Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection to Advance Notice Related to an Expansion of The Options Clearing Corporation's Non-Bank Liquidity Facility Program as Part of Its Overall Liquidity Plan
Citation: "87 FR 55048"
Document Number: "Release No. 34-95670; File No. SR-OCC-2022-803"
Page Number: "55048"
"Notices"
I. Introduction
On
FOOTNOTE 1 12 U.S.C. 5465(e)(1). END FOOTNOTE
FOOTNOTE 2 17 CFR 240.19b-4(n)(1)(i). END FOOTNOTE
FOOTNOTE 3 15 U.S.C. 78a et seq. END FOOTNOTE
FOOTNOTE 4 See Notice of Filing, infra note 5, at 87 FR 44477. END FOOTNOTE
FOOTNOTE 5 See Exchange Act Release No. 95327 (
FOOTNOTE 6 Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm. END FOOTNOTE
II. Background /7/
FOOTNOTE 7 Capitalized terms used but not defined herein have the meanings specified in OCC's Rules and By-Laws, available at https://www.theocc.com/about/publications/bylaws.jsp. END FOOTNOTE
As the sole clearing agency for standardized
FOOTNOTE 8 See Notice of Filing, 87 FR at 44477. END FOOTNOTE
OCC's liquidity plan already provides access to a diverse set of funding sources, including banks (i.e., OCC's syndicated credit facility), /9/ the Non-Bank Liquidity Facility program (defined above), /10/ and Clearing Members' Clearing Fund Cash Requirement. /11/ OCC currently maintains
FOOTNOTE 9 See Exchange Act Release No. 88971 (
FOOTNOTE 10 See Exchange Act Release No. 89039 (
FOOTNOTE 11 See OCC Rule 1002. END FOOTNOTE
FOOTNOTE 12 See 17 CFR 240.17Ad-22(a)(14) (defining qualifying liquid resources). END FOOTNOTE
FOOTNOTE 13 In a separate advance notice, OCC is proposing to enter a new MRA with a commercial bank counterparty. See Exchange Act Release No. 95326 (
FOOTNOTE 14 See Notice of Filing, 87 FR at 44477. END FOOTNOTE
FOOTNOTE 15 As discussed below, OCC would be required to file an advance notice with the Commission if it were to seek to reduce the commitments under the Non-Bank Liquidity Facility so as to reduce external liquidity below the
FOOTNOTE 16 The third and fourth components of OCC's proposed expansion of its liquidity plan are briefly discussed below. END FOOTNOTE
Under OCC's existing Non-Bank Liquidity Facility program, OCC maintains a series of arrangements to access cash in exchange for Government securities ("Eligible Securities") deposited by Clearing Members in respect of their
FOOTNOTE 17 In 2020, OCC set the aggregate amount it may seek through the Non-Bank Liquidity Facility program to an amount up to
FOOTNOTE 18 OCC's Board has authorized OCC to seek up to an additional
FOOTNOTE 19 See Notice of Filing, 87 FR at 44479. END FOOTNOTE
FOOTNOTE 20 See OCC Rule 1006(f)(1)(A). OCC may also use the
With respect to OCC's overall liquidity plan, the Non-Bank Liquidity Facility program reduces the concentration of OCC's counterparty exposure by diversifying its base of liquidity providers among banks and non-bank, non-Clearing Member institutional investors, such as pension funds or insurance companies.
The currently approved Non-Bank Liquidity Facility consists of two parts: a Master Repurchase Agreement ("MRA"), and confirmations with one or more institutional investors, which contain certain individualized terms and conditions of transactions executed between OCC, the institutional investors, and their agents. The MRA is structured so that the buyer (i.e., the institutional investor) would purchase Eligible Securities from OCC from time to time. /21/ OCC, the seller, would transfer Eligible Securities to the buyer in exchange for a buyer payment to OCC in immediately available funds ("Purchase Price"). The buyer would simultaneously agree to transfer the purchased securities back to OCC at a specified later date ("Repurchase Date"), or on OCC's demand against the transfer of funds from OCC to the buyer, where the funds would be equal to the outstanding Purchase Price plus the accrued and unpaid price differential (together, "Repurchase Price").
FOOTNOTE 21 OCC would use Eligible Securities that are included in
The confirmations establish tailored provisions of repurchase transactions permitted under the Non-Bank Liquidity Facility that are designed to reduce concentration risk and promote certainty of funding and operational effectiveness based on the specific needs of a party. For example, OCC would only enter into confirmations with an institutional investor that is not a Clearing Member or affiliated bank, such as a pension fund or an insurance company, in order to allow OCC to access stable and reliable sources of funding without increasing the concentration of its exposure to counterparties that are affiliated banks, broker-dealers, or futures commission merchants. In addition, any such institutional investor is obligated to enter repurchase transactions even if OCC experiences a material adverse change, /22/ funds must be made available to OCC within 60 minutes of OCC's delivering Eligible Securities, and the institutional investor is not permitted to rehypothecate purchased securities. /23/ Additionally, the confirmations set forth the term and maximum dollar amounts of the transaction permitted under the MRA.
