January 2, 2015.
On November 6, 2014, The Options Clearing Corporation (“OCC”) filed with the Securities and Exchange Commission (“Commission”) advance notice SR-OCC-2014-809 (“Advance Notice”) pursuant to Section 806(e)(1) of the Payment, Clearing, and Settlement Supervision Act of 2010 (“Clearing Supervision Act” or “Title VIII”) 
and Rule 19b-4(n)(1)(i) under the Securities Exchange Act of 1934 (“Exchange Act”).
The Advance Notice was published for comment in the Federal Register on December 9, 2014.
The Commission did not receive any comments on the Advance Notice publication. This publication serves as a notice of no objection to the Advance Notice.
I. Description of the Advance Notice
The purpose of the proposed change is to allow OCC to implement a committed master repurchase agreement program (“MRA Program”) in order to access an additional committed source of liquidity to meet its settlement obligations in a manner that does not increase the concentration of OCC's counterparty exposure, given OCC's existing affiliations between a number of commercial banking institutions and OCC's clearing members. According to OCC, the MRA Program will take the form of OCC entering into a committed master repurchase agreement and related confirmations (together, the “Master Repurchase Agreement”) with one or more non-bank, non-clearing Start Printed Page 1063member institutional investors.
The program will be part of OCC's overall liquidity plan that is meant to provide OCC with access to diverse sources of liquidity, which includes committed credit facilities, securities lending and securities repurchase arrangements, and clearing member funding requirements that, under certain conditions, allow OCC to obtain funds from clearing members.
Although the Master Repurchase Agreement would be based on the standard form of master repurchase agreement 
so that it will be more familiar to potential institutional investors, OCC would require the Master Repurchase Agreement to contain certain additional provisions tailored to ensure a reduction in concentration risk, certainty of funding, and operational effectiveness.
b. The Proposed MRA Program
i. Standard Repurchase Agreement Terms
According to OCC, the Master Repurchase Agreement generally will be structured like a typical repurchase arrangement, in order to help OCC attract interest from potential institutional investors willing to be counterparties to OCC. Under the Master Repurchase Agreement, the buyer (i.e., the institutional investor) on occasion would purchase from OCC United States government securities (“Eligible Securities”).
OCC, as the seller, will transfer Eligible Securities to the buyer in exchange for a payment by the buyer to OCC in immediately available funds (“Purchase Price”). The buyer will simultaneously agree to transfer the purchased securities back to OCC at a specified later date or on OCC's demand (“Repurchase Date”) against the transfer of funds by OCC to the buyer in an amount equal to the outstanding Purchase Price plus the accrued and unpaid price differential (together, the “Repurchase Price”), which is the interest component of the Repurchase Price.
At all times while a transaction is outstanding, OCC will be required to maintain a specified amount of securities or cash margin with the buyer.
The market value of the securities supporting each transaction will be determined daily, typically based on a price obtained from a generally recognized pricing source. If the market value of the purchased securities is determined to have fallen below OCC's required margin, OCC will be required to transfer to the buyer sufficient cash or additional securities reasonably acceptable to the buyer so that OCC's margin requirement is satisfied.
If the market value of the purchased securities is determined to have risen to above OCC's required margin, OCC will be permitted to require the return of excess purchased securities from the buyer.
As in a typical master repurchase agreement, an event of default will occur with respect to the buyer if the buyer fails to purchase securities on a purchase date, fails to transfer purchased securities on any applicable Repurchase Date, or fails to transfer any interest, dividends or distributions on purchased securities to OCC within a specified period after receiving notice of such failure. An event of default will occur with respect to OCC if OCC fails to transfer purchased securities on a purchase date or fails to repurchase purchased securities on an applicable Repurchase Date. The Master Repurchase Agreement also will provide for standard events of default for either party, including a party's failure to maintain required margin or an insolvency event with respect to one of the parties.
