[Federal Register Volume 79, Number 236 (Tuesday, December 9, 2014)]
[Notices]
[Pages 73116-73120]
[FR Doc No: 2014-28767]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73726; File No. SR-OCC-2014-809]

Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of an Advance Notice Concerning the Implementation of
a Committed Master Repurchase Agreement Program as Part of OCC's
Overall Liquidity Plan

December 3, 2014.
    Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act entitled the Payment,
Clearing, and Settlement Supervision Act of 2010 (``Clearing
Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) under the Securities
Exchange Act of 1934 \2\ notice is hereby given that on November 4,
2014, The Options Clearing Corporation (``OCC'') filed with the
Securities and Exchange Commission (``Commission'') the advance notice
as described in Items I and II below, which Items have been prepared by
OCC. The Commission is publishing this notice to solicit comments on
the advance notice from interested persons.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
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I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice

    This advance notice is filed by OCC in connection with a proposed
change to its operations in the form of implementing a committed master
repurchase agreement program, as part of OCC's overall liquidity plan.

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 on the advance notice were not and are not
intended to be solicited with respect to the advance notice and none
have been received.

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

Description of Change
    This advance notice is being filed in connection with a proposed
change to OCC's operations through which OCC would implement a
committed master repurchase agreement program, as discussed below, to
access an additional committed source of liquidity to meet its
settlement obligations.
Background
    OCC has been working with a lending agent and an interested
institutional investor to develop a program that would allow OCC to
access an additional committed source of liquidity that does not
increase the concentration of OCC's counterparty exposure, given
existing affiliations between a number of commercial banking
institutions and OCC's clearing members. The program would take the
form of OCC's implementing a committed master repurchase agreement and
related

