[Federal Register Volume 84, Number 199 (Tuesday, October 15, 2019)]
[Notices]
[Pages 55194-55201]
[FR Doc No: 2019-22392]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87257; File No. SR-OCC-2019-805]

Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Partial Amendment No. 1 and Notice of No Objection
to Advance Notice, as Modified by Partial Amendment No. 1, Concerning a
Proposed Capital Management Policy That Would Support the Options
Clearing Corporation's Function as a Systemically Important Financial
Market Utility

October 8, 2019.

I. Introduction

    On August 9, 2019, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') advance
notice SR-OCC-2019-805 (``Advance Notice'') 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\ to adopt a policy concerning capital management
at OCC, which includes OCC's plan to replenish its capital in the event
it falls close to or below target capital levels.\4\ The Advance Notice
was published for public comment in the Federal Register on September
11, 2019,\5\ and the

Commission has received comments regarding the changes proposed in the
Advance Notice.\6\ On September 11, 2019, OCC filed a partial amendment
(``Partial Amendment No. 1'') to modify the Advance Notice.\7\ The
Commission is publishing this notice to solicit comments on Partial
Amendment No. 1 from interested persons and, for the reasons discussed
below, is hereby providing notice of no objection to 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.
    \4\ See Notice of Filing infra note 5, at 84 FR 47990.
    \5\ Securities Exchange Act Release No. 86888 (Sep. 5, 2019), 84
FR 47990 (Sep. 11, 2019) (File No. SR-OCC-2019-805) (``Notice of
Filing''). On August 9, 2019, OCC also filed a related proposed rule
change (SR-OCC-2019-007) with the Commission pursuant to Section
19(b)(1) of the Exchange Act and Rule 19b-4 thereunder (``Proposed
Rule Change''). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4,
respectively. In the Proposed Rule Change, which was published in
the Federal Register on August 27, 2019, OCC seeks approval of
proposed changes to its rules necessary to implement the Advance
Notice. Securities Exchange Act Release No. 86725 (Aug. 21, 2019),
84 FR 44944 (Aug. 27, 2019). The comment period for the related
Proposed Rule Change filing closed on September 17, 2019.
    \6\ See letter from Jacqueline Mesa, Chief Operating Officer &
Senior Vice President of Global Policy Futures Industry Association
(``FIA''), dated September 17, 2019, to Vanessa Countryman,
Secretary, Commission (``FIA Letter''); letter from Joseph P.
Kamnik, Senior Vice President and Chief Regulatory Counsel, OCC,
dated September 20, 2019 to Vanessa Countryman, Secretary,
Commission (``OCC Letter''); letter from Steven Morrison, SVP,
Associate General Counsel, LPL Financial (``LPL''), dated September
17, 2019 (received September 26, 2019) to Brent J. Fields,
Secretary, Commission, (``LPL Letter''); letter from Brian Sopinsky,
General Counsel, Susquehanna International Group (``SIG''), dated
October 1, 2019, to Vanessa Countryman, Secretary, Commission (``SIG
Letter''); memorandum from Sean Memon, Chief of Staff to Chairman
Jay Clayton, Commission, to File No. SR-OCC-2019-007, dated October
2, 2019, available at https://www.sec.gov/comments/sr-occ-2019-007/srocc2019007.htm.
    Since the proposal contained in the Advance Notice was also
filed as a proposed rule change, all public comments received on the
proposal are considered regardless of whether the comments are
submitted on the proposed rule change or the Advance Notice.
    \7\ In Partial Amendment No. 1, OCC appended an Exhibit 2 to the
materials filed on August 9, 2019 regarding File No. SR-OCC-2019-
805. The appended Exhibit 2 consists of communications from OCC
concerning the proposal dated after OCC filed the proposal on August
9, 2019 and does not change the purpose of or basis for the Advance
Notice. References to the Advance Notice from this point forward
refer to the Advance Notice, as amended by Partial Amendment No. 1.
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II. Background

    On February 13, 2019, the Commission issued an order disapproving a
rule change that OCC proposed regarding a plan to increase OCC's
capitalization.\8\ OCC now proposes changes to adopt, as part of its
rules, a new policy concerning capital management at OCC (``Capital
Management Policy''). Specifically, the proposed Capital Management
Policy would (i) describe how OCC would determine the amount of liquid
net assets funded by equity (``LNAFBE'') necessary to cover OCC's
potential general business losses; (ii) require OCC to hold a minimum
amount of shareholders equity (``Equity'') sufficient to support the
amount of LNAFBE determined to be necessary; \9\ and (iii) establish a
plan for replenishing OCC's capital in the event that Equity were to
fall below certain thresholds. OCC also proposes to revise its existing
rules to support the terms of the proposed Capital Management policy.
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    \8\ See Securities Exchange Act Release No. 85121 (Feb. 13,
2019), 84 FR 5157 (Feb. 20, 2019) (File No. SR-OCC-2015-02).
    \9\ LNAFBE would mean cash and cash equivalents to the extent
that such cash and cash equivalents do not exceed Equity.
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A. Determining Capital Requirements

    As noted above, OCC proposes to adopt rules describing the
determination of the LNAFBE necessary to cover potential general
business losses. As proposed, LNAFBE would be a subset of OCC's overall
Equity--specifically, cash and cash equivalents, less any approved
adjustments--and therefore could not, by definition, exceed Equity.
Specifically, OCC proposes to set a ``Target Capital Requirement,''
which would be based on two components: (i) The amount of LNAFBE
determined by OCC to be necessary to ensure compliance with OCC's
regulatory obligations, including Rule 17Ad-22(e)(15) under the
Exchange Act; \10\ and (ii) any additional amounts determined to be
necessary and appropriate for capital expenditures approved by OCC's
Board.\11\
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    \10\ 17 CFR 240.17Ad-22(e)(15).
    \11\ In setting the Target Capital Requirement, OCC would also
consider but not be bound by, its projected rolling twelve-months'
operating expenses pursuant to OCC's interpretation of Commodity
Exchange Act Rule 39.11(a)(2). 17 CFR 39.11(a)(2). Nothing in this
Order constitutes an interpretation of Rule 39.11(a)(2) under the
Commodity Exchange Act by the Commission or an endorsement of OCC's
interpretation of Rule 39.11(a)(2).
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    With respect to the first component of the Target Capital
Requirement, to ensure that it is set at a level sufficient to ensure
compliance with OCC's regulatory obligations, OCC proposes to set its
Target Capital Requirement, at a minimum, equal to the greater of three
amounts: (i) An amount equal to six months of OCC's current operating
expenses; (ii) the amount determined by OCC's Board to be sufficient to
ensure a recovery or orderly wind-down of critical operations and
services (``RWD Amount''); \12\ or (iii) the amount determined by OCC's
Board to be sufficient for OCC to continue operations and services as a
going concern if general business losses materialize (``Potential Loss
Amount'').\13\ OCC believes that a minimum Target Capital Requirement
sized to cover at least these three amounts would address OCC's
obligations under Exchange Act Rule 17Ad-22(e)(15).\14\ With respect to
the second component of the Target Capital Requirement, the proposal
would authorize OCC's Board to increase the Target Capital Requirement
by an amount to be retained for capital expenditures.\15\ OCC's Board
would be responsible for reviewing and approving the Target Capital
Requirement annually.
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    \12\ Under the proposal, OCC's Board would approve the RWD
Amount annually at a level designed to cover the cost to maintain
OCC's critical services over the recovery or wind-down period.
Identification of OCC's critical services and the length of time
necessary to recover or wind-down is covered in OCC's Recovery and
Wind-Down Plan. See Securities Exchange Act Release No. 83918 (Aug.
23, 2018), 83 FR 44091 (Aug. 29, 2018).
    \13\ Under the proposal, OCC's Board would set the Potential
Loss Amount by analyzing and aggregating potential losses from
individual operational risk scenarios, aggregating the loss events,
and conducting loss modeling at or above the 99 percent confidence
level.
    \14\ See Notice of Filing, 84 FR at 47991.
    \15\ Under the proposal, OCC's Board could determine, in the
alternative, to fund capital expenditures out of funds in excess of
the Target Capital Requirement. OCC stated that, in making such a
determination, its Board would consider factors including, but not
limited to, the amount of funding required, the amount of Equity
proposed to be retained, the potential impact of the investment on
OCC's operations, and the duration of time over which funds would be
accumulated. See Notice of Filing, 84 FR at 47991.
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B. Maintaining Capital