Upon the occurrence of an event of default, the non-defaulting party, at its option, will have the right, among others, to accelerate the Repurchase Date of all outstanding transactions between the defaulting party and the non-defaulting party. For example, if OCC were the defaulting party with respect to a transaction and the buyer chose to terminate the transaction, OCC will be required to immediately transfer the Repurchase Price to the buyer. If the buyer were the defaulting party with respect to a transaction and OCC chose to terminate the transaction, the buyer will be required to deliver all purchased securities to OCC. If OCC or the buyer does not perform in a timely manner, the non-defaulting party will be permitted to buy or sell, or deem itself to have bought or sold, securities as needed to be made whole and the defaulting party will be required to pay the costs related to any covering transactions. Additionally, if OCC is required to obtain replacement securities as a result of an event of default, the buyer will be required to pay the excess of the price paid by OCC to obtain replacement securities over the Repurchase Price.
ii. Customized Features
As part of the Master Repurchase Agreement, OCC will enter into an individualized master confirmation with each buyer and its agent which will set forth certain terms and conditions applicable to all transactions entered into under the Master Repurchase Agreement by that buyer. According to OCC, these required terms and conditions will be designed to promote OCC's goals of reduced concentration risk, certainty of funding and operational effectiveness. The terms of the master confirmations under each Master Repurchase Agreement may vary from one another, because a separate master confirmation will be negotiated for a given buyer at the time that buyer becomes a party to the Master Repurchase Agreement. OCC has identified the following as key standards that will need to be incorporated into each repurchase arrangement entered into under the program.
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OCC only will enter into repurchase arrangements with non-bank institutional investors, such as pension funds or insurance companies that are not OCC clearing members or banks affiliated with any OCC clearing member. OCC believes this requirement will allow OCC to access stable, reliable sources of funding, without increasing the concentration of its exposure to counterparties that are affiliated banks, broker/dealers and futures commission merchants. OCC believes that this reduction in concentration risk is a key advantage of this proposed program.
Commitment to Fund and Funding Accounts
OCC will seek funding commitments from one or more potential counterparties that will equal $1 billion in the aggregate,
with each commitment extending for 364 days or more. Each counterparty will be obligated to enter into transactions under the Master Repurchase Agreement up to its committed amount so long as no default had occurred and OCC transferred sufficient Eligible Securities. Each counterparty will be obligated to enter into transactions even if OCC had experienced a material adverse change, such as the failure of a clearing member. According to OCC, this commitment to provide funding will be a key departure from ordinary repurchase arrangements and a key requirement for OCC. Each commitment will be supported by an agreement by the counterparty to maintain cash and investments acceptable to OCC that must be readily converted into cash in a designated account into which OCC has visibility. OCC believes that the creation of a funding account is important because it will help OCC ensure that the committed funds will be available each day. OCC also believes that it will facilitate prompt funding by counterparties that are not commercial banks and therefore are not in the business of daily funding.
According to OCC, funding mechanics will be targeted so that OCC will receive the Purchase Price in immediately available funds within 60 minutes of its request for funds and delivery of Eligible Securities and, if needed, prior to OCC's regular daily settlement time.
OCC believes that these targeted funding mechanics will allow OCC to receive needed liquidity in time to satisfy settlement obligations, even in the event of a default by a clearing member or a market disruption. The funding mechanism may be, for example, delivery versus payment/receive versus payment or another method acceptable to OCC that both satisfies the objectives of the MRA Program and presents limited operational risks.
Under the terms of each master confirmation, the buyer would not be permitted to grant any third party an interest in purchased securities, the custody account at the custodian where purchased securities are held, or any cash held in OCC's account. As a result, OCC states that the buyer would be prohibited from rehypothecating purchased securities, the purchased securities should never leave the account, and there should be no third-party claims against the purchased securities. OCC believes that the prohibition on rehypothecation also would reduce the risk that a third party could interfere with the buyer's transfer of the purchased securities on the Repurchase Date. Further, according to OCC, the custodian would agree to provide OCC with daily information about each buyer's account. OCC believes that this visibility would allow OCC to act quickly in the event a buyer violates any requirements.
Early Termination Rights
Under the Master Repurchase Agreement, OCC would have the ability to terminate any transaction upon written notice to the buyer, but a buyer only would be able to terminate a transaction upon the occurrence of an event of default with respect to OCC.
OCC has stated that this optional early termination right is important because its liquidity needs may change unexpectedly over time and as a result OCC may not want to keep a transaction outstanding as long as originally planned.
Under the Master Repurchase Agreement, OCC would have the ability to substitute any Eligible Securities for purchased securities in its discretion by a specified time, so long as the Eligible Securities satisfy any applicable criteria contained in the Master Repurchase Agreement and the transfer of the Eligible Securities would not create a margin deficit, as described above.