confirmations (together, the ``Master Repurchase Agreement'') with one
or more non-bank, non-clearing member institutional investors and their
agents.\3\
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    \3\ The agents for the institutional investors would be
responsible for handling administrative aspects of the program on
behalf of the investors.
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    OCC would conduct a due diligence review with respect to each
counterparty before entering into a master repurchase arrangement with
it. Because the appropriate due diligence activities and financial
criteria will vary for each type of counterparty and for each
individual counterparty, OCC would determine on a case-by-case basis
the specific due diligence criteria it would implement. However, as the
principal purpose of these activities would be to obtain assurance that
each counterparty has the financial ability to satisfy its obligations
under the program, the review would encompass an assessment of the
counterparty's financial statements (including external auditor reports
thereon) and, as applicable, ratings and/or investment reports. As part
of the due diligence process, OCC would identify key criteria relative
to monitoring the financial stability of the counterparty on a going
forward basis.
    Although the Master Repurchase Agreement would be based on the
standard form of master repurchase agreement \4\ so that it will be
more familiar to potential institutional investors, OCC would require
the Master Repurchase Agreement to contain certain additional
provisions tailored to ensure a reduction in concentration risk,
certainty of funding, and operational effectiveness, as described in
more detail below. OCC believes that these provisions are necessary and
appropriate to integrate the program into its operations and in order
to promote safety and soundness consistent with OCC's systemic
responsibilities. The terms and conditions applicable to the Master
Repurchase Agreement are set forth in the Summary of Indicative Terms
attached to this filing as Exhibit 3.
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    \4\ The standard form master repurchase agreement is published
by the Securities Industry and Financial Markets Association
(``SIFMA'') and is commonly used in the repurchase market by
institutional investors.
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    The program would be part of OCC's overall liquidity plan, which is
meant to provide OCC with access to a diverse set of sources for
liquidity, which includes committed credit facilities, securities
lending and securities repurchase arrangements, and clearing member
funding requirements that, under certain conditions, allow OCC to
obtain funds from clearing members.\5\
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    \5\ See, e.g., Securities Exchange Act Release No. 72752 (August
4, 2014), 79 FR 46490 (August 8, 2014) (SR-OCC-2014-17), Securities
Exchange Act Release No. 71549 (February 12, 2014), 79 FR 03574
(February 19, 2014) (SR-OCC-2014-801) and Securities Exchange Act
Release No. 73257 (September 30, 2014), 79 FR 23698 (October 3,
2014) (SR-OCC-2014-806).
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The Proposed Program: Standard Repurchase Agreement Terms
    The Master Repurchase Agreement would generally be structured like
a typical repurchase arrangement, in order to help OCC attract interest
from potential institutional investors willing to be a counterparty to
OCC. Under the Master Repurchase Agreement, the buyer (i.e., the
institutional investor) would purchase from OCC from time to time
United States government securities (``Eligible Securities'').\6\ OCC,
as the seller, would transfer Eligible Securities to the buyer in
exchange for a payment by the buyer to OCC in immediately available
funds (the ``Purchase Price''). The buyer would simultaneously agree to
transfer the purchased securities back to OCC at a specified later date
or on OCC's demand (the ``Repurchase Date'') against the transfer of
funds by OCC to the buyer in an amount equal to the outstanding
Purchase Price plus the accrued and unpaid price differential
(together, the ``Repurchase Price''), which is the interest component
of the Repurchase Price.
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    \6\ OCC would use U.S. government securities that are included
in clearing fund contributions by clearing members and margin
deposits of any clearing member that has been suspended by OCC for
the repurchase arrangements. Article VIII, Section 5(e) of OCC's By-
Laws and OCC Rule 1104(b) authorize OCC to obtain funds from third
parties through securities repurchases using these sources. The
officers who may exercise this authority include the Executive
Chairman and the President.
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    At all times while a transaction is outstanding, OCC would be
required to maintain a specified amount of securities or cash margin
with the buyer.\7\ The market value of the securities supporting each
transaction would be determined daily, typically based on a price
obtained from a generally recognized pricing source. If the market
value of the purchased securities is determined to have fallen below
OCC's required margin, OCC would be required to transfer to the buyer
sufficient cash or additional securities reasonably acceptable to the
buyer so that OCC's margin requirement is satisfied.\8\ If the market
value of the purchased securities is determined to have risen to above
OCC's required margin, OCC would be permitted to require the return of
excess purchased securities from the buyer.
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    \7\ OCC expects that it would be required to maintain margin
equal to 102% of the Repurchase Price, which is a standard rate for
arrangements involving U.S. government securities.
    \8\ OCC expects that it would use clearing fund securities and
securities posted as margin by defaulting clearing members, as more
fully discussed in footnote 7.
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    As in a typical master repurchase agreement, an event of default
would occur with respect to the buyer if the buyer failed to purchase
securities on a Purchase Date, failed to transfer purchased securities
on any applicable Repurchase Date, or failed to transfer any interest,
dividends or distributions on purchased securities to OCC within a
specified period after receiving notice of such failure. An event of
default would occur with respect to OCC if OCC failed to transfer
purchased securities on a Purchase Date or failed to repurchase
purchased securities on an applicable Repurchase Date. The Master
Repurchase Agreement would also provide for standard events of default
for either party, including a party's failure to maintain required
margin or an insolvency event with respect to the party.
    Upon the occurrence of an event of default, the non-defaulting
party, at its option, would have the right to accelerate the Repurchase
Date of all outstanding transactions between the defaulting party and
the non-defaulting party, among other rights. For example, if OCC were
the defaulting party with respect to a transaction and the buyer chose
to terminate the transaction, OCC would be required to immediately
transfer the Repurchase Price to the buyer. If the buyer were the
defaulting party with respect to a transaction and OCC chose to
terminate the transaction, the buyer would be required to deliver all
purchased securities to OCC. If OCC or the buyer did not timely
perform, the non-defaulting party would be permitted to buy or sell, or
deem itself to have bought or sold, securities as needed to be made
whole and the defaulting party would be required to pay the costs
related to any covering transactions. Additionally, if OCC was required
to obtain replacement securities as a result of an event of default,
the buyer would be required to pay the excess of the price paid by OCC
to obtain replacement securities over the Repurchase Price.

