How can the public comment when RWD Plan Supporting Information (Exhibit 3) & Recovery and Orderly Wind-Down Plan (Exhibit 5) is entirely [REDACTED]?
- The RWD Plan was adopted on August 23, 20185 and is maintained by OCC in accordance with the requirements of Rule 17Ad-22(e)(3)(ii).6 The Commission approved updates to the RWD Plan on December 17, 2020.
- The RWD Plan describes OCC’s ability to provide critical services in the event of severe financial or operational stress.
- The Plan also describes OCC’s approach to a wind-down in the unlikely event that it experiences a severe stress that causes it to exhaust its available tools and resources.
- OCC posts a Recovery and Orderly Wind-Down Plan Participant Guide on its public website that is available to Clearing Members, Participant Exchanges, and the public.
The proposed rule change would amend the RWD Plan by: (i) removing certain supporting information; (ii) incorporating references to certain documents and materials; (iii) implementing updates and amendments to all six chapters of the proposed Plan; and (iv) updating and revising the hypothetical stress scenarios set forth in Appendix A of the proposed RWD Plan.
Removal of Supporting Information
The current version of OCC’s RWD Plan includes information related to OCC’s operations, management structure, personnel, support functions, banking relationships, vendors and key agreements. This supporting information provides background and context for parties that are reviewing the RWD Plan or utilizing it as part of an actual recovery or wind-down event. This information does not constitute a stated policy, practice, or interpretation of OCC and is, by its nature, prone to change. OCC proposes to remove certain supporting information from the RWD Plan and maintain it in a separate document (the “RWD Plan Supporting Information”). The purpose of this change is to allow OCC to update the supporting information so that it is current, accurate and most helpful to potential users of the RWD Plan. OCC will review and update the RWD Plan Supporting Information twice a year, or more frequently as needed.
Incorporate References to Certain Documents and Materials
The current version of OCC’s RWD Plan restates certain information that is publicly available or separately maintained by OCC. Maintaining this information in multiple documents with distinct regulatory requirements creates a risk that the RWD Plan may not contain current information. To eliminate this risk, OCC proposes to incorporate references to certain materials rather than restating the information set forth in those materials in the RWD Plan. OCC proposes to move all of the RWD Plan Appendices to the RWD Plan Supporting Information document, with the exception of the current Appendix B (“Detailed Stress Scenarios”), which will become the new Appendix A. For example, references to current Appendix A and Appendix C of the RWD Plan, which currently include a list of Clearing Members and Members of OCC’s Board of Directors as of a specific date, would be replaced by incorporating a link to the sections of OCC’s website that maintain current information about OCC’s Clearing Members and Board of Directors. Similarly, OCC proposes to replace certain financial information set forth in the RWD Plan, including the excerpts from OCC’s audited financial statements provided in Appendix D and references to the amount of OCC’s Target Capital Requirement, with a link to the section of OCC’s website that displays OCC’s Annual Reports, which include OCC’s audited financial statements, and a link to OCC’s fee schedule, which depicts the Target Capital Requirement. Finally, OCC proposes to delete the excerpted portions of its rule-filed Risk Management Framework Policy from Section 2.9 of the RWD Plan and Appendix I. OCC believes that incorporating these materials by reference would allow the RWD Plan to better reflect current and accurate information. OCC intends to introduce the RWD Plan Supporting Information document to provide additional background and context on the RWD Plan in order to assist in reviewing or utilizing the Plan. Additionally, the RWD Plan Supporting Information document will allow OCC to more easily maintain and update information about the RWD Plan as quickly as possible.
Updates and Amendments to each Chapter of the RWD Plan:
The Options Clearing Corporation (OCC) is proposing changes to its Recovery and Orderly Wind-Down Plan (RWD Plan) to improve readability, remove outdated information, and incorporate changes identified in their annual internal review. Here's a brief rundown of the main proposed amendments to the chapters:
Chapter 1: Executive Summary This chapter provides a broad overview of the RWD Plan. The proposed changes include:
- Updating the name of a committee from "Committee on Payment and Settlement Systems" to "Committee on Payments and Market Infrastructures."
- Mentioning additional resources considered during the RWD Plan update.
- Introducing references to the RWD Plan Supporting Information document (a separate document for details subject to frequent change).
- Changing the language about expense assumptions during a resolution process to better reflect the intended meaning.
- Incorporating several grammatical and non-substantive technical amendments for improved readability, such as modifying the use of certain defined terms, capitalizing the term "Clearing Member" consistently, deleting unnecessary words, and modifying tense for clarity.
Chapter 2: OCC Overview This chapter provides a detailed description of the OCC's business. The proposed changes include:
- Updating outdated information or practices, including the description of OCC’s services and facilities.
- Adding new references/links for users to access up-to-date information, including a link to OCC’s Annual Report for the most recent financial information.
