
[Federal Register Volume 77, Number 245 (Thursday, December 20, 2012)]
[Notices]
[Pages 75466-75468]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30689]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68445; File No. SR-OCC-2012-19]


Self-Regulatory Organizations; Options Clearing Corporation; 
Order Approving Proposed Rule Change To Revise the Method for 
Determining the Minimum Clearing Fund Size To Include Consideration of 
the Amount Necessary To Draw on Secured Credit Facilities

December 14, 2012.

I. Introduction

    On October 18, 2012, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change SR-OCC-2012-19 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 November 7, 2012.\3\ The 
Commission received no comment letters. This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 68130 (November 1, 
2012), 77 FR 66900 (November 7, 2012). OCC also filed an advance 
notice relating to these proposed changes. See Securities Exchange 
Act Release No. 68225 (November 14, 2012), 77 FR 69668 (November 20, 
2012). The Commission did not receive any comments on this 
publication.

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II. Description of the Proposed Rule Change

A. Background

    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.\4\ 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.\5\
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    \4\ Securities Exchange Act Release No. 34-65386 (September 23, 
2011), 76 FR 60572 (September 29, 2011) (SR-OCC-2011-10).
    \5\ 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.
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    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'' \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.\7\ 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.
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    \6\ 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.
    \7\ 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.
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B. Proposed Rule Change

    The proposed rule change will implement a minimum clearing fund 
size equal to 110% of the amount of committed credit facilities secured 
by the clearing fund so 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, settlement banks, or banks that issue 
letters of credit on behalf of clearing members as a form of margin 
fails to meet its obligations.\8\ 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.
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    \8\ 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.
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    OCC's committed credit facilities are secured by assets in the 
clearing fund and certain margin deposits of the suspended clearing 
member. 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. As 
an example, for OCC to draw on the full amount of its current credit 
facilities secured by the clearing fund, the size of the clearing fund 
likely 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 reduce the risk 
that the assets in the clearing fund might at any time be insufficient 
to enable OCC to meet potential liquidity needs by accessing the full 
amount of its committed credit facilities that are secured by the 
clearing fund, OCC is amending the current minimum clearing fund size 
requirement of $1 billion by providing instead that the minimum 
clearing fund size is the greater of either $1 billion or 110% of the 
amount of such committed credit facilities. OCC is denoting the credit 
facility component of the minimum clearing fund requirement as a 
percentage of the total amount of the credit facilities that 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.

III. Discussion

    Section 17A(b)(3)(F) of the Act \9\ requires that, among other 
things, that the rules of a clearing agency are designed to promote the 
prompt and accurate clearance and settlement of securities transactions 
and, to the extent applicable, derivative agreements, contracts, and 
transactions, and to safeguard securities and funds in its custody or 
control or for which it is responsible. The proposed rule change will 
further these ends by requiring a minimum clearing fund size that is 
designed to enable OCC to draw in full on its committed credit 
facilities that are secured by the clearing fund.
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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-2012-19) be and 
hereby is approved \12\ as of the date of this order or the date of the 
``Notice of No Objection to Advance Notice Filing to Revise the Method 
for Determining the Minimum Clearing Fund Size to Include Consideration 
of the Amount Necessary to Draw on Secured Credit Facilities''

[[Page 75468]]

(File No. AN-OCC-2012-04), whichever is later.
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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).
    \13\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30689 Filed 12-19-12; 8:45 am]
BILLING CODE 8011-01-P


