
[Federal Register Volume 76, Number 189 (Thursday, September 29, 2011)]
[Notices]
[Pages 60572-60574]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-25074]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65386; File No. SR-OCC-2011-10]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Revise Its By-Laws and Rules To 
Establish a Clearing Fund Amount Intended To Support Losses Under a 
Defined Set of Default Scenarios

September 23, 2011.

I. Introduction

    On August 3, 2011, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-OCC-2011-10 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 for comment in 
the Federal Register on August 17, 2011.\3\ The Commission received no 
comment letters. This order approves the proposed rule change.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-65119 (August 12, 
2011), 76 FR 51087 (August 17, 2011).
    \4\ This proposed rule change replaced a previously filed and 
later withdrawn proposed rule change by OCC regarding clearing fund 
sizing. File No. SR-OCC-2010-04, Securities Exchange Act Release 34-
62371 (June 24, 2010), 75 FR 37864 (June 30, 2010) (Notice of Filing 
of Proposed Rule Change To Revise its By-Laws and Rules To Establish 
a Clearing Fund Amount Intended to Support Losses Under a Defined 
Set of Default Scenarios). OCC withdrew its earlier proposed rule 
change in order that it could: incorporate amendments that had been 
proposed for the previous proposed rule change; discuss the 
adaptation of the methodology underlying the formula to take into 
account the effects of implementing its ``Collateral in Margins'' 
rule change (Securities Exchange Act Release No. 34-58158 (July 15, 
2008), 73 FR 42646 (July 22, 2008) (SR-OCC-2007-20)); give itself 
time to prepare updated comparative data about the impact of the 
proposed clearing fund sizing formula; and make additional changes 
to improve the overall readability of the proposed rule text.
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II. Description of the Proposal

    This proposed rule change would revise OCC's By-Laws and Rules to 
establish the size of OCC's clearing fund as the amount that is 
required within a confidence level selected by OCC to sustain the 
possible loss under a defined

[[Page 60573]]

