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Federal Register / Vol. 86, No. 39 / Tuesday, March 2, 2021 / Notices
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recommendations is that central counterparties should have skin-in-thegame in a more defined manner.12 In contrast, OCCs current variable approach to skin-in-the-game does not guarantee a defined amount would be available as skin-in-the-game.
Additionally, as OCC seeks recognition in the European Union and the United Kingdom, OCC is cognizant of the European Market Infrastructure Regulations EMIR expectation that skin-in-the-game be a minimum of 25%
of the central counterpartys regulatory capital requirement.13 Under the current Capital Management Policy, excess capital is not dedicated solely as skinin-the-game and it is possible that OCCs capital in excess of 110% of its Target Capital Requirement would be less than 25% of OCCs Target Capital Requirement.
To address the concerns raised by these market participants, further strengthen OCCs pre-funded financial resources, further align the interests of OCCs management and Clearing Members, and align OCCs skin-in-thegame with international standards, OCC
is filing this proposed rule change, which would establish a persistent minimum amount of skin-in-the-game that would be used to cover default losses and liquidity shortfalls. This skin-in-the-game proposal is part of a broader set of decisions announced by OCC to lower the cost of clearing for its members,14 including a fee decrease www.jpmorgan.com/solutions/cib/markets/a-pathforward-for-ccp-resilience-recovery-and-resolution.
12 While OCC agrees with the papers authors that central counterparties should have meaningful skinin-the-game, OCC does not agree with the level of skin-in-the-game recommended in the paper. See Optimizing Incentives, Resilience and Stability in Central Counterparty Clearing: Perspectives on CCP
Issues from a Utility Model Clearinghouse September 22, 2020, available at https
www.theocc.com/Newsroom/Insights/2020/09-22Optimizing-Incentives,-Resilience-and-Stabil.
13 Though OCC, as a non-EU central counterparty, would not be subject directly to the EMIR standards or the supervision of the European Securities and Markets Authority ESMA, OCC has considered the EMIR standards as part of its bid to seek thirdcountry recognition in Europe and the United Kingdom. OCC is seeking recognition to address European bank capital requirements set to go into effect next year that would require European banks to set aside additional capital for exposure to central counterparties that are not qualified CCPs in Europe. In order to become a qualified CCP, ESMA and the regulatory authority in a non-EU
jurisdiction must reach an agreement that their regulatory regimes for central counterparties are equivalent. As of the date of this filing, the Commodity Futures Trading Commission CFTC
has reached an agreement with ESMA on the equivalence of their regulatory regimes.
14 OCC announced these decisions in a press release and letter to Clearing Members. See Press Release, OCC To Lower Costs for Users of U.S.
Equity Derivatives Markets Aug. 3, 2020, available at https www.theocc.com/Newsroom/Press-

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effective September 1, 2020.15 OCC also discussed these changes on calls with OCCs Non-Equity Exchanges, Clearing Members, and other market participants, including discussions with the SIFMA
Options Committee and FIA and open calls with OCC Clearing Members.
Members expressed that the proposed addition of a minimum level of skin-inthe-game would be a welcome enhancement by OCC. One market participant expressed its appreciation for OCCs commitment to resiliency, but renewed concerns it had raised in connection with OCCs Capital Management Policy about increases in OCCs capital and, if OCC were sold, a more commercial orientation monetized with higher fees. As OCC stated with respect to the establishment of the Capital Management Policy,16 OCC
believes that this view is well outside the scope of the Capital Management Policy and this proposed rule change, but will continue to engage with Clearing Members and other market participants to address any concerns.
While questions were raised in these conversations, no specific suggestions were made.
Proposed Changes In order to establish a persistent minimum amount of skin-in-the-game, OCC is proposing to: a Amend OCCs Rules to define the Minimum Corporate Contribution, insert the Minimum Corporate Contribution in OCCs default waterfall as provided in Rule 1006, provide for how OCC would calculate any LNAFBE greater than 110% of its Target Capital Requirement OCC would contribute in addition to the Minimum Corporate Contribution, and provide a time by which OCC would reestablish the Minimum Corporate Contribution if and when OCC uses it to cover default losses; b amend the Capital Management Policy to exclude the Minimum Corporate Contribution from OCCs measurement of its LNAFBE
against its Target Capital Requirement and from OCCs calculation of the Early Warning and Trigger Event, to ensure that OCC may maintain the Minimum Corporate Contribution exclusively for default losses while retaining access to replenishment capital in the event OCC
suffers an operational loss that reduces Releases/2020/08-03-OCC-To-Lower-Costs-forUsers-of-US-Equity-De; Letter to Clearing Member FirmsOCC to Lower Costs for Users of U.S. Equity Derivative Markets Aug. 3, 2020, available at https www.theocc.com/Newsroom/Views/2020/0803-Letter-to-Clearing-Member-Firms.
15 See Exchange Act Release No. 89534 Aug. 12, 2020, 85 FR 50858 Aug. 18, 2020 File No. SR
OCC2020009.
16 See Exhibit 3g to File No. SROCC2019007.

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its Equity below those thresholds; and c apply conforming changes to the Default Management Policy, Clearing Fund Methodology Policy, and the RWD
Plan to reflect that in the event of a default loss or liquidity shortfall, the Minimum Corporate Contribution would be charged after contributing the margin and Clearing Fund deposit of a default member and before the contribution of OCCs LNAFBE in excess of 110% of OCCs Target Capital Requirement, both before OCC charges the Clearing Fund deposits of nondefault Clearing Members and the EDCP
Unvested Balance on a pro rata basis.
a Amendments to OCCs Rules To establish and maintain a persistent minimum level of skin-in-the-game, OCC proposes to amend its Rules to 1
define the Minimum Corporate Contribution; 2 revise OCCs default waterfall to more clearing define the skin-in-the-game resources OCC would contribute to a default loss; 3 provide for how OCC would calculate any LNAFBE greater than 110% of the Target Capital Requirement it would contribute after exhausting the Minimum Corporate Contribution; and 4 provide for how OCC would replenish the Minimum Corporate Contribution after each chargeable default loss.
1 Defining the Minimum Corporate Contribution OCC would establish a persistent minimum level of skin-in-the-game by first amending OCCs Rules to define the Minimum Corporate Contribution in Chapter I of the Rules to mean the minimum level of OCCs own funds maintained exclusively to cover credit losses or liquidity shortfalls, the level of which OCCs Board shall determine from time to time. As OCCs own funds, OCC would hold the Minimum Corporate Contribution in accordance with OCCs By-Laws governing the investment of OCCs funds 17 and OCCs policies and procedures governing cash and investment management.
Specifically, OCC maintains uninvested OCC cash in demand deposits and any investments of funds maintained to satisfy the Minimum Corporate Contribution would be limited to overnight reverse repurchase agreements involving U.S. Government Treasury Securities, consistent with OCCs same-day liquidity needs for such funds.
While the proposed definition would give OCCs Board discretion in setting the Minimum Corporate Contribution, 17 See
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OCC By-Laws Art. IX, Sec. 1.

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