Self-Regulatory Organizations; The Options Clearing Corporation; Order Granting Approval of Proposed Rule Change by The Options Clearing Corporation Concerning Certain Revisions in Connection With Proposed Modifications to the Manner in Which OCC Accounts for the Guaranty Substitution Payment in OCC's Liquidity Risk Management Processes

<NOTICE> SECURITIES AND EXCHANGE COMMISSION <DEPDOC>[Release No. 34-104350; File No. SR-OCC-2025-013]</DEPDOC> <SUBJECT>Self-Regulatory Organizations; The Options Clearing Corporation; Order Granting Approval of Proposed Rule Change by The Options Clearing Corporation Concerning Certain Revisions in Connection With Proposed Modifications to the Manner in Which OCC Accounts for the Guaranty Substitution Payment in OCC's Liquidity Risk Management Processes</SUBJECT> <DATE>December 9, 2025.</DATE> <HD SOURCE="HD1">I. Introduction</HD> On August 29, 2025, the Options Clearing Corporation (“OCC”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change SR-OCC-2025-013, pursuant to Section 19(b) of the Securities Exchange Act of 1934 (“Exchange Act”)  thereunder, to permit OCC to account for the cash payment OCC could make to the National Securities Clearing Corporation following the default of a common clearing participant that is attributable only to OCC-related activity in OCC's liquidity stress testing (hereinafter defined as “Proposed Rule Change”). <SU>3</SU> <FTREF/> The Proposed Rule Change was published for public comment in the <E T="04">Federal Register</E> on September 15, 2025. <SU>4</SU> <FTREF/> On September 25, 2025, pursuant to Section 19(b)(2) of the Exchange Act, <SU>5</SU> <FTREF/> the Commission designated a longer period within which to approve, disapprove, or institute proceedings to determine whether to approve or disapprove the Proposed Rule Change, until December 14, 2025. <SU>6</SU> <FTREF/> The Commission has received no comments regarding the Proposed Rule Change. For the reasons discussed below, the Commission is approving the Proposed Rule Change. <FTNT> <SU>1</SU>  15 U.S.C. 78s(b)(1). </FTNT> <FTNT> <SU>2</SU>  17 CFR 240.19b-4. </FTNT> <FTNT> <SU>3</SU>   <E T="03">See</E> Notice of Filing <E T="03">infra</E> note 4, at 90 FR 44430. </FTNT> <FTNT> <SU>4</SU>   <E T="03">See</E> Exchange Act Release No. 103937 (Sep. 10, 2025), 90 FR 44430 (Sep. 15, 2025) (File No. SR-OCC-2025-013) (“Notice of Filing”). </FTNT> <FTNT> <SU>5</SU>  15 U.S.C. 78s(b)(2). </FTNT> <FTNT> <SU>6</SU>  Exchange Act Release No. 104078 (Sep. 25, 2025), 90 FR 47012 (Sep. 30, 2025) (File No. SR-OCC-2025-013). </FTNT> <HD SOURCE="HD1">II. Background</HD> OCC is a central counterparty, which means that, as part of its function as a clearing agency, it interposes itself as the buyer to every seller and the seller to every buyer for certain financial transactions. OCC is the sole clearing agency for standardized equity options listed on national securities exchanges registered with the Commission, including options that contemplate the physical delivery of equities cleared by the National Securities Clearing Corporation (“NSCC”) in exchange for cash (“physically-settled” options). <SU>7</SU> <FTREF/> OCC also clears certain futures contracts that, at maturity, require the delivery of equity securities cleared by NSCC in exchange for cash. As a result, the exercise and assignment of certain options or maturation of certain futures cleared by OCC effectively results in stock settlement obligations to be cleared by NSCC (“E&A Activity”). Because OCC is obligated to perform on the contracts it clears, even where one of its Clearing Members defaults, OCC is exposed to liquidity risk  <SU>8</SU> <FTREF/> in the form of exposure to a Clearing Member's trading activities. OCC manages such risk, in part, by performing daily stress testing  <SU>9</SU> <FTREF/> that covers a wide range of scenarios. <SU>10</SU> <FTREF/> <FTNT> <SU>7</SU>  The term “physically-settled” as used throughout the OCC Rulebook refers to cleared contracts that settle into their underlying interest ( <E T="03">i.e.,</E> options or futures contracts that are not cash-settled). When a contract settles into its underlying interest, shares of stock are sent ( <E T="03">i.e.,</E> delivered) to contract holders who have the right to receive the shares from contract holders who are obligated to deliver the shares at the time of exercise/assignment in the case of an option and at the time of maturity in the case of a future. Capitalized terms used but not defined herein have the meanings specified in OCC's Rules and By-Laws, available at <E T="03">https://www.theocc.com/about/publications/bylaws.jsp.</E> </FTNT> <FTNT> <SU>8</SU>  Liquidity risk is the risk that a counterparty will have insufficient funds to meet its financial obligations as and when expected, although it may be able to do so in the future. Bank for International Settlements & International Organization of Securities Commissions, Principles for Financial Market Infrastructures, <E T="03">https://www.bis.org/cpmi/publ/d101a.pdf.