agency. Section
805(b) of the Clearing Supervision Act \32\ states that the objectives
and principles for risk management standards prescribed under Section
805(a) shall be to:
---------------------------------------------------------------------------

    \30\ 12 U.S.C. 5461(b).
    \31\ 12 U.S.C. 5464(a)(2).
    \32\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

     Promote robust risk management;
     promote safety and soundness;
     reduce systemic risks; and
     support the stability of the broader financial system.
    The Commission has adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act and the Act in furtherance of
these objectives and principles, including those standards adopted
pursuant to the Commission rules cited below.\33\ For the reasons set
forth below, OCC believes that the proposed change is consistent with
the risk management standards promulgated under Section 805(a) of the
Clearing Supervision Act.\34\
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    \33\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release
Nos. 68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-
08-11) (``Clearing Agency Standards''); 78961 (September 28, 2016),
81 FR 70786 (October 13, 2016) (S7-03-14) (``Standards for Covered
Clearing Agencies''). The Standards for Covered Clearing Agencies
became effective on December 12, 2016. OCC is a ``covered clearing
agency'' as defined in Rule 17Ad-22(a)(5) and therefore is subject
to section (e) of Rule 17Ad-22.
    \34\ 12 U.S.C. 5464(b)(1) and (4).
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Recovery and Orderly Wind-Down
    In relevant part, Rule 17Ad-22(e)(3)(ii) requires that each CCA
``establish, implement, maintain and enforce written policies and
procedures reasonably designed to . . . plan[ ] for the recovery and
orderly wind-down of the [CCA] necessitated by credit losses, liquidity
shortfalls, losses from general business risk, or any other losses.''
\35\ As stated above, each of the proposed changes is designed to
provide OCC with tools to address the risks OCC might confront in a
recovery and orderly wind-down scenario.\36\ Consistent with the
requirements of Rule 17Ad-22(e)(3)(ii), the proposed tools would enable
OCC to better address the risks of liquidity shortfalls and credit
losses resulting from a Clearing Member default or certain other loss
events and, if necessary, to ultimately re-establish a matched book in
a recovery or orderly wind-down scenario.\37\ In this context, the
proposed changes serve as a critical component of OCC's recovery and
orderly wind-down plan. As a result, in OCC's view, the proposed
changes are consistent with the requirements of Rule 17Ad-22(e)(3)(ii)
as to the recovery and orderly wind-down plan.\38\
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    \35\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \36\ Indeed, the OCC's separately filed recovery and orderly
wind-down plan identifies OCC's assessment powers, ability to call
for voluntary payments, ability to call for Voluntary Tear-Ups and
ability to impose Partial Tear-Ups among its ``Recovery Tools.'' OCC
has filed a proposed rule change with the Commission in connection
with this proposal. See SR-OCC-2017-021.
    \37\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \38\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------

