[Federal Register Volume 88, Number 167 (Wednesday, August 30, 2023)]
[Notices]
[Pages 59988-60001]
[FR Doc No: 2023-18672]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98214; File No. SR-OCC-2023-801]

Self-Regulatory Organizations; the Options Clearing Corporation;
Notice of Filing and Extension of Review Period of Advance Notice
Concerning Modifications to the Amended and Restated Stock Options and
Futures Settlement Agreement Between the Options Clearing Corporation
and the National Securities Clearing Corporation

August 24, 2023.
    Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, entitled Payment, Clearing
and Settlement Supervision Act of 2010 (``Clearing Supervision Act'')
\1\ and Rule 19b-4(n)(1)(i) \2\ under the Securities Exchange Act of
1934 (``Exchange Act''),\3\ notice is hereby given that on August 10,
2023, the Options Clearing Corporation (``OCC'') filed with the
Securities and Exchange Commission (``SEC'' or ``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 and to
extend the review period of the advance notice.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ 15 U.S.C. 78a et seq.
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I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice

    This advance notice is submitted by OCC in connection with a prosed
change to its operations to (1) modify the Amended and Restated Stock
Options and Futures Settlement Agreement dated August 5, 2017 between
OCC and National Securities Clearing Corporation (``NSCC,'' and
together with OCC, the ``Clearing Agencies'') (``Existing Accord'') \4\
and (2) make certain revisions to OCC By-Laws, OCC Rules,\5\ OCC's
Comprehensive Stress Testing & Clearing Fund Methodology, and Liquidity
Risk Management Description and OCC's Liquidity Risk Management
Framework in connection with the proposed modifications to the Existing
Accord, as described in greater detail below.\6\
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    \4\ The Existing Accord was previously approved by the
Commission. See Securities Exchange Act Release Nos. 81266, 81260
(July 31, 2017) (File Nos. SR-NSCC-2017-007; SR-OCC-2017-013), 82 FR
36484 (Aug. 4, 2017).
    \5\ OCC By-Laws are available at https://www.theocc.com/getmedia/3309eceb-56cf-48fc-b3b3-498669a24572/occ_bylaws.pdf and OCC
Rules are available at https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occ_rules.pdf.
    \6\ NSCC also has filed a proposed rule change with the
Commission in connection with this proposal. See SR-NSCC-2023-007.
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    The proposed changes would permit OCC to elect to make a cash
payment to NSCC following the default of a common clearing participant
that would cause NSCC's central counterparty trade guaranty to attach
to certain obligations of that participant, as described in greater
detail below.
    The proposed changes are included in Exhibits 5A and 5B and
confidential Exhibits 5C, 5D, and 5E to File No. SR-OCC-2023-801.
Material proposed to be added is underlined and material proposed to be
deleted is marked in strikethrough text.

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 changes, and none have been received.

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

Description of Proposed Change
Background
    OCC is filing this advance notice to (1) modify the Existing Accord
between OCC and NSCC and (2) make certain revisions to OCC By-Laws, OCC
Rules, OCC's Comprehensive Stress Testing & Clearing Fund Methodology,
and

Liquidity Risk Management Description and OCC's Liquidity Risk
Management Framework in connection with the proposed modifications to
the Existing Accord, as described in greater detail below. The proposed
changes would permit OCC to elect to make a cash payment to NSCC
following the default of a common clearing participant that would cause
NSCC's central counterparty trade guaranty to attach to certain
obligations of that participant, as described in greater detail below.
i. Executive Summary
    NSCC is a clearing agency that provides clearing, settlement, risk
management, and central counterparty services for trades involving
equity securities. OCC is the sole clearing agency for standardized
equity options listed on national securities exchanges registered with
the Commission, including options that contemplate the physical
delivery of equities cleared by NSCC in exchange for cash (``physically
settled'' options).\7\ OCC also clears certain futures contracts that,
at maturity, require the delivery of equity securities cleared by NSCC
in exchange for cash. As a result, the exercise/assignment of certain
options or maturation of certain futures cleared by OCC effectively
results in stock settlement obligations. NSCC and OCC maintain a legal
agreement, generally referred to by the parties as the ``Accord''
agreement, that governs the processing of such physically settled
options and futures cleared by OCC that result in transactions in
underlying equity securities to be cleared by NSCC (i.e., the Existing
Accord). The Existing Accord establishes terms under which NSCC accepts
for clearing certain securities transactions that result from the
exercise and assignment of relevant options contracts and the maturity
of futures contracts that are cleared and settled by OCC.\8\ It also
establishes the time when OCC's settlement guaranty in respect of those
transactions ends and NSCC's settlement guaranty begins.
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    \7\ The term ``physically-settled'' as used throughout the OCC
Rulebook refers to cleared contracts that settle into their
underlying interest (i.e., options or futures contracts that are not
cash-settled). When a contract settles into its underlying interest,
shares of stock are sent, i.e., delivered, to contract holders who
have the right to receive the shares from contract holders who are
obligated to deliver the shares at the time of exercise/assignment
in the case of an option and maturity in the case of a future.
    \8\ Under the Existing Accord, such options and futures are
defined as ``E&A/Delivery Transactions'', which refers to ``Exercise
& Assignment Delivery Transactions.''
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    The Existing Accord allows for a scenario in which NSCC could
choose not to guarantee the settlement of such securities arising out
of transactions. Specifically, NSCC is not obligated to guarantee
settlement until its member has met its collateral requirements at
NSCC. If NSCC chooses not to guarantee settlement, OCC would engage in
an alternate method of settlement outside of NSCC. This scenario
presents two primary problems. First, the cash required for OCC and its
Clearing Members in certain market conditions to facilitate settlement
outside of NSCC could be significantly more than the amount required if
NSCC were to guarantee the relevant transactions. This is because
settlement of the transactions in the underlying equity securities
outside of NSCC would mean that they would no longer receive the
benefit of netting through the facilities of NSCC. In such a scenario,
the additional collateral required from Clearing Members to support
OCC's continuing settlement guarantee would also have to be
sufficiently liquid to properly manage the risks associated with those
transactions being due on the second business day following the option
exercise or the relevant futures contract maturity date.
    Based on an analysis of scenarios using historical data where it
was assumed that OCC could not settle transactions through the
facilities of NSCC, the worst-case outcome resulted in extreme
liquidity demands of over $300 billion for OCC to effect settlement via
an alternative method, e.g., by way of gross broker-to-broker
settlement, as discussed in more detail below. OCC Clearing Members, by
way of their contributions to the OCC Clearing Fund, would bear the
brunt of this demand. Furthermore, there is no guarantee that OCC
Clearing Members could fund the entire amount of any similar real-life
scenarios. By contrast, projected GSPs, defined below, identified
during the study ranged from approximately $419 million to over $6
billion, also as discussed in more detail below.
    The second primary problem relates to the significant operational
complexities if settlement occurs outside of NSCC. More specifically,
netting through NSCC reduces the volume and value of settlement
obligations. For example, in 2022 it is estimated that netting through
NSCC's continuous net settlement (``CNS'') accounting system \9\
reduced the value of CNS settlement obligations by approximately 98% or
$510 trillion from $519 trillion to $9 trillion. If settlement occurred
outside of NSCC, on a broker-to-broker basis between OCC Clearing
Members, for example, shares would not be netted and Clearing Members
would have to coordinate directly with each other to settle the
relevant transactions. The operational complexities and uncertainty
associated with alternate means of settlement would impact every market
participant involved in a settlement of OCC-related transactions.
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    \9\ See Rule 11 (CNS System) and Procedure VII (CNS Accounting
Operation) of the NSCC Rules. See NSCC's Rules, available at https://www.dtcc.com/-/media/Files/Downloads/legal/rules/nscc_rules.pdf.
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    To address these problems, the Clearing Agencies are proposing to
amend and restate the Existing Accord and make related changes to their
respective rules that would allow OCC to elect to make a cash payment
to NSCC following the default of a Common Member \10\ that would cause
NSCC to guarantee settlement of that Common Member's transactions and,
therefore, cause those transactions to be settled through processing by
NSCC. As part of this proposal, OCC also will enhance its daily
liquidity stress testing processes and procedures to account for the
possibility of OCC making such a payment to NSCC in the event of a
Common Member default. By making these enhancements to its stress
testing, OCC could include the liquid resources necessary to make the
payment in its resource planning. The Clearing Agencies believe that by
NSCC accepting such a payment from OCC, the operational efficiencies
and reduced costs related to the settlement of transactions through
NSCC would limit market disruption following a Common Member default
because settlement through NSCC following such a default would be less
operationally complex and would be expected to require less liquidity
and other collateral from market participants than the processes
available to OCC for closing out positions. Additionally, proposed
enhancements by OCC to its liquidity stress testing would add
assurances that OCC could make such a payment in the event of a Common
Member default. The Clearing Agencies believe that their respective
clearing members and all other participants in the markets for which
OCC provides clearance and settlement will benefit from OCC's ability
to choose to make a cash payment to effect settlement through the
facilities of NSCC. This change will