FOOTNOTE 22 A "material adverse change" is typically defined contractually as a change that would have a materially adverse effect on the business or financial condition of a company. END FOOTNOTE
FOOTNOTE 23 See Notice of No Objection to 2014 Advance Notice, 80 FR at 1064. END FOOTNOTE
In 2020, OCC set the aggregate amount it may seek through the Non-Bank Liquidity Facility program to an amount of up to
FOOTNOTE 24 See Notice of No Objection to 2020 Advance Notice, 85 FR at 36446.
FOOTNOTE 25 The LRMF defines "Base Liquidity Resources" to mean the amount of committed liquidity resources maintained at all times by OCC to meet its Cover 1 liquidity resource requirements under the applicable regulations. Base Liquidity Resources are comprised of qualifying liquid resources in the form of
FOOTNOTE 26 The LRMF defines "Available Liquidity Resources" to include Base Liquidity Resources plus allowable
FOOTNOTE 27 In response to increased stressed liquidity demands in 2021, OCC exercised authority under OCC Rule 1002(a) to increase the Clearing Fund Cash Requirement from
The Proposed Change
In order to give OCC greater capacity to source liquidity from external liquidity providers as needed, OCC would modify the Non-Bank Liquidity Facility program to remove the aggregate commitment limit of
FOOTNOTE 28 See Notice of No Objection to 2020 Advance Notice, 85 FR at 36446. END FOOTNOTE
FOOTNOTE 29 In setting the level of aggregate commitments for the Non-Bank Liquidity Facility, the Board would consider factors including, but not limited to: (1) the size and make-up of the
OCC's Board has authorized OCC to seek up to an additional
FOOTNOTE 30 OCC performs daily liquidity stress testing to assess its liquidity resources. See Notice of Filing, 87 FR at 44478. Based on the results of such stress testing, OCC increased
FOOTNOTE 31 See Notice of Filing, 87 FR at 44479. END FOOTNOTE
Removing the present
FOOTNOTE 32 The facility is designed to allow OCC to seek individual commitments from counterparties on specified terms. See e.g., Exchange Act Release No. 89039 (
FOOTNOTE 33 For the purposes of clarity, OCC would not consider changes to pricing or changes in representations, covenants, and terms of events of default, to be changes to a term or condition that would require the filing of a subsequent advance notice provided that pricing is at the then prevailing market rate and changes to such other provisions are immaterial to OCC as the seller and do not impair materially OCC's ability to draw against the facility. END FOOTNOTE
FOOTNOTE 34 See Third-Party Risk Management Framework, available at Documents & Archives, https://www.theocc.com/Company-Information/Documents-and-Archives. While credit monitoring of insurance companies that may become liquidity providers would necessarily be different than credit monitoring of existing pension fund counterparties, any new liquidity would be subject to the same credit review for counterparties of the same type. END FOOTNOTE
FOOTNOTE 35 See Notice of No Objection to 2020 Advance Notice, 85 FR at 36445-46. END FOOTNOTE
Provided that none of the conditions under which OCC would file a subsequent advance notice are present, OCC would consider a new or renewed commitment as being on substantially the same terms and conditions as existing commitments under the Non-Bank Liquidity Facility program, such that executing such commitments would not be subject to the requirement to file an advance notice filing pursuant to Section 806(e)(1) of the Clearing Supervision Act. /36/ Conversely, a new commitment or renewal under different conditions would necessitate OCC providing advance notice to the Commission for consideration.