Allocation of Credit Losses Above Available Resources
    In relevant part, Rule 17Ad-22(e)(4)(viii) requires that each CCA
``establish, implement, maintain and enforce written policies and
procedures reasonably designed to . . . [a]ddress[ ] allocation of
credit losses the [CCA] may face if its collateral and other resources
are insufficient to fully cover its credit exposures . . .'' \39\ The
proposed changes would provide OCC with three distinct tools that could
be used to allocate any credit losses OCC may face in excess of
collateral and other resources available to OCC. First, new Rule 1009
would provide a framework by which OCC could receive voluntary payments
in a circumstance where a Clearing Member has defaulted and OCC has
determined that, notwithstanding the availability of any remaining
resources under OCC Rules 707, 1001, 1104 through 1107, 2210 and
2211,\40\ OCC may not have sufficient resources to satisfy its
obligations and liabilities resulting from such default. Second, new
Rule 1111 would establish a framework by which non-defaulting Clearing
Members and non-defaulting customers of Clearing Members could be given
an opportunity to participate in Voluntarily Tear-Ups in a circumstance
where a Clearing Member has defaulted and OCC has determined that,
notwithstanding the availability of any remaining resources under OCC
Rules 707, 1001, 1104 through 1107, 2210 and 2211, OCC may not have
sufficient resources to satisfy its obligations and liabilities
resulting from such default. Finally, new Rule 1111 also would provide
the Board with discretion to mandatorily tear-up Remaining Open
Positions and Related Open Positions, in a circumstance where a
Clearing Member has defaulted and OCC has determined that,
notwithstanding the availability of any remaining resources under OCC
Rules 707, 1001, 1104 through 1107, 2210 and 2211, OCC may not have
sufficient resources to satisfy its obligations and liabilities
resulting from such default.\41\ In OCC's view, each of these tools
could be deployed by OCC, if necessary, to allocate credit losses in
excess of the collateral and other resources available to OCC, in
accordance with Rule 17Ad-22(e)(4)(viii).\42\
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    \39\ 17 CFR 240.17Ad-22(e)(v)(viii).
    \40\ Rule 707 addresses the treatment of funds in a Clearing
Member's X-M accounts. Rule 1001 addresses the size of OCC's
Clearing Fund and the amount of a Clearing Member's contribution.
Rules 1104 through 1107 concern the treatment of the portfolio of a
defaulted Clearing Member. Rules 2210 and 2211 concern the treatment
of Stock Loan positions of a defaulted Clearing Member.
    \41\ Rule 1111(g), which would provide the Board authority to
equitably re-allocate losses, costs and fees directly imposed as a
result of a Partial Tear-Up among all non-defaulting Clearing
Members through a special charge, would serve as a discretionary
tool to redistribute the credit losses allocated through Partial
Tear-Up.
    \42\ 17 CFR 240.17Ad-22(e)(v)(viii).
---------------------------------------------------------------------------

Replenishment of Financial Resources Following a Default
    In relevant part, Rule 17Ad-22(e)(4)(ix) requires that each CCA
``establish, implement, maintain and enforce written policies and
procedures reasonably designed to . . . [d]escrib[e] the [CCA's]
process to replenish any financial resources it may use following a
default or other event in which use of such resources is
contemplated.'' \43\ OCC's Clearing Members have a standing obligation
to replenish the Clearing Fund following any proportionate charge. The
proposed changes would establish a rolling cooling-off period,
triggered by the payment of a proportionate charge against the Clearing
Fund, during which period the aggregate liability of a Clearing Member
to replenish the Clearing Fund (inclusive of assessments) would be 200%
of the Clearing Member's required contribution as of the time
immediately preceding the triggering proportionate charge. Compared to
the current requirement under which a Clearing Member may cap its
liability to proportionate charges at an additional 100% of its then-
required contribution, a Clearing Member would instead be permitted to
cap its liability for proportionate charges at an additional 200% of
its then-required Clearing Fund contribution.
---------------------------------------------------------------------------

    \43\ 17 CFR 240.17Ad-22(e)(4)(ix).
---------------------------------------------------------------------------

    OCC believes that the proposed approach improves predictability for

OCC and for Clearing Members regarding the size of Clearing Fund
contributions that are likely to be subject to assessments for
proportionate charges. Additionally, replacing the five business day
withdrawal period with the withdrawal period commensurate with the
cooling-off period (which, as proposed would be a minimum of fifteen
calendar days) would give Clearing Members a more reasonable period in
which to meet the wind-down and termination requirements necessary to
cap their liability. OCC believes that this would afford them greater
certainty regarding their maximum liability with respect to the
Clearing Fund during extreme stress events, which in turn, facilitates
Clearing Members' management of their own risk management, and to the
extent applicable, regulatory capital considerations. And OCC believes
this increased predictability would also be beneficial to OCC by
helping it to more reliably understand the amount of Clearing Fund
contributions that will likely be available to it after a proportionate
charge is assessed.\44\
---------------------------------------------------------------------------

    \44\ Under the existing approach, it is less certain from OCC's
standpoint regarding whether Clearing Members would reasonably be
able to cap their liability to proportionate charges within five
business days.
---------------------------------------------------------------------------