provide more certainty around certain default scenarios and would blunt
the financial and operational burdens market participants could
experience in the case of most clearing member defaults.\11\
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    \10\ A firm that is both an OCC Clearing Member and an NSCC
Member or is an OCC Clearing Member that has designated an NSCC
Member to act on its behalf is referred to herein as a ``Common
Member.'' The term ``Clearing Member'' as used herein has the
meaning provided in OCC's By-Laws. See OCC's By-Laws, supra, note 5.
The term ``Member'' as used herein has the meaning provided in
NSCC's Rules. See NSCC's Rules, supra note 9.
    \11\ OCC provided its analysis of the financial impact of
alternate means of settlement as Exhibit 3A to File No. SR-OCC-2023-
801.
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ii. Background
    OCC acts as a central counterparty clearing agency for U.S.-listed
options and futures on a number of underlying financial assets
including common stocks, currencies and stock indices. In connection
with these services, OCC provides the OCC Guaranty pursuant to its By-
Laws and Rules. NSCC acts as a central counterparty clearing agency for
certain equity securities, corporate and municipal debt, exchange
traded funds and unit investment trusts that are eligible for its
services. Eligible trading activity may be processed through NSCC's CNS
system \12\ or through its Balance Order Account system,\13\ where all
eligible compared and recorded transactions for a particular settlement
date are netted by issue into one net long (buy), net short (sell) or
flat position. As a result, for each day with activity, each Member has
a single deliver or receive obligation for each issue in which it has
activity. In connection with these services, NSCC also provides the
NSCC Guaranty pursuant to Addendum K of the NSCC Rules.
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    \12\ See Rule 11 (CNS System) and Procedure VII (CNS Accounting
Operation) of the NSCC Rules, supra note 9.
    \13\ See Rule 8 (Balance Order and Foreign Security Systems) and
Procedure V (Balance Order Accounting Operation) of the NSCC Rules,
supra note 9.
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    OCC's Rules provide that delivery of, and payment for, securities
underlying certain exercised stock options and matured single stock
futures that are physically settled are generally effected through the
facilities of NSCC and are not settled through OCC's facilities.\14\
OCC and NSCC executed the Existing Accord to facilitate, via NSCC's
systems, the physical settlement of securities arising out of options
and futures cleared by OCC. OCC Clearing Members that clear and settle
physically settled options and futures transactions through OCC also
are required under OCC's Rules \15\ to be Members of NSCC or to have
appointed or nominated a Member of NSCC to act on its behalf. As noted
above, these firms are referred to as ``Common Members'' in the
Existing Accord.
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    \14\ See Chapter IX of OCC's Rules (Delivery of Underlying
Securities and Payment), supra note 5.
    \15\ See OCC Rule 901, supra note 5.
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iii. Summary of the Existing Accord
    The Existing Accord governs the transfer between OCC and NSCC of
responsibility for settlement obligations that involve a delivery and
receipt of stock in the settlement of physically settled options and
futures that are cleared and settled by OCC and for which the
underlying securities are eligible for clearing through the facilities
of NSCC (``E&A/Delivery Transactions''). It also establishes the time
when OCC's settlement guarantee (the ``OCC Guaranty'') ends and NSCC's
settlement guarantee (the ``NSCC Guaranty'') \16\ begins with respect
to E&A/Delivery Transactions. However, in the case of a Common Member
default \17\ NSCC can reject these settlement obligations, in which
case the settlement guaranty will not transfer from OCC to NSCC and OCC
would not have a right to settle the transactions through the
facilities of NSCC. Instead, OCC would have to engage in alternative
methods of settlement that have the potential to create significant
liquidity and collateral requirements for both OCC and its non-
defaulting Clearing Members.\18\ More specifically, this could involve
broker-to-broker settlement between OCC Clearing Members.\19\ This
settlement method is operationally complex because it requires
bilateral coordination directly between numerous Clearing Members
rather than relying on NSCC to facilitate multilateral netting to
settle the relevant settlement obligations. As described above, it also
potentially could result in significant liquidity and collateral
requirements for both OCC and its non-defaulting Clearing Members
because the transactions will not be netted through the facilities of
NSCC. Alternatively, where NSCC accepts the E&A/Delivery Transactions
from OCC, the OCC Guaranty ends and the NSCC Guaranty takes effect. The
transactions are then netted through NSCC's systems, which allows
settlement obligations for the same settlement date to be netted into a
single deliver or receive obligation. This netting reduces the costs
associated with securities transfers by reducing the number of
securities movements required for settlement and further reduces
operational and market risk. The benefits of such netting by NSCC may
be significant with respect to the large volumes of E&A/Delivery
Transactions processed during monthly options expiry periods.
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    \16\ See Addendum K and Procedure III of the NSCC Rules, supra
note 9.
    \17\ A Common Member that has been suspended by OCC or for which
NSCC has ceased to act is referred to as a ``Mutually Suspended
Member.''
    \18\ For example, OCC evaluated certain Clearing Member default
scenarios in which OCC assumed that NSCC would not accept the
settlement obligations under the Existing Accord, including the
default of a large Clearing Member coinciding with a monthly options
expiration. OCC has estimated that in such a Clearing Member default
scenario, the aggregate liquidity burden on OCC in connection with
obligations having to be settled on a gross broker-to-broker basis
could reach a significantly high level. For example, in January
2022, the largest gross broker-to-broker settlement amount in the
case of a larger Clearing Member default would have resulted in
liquidity needs of approximately $384,635,833,942. OCC provided the
data and analysis as Exhibit 3A to File No. SR-OCC-2023-801.
    \19\ In broker-to-broker settlement, Clearing Member parties are
responsible for coordinating settlement--delivery and payment--among
themselves on a transaction-by-transaction basis. Once transactions
settle, the parties also have an obligation to affirmatively notify
OCC so that OCC can close out the transactions. If either one of or
both of the parties do not notify OCC, the transaction will remain
open on OCC's books indefinitely until the time both parties have
provided notice of settlement to OCC.
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    Pursuant to the Existing Accord, on each trading day NSCC delivers
to OCC a file that identifies the securities, including stocks,
exchange-traded funds and exchange-traded notes, that are eligible (1)
to settle through NSCC and (2) to be delivered in settlement of (i)
exercises and assignments of stock options cleared and settled by OCC
or (ii) delivery obligations from maturing stock futures cleared and
settled by OCC. OCC, in turn, delivers to NSCC a file identifying
securities to be delivered, or received, for physical settlement in
connection with OCC transactions.\20\
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    \20\ Each day that both OCC and NSCC are open for accepting
trades for clearing is referred to as an ``Activity Date'' in the
Existing Accord. Securities eligible for settlement at NSCC are
referred to collectively as ``Eligible Securities'' in the Existing
Accord. Eligible securities are settled at NSCC through NSCC's CNS
Accounting Operation or NSCC's Balance Order Accounting Operation.
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    After NSCC, receives the list of eligible transactions from OCC,
and NSCC has received all required deposits to the NSCC Clearing Fund
from all Common Members taking into consideration amounts required to
physically settle the OCC transactions, the OCC Guaranty would end and
the NSCC Guaranty would begin with respect to physical settlement of
the eligible OCC-related transactions. At this point, NSCC is solely
responsible for settling the transactions.\21\ \22\
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    \21\ The term ``NSCC Clearing Fund'' as used herein has the same
meaning as the term ``Clearing Fund'' as provided in the NSCC Rules.
Procedure XV of the NSCC Rules provides that all NSCC Clearing Fund
requirements and other deposits must be made within one hour of
demand, unless NSCC determines otherwise, supra note 9.
    \22\ This is referred to in the Existing Accord as the
``Guaranty Substitution Time,'' and the process of the substitution
of the NSCC Guaranty for the OCC Guaranty in respect of E&A/Delivery
Transactions is referred to as ``Guaranty Substitution.''

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    Each day, NSCC is required to promptly notify OCC at the time the
NSCC Guaranty takes effect. If NSCC rejects OCC's transactions due to
an improper submission \23\ or if NSCC ``ceases to act'' for a Common
Member,\24\ NSCC's Guaranty will not take effect for the affected
transactions pursuant to the NSCC Rules.
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    \23\ Guaranty Substitution by NSCC (discussed further below)
does not occur with respect to an E&A/Delivery Transaction that is
not submitted to NSCC in the proper format or that involves a
security that is not identified as an Eligible Security on the then-
current NSCC Eligibility Master File.
    \24\ Under NSCC's Rules, a default would generally be referred
to as a ``cease to act'' and could encompass a number of
circumstances, such as an NSCC Member's failure to make a Required
Fund Deposit in a timely fashion. See NSCC Rule 46 (Restrictions on
Access to Services), supra note 9. An NSCC Member for which it has
ceased to act is referred to in the Existing Accord as a
``Defaulting NSCC Member.'' Transactions associated with a
Defaulting NSCC Member are referred to as ``Defaulted NSCC Member
Transactions'' in the Existing Accord.
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    NSCC is required to promptly notify OCC if it ceases to act for a
Common Member. Upon receiving such a notice, OCC would not continue to
submit to NSCC any further unsettled transactions that involve such
Common Member, unless authorized representatives of both OCC and NSCC
otherwise consent. OCC would, however, deliver to NSCC a list of all
transactions that have already been submitted to NSCC and that involve
such Common Member. The NSCC Guaranty ordinarily would not take effect
with respect to transactions for a Common Member for which NSCC has
ceased to act, unless both Clearing Agencies agree otherwise. As such,
NSCC does not have any existing contractual obligation to guarantee
such Common Member's transactions. To the extent the NSCC Guaranty does
not take effect, OCC's Guaranty would continue to apply, and, as
described above, OCC would remain responsible for effecting the
settlement of such Common Member's transactions pursuant to OCC's By-
Laws and Rules.
    As noted above, the Existing Accord does provide that the Clearing
Agencies may agree to permit additional transactions for a Common
Member default (``Defaulted NSCC Member Transactions'') to be processed
by NSCC while subject to the NSCC Guaranty. This optional feature,
however, creates uncertainty for the Clearing Agencies and market
participants about how Defaulted NSCC Member Transactions may be
processed following a Common Member default and also does not provide
NSCC with the ability to collect collateral from OCC that it may need
to close out these additional transactions. While the optional feature
would remain in the agreement as part of this proposal, the proposed
changes to the Existing Accord, as described below, could significantly
reduce the likelihood that it would be utilized.
Proposed Change
i. Proposed Changes to the Existing Accord
    The proposed changes to the Existing Accord would permit OCC to
make a cash payment, referred to as the ``Guaranty Substitution
Payment'' or ``GSP,'' to NSCC. This cash payment could occur on either
or both of the day that the Common Clearing Member becomes a Mutually
Suspended Member and on the next business day. Upon NSCC's receipt of
the Guaranty Substitution Payment from OCC, the NSCC Guaranty would
take effect for the Common Member's transactions, and they would be
accepted by NSCC for clearance and settlement.\25\ OCC could use all
Clearing Member contributions to the OCC Clearing Fund \26\ and certain
Margin Assets \27\ of a defaulted Clearing Member to pay the GSP, as
described in more detail below.
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    \25\ Acceptance of such transactions by NSCC would be subject to
NSCC's standard validation criteria for incoming trades. See NSCC
Rule 7, supra note 9.
    \26\ The term ``OCC Clearing Fund'' as used herein has the same
meaning as the term ``Clearing Fund'' in OCC's By-Laws, supra note
5.
    \27\ The term ``Margin Assets'' as used herein has the same
meaning as provided in OCC's By-Laws, supra note 5.
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    NSCC would calculate the Guaranty Substitution Payment as the sum
of the Mutually Suspended Member's unpaid required deposit to the NSCC
Clearing Fund (``Required Fund Deposit'') \28\ and the unpaid
Supplemental Liquidity Deposit \29\ obligation that is attributable to
E&A/Delivery Transactions. The proposed changes to the Existing Accord
define how NSCC would calculate the Guaranty Substitution Payment.
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    \28\ The Required Fund Deposit is calculated pursuant to Rule 4
(Clearing Fund) and Procedure XV (Clearing Fund Formula and Other
Matters) of the NSCC Rules, see supra note 9.
    \29\ Under the NSCC Rules, NSCC collects additional cash
deposits from those Members who would generate the largest
settlement debits in stressed market conditions, referred to as
``Supplemental Liquidity Deposits'' or ``SLD''. See Rule 4A of the
NSCC Rules, supra note 9.
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    More specifically, NSCC would first determine how much of the
member's unpaid Clearing Fund requirement would be included in the GSP.
NSCC would look at the day-over-day change in gross market value of the
Mutually Suspended Member's positions as well as day-over-day change in
the member's NSCC Clearing Fund requirements. Based on such changes,
NSCC would identify how much of the change in the Clearing Fund
requirement was attributable to E&A/Delivery Transactions coming from
OCC. If 100 percent of the day-over-day change in the NSCC Clearing
Fund requirement is attributable to activity coming from OCC, then the
GSP would include 100 percent of the member's NSCC Clearing Fund
requirement. If less than 100 percent of the change is attributable to
activity coming from OCC, then the GSP would include that percent of
the member's unpaid NSCC Clearing Fund requirement attributable to
activity coming from OCC. NSCC would then determine the portion of the
member's unpaid SLD obligation that is attributable to E&A/Delivery
Transactions. As noted above, the GSP would be the sum of these two
amounts. A member's NSCC Clearing Fund requirement and SLD obligation
at NSCC are designed to address the credit and liquidity risks that a
member poses to NSCC. The GSP calculation is intended to assess how
much of a member's obligations arise out of activity coming from OCC so
that the amount paid by OCC is commensurate with the risk to NSCC of
guarantying such activity.
    To permit OCC to anticipate the potential resources it would need
to pay the GSP for a Mutually Suspended Member, each business day, NSCC
would provide OCC with (1) Required Fund Deposit and Supplemental
Liquidity Deposit obligations, as calculated pursuant to the NSCC
Rules, and (2) the gross market value of the E&A/Delivery Transactions
and the gross market value of total Net Unsettled Positions (as such
term is defined in the NSCC Rules). On options expiry days that fall on
a Friday, NSCC would also provide OCC with information regarding
liquidity needs and resources, and any intraday SLD requirements of
Common Members. Such information would be delivered pursuant to the
ongoing information sharing obligations under the Existing Accord (as
proposed to be amended) and the Service Level Agreement (``SLA'') to
which both NSCC and OCC are a party pursuant to Section 2 of the
Existing Accord.\30\ The SLA addresses specifics regarding the time,
form, and manner of various required notifications and actions
described in the Accord and also

