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Federal Register / Vol. 86, No. 39 / Tuesday, March 2, 2021 / Notices
jbell on DSKJLSW7X2PROD with NOTICES

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.
2 Statutory Basis OCC believes the proposed rule changes are consistent with Section 17A
of the Securities Exchange Act of 1934
Exchange Act and the rules and regulations thereunder. In particular,
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OCC believes that the proposed establishment of the Minimum Corporate Contribution and other proposed changes are consistent with Section 17Ab3F of the Exchange Act 24 and Rules 17Ad22e2i,25
17Ad22e4, 26 17Ad 22e15iiA,27 17Ad22e15iii,28
and Rule 17Ad22e23 29 thereunder for the reasons described below.
Section 17Ab3F of the Exchange Act requires, in part, that the rules of OCC be designed to promote the prompt and accurate clearance and settlement of securities transactions and, in general, to protect investors and the public interest. The proposed revisions to the Capital Management Policys definitions of LNAFBE, Early Warning and Trigger Event are designed to ensure that OCC
may establish the Minimum Corporate Contribution exclusively to cover default losses while continuing to maintain sufficient LNAFBE for operational expenses such that it could continue to promptly and accurately clear and settle securities transactions even if it suffered significant operational losses, including by continuing to maintain access to its Replenishment Plan should an operational loss cause OCCs Equity, less the Minimum Corporate Contribution, to fall close to or below OCCs Target Capital Requirement. In other words, conforming these definitions to account for the establishment of the Minimum Corporate Contribution, which will not be available to cover operational losses, ensures that OCC will continue to hold sufficient LNAFBE separate from the Minimum Corporate Contribution and maintain access to its Replenishment Plan to absorb operational losses and avoid a disruption that could negatively impact OCCs prompt and accurate clearing and settlement of transactions.
Therefore, OCC believes that the proposed amendments to the definitions of LNAFBE, Early Warning and Trigger Event under its Capital Management Policy, which are reasonably designed to ensure that OCC has sufficient LNAFBE to continue operations in the event of an operational loss, are consistent with the requirements of Section 17Ab3F of the Exchange Act by protecting investors and the public interest.30
Rule 17Ad22e4 under the Exchange Act provides, in part, that 24 15

U.S.C. 78q1b3F.
CFR 240.17Ad22e2i.
26 17 CFR 240.17Ad22e4.
27 17 CFR 240.17Ad22e15ii.
28 17 CFR 240.17Ad22e15iii.
29 17 CFR 240.17Ad22e23.
30 15 U.S.C. 78q1b3F.
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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.31 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.32 Rule 17Ad 22e15iiA requires that the LNAFBE held by OCC to satisfy the minimum LNAFBE required by Rule 17Ad22e15ii 33 shall be in addition to resources held to cover participant defaults or other credit or 31 17

CFR 240.17Ad22e4i.
CFR 240.17Ad22e15iiA.
33 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 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.
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