    OCC believes that the relative certainty provided by the proposed
cooling-off period and 200% cap on assessments ultimately could reduce
the risks of successive or ``cascading'' defaults, in which the
financial demands on remaining non-defaulting Clearing Members to
continually replenish OCC's Clearing Fund (and similar guaranty funds
at other CCPs to which such Clearing Members might belong) have the
effect of further weakening such Clearing Members to the point of
default. In this regard, the proposed changes are designed to provide
OCC, Clearing Members and other stakeholders with sufficient time to
manage the ongoing default(s) without further aggravating the extreme
stresses facing market participants.
    OCC recognizes that the proposed changes would limit the maximum
amount of Clearing Fund resources that could be available to OCC in an
extreme stress scenario, which introduces the possibility, however
remote, that the proposed 200% cap ultimately could be reached. If
during any cooling-off period the amount of aggregate proportionate
charges against the Clearing Fund approaches the 200% cap, the amount
remaining in the Clearing Fund may no longer be sufficient to comply
with the applicable minimum regulatory financial resources requirements
in the CCAs. In any such event, OCC's existing authority under Rule 603
would permit OCC to call on participants for additional initial margin,
which could ensure that OCC's minimum financial resources remain in
excess of applicable CCA requirements.\45\ OCC recognizes that the
imposition of increased margin requirements could have an immediate
pro-cyclical impact on participants (and consequential impacts on the
broader financial system) that is potentially greater than the impact
of replenishing the Clearing Fund. These risks would be limited to a
specific extreme stress event and could be mitigated by certain
factors. First, OCC, in coordination with its regulators, would
carefully evaluate any potential increase in the context of then-
existing facts and circumstances. Second, during the cooling-off
period, Clearing Members and their customers will have the opportunity
to reduce or rebalance their respective portfolios in order to mitigate
their exposures to stress losses and initial margin increases. Finally,
since initial margin is not designed to be subject to mutualized loss,
the risk of loss faced by Clearing Members for amounts posted as
additional margin would be substantially less than for replenishments
of the Clearing Fund.
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    \45\ Rule 603 provides that ``[t]he Risk Committee may, from
time to time, increase the amount of margin which may be required in
respect of a cleared contract, open short position or exercised
contract if, in its discretion, it determines that such increase is
advisable for the protection of [OCC], the Clearing Members or the
general public.''
---------------------------------------------------------------------------

    Given the products cleared by OCC and the composition of its
clearing membership, OCC has determined that a minimum 15-calendar day
cooling-off period, rolling up to a maximum of 20 calendar days, is
likely to be a sufficient amount of time for OCC to manage the ongoing
default(s) and take necessary steps in furtherance of stabilizing the
clearing system. Further, through conversations with Clearing Members,
OCC believes that the proposed cooling-off period is likely to be a
sufficient amount for Clearing Members (and their customers) to orderly
reduce or rebalance their positions, in an attempt to mitigate stress
losses and exposure to potential initial margin increases as they
navigate the stress event. Through conversations with Clearing Members,
OCC also believes that the proposed cooling-off period is likely to be
a sufficient amount for certain Clearing Members to orderly close-out
their positions and transfer customer positions as they withdraw from
clearing membership. OCC believes the proposed cooling-off period,
coupled with the other proposed changes to OCC's assessment powers, is
likely to provide Clearing Members with an adequate measure of
stability and predictability as to the potential use of Clearing Fund
resources, which OCC believes removes the existing incentive for
Clearing Members to withdraw following a proportionate charge.\46\
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    \46\ OCC initially considered a fixed 15-calendar day cooling-
off period; however, OCC concluded that a fixed 15-calendar day
cooling-off period may increase the risks of successive or cascading
Clearing Member defaults and may perversely incentivize Clearing
Members to seek to withdraw from clearing membership. Through
conversations with Clearing Members, OCC believes that these
potentially disruptive consequences are mitigated by the proposed
rolling cooling-off period.
---------------------------------------------------------------------------

    In light of the foregoing, OCC believes that the proposed changes
would enhance and strengthen its process to replenish the Clearing Fund
following a default or other event in which use of the Clearing Fund is
contemplated, in accordance with Rule 17Ad-22(e)(4)(ix).\47\
---------------------------------------------------------------------------