    As noted above, OCC proposes to adopt rules that would require it
to hold the minimum amount of Equity necessary to cover the Target
Capital Requirement. Specifically, OCC proposes to adopt rules
pertaining to the monitoring and management of OCC's Equity. Under the
proposed rules, OCC's senior management would be responsible for
reviewing analyses, including projections of future volume, expenses,
cash flows, capital needs and other factors, to help ensure adequate
financial resources are available to meet general business obligations.
Such analyses would also include a monthly review of whether OCC's
Equity falls close to or below the Target Capital Requirement. Under
the proposal, OCC would view Equity less than 110 percent of the Target
Capital Requirement as falling close to the Target Capital
Requirement.\16\ OCC

would refer to a breach of this 110 percent threshold as an ``Early
Warning.'' Under the proposed rules, OCC's senior management would be
obligated to notify OCC's Board promptly if Equity were to fall below
the Early Warning threshold and to recommend to the Board whether to
implement a fee increase in an amount that the Board determines
necessary and appropriate to raise additional Equity.
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    \16\ OCC stated that 10 percent of the Target Capital
Requirement represents approximately two months of earnings, and
that OCC believes that a two-month window would provide OCC's senior
management and Board sufficient time to respond to a deterioration
of OCC's capital. See Notice of Filing, 84 FR at 47992.
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    Under the proposal, OCC's senior management would also, on a
quarterly basis, review OCC's schedule of fees in consideration of
projected operating expenses, projected volumes, anticipated cash
flows, and capital needs. Based on its review, OCC's senior management
would recommend to OCC's Board Compensation and Performance Committee
whether to issue a fee increase, decrease or fee waiver. Additionally,
if Equity were to exceed 110 percent of the Target Capital Requirement
plus an amount of excess Equity approved for capital expenditures,
OCC's Board could reduce the cost of clearing by lowering fees,
declaring a fee holiday, or issuing refunds.
    OCC stated that resources held to meet OCC's Target Capital
Requirement would be in addition to OCC's resources to cover
participant defaults.\17\ OCC proposes, however, to mitigate losses
arising out of a Clearing Member default with OCC's excess capital.
Specifically, OCC proposes to offset default losses remaining after the
application of a defaulted Clearing Member's margin deposits and
Clearing Fund contributions with capital in excess of 110 percent of
the Target Capital Requirement (``skin-in-the-game''). OCC also
proposes to charge losses remaining after the application of skin-in-
the-game to OCC senior management's deferred compensation as well as
non-defaulting Clearing Members.\18\
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    \17\ See Notice of Filing, 84 FR at 47997.
    \18\ Such losses would be charged on a pro rata basis to (a)
non-defaulting Clearing Members' Clearing Fund contributions, and
(b) the aggregate value of the EDCP Unvested Balance (defined
below).
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C. Replenishing Capital

    OCC proposes to establish a plan for replenishing its capital in
the event that Equity were to fall below certain thresholds
(``Replenishment Plan''). As described above, OCC proposes to establish
an Early Warning threshold to define when OCC's Equity falls close
enough to the Target Capital Requirement to require action. OCC also
proposes to establish two ``Trigger Event'' thresholds to identify (i)
whether OCC's Equity were to fall below the Target Capital Requirement;
and (ii) the appropriate response based on the severity and speed of
capital deterioration. Further, the proposed Capital Management Policy
would require that, on an annual basis, OCC's Management recommend that
the Board approve or, as appropriate, modify the Replenishment Plan,
and that the Board review and, as appropriate, approve Management's
recommendation.
    Under the proposed rules, a Trigger Event would occur if OCC's
Equity were to remain below 100 percent of the Target Capital
Requirement for a period of 90 consecutive calendar days (referred to
herein as the ``Moderate Trigger Event''). OCC believes that the
failure of a fee increase resulting from an Early Warning to increase
OCC's Equity above the Target Capital Requirement within 90 days would
indicate that corrective action in the form of a fee increase would be
insufficient.\19\ Under the proposed rules, a Trigger Event would also
occur if OCC's Equity were to fall below 90 percent of the Target
Capital Requirement at any time (referred to herein as the ``Severe
Trigger Event''). OCC believes that a Severe Trigger Event would be a
sign that corrective action more significant and with a more immediate
impact than increasing fees should be taken to increase OCC's
Equity.\20\
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    \19\ See Notice of Filing, 84 FR at 47992.
    \20\ See id.
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    As noted above, OCC's Board would be authorized to approve fee
increases to address the deterioration of OCC's capital over time. To
address the more acute capital replenishment needs posed by the Trigger
Events, OCC proposes to authorize the use of two additional resources:
(i) Funds held under The Options Clearing Corporation Executive
Deferred Compensation Plan Trust (``EDCP''); \21\ and (ii) funds
obtained by levying a special fee on Clearing Members.
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    \21\ The EDCP funds available for capital replenishment would be
only those funds that are (i) deposited on or after January 1, 2020
in respect of the EDCP and (ii) in excess of amounts necessary to
pay for benefits accrued and vested under the EDCP at such time
(``EDCP Unvested Balance'').
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    In response to a Trigger Event, OCC would be required to replenish
its capital first through the contribution of the EDCP Unvested
Balance. The amount of the EDCP Unvested Balance contributed would be
the lesser of (i) the entire EDCP Unvested Balance or (ii) the amount
necessary to raise OCC's Equity above 110 percent of the Target Capital
Requirement. If a contribution of the entire EDCP Unvested balance were
necessary, OCC would be required to reevaluate its Equity vis-[agrave]-
vis the Target Capital Requirement to determine whether further action
would be required following such a contribution.
    The proposed rules would require that OCC take further action if,
after contributing the entire EDCP Unvested Balance, either: (i) Equity
were to remain above 90 percent, but below 100 percent, of the Target
Capital Requirement for an additional 90-day period; \22\ or (ii)
Equity were below 90 percent of the Target Capital Requirement. Under
the proposal, if OCC were to determine that further action would be
necessary to replenish its capital, OCC would be required to levy a
special fee on its Clearing Members (``Operational Loss Fee''), which
would be payable within five business days of OCC providing notice to
the Clearing Members. Accordingly, OCC proposes to amend its schedule
of fees to describe the maximum Operation Loss Fee that it could charge
Clearing Members. The maximum Operational Loss Fee would be sized to
provide OCC with the RWD Amount after any applicable taxes (``Adjusted
RWD Amount'').\23\ Under the proposal, OCC would be authorized to
charge Clearing Members, collectively, the lesser of (i) the maximum
Operational Loss Fee; or (ii) the amount necessary to raise OCC's
Equity above 110 percent of the Target Capital Requirement. Under the
proposal, OCC would allocate the Operational Loss Fee equally among the
Clearing Members. OCC believes that charging the Operational Loss Fee
in equal shares is preferable to other potential allocation methods
because it would equally mutualize the risk of operational loss among
the firms that use OCC's services.\24\
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    \22\ The 90-calendar day term of a subsequent Moderate Trigger
Event would be measured beginning on the date OCC applies the EDCP
Unvested Balance.
    \23\ OCC acknowledged that the tax implications of the income
represented by the Operational Loss Fee would depend on the extent
to which any operational loss giving rise to a Trigger Event would
be tax deductible. See Notice of Filing, 84 FR at 47993.
    \24\ See id. OCC stated that it found no evidence of a
correlation between the risk of operational loss and either volume
or a Clearing Member's credit risk profile. See id.
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    The proposed rules would permit OCC to charge amounts only up to
the maximum Operational Loss Fee. If, after charging some amount less
than the maximum Operational Loss Fee, OCC were to issue clearing fee
refunds to manage excess capital, OCC would issue such refunds in equal
shares until the amount of the Operational Loss Fee charged to each
Clearing Member had been fully refunded. If OCC were to

charge some amount less than the maximum Operational Loss Fee, then the
proposed rules would allow OCC to charge another Operational Loss Fee
in the future, provided that the sum of all Operational Loss Fees, less
amounts refunded, could not exceed the maximum Operational Loss Fee. In
the event that OCC were to charge the maximum Operational Loss Fee, OCC
would then be required to convene its Board to develop a new
replenishment plan.

III. 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_ADDRESS>Please include
File Number SR-OCC-2019-805 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-2019-805. 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 proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filings will also be available for inspection
and copying at the principal office of OCC and OCC's website at https://www.theocc.com/about/publications/bylaws.jsp.
    All comments received will be posted without change. Persons
submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-OCC-2019-805 and should be
submitted on or before October 30, 2019.