FOOTNOTE 36 12 U.S.C. 5465(e)(1). END FOOTNOTE
III. 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. /37/
FOOTNOTE 37 See 12 U.S.C. 5461(b). END FOOTNOTE
Section 805(a)(2) of the Clearing Supervision Act 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. /38/ Section 805(b) of the Clearing Supervision Act provides the following objectives and principles for the Commission's risk management standards prescribed under Section 805(a): /39/
FOOTNOTE 38 12 U.S.C. 5464(a)(2). END FOOTNOTE
FOOTNOTE 39 12 U.S.C. 5464(b). END FOOTNOTE
* 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. /40/
FOOTNOTE 40 12 U.S.C. 5464(c). END FOOTNOTE
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"). /41/ 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. /42/ 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, /43/ and in the Clearing Agency Rules, in particular Rule 17Ad-22(e)(7). /44/
FOOTNOTE 41 17 CFR 240.17Ad-22. See Exchange Act Release No. 68080 (
FOOTNOTE 42 17 CFR 240.17Ad-22. END FOOTNOTE
FOOTNOTE 43 12 U.S.C. 5464(b). END FOOTNOTE
FOOTNOTE 44 17 CFR 240.17Ad-22(e)(7). END FOOTNOTE
A. Consistency With Section 805(b) of the Clearing Supervision Act
The Commission believes that the proposal contained in OCC's Advance Notice is consistent with the stated objectives and principles of Section 805(b) of the Clearing Supervision Act. Specifically, as discussed below, the Commission believes that the changes proposed in the Advance Notice are consistent with promoting robust risk management, promoting safety and soundness, reducing systemic risks, and supporting the stability of the broader financial system. /45/
FOOTNOTE 45 12 U.S.C. 5464(b). END FOOTNOTE
The Commission believes that the proposed changes are consistent with promoting robust risk management, in particular the management of liquidity risk presented to OCC. As a central counterparty and a SIFMU, /46/ it is imperative that OCC have adequate resources to be able to satisfy liquidity needs arising from its settlement obligations, including in the event of a Clearing Member default. /47/ To support this objective, OCC proposes to remove the
FOOTNOTE 46
FOOTNOTE 47 See Notice of No Objection to 2014 Advance Notice, 80 FR at 1065. END FOOTNOTE
FOOTNOTE 48 As proposed, the facility would not limit the total aggregate commitments OCC may seek. As a practical matter, OCC expressed its intent to source approximately
FOOTNOTE 49 12 U.S.C. 5464(b). END FOOTNOTE
The Commission also believes that the changes proposed in the Advance Notice are consistent with promoting safety and soundness, reducing systemic risks, and promoting the stability of the broader financial system. By removing the
FOOTNOTE 50 As noted above, OCC intends to expand its aggregate external liquidity by
FOOTNOTE 51 See FSOC 2012 Annual Report, Appendix A, https://home.treasury.gov/system/files/261/here.pdf (last visited
FOOTNOTE 52 12 U.S.C. 5464(b). END FOOTNOTE
The Commission received comments asserting that the proposal would put public retirement funds at risk to cover investing choices made by Clearing Members. /53/ The Commission has carefully considered the risk to investors' retirement funds relative to the benefits of expanding the Non-Bank Liquidity Facility. Given that the Non-Bank Liquidity Facility has included non-bank institutional investors such as pension funds and insurance companies among its liquidity providers since its implementation in 2015, and has retained substantially the same terms throughout, the Commission does not believe that the proposed expansion to the Non-Bank Liquidity Facility would introduce new risks to OCC's counterparties. /54/ Further, the terms of the facility would require OCC to provide Eligible Securities (e.g., Treasuries) subject to haircuts negotiated by OCC and its counterparties to address the potential credit risk to OCC's counterparties. Moreover, the terms of the facility would require OCC to pay the costs of any covering transactions required if OCC were to fail to perform its obligation. As described above, the expansion of commitments in the Non-Bank Liquidity Facility would reduce the likelihood that OCC would have insufficient financial resources resulting from a Clearing Member default. Taken together, the Commission believes that the terms of the agreement to protect OCC and its counterparties, combined with the reduced likelihood of OCC's failure to manage a default, would in fact promote the safety and soundness of the
FOOTNOTE 53 Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm. END FOOTNOTE
FOOTNOTE 54 When OCC proposed the first iteration of the Non-Bank Liquidity Facility, it acknowledged that, like any liquidity source, it would involve certain risks. See Exchange Act Release No. 73726 (
The Commission also received comments asserting that "changing the rules regarding advance notice" (likely referring to OCC not having to file an advance notice at renewal) has "no value to the public." /55/ The Commission has carefully considered the risk of allowing new or renewed commitments under the terms of Non-Bank Liquidity Facility without requiring additional advance notice filings from OCC. Given that such additional commitments would only be permitted without an advance notice if executed on substantially similar terms as the current Non-Bank Liquidity Facility, to which the Commission has previously not objected, the Commission does not believe that such additional commitments would necessarily present a material change to the risks that OCC presents. Any change to the Non-Bank Liquidity Facility that could materially affect the nature or level of risk posed by OCC would necessitate an advance notice filing. /56/