- Moving a significant portion of the existing sections "Business Overview" and "Management Structure" into the RWD Plan Supporting Information document.
- Removing the section related to the Risk Appetite Framework and Tolerance as the Commission recently approved OCC’s adoption of a Risk Management Framework and Corporate Risk Management Policy, making this section redundant.
Chapter 3: Critical Services and Critical Support Functions will now have data that changes frequently moved to a Supporting Information document to keep information accurate. This chapter will now offer more detailed descriptions of OCC's pricing and valuation services and update Critical Support Functions.
Chapter 4: Recovery Plan is about OCC's response to extreme stress events. The update adds a description of the current approach to developing stress scenarios, and introduces additional risk management tools such as insurance coverage, increased clearing fees, and extending the settlement window. It also modifies trigger events for recovery, separating operational disruptions and general business losses into two separate triggers.
Chapter 5: Wind-Down Plan will have a single trigger event: a determination by OCC’s Board of Directors that recovery efforts aren't likely to be successful. Updates include changes to assumptions about timing, cost, and employee retention, and further description of potential winddown transaction structures.
Chapter 6: RWD Plan Governance details the governance of OCC’s RWD Plan. Minor edits are made to numbering for nonsubstantive purposes.
Hypothetical Stress Scenarios
OCC is proposing to move the Detailed Stress Scenarios in Appendix B into Appendix A. The RWD Plan currently identifies four hypothetical stress scenarios and 15 describes how OCC would respond to each scenario. As described in more detail below, the proposed RWD Plan would generally retain the same hypothetical stress scenarios with several updates and amendments that were identified during OCC’s annual review of the Plan. An overview of the updates and amendments to each scenario is included below. To remind potential users of the Plan of OCC’s escalation procedures, each scenario has been revised to include a description of the escalation to OCC’s business continuity team. The changes to the hypothetical stress scenarios would also incorporate certain grammatical and non-substantive technical amendments, including renumbering of the relevant sections and using initial capitalization for the term “Clearing Member” consistently throughout the document
Hypothetical Scenario 1: The proposed updates to the first hypothetical scenario would incorporate recent data for several areas, including: (i) the highest and second highest stressed Clearing Member liquidity demands; (ii) the size and cash component of the Clearing Fund; and (iii) the two largest Clearing Fund contributions made by Clearing Members. The proposed revisions to Hypothetical Scenario 1 would also remove references to energy futures and options and eliminate a related note indicating that the products reflected in this scenario may not be reflective of products cleared by OCC. OCC believes that these changes would better reflect its current operations. The proposal would also incorporate several grammatical and technical amendments, including adjusting the timing of several events so that the scenario more accurately reflects OCC’s current processes and procedures and aligning the descriptions of the trigger events and enhanced risk management tools with the changes described above
Hypothetical Scenario 2. The proposed revisions to the second hypothetical scenario would clarify several roles and responsibilities to ensure that the descriptions set forth in this scenario align with OCC’s current practices and procedures. These changes would clarify that OCC’s Head of Default Management or a delegate makes a recommendation to the OCEO, which authorizes the enactment of alternative settlement procedures and an extension of settlement. The proposal would also note that OCC’s Legal Department is responsible for drafting an information memo notifying Clearing Members of alternate settlement procedures. The proposed revisions to the second hypothetical scenario would also revise the assumptions in the scenario to contemplate further communications between OCC and the hypothetical settling bank involved in the scenario and to contemplate the potential stock loan activity of Clearing Members. In addition, the proposed RWD Plan would update the settlement time in hypothetical scenario 1 and 2 of the existing Plan from 9:00 A.M. Central Time to 8:00 A.M. Central Time (9:00 A.M. Eastern Time) to comply with OCC’s existing Rule 101 definition of “Settlement Time.” Finally, the proposal would incorporate several grammatical and technical amendments, including aligning the descriptions of the trigger events and enhanced risk management tools with the changes described above.
Hypothetical Scenario 3. The proposed amendments to the third scenario would amend the assumptions to clarify that the scenario includes stock loan activity and add assumptions specifying that OCC’s ability to communicate with its Clearing Members would not be impacted and that OCC would engage in any necessary regulatory communications and required regulatory reporting. The proposed revisions would also clarify several roles and responsibilities to help ensure that the descriptions set forth in 17 this scenario align with OCC’s current practices and procedures. These changes would include clarifying that OCC’s Collateral Services Department would be responsible for identifying and escalating issues with the normal processing of pledged collateral and stock loan activity. The description of Scenario 3 would also be expanded to describe several additional notifications and communications that OCC would expect to make in connection with this scenario (e.g., notices to Clearing Members, Depository and Correspondent Clearing Corporation). Finally, the proposal would also incorporate several grammatical and technical amendments, including aligning the description of the trigger events with the changes described above.