    \47\ 17 CFR 240.17Ad-22(e)(4)(ix).
---------------------------------------------------------------------------

Replenishment of Liquid Resources
    In relevant part, Rule 17Ad-22(e)(7)(ix) requires that each CCA
``establish, implement, maintain and enforce written policies and
procedures reasonably designed to . . . [d]escrib[e] the [CCA's]
process to replenish any liquid resources that the clearing agency may
employ during a stress event.'' \48\ Since the use any part of the cash
portion of OCC's Clearing Fund would constitute a depletion of one of
OCC's liquid resources, OCC's assessment power, discussed above, is the
primary means of replenishing the Clearing Fund cash that OCC used to
address the stress event. For the same reasons stated above, OCC
believes that the proposed changes enhance and strengthen its process
to replenish the Clearing Fund, as necessary, following a default or
other stress event in which the Clearing Fund is used, and therefore,
OCC views the proposed changes as consistent with Rule 17Ad-
22(e)(7)(ix).\49\
---------------------------------------------------------------------------

    \48\ 17 CFR 240.17Ad-22(e)(7)(ix).
    \49\ 17 CFR 240.17Ad-22(e)(7)(ix).
---------------------------------------------------------------------------

Timely Action To Contain Losses
    In relevant part, Rule 17Ad-22(e)(13) requires that each CCA
``establish, implement, maintain and enforce written policies and
procedures reasonably designed to . . . [e]nsure the [CCA] has the
authority and operational capacity to take timely action to contain
losses and liquidity demands and continue to meet its obligations . .
.'' \50\ The proposed changes would provide OCC with the authority to
call for Voluntary Tear-Ups and OCC's Board

with the discretion to impose Partial Tear-Ups, which would provide OCC
with authority necessary to extinguish certain losses (and attendant
liquidity demands) thereby potentially enabling OCC to continue to meet
its remaining obligations to participants. As designed, Voluntary Tear-
Ups and Partial Tear-Ups would be initiated on a date sufficiently in
advance of the exhaustion of OCC's financial resources such that OCC is
expected to have adequate resources remaining to cover the amount it
must pay to extinguish the positions of Clearing Members and customers
without haircutting gains. Accordingly, OCC believes that its authority
and capacity to conduct a Partial Tear-Up should be timely, relative to
the adequacy of OCC's remaining financial resources. Finally, OCC
believes it has the operational and systems capacity sufficient to
support the proposed changes, and OCC's policies and procedures will be
updated accordingly to reflect the existence of these new tools. As a
result, OCC believes that the proposed changes conform to the relevant
requirements in Rule 17Ad-22(e)(13).\51\
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    \50\ 17 CFR 240.17Ad-22(e)(13).
    \51\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------

Public Disclosure of Key Aspects of Default Rules
    In relevant part, Rule 17Ad-22(e)(23)(i) requires that each CCA
``establish, implement, maintain and enforce written policies and
procedures reasonably designed to . . . [p]ublicly disclos[e] all
relevant rules and material procedures, including key aspects of its
default rules and procedures.'' \52\ As stated above, each of the tools
discussed herein are contemplated to be deployed by OCC if an extreme
stress event has placed OCC into a recovery or orderly wind-down
scenario, and therefore, the tools discussed herein constitute key
aspects of OCC's default rules. By incorporating the proposed changes
into OCC's Rules and By-Laws, as further supplemented by the discussion
in OCC's public rule filing, OCC believes that proposed changes would
conform to the relevant requirements in Rule 17Ad-22(e)(23)(i).\53\
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    \52\ 17 CFR 240.17Ad-22(e)(23)(i).
    \53\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------