OCC believes that this substitution right is important because it must be able to manage clearing member requests to return excess or substitute Eligible Securities in accordance with established operational procedures.
Events of Default
In addition to the standard events of default for a failure to purchase or transfer securities on the applicable Purchase Date or Repurchase Date, OCC would require that the Master Repurchase Agreement not contain any additional events of default that would restrict OCC's access to funding and that it contain an additional default remedy. OCC would require that it would not be an event of default if OCC suffers a “material adverse change.” 
According to OCC, this provision provides it with certainty of funding, even in difficult market conditions.
Upon the occurrence of an event of default, in addition to the non-defaulting party's right to accelerate the Repurchase Date of all outstanding transactions or to buy or sell securities as needed to be made whole, the non-defaulting party may elect to take the actions specified in the “mini close-out” provision of the Master Repurchase Agreement, rather than declaring an event of default.
Therefore, if the buyer fails to deliver purchased securities on any Repurchase Date, OCC believes that it would have remedies that allow it to mitigate risk with respect to a particular transaction, without declaring an event of default with Start Printed Page 1065respect to all transactions under the Master Repurchase Agreement.
II. Discussion and Commission Findings
Although Title VIII does not specify a standard of review for an advance notice, the Commission believes that the stated purpose of Title VIII is instructive.
The stated purpose of Title VIII is to mitigate systemic risk in the financial system and promote financial stability by, among other things, promoting uniform risk management standards for systemically-important financial market utilities (“FMUs”) and strengthening the liquidity of systemically important FMUs.
Section 805(a)(2) of the Clearing Supervision Act 
authorizes the Commission to prescribe risk management standards for the payment, clearing, and settlement activities of designated clearing entities and financial institutions engaged in designated activities for which it is the supervisory agency or the appropriate financial regulator. Section 805(b) of the Clearing Supervision Act 
states that the objectives and principles for the risk management standards prescribed under Section 805(a) shall be to:
- Promote robust risk management;
- promote safety and soundness;
- reduce systemic risks; and
- support the stability of the broader financial system.
The Commission has adopted risk management standards under Section 805(a)(2) of the Clearing Supervision Act (“Clearing Agency Standards”).
The Clearing Agency Standards became effective on January 2, 2013, and require registered clearing agencies that perform central counterparty (“CCP”) services to establish, implement, maintain, and enforce written policies and procedures that are reasonably designed to meet certain minimum requirements for their operations and risk management practices on an ongoing basis.
As such, it is appropriate for the Commission to review advance notices against these Clearing Agency Standards, and the objectives and principles of these risk management standards as described in Section 805(b) of the Clearing Supervision Act.
The Commission believes that the proposal in this Advance Notice is designed to further the objectives and principles of Section 805(b) of the Clearing Supervision Act.
As a systemically-important FMU, it is imperative that OCC have adequate resources to be able to satisfy its counterparty settlement obligations. The MRA Program provides OCC with a committed liquidity resource that does not increase the concentration of OCC's counterparty exposure because the counterparties will not include OCC's clearing members nor affiliated commercial banking institutions. Accordingly, the Commission believes that the proposal should promote robust risk management, promote safety and soundness in the marketplace, reduce systemic risks, and support the stability of the broader financial system by giving OCC access to additional committed liquidity that will help OCC meet its settlement obligations in a timely manner, while also limiting the exposure that OCC has to its counterparties.
Exchange Act Rule 17Ad-22(b)(3),
adopted as part of the Clearing Agency Standards, requires that a non-security-based swap registered clearing agency that performs CCP services establish, implement, maintain, and enforce written policies and procedures reasonably designed to withstand, at a minimum, a default by the participant family to which it has the largest exposure in extreme but plausible market conditions. As a part of OCC's overall liquidity plan, the Commission believes that the MRA Program will contribute additional liquid financial resources that should enhance OCC's ability to meet any potential settlement demands arising out of a default of a clearing member or clearing member family, including one to which it has the largest exposure.
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 proposal (SR-OCC-2014-809) and that OCC is authorized to implement the proposal as of the date of this notice.
By the Commission.
Brent J. Fields,
[FR Doc. 2015-00052 Filed 1-7-15; 8:45 am]
BILLING CODE 8011-01-P