Hypothetical Scenarios 4A and 4B Consolidated Into Scenario 4. Presently, the RWD Plan contemplates a hypothetical Scenario 4A and a separate hypothetical scenario 4B. Each Scenario contemplates general business and operational risks presented to OCC but with different assumptions. Namely, Scenario 4A involves assumptions related to a cyberattack, and Scenario 4B involves assumptions related to a Clearing Member default and decreased OCC clearing volumes. The proposed revisions would streamline this structure by consolidating Scenarios 4A and 4B into a single Scenario 4 and would create greater efficiencies. Like current Scenarios 4A and 4B, Scenario 4 would continue to contemplate default and general business risks to OCC. Specifically, it would merge aspects of the current scenarios to contemplate a Clearing Member default coupled with a cyberattack that occurs while OCC is carrying out its default management processes. In addition, the proposal would also make certain changes to the assumptions that are currently part of Scenarios 4A and 4B. For example, regarding certain of the assumptions in both Scenario 4A and 4B, the changes to create Scenario 4 would make 18 the assumptions less specific by deleting unnecessary details about the hypothetical event and the proposal would incorporate several grammatical and technical amendments, including aligning the description of the trigger events with the changes described above. Regarding what is currently Scenario 4A, the proposal would modify the current assumptions to increase the amount of the hypothetical loss and to reference OCC’s current Early Warning Threshold and Target Capital Requirements without using specific amounts that are subject to change. Regarding what is currently Scenario 4B, the proposed revisions would modify the assumptions in the scenario to contemplate the default of a mid-sized Clearing Member, assume that the collateral available to OCC from the Clearing Member would be less than the settlement amount that gives rise to the Clearing Member default, and remove current assumptions related to substantial declines in OCC clearing volume and to cost-reducing measures taken by OCC. The changes would also update the accounting values described in the scenario to reflect current requirements and the effects of the Clearing Member default on those values and OCC’s capital.
How to Comment:
Use the Commission’s Internet comment form (http://www.sec.gov/rules/sro.shtml)
Send an e-mail to
[email protected]. Please include File Number SR-OCC2023-005 on the subject line.
- Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly.
- They may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright protection. All submissions should refer to File Number SR-OCC-2023-005 and should be submitted on or before [insert date 21 days from publication in the Federal Register].
Subject: File Number SR-OCC2023-005
I'm writing as an individual investor deeply concerned about the fairness and transparency of our markets. While I understand the necessity of updating the Recovery and Wind-Down (RWD) Plan, the redaction of its Supporting Information and the Plan itself is concerning. Household investors are forced to entrust OCC with this enormous responsibility with the belief in its supposed capacity to ensure stability in financial markets, yet transparency is paramount to maintaining that trust!
While the hypothetical scenarios mentioned in your proposal give an idea about the possible crises, we need to be privy to the full scope of the RWD Plan Supporting Information (Exhibit 3) and Recovery and Orderly Wind-Down Plan (Exhibit 5).
To adequately prepare for and react to any potential stress scenario, Clearing Members, investors, and all stakeholders involved must understand the full details of these scenarios and how OCC plans to respond.
I appreciate the OCC’s efforts to keep the RWD Plan up to date with current operations and conditions in the financial markets. However, more transparency is needed, especially in these uncertain times. I understand certain information may be sensitive, but a higher level of disclosure could go a long way towards reassuring the public, building trust, and promoting a fairer, more transparent market.
Thank you for considering my views. I hope you understand the public's need for clarity and reassurance.
With warmest regards,
- The Options Clearing Corporation (OCC) is proposing changes to its Recovery and Orderly Wind-Down Plan (RWD Plan). This plan, in case you're not familiar with it, outlines the OCC's abilities to continue providing crucial services even during severe financial or operational stress.
- It also explains how OCC would handle a shutdown if it exhausts its available resources due to extreme stress...
The Recovery and Wind-Down (RWD) plan also outlines how they would respond to various stress scenarios:
- Scenario 1: The proposal updates recent data points, removes references to energy futures and options, and tweaks the timing of several events to better reflect OCC’s current processes and procedures.
- Scenario 2: The proposal includes clarifying roles and responsibilities, such as who makes certain recommendations and who drafts memos, revising assumptions to include more communication between OCC and the hypothetical settling bank, adjusting the settlement time to comply with existing rules, and considering the potential stock loan activity of Clearing Members.
- Scenario 3: This proposal adds stock loan activity, assumes OCC’s communication ability isn't impacted, and clarifies roles and responsibilities. It also expands to describe additional notifications and communications that OCC would expect to make in this scenario.
- Scenarios 4A and 4B into Scenario 4: The proposal merges these two scenarios, which focus on a cyberattack and a Clearing Member default, respectively.