Sufficient Information Regarding the Risks, Fees and Costs of Clearing
    In relevant part, Rule 17Ad-22(e)(23)(ii) requires that each CCA
``establish, implement, maintain and enforce written policies and
procedures reasonably designed to . . . [p]rovid[e] sufficient
information to enable participants to identify and evaluate the risks,
fees, and other material costs they incur by participating in the
covered clearing agency.'' \54\ The proposed changes would clearly
explain to Clearing Members and market participants that an extreme
stress scenario could result in the use--and theoretically the
exhaustion--of OCC's financial resources, inclusive of OCC's proposed
assessment powers. Proposed changes to Section 6, Article VIII of OCC's
By-Laws would explain Clearing Members' replenishment obligation and
liability for assessments. The proposed changes also would clearly
explain, through proposed Rules 1009 and 1111, that as OCC nears the
exhaustion of its assessment powers, Clearing Members may be asked for
voluntary payments and, if necessary, Clearing Members and customers
may be asked to participate in a Voluntary Tear-Up and/or subject to a
Partial Tear-Up. Proposed Rules 1009(b) and 1111(a)(ii) also would make
clear that Clearing Members that made voluntary payments and Clearing
Members and customers whose tendered positions were extinguished in the
Voluntary Tear-Up would be prioritized in the distribution of any
recovery from the defaulted Clearing Member(s). Proposed changes to
Article VIII would clarify that the Clearing Fund contributions
remaining after OCC has conducted a Voluntary Tear-Up or Partial Tear-
Up could be used to compensate the non-defaulting Clearing Members and
non-defaulting customers for the losses, costs or fees imposed upon
them as a result of such Voluntary Tear-Up or Partial Tear-Up. Proposed
Rule 1111(g) would make clear that, following a Partial Tear-Up, OCC's
Board may seek to equitably re-allocate losses, costs and fees directly
imposed as a result of a Partial Tear-Up among all non-defaulting
Clearing Members through a special charge. By incorporating the
proposed changes into OCC's Rules and By-Laws, as further supplemented
by the discussion in OCC's public rule filing, OCC believes that is has
provided sufficient information to enable participants to identify and
evaluate the risks, fees, and other material costs they could incur by
participating OCC, consistent with the requirements in Rule 17Ad-
22(e)(23)(ii).\55\
---------------------------------------------------------------------------

    \54\ 17 CFR 240.17Ad-22(e)(23)(ii).
    \55\ 17 CFR 240.17Ad-22(e)(23)(ii).
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III. Date of Effectiveness of the Advance Notice and Timing for
Commission Action

    The proposed change may be implemented if the Commission does not
object to the proposed change within 60 days of the later of (i) the
date the proposed change was filed with the Commission or (ii) the date
any additional information requested by the Commission is received. OCC
shall not implement the proposed change if the Commission has any
objection to the proposed change.
    The Commission may extend the period for review by an additional 60
days if the proposed change raises novel or complex issues, subject to
the Commission providing the clearing agency with prompt written notice
of the extension. A proposed change may be implemented in less than 60
days from the date the advance notice is filed, or the date further
information requested by the Commission is received, if the Commission
notifies the clearing agency in writing that it does not object to the
proposed change and authorizes the clearing agency to implement the
proposed change on an earlier date, subject to any conditions imposed
by the Commission.
    OCC shall post notice on its website of proposed changes that are
implemented.
    The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include
File Number SR-OCC-2017-809 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-OCC-2017-809. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements

with respect to the advance notice that are filed with the Commission,
and all written communications relating to the advance notice between
the Commission and any person, other than those that may be withheld
from the public in accordance with the provisions of 5 U.S.C. 552, will
be available for website viewing and printing in the Commission's
Public Reference Room, 100 F Street NE, Washington, DC 20549 on
official business days between the hours of 10:00 a.m. and 3:00 p.m.
Copies of the filing also will be available for inspection and copying
at the principal office of OCC and on OCC's website at https://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_17_809.pdf.
    All comments received will be posted without change. Persons
submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly.
    All submissions should refer to File Number SR-OCC-2017-809 and
should be submitted on or before February 13, 2018.

