United States Court of Appeals, District of Columbia Circuit
March 20, 2017
Petition for Review of an Order of the Securities &
H. Thompson argued the cause for petitioners. With him on the
briefs were Howard C. Nielson Jr., Peter A. Patterson, and
Harold S. Reeves.
Battalio and Robert Jennings, pro se, were on the brief for
amicus curiae Robert Battalio and Robert Jennings in support
A. Hardin, Assistant General Counsel, Securities and Exchange
Commission, argued the cause for respondent. With her on the
brief were Anne K. Small, General Counsel, Sanket J. Bulsara,
Deputy General Counsel, Michael A. Conley, Solicitor, and
Emily T.P. Rosen, Senior Counsel.
William J. Nissen argued the cause for intervenor. With him
on the brief were Steven E. Sexton and Kristen E. Rau.
Before: Garland, Chief Judge, Griffith, Circuit Judge, and
Sentelle, Senior Circuit Judge.
Garland, Chief Judge
to increase its capital reserves, the Options Clearing
Corporation proposed a change in its rules. That change was
subject to approval by the Securities and Exchange
Commission, which granted approval without itself making the
findings and determinations prescribed by the Securities
Exchange Act of 1934. Instead, it effectively abdicated that
responsibility to the Corporation. Because this does not
represent the kind of reasoned decisionmaking required by
either the Exchange Act or the Administrative Procedure Act,
we remand the case to the Commission for further proceedings.
Options Clearing Corporation (OCC), a Delaware corporation,
is a clearing agency that facilitates trades in options and
other financial instruments. It is the only clearing agency
for standardized U.S. options listed on U.S. national
securities exchanges. Given its significant role, OCC has
been designated a systemically important financial market
utility and is closely regulated by the Securities and
Exchange Commission (SEC). See Order Approving
Proposed Rule Change Concerning the Options Clearing
Corporation's Capital Plan, 81 Fed. Reg. 8294, 8294 (Feb.
18, 2016) ("Order").
time of the events in this case, there were twelve national
securities exchanges on which listed options were traded.
Five were equal shareholders in OCC; seven were
nonshareholders, lacking any ownership interest. All of the
exchanges clear their trades in listed options through OCC.
In addition to the exchanges, OCC has "clearing
members" that clear and settle options trades for their
customers through the exchanges. See Order, 81 Fed.
Reg. at 8294; OCC, Bylaws Art. V (amended 2009).
charges clearing members fees for the transactions they make.
For each upcoming year, OCC sets the fees to cover the
year's projected expenses, plus a buffer. If, at the end
of the year, OCC has taken in more fees than needed to cover
its expenses and maintain its reserves, it refunds the excess
fees to the clearing members, allocated in proportion to what
they had paid. Until the developments at issue here, OCC
refunded all such excess fees. See Notice of Filing
of a Proposed Rule Change Concerning a Proposed Capital Plan,
80 Fed. Reg. 5171, 5175 (Jan. 30, 2015) ("Notice of
Proposed Rule Change").
case concerns OCC's attempt to boost its capital reserves
and, in order to do so, to alter how fees and refunds are
calculated. In 2014, OCC began evaluating its capital level
and eventually determined that it did not have enough to
cover "business, operational, and pension risks."
Order, 81 Fed. Reg. at 8296. While these capital needs
exclude counterparty and on-balance-sheet risks, which are
covered by billions of dollars in other funds, they are still
significant. OCC determined that on top of its existing
capital reserves of $25 million, it needed an additional $222
million of capital immediately on hand, plus another $117
million in backup "Replenishment Capital" that it
could call upon if necessary. See Notice of Proposed
Rule Change, 80 Fed. Reg. at 5172; Order, 81 Fed. Reg. at
amass those reserves, OCC developed a Capital Plan. Under the
Plan, OCC's five shareholder exchanges would make
immediate capital contributions to reach OCC's current
capital target and also pledge to provide Replenishment
Capital upon request. The Plan compensates those
contributions with dividends paid out of OCC's fees. In
particular, after fees are applied to OCC's operating
expenses, and then used to restore capital reserves if they
have dipped, the remaining unused fees are split between
dividends and refunds. Approximately half of the unused fees
go to shareholders as dividends; approximately half are
refunded to clearing members. In other words, whereas
clearing members previously received all of the excess fees
as refunds, the Plan diverts roughly half of those refunds to
dividends. See Notice of Proposed Rule Change, 80
Fed. Reg. at 5173-75.
Plan makes other changes to OCC's fee practices as well.
The buffer used to calculate each year's fees -- that is,
the amount by which that year's projected expenses are
inflated to arrive at the amount to be charged as upfront
fees -- decreases under the Plan from 31% to 25%. And the
Plan provides for a permanent end to refunds (but not
dividends) if Replenishment Capital becomes necessary and is
not repaid in 24 months or if the target capital requirement
is not restored within that period. See id.
Plan cannot go into effect unless approved by the SEC because
OCC is a "self-regulatory organization" under the
Securities Exchange Act of 1934, 15 U.S.C. § 78a et
seq. ("Exchange Act"). In early 2015, OCC
brought its Plan to the SEC, which published a Notice of
Filing of a Proposed Rule Change and solicited public
comments. The SEC issued a final Order approving the Plan in
early 2016. See Order, 81 Fed. Reg. at 8294-95.
-- two nonshareholder exchanges (Miami International
Securities Exchange, LLC and BOX Options Exchange LLC), a
clearing member (KCG Americas LLC, a subsidiary of Petitioner
KCG Holdings), and a market participant (Susquehanna
International Group, LLP) -- sought judicial review. They
also moved to stay the SEC's Order to prevent the
OCC's Plan from going into effect, but a panel of this
court denied the stay. Susquehanna Int'l Grp., LLP v.
SEC, No. ...