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Federal Register / Vol. 86, No. 38 / Monday, March 1, 2021 / Notices
OCCs same-day liquidity needs for such funds.
While the proposed definition would give OCCs Board discretion in setting the Minimum Corporate Contribution, the Board has approved an initial Minimum Corporate Contribution that sets OCCs total persistent skin-in-thegame i.e., the sum of the Minimum Corporate Contribution and OCCs current EDCP Unvested Balance at 25%
of OCCs Target Capital Requirement. In setting the initial Minimum Corporate Contribution, OCCs Board considered factors including, but not limited to, the regulatory requirements in each jurisdiction in which OCC is registered or in which OCC is actively seeking recognition, the amount similarly situated central counterparties commit of their own resources to address participant defaults, the EDCP Unvested Balance, OCCs LNAFBE greater than 110% of its Target Capital Requirement, projected revenue and expenses, and other projected capital needs.
2 Revising OCCs Default Waterfall OCC would also amend OCC Rule 1006 to insert the Minimum Corporate Contribution in OCCs default waterfall after contributing a defaulting Clearing Members margin and Clearing Fund deposit, and before contributing OCCs LNAFBE greater than 110% of OCCs Target Capital Requirement, both of which OCC would exhaust before charging a loss to the Clearing Fund and the EDCP Unvested Balance, pari passu with the Clearing Fund deposits of nondefaulting Clearing Members. So placed, OCC believes that the Minimum Corporate Contribution would demonstrate OCCs institutional commitment to its ongoing financial surveillance of clearing members and the establishment and maintenance of a prudent and effective margin methodology. A draw against the Minimum Corporate Contribution and the associated requirement to replenish, as discussed below, would provide fewer resources to meet other corporate commitments. Accordingly, the proposal would further align OCCs and its managements interests with those of non-defaulting Clearing Members.
OCC would also remove references to retained earnings or current or retained earnings in OCC Rule 1006b, Rule 1006ei, Rule 1006eii, and the second sentence of Rule 1006eiii, and replace them with references to the contribution of the Minimum Corporate Contribution and the Corporations liquid net assets funded by equity that are greater than 110% of its Target Capital Requirement. The refences to retained earnings or
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current or retained earnings are legacy terms used prior to OCCs implementation of the Capital Management Policy.19 OCC is proposing to replace these references in OCCs Rules to better identify the funds OCCs would contribute in terms that align with OCCs Capital Management Policy.
3 Calculating LNAFBE Available as Skin-In-The-Game Because OCC proposes to replace references to current or retained earnings, OCC would also delete the first sentence of Rule 1006eiii, which currently provides for how OCC
determines its current earnings for purposes of the amount available to cover losses under Rule 1006ei and Rule 1006eii. In its place, the first sentence of Rule 1006eiii would set out how OCC would determine its LNAFBE for purposes of contributing LNAFBE greater than 110% of the Target Capital Requirement to cover default losses and liquidity shortfalls.
Specifically, similar to how the Rules currently provide for the calculation of current earnings, OCC would determine its LNAFBE based on OCCs unaudited financial statements at the close of the calendar month immediately preceding the occurrence of the loss or deficiency under paragraphs ei or eii, less an amount equal to the aggregate of all refunds made or authorized to be made or deemed to have been made during the fiscal year in which such loss or deficiency occurs if the refund is not reflected on such unaudited financial statements. Accordingly, OCC would retain the priority given to the payment of refunds that OCC has declared, but not yet issued, as currently provided by OCC Rule 1106eiii, when calculating the amount of LNAFBE available to cover a default loss after contributing the Minimum Corporate Contribution.
OCC would further amend Rule 1006eiii to provide that in no event shall OCC be required to contribute an amount that would cause OCCs LNAFBE to fall below 110% of the Target Capital Requirement at the time changed. The Capital Management Policy, in accordance with SEC Rule
17Ad22e15iiA,20 currently requires that the funds OCC maintains to satisfy its Target Capital Requirement be separate from OCCs resources to cover participant defaults and liquidity shortfalls. Accordingly, should a default occur in a month during which OCC
suffers an operational loss that decreases the value of its excess capital available as skin-in-the-game below what is reflected on the unaudited financial statement at the close of the previous month,21 OCC would be able to take into account the decrease in its excess capital when calculating its available LNAFBE above 110% of the Target Capital Requirement. In addition, OCC would renumber as Rule 1006eiv the last sentence of Rule 1006eiii. That sentence, which concerns a defaulting Clearing Members continuing obligation for losses OCC charges to OCCs own capital, is conceptually distinct from the rest of Rule 1006eiii and, accordingly, deserves to be addressed separately.
4 Replenishing the Minimum Corporate Contribution Finally, OCC would add a new paragraph to Rule 1006eRule 1006evto provide for a 270
calendar-day period during which the Minimum Corporate Contribution, once charged, would be reduced to the remaining unused portion. OCC believes that 270 calendar days, or approximately nine months, is sufficient time for OCC to accumulate the funds necessary to reestablish the Minimum Corporate Contribution. In making this determination, OCC used the same analysis employed to set the Early Warning and Trigger Event under its Replenishment Plan, both of which are based on the time OCC estimates it would take to accumulate 10% of its Target Capital Requirement.22
Specifically, OCC took into account its typical monthly earnings and the amount of earnings that would be needed to replenish the Minimum Corporate Contribution on an after-tax basis. Proposed Rule 1006ev would also provide that OCC shall notify Clearing Members of any such reduction 20 17

19 OCC

first established discretionary use of OCCs current or retained earnings to cover default losses in Article VIII Clearing Fund of OCCs ByLaws. See Exchange Act Release No. 15493 Jan. 4, 1979, 44 FR 3802 Jan. 18, 1979 File No. SR
OCC7901. When OCC moved the provisions governing the Clearing Fund from OCCs By-Laws to the Rules in 2018, the provisions governing the usage of the Clearing Fund became Rule 1006e.
See Exchange Act Release No. 83735 July 27, 2018, 83 FR 37855 Aug. 2, 2018 File No. SR
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CFR 240.17Ad22e15iiA.
OCCs current rules, LNAFBE greater than 110% of the Target Capital Requirement and the EDCP Unvested Balance are committed to cover both operational losses and default losses. In the event OCC experiences operational losses and default losses in short succession, OCC would contribute these resources in the manner specified by OCCs Rules to the event that occurred first.
22 See Order Approving Capital Management Policy, 85 FR at 551011. OCC has included this analysis as part of confidential Exhibit 3 to File No.
SROCC2021801.
21 Under
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