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-01070 Filed 1-22-18; 8:45 am]
 BILLING CODE 8011-01-P


[Federal Register Volume 85, Number 147 (Thursday, July 30, 2020)]
[Rules and Regulations]
[Pages 45767-45769]
[FR Doc No: 2020-16484]

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DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. FAA-2020-0337; Product Identifier 2020-NM-044-AD; Amendment
39-21172; AD 2020-15-09]
RIN 2120-AA64

Airworthiness Directives; Airbus SAS Airplanes

AGENCY: Federal Aviation Administration (FAA), Department of
Transportation (DOT).

ACTION: Final rule.

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

SUMMARY: The FAA is adopting a new airworthiness directive (AD) for all
Airbus SAS Model A330-941 airplanes. This AD was prompted by a report
that seven spoiler servo-controls (SSCs) lost hydraulic locking
function due to a sheared seal on the blocking valve. This AD requires
repetitive operational tests of the hydraulic locking function on each
SSC and replacement if necessary, as specified in a European Union
Aviation Safety Agency (EASA), which is incorporated by reference. The
FAA is issuing this AD to address the unsafe condition on these
products.

DATES: This AD is effective September 3, 2020.
    The Director of the Federal Register approved the incorporation by
reference of a certain publication listed in this AD as of September 3,
2020.

ADDRESSES: For material incorporated by reference (IBR) in this AD,
contact the EASA, Konrad-Adenauer-Ufer 3,

50668 Cologne, Germany; telephone +49 221 89990 1000; email
<EMAIL_ADDRESS>internet www.easa.europa.eu. You may find this IBR
material on the EASA website at https://ad.easa.europa.eu. You may view
this IBR material at the FAA, Airworthiness Products Section,
Operational Safety Branch, 2200 South 216th St., Des Moines, WA. For
information on the availability of this material at the FAA, call 206-
231-3195. It is also available in the AD docket on the internet at
https://www.regulations.gov by searching for and locating Docket No.
FAA-2020-0337.

Examining the AD Docket

    You may examine the AD docket on the internet at https://www.regulations.gov by searching for and locating Docket No. FAA-2020-
0337; or in person at Docket Operations between 9 a.m. and 5 p.m.,
Monday through Friday, except Federal holidays. The AD docket contains
this final rule, any comments received, and other information. The
address for Docket Operations is U.S. Department of Transportation,
Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200
New Jersey Avenue SE, Washington, DC 20590.

FOR FURTHER INFORMATION CONTACT: Vladimir Ulyanov, Aerospace Engineer,
Large Aircraft Section, International Validation Branch, FAA, 2200
South 216th St., Des Moines, WA 98198; telephone and fax:<PHONE_NUMBER>;
email<EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION:

Discussion

    The EASA, which is the Technical Agent for the Member States of the
European Union, has issued EASA AD 2020-0054, dated March 11, 2020
(``EASA AD 2020-0054'') (also referred to as the Mandatory Continuing
Airworthiness Information, or ``the MCAI''), to correct an unsafe
condition for all Airbus SAS Model A330-941 airplanes.
    The FAA issued a notice of proposed rulemaking (NPRM) to amend 14
CFR part 39 by adding an AD that would apply to all Airbus SAS Model
A330-941 airplanes. The NPRM published in the Federal Register on April
27, 2020 (85 FR 23255). The NPRM was prompted by a report that seven
SSCs lost hydraulic locking function due to a sheared seal on the
blocking valve. The NPRM proposed to require repetitive operational
tests of the hydraulic locking function on each SSC and replacement if
necessary, as specified in a EASA AD.
    The FAA is issuing this AD to address loss of hydraulic locking
function on the SSCs, which in combination with one engine inoperative
at takeoff, could result in reduced controllability of the airplane.
See the MCAI for additional background information.

Comments

    The FAA gave the public the opportunity to participate in
developing this final rule. The FAA has considered the comments
received. The Air Line Pilots Association, International (ALPA)
indicated its support for NPRM.

Conclusion

    The FAA reviewed the relevant data, considered the comment
received, and determined that air safety and the public interest
require adopting this final rule as proposed, except for minor
editorial changes. The FAA has determined that these minor changes:
     Are consistent with the intent that was proposed in the
NPRM for addressing the unsafe condition; and
     Do not add any additional burden upon the public than was
already proposed in the NPRM.