The Proposed Program: Customized Features To Promote a Reduction in
Concentration Risk, Certainty of Funding and Operational Effectiveness
    In addition to the master repurchase agreement, OCC would enter
into an individualized master confirmation with each buyer and its
agent which would set forth certain terms and conditions applicable to
all transactions entered into under the Master Repurchase Agreement by
that buyer. As discussed above, these required terms and conditions
would be designed to promote OCC's goals of reduced concentration risk,
certainty of funding and operational effectiveness. The terms of the
master confirmations under each Master Repurchase Agreement may vary
from one another, because a separate master confirmation will be
negotiated for a given buyer at the time that buyer becomes a party to
the Master Repurchase Agreement. Because the arrangements between OCC
and the individual buyers have not been fully negotiated, OCC has
identified the following as key standards that would need to be
incorporated into each repurchase arrangement entered into under the
program.\9\
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    \9\ OCC expects that the Master Repurchase Agreement will also
include other, more routine, provisions such as the method for
giving notices and basic due authorization representations by the
parties.
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Counterparties
    OCC would only enter into repurchase arrangements with
institutional investors, such as pension funds or insurance companies,
that are not OCC clearing members or banks affiliated with any OCC
clearing member. This requirement would allow OCC to access stable,
reliable sources of funding, without increasing the concentration of
its exposure to counterparties that are affiliated banks, broker/
dealers and futures commission merchants. This reduction in
concentration risk is a key advantage of this proposed program.
Commitment To Fund and Funding Accounts
    OCC would seek funding commitments from one or more potential
counterparties that would equal $1 billion in the aggregate,\10\ with
each commitment extending for 364 days or more. Each counterparty would
be obligated to enter into transactions under the Master Repurchase
Agreement up to its committed amount so long as no default had occurred
and OCC transferred sufficient Eligible Securities. Each counterparty
would be obligated to enter into transactions even if OCC had
experienced a material adverse change, such as the failure of a
clearing member. This commitment to provide funding would be a key
departure from ordinary repurchase arrangements and a key requirement
for OCC. Each commitment would be supported by an agreement by the
counterparty to maintain cash and investments acceptable to OCC that
must be readily converted into cash in a designated account into which
OCC had visibility. The creation of a funding account is important
because it would provide OCC with two key protections. First, it would
help OCC ensure that the committed funds would be available each day,
as discussed below. Second, it would facilitate prompt funding by
counterparties that are not commercial banks and therefore are not in
the business of daily funding.
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    \10\ The $1 billion in commitments could be spread across
multiple counterparties, but $1billion represents the proposed
aggregate size of the program.
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Funding Mechanics
    Funding mechanics would be targeted so that OCC would receive the
Purchase Price in immediately available funds within 60 minutes of its
request for funds and delivery of Eligible Securities and, if needed,
prior to OCC's regular daily settlement time.\11\ These targeted
funding mechanics would allow OCC to receive needed liquidity in time
to satisfy settlement obligations, even in the event of a default by a
clearing member or a market disruption. The funding mechanism may be,
for example, delivery versus payment/receive versus payment\12\ or
another method acceptable to OCC that both satisfies the objectives of
the master repurchase agreement program and presents limited
operational risks.
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    \11\ This would include OCC's regular daily settlement time and
any extended settlement time implemented by OCC in an emergency
situation under Rule 505.
    \12\ Delivery versus payment/receive versus payment is a method
of settlement under which payment for securities must be made prior
to or simultaneously with delivery of the securities.
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No Rehypothecation
    Under the terms of each master confirmation, the buyer would not be
permitted to grant any third party an interest in purchased securities,
the custody account at the custodian in which purchased securities are
held or any cash held in OCC's account. This requirement is important
for two reasons. First, because the buyer would be prohibited from
rehypothecating purchased securities, the purchased securities should
never leave the account and there should be no third-party claims
against the purchased securities. Second, the prohibition on
rehypothecation would also reduce the risk that a third party could
interfere with the buyer's transfer of the purchased securities on the
Repurchase Date. Further, the custodian would agree to provide OCC with
daily information about each buyer's account. This visibility would
allow OCC to act quickly in the event a buyer violates any
requirements.
Early Termination Rights
    Under the Master Repurchase Agreement, OCC would have the ability
to terminate any transaction upon written notice to the buyer, but a
buyer would only be able to terminate a transaction upon the occurrence
of an event of default with respect to OCC, as further described below.
A notice of termination by OCC would specify a new Repurchase Date
prior to the originally agreed upon Repurchase Date. Upon the early
termination of a transaction, the buyer would be required to return all
purchased securities to OCC and OCC would be required to pay the
Repurchase Price. This optional early termination right is important to
OCC because OCC's liquidity needs may change unexpectedly over time and
as a result OCC may not want to keep a transaction outstanding as long
as originally planned.
Substitution
    Under the Master Repurchase Agreement, OCC would have the ability
to substitute any Eligible Securities for purchased securities in its
discretion by a specified time, so long as the Eligible Securities
satisfy any applicable criteria contained in the Master Repurchase
Agreement and the transfer of the Eligible Securities would not create
a margin deficit, as described above.\13\ This substitution right is
important to OCC because it must be able to manage requests of clearing
members to return excess or substitute Eligible Securities in
accordance with established operational procedures.
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    \13\ In addition to its substitution rights, OCC could cause the
return of purchased securities by exercising its optional early
termination rights under the Master Repurchase Agreement. If OCC
were to terminate part or all of a transaction, the buyer would be
required to return purchased securities to OCC against payment of
the corresponding Repurchase Price.
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Events of Default
    Beyond the standard events of default for a failure to purchase or
transfer securities on the applicable Purchase

