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2014 OCC Comment Letters

Deparment of the Treasury, December 19, 2014
Letter on Application of Mark-to-Market Proposals to Exchange-Traded Equity Options
OCC submitted this letter on behalf of the U.S. Securities Markets Coalition to The Honorable Mark Mazur, Assistant Secretary (Tax Policy) at the Department of the Treasury expressing concerns over the application of mark-to-market proposals that would treat all options as sold at the end of the year, unfairly penalizing individual investors and other taxpayers who use exchange-traded (or listed) options.

IRS, July 15, 2014
Proposed Regulations Under Code Section 871(m) (REG-120282-10)
OCC filed this comment letter in connection with the IRS' proposed regulations under Section 871(m) of the tax code, which impose U.S. withholding tax on dividend equivalents if the option is held by a non-U.S. person and had an initial delta of 70 or higher at the time it was issued. In the letter, OCC expresses full support for the letter previously submitted by the U.S. Securities Markets Coalition (comprised of all of the major options exchanges in the United States and OCC) on the proposed regulations. OCC also recommends that IRS and Treasury convene a roundtable of interested market participants to discuss the costs, burdens and adverse consequences of the proposed regulations and to identify more practical approaches to meeting the policy objectives underlying section 871(m), and that if this course is not followed, that IRS and Treasury issue the next iteration of the regulations in proposed form so that market participants have an opportunity to comment before the revised regulations are issued in final form. In addition, OCC provides specific comments aspects of the proposed regulations that could directly affect OCC's ability to function efficiently in its critical role as the clearing organization for all U.S. options exchanges as well as several U.S. futures exchanges, including recommendations to IRS and Treasury about clarifying which market participant will have the obligation to determine if a transaction is subject to section 871(m) and the amount of any dividend equivalents.

SEC, May 27, 2014
File No. S7-03-14: Proposed Standards for Covered Clearing Agencies
OCC submitted this comment letter on the SEC's proposed Standards for Covered Clearing Agencies (the "Proposal"). On April 16, 2012, the Committee on Payment and Settlement Systems of the Bank for International Settlements and the Technical Committee of the International Organization of Securities Commissions ("CPSS-IOSCO"), published its final Principles for Financial Market Infrastructures (the "PFMI Report"). The PFMI Report adopted standards (the "PFMIs") designed to harmonize and, where appropriate, strengthen the existing international standards for, among others, central counterparties such as OCC. The PFMIs, with few exceptions, "do not prescribe a specific tool or arrangement to achieve their requirements and allow for different means to satisfy a particular principle." The PFMIs were "designed to be applied holistically because of the significant interaction between principles[.]"

On March 12, 2014, the SEC issued the Proposal, which would adopt a new regulatory framework for covered clearing agencies ("CCAs") such as OCC, consistent with Title VIII of the Dodd-Frank Act and the PFMIs. Regulatory authorities around the world, including the CFTC and the Board of Governors of the Federal Reserve System, are in various stages of updating their regulatory regimes to adopt requirements that are consistent with the PFMIs.

OCC supports the flexible approach taken by the SEC and the implicit recognition by the SEC that a one-size-fits-all approach to regulating a CCA would be impractical and inappropriate. There are several aspects of the Proposal, particularly with respect to the "funded by equity" requirement in proposed Rule 17Ad-22(e)(15), the use of contingent capital in meeting the capital requirements under that proposed rule, and the acceptance of equity securities as collateral under proposed Rule 17Ad-22(e)(5), on which we believe the Proposal could be improved through minor modifications or the issuance of interpretive guidance by the SEC in the final rules release, and we look forward to discussing those aspects of the Proposal with SEC Staff in the near future.