IV. Summary of Comments

    As noted above, the Commission received comments on the substance
of the proposal. In its comment, the FIA requests clarification
regarding certain aspects of OCC's proposal, raises concerns about
other aspects, and generally expresses the hope that its concerns will
be addressed prior to the approval of the related Proposed Rule
Change.\25\ The FIA appreciates certain aspects of OCC's proposed skin-
in-the-game provisions and characterizes them as positive and important
steps in the right direction.\26\ At the same time, the FIA suggests
that the minimum amount of skin-in-the-game should be clearly defined,
scalable, and prefunded.\27\ In response, OCC states that the
Commission has not imposed a skin-in-the-game requirement, but that OCC
nevertheless believes it is prudent to align OCC's incentives with
those of the broader industry with respect to the management of risks
faced by OCC and, as a result, has determined to propose the skin-in-
the-game provisions included in its proposal.\28\
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    \25\ FIA Letter at 1.
    \26\ FIA Letter at 1.
    \27\ FIA Letter at 1-2.
    \28\ OCC Letter at 1.
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    With respect to allocating a potential capital shortfall through
the Operational Loss Fee, the FIA acknowledges that OCC has a hybrid
ownership structure whereby it is owned by exchanges rather than
members, and that OCC previously proposed to allocate capital
shortfalls to shareholders rather than Clearing Members, but that
proposal was disapproved by the Commission, and that as a result of
those factors, OCC has now proposed to raise replenishment capital
through the Operational Loss Fee. However, FIA expresses the belief
that imposing the Operational Loss Fee on Clearing Members without
providing a return is inequitable and that, ideally, OCC's shareholders
should either be required to provide ``similar such commitment or allow
for an equity dilution.'' \29\ In response, OCC notes that the
Standards for Covered Clearing Agencies do not impose a requirement on
the source of the funding other than the funds be ``equity'' of the
clearing agency and that OCC originally proposed a plan for
replenishment funding that would come from then-existing shareholders
that was disapproved by the Commission.\30\
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    \29\ FIA Letter at 2.
    \30\ OCC Letter at 2.
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    The FIA agrees with OCC's proposal to apportion equally resources
raised from Clearing Members, but suggests that OCC should clarify the
mechanism for returning such resources.\31\ In response, OCC states
that if an Operational Loss Fee were charged and OCC's capital
subsequently exceeded 110 percent of the Target Capital Requirement
such that OCC determined to return funds received pursuant to the
charge, OCC would return the funds to Clearing Members in equal share
to each Clearing Member that paid the Operational Loss Fee until such
time as the aggregate amount of the Operational Loss Fee was
returned.\32\
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    \31\ FIA Letter at 3.
    \32\ OCC Letter at 2-3. OCC's comment included an example to
further clarify OCC's explanation. OCC Letter at 3.
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    Contrary to the FIA's comment, LPL expresses the belief that the
proposal to allocate the Operational Loss fee in equal shares among
OCC's Clearing Members would be inequitable, and therefore, in
contravention of Exchange Act Section 17A(b)(3)(D).\33\ LPL
acknowledges that Clearing Members may have access to clearance and
settlement services provided by OCC, but states that allocating the
Operational Loss Fee to Clearing Members in equal shares because they
have equal access to the OCC's services would not necessarily result in
an equitable allocation of such fees.\34\ LPL argues that Clearing
Members' actual use of, and therefore actual benefit derived from, the
operational availability of the OCC's services vary widely, and as
such, in the event of an operational loss, not every Clearing Member
would suffer to the same degree.\35\ Further, LPL argues that OCC's
statement that there is no correlation between operational risks, on
the one hand, and contract volume, on the other hand, is flawed
inasmuch as it ignores the fact that a Clearing Member that makes
greater use of the OCC's clearing and settlement system places greater
strain on that system and thus exposes the system to greater
operational risk.\36\
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    \33\ LPL Letter at 1.
    \34\ LPL Letter at 2.
    \35\ LPL Letter at 2-3.
    \36\ LPL Letter at 3.
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    The FIA expresses the belief that any Board decision that results
in the imposition of an Operational Loss Fee

should be ``syndicated with'' Clearing Members and that any resulting
feedback from Clearing Members should be ``presented to the Board
before any decisions are taken.'' \37\ OCC responds by noting its
strong belief that part of the viability of a plan to replenish capital
is the speed with which that replenishment capital is accessible if
needed and that, with respect to the Operational Loss Fee, relevant
decisions related to imposing it would need to be made quickly, and as
such they would not lend themselves to the additional step of
consideration by Clearing Members before consideration by the
Board.\38\ OCC also expresses its view that OCC's By-Laws and the
composition of the Board itself,\39\ as well as a number of formal and
informal mechanisms OCC has implemented to solicit Clearing Member and
other interested stakeholder feedback,\40\ ensure that a view informed
by the Clearing Membership is already built into the Board's
deliberations and decision-making. Thus OCC states the Capital
Management Policy as a whole has been constructed with the benefit of
the perspective of the Clearing Member community, and that any future
Board decisions related to the imposition of an Operational Loss Fee
would likewise benefit from the perspective of the Clearing Member
community.\41\ Further, the FIA expresses a concern that OCC's Board
has a fiduciary duty to OCC, and by implication, not to Clearing
Members that are not shareholders of OCC. In its response, OCC states
that it has augmented its governance structure with a variety of formal
and informal mechanisms to solicit Clearing Member and other interested
stakeholder feedback.\42\
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    \37\ FIA Letter at 3.
    \38\ OCC Letter at 3.
    \39\ OCC Letter at 3 (stating that more than two-thirds of OCC's
directors are either Clearing Member directors or public directors).
    \40\ OCC Letter at 4 (stating that such mechanisms include: (i)
The Financial Risk Advisory Committee; (ii) the Operations
Roundtable; (iii) multiple letters and open calls with Clearing
Members and other interested stakeholders; and (iv) routine in-
person meetings with trade groups and individual firms).
    \41\ OCC Letter at 4.
    \42\ OCC Letter at 4.
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    The FIA notes that, as a general matter, it believes that non-
default losses should not be allocated to Clearing Members and that a
CCP should absorb such losses through its capital,\43\ and therefore
OCC should ``revisit its approach to non-default losses and ensure its
own adequate capitalization to cover this.'' \44\ At the same time, the
FIA acknowledges the time that would be required to raise resources
through retained earnings.\45\ OCC disagrees with the FIA's comment
regarding allocation of non-default losses to Clearing Members in the
context of OCC's current proposal and notes that (i) it has increased
its capital reserves approximately tenfold since December 31, 2013;
(ii) the Operational Loss Fee would be part of OCC's plan to replenish
its capital rather than a mechanism to raise funds to meet the Target
Capital Requirement; and (iii) an accumulation of retained earnings
would still source the funds from Clearing Members.\46\
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    \43\ FIA Letter at 3.
    \44\ FIA Letter at 3.
    \45\ FIA Letter at 2.
    \46\ OCC Letter at 2-3.
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    Finally, the FIA urges OCC to provide disclosures on any expenses
or losses that could result in the Operational Loss Fee being charged,
which the FIA asserts would assist Clearing Members in their own risk
management.

V. Commission Findings and Notice of No Objection

    Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, the stated purpose of the Clearing
Supervision Act is instructive: 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 (``SIFMUs'') and strengthening the
liquidity of SIFMUs.\47\
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    \47\ See 12 U.S.C. 5461(b).
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    Section 805(a)(2) of the Clearing Supervision Act \48\ authorizes
the Commission to prescribe regulations containing risk-management
standards for the payment, clearing, and settlement activities of
designated clearing entities engaged in designated activities for which
the Commission is the supervisory agency. Section 805(b) of the
Clearing Supervision Act \49\ provides the following objectives and
principles for the Commission's risk-management standards prescribed
under Section 805(a):
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    \48\ 12 U.S.C. 5464(a)(2).
    \49\ 12 U.S.C. 5464(b).
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     To promote robust risk management;
     to promote safety and soundness;
     to reduce systemic risks; and
     to support the stability of the broader financial system.
    Section 805(c) provides, in addition, that the Commission's risk-
management standards may address such areas as risk-management and
default policies and procedures, among other areas.\50\
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    \50\ 12 U.S.C. 5464(c).
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    The Commission has adopted risk-management standards under Section
805(a)(2) of the Clearing Supervision Act and Section 17A of the
Exchange Act (the ``Clearing Agency Rules'').\51\ The Clearing Agency
Rules require, among other things, each covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures that are reasonably designed to meet certain minimum
requirements for its operations and risk-management practices on an
ongoing basis.\52\ As such, it is appropriate for the Commission to
review advance notices against the Clearing Agency Rules and the
objectives and principles of these risk management standards as
described in Section 805(b) of the Clearing Supervision Act. As
discussed below, the Commission believes the changes proposed in the
Advance Notice are consistent with the objectives and principles
described in Section 805(b) of the Clearing Supervision Act,\53\ and in
the Clearing Agency Rules, in particular Rules 17Ad-22(e)(2) and
(15).\54\
---------------------------------------------------------------------------

