This PDF is the current document as it appeared on Public Inspection on 04/25/2012 at 08:45 am.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)  and Rule 19b-4 thereunder, notice is hereby given that on April 10, 2012, The Options Clearing Corporation (“OCC”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change described in Items I and II below, which items have been prepared primarily by OCC. The Commission is publishing this Notice and Order to solicit comments on the proposed rule change from interested persons and to approve the proposed rule change on an accelerated basis.
I. Self-Regulatory Organization's Statement of Terms of Substance of the Proposed Rule Change
The proposed rule change would ensure compliance with final regulations of the Commodity Futures Trading Commission (“CFTC”) applicable to derivatives clearing organizations (“DCOs”) that become effective on May 7, 2012.
II. Self-Regulatory Organization's Statement of Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, OCC included statements concerning the purpose and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item III below. OCC has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of Purpose of, and Statutory Basis for, the Proposed Rule Change
The purposes of the proposed changes to OCC's By-Laws and Rules are (a) to ensure compliance with certain regulations recently promulgated by the CFTC that become effective on May 7, 2012, and (b) to put in place a minor rule violation plan (“MRV Plan”), within the meaning of Exchange Act Rule 19d-1(c)(2). The CFTC's final regulations implement statutory “core principles” applicable to DCOs as those core principles were amended by the Dodd-Frank Act.
The Final DCO Regulations
On October 18, 2011, the CFTC held an open meeting at which it issued final regulations implementing many of the new statutory core principles for DCOs enacted under the Dodd-Frank Act. On December 20, 2011, OCC filed a rule change implementing changes designed to bring it into compliance with certain of these final regulations that went into effect on January 9, 2012. This rule filing was approved by the Commission on an accelerated basis on January 3, 2012. The majority of the remaining regulations go into effect on May 7, 2012. While OCC is already in compliance with most of the final regulations that go into effect on May 7, 2012, OCC believes it appropriate to amend and clarify certain of its rules to ensure compliance with the CFTC's rules as described herein.
1. Clearing Members' Ability To Meet Clearing Fund Assessments
Final CFTC Rule 39.11(d)(2)(i) states that a DCO must have rules “requiring that its clearing members have the ability to meet an assessment within the time frame of a normal end-of-day variation settlement cycle.” [Emphasis added.] While OCC By-Laws Article VIII, Section 6 provides that “whenever an amount is paid out of the Clearing Fund contribution of a Clearing Member * * * such Clearing Member shall be liable promptly to make good the deficiency in its contribution resulting from such payment,” it does not require that clearing members have the ability to meet an assessment within any particular time period. [Emphasis added.] OCC is therefore proposing that Article VIII, Section 6 of OCC's By-Laws be amended to require that each clearing member must have, and at all times maintain, the ability to meet any clearing fund assessment by 9:00 a.m. Central Time on the first business day following the day on which OCC notifies the clearing member of such assessment. Additionally, OCC is proposing to amend Article VIII, Section 7 of OCC's By-Laws to clarify when a withdrawing clearing member is definitively deemed to no longer be a clearing member and hence will no longer be subject to charges against its clearing fund contribution or be obligated to make further contributions.
2. Clearing Member Financial Resources Requirements
CFTC Rule 39.12(a)(2)(i) states that a DCO must have participation requirements that “require clearing members to have access to sufficient financial resources to meet obligations arising from participation in the [DCO] in extreme but plausible market conditions.” [Emphasis added.] In order to avoid any doubt about OCC's compliance with this rule, OCC is proposing to amend Interpretation and Policy .01 of Article V, Section 1 of its By-Laws, add a new Rule 301(d), add an Interpretation and Policy .11 to Rule 305 and add an Interpretation and Policy .02 to Rule 1102 to more closely address the requirements of the referenced CFTC Rule.
3. Clearing Member Operational Capacity Requirements
CFTC Rule 39.12(a)(3) requires a DCO to have participation requirements that “require clearing members to have adequate operational capacity to meet obligations arising from participation in the [DCO] * * * [that] include * * * the ability to process expected volumes and values of transactions cleared by a clearing member within required time frames, including at peak times and on peak days; the ability to fulfill collateral, payment, and delivery obligations imposed by the [DCO]; and the ability to participate in default management activities under the rules of the [DCO] and in accordance with [CFTC Rule 39.16].” [Emphasis added.] OCC is proposing to amend Article V, Section 1, Interpretation .02, add a new Rule 214(d), add a new Interpretation and Policy .12 to Rule 305, and add new Interpretation and Policy .02 to Rule 1102 to more closely address the requirements of the referenced CFTC Rule. OCC is also proposing to add a new Rule 214(c) to require clearing members to have adequate personnel arrangement to ensure their ability to meet the requirements of clearing membership, and to provide OCC with a list of such personnel.
