
[Federal Register Volume 77, Number 224 (Tuesday, November 20, 2012)]
[Notices]
[Pages 69668-69670]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-28143]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68225; File No. AN-OCC-2012-04]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Advance Notice To Revise the Method for Determining 
the Minimum Clearing Fund Size To Include Consideration of the Amount 
Necessary To Draw on Secured Credit Facilities

November 14, 2012.
    Pursuant to Section 806(e)(1) of the Payment, Clearing, and 
Settlement Supervision Act of 2010 (``Clearing Supervision Act'') \1\ 
and Rule 19b-4(n)(1)(i),\2\ notice is hereby given that on October 18, 
2012, The Options Clearing Corporation (``OCC'') filed with the 
Securities and Exchange Commission (``Commission'') the advance notice 
described in Items I, II, and III below, which Items have been prepared 
primarily by OCC. The Commission is

[[Page 69669]]

publishing this notice to solicit comments on the advance notice from 
interested persons.
---------------------------------------------------------------------------

    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(i).
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    OCC proposes to revise the method for determining the minimum 
clearing fund size to include consideration of the amount necessary for 
OCC to draw on its secured credit facilities.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the advance notice and 
discussed any comments it received on the advance notice. 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 these statements.\3\
---------------------------------------------------------------------------

    \3\ The Commission has modified the text of the summaries 
prepared by OCC.
---------------------------------------------------------------------------

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    The purpose of this advance notice is to implement a minimum 
clearing fund size equal to 110% of the amount of committed credit 
facilities secured by the clearing fund to ensure that the amount of 
the clearing fund likely will exceed the required collateral value that 
would be necessary for OCC to be able to draw in full on such credit 
facilities. OCC's clearing fund is primarily intended to provide a high 
degree of assurance that market integrity will be maintained in the 
event that one or more clearing members or other specified entities to 
which OCC has credit exposure fails to meet its obligations.\4\ This 
includes the potential use of the clearing fund as a source of 
liquidity should it ever be the case that OCC is unable to obtain 
prompt delivery of, or convert promptly to cash, any asset credited to 
the account of a suspended clearing member.
---------------------------------------------------------------------------

    \4\ Under Article VIII, Section 1 of OCC's By-Laws, the clearing 
fund may be used to pay losses suffered by OCC: (1) As a result of 
the failure of a clearing member to perform its obligations with 
regard to any exchange transaction accepted by OCC; (2) as a result 
of a clearing member's failure to perform its obligations in respect 
of an exchange transaction or an exercised/assigned options 
contract, or any other contract or obligations in respect of which 
OCC is liable; (3) as a result of the failure of a clearing member 
to perform its obligations in respect of stock loan or borrow 
positions; (4) as a result of a liquidation of a suspended clearing 
member's open positions; (5) in connection with protective 
transactions of a suspended clearing member; (6) as a result of a 
failure of any clearing member to make any other required payment or 
to render any other required performance; or (7) as a result of a 
failure of any bank or securities or commodities clearing 
organization to perform its obligations to OCC.
---------------------------------------------------------------------------

    On September 23, 2011, the Commission approved a proposed rule 
change by OCC 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 maximum anticipated loss under a defined set of scenarios 
as determined by OCC, subject to a minimum clearing fund size of $1 
billion.\5\ OCC implemented this change in May 2012. Until that time, 
the size of OCC's clearing fund was calculated each month as a fixed 
percentage of the average total daily margin requirement for the 
preceding month, provided that the calculation resulted in a clearing 
fund of $1 billion or more.\6\
---------------------------------------------------------------------------

    \5\ Securities Exchange Act Release No. 34-65386 (September 23, 
2011), 76 FR 60572 (September 29, 2011) (SR-OCC-2011-10).
    \6\ If the calculation did not result in a clearing fund size of 
$1 billion or more, then the percentage of the average total daily 
margin requirement for the preceding month that resulted in a fund 
level of at least $1 billion would be applied. However, in no event 
was the percentage permitted to exceed 7%. With the rule change 
approved in September 2011, this 7% limiting factor on the minimum 
clearing fund size was eliminated.
---------------------------------------------------------------------------

    Under the formula that is implemented for determining the size of 
the clearing fund as a result of the May 2012 change, OCC's Rules 
provide that the amount of the fund is 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'' \7\ 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.\8\ The size of the clearing 
fund continues to be recalculated monthly, based on a monthly averaging 
of daily calculations for the previous month, and it is subject to a 
requirement that its minimum size may not be less than $1 billion.
---------------------------------------------------------------------------

    \7\ The term ``clearing member group'' is defined in OCC's By-
Laws to mean a clearing member and any member affiliates of the 
clearing member.
    \8\ 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'' were approved by the Commission at 99% and 99.9%, 
respectively. However, the Commission approval order notes that OCC 
retains discretion to employ different confidence levels in these 
calculations provided that OCC will not employ confidence levels of 
less than 99% without first filing a proposed rule change.
---------------------------------------------------------------------------