    \51\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No.
68080 (October 22, 2012), 77 FR 66220 (Nov. 2, 2012) (S7-08-11). See
also Securities Exchange Act Release No. 78961 (September 28, 2016),
81 Fed .Reg. 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing
Agency Standards''). The Commission established an effective date of
December 12, 2016 and a compliance date of April 11, 2017 for the
Covered Clearing Agency Standards. OCC is a ``covered clearing
agency'' as defined in Rule 17Ad-22(a)(5).
    \52\ 17 CFR 240.17Ad-22.
    \53\ 12 U.S.C. 5464(b).
    \54\ 17 CFR 240.17Ad-22(e)(2) and 17 CFR 240.17Ad-22(e)(15).
---------------------------------------------------------------------------

A. Consistency With Section 805(b) of the Clearing Supervision Act

    The Commission believes that the Advance Notice is consistent with
the stated objectives and principles of Section 805(b) of the Clearing
Supervision Act.\55\ The Commission

believes that the proposed rules regarding the determination of the
Target Capital Requirement and monitoring of OCC's capital levels are
consistent with the promotion of robust risk management because they
are designed to ensure that OCC maintains the resources necessary to
continue operations and services as a going concern in the event that
OCC suffers general business losses. OCC's Target Capital Requirement
would be designed to cover at least the Potential Loss Amount (i.e.,
the amount necessary for OCC to continue operations and services as a
going concern if general business losses materialize). As such, OCC
could be expected to rely on its LNAFBE to address general business
losses, which would, by definition, be limited by Equity. Further, OCC
proposes to monitor Equity levels, and take action where those levels
fall below the Early Warning threshold. The Commission believes,
therefore, that setting and monitoring the level of OCC's Equity above
the amount of capital that OCC has determined is necessary to cover the
risk of potential general business losses is consistent with robust
risk management. Further, OCC proposes to charge losses remaining after
the application of skin-in-the-game to OCC senior management as well as
Clearing Members by, as discussed above, replenishing its capital first
through the contribution of the EDCP Unvested Balance. The Commission
believes that making senior management's resources available for
default management would help align senior management's personal
economic incentives with OCC's overall risk management incentives,
thereby promoting robust risk management at OCC.
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    \55\ Three of the issues raised by the FIA's comments are made
with reference to the Proposed Rule Change, and, to the extent they
are relevant to the Commission's review and evaluation thereof, will
be addressed in that context. Specifically, the FIA expresses the
belief that (i) the proposed application of the Operational Loss Fee
is inequitable; (ii) as a general matter, non-default losses should
not be allocated to Clearing Members and that a CCP should absorb
such losses through its capital; and (iii) OCC should provide
disclosures on any expenses or losses that could result in the
Operational Loss Fee being charged. The Commission's evaluation of
the Advance Notice is conducted under the Clearing Supervision Act
and, as noted above, generally considers whether the proposal will
mitigate systemic risk and promote financial stability. The
Commission notes that the FIA has not explained or demonstrated how
the absence of either a return on fees or the incorporation of
shareholders in OCC's capital management planning would cause the
proposal to be inconsistent with the Clearing Supervision Act.
    LPL's and SIG's comments are also directed at the Proposed Rule
Change and will be addressed in that context. LPL has not explained
or demonstrated how the equal allocation of the Operational Loss Fee
across Clearing Members would cause the proposal to be inconsistent
with the Clearing Supervision Act. Similarly, SIG has not explained
or demonstrated how a hypothetical future sale would cause the
proposal to be inconsistent with the Clearing Supervision Act.
Similarly, SIG has not explained or demonstrated how a hypothetical
future sale would cause the proposal to be inconsistent with the
Clearing Supervision Act.
---------------------------------------------------------------------------

    The Commission believes that the proposed changes pertaining to
capital monitoring and replenishment are consistent with the promotion
of safety and soundness because such changes would be designed to
monitor, maintain, and, if necessary, replenish the capital that OCC
would rely on to remain a going concern. As described above, OCC would
project future volume, expenses, cash flows, capital needs and other
factors to help ensure adequate financial resources are available to
meet general business obligations. OCC would also, on a monthly basis,
review Equity against the Target Capital Requirement to determine
whether an Early Warning or Trigger Event had occurred. In response to
such monitoring, OCC would use fee-related tools (e.g., increases,
decreases, refunds, or fee waivers) to manage OCC's capital as
necessary on an ongoing basis. Further, OCC would apply the EDCP
Unvested Balance and the Operational Loss Fee to replenish capital as
necessary. The Commission believes that the proposed combination of
capital monitoring, management, and replenishment tools is consistent
with promoting safety and soundness because it would support OCC's
ability to maintain the capital necessary to remain a going concern
following the realization of general business losses. Further, the
Commission believes that to the extent the proposed changes are
consistent with promoting OCC's safety and soundness, they are also
generally consistent with supporting the stability of the broader
financial system. OCC has been designated as a SIFMU, in part, because
its failure or disruption could increase the risk of significant
liquidity or credit problems spreading among financial institutions or
markets.\56\ The Commission believes that the proposed changes would
help support the maintenance of OCC as a going concern, even in the
face of significant general business losses, which in turn would help
support the stability of the financial system by reducing the risk of
significant liquidity or credit problems spreading among market
participants that rely on OCC's central role in the options market.
---------------------------------------------------------------------------

    \56\ See Financial Stability Oversight Council (``FSOC'') 2012
Annual Report, Appendix A, https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf (last visited Sep. 20,
2019).
---------------------------------------------------------------------------

    Finally, the Commission believes that the proposed changes to
increase OCC's default management resources are consistent with the
reduction of systemic risk because such increase enhances the ability
of OCC to absorb and contain the spread of any losses that might arise
from a member default. As discussed above, the resources held to meet
OCC's Target Capital Requirement would be in addition to OCC's
resources to cover participant defaults. Capital in excess of 110
percent of the Target Capital Requirement, however, would be available
as skin-in-the-game to offset default losses remaining after the
application of a defaulted Clearing Member's margin deposits and
Clearing Fund contributions. OCC does not propose to guaranty a set
amount of pre-funded skin-in-the-game, but by providing for a mechanism
by which OCC would identify such resources, the proposal could provide
additional resources to absorb and contain the spread of losses arising
from a participant default. Accordingly, and for the reasons stated
above, the Commission believes the changes proposed in the Advance
Notice are consistent with Section 805(b) of the Clearing Supervision
Act.\57\
---------------------------------------------------------------------------

    \57\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

A. Consistency With Rule 17Ad-22(e)(2) Under the Exchange Act

    Rule 17Ad-22(e)(2) under the Exchange Act generally requires that a
covered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to provide for
governance arrangements that meet a number of criteria.\58\ In adopting
Rule 17Ad-22(e)(2), the Commission discussed comments it received
regarding incentives and the concept of skin-in-the-game.\59\ The
Commission stated its belief that ``the proper alignment of incentives
is an important element of a covered clearing agency's risk management
practices,'' and noted that skin-in-the-game ``may place a role in
those risk management practices in many instances, but in other
instances may not be essential to a robust governance framework.'' \60\
Further, the Commission declined to include a specific skin-in-the-game
requirement in Rule 17Ad-22(e), and expressed the belief that it is
appropriate to provide covered clearing agencies with flexibility,
subject to their obligations and responsibilities as SROs under the
Exchange Act, to structure their default management processes to take
into account the particulars of their financial resources, ownership
structures, and risk management frameworks.\61\ As described above, the
FIA suggests that OCC's proposal should have a minimum amount of skin-
in-the-game that is clearly defined, scalable, and prefunded. But the
approach the FIA comment suggests is not provided for in the proposal
submitted to the Commission, and, as noted above, the Commission's
rules do not require such a skin-in-the-game approach. Nonetheless, the
Commission believes OCC's inclusion of its specific proposed skin-in-
the-game component into its Capital Management Policy proposal is

consistent with the Clearing Supervision Act because, among other
things, it promotes robust risk management, as discussed above.
---------------------------------------------------------------------------

    \58\ 17 CFR 240.17Ad-22(e)(2).
    \59\ Covered Clearing Agency Standards, 81 FR at 70805-06.
    \60\ Covered Clearing Agency Standards, 81 FR at 70806.
    \61\ Id.
---------------------------------------------------------------------------

