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Federal Register / Vol. 86, No. 39 / Tuesday, March 2, 2021 / Notices Rule 1006ev is designed to allow OCC to manage multiple defaults within a 270-day period by eliminating the risk that a successive default would exhaust the resources needed to reestablish the Minimum Corporate Contribution by the end of the initial 270-day period. And while a successive default loss that does not impact excess LNAFBE 22 available to replenish the Minimum Corporation Contribution would nevertheless trigger another 270-day period during which the Minimum Corporate Contribution would be reduced to the remaining unused portion after the first two defaults, any LNAFBE greater than 110% of the Target Capital Requirement would continue to be available to cover successive default losses. In the very unlikely event that OCC experiences an operational loss or a drop in revenue from clearing fees that threatens its ability to reestablish the Minimum Corporate Contribution at the end of the 270-day period, OCC would likely file a rule change to extend the period rather than act to lower the Minimum Corporate Contribution, dependent on the Boards consideration of the same non-exclusive list of factors that the Board would consider when determining whether to adjust the Minimum Corporate Contribution, discussed below.

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b Amendments to the Capital Management Policy Consistent with the proposed changes to OCCs Rules, OCC would amend the portions of the Capital Management Policy that concern OCCs usage of excess capital to cover default losses to more specifically identify the resources OCC would contribute to default losses;
namely, the Minimum Corporate Contribution and LNAFBE above 110%
of the Target Capital Requirement. OCC
would clarify that after exhausting the Minimum Corporate Contribution, OCC
would continue to offset default losses with LNAFBE, rather than Equity, above 110% of the Target Capital requirement. This change is not intended to change OCCs current obligations. Rather, OCC intends to conform the Capital Management Policy so that the terms are consistent with those used in the proposed Rules, other requirements in the Capital Management Policy, and OCCs regulatory obligations. Specifically, the Capital Management Policy provides 22 As described below, OCC is proposing to amend the Capital Management Policy to exclude the Minimum Corporate Contribution from the definition of LNAFBE. As a result, a second default loss covered exclusively by the Minimum Corporate Contribution would not impact OCCs level of LNAFBE.

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that the resources held to meet the Target Capital Requirement must be liquid assets separate from OCCs resources to cover participant defaults and liquidity shortfalls, consistent with SEC Rule 17Ad22e15iiA.23
Because Equity typically exceeds LNAFBE and because any funds OCC
would contribute to cover a default loss would need to be liquid assets, contributing liquid assets in excess of LNAFBE greater than 110% of the Target Capital Requirement would be inconsistent with the Capital Management Policy.
In addition, OCC would amend the Capital Management Policys list of capital management actions with a material impact on current or future levels of Equity, replacing use of current and retained earnings greater than 100% of the Target Capital Requirement with use of excess capital, to align with the title of the Capital Management Policys Excess Capital Usage section. That section would also be updated to include a discussion of the factors that the Board would consider in establishing and adjusting the Minimum Corporate Contribution. Factors the Board would consider include, but are 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 current and projected level of the EDCP Unvested Balance, OCCs LNAFBE greater than 110% of its Target Capital Requirement, projected revenue and expenses, and other projected capital needs. While the Capital Management Policy would provide that the Board would review Minimum Corporate Contribution annually, the Board would retain authority to change the Minimum Corporate at its discretion. In addition, the Capital Management Policy would be updated to include the substance of and references to proposed Rule 1006ev, which, as discussed above, provides for a 270-day period following a chargeable loss during which the Minimum Corporate Contribution is reduced to its remaining unused portion.
OCC would also amend the definition of LNAFBE in the Capital Management Policy to specifically exclude the Minimum Corporate Contribution, which would be dedicated to cover default losses. The Capital Management Policy defines LNAFBE as the level of cash and cash equivalents, no greater 23 See
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17 CFR 240.17Ad22e15iiA.

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than Equity, less any approved adjustments. The definition currently specifies the exclusion of agencyrelated liabilities, such as Section 31
fees as the only approved adjustment.
OCC would amend the definition to add the Minimum Corporate Contribution as another example of an approved exemption to the calculation of LNAFBE. As discussed in more detail in the discussion of the statutory basis for these proposed changes below, this proposed amendment to the definition of LNAFBE is intended to ensure that OCC does not double count resources committed to cover default losses as resources available to satisfy regulatory requirements concerning the amount of LNAFBE or other financial resources OCC must maintain to cover operational costs and potential business losses. For similar reasons, OCC would amend the Capital Management Policys discussion of OCCs Replenishment Plan to add that in the event of an operational loss, OCC shall first use Equity, less the Minimum Corporate Contribution, above 110% of Target Capital. This amendment reflects that the funds maintained for the Minimum Corporate Contribution are not funds available to cover operational losses.
With respect to OCCs Replenishment Plan, OCC would also amend the definitions of the Early Warning and Trigger Event to exclude the Minimum Corporate Contribution from the calculation of those thresholds so that OCC maintains access to replenishment capital in the event operational losses materialize while still maintaining the Minimum Corporate Contribution exclusively to cover default losses. As described above, the Early Warning and Trigger Event are the thresholds for actions under OCCs Replenishment Plan. Currently, the Early Warning and Trigger Event thresholds are defined with respect to OCCs Equity falling below certain thresholds. OCC is proposing to amend those definitions so that the Early Warning and Trigger Event occur when Equity less the Minimum Corporate Contribution falls below those same thresholds. These changes would ensure that OCC may maintain the Minimum Corporate Contribution exclusively to address default lossesthe effect of which would be to increase Equity relative to LNAFBEwhile still maintaining access to its Replenishment Plan should OCCs Equity, less the Minimum Corporate Contribution, fall close to or below the Target Capital Requirement.

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