
[Federal Register Volume 78, Number 46 (Friday, March 8, 2013)]
[Notices]
[Pages 15088-15090]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-05412]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69026; File No. SR-OCC-2013-02]


Self-Regulatory Organizations; the Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Implement a Revised Method 
of Calculating Clearing Members' Respective Contributions to OCC's 
Clearing Fund

March 4, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on February 19, 2013, 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    OCC proposes to implement a revised method of calculating clearing 
members' respective contributions to OCC's clearing fund.

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 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.\3\
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    \3\ The Commission has modified the text of the summaries 
prepared by OCC.
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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 this proposed rule change is to revise OCC's By-Laws 
and Rules to implement a revised method of calculating clearing 
members' respective contributions to OCC's clearing fund. Currently, 
clearing members contribute to the clearing fund in proportion to 
average daily open interest, i.e., the total number of cleared 
contracts and open positions plus units of stock underlying open stock 
loan or borrow positions, over the calendar month preceding the date of 
calculation, subject to a $150,000 minimum contribution. There are 
exceptions for a small number of Execution-Only Clearing Members,\4\ 
which are required to make a minimum contribution equal to $150,000 
plus the product of $15 per contract multiplied by the average daily 
volume of the Execution-Only Clearing Member over the previous calendar 
month, and for newly-admitted Clearing Members, whose initial 
contribution is fixed by OCC's Board of Directors.
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    \4\ Article I of OCC's By-Laws define Execution-Only Clearing 
Members as those approved to act only as a Clearing Member that 
transfers confirmed trades or allocates positions to other Clearing 
Members and not to carry positions in its accounts with OCC on a 
routine basis.
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    OCC has developed a new allocation formula that it believes would 
more equitably allocate contributions among its clearing members based 
on each clearing member's particular activities and use of OCC's 
facilities. The revised formula would include the following components: 
(1) Open interest; (2) total risk charge; and (3) volume.\5\ The total 
risk charge and volume components would be new components of the 
allocation formula. The Commission recently noted in publishing its 
Clearing Agency Standards, ``registered clearing agencies must evaluate 
continually and make appropriate updates and improvements to their 
operations and risk management practices * * *.'' \6\ OCC believes that 
these proposed enhancements to its existing clearing fund allocation 
formula are consistent with this notion of continual evaluation and 
refinement.
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    \5\ Because Execution-Only Clearing Members do not clear their 
own trades, the measure of volume applicable to them would be 
executed volume rather than cleared volume.
    \6\ Securities Exchange Act Release No. 34-68080 (October 22, 
2012), 77 FR 66220 (November 2, 2012).
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    OCC believes that the 1980 Standards for the Registration of 
Clearing Agencies issued by the staff of the Securities and Exchange 
Commission supports the idea that clearing members' use of the services 
of a clearing agency forms an appropriate basis on which clearing 
members should correspondingly be required to participate in the 
obligations of the clearing agency's risk management framework.\7\ Use 
of a clearing agency by its clearing members may be measured in a 
number of ways.
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    \7\ Securities Exchange Act Release No. 34-16900 (June 17, 
1980); 45 FR 41920 (June 23, 1980) (providing in pertinent part that 
``all participants utilizing similar clearing agency services * * * 
should be required to comply fully with the clearing agency's 
internal financial and operational rules such as clearing fund 
deposits, mark-to-the-market payments and margin deposits related to 
the service used'').
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    OCC believes that its proposed allocation formula is preferable to 
its current formula because, by incorporating measurements of volume 
and certain risk charges, it would apportion contributions based on 
more sophisticated measurements of clearing members' usage of OCC's 
facilities. OCC believes that clearing member volume and risk charges 
would recognize demands on OCC's services and facilities that are not 
captured by open interest alone. OCC believes that the new formula 
would incorporate open interest, total risk charge, and volume, in 
proportions that are designed to equitably allocate clearing fund 
requirements in light of these additional demands. Specifically, open 
interest, total risk charge, and volume would have weightings of 50%, 
35%, and 15%, respectively. OCC contemplated alternative weightings in 
its decision to propose this particular allocation method but believes 
that the proposed formula is appropriate because it would give 
significant weight to the new volume and risk charge components and tie 
allocations more closely to demands placed by clearing members on OCC's 
facilities. While the revised formula would result in significant 
reallocations of contributions, OCC does not expect that it would 
unduly burden those clearing members anticipated to experience 
increased contributions.
    OCC believes it is appropriate for open interest to continue to 
serve as the most heavily weighted component because open interest, 
generally speaking, is a measure of a clearing member's overall usage 
of OCC's facilities. With respect to open interest, the definition of 
open interest in proposed Rule 1001(d) is not identical to the 
definition of open interest in existing Rule 1001(b), which OCC 
proposes to delete. However, OCC believes that the differences in these 
two definitions are not material and are the result of the use of the 
defined term ``cleared contract'' in proposed Rule 1001(d) instead of 
specifically naming the individual types of contracts that make up 
``cleared contracts,'' as well as general updating and restructuring of 
the rule provision.
    OCC also believes that risk and volume are relevant factors because 
they distinctly measure material aspects of clearance and settlement 
activity and therefore a clearing member's use of OCC's resources. Each 
clearing

