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Federal Register / Vol. 86, No. 38 / Monday, March 1, 2021 / Notices soundness, reducing systemic risks, and supporting the stability of the broader financial system.
OCC also believes that the proposed changes are consistent with the risk management standards adopted by the Commission under Section 805a2 of the Clearing Supervision Act; 33
specifically, Rules 17Ad22e4, 34
17Ad22e15iiA,35 17Ad 22e15iii,36 Rules 17Ad22e2i,37
and 17Ad22e23 38 thereunder for the reasons described below.
Rule 17Ad22e4 under the Exchange Act provides, in part, that OCC establish, implement, maintain and enforce written policies and procedures reasonably designed to effectively identify, measure, monitor and manage its credit exposures to participants and those arising from its payment, clearing and settlement processes, including by maintaining sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence.39 By providing that OCC
shall maintain a minimum level of skinin-the-gamein addition to OCCs LNAFBE greater than 110% of its Target Capital Requirement, contributed prior to charging the Clearing Fund, as OCCs Rules currently provideOCC is providing for a minimum level of prefunded financial resources available to cover losses in the event of a Clearing Member default, and reducing the amount OCC would charge the Clearing Fund contributions of non-defaulting Clearing Members. Therefore, OCC
believes the amendments to its Rules, the Capital Management Policy, and other related policies to establish the Minimum Corporate Contribution are consistent with Rule 17Ad22e4.
OCC also believes that the proposed changes to the definition of LNAFBE in OCCs Capital Management Policy, which exclude the Minimum Corporate Contribution from the calculation of LNAFBE, are consistent with Rule 17Ad22e15iiA under the Exchange Act.40 Rule 17Ad 22e15iiA requires that the LNAFBE held by OCC to satisfy the minimum LNAFBE required by Rule 17Ad22e15ii 41 shall be in 33 12

U.S.C. 5464a2.
CFR 240.17Ad22e4.
35 17 CFR 240.17Ad22e15ii.
36 17 CFR 240.17Ad22e15iii.
37 17 CFR 240.17Ad22e2i.
38 17 CFR 240.17Ad22e23.
39 17 CFR 240.17Ad22e4i.
40 17 CFR 240.17Ad22e15iiA.
41 Rule 17Ad22e15ii, in turn, requires that OCC hold LNAFBE to the greater of x six months of OCCs current operating expenses, or y the amount determined by the Board to be sufficient to ensure a recovery or orderly wind-down of critical 34 17

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addition to resources held to cover participant defaults or other credit or liquidity risks.42 The proposed revision to OCCs definition of LNAFBE is designed to satisfy Rule 17Ad 22e15iiA by providing that the proposed Minimum Corporate Contribution, which would be held exclusively to cover participant defaults and liquidity shortfalls, would be in addition to the LNAFBE that OCC holds to meet or exceed its regulatory capital requirements under Rule 17Ad 22e15iii.e., LNAFBE in an amount equal to 110% of OCCs Target Capital Requirement. In addition, the proposed revisions to OCC Rule 1006eiii and the Capital Management Policywhich would specify that OCCs committed skin-in-the-game shall include the Minimum Corporate Contribution and LNAFBE greater than 110% of the Target Capital Requirementsare reasonably designed to ensure that OCC would not be obligated to contribute an amount of skin-in-the-game that would cause its LNAFBE to fall below the Early Warning threshold intended to ensure OCC
maintains sufficient LNAFBE to meet its regulatory obligations. As a result, OCC
believes the proposed amendments to the Capital Management Policy are designed to comply with Rule 17Ad 22e15iiA.
In addition, OCC believes that the proposed amendments to OCCs definition of the Early Warning and Trigger Event thresholds under OCCs Replenishment Plan are consistent with Rule 17Ad22e15iii 43 because operations and services. 17 CFR 240.17Ad 22e15ii. OCCs Capital Management Policy is reasonably designed to meet this requirement, and Rule 17Ad22e15 more broadly, by providing that OCC sets its Target Capital Requirement at a level sufficient to maintain LNAFBE at least equal to the greater of: x Six months of OCCs current operating expenses, y the amount determined by the Board to be sufficient to ensure a recovery or orderly winddown of critical operations and services, and z the amount determined by the Board to be sufficient for OCC to continue operations and services as a going concern if general business losses materialize. See Order Approving Capital Management Policy, 85 FR at 550102. In addition, in setting the Target Capital Requirement, OCCs Board considers OCCs projected rolling twelve-months operating expenses to ensure that OCC maintains Equity and other financial resources approved by the CFTC, as required by CFTC Rule 39.11a2. See id. at 5501
n.19 citing 17 CFR 39.11a2.
42 Id. Similarly, CFTC Rule 39.11b3 provides that a derivatives clearing organization DCO
may allocate financial resources to satisfy requirements that the DCO possess financial resources i to enable the DCO to meet obligations notwithstanding a default by the clearing member creating the largest financial exposure for the DCO
in extreme but plausible market conditions, and ii to enable the DCO to cover its operational costs, but not both. See 17 CFR 39.11b3.
43 17 CFR 240.17Ad22e15iii.

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excluding the Minimum Corporate Contribution from those thresholds would ensure that OCC may continue to access replenishment capital in the unlikely event that OCC experiences an operational loss while continuing to maintain the Minimum Corporate Contribution exclusively to cover default losses. Rule 17Ad22e15iii requires, in part, that OCC establish, implement, maintain and enforce written policies and procedures reasonably designed to identify, monitor, and manage OCCs general business risk, including by maintaining a viable plan for raising additional Equity should its Equity fall close to or below the amount required under Rule 17Ad22e15ii.44 By setting the threshold triggers by reference to the Target Capital Requirement, OCCs Replenishment Plan is designed to require OCC to act to raise capital should its Equity fall close to or below the amounts required under Rule 17Ad 22e15ii. However, the effect of holding the Minimum Corporate Contribution would be to increase OCCs Equity relative to LNAFBE
available to cover potential operational losses. To help ensure that OCC holds LNAFBE above its Target Capital Requirement and maintains access to replenishment capital, the proposed change would exclude the Minimum Corporate Contribution when measuring OCCs Equity against the Early Warning and Trigger Event thresholds under its Replenishment Plan. Accordingly, OCC
believes that the proposed amendments to the definitions of the Early Warning and Trigger Event thresholds are consistent with Rule 17Ad 22e15iii.
OCC also believe that the proposed changes are consistent with Rule 17Ad 22e2i, which requires that covered clearing agencies maintain written policies and procedures reasonably designed to provide for governance arrangements that are clear and transparent.45 The proposed changes would align the terminology used in OCCs Rules and other rule-filed policies with the terminology of the Capital Management Policy, providing better clarity and consistency between OCCs governing documents.
Specifically, OCC would amend its Rules, Capital Management Policy, Default Management Policy, Clearing Fund Methodology Policy and RWD
Plan to identify OCCs sources of skin44 Id. As discussed in note 41, supra, OCCs Target Capital Requirement is reasonably designed to meet or exceed the minimum LNAFBE required to satisfy Rule 17Ad22e15ii.
45 17 CFR 240.17Ad22e2i.

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