Date or Repurchase Date, as described above, OCC would require that the
Master Repurchase Agreement not contain any additional events of
default that would restrict OCC's access to funding and that it contain
an additional default remedy. Most importantly, OCC would require that
it would not be an event of default if OCC suffers a ``material adverse
change''.\14\ This provision is important because it provides OCC with
certainty of funding, even in difficult market conditions.
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    \14\ When included in a contract, a ``material adverse change''
is typically defined as a change that would have a materially
adverse effect on the business or financial condition of a company.
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    Upon the occurrence of an event of default, in addition to the non-
defaulting party's right to accelerate the Repurchase Date of all
outstanding transactions or to buy or sell securities as needed to be
made whole, the non-defaulting party may elect to take the actions
specified in the ``mini close-out'' provision of the Master Repurchase
Agreement, rather than declaring an event of default. For example, if
the buyer fails to transfer purchased securities on the applicable
Repurchase Date, rather than declaring an event of default, OCC may (1)
if OCC has already paid the Repurchase Price, require the buyer to
repay the Repurchase Price, (2) if there is a margin excess, require
the buyer to pay cash or delivered purchased securities in an amount
equal to the margin excess, or (3) declare that the applicable
transaction, and only that transaction, will be immediately terminated,
and apply default remedies under the Master Repurchase Agreement to
only that transaction. Therefore, if the buyer fails to deliver
purchased securities on any Repurchase Date, OCC would have remedies
that allow it to mitigate risk with respect to a particular
transaction, without declaring an event of default with respect to all
transactions under the Master Repurchase Agreement.
Anticipated Effect on and Management of Risk
    OCC believes that the overall impact of the program on the risks
presented by OCC would be to reduce settlement risk associated with
OCC's operations as a clearing agency. The program would reduce
settlement risk by providing an additional source of liquidity, from
diversified funding sources that decrease OCC's concentration of risk,
with funding certainty and operational efficiency. The resulting
reduction in OCC settlement risk would lead to a corresponding
reduction in systemic risk and would have a positive impact on the
safety and soundness of the clearing system by enabling OCC to have
continuous access to funds to settle its obligations to its clearing
members. OCC's consistent ability to timely settle its obligations is a
key part of OCC's role as a clearing agency and allows OCC to mitigate
counterparty risk within the market. In order to sufficiently perform
this key role in promoting market stability, it is critical that OCC
continuously has access to funds to settle its obligations.
    The Master Repurchase Agreement, like any liquidity source, would
involve certain risks, but OCC would structure the program to mitigate
those risks. Most of these risks are standard in any master repurchase
agreement. For example, a buyer could fail to deliver, or delay in
delivering, purchased securities to OCC by the applicable Repurchase
Date. OCC will address this risk by seeking a security interest from
the buyer in that portion of the purchased securities representing the
excess of the market value over the Repurchase Price, or by obtaining
other comfort from the buyer that the purchased securities will be
timely returned. Further, the purchased securities generally will not
be ``on-the-run'' securities, i.e the most recently issued Treasury
securities. The demand in the marketplace for Treasury securities, for
uses other than collateral, is much greater for on-the-run Treasury
securities, and therefore, OCC believes buyers will have little
incentive to retain the securities transferred by OCC.
    The mechanics under the Master Repurchase Agreement would be
structured so that OCC could avoid losses by paying the Repurchase
Price. For example, OCC will have optional early termination rights in
each master confirmation, under which OCC would be able to accelerate
the Repurchase Date of any transaction by providing written notice to
the buyer and paying the Repurchase Price. Through this mechanism, OCC
can maintain the benefit of the Master Repurchase Agreement, while
mitigating any risk associated with a particular transaction.
    The Master Repurchase Agreement would be structured to avoid
potential third-party risks, which are typical of repurchase
arrangements. The prohibition on buyer rehypothecation and use of
purchased securities, along with OCC's visibility into the buyer's
custody account, would reduce the risk to OCC of a buyer default.
    As with any repurchase arrangement, OCC is subject to the risk that
it may have to terminate existing transactions and accelerate the
applicable Repurchase Date with respect to a buyer due to changes in
the financial health or performance of the buyer. Terminating
transactions could negatively affect OCC's liquidity position. However,
any negative effect is reduced by the fact that OCC maintains a number
of different financing arrangements, and thus will have access to
liquidity sources in the event the Master Repurchase Agreement is no
longer a viable source.
    Under the Master Repurchase Agreement, OCC would be obligated to
transfer additional cash or securities as margin in the event the
market value of any purchased securities decreases. OCC seeks to ensure
it can meet any such obligation by monitoring the value of the
purchased securities and maintaining adequate cash resources to make
any required payments. Such payments are expected to be small in
comparison to the total amount of cash received for each transfer of
purchased securities.
Consistency With the Payment, Clearing and Settlement Supervision Act
    OCC believes that the proposed change is consistent with Section
805(b)(1) of the Payment, Clearing and Settlement Supervision Act.\15\
The objectives and principles of Section 805(b)(1) of the Payment,
Clearing and Settlement Supervision Act specify the promotion of robust
risk management, promotion of safety and soundness, reduction of
systemic risks and support of the stability of the broader financial
system.\16\ OCC believes that the proposed change would promote these
objectives because the program should provide OCC with an additional
source of committed liquidity to meet its settlement obligations while
at the same time being structured to mitigate certain operational
risks, as described above, that arise in connection with this committed
liquidity source.
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    \15\ 12 U.S.C. 5464(b)(1).
    \16\ Id.
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Accelerated Commission Action Requested
    OCC requests that the Commission notify OCC that it has no
objection to the change no later than December 12, 2014, in order to
allow OCC to implement the master repurchase agreement program
beginning in mid-December. OCC requests Commission action to ensure
that OCC can access this source of additional liquidity on a timely
basis, given the importance of maintaining diverse funding sources in
connection with OCC's risk management.