set of scenarios as determined by OCC. Currently the size of the 
clearing fund is calculated each month and is equal to a fixed 
percentage of the average total daily margin requirement for the 
preceding month provided that this calculation results in a clearing 
fund of $1 billion or more.\5\
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    \5\ If the calculation does not result in a clearing fund of $1 
billion or more, the percentage of the average total daily margin 
requirement for the preceding month that results in a fund level of 
at least $1 billion is applied provided that in no event will the 
percentage exceed 7%.
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    Under the revised formula for determining the size of the clearing 
fund, the amount of the fund will be equal to the larger of the amount 
of the charge to the fund that would result from (i) a default by the 
single ``clearing member group'' \6\ whose default would be likely to 
result in the largest draw against the clearing fund or (ii) an event 
involving the near-simultaneous default of two randomly selected 
``clearing member groups'' in each case as calculated by OCC with a 
confidence level selected by OCC. Initially, the confidence levels 
employed by OCC in calculating the charge likely to result from a 
default by OCC's largest ``clearing member group'' and the default of 
two randomly-selected ``clearing member groups'' will be 99% and 99.9%, 
respectively. However, OCC will have the discretion to employ different 
confidence levels in these calculations in the future provided that OCC 
will not employ confidence levels of less than 99% without filing a 
rule change with the Commission.\7\ The size of the clearing fund will 
continue to be recalculated monthly based on a monthly averaging of 
daily calculations for the previous month and subject to a requirement 
that the total clearing fund be not less than $1 billion.\8\
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    \6\ ``Clearing member group'' will be defined in Article I 
(``Definitions'') of OCC's By-Laws to mean ``a Clearing Member and 
any Member Affiliates of such Clearing Member.''
    \7\ Proposed Interpretation and Policy .02 to OCC Rule 1001.
    \8\ Proposed Interpretation and Policy .01 to OCC Rule 1001.
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    The new formula is designed to more directly take into account 
anticipated losses resulting from the clearing member default scenarios 
described above and thereby establish the clearing fund at a size that 
is sufficient to cover such losses without relying on any rights of OCC 
to require clearing members to replenish the clearing fund. OCC 
believes the formula is generally consistent with the current 
``Recommendations for Central Counterparties'' published by the Bank 
for International Settlements and the International Organization of 
Securities Commissioners. Among the recommendations in the publication 
are that a clearing organization ``maintain sufficient financial 
resources to withstand, at a minimum, a default by the clearing member 
to which it has the largest exposure in extreme but plausible market 
conditions.'' The publication further advises clearing organizations to 
plan for the possibility of a default by two or more clearing members 
in a short time frame.\9\
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    \9\ Bank for International Settlements and International 
Organization of Securities Commissions, Recommendations for Central 
Counterparties (November 2004), available at 
http:[sol][sol]www.iosco.org/library/pubdocs/pdf/IOSCOPD176.pdf 
(``2004 Recommendations''). OCC notes that in December 2009 the 
Committee on Payment and Settlement Systems of the Bank for 
International Settlements (``CPSS'') and the Technical Committee of 
the International Organization of Securities Commissions (``IOSCO'') 
began a comprehensive review of the 2004 Recommendations in order to 
strengthen and clarify such recommendations based on experience and 
lessons learned from the recent financial crisis. In March 2011, 
CPSS and IOSCO published for comment the results of its review with 
comments requested by July 29, 2011. Bank for International 
Settlements and International Organization of Securities 
Commissions, Principles for financial market infrastructures (March 
2011), available at http:[sol][sol]www.iosco.org/library/pubdocs/
pdf/IOSCOPD350.pdf
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    In considering whether to revise the current formula for 
determining the size of the clearing fund, OCC compared the size of the 
clearing fund that would have resulted from application of the revised 
formula to the actual size of the clearing fund for each month from 
February 2008 through September 2009. This analysis revealed that for 
this time period the size of the clearing fund under the revised 
formula would have been on average 10% larger than under the current 
formula. In September and October 2008, which were two months of 
extreme volatility in the U.S. securities markets, the revised formula 
would have resulted in a clearing fund size of approximately 31% and 
27% greater than under the current formula. The average monthly change 
in the size of the clearing fund and the standard deviation of clearing 
fund size from month-to-month for this time period under the two 
formulas were broadly similar.\10\
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    \10\ Note the comparative data described in this paragraph was 
obtained using confidence levels set at 99% and higher. OCC 
estimates that using only a 99% confidence level for the months 
referenced would have lowered by an average of approximately 
[frac12]% the total size of the clearing fund as determined by the 
proposed methodology.
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    Since deciding in September 2009 that it wished to adopt the 
revised formula, OCC has continued to compare the size of the clearing 
fund under the revised formula with the size under the current formula. 
During 2010 the methodology underlying the revised formula was adapted 
to incorporate the effects of the implementation of the changes 
described in its Collateral in Margins rule change.\11\ Under those 
changes, certain types of securities accepted as collateral are 
analyzed for margin purposes together with positions in cleared 
products as a single portfolio to afford a more accurate measurement of 
risk. During the period February 2008 through January 2010 (i.e., prior 
to the implementation of the Collateral in Margins Filing) for which 
comparative data is available, the size of the clearing fund under the 
revised formula would have been on average 3% larger than under the 
current formula. Including also the months of July 2010 through June 
2011 (i.e., since the implementation of the Collateral in Margins rule 
change) for which comparative data is available, the corresponding 
percentage increase is 2%.
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    \11\ Securities Exchange Act Release No. 34-58158 (July 15, 
2008), 73 FR 42646 (July 22, 2008) (SR-OCC-2007-20). Supra note 4.
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    The existing formula for determining the size of the clearing fund 
was intended to establish the fund at a level reasonably designed to 
cover losses resulting from one or more clearing member defaults, and 
OCC believes that it has served that purpose adequately. Nevertheless, 
OCC believes that the revised formula presents a more accurate 
prediction of the actual losses that would be likely to result from 
such defaults. The existing formula takes potential losses into account 
only indirectly by setting the size of the clearing fund as a 
percentage of average margin requirements. The revised formula will 
directly take into account various types of default scenarios and 
therefore in OCC's view will be more likely to result in a level for 
the clearing fund that is adequate in the event such scenarios occur. 
The new formula is designed to more closely align the size of the 
clearing fund with its intended purpose of protecting OCC from any 
losses that could result from clearing member defaults and should 
thereby better help avoid a disruption of the clearance process even 
during extreme market conditions.
    Article VIII, Section 6 of OCC's By-Laws, which obligates clearing 
members to make good deficiencies in their clearing fund deposits 
resulting from pro rata charges or otherwise will remain unchanged.\12\
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    \12\ OCC's members' obligation to make good deficiencies in 
their clearing fund deposits will continue to be subject to a cap 
equal to 100% of a clearing member's then required deposit if it 
promptly withdraws from membership and closes out or transfers its 
open positions.

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[[Page 60574]]

III. Discussion

    Section 17A(b)(3)(F) of the Act \13\ requires, among other things, 
that the rules of a clearing agency be designed to assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible. The 
Commission believes that because the proposed rule change creates a 
more direct correlation between OCC's clearing fund size and potential 
losses from a defined set of default scenarios, it should better enable 
OCC to fulfill this statutory obligation.
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    \13\ 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 \14\ and the 
rules and regulations thereunder.
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    \14\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (File No. SR-OCC-2011-10) be, 
and hereby is, approved.\16\
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    \15\ 15 U.S.C. 78s(b)(2).
    \16\ 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.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-25074 Filed 9-28-11; 8:45 am]
BILLING CODE 8011-01-P