Related IBR Material Under 1 CFR Part 51

    EASA AD 2020-0054 describes procedures for repetitive operational
tests of the hydraulic locking function on each SSC (any type), when
fitted on the blue or yellow hydraulic circuits, and replacing any
affected SSC with a serviceable part. This material is reasonably
available because the interested parties have access to it through
their normal course of business or by the means identified in the
ADDRESSES section.

Costs of Compliance

    The FAA estimates that this AD affects 5 airplanes of U.S.
registry. The FAA estimates the following costs to comply with this AD:

                                      Estimated Costs for Required Actions
----------------------------------------------------------------------------------------------------------------
                                                                                Cost per       Cost on U.S.
                          Labor cost                              Parts cost        product         operators
----------------------------------------------------------------------------------------------------------------
6 work-hours x $85 per hour = $510...........................              $0             $510           $2,550
----------------------------------------------------------------------------------------------------------------

    The FAA estimates the following costs to do any necessary on-
condition action that would be required based on the results of any
required actions. The FAA has no way of determining the number of
aircraft that might need this on-condition action:

                 Estimated Costs of On-Condition Actions
------------------------------------------------------------------------
                                                             Cost per
              Labor cost                   Parts cost        product
------------------------------------------------------------------------
3 work-hours x $85 per hour = $255....         $35,000          $35,255
------------------------------------------------------------------------

Authority for This Rulemaking

    Title 49 of the United States Code specifies the FAA's authority to
issue rules on aviation safety. Subtitle I, section 106, describes the
authority of the FAA Administrator. Subtitle VII: Aviation Programs,
describes in more detail the scope of the Agency's authority.
    The FAA is issuing this rulemaking under the authority described in
Subtitle VII, Part A, Subpart III, Section 44701: General requirements.
Under that section, Congress charges the FAA with promoting safe flight
of civil aircraft in air commerce by prescribing regulations for
practices, methods, and procedures the Administrator finds necessary
for safety in air commerce. This regulation is within the scope of that
authority because it addresses an unsafe condition that is likely to
exist or

develop on products identified in this rulemaking action.

Regulatory Findings

    This AD will not have federalism implications under Executive Order
13132. This AD will not have a substantial direct effect on the States,
on the relationship between the national government and the States, or
on the distribution of power and responsibilities among the various
levels of government.
    For the reasons discussed above, I certify that this AD:
    (1) Is not a ``significant regulatory action'' under Executive
Order 12866,
    (2) Will not affect intrastate aviation in Alaska, and
    (3) Will not have a significant economic impact, positive or
negative, on a substantial number of small entities under the criteria
of the Regulatory Flexibility Act.

List of Subjects in 14 CFR Part 39

    Air transportation, Aircraft, Aviation safety, Incorporation by
reference, Safety.

Adoption of the Amendment

    Accordingly, under the authority delegated to me by the
Administrator, the FAA amends 14 CFR part 39 as follows:

PART 39--AIRWORTHINESS DIRECTIVES

0
1. The authority citation for part 39 continues to read as follows:

    Authority: 49 U.S.C. 106(g), 40113, 44701.

Sec.  39.13  [Amended]

0
2. The FAA amends Sec.  39.13 by adding the following new airworthiness
directive (AD):

2020-15-09 Airbus SAS: Amendment 39-21172; Docket No. FAA-2020-0337;
Product Identifier 2020-NM-044-AD.

(a) Effective Date

    This AD is effective September 3, 2020.

(b) Affected ADs

    None.

(c) Applicability

    This AD applies to all Airbus SAS Model A330-941 airplanes,
certificated in any category.

(d) Subject

    Air Transport Association (ATA) of America Code 27, Flight
controls.

(e) Reason

    This AD was prompted by a report that seven spoiler servo-
controls (SSCs) lost hydraulic locking function due to a sheared
seal on the blocking valve. The FAA is issuing this AD to address
loss of hydraulic locking function on the SSCs, which in combination
with one engine inoperative at takeoff, could result in reduced
controllability of the airplane.

(f) Compliance

    Comply with this AD within the compliance times specified,
unless already done.