4. Clearing Member Reporting Requirements
CFTC Rule 39.12(a)(5)(i) states that a DCO must “require all clearing members, including non-futures commission merchants, to provide to the [DCO] periodic financial reports that contain any financial information that the [DCO] determines is necessary to assess whether participation requirements are being met on an ongoing basis.” Further, under Rule 39.12(a)(5)(i)(B), a DCO must require non-FCM clearing members to make these periodic financial reports available to the CFTC upon request or, alternatively, a DCO may provide such financial reports directly to the CFTC upon CFTC request. All of OCC's non-FCM clearing members are either registered U.S. broker-dealers or “non-U.S. Clearing Members” subject to comparable regulation in their home jurisdictions. OCC Rule 306 generally requires that financial reports required to be filed pursuant to regulations applicable to such clearing members also be filed with OCC, and Rule 306(b) requires non-U.S. Clearing Members to file such financial reports with OCC at such times as OCC may specify. OCC therefore believes that the financial reports it currently receives from non-FCM clearing members fulfill the requirement of Rule 39.12(a)(5)(i). However, in order to avoid any doubt about OCC's compliance with this rule, OCC is proposing to add language to Rule 306(a) to expressly provide that OCC may require clearing members to make financial reports for the purpose of assessing whether the clearing member is meeting OCC's participation requirements on an ongoing basis. With respect to the requirement of Rule 39.12(a)(5)(i)(B), OCC has determined that, for the convenience of its non-FCM clearing members, it will provide the financial reports filed by them to the CFTC (upon the CFTC's request). OCC is proposing to state this policy in a new Interpretation and Policy .03 to OCC Rule 306. OCC is also proposing to amend Interpretation and Policy .02 to OCC Rule 306 to parallel the changes being proposed to Rule 306(a) discussed above.
CFTC Rule 39.12(a)(5)(ii) requires a DCO to adopt rules that “require clearing members to provide to the [DCO], in a timely manner, information that concerns any financial or business developments that may materially affect the clearing members' ability to continue to comply with participation requirements.” While OCC Rule 215 already requires a clearing member to give OCC prompt written notice of any change of organization or ownership structure, and certain other OCC Rules have notice requirements that address portions of this new requirement, OCC is proposing to amend OCC Rule 215 to more closely address the requirements of the referenced CFTC Rule, as well as to expand the notice requirement in Rule 215(a)(4) to include changes in clearing member's jurisdiction of organization or incorporation, in addition to changes in name or form of business organization. OCC is also proposing to adopt a specific schedule of fines for violation of OCC Rule 215 and to amend Rule 209 to allow OCC to withdraw the amounts of any fines payable in connection with a minor rule violation (as well as any fine levied in connection with a disciplinary proceeding pursuant to Chapter XII of the Rules), including a violation of Rule 215, from a clearing member's bank account, provided that the Clearing Member has not timely contested such fines. The proposed schedule of fines is based on a fine schedule that has been adopted by operating subsidiaries of the Depository Trust & Clearing Corporation. As proposed, fines for violation of amended Rule 215 would be between $300 and $1,500, depending on the number of violations within any rolling 24-month period and the first, second and third violations of Rule 215 would constitute “minor rule violations” (see below). The fourth such violation would result in disciplinary action under Chapter XII of OCC's Rules and would not constitute a minor rule violation. OCC believes that adopting a specific schedule of fines will provide OCC with greater ability to ensure compliance by clearing members.
OCC is also proposing to amend Rule 202 to require its clearing members to notify OCC of any changes to the representatives who are authorized to act on behalf of the clearing member and to update their certified lists of signatures.
5. Clearing Member Customer Initial Margin
CFTC Rule 39.13(g)(8)(ii) states that a DCO must “require its clearing members to collect customer initial margin * * * from their customers, for nonhedge positions, at a level that is greater than 100 percent of the [DCO's] initial margin requirements with respect to each product and swap portfolio. The [DCO] shall have reasonable discretion in determining the percentage by which customer initial margins must exceed the [DCO's] initial margin requirements with respect to particular products or swap portfolios.” [Emphasis added.] Additionally, CFTC Rule 39.13(g)(8)(iii) requires each DCO to “require its clearing members to ensure that their customers do not withdraw funds from their accounts with such clearing members unless the net liquidating value plus the margin deposits remaining in a customer's account after such withdrawal are sufficient to meet the customer initial margin requirements with respect to all products and swap portfolios held in such customer's account which are cleared by the [DCO].” OCC is proposing to adopt a new Rule 602 (which had previously been reserved) in order to implement the requirements of CFTC Rule 39.13(g)(8)(ii) and (iii).