III. Date of Effectiveness of the Advance Notice and Timing for
Commission Action

    The designated clearing agency may implement this change if it has
not received an objection to the proposed change within 60 days of the
later of (i) the date that the Commission receives the notice of
proposed change, or (ii) the date the Commission receives any further
information it requests for consideration of the notice. The designated
clearing agency shall not implement this change if the Commission has
an objection.
    The Commission may, during the 60-day review period, extend the
review period for an additional 60 days for proposed changes that raise
novel or complex issues, subject to the Commission providing the
designated clearing agency with prompt written notice of the extension.
The designated clearing agency may implement a change in less than 60
days from the date of receipt of the notice of proposed change by the
Commission, or the date the Commission receives any further information
it requested, if the Commission notifies the designated clearing agency
in writing that it does not object to the proposed change and
authorizes the designated clearing agency to implement the change on an
earlier date, subject to any conditions imposed by the Commission.
    The designated clearing agency shall post notice on its Web site 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. 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_ADDRESS>Please include
File Number SR-OCC-2014-809 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-OCC-2014-809. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (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 Web site viewing and printing in
the Commission's Public Reference Room, 100 F Street NE., Washington,
DC 20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of OCC and on OCC's Web site at
http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_14_809.pdf.
    All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-OCC-2014-809
and should be submitted on or before December 30, 2014.

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-28767 Filed 12-8-14; 8:45 am]
BILLING CODE 8011-01-P