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Federal Register / Vol. 86, No. 38 / Monday, March 1, 2021 / Notices
Corporate Contribution, fall close to or below the Target Capital Requirement.
c Amendments to the Default Management Policy, Clearing Fund Methodology Policy, and RWD Plan To accommodate the proposed establishment of the Minimum Corporate Contribution, OCC proposes conforming changes to other rule-filed policies that describe OCCs default waterfall, as set forth in OCC Rule 1006.
In the Default Management Policy, OCC
would delete the passage concerning Current and Retained Earnings in the current discussion of OCCs default waterfall and replace it with the Minimum Corporate Contribution and LNAFBE greater than 110% of the Target Capital Requirement, as provided in the proposed amendments to Rule 1006 above. OCC would also amend the Default Management Policys definition of financial resources to include the Minimum Corporate Contribution as among those available to address Clearing Member defaults and suspensions. In the Clearing Fund Methodology Policy, OCC would similarly revise the discussion of the default waterfall in that policys section covering Clearing Fund charges and assessments to incorporate the Minimum Corporate Contribution, consistent with the proposed amendments to Rule 1006 above. OCC
would also amend the Clearing Fund Methodology Policys definitions of OCCs Pre-Funded Financial Resources for the purposes of sizing or measuring the sufficiency of the Clearing Fund to include the Minimum Corporate Contribution. Finally, OCC
would amend the RWD Plan to replace all references to current or retained earnings with the Minimum Corporate Contribution and LNAFBE greater than 110% of the Target Capital Requirement, or skin-in-the-game for short, modify certain example scenarios concerning use of OCCs Enhanced Risk Management and Recovery Tools to account for the proposed Minimum Corporate Contribution, and make certain other conforming changes concerning use of skin-in-the-game to address liquidity shortfalls and, in the case of LNAFBE greater than 110% of the Target Capital Requirement, OCCs authority to use skin-in-the-game to address losses resulting from bank or securities or commodities clearing organization failures, including custody or investment losses.
Anticipated Effect on and Management of Risk OCC believes that the proposed changes would reduce the nature and
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level of risk presented by OCC because they would enhance the overall resilience of OCCs capital management and default management processes.
Establishing a Minimum Corporate Contribution, which OCC would apply after a defaulting Clearing Members margin and Clearing Fund deposits, would ensure a minimum level of OCCs own pre-funded financial resources available to cover credit losses. By applying the Minimum Corporate Contribution before charging the Clearing Fund, the proposed change helps protect non-defaulting Clearing Members from default losses of another Clearing Member, which in turn helps reduce OCCs overall level of risk and ensure the prompt and accurate clearance and settlement of its cleared products. In addition, the proposed changes to OCCs Rules, Capital Management Policy and other rule-filed policies intended to account for the use of OCCs Minimum Corporate Contribution and LNAFBE greater than 110% of the Target Capital Requirement would help ensure that OCC continues to hold LNAFBE sufficient to meet its regulatory obligations and maintain access to its Replenishment Plan in the event that an operational loss causes Equity, less the Minimum Corporate Contribution reserved for default losses, to fall close to or below regulatory requirements. Together these features of the Capital Management Policy help ensure that OCC maintains levels of capital sufficient to allow it to absorb substantial business losses and meet its responsibilities as a systemically important financial market utility, which in turn helps reduce OCCs overall level of risk.
Consistency With the Clearing Supervision Act The stated purpose of the Clearing Supervision Act 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 and strengthening the liquidity of systemically important financial market utilities.25 Section 805a2 of the Clearing Supervision Act 26 also authorizes the Commission to prescribe risk management standards for the payment, clearing and settlement activities of designated clearing entities, like OCC, for which the Commission is the supervisory agency. Section 805b of the Clearing Supervision Act 27 states 25 12

U.S.C. 5461b.
U.S.C. 5464a2.
27 12 U.S.C. 5464b.
26 12

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that the objectives and principles for risk management standards prescribed under Section 805a 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 805a2 of the Clearing Supervision Act and the Exchange Act in furtherance of these objectives and principles.28
Rule 17Ad22 requires registered clearing agencies, like OCC, 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.29
Therefore, the Commission has stated 30
that it believes it is appropriate to review changes proposed in advance notices against Rule 17Ad22 and the objectives and principles of these risk management standards as described in Section 805b of the Clearing Supervision Act.31
OCC believes the proposed changes are consistent with the objectives and principles of Section 805b of the Clearing Supervision Act.32 The proposed changes are generally designed to enhance OCCs resiliency by establishing a Minimum Corporate Contribution that would be used to absorb losses or liquidity shortfalls arising from the default of a Clearing Member. While OCCs current rules commit OCC to contribute a contingent amount of capital to address default losses or liquidity shortfalls, the proposed changes would commit to a minimum amount, subject to a replenishment period if OCC charges a loss to the Minimum Corporate Contribution. Ensuring a minimum amount of skin-in-the-game would reduce the amount OCC may need to charge the Clearing Fund deposits of non-defaulting Clearing Member. In this way, OCC believes that the proposed establishment of the Minimum Corporate Contribution and attendant changes would improve OCCs resilience as a systemically important market utility by promoting robust risk management, promoting safety and 28 17 CFR 240.17Ad22. See Exchange Act Release Nos. 68080 October 22, 2012, 77 FR 66220
November 2, 2012 S70811 Clearing Agency Standards; 78961 September 28, 2016, 81 FR
70786 October 13, 2016 S70314 Standards for Covered Clearing Agencies.
29 17 CFR 240.17Ad22.
30 See, e.g., Exchange Act Release No. 86182 June 24, 2019, 84 FR 31128, 31129 June 28, 2019 SR
OCC2019803.
31 12 U.S.C. 5464b.
32 Id.

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