includes information applicable under the Accord.
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    \30\ OCC provided the revised SLA to the Commission as Exhibit
3C to File No. SR-OCC-2023-801.
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    NSCC and OCC believe the proposed calculation of the Required Fund
Deposit portion of the GSP is appropriate because it is designed to
provide a reasonable proxy for the impact of the Mutually Suspended
Member's E&A/Delivery Transactions on its Required Fund Deposit. While
impact study data did show that the proposed calculation could result
in a GSP that overestimates or underestimates the Required Fund Deposit
attributable to the Mutually Suspended Member's E&A/Delivery
Transactions,\31\ current technology constraints prohibit NSCC from
performing a precise calculation of the GSP on a daily basis for every
Common Member.\32\
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    \31\ The impact study was conducted at the Commission's request
to cover a three-day period and reviewed the ten Common Members with
the largest Required Fund Deposits attributable to the Mutually
Suspended Member's E&A/Delivery Transactions. Over the 30 instances
in the study, approximately 15 instances resulted in an
underestimate of the Required Fund Deposit by an average of
approximately $112,900,926, four instances where the proxy
calculation was the same as the Required Fund Deposit, and eleven
instances of an overestimate of the Required Fund Deposit by an
average of approximately $59,654,583. See Exhibit 3D to File No. SR-
OCC-2023-801 for additional detail related to the referenced study.
    \32\ OCC and NSCC have agreed that performing the necessary
technology build at this time would delay the implementation of this
proposal. Therefore, NSCC would consider incorporating those
technology updates into future revisions to the Accord, for example
in connection with a move to a shorter settlement cycle in the U.S.
equities markets.
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    Implementing the ability for OCC to make the GSP and cause the E&A/
Delivery Transactions to be cleared and settled through NSCC would
promote the ability of OCC and NSCC to be efficient and effective in
meeting the requirements of the markets they serve. This is because
data demonstrates that the expected size of the GSP would be smaller
than the amount of cash that would otherwise be needed by OCC and its
Clearing Members to facilitate settlement outside of NSCC. More
specifically, based on a historical study of alternate means of
settlement available to OCC from September 2021 through September 2022,
in the event that NSCC did not accept E&A/Delivery Transactions, the
worst-case scenario peak liquidity need OCC identified was
$384,635,833,942 for settlement to occur on a gross broker-to-broker
basis. OCC estimates that the corresponding GSP in this scenario would
have been $863,619,056. OCC also analyzed several other large liquidity
demand amounts that were identified during the study if OCC effected
settlement on a gross broker-to-broker basis.\33\ These liquidity
demand amounts and the largest liquidity demand amount OCC observed of
$384,635,833,942 substantially exceed the amount of liquid resources
currently available to OCC.\34\ By contrast, projected GSPs identified
during the study ranged from $419,297,734 to $6,281,228,428. For each
of these projected GSP amounts, OCC observed that the Margin Assets and
OCC Clearing Fund contributions that would have been required of
Clearing Members in these scenarios would have been sufficient to
satisfy the amount of the projected GSPs.
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    \33\ See Exhibit 3A to File No. SR-OCC-2023-801 for additional
detail related to the referenced study.
    \34\ As of March 31, 2023, OCC held approximately $10.37 billion
in qualifying liquid resources. See OCC Quantitative Disclosure,
January-March 2023, available at https://www.theocc.com/risk-management/pfmi-disclosures.
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    To help address the current technology constraint that prohibits
NSCC from performing a precise calculation of the GSP on a daily basis
for every Common Member, proposed Section 6(b)(i) of the Existing
Accord and related Section 7(d) of the SLA would provide that with
respect to a Mutually Suspended Member, either NSCC or OCC may require
that the Required Fund Deposit portion of the GSP be re-calculated by
calculating the Required Fund Deposit for the Mutually Suspended Member
both before and after the delivery of the E&A/Delivery Transactions and
utilize the precise amount that is attributable to that activity in the
final GSP. If such a recalculation is required, the result would
replace the Required Fund Deposit component of the GSP that was
initially calculated. The SLD component of the GSP would be unchanged
by such recalculation.
    As the above demonstrates, the GSP is intended to address the
significant collateral and liquidity requirements that could be
required of OCC Clearing Members in the event of a Common Member
default.
    Allowing OCC to make a GSP payment also is intended to allow for
settlement processing to take place through the facilities of NSCC to
retain operational efficiencies associated with the settlement process.
Alternative settlement means such as broker-to-broker settlement add
operational burdens, because transactions would need to be settled
individually on one-off bases. In contrast, NSCC's netting reduces the
volume and value of settlement obligations that would need to be closed
out in the market.\35\ Because the clearance and settlement of
obligations through NSCC's facilities following a Common Member
default, including netting of E&A/Delivery Transactions with a Common
Member's positions at NSCC, would avoid these potentially significant
operational burdens for OCC and its Clearing Members, OCC and NSCC
believe that the proposed changes would limit market disruption
relating to a Common Member default. NSCC netting significantly reduces
the total number of obligations that require the exchange of money for
settlement. Allowing more activity to be processed through NSCC's
netting systems would minimize risk associated with the close out of
those transactions following the default of a Common Member.
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    \35\ CNS reduces the value of obligations that require financial
settlement by approximately 98%, where, for example $519 trillion in
trades could be netted down to approximately $9 trillion in net
settlements.
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    Amending the Existing Accord to define the terms and conditions
under which Guaranty Substitution may occur, at OCC's election, with
respect to Defaulted NSCC Member Transactions after a Common Member
becomes a Mutually Suspended Member will also provide more certainty to
both the Clearing Agencies and market participants generally about how
a Mutually Suspended Member's Defaulted NSCC Member Transactions may be
processed.
    NSCC and OCC have agreed it is appropriate to limit the
availability of the proposed provision to the day of the Common Member
default and the next business day because, based on historical
simulations of cease to act events involving Common Members, most
activity of a Mutually Suspended Member is closed out on those
days.\36\ Furthermore, the benefits of netting through NSCC's systems
would be reduced for any activity submitted to NSCC after that time.
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    \36\ OCC provided data regarding such events in a Exhibit 3B to
File No. SR-OCC-2023-801. The information contained therein includes
the assumptions and timelines leading up to the declaration of a
default for a Common Member and the anticipated timing of OCC's
payment of the GSP.
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    To implement these proposed changes to the Existing Accord, OCC and
NSCC propose to make the following changes.
Section 1--Definitions
    First, new definitions would be added, and existing definitions
would be amended in Section 1, which is the Definitions section.
    The new defined terms would be as follows.
     The term ``Close Out Transaction'' would be defined to
mean ``the liquidation, termination or acceleration

