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Federal Register / Vol. 86, No. 39 / Tuesday, March 2, 2021 / Notices
losses or liquidity shortfalls.
Amendments to OCCs Rules are included in Exhibit 5a of filing SR
OCC2021003. Amendments to OCCs Capital Management Policy are included in confidential Exhibit 5b of filing SR
OCC2021003. OCC would also make conforming changes to the Default Management Policy, Clearing Fund Methodology Policy, and Recovery and Orderly Wind-Down Plan RWD
Plan, which can be found in confidential Exhibits 5c, 5d, and 5e of filing SROCC2021003, respectively, to reflect the amended default waterfall i.e., the financial resources OCC would use to address default losses and liquidity shortfalls, listed in the order OCC would utilize them. Material proposed to be added is marked by underlining, and material proposed to be deleted is marked with strikethrough text. All terms with initial capitalization that are not otherwise defined herein have the same meaning as set forth in the OCC By-Laws and Rules.3
II. Clearing Agencys Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, OCC included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. OCC has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of these statements.

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A Clearing Agencys Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1 Purpose OCC is proposing to amend OCCs Rules, Capital Management Policy, and certain other policies to establish a persistent minimum level of skin-in-thegame that OCC would contribute to cover default losses or liquidity shortfalls, which would consist of a minimum amount of OCCs own prefunded resources that OCC would charge prior to charging a loss to the Clearing Fund as defined below, the Minimum Corporate Contribution and, as OCCs Rules currently provide, applicable funds held in trust in respect to OCCs Executive Deferred Compensation Plan EDCP such funds, as defined in OCCs Rules, being the EDCP Unvested Balance that 3 OCCs By-Laws and Rules can be found on OCCs public website: https www.theocc.com/
Company-Information/Documents-and-Archives/
By-Laws-and-Rules.

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would be charged pari passu with the Clearing Fund deposits of nondefaulting Clearing Members. The persistent minimum level of skin-in-thegame would establish a floor for the prefunded resources OCC would contribute to cover default losses and liquidity shortfalls. In addition to this minimum, OCC would continue to commit its liquid net assets funded by equity LNAFBE 4 greater than 110% of its Target Capital Requirement prior to charging a loss to the Clearing Fund.
Background In January 2020, OCC implemented its Capital Management Policy, by which OCC a determines the amount of Equity 5 sufficient for OCC to meet its regulatory obligations and to serve market participants and the public interest as defined in OCCs Rules, the Target Capital Requirement, b monitors Equity and LNAFBE levels to help ensure adequate financial resources are available to meet general business obligations; and c manages Equity levels, including by i adjusting OCCs fee schedule as appropriate and ii establishing a plan for accessing additional capital should OCCs Equity fall below certain thresholds the Replenishment Plan.6 In addition, OCCs Rules, the Capital Management Policy, and associated policies provide for the use of OCCs current and retained earnings in excess of 110% of the Target Capital Requirement i.e., the Early Warning threshold under OCCs Replenishment Plan to cover losses arising from a Clearing Members default.7 While OCCs Rules previously provided for OCC to contribute its own capital to cover default losses at the Boards discretion, the Capital Management Policy changes made the contribution of such excess capital obligatory.8
4 International standards and the Commissions Rules established minimum LNAFBE requirements for financial market infrastructures and covered clearing agencies, respectively. See CPSSIOSCO, Principles for financial market infrastructures, at Principle 15 Apr. 16, 2012, available at http
www.bis.org/publ/cpss101a.pdf; 17 CFR 240.17Ad 22e15. The Capital Management Policy defines LNAFBE as the level of cash and cash equivalents, no greater than Equity, less any approved adjustments i.e., agency-related liabilities such as Section 31 fees held by OCC.
5 The Capital Management Policy defines Equity as shareholders equity as shown on OCCs Statement of Financial Condition.
6 See Exchange Act Release No. 88029 Jan. 24, 2020, 85 FR 5500 Jan. 30, 2020 File No. SR
OCC2019007 hereinafter, Order Approving Capital Management Policy.
7 Id. at 5502.
8 Use of excess capital to cover losses arising from the default of a bank or other clearing agency that is not otherwise associated with a Clearing Member
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In the event of a Clearing Member default, OCC would contribute excess capital to cover losses remaining after applying the margin assets and Clearing Fund contribution of the defaulting Clearing Member and before charging the Clearing Fund contributions of nondefaulting Clearing Members. Should OCCs excess capital be insufficient to cover the loss, OCC also has another tranche of OCC resources in addition to the Clearing Fund; namely, the EDCP
Unvested Balance.9 In the event of a default loss, the EDCP Unvested Balance is contributed pari passu with the Clearing Fund contributions of nondefaulting Clearing Members.
The implementation of OCCs Capital Management Policy marked the first time OCC committed OCCs own prefunded financial resources into OCCs approach to capital management and resiliency. In particular, OCC believes that the inclusion of the EDCP Unvested Balance is a powerful alignment of interest between management and Clearing Members. OCC takes seriously the interest of the industry and international regulators in seeing more significant skin-in-the-game commitments at central counterparties.
To that end, OCC has reviewed feedback received in connection with the initial filing of the Capital Management Plan, relevant papers from industry participants and stakeholders concerning skin-in-the-game, and regulatory regimes in jurisdictions outside the United States. For one, a comment submitted in connection with the Capital Management Policys filing urged OCC to implement a minimum amount of skin-in-the-game that scales with risk and is defined and funded upfront and . . . to define a level of skin-in-the-game ex ante that would always be readily available in case of a default loss. 10 OCC has also reviewed the paper, A Path Forward for CCP
Resilience, Recover, and Resolution, originally released in October 2019 with nine signatories and re-released in March of 2020 with ten additional signatories, representing major buy-side and sell-side firms in the markets OCC
serves.11 One of the papers significant default remains at the Boards discretion. See Rule 1006eii.
9 As defined in OCCs Rules, the EDCP Unvested Balance consists of funds x deposited on or after January 1, 2020 in respect of its EDCP and y in excess of amounts necessary to pay for benefits accrued and vested under the EDCP at such time.
10 Order Approving Capital Management Policy, 85 FR at 5507 quoting comments submitted by FIA.
11 See ABN AMRO Clearing Bank N.V., et al., A
Path Forward for CCP Resilience, Recovery, and Resolution March 10, 2020, available at https

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