6. Initial Margin—Pledged Assets
CFTC Rule 39.13(g)(14) states that “if a [DCO] permits its clearing members to pledge assets for initial margin while retaining such assets in accounts in the names of such clearing members, the [DCO] shall ensure that such assets are unencumbered and that such pledge has been validly created and validly perfected in the relevant jurisdiction.” While OCC Rule 604(b)(4)(ii) allows pledged assets to be provided as margin under certain circumstances, OCC is proposing to add a new Interpretation and Policy .07 to Rule 604 to explicitly state that all assets pledged to OCC, for whatever purpose, must be free of any lien or other encumbrance senior to OCC's lien. OCC does not believe that this is a substantive amendment to its Rules, as OCC already takes measures to ensure that its lien over assets provided as initial margin is senior to all other liens or other encumbrances over such assets. OCC is proposing this amendment in order to avoid any doubt as to its compliance with the referenced CFTC Rule.
7. Clearing Member Risk Management Requirements
CFTC Rule 39.13(h)(5)(i) requires a DCO to adopt rules that: “(A) require its clearing members to maintain current written risk management policies and procedures, which address the risks that such clearing members may pose to the [DCO]; (B) ensure that it has the authority to request and obtain information and documents from its clearing members regarding their risk management policies, procedures, and practices, including, but not limited to, information and documents relating to the liquidity of their financial resources and their settlement procedures; and (C) require its clearing members to make information and documents regarding their risk management policies, procedures, and practices available to the [CFTC] upon [CFTC] request.” OCC is proposing to adopt a new Rule 311 entitled “Clearing Member Risk Management” requiring clearing members to maintain risk management policies and procedures meeting the requirements of CFTC Rule 39.13(h)(5)(i)(A), granting OCC the authority to request and obtain information and documents from clearing members regarding their risk management policies, procedures and practices, and requiring clearing members to make information and documents regarding their risk management policies, procedures and practices available to the CFTC upon its request.
8. Daily Settlements
CFTC Rule 39.14(b) requires that a DCO “effect a settlement with each clearing member at least once each business day” and that it “have the authority and operational capacity to effect a settlement with each clearing member, on an intraday basis, either routinely, when thresholds specified by the DCO are breached, or in times of extreme market volatility.” OCC Rule 1301(c) provides OCC with the authority to effect intraday settlements and Interpretation and Policy .01 of Rule 1301 states OCC's policy of not requiring intraday variation payments while reserving OCC's right to require such payments from time to time as appropriate. However, for purposes of conforming OCC's Rules more closely to the regulatory language, OCC is proposing to revise Interpretation and Policy .01 of Rule 1301 to clarify that intraday variation payments will not be required “in the ordinary course” and to state that circumstances under which OCC may assert its right to require intraday variation payments may include, but are not limited to, breach of any threshold set by OCC or during times of extreme market volatility.
9. Implementation of the MRV Plan
OCC's rules currently give OCC the ability to censure, suspend, expel or limit the activities, functions or operations of any Clearing Member for any violation of OCC's By-Laws or Rules. OCC may also impose fines on Clearing Members for such violations. OCC's Rules have not historically distinguished between those violations of the Rules and By-Laws that are minor and do not call for the full procedural regime applicable to other violations and those that are not minor. With the amendments being proposed to Rule 215, and the inclusion of a specific fine schedule for violations of Rule 215, OCC now believes it is appropriate to put in place an MRV Plan in Rule 1201(b) that will meet the definition of a “minor rule violation plan” in Exchange Act Rule 19d-1(c)(2). OCC will specify which violations of the By-Laws or Rules will constitute minor rule violations. OCC currently proposes to designate only a violation of Rule 215 as a minor rule violation. A Clearing Member that wishes to contest a minor rule violation may do so by providing written notice to OCC. Upon contesting a minor rule violation, the violation will be deemed to no longer be a minor rule violation and will be subject to the full provisions of OCC's Chapter XII rules with respect to disciplinary proceedings, including the procedures provided therein for answering charges levied against a Clearing Member, which give Clearing Members the right to a hearing and to be represented by counsel at such hearing. Verbatim transcripts of any such hearing are prepared by OCC.