of one or more exercised or matured Stock Options \37\ or Stock Futures
\38\ contracts, securities contracts, commodity contracts, forward
contracts, repurchase agreements, swap agreements, master netting
agreements or similar agreements of a Mutually Suspended Member
pursuant to OCC Rules 901, 1006 and 1101 through 1111 (including but
not limited to Rules 1104 and 1107) and/or NSCC Rule 18.'' This
proposed definition would make it clear that the payment of the
Guaranty Substitution Payment and NSCC's subsequent acceptance of
Defaulted NSCC Member Transactions for clearance and settlement are
intended to fall within the ``safe harbors'' provided in the Bankruptcy
Code,\39\ the Securities Investor Protection Act,\40\ and other similar
laws.
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    \37\ The term ``Stock Options'' is defined in the Existing
Accord within the definition of ``Eligible Securities,'' and refers
to options issued by OCC.
    \38\ The term ``Stock Futures'' is defined in the Existing
Accord within the definition of ``Eligible Securities,'' and refers
to stock futures contracts cleared by OCC.
    \39\ 11 U.S.C. 101 et seq., including Sec. Sec.  362(b)(6), (7),
(17), (25) and (27) (exceptions to the automatic stay), Sec. Sec.
546(e)-(g) and (j) (limitations on avoiding powers), and Sec. Sec.
555-556 and 559-562 (contractual right to liquidate, terminate or
accelerate certain contracts).
    \40\ 15 U.S.C. 78aaa-lll, including Sec.  78eee(b)(2)(C)
(exceptions to the stay).
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     The term ``Guaranty Substitution Payment'' would be
defined to mean ``an amount calculated by NSCC in accordance with the
calculations set forth in Appendix A [to the Existing Accord (as
proposed to be amended)], to include two components: (i) a portion of
the Mutually Suspended Member's Required Fund Deposit deficit to NSCC
at the time of the cease to act; and (ii) a portion of the Mutually
Suspended Member's unpaid Supplemental Liquidity Deposit obligation at
the time of the cease to act.''
     The term ``Mutually Suspended Member'' would mean ``any
OCC Participating Member \41\ that has been suspended by OCC that is
also an NSCC Participating Member \42\ for which NSCC has ceased to
act.''
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    \41\ The term ``OCC Participating Member'' is defined in the
Existing Accord to mean ``(i) a Common Member; (ii) an OCC Clearing
Member that is an `Appointing Clearing Member' (as defined in
Article I of OCC's By-Laws) and has appointed an Appointed Clearing
Member that is an NSCC Member to effect settlement of E&A/Delivery
Transactions through NSCC on the Appointing Clearing Member's
behalf; (iii) an OCC Clearing Member that is an Appointed Clearing
Member; or (iv) a Canadian Clearing Member.'' No changes are
proposed to this definition.
    \42\ The term ``NSCC Participating Member'' is defined in the
Existing Accord to mean ``(i) a Common Member; (ii) an NSCC Member
that is an `Appointed Clearing Member' (as defined in Article I of
OCC's By-Laws); or (iii) [or Canadian Depository for Securities, or
``CDS'']. For the avoidance of doubt, the Clearing Agencies agree
that CDS is an NSCC Member for purposes of this Agreement.'' No
changes are proposed to this definition.
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     The term ``Required Fund Deposit'' would have the meaning
``provided in Rule 4 of NSCC's Rules and Procedures (or any replacement
or substitute rule), the version of which, with respect to any
transaction or obligation incurred that is the subject of this
Agreement, is in effect at the time of such transaction or incurrence
of obligation.''
     The term ``Supplemental Liquidity Deposit'' would have the
meaning ``provided in Rule 4A of NSCC's Rules and Procedures (or any
replacement or substitute rule), the version of which, with respect to
any transaction or obligation incurred that is the subject of this
Agreement, is in effect at the time of such transaction or incurrence
of obligation.''
    The defined terms that would be amended in Section 1 of the
Existing Accord are as follows.
     The definition for the term ``E&A/Delivery Transaction''
generally contemplates a transaction that involves a delivery and
receipt of stock in the settlement of physically settled options and
futures that are cleared and settled by OCC and for which the
underlying securities are eligible for clearing through the facilities
of NSCC. The definition would be amended to make clear that it would
apply in respect of a ``Close Out Transaction'' of a ``Mutually
Suspended Member'' as those terms are proposed to be defined (described
above).
     The definition for the term ``Eligible Securities''
generally contemplates the securities that are eligible to be used for
physical settlement under the Existing Accord. The term would be
modified to clarify that this may include, for example, equities,
exchange-traded funds and exchange-traded notes that are underlying
securities for options issued by OCC.
Section 6--Default by an NSCC Participating Member or OCC Participating
Member
    Section 6 of the Existing Accord provides that NSCC is required to
provide certain notice to OCC in circumstances in which NSCC has ceased
to act for a Common Member. Currently, Section 6(A)(ii) of the Existing
Accord also requires NSCC to notify OCC if a Common Member has failed
to satisfy its Clearing Fund obligations to NSCC, but for which NSCC
has not yet ceased to act. In practice, this provision would trigger a
number of obligations (described below) when a Common Member fails to
satisfy its NSCC Clearing Fund obligations for any reason, including
those due to an operational delay. Therefore, OCC and NSCC are
proposing to remove the notification requirement under Section 6(A)(ii)
from the Existing Accord. Under Section 7(d) of the Existing Accord,
NSCC and OCC are required to provide each other with general
surveillance information regarding Common Members, which includes
information regarding any Common Member that is considered by the other
party to be in distress. Therefore, if a Common Member has failed to
satisfy its NSCC Clearing Fund obligations and NSCC believes this
failure is due to, for example, financial distress and not, for
example, due to a known operational delay, and NSCC has not yet ceased
to act for that Common Member, such notification to OCC would still
occur but would be done pursuant to Section 7(d) of the Existing Accord
(as proposed to be amended), and not Section 6(A)(ii). Notifications
under Section 6 of the Existing Accord (as proposed to be amended)
would be limited to instances when NSCC has actually ceased to act for
a Common Member pursuant to the NSCC Rules.\43\
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    \43\ See Rule 46 (Restrictions on Access to Services) of the
NSCC Rules, supra note 9.
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    Following notice by NSCC that it has ceased to act for a Common
Member, OCC is obligated in turn to deliver to NSCC a list of all E&A/
Delivery Transactions (excluding certain transactions for which
Guaranty Substitution does not occur) involving the Common Member.\44\
This provision would be amended to clarify that it applies in respect
of such E&A/Delivery Transactions for the Common Member for which the
NSCC Guaranty has not yet attached--meaning that Guaranty Substitution
has not yet occurred.
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    \44\ The section of the Existing Accord that addresses
circumstances in which NSCC ceases to act and/or an NSCC Member
defaults is currently part of Section 6(a). It would be re-
designated as Section 6(b) for organizational purposes.
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    As described above in the summary of the Existing Accord, where
NSCC has ceased to act for a Common Member, the Existing Accord refers
to the Common Member as the Defaulting NSCC Member and also refers to
the relevant E&A/Delivery Transactions in connection with that
Defaulting NSCC Member for which a Guaranty Substitution has not yet
occurred as Defaulted NSCC Member Transactions.
    If the Defaulting NSCC Member is also suspended by OCC, it would be
covered by the proposed definition that is described above for a
Mutually Suspended Member. For such a

Mutually Suspended Member, the proposed changes in Section 6(b) would
provide that NSCC, by a time agreed upon by the parties, would provide
OCC with the amount of the Guaranty Substitution Payment as calculated
by NSCC and related documentation regarding the calculation. The
Guaranty Substitution Payment would be calculated pursuant to NSCC's
Rules as that portion of the unmet Required Fund Deposit \45\ and
Supplemental Liquidity Deposit \46\ obligations of the Mutually
Suspended Member attributable to the Defaulted NSCC Member
Transactions. By a time agreed upon by the parties,\47\ OCC would then
be required to either notify NSCC of its intent to make the full amount
of the Guaranty Substitution Payment to NSCC or notify NSCC that it
will not make the Guaranty Substitution Payment. If OCC makes the full
amount of the Guaranty Substitution Payment, NSCC's guaranty would take
effect at the time of NSCC's receipt of that payment and the OCC
Guaranty would end.
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    \45\ The Required Fund Deposit is calculated pursuant to Rule 4
(Clearing Fund) and Procedure XV (Clearing Fund Formula and Other
Matters) of the NSCC Rules, see supra note 9.
    \46\ The Supplemental Liquidity Deposit is calculated pursuant
to Rule 4A (Supplemental Liquidity Deposits) of the NSCC Rules, see
supra note 9.
    \47\ The time by which OCC would be required notify NSCC of its
intent would be defined in the Service Level Agreement. As of the
time of this filing, the parties intend to set that time as one hour
after OCC's receipt of the calculated Guaranty Substitution Payment
from NSCC.
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    The proposed changes would further provide that if OCC does not
suspend the Common Member (such that the Common Member would therefore
not meet the proposed definition of a Mutually Suspended Member) or if
OCC elects to not make the full amount of the Guaranty Substitution
Payment to NSCC, then all of the Defaulted NSCC Member Transactions
would be exited from NSCC's CNS Accounting Operation and/or NSCC's
Balance Order Accounting Operation, as applicable, and Guaranty
Substitution would not occur in respect thereof. Therefore, NSCC would
continue to have no obligation to guarantee or settle the Defaulted
NSCC Member Transactions, and the OCC Guaranty would continue to apply
to them pursuant to OCC's By-Laws and Rules.\48\
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    \48\ Under the current and proposed terms of the Existing
Accord, NSCC would be permitted to voluntarily guaranty and settle
the Defaulted NSCC Member Transactions.
---------------------------------------------------------------------------

    Proposed changes to the Existing Accord would also address the
application of any Guaranty Substitution Payment by NSCC. Specifically,
new Section 6(d) would provide that any Guaranty Substitution Payment
made by OCC may be used by NSCC to satisfy any liability or obligation
of the Mutually Suspended Clearing Member to NSCC on account of
transactions involving the Mutually Suspended Clearing Member for which
the NSCC Guaranty applies and to the extent that any amount of assets
otherwise held by NSCC for the account of the Mutually Suspended Member
(including any Required Fund Deposit or Supplemental Liquidity Deposit)
are insufficient to satisfy its obligations related to transactions for
which the NSCC Guaranty applies. Proposed changes to Section 6(d) would
further provide for the return to OCC of any unused portion of the GSP.
With regard to the portion of the Guaranty Substitution Payment that
corresponds to a member's Supplemental Liquidity Deposit obligation,
NSCC must return any unused amount to OCC within fourteen (14) days
following the conclusion of NSCC's settlement, close-out and/or
liquidation. With regard to the portion of the Guaranty Substitution
Payment that corresponds to a Required Fund Deposit, NSCC must return
any unused amount to OCC under terms agreed to by the parties.\49\
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    \49\ Such amounts would be returned to OCC as appropriate and in
accordance with a Netting Contract and Limited Cross-Guaranty, by
and among the Depository Trust Company, Fixed Income Clearing
Corporation, NSCC and OCC, dated as of January 1, 2003, as amended.
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Other Proposed Changes
    Certain other technical changes are also proposed to the Existing
Accord to conform it to the proposed changes described above. For
example, the preamble and the ``whereas'' clauses in the Preliminary
Statement would be amended to clarify that the agreement is an amended
and restated agreement and to summarize that the agreement would be
modified to contemplate the Guaranty Substitution Payment structure.
Section 1(c), which addresses the terms in the Existing Accord that are
defined by reference to NSCC's Rules and Procedures and OCC's By-Laws
and Rules would be modified to state that such terms would have the
meaning then in effect at the time of any transaction or obligation
that is covered by the agreement rather than stating that such terms
have the meaning given to them as of the effective date of the
agreement. This change is proposed to help ensure that the meaning of
such terms in the agreement will not become inconsistent with the
meaning in the NSCC Rules and/or OCC By-Laws and Rules, as they may be
modified through proposed rule changes with the Commission.
    Technical changes would be made to Sections 3(d) and (e) of the
Existing Accord to provide that those provisions would not apply in the
event new Section 6(b) described above, is triggered. Section 3(d)
generally provides that OCC will no longer submit E&A/Delivery
Transactions to NSCC involving a suspended OCC Participating
Member.\50\ Similarly, Section 3(e) generally provides that OCC will no
longer submit E&A/Delivery Transactions to NSCC involving an NSCC
Participating Member \51\ for which NSCC has ceased to act. A proposed
change would also be made to Section 5 of the Existing Accord to modify
a reference to Section 5 of Article VI of OCC's By-Laws to instead
provide that the updated cross-reference should be to Chapter IV of
OCC's Rules.
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    \50\ See supra note 41 defining OCC Participating Member.
    \51\ See supra note 42 defining NSCC Participating Member.
---------------------------------------------------------------------------