</E> </FTNT> <FTNT> <SU>9</SU>  Stress testing is the estimation of credit or liquidity exposures that would result from the realization of potential stress scenarios, such as extreme price changes, multiple defaults, or changes in other valuation inputs and assumptions. 17 CFR 240.17ad-22(a). </FTNT> <FTNT> <SU>10</SU>   <E T="03">See</E> OCC Rule 1001. </FTNT> NSCC and OCC maintain a legal agreement, generally referred to by the parties as the “Accord,” that governs the processing of such E&A Activity for firms that are members of both OCC and NSCC (“Common Members”). <SU>11</SU> <FTREF/> Under the terms of the Accord, NSCC is required to accept E&A Activity from OCC ( <E T="03">i.e.,</E> guaranty the positions of a defaulting Common Member), provided that OCC makes a payment to NSCC called the “Guaranty Substitution Payment,” or “GSP.” The GSP was incorporated into the Accord to address liquidity and operational issues that could arise at OCC in the event of a Common Member default. <SU>12</SU> <FTREF/> The incorporation of the GSP is designed to reduce OCC's potential liquidity exposure to an amount that is within the scope of its resources. <SU>13</SU> <FTREF/> To take advantage of this change, however, OCC must be prepared to make a cash payment to NSCC. <SU>14</SU> <FTREF/> As a result, OCC accounts for the potential need to make a Guaranty Substitution Payment to NSCC in its liquidity risk management planning based on information provided by NSCC. <FTNT> <SU>11</SU>  Pursuant to OCC Rule 302, outside of certain limited exceptions, every Clearing Member that effects transactions in physically-settled options or futures must also be a participant in NSCC. </FTNT> <FTNT> <SU>12</SU>   <E T="03">See</E> Exchange Act Release No. 99735 (Mar. 14, 2024), 89 FR 19907, 19908 (Mar. 20, 2024) (File No. SR-OCC-2023-007) (“Accord Approval”). </FTNT> <FTNT> <SU>13</SU>   <E T="03">See id.</E> at 19912. </FTNT> <FTNT> <SU>14</SU>   <E T="03">See id.</E> </FTNT> NSCC calculates the amounts of the components used to determine the GSP and other financial information each trading day (“T”) for each Common Member. The components used to determine the GSP are a Common Member's unpaid Required Fund Deposit (“RFD”) and unpaid Supplemental Liquidity Deposit (“SLD”) obligation as defined by NSCC's rules, some amount of which may be attributable to E&A Activity. NSCC calculates the GSP by determining that are attributable to E&A Activity. NSCC then sends the results to OCC at the NSCC Family level on T+1 each day prior to morning settlement. As a conservative approach to liquidity risk management, OCC chose to incorporate a Common Member's total RFD and SLD obligations to NSCC (not just the portion represented in the GSP) into OCC's liquidity risk management. <SU>15</SU> <FTREF/> As a result, OCC currently collects resources to account for activity that is not related to the settlement of the underlying equity securities related to E&A Activity. OCC made this design choice prior to implementation of the GSP to increase the likelihood that OCC would be in a position to make a future Guaranty Substitution Payment that exceeds historical GSP requirements. <SU>16</SU> <FTREF/> <FTNT> <SU>15</SU>   <E T="03">See id.</E> at 19910. </FTNT> <FTNT> <SU>16</SU>   <E T="03">See id.</E> at 19912. </FTNT> Based on observations from the 13 months following implementation of the GSP, OCC identified unexpected amounts in the data from NSCC that could cause OCC to over collect resources. <SU>17</SU> <FTREF/> OCC believes that NSCC's calculation methodology for SLD obligations may include activity by affiliates of a Common Member that are not OCC Clearing Members. <SU>18</SU> <FTREF/> Further, the data NSCC sends to OCC sometimes includes deficits related to non-E&A Activity ( <E T="03">e.g.,</E> exchange traded fund creation and redemption activity). <SU>19</SU> <FTREF/> <FTNT> <SU>17</SU>   <E T="03">See</E> Notice of Filing, 90 FR at 44431. </FTNT> <FTNT> <SU>18</SU>   <E T="03">See id.</E> </FTNT> <FTNT> <SU>19</SU>   <E T="03">See id.</E> OCC received data from NSCC suggesting a potential need to hold $7 billion driven by certain SLD obligations where E&A Activity from OCC was related to only $60 million of exposure. The addition exposures arose from affiliates of the Common Member, but not the Common Member itself. <E T="03">See id.</E> </FTNT> OCC proposes to change its Comprehensive Stress Testing & Clearing Fund Methodology, and Liquidity Risk Management Description (the “Methodology Description”) and OCC's Liquidity Risk Management Framework (“LRMF”) so that OCC will account for only the portion of a Clearing Member's unpaid RFD and SLD obligations related to E&A Activity in OCC's liquidity risk management processes. The Methodology Description enables OCC to review the sufficiency of its financial resources and includes stress tests designed to size and monitor the sufficiency of ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 25k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━