    This minimum dollar size for OCC's clearing fund is the subject of 
this advance notice. OCC maintains committed credit facilities that are 
secured by the clearing fund in order to provide a source of liquidity 
in the event of a default by a clearing member or one of OCC's 
settlement banks. The change arises out of a regular review that OCC 
conducts in order to determine the appropriate aggregate amount of such 
committed credit facilities. In addition to its liquidity exposure to 
the potential failure of a clearing member, OCC also evaluates its 
liquidity exposure to settlement banks in respect of their ability to 
wire net settlement proceeds in time for OCC to meet its settlement 
obligations at one or more of OCC's other settlement banks as well as 
OCC's credit exposure to banks that issue letters of credit on behalf 
of clearing members as a form of margin.
    OCC's committed credit facilities are secured by assets in the 
clearing fund and certain margin deposits of suspended clearing 
members. In light of the uncertainty regarding the amount of margin 
assets of a suspended clearing member that might be eligible at any 
given point to support borrowing under the secured credit facilities, 
OCC has considered the availability of funds based on a consideration 
of the amount of the clearing fund deposits available as collateral. To 
draw on the full amount of its credit facilities secured by the 
clearing fund, the size of the clearing fund would need to be 
approximately $2.2 billion. The $2.2 billion figure reflects a 10% 
increase above the total size of such credit facilities, which is meant 
to account for the percentage discount applied to collateral pledged by 
OCC in determining the amount available for borrowing.
    Based on monthly recalculation information, the size of OCC's 
clearing fund during the period from July 2011 to July 2012 was less 
than $2.2 billion on eight occasions. Therefore, to address the risk 
that the assets in the clearing fund might at any time be insufficient 
to enable OCC to meet potential liquidity needs by fully accessing its 
committed credit facilities that are secured by the clearing fund, the 
proposed rule change described by the advance notice would amend the 
requirement that the minimum size of the clearing fund cannot be less 
than $1 billion by providing instead that the minimum clearing fund 
size would be equal to the greater of either $1 billion or 110% of the 
amount of such committed credit facilities. OCC proposes to denote the 
credit facility component of the minimum clearing fund requirement as a 
percentage of the total amount of the credit facilities that

[[Page 69670]]

OCC actually secures with clearing fund assets because OCC negotiates 
these credit facility agreements, including size and other terms, on an 
annual basis and the total size is therefore subject to change.

(B) Clearing Agency's Statement on Burden on Competition

    OCC does not believe that the proposed changes contained in the 
advance notice will have any impact or impose any burden on 
competition.

(C) Clearing Agency's Statement on Comments on the Advance Notice 
Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule changes contained in the advance notice.

III. Date of Effectiveness of the Advance Notice and Timing for 
Commission Action

    The proposed changes contained in the advance notice may be 
implemented pursuant to Section 806(e)(1)(G) of Clearing Supervision 
Act \9\ if the Commission does not object to the proposed changes 
within 60 days of the later of (i) the date that the advance notice was 
filed with the Commission or (ii) the date that any additional 
information requested by the Commission is received. The clearing 
agency shall not implement the proposed changes contained in the 
advance notice if the Commission objects to the proposed changes.
---------------------------------------------------------------------------

    \9\ 12 U.S.C. 5465.
---------------------------------------------------------------------------

    The Commission may extend the period for review by an additional 60 
days if the proposed changes raise novel or complex issues, subject to 
the Commission providing the clearing agency with prompt written notice 
of the extension. Proposed changes may be implemented in fewer than 60 
days from the date the advance notice is filed, or the date further 
information requested by the Commission is received, if the Commission 
notifies the clearing agency in writing that it does not object to the 
proposed changes and authorizes the clearing agency to implement the 
proposed changes on an earlier date, subject to any conditions imposed 
by the Commission.
    The proposals contained in this advance notice shall not take 
effect until all regulatory actions required with respect to the 
proposals are completed.\10\ The clearing agency shall post notice on 
its Web site of proposed changes that are implemented.
---------------------------------------------------------------------------

    \10\ OCC also filed the proposals contained in this advance 
notice as a proposed rule change under Section 19(b)(1) of the 
Exchange Act and Rule 19b-4 thereunder. 15 U.S.C. 78s(b)(1); 17 CFR 
240.19b-4. Pursuant to Section 19(b)(2) of the Exchange Act, within 
forty-five days of the date of publication of the proposed rule 
change in the Federal Register or within such longer period up to 
ninety days if the Commission designates or the self-regulatory 
organization consents the Commission will either: (i) By order 
approve or disapprove the proposed rule change or (ii) institute 
proceedings to determine whether the proposed rule change should be 
disapproved. 17 U.S.C. 78s(b)(2)(A). See Securities Exchange Act 
Release No. 34-68130 (November 1, 2012), 77 FR 66900 (November 7, 
2012) (SR-OCC-2012-19).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. 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 email to rule-comments@sec.gov. Please include 
File Number AN-OCC-2012-04 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number AN-OCC-2012-04. This file 
number should be included on the subject line if email 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 advance notice that are filed 
with the Commission, and all written communications relating to the 
advance notice 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 Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE., Washington, 
DC 20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filings 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/components/docs/legal/rules_and_bylaws/sr_occ_12_19.pdf.
    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 AN-OCC-2012-04 
and should be submitted on or before December 11, 2012.

    By the Commission.
Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2012-28143 Filed 11-19-12; 8:45 am]
BILLING CODE 8011-01-P


