

[Federal Register: February 12, 2008 (Volume 73, Number 29)]
[Notices]               
[Page 8098-8100]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12fe08-76]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57270; File No. SR-OCC-2007-20]

 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating to the System for 
Theoretical Analysis and Numerical Simulations

February 5, 2008.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 14, 2007, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which items have been prepared 
primarily by OCC. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change would permit the incorporation of certain 
forms of securities deposited as margin collateral into OCC's System 
for Theoretical Analysis and Numerical Simulations (``STANS'') risk 
management methodology.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the

[[Page 8099]]

proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. OCC has prepared summaries, set 
forth in sections (A), (B), and (C) below, of the most significant 
aspects of such statements.\2\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ The Commission has modified parts of these statements.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to more accurately 
measure the risk in clearing members' accounts and thereby permit OCC 
to set margin requirements that more precisely reflect that risk. In 
connection with this proposed change, it is also necessary to propose 
additional flexibility in determining the amount of replacement 
collateral required when securities deposited as margin are withdrawn. 
In addition, because OCC believes that certain existing concentration 
limits and requirements regarding minimum share prices are no longer 
appropriately applied to securities that are underlying securities or 
to fund shares that track an index that is an underlying index for 
covered contracts, OCC is proposing to eliminate such requirements with 
respect to such securities.
    Overview of Proposed Changes. OCC proposes to incorporate certain 
common stocks and ETFs (defined as ``fund shares'' in Article I of 
OCC's By-Laws) into the STANS margin calculation process.\3\ STANS is a 
large-scale Monte Carlo-based risk management methodology used to 
measure risk associated with portfolios of cleared contracts. 
Currently, these forms of securities when deposited as collateral to 
satisfy margin requirements are priced on a nightly basis and are 
assigned a value equal to their end-of-day market price minus the 
haircut applicable to that form of collateral, an amount that varies 
according to asset type. While this method of valuing collateral has 
generally served OCC well in the past, it does not take into account 
the potential risk-reducing impact that the deposited collateral might 
have on a clearing member's portfolio. Under the proposed rule change, 
cleared options positions and underlying securities in the forms 
indicated above would be analyzed as a single portfolio using STANS, 
thus providing a more accurate valuation of securities deposited as 
collateral in relation to the other positions in the account. The 
proposed rule change would align risk management techniques utilized to 
manage market risk of options portfolios with those used to value 
margin deposits. There are two primary benefits expected from the rule 
change. First, margin requirements would be based on the risk of the 
combined portfolio that includes both cleared contracts and deposited 
collateral thereby allowing the relevant intercorrelations of cleared 
contracts and deposited collateral to be taken into consideration 
rather than treating securities deposited as collateral as having fixed 
values. Second, the coverage provided by a particular asset class 
(e.g., shares of IBM common stock) would be based on the historical 
volatility of that particular asset rather than by taking a flat 
``haircut'' rate across a much broader class of assets (e.g., 30% 
haircut for common stock). For the period from August 16, 2007, to 
September 10, 2007, OCC staff computed margin requirements for all 
existing accounts according to this proposed approach. The result 
showed an average daily reduction in risk margin requirements of 
approximately $1.2 billion, or 5%, as compared to OCC's current 
approach. At the same time that average daily collateral requirements 
would be reduced, the STANS calculations would also measure and 
compensate for added risk arising where risks are positively correlated 
rather than offsetting.
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    \3\ For a description of STANS, refer to Securities Exchange Act 
Release No. 53322 (February 15, 2006) 71 FR 9403 (February 23, 2006) 
(File No. SR-OCC-2004-20).
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    OCC is also proposing an exception to collateral minimum price and 
concentration limits with respect to certain securities deposited as 
collateral. Currently, eligible collateral securities deposited with 
OCC must (1) have a market value greater than $10 per share and (2) be 
traded on a national securities exchange, the Nasdaq Global Market, or 
the Nasdaq Capital Market. Additionally, the aggregate value of margin 
attributed to a single security cannot exceed 10% of a clearing 
member's total margin requirement. These criteria were designed to 
limit deposits to liquid, readily marketable securities and to avoid 
concentrations of deposits in a single security. OCC proposes an 
exception to these eligibility and concentration requirements for 
securities that are deliverable upon exercise of a contract cleared by 
OCC or, in the case of ETFs, that track an index underlying cleared 
contracts whether or not the particular ETF is an underlying security. 
OCC believes that this exception would permit and encourage the use of 
collateral that closely hedges related options positions. The proposed 
exception would apply only to the approximately 2,800 exchange-listed 
equity securities that currently underlie listed options. Thus, OCC's 
existing minimum value and concentration restrictions would continue to 
apply to the approximate 7,200 exchange-listed equity securities that 
do not underlie listed options.
    OCC also proposes a minor amendment to the current requirement that 
the aggregate value of margin attributed to a single security cannot 
exceed 10% of the total margin requirement in an account. The proposed 
change would base the calculation on the clearing member's actual 
margin deposits rather than the clearing member's total margin 
requirement in the account. Thus, the requirement as amended would 
limit the value given to deposits in any single security to no more 
than 10% of the market value of a member's aggregate margin deposits in 
the account. This test is very similar in purpose and effect to the 
current test, but OCC believes it will be much easier to administer 
than the current test when collateral is included in STANS.
    In addition, OCC would need a different means for addressing 
substitutions of collateral where a security that has been valued in 
STANS was being replaced during the business day. STANS performs 
multiple portfolio revaluations during the business day using current 
prices of collateral and cleared contracts. While the revaluations 
include updated positions in cleared contracts reflecting intraday 
trading activity, they do not at present include updated collateral 
positions reflecting withdrawals and substitutions. In addition, it is 
operationally too intensive, given the complexity of the STANS 
methodology and the frequency of substitution requests, to recalculate 
the STANS requirement for each such collateral withdrawal/deposit. 
Although OCC intends ultimately to make further systems changes to 
address these issues in more efficient ways, OCC has developed an 
approach that provides the necessary protection to the clearing system 
by taking a conservative view of the estimated impact that a 
withdrawal/deposit would have on the member's requirement.
    OCC proposes to treat margin collateral substitutions and 
withdrawals in the same manner that substitutions and withdrawals of 
specific and escrow deposits are treated. In the case of a margin 
withdrawal or deposit, OCC would incorporate an adjustment factor, 
based on the historical volatility of the