Section 17A(b)(3)(G) of the Act  requires that the rules of a clearing agency provide that its members be appropriately disciplined for violation of any provision of the rules of the clearing agency by expulsion, suspension, limitation of activities, functions, and operations, fine, censure, or any other fitting sanction. Section 17A(b)(3)(H) of the Act  requires, among other things, that the rules of a clearing agency, in general, provide a fair procedure with respect to the disciplining of members. OCC believes that adopting an MRV Plan furthers the statutory objective of providing a fair procedure for disciplining Clearing Members, and will provide OCC with the ability to impose a meaningful sanction for those rule violations that do not necessarily rise to a level meriting a full disciplinary proceeding under Chapter XII of the Rules. Accordingly, the proposed changes promote the prompt and accurate clearance and settlement of securities transactions and are therefore consistent with the requirements of the Exchange Act and the rules and regulations promulgated thereunder applicable to OCC.
10. Other Amendments
Several of OCC's By-Laws and Rules include now-dated references to the National Association of Securities Dealers, which OCC has corrected to refer instead to the Financial Industry Regulatory Authority. In addition, OCC Rule 307 includes references to a paragraph of Exchange Act Rule 15c3-1  that, while correct when Rule 307 was adopted, have since become incorrect due to the reorganization of that rule. OCC is amending its By-Laws and Rules to correct the foregoing references.
OCC believes the proposed changes are consistent with the requirements of the Act. OCC, as a DCO, is required to implement the proposed changes to comply with recent changes to CFTC regulations. OCC notes that the policies of the CEA with respect to clearing are comparable to a number of the policies underlying the Act, such as promoting market transparency for derivatives markets, promoting the prompt and accurate clearance of transactions, and protecting investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
OCC does not believe that the proposed rule change will have any impact or impose any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others
OCC has not solicited and does not intend to solicit comments regarding this proposed rule change. OCC has not received any unsolicited written comments from interested parties.
III. Solicitation of Comments
Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
- Electronic comments may be submitted by using the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml), or send an email to email@example.com. Please include File No. SR-OCC-2012-06 on the subject line.
- Paper comments should be sent in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2012-06. 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 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 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 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of OCC and on OCC's Web site at http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/sr_occ_12_06.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-2012-06 and should be submitted on or before May 17, 2012.
IV. Commission's Findings and Order Granting Accelerated Approval of Proposed Rule Change
Section 19(b) of the Act  directs the Commission to approve a proposed rule change of a self-regulatory organization if it finds that such proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such organization. The Commission finds that the proposed rule change is consistent with the requirements of the Act, in particular the requirements of Section 17A of the Act, and the rules and regulations thereunder applicable to OCC. Specifically, the Commission finds that the proposed rule change is consistent with Section 17A(b)(3)(F) of the Act which requires, among other things, that the rules of a clearing agency be designed to assure the safeguarding of securities and funds which are in the custody and control of the clearing agency because the proposed rule change should allow OCC to better monitor the financial status and risk management procedures of its clearing members. In addition, the Commission finds that the proposed rule change implementing a minor rule violation plan is consistent with the requirements of Section 17A(b)(3)(G) of the Act, which requires that the rules of a clearing agency provide that its members be appropriately disciplined for violation of any provision of the rules of the clearing agency by expulsion, suspension, limitation of activities, functions, and operations, fine, censure, or any other fitting sanction, as well as Section 17A(b)(3)(H) which, among other things, requires that the rules of a clearing agency provide a fair procedure with respect to the disciplining of participants.
In its filing, OCC requested that the Commission approve this proposed rule change on an accelerated basis for good cause shown. OCC cites as the reason for this request OCC's operation as a DCO, which is subject to regulation by the CFTC under the CEA. This rule change is being made according to regulations promulgated by the CFTC, which were previously subject to notice and comment. Not approving this request on an accelerated basis would have a significant impact on OCC's operations as a DCO.
The Commission finds good cause for approving the proposed rule change prior to the 30th day after the date of publication of notice in the Federal Register because the proposed rule change allows OCC to implement the regulations of another federal regulatory agency, the CFTC, in accordance with those regulations' effective date.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (SR-OCC-2012-06) is approved on an accelerated basis.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Elizabeth M. Murphy,
6. See Exchange Act Release No. 21013 (June 1, 1984), 49 FR 23828 (June 8, 1984).Back to Citation
7. See OCC Rule 1201.Back to Citation
[FR Doc. 2012-10028 Filed 4-25-12; 8:45 am]
BILLING CODE 8011-01-P