    Section 5 would also be amended to clarify that Guaranty
Substitution occurs when NSCC has received both the Required Fund
Deposit and Supplemental Liquidity Deposit, as calculated by NSCC in
its sole discretion, from Common Members. The addition of the
collection of the Supplemental Liquidity Deposit to the definition of
the Guaranty Substitution Time in this Section 5 would reflect OCC and
NSCC's agreement that both amounts are components of the Guaranty
Substitution Payment (as described above) and would make this
definition consistent with that agreement.
    In Section 7 of the Existing Accord, proposed changes would be made
to provide that NSCC would provide to OCC information regarding a
Common Member's Required Fund Deposit and Supplemental Liquidity
Deposit obligations, to include the Supplemental Liquidity Deposit
obligation in this notice requirement, and additionally that NSCC would
provide OCC with information regarding the potential Guaranty
Substitution Payment for the Common Member. On an options expiration
date that is a Friday, NSCC would, by close of business on that day,
also provide to OCC information regarding the intra-day liquidity
requirement, intra-day liquidity resources and intra-day calls for a
Common Member that is subject to a Supplemental Liquidity Deposit at
NSCC.
    Finally, Section 14 of the Existing Accord would be modernized to
provide

that notices between the parties would be provided by email rather than
by hand, overnight delivery service or first-class mail.
ii. Proposed Changes to OCC By-Laws and Rules
General Description
    OCC is also proposing certain changes to its By-Laws and Rules that
are designed to complement the proposed changes described above
regarding the Existing Accord. These proposed changes to the By-Laws
and Rules are described below, and they generally cover the following
four areas. First, the proposed changes would define Guaranty
Substitution Payment. Second, the proposed changes would describe the
circumstances under which OCC could make a Guaranty Substitution
Payment to NSCC. Third, the proposed changes would specify what
financial resources could be used by OCC to make the Guaranty
Substitution Payment.\52\ Fourth, the proposed changes to OCC's
Comprehensive Stress Testing and Clearing Fund Methodology, and
Liquidity Risk Management Description would outline enhanced stress
testing incorporating the GSP and OCC's ability to call for additional
resources from Clearing Members. OCC also is proposing changes to OCC's
Liquidity Risk Management Framework to account for OCC's ability to
make the GSP.
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    \52\ OCC would be permitted to borrow from the Clearing Fund and
margin of a suspended Clearing Member, over which OCC has a general
lien, where that Clearing Member is a Mutually Suspended Member. The
change would merely expand the circumstances under which OCC's
current By-Laws and Rules permit OCC to borrow Clearing Fund and
margin. The change would not affect the treatment of such borrowing
under OCC's default waterfall that determines how OCC allocates
losses against available financial resources. The Mutually Suspended
Member's margin and Clearing Fund collateral would remain first in
line to absorb losses.
---------------------------------------------------------------------------

Article I--Definitions
    OCC proposes to add ``Guaranty Substitution Payment'' as a new
defined term under Article I of OCC's By-Laws, which is the Definitions
section. The term ``Guaranty Substitution Payment'' would be defined to
mean: ``a payment that may be made by [OCC] to [NSCC] under the terms
of an agreement between them, as described in Rule 901, so that [NSCC]
will not reject settlement obligations for CCC-eligible \53\ securities
that are directed by [OCC] for settlement through the facilities of
[NSCC] on account of a Clearing Member that has been suspended, as
described in Rule 1102, and for which [NSCC] has ceased to act.''
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    \53\ The term ``CCC-Eligible'' as used herein has the meaning
provided in OCC's By-Laws, supra note 5.
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Chapter IX--Delivery of Underlying Securities and Payment
    Certain changes are also proposed to Chapter IX of OCC's Rules. OCC
proposes to add parenthetical language to the Introduction section of
Chapter IX of OCC's Rules. It would specify that a Guaranty
Substitution Payment could be made by OCC to NSCC in connection with
OCC's general policy that to the extent a security to be delivered and
received is CCC-eligible, OCC will direct the delivery and payment
obligations to be settled through the facilities of NSCC where the
obligations are physically-settled and arise out of the exercise of
stock option contracts or the maturity of stock futures contracts.
    Next, OCC proposes to delete certain provisions from Rule 901(b)
regarding when a Guaranty Substitution occurs. Specifically, Rule
901(b) currently provides that unless otherwise agreed between OCC and
NSCC, a Guaranty Substitution with respect to settlement obligations
for CCC-eligible securities that settle ``regular way'' under NSCC's
Rules and Procedures will occur if: (i) the applicable settlement
obligations are reported to and are not rejected by NSCC; (ii) NSCC has
not notified OCC that it has ceased to act for the relevant Clearing
Member or Appointed Clearing Member; and (iii) the NSCC Clearing Fund
requirements of the relevant Clearing Member or Appointed Clearing
Member owing to NSCC, as determined in accordance with NSCC's Rules and
Procedures, are received by NSCC. These considerations regarding when a
Guaranty Substitution occurs are addressed under the terms of the
Existing Accord, and they would continue to be relevant considerations
regarding when a Guaranty Substitution occurs under the changes that
OCC and NSCC are proposing to the Existing Accord. However, because
additional considerations would be added to the Guaranty Substitution
process in connection with the proposed ability for OCC in certain
circumstances to make a Guaranty Substitution Payment to NSCC and also
to eliminate the potential for a description of the Guaranty
Substitution process in OCC's Rules to become inconsistent with the
process that OCC and NSCC have agreed to in the Existing Accord, as it
would be amended, OCC is proposing to delete the discussion of these
considerations in Rule 901(b) in favor of instead simply cross
referencing the terms of the agreement.\54\
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    \54\ For purposes of the proposed rule change process under
Exchange Act Section 19(b), the agreement is treated as a rule of a
clearing agency under Exchange Act Section 3(a)(27) and therefore
any proposed changes to it by OCC are subject to the related rule
change process and public notice and comment. OCC therefore believes
that addressing the terms in the agreement and cross-referencing the
agreement in OCC Rule 901 would not deprive the Commission or the
public of notice regarding any future proposed changes.
---------------------------------------------------------------------------

    In addition, OCC proposes to add a new paragraph to the end of Rule
901(b) to provide that pursuant to the proposed changes to the Existing
Accord, OCC would be permitted to make a Guaranty Substitution Payment
to NSCC. The proposed changes would also describe the circumstances in
which OCC may make a Guaranty Substitution Payment in connection with
settlement obligations of a suspended Clearing Member, and that the
amount of the Guaranty Substitution Payment under the terms of the
Existing Accord, as amended, would be the amount required by NSCC to
satisfy its deficit(s) regarding such Clearing Member's ``Required Fund
Deposit'' and ``Supplemental Liquidity Deposit'' as those terms are
defined in NSCC's Rules and Procedures.\55\ The changes would provide
that any amount of a Guaranty Substitution Payment that NSCC does not
use pursuant to its Rules and Procedures would subsequently be returned
to OCC under such terms and within such times as are agreed by OCC and
NSCC. OCC believes that it is useful to include this description of the
proposed process for the Guaranty Substitution Payment and the
circumstances in which it may be made so that a user of OCC's publicly
available By-Laws and Rules would have sufficient information to
understand the existence of the Guaranty Substitution Payment
mechanism, the general circumstances in which it may be made and the
role that a Guaranty Substitution Payment would play in causing NSCC to
accept obligations for CCC-eligible securities for clearance and
settlement.
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    \55\ See NSCC Rules 4 (defining ``Required Fund Deposit'') and
4A (defining ``Supplemental Liquidity Deposit''), supra note 9.
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Chapters X and XI--Clearing Fund Contributions and Suspension of a
Clearing Member
    As generally described above, the proposed changes would also
provide that OCC would be permitted to borrow from the OCC Clearing
Fund and also against certain Margin Assets of a Clearing Member that
has been suspended by OCC where that Clearing Member is a Mutually
Suspended Member. To implement these changes, OCC is proposing the
following