    As described above, the FIA expresses the belief that any Board
decision that results in the imposition of an Operational Loss Fee
should be ``syndicated with'' Clearing Members and that any resulting
feedback from Clearing Members should be ``presented to the Board
before any decisions are taken.'' \62\ In response, OCC refers to the
requirements of its By-Laws that result in more than two-thirds of
OCC's directors being either Clearing Member directors or public
directors).\63\ Further, OCC expresses its strong belief that part of
the viability of a plan to replenish capital is the speed at which that
replenishment capital is accessible. OCC's response is persuasive. Rule
17Ad-22(e)(2)(iii) under the Exchange Act requires that a covered
clearing agency establish, implement, maintain, and enforce written
policies and procedures reasonably designed to provide for governance
arrangements that support the public interest requirements of Section
17A of the Exchange Act applicable to clearing agencies, and the
objectives of owners and participants.\64\ In adopting Rule 17Ad-
22(e)(2), the Commission added paragraph (vi) in response to comments
regarding the scope of Rule 17Ad-22(e)(2)(iii).\65\ Paragraph (vi) of
Rule 17Ad-22(e)(2) specifically addresses the consideration of the
interests of participants' customers, securities issuers and holders,
and other relevant stakeholders of the covered clearing agency.\66\ In
adopting Rule 17Ad-22(e)(2), the Commission noted that the inclusion of
independent directors on a clearing agency's board may be one mechanism
for helping to ensure that the relevant views of stakeholders are
presented and considered.\67\ In the context of default management, the
Commission has acknowledged that risk exposures can change rapidly
during periods of market stress.\68\ Similarly, the Commission believes
that the general business risk exposures, and related losses, may
change rapidly during periods of stress, and, in turn, that there is a
benefit to a covered clearing agency's ability to respond to such
changes in a timely fashion.
---------------------------------------------------------------------------

    \62\ FIA Letter at 3.
    \63\ OCC Letter at 3.
    \64\ 17 CFR 240.17Ad-22(e)(2)(iii).
    \65\ Covered Clearing Agency Standards, 81 FR at 70803.
    \66\ 17 CFR 240.17Ad-22(e)(2)(vi).
    \67\ Covered Clearing Agency Standards, 81 FR at 70803.
    \68\ Covered Clearing Agency Standards, 81 FR at 70806.
---------------------------------------------------------------------------

    Further, as described above, the FIA expresses a concern that OCC's
Board has a fiduciary duty to OCC, and by implication, not to Clearing
Members; however, OCC's response describes the formal and informal
mechanisms that OCC employs to solicit feedback from Clearing Members
and other interested stakeholders, and this response is persuasive. In
adopting Rule 17Ad-22(e)(2), the Commission noted that the approach a
covered clearing agency may take in considering the views of
stakeholders could vary depending on the ownership structure or
organizational form of the covered clearing agency.\69\ The Commission
believes that the governance arrangements proposed by OCC in connection
with the Advance Notice and discussed above are consistent with the
consideration of the interests of OCC's participants and are consistent
with Rule 17Ad-22(e)(2).
---------------------------------------------------------------------------

    \69\ Covered Clearing Agency Standards, 81 FR at 70803.
---------------------------------------------------------------------------

    Accordingly, and for the reasons stated above, the Commission
believes the changes proposed in the Advance Notice are consistent with
Rule 17Ad-22(e)(2) under the Exchange Act.\70\
---------------------------------------------------------------------------

    \70\ 17 CFR 240.17Ad-22(e)(2).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(15) Under the Exchange Act

    Rule 17Ad-22(e)(15) under the Exchange Act requires that a covered
clearing agency establish, implement, maintain, and enforce written
policies and procedures reasonably designed to identify, monitor, and
manage the covered clearing agency's general business risk and hold
sufficient liquid net assets funded by equity to cover potential
general business losses so that the covered clearing agency can
continue operations and services as a going concern if those losses
materialize, including by taking the actions described in Rules 17Ad-
22(e)(15)(i)-(iii) under the Exchange Act.\71\ Rule 17Ad-22(e)(15)(i)
under the Exchange Act requires that the policies and procedures
described under Rule 17Ad-22(e)(15) include determining the amount of
liquid net assets funded by equity based upon a covered clearing
agency's general business risk profile and the length of time required
to achieve a recovery or orderly wind-down, as appropriate, of its
critical operations and services if such action is taken.\72\
---------------------------------------------------------------------------

    \71\ 17 CFR 240.17Ad-22(e)(15).
    \72\ 17 CFR 240.17Ad-22(e)(15)(i).
---------------------------------------------------------------------------

    As described above, OCC proposes to adopt rules governing OCC's
process for determining the amount of Equity required to support the
LNAFBE necessary to cover potential general business losses. The
proposal is designed to identify and maintain the resources necessary
for OCC to recover or wind-down its critical operations or services as
well as to remain a going concern following the realization of losses
due to general business risk. The proposal would also allow for the
inclusion of Board-approved capital expenditures in setting OCC's
Target Capital Requirement. The Commission believes, therefore, that
the proposal is consistent with Rule 17Ad-22(e)(15)(i).\73\
---------------------------------------------------------------------------

    \73\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(15)(ii) under the Exchange Act requires that the
policies and procedures described under Rule 17Ad-22(e)(15) include
holding liquid net assets funded by equity equal to the greater of
either (i) six months of the covered clearing agency's current
operating expenses, or (ii) the amount determined by the board of
directors to be sufficient to ensure a recovery or orderly wind-down of
critical operations and services of the covered clearing agency, as
contemplated by the plans established under Rule 17Ad-22(e)(3)(ii), and
which shall be in addition to resources held to cover participant
defaults or other risks covered under applicable credit risk and the
liquidity risk standards, and shall be of high quality and sufficiently
liquid to allow the covered clearing agency to meet its current and
projected operating expenses under a range of scenarios, including in
adverse market conditions.\74\
---------------------------------------------------------------------------

    \74\ 17 CFR 240.17Ad-22(e)(15)(ii).
---------------------------------------------------------------------------

    As described above, OCC proposes to adopt rules that would require
it to hold at least the minimum amount of Equity necessary to meet the
Target Capital Requirement. In turn, OCC proposes to set its Target
Capital Requirement at a level at least sufficient to comply with Rule
17Ad-22(e)(15)(ii) under the Exchange Act. Specifically, the Target
Capital Requirement would, at a minimum, be at least equal to the
greater of: (i) The amount equal to six-months of OCC's current
operating expenses; (ii) the RWD Amount; or (iii) the Potential Loss
Amount. Thus, OCC's Target Capital Requirement would equal or exceed
the amount determined by OCC to correspond to the amounts described in
Rule 17Ad-22(e)(15)(ii). Moreover, OCC would be required to set the
Target Capital Requirement at a level equal to or greater than a
sufficient

amount of ``liquid net assets funded by equity'' as such term is used
in the Rule because the Capital Management Policy provides that OCC
must set the Target Capital Requirement at a level sufficient to
maintain LNAFBE equal to the amounts described above and LNAFBE, in
turn, must be supported by the overall amount of Equity that OCC holds.
    Further, OCC proposes to require OCC Management to notify OCC's
Board promptly if Equity were to fall below the Early Warning threshold
and to recommend to the Board whether to implement a fee increase in an
amount that the Board determines necessary and appropriate to raise
additional Equity. The requirement to notify the Board, and recommend
appropriate action, would help to ensure that OCC continues to hold
sufficient resources to meet the Target Capital Requirement. The
Commission believes, therefore, that the proposal would be designed to
ensure that OCC holds Equity sufficient to support the amount of LNAFBE
equal to the Target Capital Requirement, which requirement would
correspond to the amounts specified under Rule 17Ad-22(e)(15)(ii).
    The Commission also believes that the proposed rules concerning the
form of OCC's LNAFBE and manner in which it would be held are
consistent with the requirements of Rule 17Ad-22(e)(15)(ii). OCC
proposes to define LNAFBE such that it would consist of only cash and
cash equivalents. OCC's LNAFBE must, therefore, be liquid by
definition. Further, OCC proposes to adopt rules requiring that OCC
hold Equity equal to 110 percent of the Target Capital Requirement
separate from OCC's resources to cover participant defaults.
    Rule 17Ad-22(e)(15)(iii) under the Exchange Act requires that the
policies and procedures described under Rule 17Ad-22(e)(15) include
maintaining a viable plan, approved by the board of directors and
updated at least annually, for raising additional equity should a
covered clearing agency's equity fall close to or below the amount
required under Rule 17Ad-22(e)(15)(ii).\75\
---------------------------------------------------------------------------

    \75\ 17 CFR 240.17Ad-22(e)(15)(iii).
---------------------------------------------------------------------------