[[Page 8100]]

security, equal to the estimated impact (within the 99% confidence 
interval) of the security on the projected liquidating value of the 
account. For example, if a clearing member deposited $300 in IBM stock 
and IBM is given a risk adjustment factor of 10%, the deposited stock 
would be given a value of $270 ($300 x [100%-10%]) in intraday excess 
collateral value to be used against releases to account for the 
potential negative risk impact of adding the stock to the portfolio. If 
the clearing member then released $200 of Google stock and Google is 
given a risk adjustment factor of 12%, the clearing member would be 
required to maintain $224 ($200 x [100% + 12%]) in excess collateral to 
account for the negative impact of removing Google from the portfolio.
    Proposed Changes to OCC's Rules to Implement the Foregoing 
Concepts. OCC's Rule 601, ``Margin Requirements,'' currently states in 
paragraph (c) that margin assets may be incorporated into the Monte 
Carlo calculations as an alternative to valuing such assets under Rule 
604, ``Form of Margin Assets.'' OCC now proposes merely to add an 
Interpretation to Rule 601 to indicate that OCC is implementing this 
alternative to the extent that it will be incorporating common stocks 
and ETFs into the STANS calculation of expected net liquidating value. 
Rule 604(b)(4), which governs the deposit of equity and debt issues to 
satisfy margin requirements, would be amended to provide exceptions to 
the per share minimum price and concentration limits and to provide 
that concentration limits will be measured in relation to the aggregate 
margin on deposit rather than to the margin requirement in an account. 
Rule 604(b)(4) is also proposed to be amended to reflect the fact that 
Nasdaq is now registered as a national securities exchange. An 
Interpretation is proposed to be added to Rule 608, ``Withdrawals of 
Margin,'' to give OCC the flexibility to adopt the interim method of 
dealing with collateral withdrawals and substitutions as described 
above. The proposed changes in Rules 609, ``Intraday Margin,'' and 
706(c), ``Cross-Margining Settlement Procedures,'' would reflect minor 
conforming changes and nonsubstantive updates to streamline the rules 
and add flexibility.
    OCC proposes to put all of the foregoing proposed rule changes into 
effect simultaneously upon appropriate notice to clearing members once 
systems changes needed for full implementation are in place. The 
published text of OCC's Rules would not be modified until that time 
although this rule change would be published as pending approval or 
approved but not yet implemented, as the case may be.
    The proposed changes to OCC's Rules are consistent with the 
purposes and requirements of section 17A of the Act because they are 
designed to promote accuracy in the clearance and settlement of 
transactions in options and other derivatives cleared by OCC and in the 
risk assessments related thereto, to promote efficiency and eliminate 
unnecessary costs to investors by reducing risk margin requirements, 
and in general to protect investors and the public interest. The 
proposed changes accomplish this purpose by more accurately evaluating 
collateral deposits and encouraging the use of collateral that closely 
hedges options positions. The proposed changes are not inconsistent 
with the existing By-laws and Rules of OCC, including any proposed to 
be amended.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would impose any 
burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    Written comments were not and are not intended to be solicited with 
respect to the proposed rule change and none have been received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which the self-regulatory organization consents, 
the Commission will:
    (A) By order approve the proposed rule change or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
 ) or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-OCC-2007-20 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2007-20. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml 

). Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 100 F Street, NE., Washington, 
DC 20549, 100 F Street, NE., Washington, DC 20549, on official business 
days between the hours of 10 a.m. and 3 p.m. Copies of such filing also 
will be available for inspection and copying at the principal office of 
OCC and on OCC's Web site at http://www.optionsclearing.com. 

    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-OCC-2007-20 
and should be submitted on or before March 4, 2008.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon ,
Deputy Secretary.
 [FR Doc. E8-2469 Filed 2-11-08; 8:45 am]

BILLING CODE 8011-01-P