amendments to OCC Rule 1006 and Rule 1104.
    OCC Rule 1006 addresses the purpose and permitted uses of the OCC
Clearing Fund. OCC proposes to make amendments to paragraphs (a) and
(f) to permit OCC to utilize assets in the Clearing Fund as a liquidity
resource in connection with making a Guaranty Substitution Payment.
Currently, OCC Rule 1006(a) states the conditions for use of the OCC
Clearing Fund. These provide that the OCC Clearing Fund may be used for
borrowings pursuant to OCC Rule 1006(f) or to make good losses or
expenses suffered by OCC including: (i) as a result of the failure of
any Clearing Member to discharge duly any obligation on or arising from
any confirmed trade accepted by OCC, (ii) as a result of the failure of
any Clearing Member (including any Appointed Clearing Member) or of CDS
(Canada's national securities depository) to perform its obligations
under any contract or obligation issued, undertaken, or guaranteed by
OCC or in respect of which OCC is otherwise liable, (iii) as a result
of the failure of any Clearing Member to perform any of its obligations
to OCC in respect of the stock loan and borrow positions of such
Clearing Member, (iv) in connection with any liquidation of a Clearing
Member's open positions, (v) in connection with protective transactions
effected for the account of OCC pursuant to Chapter XI of OCC's Rules
(delivery of underlying securities and payment), (vi) as a result of
the failure of any Clearing Member to make any other required payment
or render any other required performance or (vii) as a result of the
failure of any bank, securities or commodities clearing organization,
or investment counterparty, to perform its obligations to OCC for
certain specified reasons.\56\
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    \56\ The terms ``Clearing Member'' and ``Appointed Clearing
Member'' as used herein have the meanings provided in OCC's By-Laws,
supra note 5.
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    OCC proposes to renumber clauses (iii) through (vii) in paragraph
(a) as (iv) through (viii), and to insert as new clause (iii) a
provision that the OCC Clearing Fund may be used ``regarding any
Guaranty Substitution Payment that [OCC] may make to [NSCC] under an
agreement between them, as described in [OCC] Rule 901, so that [NSCC]
will not reject settlement obligations for CCC-eligible securities
involving a Clearing Member for which [NSCC] has ceased to act and that
[OCC] directs to [NSCC] for settlement through its facilities.'' \57\
OCC also proposes to add parenthetical language to paragraphs (f)(1)(A)
and (f)(2)(A)(ii) to further clarify that contributions to the OCC
Clearing Fund may be borrowed by OCC for use in connection with making
a Guaranty Substitution Payment to NSCC. Any borrowing from the OCC
Clearing Fund by OCC to make a Guaranty Substitution Payment to NSCC
would be subject to the existing terms of OCC Rule 1006(f)(3) that
provide that irrespective of how any such borrowings from the OCC
Clearing Fund are applied by OCC, the borrowing for a period not to
exceed thirty (30) days will not be deemed to result in charges against
the OCC Clearing Fund under OCC's default waterfall for allocating
actual losses. For purposes of determining whether a loss resulting
from a Guaranty Substitution Payment has occurred, OCC Rule 1006(f)(3)
would be amended to provide that the Guaranty Substitution Payment is
deemed to be repaid by OCC at such time as under the Accord that it is
NSCC's obligation to return any portion of the Guaranty Substitution
Payment that NSCC does not use pursuant to its rules. If, subsequent to
the borrowing, OCC determines that the borrowing represents an actual
loss or all or any part of the borrowing remains outstanding after
thirty (30) days (or on the first Business Day thereafter if the
thirtieth calendar day is not a Business Day) then the amount of OCC
Clearing Fund assets used in the outstanding borrowing would be an
actual loss that OCC would be required to immediately allocate under
its By-Laws and Rules.\58\ As noted above, losses resulting from the
borrowing of Clearing Fund or Margin Assets as a liquidity resource to
facilitate OCC making a Guaranty Substitution Payment would be
allocated in the same sequence as any other losses charged to the
default waterfall.
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    \57\ In connection with these amendments, the reference in Rule
1006(b) to ``clauses (i) through (vi) of paragraph (a)'' would be
changed to ``clauses (i) through (vii) of paragraph (a).''
    \58\ If the defaulting OCC Clearing Member's Margin Assets and
OCC Clearing Fund contribution were insufficient to cover the
associated losses, OCC would next look to certain OCC financial
resources that are available for that purpose (e.g., OCC's corporate
contribution and Clearing Fund contributions of non-defaulting OCC
Clearing Members).
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    Consistent with these changes to permit OCC to use the OCC Clearing
Fund as a borrowing resource to make a Guaranty Substitution Payment to
NSCC, OCC is also proposing similar changes to OCC Rule 1104 that would
permit OCC to borrow certain Margin Assets of a Clearing Member that
has been suspended by OCC where that Clearing Member is a Mutually
Suspended Member and OCC has a general lien \59\ over the Margin
Assets.
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    \59\ Article I, Section 1.G.(1) of OCC's By-Laws states that the
``term `general lien' means a security interest of [OCC] in all or
specified assets in a Clearing Member account as security for all of
the Clearing Member's obligations to [OCC] regardless of the source
or nature of such obligations.'' See OCC By-Laws, supra note 5.
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    Specifically, OCC proposes to add a new paragraph (g) to OCC Rule
1104 that would provide that OCC may use specified Margin Assets of a
suspended Clearing Member as a borrowing in order to use such borrowed
Margin Assets to make a Guaranty Substitution Payment to NSCC. OCC
would be permitted to use Margin Assets from the following accounts of
a suspended Common Member: firm lien account and firm non-lien account;
separate Market-Maker's account; combined Market-Maker's account; and
JBO Participants' account.\60\ OCC is not proposing at this time to
have authority to borrow Margin Assets from other types of accounts
over which OCC has a restricted lien \61\ and for which the Margin
Assets are security for the particular restricted lien accounts because
of additional complexity that OCC believes would be associated with
tracking NSCC's use of Margin Assets associated with those accounts and
also due to certain regulatory requirements under Commission Rule 15c3-
3 that apply to broker-dealer Clearing Members and prohibit the use of
customer property of the broker-dealer to support non-customer
activities.\62\
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    \60\ The Clearing Member accounts referenced herein are
described in subparagraphs (a), (b), (c) and (h) of Article VI,
Section 3 of OCC's By-Laws. See OCC's By-Laws, supra note 5.
    \61\ Article I, Section 1.R.(8) of OCC's By-Laws states that the
``term `restricted lien' means a security interest of [OCC] in
specified assets (including any proceeds thereof) in an account of a
Clearing Member with [OCC] as security for the Clearing Member's
obligations to [OCC] arising from such account or, to the extent so
provided in the By-Laws or Rules, a specified group of accounts that
includes such account including, without limitation, obligations in
respect of all confirmed trades effected through such account or
group of accounts, and exercise notices assigned to such account or
group of accounts.'' See OCC's By-Laws, supra note 5.
    \62\ For example, under the broker-dealer customer reserve
account formula to SEC Rule 15c3-3 the broker-dealer takes a debit
in the formula under Item 13 for margin that is ``required and on
deposit with OCC for all option contracts written or purchased in
customer accounts.'' This means that such margin in turn can be used
by the broker-dealer Clearing Member as Margin Assets to support the
securities customers' account at OCC.
---------------------------------------------------------------------------

    As with the terms that currently apply to any borrowing from the
OCC Clearing Fund pursuant to OCC Rule 1006(f), new paragraph (g) in
OCC Rule 1104 would further provide that Margin Assets borrowed by OCC
to make a Guaranty Substitution Payment to NSCC

would not be deemed to be charges against the margin assets for the
relevant account(s) for up to thirty (30) days; however, if all or a
part of such borrowing were to be determined by OCC, in its discretion,
to represent an actual loss, or if all or a part of the borrowing were
to remain outstanding after such thirty (30)-day period, OCC would
consider the amount of margin assets used to support OCC's obligations
under the outstanding borrowing or transaction as an actual loss and
immediately allocate the loss in accordance with OCC's By-Laws and
Rules.
    OCC anticipates that in a scenario in which it would be permitted
make a Guaranty Substitution Payment to NSCC under the proposed changes
to the Existing Accord and OCC's By-Laws and Rules, OCC would generally
expect to borrow from the Clearing Fund as a primary liquidity
resource. OCC could also borrow Margin Assets of the suspended Clearing
Member that is a Common Member under the proposed terms described
above. OCC is not proposing changes that would require a specific
borrowing sequence because OCC believes that it is more appropriate to
preserve flexibility to borrow from the available OCC Clearing Fund or
Margin Assets as OCC determines appropriate under the circumstances.
    In addition, OCC proposes to specify in OCC Rule 1107(a)(1) that
exercised option contracts and matured, physically-settled stock
futures to which the suspended Clearing Member is a party may be
settled in accordance with the terms of any agreement between OCC and
NSCC governing the settlement of exercised option contracts and
matured, physically-settled stock futures of a suspended Clearing
Member. In such an event, settlement will be governed by and subject to
the agreement between OCC and NSCC and the rules of NSCC.
    The purpose of the proposed changes to create the Guaranty
Substitution Payment mechanism is to provide OCC and NSCC with an
additional default management tool to help manage liquidity and
settlement risks that OCC believes would be presented to each covered
clearing agency in connection with a Mutually Suspended Member. OCC
believes that having the ability to make a Guaranty Substitution
Payment to NSCC in regard to any unmet Required Fund Deposit or
Supplemental Liquidity Deposit obligations of a Mutually Suspended
Member would promote prompt and accurate clearance and settlement in
the national system for the settlement of securities transactions by
causing NSCC to guarantee certain securities settlement obligations
that result from exercised options and matured futures contracts that
are cleared and settled by OCC. In the following ways, OCC believes
that this would be beneficial to and protective of OCC, NSCC, their
participants, and the markets they serve.
    First, OCC's ability to make the Guaranty Substitution Payment
would ensure that the relevant securities settlement obligations would
be accepted by NSCC for clearance and settlement and therefore the size
of the related settlement obligations could be decreased from netting
through NSCC's CNS Accounting Operation and/or NSCC's Balance Order
Accounting Operation. Second, this outcome would avoid a scenario in
which OCC's Guaranty would continue to apply and the settlement
obligations would be settled on a broker-to-broker basis between OCC
Clearing Members pursuant to the applicable provisions in Chapter IX of
OCC's Rules. As noted above, OCC believes that such a broker-to-broker
settlement scenario could result in substantial collateral and
liquidity requirements for OCC Clearing Members. OCC believes that
these potential collateral and liquidity consequences would be due to
the lost benefit of netting of the settlement obligations through
NSCC's facilities and also due to the short time (i.e., the T+2
standard settlement cycle) between a rejection by NSCC of the
settlement obligations for clearing and the associated settlement date
on which settlement would be otherwise required to be made bilaterally
by OCC Clearing Members. This scenario also raises the potential for
procyclical liquidity demands on OCC Clearing Members and participants
during stressed market conditions. Third, OCC will plan to size its
liquidity resource requirements to reasonable expectations with a high
probability of making a Guaranty Substitution Payment in order to
facilitate the settlement of a Mutually Suspended Member's obligations
through NSCC. Accounting for net liquidity demands from a Mutually
Suspended Member's settlement obligations at the central counterparty-
level enhances liquidity in the financial system and promotes the
efficient use of capital by reducing the demand for liquidity
associated with gross settlement of obligations and enabling the
application of resources at both clearing agencies to satisfy the
Member's obligation. Fourth, OCC believes that the potential for the
size of the settlement obligations to be comparatively larger than the
Guaranty Substitution Payment coupled with the short time remaining to
settlement could also increase the risk of default by the affected OCC
Clearing Members at a time when a Common Member has already been
suspended. Therefore, OCC believes that the proposed changes to
implement the ability for OCC to make a Guaranty Substitution Payment
to NSCC would allow OCC to avoid these risks by causing NSCC to accept
the relevant obligations arising from exercised options and matured
futures cleared and settled by OCC, as it ordinarily would, and
guarantee their settlement, upon OCC making a Guaranty Substitution
Payment to NSCC in accordance with the revised Accord.
Comprehensive Stress Testing & Clearing Fund Methodology, and Liquidity
Risk Management Description
    OCC proposes to revise the OCC Comprehensive Stress Testing &
Clearing Fund Methodology, and Liquidity Risk Management Description to
include the GSP in its liquidity risk management practices. Overall,
the proposed changes would reflect that the GSP functions as an
additional liquidity demand type at the Clearing Member Organization
(``CMO'') Group level.\63\
---------------------------------------------------------------------------