    As described above, the proposed Replenishment Plan would govern
OCC's process for replenishing its capital in the event that Equity
were to fall close to or below the Target Capital Requirement. The
proposed Replenishment Plan would require OCC's Management to monitor
changes in Equity and to notify OCC's Board of a Trigger Event. Under
the proposed Replenishment Plan, OCC would be required, in response to
a Trigger Event, to replenish its capital first through the
contribution of the EDCP Unvested Balance. If OCC were to determine
that further replenishment were necessary following the contribution of
the entire EDCP Unvested Balance, OCC would be required to charge the
Operational Loss Fee described above. Under the proposal, OCC's
Management would be obligated to recommend that the Board approve or,
as appropriate, modify the proposed Replenishment Plan annually. In
turn, OCC's Board would be obligated to approve or, as appropriate,
modify the proposed Replenishment Plan annually based on Management's
recommendation. The Commission believes, therefore, that adoption of
these aspects of the proposed Capital Management Policy and supporting
rule changes are consistent with Exchange Act Rule 17Ad-22(e)(15).\76\
---------------------------------------------------------------------------

    \76\ 17 CFR 240.17Ad-22(e)(15).
---------------------------------------------------------------------------

VI. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act, that the Commission does not object to
Advance Notice (SR-OCC-2019-805) and that OCC is authorized to
implement the proposed change as of the date of this notice or the date
of an order by the Commission approving proposed rule change SR-OCC-
2019-007, as modified by Partial Amendment No. 1, whichever is later.

    By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019-22392 Filed 10-11-19; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 88, Number 138 (Thursday, July 20, 2023)]
[Rules and Regulations]
[Pages 46673-46677]
[FR Doc No: 2023-15305]

========================================================================
Rules and Regulations
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents.

========================================================================

Federal Register / Vol. 88, No. 138 / Thursday, July 20, 2023 / Rules
and Regulations

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. FAA-2022-0458; Project Identifier AD-2021-00633-T;
Amendment 39-22494; AD 2023-13-09]
RIN 2120-AA64

Airworthiness Directives; The Boeing Company Airplanes

AGENCY: Federal Aviation Administration (FAA), DOT.

ACTION: Final rule.

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

SUMMARY: The FAA is adopting a new airworthiness directive (AD) for all
The Boeing Company Model 767 airplanes. This AD was prompted by reports
of inoperative manual and alternate horizontal stabilizer trim
switches. This AD requires repetitive inspections for immersion of each
limit switch and position transmitter module (LSPTM) and of the LSPTM
electrical wiring, repetitive inspections for blockage of the drain
holes and cleaning of each drain hole, repetitive inspections for loose
or cracked leveling compound, and applicable on-condition actions. For
certain airplanes, this AD also requires installing two new drain
holes, performing repetitive inspections for blockage of the drain
holes and cleaning each drain hole, and applicable on-condition
actions. The FAA is issuing this AD to address the unsafe condition on
these products.

DATES: This AD is effective August 24, 2023.
    The Director of the Federal Register approved the incorporation by
reference of certain publications listed in this AD as of August 24,
2023.

ADDRESSES:
    AD Docket: You may examine the AD docket at regulations.gov under
Docket No. FAA-2022-0458; or in person at Docket Operations between 9
a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD
docket contains this final rule, any comments received, and other
information. The address for Docket Operations is U.S. Department of
Transportation, Docket Operations, M-30, West Building Ground Floor,
Room W12-140, 1200 New Jersey Avenue SE, Washington, DC 20590.
    Material Incorporated by Reference:
     For service information identified in this final rule,
contact Boeing Commercial Airplanes, Attention: Contractual & Data
Services (C&DS), 2600 Westminster Blvd., MC 110-SK57, Seal Beach, CA
90740-5600; telephone<PHONE_NUMBER>; website myboeingfleet.com.
     You may view this service information at the FAA,
Airworthiness Products Section, Operational Safety Branch, 2200 South
216th St., Des Moines, WA. For information on the availability of this
material at the FAA, call<PHONE_NUMBER>. It is also available at
regulations.gov under Docket No. FAA-2022-0458.

FOR FURTHER INFORMATION CONTACT: Doug Tsuji, Aviation Safety Engineer,
FAA, 2200 South 216th St., Des Moines, WA 98198; phone:<PHONE_NUMBER>;
email: [email protected].

SUPPLEMENTARY INFORMATION:

Background

    The FAA issued a notice of proposed rulemaking (NPRM) to amend 14
CFR part 39 by adding an AD that would apply to all The Boeing Company
Model 767 airplanes. The NPRM published in the Federal Register on
April 25, 2022 (87 FR 24276). The NPRM was prompted by reports of
inoperative manual and alternate horizontal stabilizer trim switches,
as a result of blocked drain holes in the area aft of body station
(STA) 1725.5, which caused water to accumulate and eventually submerge
the three LSPTMs, affecting their function. In the NPRM, the FAA
proposed to require repetitive inspections for immersion of each LSPTM
and of the LSPTM electrical wiring, repetitive inspections for blockage
of the drain holes and cleaning of each drain hole, repetitive
inspections for loose or cracked leveling compound, and applicable on-
condition actions. For certain airplanes, the FAA proposed to also
require installing two new drain holes, performing repetitive
inspections for blockage of the drain holes and cleaning each drain
hole, and applicable on-condition actions. The FAA is issuing this AD
to address collected water or ice that could damage the LSPTMs and
cause stabilizer trim position sensors to generate corrupt or erroneous
signals to the flight crew. This condition, if not addressed, could
result in misleading or confusing flight deck indications, a high speed
overrun during takeoff, or a low altitude stall immediately after
takeoff.

Discussion of Final Airworthiness Directive

Comments

    The FAA received comments from The Air Line Pilots Association,
International (ALPA), United Airlines, and an individual who supported
the NPRM without change.
    The FAA received additional comments from four commenters,
including UPS, FedEx, Delta Air Lines (Delta), and Aviation Partners
Boeing (APB). The following presents the comments received on the NPRM
and the FAA's response to each comment.

Effect of Winglets on Accomplishment of the Proposed Actions

    APB stated that the installation of winglets per Supplemental Type
Certificate (STC) ST01920SE does not affect the accomplishment of the
manufacturer's service instructions.
    The FAA agrees with the commenter that STC ST01920SE does not
affect the accomplishment of the manufacturer's service instructions.
Therefore, the installation of STC ST01920SE does not affect the
ability to accomplish the actions required by this AD. The FAA has not
changed this AD in this regard.

Request To Revise Inspection Interval

    FedEx requested that the repetitive interval for the inspections
specified in Boeing Alert Requirements Bulletin 767-27A0240 RB, dated
January 19, 2021, be revised from 90 days to 225 days. FedEx noted
that, in anticipation of an AD, it had begun inspecting all Model 767-
300F aircraft at 90 day intervals, but could not maintain that
schedule, and even a 120 day inspection interval was challenging to
comply with. FedEx added that, during those initial inspections, it
found only one aircraft with a clogged drain hole and no evidence of
water pooling, damaged leveling compound, or damaged

LSPTMs in its fleet. Based on those findings, FedEx stated that it had
revised its inspection intervals to 450 flight cycles (the equivalent
of 225 days). FedEx noted that if the FAA mandates a 90 day repetitive
interval, it will be forced to ground aircraft. FedEx concluded that a
225 day inspection interval would eliminate undue burden on operators
while maintaining an acceptable level of safety.
    The FAA partially agrees with the commenter's request. Based on the
FAA's risk assessment, the FAA has determined that a 225 day interval,
which equates to approximately 3 inspections during the 24 month
interval before the new drain holes must be added, is not adequate to
address the unsafe condition because the inspections would not be
frequent enough. However, the FAA has determined that extending the
interval to 150 days, which equates to approximately 5 inspections
during the 24 month interval before the new drain holes must be added,
provides an adequate level of safety. The FAA has added paragraph
(h)(4) of this AD to specify the 150 day inspection interval.

