
[Federal Register Volume 75, Number 214 (Friday, November 5, 2010)]
[Notices]
[Pages 68392-68393]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-28057]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63217; File No. SR-OCC-2010-14]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Revise Its Rules To Expand the 
Forms of Collateral Eligible for Incorporation in the System for 
Theoretical Analysis and Numerical Simulations Risk Management 
Methodology

November 1, 2010.

I. Introduction

    On August 25, 2010, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-OCC-2010-14 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published in the Federal 
Register on September 13, 2010. No comment letters were received on the 
proposal. This order approves the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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II. Description

    This rule change revises OCC's Rules to expand the forms of 
collateral eligible for incorporation in OCC's System for Theoretical 
Analysis and Numerical Simulations (``STANS'') risk management 
methodology.
    The rule change alters Interpretation and Policy .06 to Rule 601 in 
connection with expanding the forms of collateral eligible for 
incorporation in the STANS risk management methodology. Prior to the 
rule change, OCC incorporated common stock and ETFs \3\ in the STANS 
margin calculation process.\4\ When OCC began including common stock 
and ETFs in the STANS margin calculation process, it noted its belief 
that the procedure would more accurately measure risk in Clearing 
Members' accounts and thereby permit OCC to more precisely set margin 
requirements to reflect that risk. For those same reasons, OCC will now 
incorporate certain fixed-income, ``government securities'' into the 
STANS margin calculation process.
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    \3\ ETFs fall within the definition of ``fund shares'' as that 
term is defined in Article I, Section 1 of OCC's By-Laws.
    \4\ Securities Exchange Act Release No. 34-58158 (July 15, 
2008), 73 FR 42626
     (July 22, 2008) (SR-OCC-2007-20).
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    The specific amendments to OCC's Rules that facilitate 
incorporation of government securities into the STANS margin 
calculation process can be found at http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/sr_occ_10_14.pdf.
    OCC will now incorporate in phases certain ``government 
securities'' into the STANS margin calculation beginning with U.S. 
Government securities.\5\ Treasury Inflation Protected Securities and 
callable U.S Treasury Securities will be excluded from the initial 
phase, as will be Canadian government securities and GSE debt 
securities.\6\
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    \5\ This would include but would not be limited to Government 
securities and GSE debt securities.
    \6\ The government securities being initially excluded will be 
evaluated by OCC for possible inclusion in STANS as appropriate 
models are developed.
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    Currently, government securities deposited as collateral to satisfy 
margin requirements are priced on a nightly basis and are assigned a 
value equal to their current market value less an applicable haircut 
based on the term to maturity. While this method of valuing collateral 
has generally served OCC well in the past, OCC believes analyzing 
cleared positions and margin assets as a single portfolio using STANS 
provides a more accurate valuation of the Clearing Members' securities 
deposited as collateral in relation to other account positions. As when 
OCC began including common stocks and ETFs in the STANS calculation, 
OCC believes phasing in government securities will align risk-
management techniques utilized to manage market risk of cleared 
positions, for example for Treasury futures contracts, with those 
techniques used to value margin deposits.
    The inclusion of government securities into STANS will be 
implemented using an approach similar to that used when common stocks 
and ETFs were added into STANS. The value of the securities deposited 
in a Clearing Member's account will be determined along with the risk 
on the margin assets on a portfolio basis with reference to the 
volatility and correlation of each deposited security to the other 
positions in the account. Given the conservative nature of the current 
haircuts applied to deposits of government securities, OCC anticipates 
a modest increase in their collateral valuation upon the implementation 
of this change.
    As a part of this rule change, OCC will apply a portfolio specific 
adjustment factor when determining whether there is sufficient margin 
excess in an account. This will enable OCC to release margin collateral 
to a Clearing Member on an intraday basis. The adjustment factor is 
account and security specific

[[Page 68393]]

and is determined by approximating the change in margin requirement 
caused by depositing or withdrawing a particular security from the 
Clearing Member's account based on the risk characteristics of that 
security and its consequent assessed value. OCC believes this process 
will provide a more accurate projection of the margin impact of 
collateral withdrawals and substitutions on a Clearing Member's 
account. This process is already used to analyze the impact of 
substitutions and withdrawals of equity collateral within the STANS 
Monte Carlo simulations.\7\
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    \7\ OCC believes the approach currently used to assess the 
impact of collateral substitutions and withdrawals represents an 
improvement over that outlined in File No. SR-OCC-2007-20. 
Interpretation and Policy .01 under Rule 608 generally provides that 
OCC may specify procedures from time-to-time to assess the impact of 
collateral withdrawals and substitutions.
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    OCC's Rule 601, ``Margin Requirements,'' already provides that 
margin assets in the form of securities may be incorporated into the 
Monte Carlo calculations as an alternative to valuing such assets under 
Rule 604, ``Form of Margin Assets.'' In connection with incorporating 
common stocks and ETFs into the STANS calculation, OCC adopted 
Interpretation and Policy .06 under Rule 601 to clarify that margin 
assets in the form of common stocks and ETFs would be included in the 
Monte Carlo simulations described in Rule 601 for purposes of 
determining the minimum expected liquidating value of an account with 
other margin assets being valued as provided for under Rule 604.\8\ OCC 
is now broadening the interpretation to provide that OCC may designate 
those margin assets which if deposited into a Clearing Member's account 
will be valued as provided in Rule 601 rather than Rule 604. This 
change is intended to facilitate OCC's adoption of certain government 
securities into the STANS margin calculation process.
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    \8\ Rule 604(f) provides that, in lieu of the valuations 
provided for in Rule 604, OCC may elect to value any or all margin 
assets in the form of securities pursuant to Rule 601.
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III. Discussion

    Section 17A(b)(3)(F) \9\ requires, among other things, that the 
rules of a clearing agency are designed to safeguard securities and 
funds in the clearing agency's possession or control or for which it is 
responsible. This requires OCC to have the ability to meet its 
settlement obligations following a member's default. It is therefore 
necessary that OCC have an effective methodology for calculating margin 
requirements that are sufficient to enable OCC to complete settlement 
in the event a member becomes insolvent or otherwise fails to meet its 
obligations to OCC. The Commission believes that the changes OCC is 
making to include government securities within the STANS risk 
management methodology should better enable OCC to fulfill its 
safeguarding obligations under the Act and therefore is consistent with 
the Act.
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \10\ and the 
rules and regulations thereunder.
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    \10\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (File No. SR-OCC-2010-14) be, 
and hereby is, approved.\12\
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    \11\ 15 U.S.C. 78s(b)(2).
    \12\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-28057 Filed 11-4-10; 8:45 am]
BILLING CODE 8011-01-P