    \63\ A Clearing Member Group is composed of a set of affiliated
OCC Clearing Members.
---------------------------------------------------------------------------

    OCC would include additional specifics to address the potential
increased demand that the inclusion of the GSP may cause in its
liquidity risk management practices in the Liquidity Risk Management
section of the Comprehensive Stress Testing & Clearing Fund
Methodology, and Liquidity Risk Management Description. Specifically,
OCC proposes to amend the Liquidity Demand for Positions Rejected by
NSCC subsection, which describes the Existing Accord, including the
scenario in which NSCC could choose not to guaranty certain securities
settlement obligations arising out of transactions cleared by OCC. This
subsection would be retitled as the Liquidity Demand Associated with
NSCC Performance of Physical Settlement Activities subsection to more
clearly describe its content and incorporate the GSP, as further
detailed below. Consistent with the changes to the Existing Accord
described above, OCC proposes to clarify that the Accord allows NSCC to
reject such obligations if OCC elects to not make a GSP.
    OCC proposes a new subsection, titled the Liquidity Demand GSP, to
describe the GSP, which NSCC would calculate as defined in the proposed
amendments to the Existing Accord. OCC would describe a GSP as a firm
specific

liquidity demand (i.e., the amount of cash OCC needs to pay NSCC on
behalf of the defaulting Common Member). OCC would describe the
components of the GSP under the Accord. OCC would explain how it
accounts for the liquidity demand associated with a potential GSP.
Specifically, OCC would apply an amount to account for a potential GSP
obligation for every day on which option expirations occur. This amount
would be based on peak GSP amounts from the prior 12 months in a given
expiration category for the specific CMO Group for each forecasted
liquidity demand calculation. OCC will use a one-year lookback time
period to determine the appropriate GSP amount to apply. The one-year
lookback allows for the best like-to-like application of a historical
GSP as there is a cyclical nature to option standard expirations with
quarterly (i.e., March, June, September, and December) and January
generally being more impactful than non-quarterly expirations. The one-
year lookback also allows behavior changes of a Clearing Member to be
recognized within an annual cycle. OCC proposes to utilize a historical
GSP based on current system capabilities and data that will be supplied
by NSCC.
    OCC would use the total amount of Clearing Fund and SLD deficits at
NSCC in its calculation to account for its obligation. However, in the
event of a default, OCC would be responsible for a proportionate share
of both NSCC Clearing Fund deficits (which are analogous to OCC margin
deficits) and SLDs that are attributable to OCC E&A activity
transmitted to NSCC for settlement, whereas NSCC will be responsible
for the portion of the Clearing Fund and SLD deficits associated with
activity that NSCC clears that is not transmitted by OCC.
    The amount of notional activity sent by OCC to NSCC informs the
likelihood of a GSP. Namely, the potential amount of NSCC Clearing Fund
and SLD deficits that are allocable to OCC increases as the amount of
activity OCC sends to NSCC increases. Since not all types of
expirations are the same with respect to the notional amount of
activity sent by OCC to NSCC, OCC proposes to use five separate
categories of expirations with potentially different GSP amounts to
apply. Each day on which expirations occur would fall into one of five
categories as follows:
     Standard Monthly Expiration: typically the third Friday of
each month from the previous twelve months;
     Non-Standard Monthly Expiration Fridays (``End of Week
Expirations''): the last business day of every week, typically a
Friday, excluding the third Friday of each month from the previous
twelve months;
     End of Month Expirations: the last trading day of every
month from the previous twelve months;
     Expirations falling on Bank Holidays where Markets Are
Open (``Bank Holiday Expirations''): days where banks are closed but
the markets are open from the previous twelve months; \64\
---------------------------------------------------------------------------

    \64\ The Bank Holiday category recognizes that for Veterans Day
and Columbus Day, the equity and equity derivative markets are open
for trading, but the banking system is closed for the day. Since the
banking system is closed while the aforementioned markets are open,
settlement at NSCC encompasses two days of equity trading and equity
derivative E&A activity. As OCC is using NSCC deficit numbers
without regard for allocation, there is a possibility of a
significant outlying GSP requirement due to the settlement of two
days of activity simultaneously. Prudence dictates retaining the
capability to risk manage a day with such disparate characteristics
differently. Additional supporting data in support of the creation
of the Bank Holiday Expiration category is included as Exhibit 3E to
File No. SR-OCC-2023-801.
---------------------------------------------------------------------------

     Remaining Expiration Days (``Daily Expirations''): All
other days with an expiration from the previous twelve months that do
not fall into any of the categories above (typically most Mondays
through Thursdays) from the previous twelve months.
    OCC believes these five categories are appropriate after an
analysis of notional activity sent to NSCC by OCC.\65\ More
specifically, the standard Friday monthly expiration far exceeds the
needs associated with any other category.\66\ The remaining categories
are intended to capture like time periods that will appropriately
account for the GSP.
---------------------------------------------------------------------------

    \65\ OCC provided its analysis of notional activity sent to NSCC
by OCC in support of the creation of the five categories as Exhibit
3E to File No. SR-OCC-2023-801. This Exhibit 3E sets forth data
related to OCC's liquidity stress testing, including Available
Liquidity Resources, Minimum Cash Requirement thresholds, and/or
liquidity breaches, for Sufficiency and Adequacy scenarios with and
without the inclusion of the GSP.
    \66\ For example, the average notional transfer for Remaining
Expiration Days is approximately 10% the size of Standard
Expiration.
---------------------------------------------------------------------------

    OCC would apply the peak GSP amounts from the prior twelve months
in a given expiration category for the specific CMO Group for each
forecasted liquidity demand calculation by adding the GSP amounts to
the CMO Group's other forecasted liquidity demands for the relevant
expiration day.\67\ If a Clearing Member defaults, OCC may have to pay
a GSP to NSCC on two successive days to facilitate the close-out of the
defaulted Clearing Member's positions. To account for this possibility
in its liquidity risk management process, OCC contemplates the payment
of a GSP on expirations that result in settlements on the first and
second days of the default management process. As described above, this
GSP amount may serve to only increase liquidity demands.\68\
---------------------------------------------------------------------------

    \67\ As an example, if the applicable GSP is $100 and the
(current) stressed liquidity demand is $150 for a Clearing Member
Group, the result after the application of the GSP for that Clearing
Member Group would be a combined liquidity requirement of $250
versus $150 currently.
    \68\ OCC provided its analysis of the impact of the GSP,
including with respect to calls for collateral and liquidity demands
as Exhibit 3E to File No. SR-OCC-2023-801.
---------------------------------------------------------------------------

    Furthermore, as stated in the new Liquidity Demand GSP subsection,
OCC would apply a floor to certain expirations. At a minimum, the GSPs
applied to the End of Week, End of Month, and Bank Holiday Expirations
will be no lower than the peak of the Daily Expirations category. If a
GSP pertaining to the End of Week, End of Month, and Bank Holiday
Expiration category is higher than the peak of the Daily Expirations
category, then OCC will apply that higher GSP. Standard Monthly
Expirations will be floored by End of Week, End of Month, and Daily
Expirations. If a GSP pertaining to any of these categories is higher
than the Standard Monthly Expiration category, then OCC will apply that
higher GSP. OCC would set out formulas representing the floors for the
Standard Monthly, End of Week, End of Month, and Bank Holiday
Expirations. Finally, OCC also proposes a minor change to clarify that
it would attempt to effect alternative settlement if OCC elected not to
make a GSP.\69\
---------------------------------------------------------------------------

    \69\ This clarification would maintain OCC's current process for
settling transactions not processed through NSCC and does not
represent the adoption of a new process or settlement method.
---------------------------------------------------------------------------

Liquidity Risk Management Framework
    OCC proposes changes to the Liquidity Risk Management Framework to
incorporate the GSP. In the Liquidity Risk Identification section, OCC
would specify that, in the situation where a member defaults
immediately preceding, or during the expiration, of physically-settled
E&A activity, OCC may elect to make a GSP to NSCC to compel NSCC to
accept and process the E&A activity. If OCC elects to not make a GSP,
OCC would complete settlement of the defaulted Clearing Member's E&A
transactions through its current process. Relatedly, OCC would include
a minor clarification to a footnote in this section to note that NSCC
is not acting on behalf of a defaulting Clearing Member ``in this
situation.''