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member's contribution to the clearing fund should therefore take these 
measures of usage of OCC's facilities into account. OCC notes that 
clearing members whose OCC accounts contain positions that are well-
diversified and/or exhibit relatively little exposure to overall market 
direction would likely have a smaller required contribution under the 
proposed formula. Clearing members exhibiting a relatively large 
exposure to market direction, a concentration in contracts that 
individually present high amounts of risk, and undiversified accounts 
would generally experience a larger required contribution than is the 
case under the current formula.
    OCC believes that the inclusion of risk and volume metrics within 
OCC's clearing fund allocation formula would generally reflect similar 
practices that are already in place at other registered clearing 
agencies. OCC believes that these existing allocation practices of 
other clearing agencies represent a meaningful benchmark of practices 
that are used across the industry. Taking those practices into account, 
OCC evaluated the appropriateness of including these mechanisms in its 
own allocation formula in a way that is tailored to the nature and 
demands of OCC's particular business. OCC understands that one clearing 
agency allocates contributions among its affected clearing members 
using certain measures of volume and open interest in addition to 
considering margin requirements over a given period.\8\ The rules of 
another clearing agency provide that clearing member contributions to 
its clearing fund are determined according to a wide variety of risk-
based charges meant to account for the ways in which clearing members 
utilize its services.\9\
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    \8\ See CME Clearing Financial Safeguards, (2012) (explaining 
that CME Group maintains three separate clearing funds that 
correspond to the different asset classes for which it provides 
clearance and settlement services and that the allocation method for 
each clearing fund is distinct), available at http://www.cmegroup.com/clearing/files/financialsafeguards.pdf.
    \9\ See National Securities Clearing Corporation Rules and 
Procedures, (September 4, 2012) Procedure XV. Clearing Fund Formula 
and Other Matters (providing that allocation of the clearing fund 
contributions for National Securities Clearing Corporation 
participants involves risk-based charges that include, but are not 
limited to, (1) Value-at-Risk to determine the potential future 
exposure of a given portfolio based on historical price movements; 
(2) mark-to-market to measure unrealized profit or loss of unsettled 
securities positions; (3) a fail charge to account for transactions 
that do not settle; and (4) other special charges to address any 
volatility or lack of liquidity in a security), available at http://www.dtcc.com/legal/rules_proc/nscc_rules.pdf.
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    OCC's intends that its proposed total risk charge would measure the 
economic significance of the activities of a clearing member. The total 
risk charge is equal to the margin requirement, as determined by OCC, 
of the accounts of the clearing member exclusive of the net asset value 
of those accounts. OCC notes that a range of factors influence the 
relationship between the open interest in a clearing member's account 
and its associated risk charge. For example, for each clearing member 
these factors include, but are not limited to, the types of positions, 
number of long positions versus short positions, value of the 
securities underlying the contracts, volatility of the underlying, 
diversification, number of accounts of the clearing member, and the 
extent to which the clearing member's options positions are in-the-
money or out-of-the-money.
    Volume, like open interest, is a measure of a clearing member's 
level of usage of OCC's facilities. However, volume is distinct from 
open interest in that it is a function of the average turnover of the 
positions in the clearing member's account. Therefore, market-making, 
high frequency trading, and execution-only services are all examples of 
activities that tend to elevate volume relative to open interest. By 
contrast, holding long term positions in long term contracts is an 
example of activity that would lower a clearing member's volume 
relative to its open interest.
    OCC notes that most Clearing Member Groups \10\ will experience a 
material change (i.e., an increase or decrease of 10% or greater in the 
dollar amount of a Clearing Member Group's aggregated Clearing Fund 
requirement) under the new formula. The majority of the Clearing Member 
Groups that would experience a material change increase in Clearing 
Fund requirements are smaller single firms with lower initial Clearing 
Fund requirements. OCC notes that small firms tend to experience an 
increase under the new allocation formula for two reasons. First, 
smaller firms often have portfolios lacking the diversification that 
lowers the risk compared with open interest for larger firms. Second, 
firms that have a small fraction of combined open interest, total risk, 
and volume, experience increases simply due to the fact that the new 
formula adds a clearing fund share on top of the $150,000 minimum as 
opposed to instead of it. To allow firms that would face a substantial 
increase in their clearing fund requirements adequate time to prepare 
for the proposed changes, OCC would provide all clearing members 
significant lead time, as described below, before implementing the new 
formula and would also use an incremental approach to implementation 
that would phase in the percentage weightings applicable to each 
component. OCC believes that this approach would provide clearing 
members with an important opportunity to secure any additional funds 
that they anticipate would be necessary in connection with the 
requirements of the new formula or to otherwise modify their 
activities, for instance by reducing positions, to manage the impact of 
the new formula.
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    \10\ The term ``Clearing Member Group'' is defined in OCC's By-
Laws as a Clearing Member and any Member Affiliates of such Clearing 
Member.
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    The Clearing Fund requirements under the new allocation formula 
will be communicated to the clearing membership prior to the time they 
become effective to allow clearing members to review and prepare for 
any changes they may experience in their specific Clearing Fund 
contribution amount. OCC will contact those clearing members that will 
be negatively impacted in a material manner (i.e., an increase of 10% 
or greater in the dollar amount of a Clearing Member Group's aggregate 
Clearing Fund requirement) to confirm such clearing members have 
reviewed the pro forma Clearing Fund requirement numbers and they are 
ready to meet the new requirement upon implementation. OCC will then 
begin a two stage phase in process for the new Clearing Fund 
requirements. The first stage of implementation will occur within 180 
calendar days from the date that OCC provides notice to clearing 
members of its intent to implement the new formula. At that stage, open 
interest, total risk charge, and volume would be applied in the formula 
with weightings of 75%, 17.5%, and 7.5%, respectively. The second stage 
of implementation and the final weightings of 50%, 35%, and 15% would 
then be implemented within 360 days from the same date of the original 
notice to clearing members concerning implementation of the new 
formula.
    The proposed rule change would also create a defined term in OCC's 
By-Laws, ``Futures-Only Affiliated Clearing Member,'' to refer to a 
clearing member that is admitted solely for the purpose of clearing 
transactions in security futures, commodity futures, and/or futures 
options.\11\ While the definition

