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

liquidity risks.34 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 35 because 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 34 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.
35 17 CFR 240.17Ad22e15iii.

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17Ad22e15ii.36 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.37 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 skinin-the-game the Minimum Corporation Contribution, LNAFBE greater than 110% of the Target Capital Requirement, and the EDCP Unvested Balance and their places within OCCs default waterfall. The proposed amendments to the Capital Management Policy would also identify factors the Board would consider in setting and adjusting the Minimum Corporate Contribution. Accordingly, OCC
believes conforming the terms in these governance arrangements and identifying factors OCC would consider in adjusting the Minimum Corporate Contribution is consistent with Rule 17Ad22e2i.
36 Id. As discussed in note 33, supra, OCCs Target Capital Requirement is reasonably designed to meet or exceed the minimum LNAFBE required to satisfy Rule 17Ad22e15ii.
37 17 CFR 240.17Ad22e2i.

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Finally, OCC believe that the proposed changes are consistent with Rule 17Ad22e23, which requires covered clearing agencies to maintain written policies and procedures reasonably designed to, among other things, provide for publicly disclosing all relevant rules and material procedures, including key aspects of its default rules and procedures.38 The proposed changes would amend OCCs Rules to remove the pre-Capital Management Policy references to use of retained earnings or current and retained earnings with respect to the sources of OCCs skin-in-the-game, and instead identify the Minimum Corporate Contribution and LNAFBE greater than 110% of the Target Capital Requirement. The proposed changes would also provide greater clarity about how OCC calculates the amount of LNAFBE greater than 110% of the Target Capital Requirement based upon the unaudited financial statements from the close of the prior month; provided, however, that OCC would not be required to contribute an amount that would cause its LNAFBE to fall below 110% of the Target Capital Requirement at the time charged. The proposed changes to OCC Rules would, in turn, be made available on OCCs website.
Therefore, OCC believes the proposed changes would disclose relevant default rules and procedures to the public and to Clearing Members.
B Clearing Agencys Statement on Burden on Competition Section 17Ab3I of the Exchange Act 39 requires that the rules of a clearing agency not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. OCC does not believe that the establishment of a Minimum Corporate Contribution and the other attendant changes discussed above have any impact, or impose any burden, on competition. As discussed above, OCC would charge the Minimum Corporate Contribution to cover a default loss or liquidity shortfall after charging the margin and Clearing Fund deposit of a default Clearing Member, and before charging OCCs LNAFBE
above 110% of the Target Capital Requirement, both of which would be exhausted before OCC charged a default loss to the Clearing Fund deposits of non-defaulting members and the EDCP
Unvested Balance on a pro rata basis.
Accordingly, all Clearing Members would benefit by the establishment of the Minimum Corporate Contribution, 38 17
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