Anticipated Effect on and Management of Risk
    OCC believes that the proposed changes would reduce the nature and
level of risk presented by OCC because the purpose of the proposed
changes to enhance its stress testing processes and create the Guaranty
Substitution Payment mechanism is to provide OCC and NSCC with
additional default management tools to help manage liquidity and
settlement risks that OCC believes would be presented to each covered
clearing agency in connection with a Mutually Suspended Member. OCC
believes that having the ability to make a Guaranty Substitution
Payment to NSCC in regard to any unmet Required Fund Deposit or
Supplemental Liquidity Deposit obligations of a Mutually Suspended
Member would promote prompt and accurate clearance and settlement in
the national system for the settlement of securities transactions by
causing NSCC to guarantee certain securities settlement obligations
that result from exercised options and matured futures contracts that
are cleared and settled by OCC. OCC further believes that enhancing its
stress testing processes will help to ensure that it maintains the
resources to make such a payment. In the following ways, OCC believes
that this would be beneficial to and protective of OCC, NSCC, their
participants, and the markets they serve.
    First, OCC's ability to make the Guaranty Substitution Payment
would ensure that the relevant securities settlement obligations would
be accepted by NSCC for clearance and settlement and therefore the size
of the related settlement obligations could be decreased from netting
through NSCC's CNS Accounting Operation and/or NSCC's Balance Order
Accounting Operation. Second, this outcome would avoid a scenario in
which OCC's Guaranty would continue to apply and the settlement
obligations would be settled on a broker-to-broker basis between OCC
Clearing Members pursuant to the applicable provisions in Chapter IX of
OCC's Rules. As noted above, OCC believes that such a broker-to-broker
settlement scenario could result in substantial collateral and
liquidity requirements for OCC Clearing Members. OCC believes that
these potential collateral and liquidity consequences would be due to
the lost benefit of netting of the settlement obligations through
NSCC's facilities and also due to the short time (i.e., the T+2
standard settlement cycle) between a rejection by NSCC of the
settlement obligations for clearing and the associated settlement date
on which settlement would be otherwise required to be made bilaterally
by OCC Clearing Members. This scenario also raises the potential for
procyclical liquidity demands on OCC Clearing Members and participants
during stressed market conditions. Third, OCC will plan to size its
liquidity resource requirements to reasonable expectations with a high
probability of making a Guaranty Substitution Payment in order to
facilitate the settlement of a Mutually Suspended Member's obligations
through NSCC. Accounting for net liquidity demands from a Mutually
Suspended Member's settlement obligations at the central counterparty-
level enhances liquidity in the financial system and promotes the
efficient use of capital by reducing the demand for liquidity
associated with gross settlement of obligations and enabling the
application of resources at both clearing agencies to satisfy the
Member's obligation. Fourth, OCC believes that the potential for the
size of the settlement obligations to be comparatively larger than the
Guaranty Substitution Payment coupled with the short time remaining to
settlement could also increase the risk of default by the affected OCC
Clearing Members at a time when a Common Member has already been
suspended. Therefore, OCC believes that the proposed changes to
implement the ability for OCC to make a Guaranty Substitution Payment
to NSCC would allow OCC to avoid these risks by causing NSCC to accept
the relevant obligations arising from exercised options and matured
futures cleared and settled by OCC, as it ordinarily would, and
guarantee their settlement, upon OCC making a Guaranty Substitution
Payment to NSCC in accordance with the revised Accord.
Consistency With the Payment, Clearing and Settlement Supervision Act
    The stated purpose of the Clearing Supervision Act is to mitigate
systemic risk in the financial system and promote financial stability
by, among other things, promoting uniform risk management standards for
systemically important financial market utilities and strengthening the
liquidity of systemically important financial market utilities.\70\
Section 805(a)(2) of the Clearing Supervision Act \71\ 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 \72\ states that the objectives
and principles for risk management standards prescribed under Section
805(a) shall be to:
---------------------------------------------------------------------------

    \70\ 12 U.S.C. 5461(b).
    \71\ 12 U.S.C. 5464(a)(2).
    \72\ 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 Exchange Act in
furtherance of these objectives and principles.\73\ Rule 17Ad-22
requires registered clearing agencies, like OCC, to establish,
implement, maintain, and enforce written policies and procedures that
are reasonably designed to meet certain minimum requirements for their
operations and risk management practices on an ongoing basis.\74\
Therefore, the Commission has stated \75\ that it believes it is
appropriate to review changes proposed in advance notices against Rule
17Ad-22 and the objectives and principles of these risk management
standards as described in Section 805(b) of the Clearing Supervision
Act.\76\
---------------------------------------------------------------------------

    \73\ 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 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).
    \74\ 17 CFR 240.17Ad-22.
    \75\ See, e.g., Exchange Act Release No. 89039, 85 FR at 36446.
    \76\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    OCC believes the proposed changes are consistent with Section
805(b)(1) of the Clearing Supervision Act \77\ because they would
promote the reduction of risks to OCC, its Clearing Members and the
markets OCC serves. As described above, OCC believes that the proposed
enhancements to its stress testing processes and having the ability to
make a Guaranty Substitution Payment to NSCC with respect to any unmet
obligations of a Mutually Suspended Member would promote the reduction
of risk because it would ensure that OCC maintains sufficient liquidity
resources and that the relevant securities settlement obligations would
be accepted by NSCC for clearance and settlement and therefore the size
of the related settlement obligations for both the Mutually Suspended
Member and its assigned delivery counterparties could be decreased from
netting through

NSCC's CNS Accounting Operation and/or NSCC's Balance Order Accounting
Operation. This would also avoid a scenario in which OCC's Guaranty
would continue to apply and the settlement obligations would be settled
on a broker-to-broker basis between OCC Clearing Members, which OCC
believes could result in substantial collateral and liquidity
requirements for OCC Clearing Members and that, in turn, could also
increase a risk of default by the affected OCC Clearing Members at a
time when a Common Member has already been suspended. For these
reasons, OCC believes that the proposed changes: (i) are designed to
promote robust risk management; (ii) are consistent with promoting
safety and soundness; and (iii) are consistent with reducing systemic
risks and promoting the stability of the broader financial system.
---------------------------------------------------------------------------

    \77\ 12 U.S.C. 5464(b)(1).
---------------------------------------------------------------------------

    OCC believes that the proposed changes are also consistent with the
SEC rules that apply to OCC as a covered clearing agency.\78\ In
particular, SEC Rule 17Ad-22(e)(20) requires OCC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to identify, monitor and manage risks related to
any link that OCC establishes with one or more other clearing agencies,
financial market utilities, or trading markets.\79\ As described in
OCC's publicly available disclosure framework for financial market
infrastructures,\80\ the Existing Accord between OCC and NSCC is one
such link. As described above, OCC believes (i) the proposed
modifications to OCC's stress testing procedures that are designed to
enhance its ability to call for additional liquidity resources, and
(ii) the implementation of the ability for OCC to make a Guaranty
Substitution Payment to NSCC in the relevant circumstances involving a
Mutually Suspended Member would help manage the risks presented to OCC
and its Clearing Members by the settlement link with NSCC because the
Guaranty Substitution Payment would ensure that the relevant securities
settlement obligations would be accepted by NSCC for clearance and
settlement and therefore the size of the related settlement obligations
could be decreased from netting through NSCC's CNS Accounting Operation
and/or NSCC's Balance Order Accounting Operation.
---------------------------------------------------------------------------

    \78\ 17 CFR 240.17Ad-22(a)(5).
    \79\ 17 CFR 240.17Ad-22(e)(20).
    \80\ See The Options Clearing Corporation Disclosure Framework
for Financial Market Infrastructures, pg. 108, (2022), available at
https://www.theocc.com/risk-management/pfmi-disclosures.
---------------------------------------------------------------------------

    For this same reason, OCC also believes that the proposed changes
are consistent with the requirements of SEC Rules 17Ad-22(e)(3) and
(7).\81\ SEC Rule 17Ad-22(e)(3) requires OCC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to maintain a sound risk management framework for
comprehensively managing, among other things, liquidity, credit and
other risks that arise in or are borne by OCC.\82\ SEC Rule 17Ad-
22(e)(7) requires OCC, in relevant part, to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to effectively measure, monitor and manage the liquidity risk
that arises in or is borne by OCC and to, among other things, address
foreseeable liquidity shortfalls that would not be covered by OCC's
liquid resources.\83\ As noted, OCC believes the proposed stress
testing enhancements and the ability to make a Guaranty Substitution
Payment to NSCC would allow OCC to better manage liquidity and credit
risks related to the settlement link with NSCC by ensuring that the
relevant securities settlement obligations would be accepted by NSCC
for clearance and settlement. It would avoid a scenario in which OCC's
Guaranty would continue to apply and the settlement obligations would
be settled on a broker-to-broker basis between OCC Clearing Members,
which OCC believes could result in substantial collateral and liquidity
requirements for OCC Clearing Members that, in turn, could also
increase a risk of default by the affected OCC Clearing Members,
particularly in circumstances where the prior suspension of a Mutually
Suspended Member relates to broader stress in the financial system.
Moreover, the incorporation of the Guarantee Substitution Payment into
OCC's liquidity risk management practices would enhance OCC's ability
to maintain additional liquidity resources to effect the settlement of
exercise and assignment activity in the event of a Common Member
default, and therefore, potentially increase the promotion of market
stability.
---------------------------------------------------------------------------

    \81\ 17 CFR 240.17Ad-22(e)(3), (7).
    \82\ 17 CFR 240.17Ad-22(e)(3).
    \83\ 17 CFR 240.17Ad-22(e)(7).
---------------------------------------------------------------------------

III. Date of Effectiveness of the Advance Notice

    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 that the proposed change was filed with the Commission or (ii) the
date that any additional information requested by the Commission is
received. The clearing agency 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 or the Board of Governors of the Federal Reserve System
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. The clearing agency 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-2023-801 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-OCC-2023-801. 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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the self-regulatory
organization.
    Do not include personal identifiable information in submissions;
you should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to File Number SR-OCC-2023-801 and should
be submitted on or before September 20, 2023.

V. Date of Timing for Commission Action

    Section 806(e)(1)(G) of the Clearing Supervision Act provides that
OCC may implement the changes if it has not received an objection to
the proposed changes within 60 days of the later of (i) the date that
the Commission receives an advance notice or (ii) the date that any
additional information requested by the Commission is received,\84\
unless extended as described below.
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    \84\ 12 U.S.C. 5465(e)(1)(G).
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    Pursuant to Section 806(e)(1)(H) of the Clearing Supervision Act,
the Commission may extend the review period of an advance notice for an
additional 60 days, if the changes proposed in the advance notice raise
novel or complex issues, subject to the Commission providing the
clearing agency with prompt written notice of the extension.\85\
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    \85\ 12 U.S.C. 5465(e)(1)(H).
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    Here, as the Commission has not requested any additional
information, the date that is 60 days after OCC filed the advance
notice with the Commission is October 9, 2023. However, the Commission
finds the issues raised by the advance notice complex because OCC
proposes changes that touch on a core aspect of the link between
infrastructures supporting the options and spot markets represented in
the Accord as well as requiring the estimation of risk arising out of
exercise and assignment activity as compared to the risk arising out of
other activity cleared by NSCC. Further, the proposal involves changes
to OCC's liquidity stress testing framework. The Commission also finds
the issues raised by the advance notice novel because the proposal
represents a material change to the structure to the default management
practices defined in the Accord. Therefore, the Commission finds it
appropriate to extend the review period of the advance notice for an
additional 60 days under Section 806(e)(1)(H) of the Clearing
Supervision Act.\86\
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    \86\ Id.
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    Accordingly, the Commission, pursuant to Section 806(e)(1)(H) of
the Clearing Supervision Act,\87\ extends the review period for an
additional 60 days so that the Commission shall have until December 8,
2023 to issue an objection or non-objection to advance notice SR-OCC-
2023-801.
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    \87\ Id.
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    All submissions should refer to File Number SR-OCC-2023-801 and
should be submitted on or before September 20, 2023.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\88\
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    \88\ 17 CFR 200.30-3(a)(91) and 17 CFR 200.30-3(a)(94).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-18672 Filed 8-29-23; 8:45 am]
BILLING CODE 8011-01-P