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is new, there would be no substantive change to Section 2 of Article 
VIII, under which, if such a clearing member is a member affiliate of 
an earlier-admitted clearing member, the clearing member's initial 
clearing fund contribution may be fixed by the Board as an amount that 
excludes the minimum clearing fund component of $150,000, so long as 
the earlier-admitted clearing member already satisfies that 
requirement.
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    \11\ Article VIII, Section 2 of OCC's By-Laws actually refers 
also to ``commodity options,'' but options directly on an underlying 
commodity--as opposed to options on futures--are now included in 
Section 1a(47) of the Commodity Exchange Act to fall within the 
definition of a ``swap.'' 7 U.S.C. 1a(47). Since OCC does not 
currently have rules for the clearing of swaps, the reference to 
commodity options is being omitted from the new definition.
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    OCC believes that the proposed rule change is consistent with 
Section 17A of the Securities Exchange Act of 1934 (``Act'') \12\ and 
the rules and regulations thereunder because the proposed modifications 
would help ensure that the Rules of OCC ``provide for the equitable 
allocation of reasonable dues, fees, and other charges among its 
participants'' \13\ and thereby promotes prompt and accurate clearance 
and settlement \14\ by enhancing the clearing fund allocation 
methodology to continue to account for open interest but also to 
additionally use risk charges and volume to account for other exposures 
to OCC that result from clearing member activities.
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    \12\ 15 U.S.C. 78q-1.
    \13\ 15 U.S.C. 78q-1(b)(3)(D).
    \14\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would impose a 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

(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 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate 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 or disapprove 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 Commissions Internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-OCC-2013-02 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 SR-OCC-2013-02. 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 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 Web site viewing and 
printing in the Commission's Public Reference Section, 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 will also be 
available for inspection and copying at the principal office of OCC and 
on OCC's Web site at http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_13_02.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 SR-OCC-2013-02 
and should be submitted on or before March 29, 2013.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-05412 Filed 3-7-13; 8:45 am]
BILLING CODE 8011-01-P