Request To Clarify Exception Language

    Delta requested that paragraph (h)(3) of the proposed AD be revised
to clarify the intent. Delta claimed the wording is very confusing and
initially lead it to believe that both service bulletins, Boeing Alert
Requirements Bulletin 767-27A0243 RB, dated May 28, 2021, and Boeing
Alert Requirements Bulletin 767-27A0240 RB, dated January 19, 2021,
must be accomplished in 90 days. Delta added that it understands the
intent of paragraph (h)(3) of the proposed AD is to address a
discrepancy where Boeing Alert Requirements Bulletin 767-27A0243 RB,
dated May 28, 2021, Action 1, gives a compliance time of 24 months to
do Boeing Alert Requirements Bulletin 767-27A0240 RB, dated January 19,
2021, which in turn has an initial compliance time of 90 days. Delta
suggested that paragraph (h)(3) could be clarified to specify the
compliance times for each referenced bulletin.
    The FAA agrees with the commenter's request. The FAA has revised
paragraph (h)(3) of this AD to clarify that although Action 1 in Boeing
Alert Requirements Bulletin 767-27A0243 RB, dated May 28, 2021,
specifies to accomplish the actions in Boeing Alert Requirements
Bulletin 767-27A0240 RB, dated January 19, 2021, within 24 months after
the date of issuance of the original airworthiness certificate or
original export certificate of airworthiness, or within 24 months after
the original issue date of Boeing Alert Requirements Bulletin 767-
27A0243 RB, whichever occurs later; Boeing Alert Requirements Bulletin
767-27A0240 RB, dated January 19, 2021, contains the applicable
compliance times for accomplishing the actions specified in Action1.
The applicable compliance times for all other actions in Boeing Alert
Requirements Bulletin 767-27A0243 RB, dated May 28, 2021, is at the
times specified in Boeing Alert Requirements Bulletin 767-27A0243 RB,
dated May 28, 2021, except as specified in paragraph (h)(1) of this AD.

Request To Delay AD Issuance Until Parts Are Available

    FedEx requested that the FAA delay issuance of a final rule until
parts are available from Boeing. FedEx noted that it is planning to
modify its aircraft as soon as possible, which would allow it to stop
the repetitive inspections. However, FedEx stated that it has been
trying unsuccessfully to order the necessary parts from Boeing since
August, 2021. FedEx added that it was told the delivery schedule was
``to be determined,'' causing it to miss many scheduled aircraft
checks.
    The FAA disagrees with the commenter's request. The FAA notes that
this AD requires repetitive inspections until the terminating
modification is accomplished, so delaying issuance of this AD would
also delay those vital inspections. Additionally, the FAA has confirmed
with the manufacturer that adequate parts will be available to comply
with this AD in the required compliance time. This AD has not been
changed regarding this issue.

Request To Revise Certain Notes

    FedEx requested that the FAA revise Note 1 to paragraph (g)(1) and
Note 2 to paragraph (g)(2). FedEx requested revised wording to ensure
that the new AD would not require the service information referenced in
those notes.
    The FAA agrees to clarify. The wording in the notes is intended to
inform operators that the service information specified contains
additional guidance for accomplishing the required actions. The service
information referenced in the notes is not mandated by this AD, and
operators are not required to use it. This AD has not been changed
regarding this issue.

Request To Allow Skipping Close Access in Certain Situations

    Delta requested that the proposed AD be revised to allow operators
to skip certain close access steps. Delta stated that certain
conditions in Boeing Alert Requirements Bulletin 767-27A0240 RB, dated
January 19, 2021; and Boeing Alert Requirements Bulletin 767-27A0243
RB, dated May 28, 2021, include reference to close access or open
access steps. Delta added that, based on how an operator would perform
the steps, it doesn't make sense to close access when finishing the
actions in one table, only to have to open access to begin work on the
actions in the next table. Delta noted that some close access steps in
Boeing Alert Requirements Bulletin 767-27A0240 RB, dated January 19,
2021, include a flagnote allowing operators to skip the close access
steps if additional work is required. Delta concluded that the flagnote
should have been included for close access steps throughout Boeing
Alert Requirements Bulletin 767-27A0240 RB, dated January 19, 2021; and
Boeing Alert Requirements Bulletin 767-27A0243 RB, dated May 28, 2021.
    The FAA agrees to clarify. The close access steps are not listed in
the ``Action'' or ``Method of Compliance'' columns in the referenced
service information. Instead, the close access steps are in a ``Refer
to'' column, which is for reference only; the procedures within that
column are not required by this AD and are for guidance only.
Therefore, operators may deviate from those steps using accepted
procedures. Acceptable deviations include not performing close access
steps until all applicable actions are completed. This AD has not been
changed regarding this issue.

Request To Not Require Certain Actions

    UPS requested that the proposed AD be revised to not require the
actions specified in paragraph (g)(2) of the proposed AD. UPS stated
that it understands that accomplishment of the repetitive inspections
at the shorter interval specified in Boeing Alert Requirements Bulletin
767-27A0240 RB, dated January 19, 2021, is an acceptable means to
detect and prevent the accumulation of water and ice in the area of the
LSPTMs. UPS suggested that these frequent inspections provide an
equivalent level of safety as adding new drain holes and inspections
with a longer inspection interval. Therefore, UPS requested that the
actions in paragraph (g)(2) of the proposed AD be made optional and
terminate the actions in paragraph (g)(1) of the proposed AD if
accomplished.
    The FAA disagrees with the commenter's request. The addition of the
two drain holes will create a configuration where multiple unique
blockage events must occur before the accumulation of water or ice can

happen. The FAA has therefore determined that the addition of drain
holes, combined with the repetitive inspections, cleaning, and on-
condition actions, is the best method to address the unsafe condition.
However, under the provisions specified in paragraph (i) of this AD,
the FAA will consider requests for alternative methods of compliance
(AMOCs). This AD has not been changed regarding this issue.

Conclusion

    The FAA reviewed the relevant data, considered any comments
received, and determined that air safety requires adopting this AD as
proposed. Accordingly, the FAA is issuing this AD to address the unsafe
condition on these products. Except for minor editorial changes, and
any other changes described previously, this AD is adopted as proposed
in the NPRM. None of the changes will increase the economic burden on
any operator.

Related Service Information Under 1 CFR Part 51

    The FAA reviewed Boeing Alert Requirements Bulletin 767-27A0240 RB,
dated January 19, 2021, which specifies procedures for repetitive
general visual inspections (GVIs) for immersion in water or ice of each
LSPTM and of the LSPTM electrical wiring, repetitive GVIs for blockage
of the three drain holes and cleaning of each drain hole, repetitive
GVIs for loose or cracked leveling compound, and applicable on-
condition actions. On-condition actions include removing any water or
ice, doing a detailed inspection for damage (corrosion or water damage)
of any immersed LSPTM or LSPTM electrical wiring, installing a
serviceable LSPTM, repairing or replacing any damaged LSPTM electrical
wiring, clearing any drain hole blockages, and repairing any loose or
cracked leveling compound.
    The FAA also reviewed Boeing Alert Requirements Bulletin 767-
27A0243 RB, dated May 28, 2021. This service information specifies
procedures for installing two new drain holes, performing repetitive
GVIs for blockage of the five drain holes and cleaning each drain hole,
and applicable on-condition actions. On-condition actions include
clearing any drain hole blockages.
    This service information is reasonably available because the
interested parties have access to it through their normal course of
business or by the means identified in ADDRESSES.

Costs of Compliance

    The FAA estimates that this AD affects 613 airplanes of U.S.
registry. The FAA estimates the following costs to comply with this AD:

                                                 Estimated Costs
----------------------------------------------------------------------------------------------------------------
            Action                Labor cost      Parts cost      Cost per product       Cost on U.S. operators
----------------------------------------------------------------------------------------------------------------
Drill drain holes............  5 work-hours x         $2,770  $3,195..................  Up to $1,958,535.
                                $85 per hour =
                                $425.
Repetitive GVI and cleaning    2 work-hours x              0  $170 per inspection       Up to $104,210 per
 of 5 drain holes.              $85 per hour =                 cycle.                    inspection cycle.
                                $170 per
                                inspection
                                cycle.
Repetitive GVI of LSPTM......  1 work-hour x               0  $85 per inspection cycle  $52,105 per inspection
                                $85 per hour =                                           cycle.
                                $85 per
                                inspection
                                cycle.
Repetitive GVI of LSPTM        1 work-hour x               0  $85 per inspection cycle  $52,105 per inspection
 electrical wiring.             $85 per hour =                                           cycle.
                                $85 per
                                inspection
                                cycle.
Repetitive GVI and cleaning    1 work-hour x               0  $85 per inspection cycle  $52,105 per inspection
 of 3 drain holes.              $85 per hour =                                           cycle.
                                $85 per
                                inspection
                                cycle.
Repetitive GVI of leveling     1 work-hour x               0  $85 per inspection cycle  $52,105 per inspection
 compound.                      $85 per hour =                                           cycle.
                                $85 per
                                inspection
                                cycle.
----------------------------------------------------------------------------------------------------------------

    The FAA estimates the following costs to do any necessary
inspections that would be required based on the results of the
inspection. The agency has no way of determining the number of aircraft
that might need these inspections:

                                               On-Condition Costs
----------------------------------------------------------------------------------------------------------------
                                                                                Cost per
                    Action                                 Labor cost               Parts cost        product
----------------------------------------------------------------------------------------------------------------
Detailed inspection of LSPTM or LSPTM           1 work-hour x $85 per hour = $85              $0             $85
 electrical wiring.
----------------------------------------------------------------------------------------------------------------

    The FAA has received no definitive data on which to base the cost
estimates for the other on-condition actions specified in this AD.