(g) Requirements

    Except as specified in paragraph (h) of this AD: Comply with all
required actions and compliance times specified in, and in
accordance with, European Union Aviation Safety Agency (EASA) AD
2020-0054, dated March 11, 2020 (``EASA AD 2020-0054'').

(h) Exception to EASA AD 2020-0054

    The ``Remarks'' section of EASA AD 2020-0054 does not apply to
this AD.

(i) Other FAA AD Provisions

    The following provisions also apply to this AD:
    (1) Alternative Methods of Compliance (AMOCs): The Manager,
Large Aircraft Section, International Validation Branch, FAA, has
the authority to approve AMOCs for this AD, if requested using the
procedures found in 14 CFR 39.19. In accordance with 14 CFR 39.19,
send your request to your principal inspector or local Flight
Standards District Office, as appropriate. If sending information
directly to the International Section, send it to the attention of
the person identified in paragraph (j) of this AD. Information may
be emailed to<EMAIL_ADDRESS>Before using any approved
AMOC, notify your appropriate principal inspector, or lacking a
principal inspector, the manager of the local flight standards
district office/certificate holding district office.
    (2) Contacting the Manufacturer: For any requirement in this AD
to obtain instructions from a manufacturer, the instructions must be
accomplished using a method approved by the Manager, Large Aircraft
Section, International Validation Branch, FAA; or EASA; or Airbus
SAS's EASA Design Organization Approval (DOA). If approved by the
DOA, the approval must include the DOA-authorized signature.
    (3) Required for Compliance (RC): For any service information
referenced in EASA AD 2020-0054 that contains RC procedures and
tests: Except as required by paragraph (i)(2) of this AD, RC
procedures and tests must be done to comply with this AD; any
procedures or tests that are not identified as RC are recommended.
Those procedures and tests that are not identified as RC may be
deviated from using accepted methods in accordance with the
operator's maintenance or inspection program without obtaining
approval of an AMOC, provided the procedures and tests identified as
RC can be done and the airplane can be put back in an airworthy
condition. Any substitutions or changes to procedures or tests
identified as RC require approval of an AMOC.

(j) Related Information

    For more information about this AD, contact Vladimir Ulyanov,
Aerospace Engineer, Large Aircraft Section, International Validation
Branch, FAA, 2200 South 216th St., Des Moines, WA 98198; telephone
and fax:<PHONE_NUMBER>; email<EMAIL_ADDRESS>
(k) Material Incorporated by Reference

    (1) The Director of the Federal Register approved the
incorporation by reference (IBR) of the service information listed
in this paragraph under 5 U.S.C. 552(a) and 1 CFR part 51.
    (2) You must use this service information as applicable to do
the actions required by this AD, unless this AD specifies otherwise.
    (i) European Union Aviation Safety Agency (EASA) AD 2020-0054,
dated March 11, 2020.
    (ii) [Reserved]
    (3) For information about EASA AD 2020-0054, contact the EASA,
Konrad-Adenauer-Ufer 3, 50668 Cologne, Germany; telephone +49 221
89990 6017; email<EMAIL_ADDRESS>internet www.easa.europa.eu.
You may find this EASA AD on the EASA website at https://ad.easa.europa.eu.
    (4) You may view this material at the FAA, Airworthiness
Products Section, Operational Safety Branch, 2200 South 216th St.,
Des Moines, WA. For information on the availability of this material
at the FAA, call<PHONE_NUMBER>. This material may be found in the AD
docket on the internet at https://www.regulations.gov by searching
for and locating Docket No. FAA-2020-0337.
    (5) You may view this material that is incorporated by reference
at the National Archives and Records Administration (NARA). For
information on the availability of this material at NARA, email
<EMAIL_ADDRESS>or go to: https://www.archives.gov/federal-register/cfr/ibr-locations.html.

    Issued on July 13, 2020.
Lance T. Gant,
Director, Compliance & Airworthiness Division, Aircraft Certification
Service.
[FR Doc. 2020-16484 Filed 7-29-20; 8:45 am]
BILLING CODE 4910-13-P