FOOTNOTE 55 Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm. END FOOTNOTE
FOOTNOTE 56 OCC would submit another advance notice only if: (1) OCC should seek to execute a commitment at a level that would have the effect of reducing external liquidity below the target of
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/
FOOTNOTE 57 12 U.S.C. 5464(b). END FOOTNOTE
B. Consistency With Rule 17Ad-22(e)(7) Under the Exchange Act
Rule 17Ad-22(e)(7)(ii) under the Exchange Act requires that a covered clearing agency establish, implement, maintain, and enforce written policies and procedures reasonably designed to effectively measure, monitor, and manage the liquidity risk that arises in or is borne by the covered clearing agency, including measuring, monitoring, and managing its settlement and funding flows on an ongoing and timely basis, and its use of intraday liquidity by, at a minimum, holding qualifying liquid resources sufficient to meet the minimum liquidity resource requirement under Rule 17Ad-22(e)(7)(i) /58/ in each relevant currency for which the covered clearing agency has payment obligations owed to clearing members. /59/ For any covered clearing agency, "qualifying liquid resources" means assets that are readily available and convertible into cash through prearranged funding arrangements, such as committed arrangements without material adverse change provisions, including, among others, repurchase agreements. /60/
FOOTNOTE 58 Rule 17Ad-22(e)(7)(i) requires OCC to establish, implement, maintain and enforce written policies and procedures reasonably designed to effectively measure, monitor, and manage liquidity risk that arises in or is borne by OCC, including measuring, monitoring, and managing its settlement and funding flows on an ongoing and timely basis, and its use of intraday liquidity by, at a minimum, maintaining sufficient liquid resources at the minimum in all relevant currencies to effect same-day settlement of payment obligations with a high degree of confidence under a wide range of foreseeable stress scenarios that includes, but is not limited to, the default of the participant family that would generate the largest aggregate payment of obligation for the covered clearing agency in extreme but plausible conditions. 17 CFR 240.17Ad-22(e)(7)(i). END FOOTNOTE
FOOTNOTE 59 17 CFR 240.17Ad-22(e)(7)(ii). END FOOTNOTE
FOOTNOTE 60 17 CFR 240.17Ad-22(a)(14)(ii)(3). END FOOTNOTE
The Non-Bank Liquidity Facility provides OCC with prearranged commitments to convert assets into cash even if OCC experiences a material adverse change, and the Commission believes that the Non-Bank Liquidity Facility provides OCC access to qualifying liquid resources to the extent that OCC has sufficient collateral to access the facility. /61/ The Commission believes, therefore, that the proposed changes--to remove the existing aggregate commitment limit, and to allow the OCC Board to increase the Non-Bank Liquidity Facility program aggregate commitment levels as needed to maintain sufficient liquidity--will further enhance OCC's ability to hold qualifying liquid resources to meet its liquidity resource requirements, consistent with the requirements of Rule 17Ad-22(e)(7)(ii) under the Exchange Act. /62/
FOOTNOTE 61 OCC would use Eligible Securities that are included in
FOOTNOTE 62 17 CFR 240.17Ad-22(e)(7)(ii). END FOOTNOTE
The Commission received comments raising concerns about the inability of liquidity providers to deny funding in the event of a material adverse change. /63/ As noted above, under Rule 17Ad-22(a)(14), committed arrangements, such as repurchase agreements, are only qualifying liquid resources where such agreements do not include material adverse change provisions. /64/ Moreover, the non-banks are voluntarily participating in the facility. These liquidity providers may consider the benefits and costs of participation, including the adverse change provision, before determining that their participation in the facility would be preferable to alternative investments and would benefit their shareholders and beneficiaries.
FOOTNOTE 63 Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm. END FOOTNOTE
FOOTNOTE 64 17 CFR 240.17Ad-22(a)(14)(ii)(A). END FOOTNOTE
Commenters also raised concerns regarding the speed with which a counterparty would be required to provide funding. /65/ As discussed above, a fundamental attribute of liquidity resources is that OCC can quickly access liquidity in the event of a Clearing Member default or market disruption. By necessity, funds must be made available to OCC within 60 minutes of OCC's delivering Eligible Securities, and the institutional investor is not permitted to rehypothecate purchased securities. Any requirement to allow liquidity providers to deny or delay funding would potentially delay OCC's access to liquidity resources, which could negatively affect the safety and soundness of the
FOOTNOTE 65 Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-occ-2022-803/srocc2022803.htm. END FOOTNOTE
Accordingly, the Commission believes that the changes proposed in the Advance Notice are consistent with Rule 17Ad-22(e)(7) under the Exchange Act. /66/
FOOTNOTE 66 17 CFR 240.17Ad-22(e)(7). END FOOTNOTE
IV. 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-2022-803) and that OCC is authorized to implement the proposed change as of the date of this notice.
By the Commission.
Deputy Secretary.
[FR Doc. 2022-19417 Filed 9-7-22;
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