SEC, May 15, 2014
Proposed Rule Change by The Options Clearing Corporation to Reflect the Elimination of a Discount to the Clearing Fee Schedule; Release No. 34-71769; File No. SR-OCC-2014-05
OCC submitted this letter in further response to comments of market participants on our recent rule filing to eliminate an existing clearing fee discount. The proposal, which was filed with the SEC in March 2014, would reinstate OCC's permanent clearing fee schedule (Permanent Fee Schedule) for securities options and securities futures. The Permanent Fee Schedule became effective May 1, 2007. Subsequently, OCC has provided discounts to the Permanent Fee Schedule, known as a Discounted Fee Schedule. Elimination of the Discounted Fee Schedule is necessary and appropriate at this time to meet increased operating expenses and satisfy both existing requirements and pending regulatory changes that would require OCC to hold liquid net assets funded by equity sufficient to cover a minimum of six months' projected operating expenses.

FRB, March 31, 2014
The Proposals Regarding FMUs and PSR Policy
OCC submitted this letter in response to the publication by the Board of Governors of the Federal Reserve System ("the Board") of (a) proposed standards for Financial Market Utilities (the Reg. HH Proposal) and (b) proposed revisions to part 1 of the Federal Reserve Policy on Payment System Risk (the "PSR Policy Proposal"). Under the Reg. HH Proposal, the Board seeks to prescribe risk-management standards governing the operations related to payment, clearing and settlement activities of Financial Market Utilities (FMUs) that have been designated by the Financial Stability Oversight Council as systemically important and for which the Board is the "Supervisory Agency," pursuant to Title VIII of the Dodd-Frank Act. These risk management standards are based on the Principles for Financial Market Infrastructures ("PFMIs") developed jointly by CPSS and IOSCO. Under the PSR Policy Proposal, the Board is, among other things, proposing to revise its existing risk-management standards in the Policy on Payment System Risk (the "PSR Policy") to reflect the PFMIs, include all central counterparties within the scope of part 1 of the PSR Policy, clarify the Board's risk-management expectations for categories of financial market infrastructures, including designated financial market utilities ("DFMUs") for which the Board is not the Supervisory Agency under Title VIII of Dodd-Frank (a category that includes OCC), and replace the existing self-assessment framework with a broader disclosure expectation.

As a DFMU, OCC recognizes our critical role in promoting financial stability and integrity in every market we serve. That is why OCC continually strives to achieve the highest standards possible in everything that we do, including with respect to the risk-management solutions that we provide to market participants. Accordingly, OCC has always treated the PFMIs themselves as reflecting best practices by which we should be guided. When the PFMIs were proposed in March, 2011, OCC submitted a lengthy and detailed comment letter. CPSS and IOSCO addressed many of our comments in the final PFMI release that was published in April, 2012, but a number of our concerns about the PFMIs, as applied to OCC's circumstances, remain. We appreciate this opportunity to raise those concerns as our regulators propose the form in which compliance with the PFMIs will be made mandatory. We intend to submit comments on the SEC's proposal through which the PFMIs will become binding on OCC, but we also appreciate the opportunity to provide our comments to the Board and we encourage the Board and SEC to adopt a consistent view as to how the PFMIs should be interpreted and applied to OCC in light of OCC's unique characteristics and structure.

IRS, March 5, 2014
Proposed Regulations Under Section 871(m) (REG-120282-10)
The U.S. Securities Markets Coalition (comprised of all of the major options exchanges in the United States and OCC) submitted this letter to the IRS in March 2014 to weigh in on the proposed regulations issued under Section 871(m) of the Internal Revenue Code related to the imposition of U.S. withholding tax on "dividend equivalents" paid pursuant to certain notional principal contracts and other equity-linked instruments referencing U.S. equities. The Coalition is very concerned about the application of the proposed regulations to exchange-traded options.

The proposed regulations, if adopted as final, would apply much more broadly than intended by Congress and would have a disruptive effect on the U.S. options markets. They would treat all options transactions with initial "deltas" of 70 or higher as economic substitutes for owning the underlying stock even though the risks and rewards associated with such options deviate significantly from those associated with owning the stock. A rational foreign person would enter an options position to avoid withholding tax on a dividend only if the options position will result in a better risk-adjusted, after-tax return. Given that dividend withholding tax typically represents only a very small percentage of a stock's value, it is highly unlikely that a foreign person would assume the risks associated with a delta-70 option to avoid withholding tax. The Coalition has a number of additional concerns about the proposed regulations which are described in detail in the comment letter.