Authority for This Rulemaking

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

Regulatory Findings

    This AD will not have federalism implications under Executive Order
13132. This AD will not have a substantial direct effect on the States,
on the relationship between the national government and the States, or
on the distribution of power and responsibilities among the various
levels of government.

    For the reasons discussed above, I certify that this AD:
    (1) Is not a ``significant regulatory action'' under Executive
Order 12866,
    (2) Will not affect intrastate aviation in Alaska, and
    (3) Will not have a significant economic impact, positive or
negative, on a substantial number of small entities under the criteria
of the Regulatory Flexibility Act.

List of Subjects in 14 CFR Part 39

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

The Amendment

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

PART 39--AIRWORTHINESS DIRECTIVES

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

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

Sec.  39.13  [Amended]

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

2023-13-09 The Boeing Company: Amendment 39-22494; Docket No. FAA-
2022-0458; Project Identifier AD-2021-00633-T.

(a) Effective Date

    This airworthiness directive (AD) is effective August 24, 2023.

(b) Affected ADs

    None.

(c) Applicability

    This AD applies to all The Boeing Company Model 767-200, -300F,
-400ER, and -2C series airplanes, certificated in any category.

(d) Subject

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

(e) Unsafe Condition

    This AD was prompted by reports of inoperative manual and
alternate horizontal stabilizer trim switches; an investigation
found that certain drain holes were blocked, causing water and ice
to collect and subsequently cover the limit switch and position
transmitter modules (LSPTMs), which affected their function. The FAA
is issuing this AD to address collected water or ice that could
damage the LSPTMs and cause stabilizer trim position sensors to
generate corrupt or erroneous signals to the flight crew. This
condition, if not addressed, could result in misleading or confusing
flight deck indications, a high speed overrun during takeoff, or a
low altitude stall immediately after takeoff.

(f) Compliance

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

(g) Required Actions

    (1) For all Model 767-200, -300, -300F, -400ER airplanes: Except
as specified by paragraph (h) of this AD, at the applicable times
specified in the ``Compliance'' paragraph of Boeing Alert
Requirements Bulletin 767-27A0240 RB, dated January 19, 2021, do all
applicable actions identified in, and in accordance with, the
Accomplishment Instructions of Boeing Alert Requirements Bulletin
767-27A0240 RB, dated January 19, 2021.

    Note 1 to paragraph (g)(1): Guidance for accomplishing the
actions required by this AD can be found in Boeing Alert Service
Bulletin 767-27A0240, dated January 19, 2021, which is referred to
in Boeing Alert Requirements Bulletin 767-27A0240 RB, dated January
19, 2021.

    (2) For Model 767-200, -300, -300F, and -400ER airplanes, as
identified in Boeing Alert Requirements Bulletin 767-27A0243 RB,
dated May 28, 2021: Except as specified by paragraph (h) of this AD,
at the applicable times specified in the ``Compliance'' paragraph of
Boeing Alert Requirements Bulletin 767-27A0243 RB, dated May 28,
2021, do all applicable actions identified in, and in accordance
with, the Accomplishment Instructions of Boeing Alert Requirements
Bulletin 767-27A0243 RB, dated May 28, 2021. Accomplishing the
installation of two new drain holes required by this paragraph
terminates the repetitive inspections of the drain holes required by
paragraph (g)(1) of this AD.

    Note 2 to paragraph (g)(2): Guidance for accomplishing the
actions required by this AD can be found in Boeing Alert Service
Bulletin 767-27A0243, dated May 28, 2021, which is referred to in
Boeing Alert Requirements Bulletin 767-27A0243 RB, dated May 28,
2021.

    (3) For Model 767-2C airplanes: Within 90 days after the
effective date of this AD, inspect the LSPTMs, LSPTM electrical
wiring, drain holes, and leveling compound; install two new drain
holes as applicable; and do applicable on-condition actions in
accordance with a method approved by the Manager, AIR-520 Continued
Operational Safety Branch, FAA.

(h) Exceptions to Service Information Specifications

    (1) Where Boeing Alert Requirements Bulletin 767-27A0243 RB,
dated May 28, 2021, uses the phrase ``the original issue date of the
Requirements Bulletin 767-27A0243 RB,'' this AD requires using ``the
effective date of this AD.''
    (2) Where Boeing Alert Requirements Bulletin 767-27A0240 RB,
dated January 19, 2021, uses the phrase ``the original issue date of
the Requirements Bulletin 767-27A0240 RB,'' this AD requires using
``the effective date of this AD.''
    (3) Where Boeing Alert Requirements Bulletin 767-27A0243 RB,
dated May 28, 2021, specifies a compliance time for Action 1
(accomplishment of Boeing Alert Requirements Bulletin 767-27A0240
RB, dated January 19, 2021), for this AD the compliance times for
accomplishing the actions in Boeing Alert Requirements Bulletin 767-
27A0240 RB, dated January 19, 2021, are as specified in paragraph
(g)(1) of this AD.
    (4) Where the ``Repeat Interval (Not to Exceed)'' column of the
Compliance tables in Boeing Alert Requirements Bulletin 767-27A0240
RB, dated January 19, 2021, specifies ``90 days,'' this AD requires
using ``150 days.''

(i) Alternative Methods of Compliance (AMOCs)

    (1) The Manager, AIR-520 Continued Operational Safety Branch,
FAA, has the authority to approve AMOCs for this AD, if requested
using the procedures found in 14 CFR 39.19. In accordance with 14
CFR 39.19, send your request to your principal inspector or
responsible Flight Standards Office, as appropriate. If sending
information directly to the manager of the certification office,
send it to the attention of the person identified in paragraph
(j)(1) of this AD. Information may be emailed to: [email protected].
    (2) Before using any approved AMOC, notify your appropriate
principal inspector, or lacking a principal inspector, the manager
of the responsible Flight Standards Office.
    (3) An AMOC that provides an acceptable level of safety may be
used for any repair, modification, or alteration required by this AD
if it is approved by The Boeing Company Organization Designation
Authorization (ODA) that has been authorized by the Manager, AIR-520
Continued Operational Safety Branch, FAA, to make those findings. To
be approved, the repair method, modification deviation, or
alteration deviation must meet the certification basis of the
airplane, and the approval must specifically refer to this AD.

(j) Additional Information

    (1) For more information about this AD, contact Doug Tsuji,
Aviation Safety Engineer, FAA, 2200 South 216th St., Des Moines, WA
98198; phone:<PHONE_NUMBER>; email: [email protected].
    (2) Service information identified in this AD that is not
incorporated by reference is available at the addresses specified in
paragraphs (k)(3) and (4) of this AD.

(k) Material Incorporated by Reference

    (1) The Director of the Federal Register approved the
incorporation by reference (IBR) of the service information listed
in this paragraph under 5 U.S.C. 552(a) and 1 CFR part 51.
    (2) You must use this service information as applicable to do
the actions required by this AD, unless the AD specifies otherwise.
    (i) Boeing Alert Requirements Bulletin 767-27A0240 RB, dated
January 19, 2021.
    (ii) Boeing Alert Requirements Bulletin 767-27A0243 RB, dated
May 28, 2021.
    (3) For service information identified in this AD, contact
Boeing Commercial Airplanes, Attention: Contractual & Data Services
(C&DS), 2600 Westminster Blvd., MC 110-SK57, Seal Beach, CA 90740-
5600;

telephone<PHONE_NUMBER>; website myboeingfleet.com.
    (4) You may view this service information at the FAA,
Airworthiness Products Section, Operational Safety Branch, 2200
South 216th St., Des Moines, WA. For information on the availability
of this material at the FAA, call<PHONE_NUMBER>.
    (5) You may view this service information that is incorporated
by reference at the National Archives and Records Administration
(NARA). For information on the availability of this material at
NARA, [email protected], or go to: www.archives.gov/federal-register/cfr/ibr-locations.html.

    Issued on June 28, 2023.
Michael Linegang,
Acting Director, Compliance & Airworthiness Division, Aircraft
Certification Service.
[FR Doc. 2023-15305 Filed 7-19-23; 8:45 am]
BILLING CODE 4910-13-P