
[Federal Register Volume 78, Number 171 (Wednesday, September 4, 2013)]
[Notices]
[Pages 54507-54509]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-21458]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70279; File No. SR-OCC-2013-14]


Clearing Agency; the Options Clearing Corporation; Notice of 
Filing of Proposed Rule Change To Amend an Existing Interpretation and 
Policy To Give OCC Discretion Not To Grant a Particular Clearing Member 
Margin Credit for an Otherwise Eligible Security

August 28, 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 August 15, 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 by OCC.\3\ The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ OCC also filed the proposed rule change as an advance notice 
under Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act entitled the Payment, Clearing, 
and Settlement Supervision Act of 2010 (``Clearing Supervision 
Act''). 12 U.S.C. 5465(e)(1). See SR-OCC-2013-805.
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    OCC proposes to amend an existing Interpretation and Policy so that 
OCC has discretion to disapprove as margin collateral for a particular 
clearing member, shares of an otherwise eligible security held as 
margin.

II. Clearing Agency'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 these 
statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(1) Purpose of the Proposed Rule Change
    The purpose of the proposed rule change is to provide OCC with 
discretion with regard to granting or not granting margin credit to a 
clearing member. OCC currently may withhold margin credit from all 
clearing members with respect to a specific security. OCC proposes to 
address the risk presented by concentrated positions of securities 
posted as margin by particular clearing members by withholding margin 
credit from such clearing member's accounts. OCC proposes to enhance 
its ability to limit its risk exposure to a concentrated position of 
equity securities posted as margin by a specific clearing member by 
providing OCC with the discretion to disregard, for the purposes of 
granting margin credit, some or all of the otherwise eligible equity 
securities posted as margin. In addition, the proposed rule change is 
designed to provide OCC with discretion to make exceptions to proposed 
Interpretation and Policy .14 with respect to a specific clearing 
member. Accordingly, OCC may allow margin credit for an otherwise 
ineligible security for a specific clearing member in situations in 
which OCC determines that such security serves as a hedge to positions 
in cleared contracts in the same account of such clearing member.
    Rule 604 lists the acceptable types of assets that clearing members 
may post with OCC to satisfy their margin requirements under Rule 601, 
including equity securities, and establishes the eligibility criteria 
for such assets. Equity securities are the most common form of margin 
assets posted by clearing members and, under Rule 601, are included in 
OCC's STANS margining system for the purposes of valuing such equity 
securities and determining on a portfolio basis a clearing member's 
margin obligation to OCC. Interpretation and Policy .14 to Rule 604 
allows OCC to disapprove a security as margin collateral for all 
clearing members based on a consideration of the factors set forth in 
the interpretation, including number of outstanding shares, number of 
outstanding shareholders and overall trading volume. The STANS system 
currently takes into account the risk to a portfolio presented by 
fluctuations in the market price ofconcentrated security positions by 
identifying the two individual securities whose adverse price movements 
would result in the largest losses in each account and applying 
additional margin requirements to an account based on those losses if 
appropriate.However, this test does not evaluate a large equity 
securities position in relation to the securities position's average 
daily trade volume, which would be relevant if OCC were required to 
liquidate the position. OCC has determined that in the event of a 
clearing member liquidation, OCC may be exposed to concentration risk 
arising from a large equity security position deposited or pledged as 
margin by a particular clearing member. Depending on the relationship 
between the average daily trading volume of a particular security and 
the number of outstanding shares of such security deposited by a 
clearing member as margin, it is possible that the listed equities 
markets may not be able to quickly absorb the equity securities OCC 
seeks to sell, or without an

[[Page 54508]]

appreciable negative price impact, in the event OCC needs to liquidate 
the clearing member's accounts. This risk is greatest when the number 
of shares being sold is large and the average daily trading volume is 
low. Neither the STANS system nor Rule 604 explicitly addresses this 
type of concentration risk.
    To address concentration risk arising from the potential need to 
liquidate a particular clearing member's margin collateral, OCC 
proposes to expand its discretion under Interpretation and Policy .14 
to limit, in OCC's discretion, the margin credit granted to an 
individual clearing member account which maintains a concentrated 
equity securities position by disregarding some or all of the otherwise 
eligible equity securities posted as margin based on an assessment of 
specific factors listed in Interpretation and Policy .14. OCC considers 
an equity security's average daily trading volume and the number of 
shares a clearing member deposited as margin to be the two most 
significant factors when making a decision to limit margin credit due 
to concentration risk.\4\ In addition, OCC proposes to amend 
Interpretation and Policy .14 so that it may grant margin credit when 
otherwise ineligible securities are deposited as margin collateral if 
such ineligible securities act as a hedge against cleared contracts 
held in the same account. For example, if a clearing member deposits 
otherwise ineligible equity securities as margin, OCC may nevertheless 
deem such ineligible securities to be acceptable margin collateral to 
the extent that the position is a hedge against a short position in its 
cleared contracts, because a decline in the value of the securities 
that serve as a hedge would be wholly or partially offset by an 
increase in value in the hedged position thereby reducing or 
eliminating the concentration risk. In such a situation, OCC will limit 
the margin credit granted to the lesser of a multiple of the daily 
trading volume or the ``delta equivalent position'' \5\ for the 
particular equity security, taking into account the hedging 
position.\6\
---------------------------------------------------------------------------

    \4\ The limit is currently two times the equity security's 
average daily trading volume.
    \5\ The ``delta equivalent position'' is the value of a 
securities position that takes into account the position's use as a 
hedge against cleared option or futures positions. This value is 
calculated using the ``delta'' of the option or futures contract, 
which is the ratio between the theoretical change in the price of an 
underlying asset to the corresponding change in the price of the 
options or futures contract. Thus, delta measures the sensitivity of 
an options or futures contract price to changes in the price of the 
underlying asset. For example, a delta of +0.7 means that for every 
$1 increase in the price of the underlying stock, the price of a 
call option will increase by $0.70. Delta for an option or future 
can be expressed in shares of the underlying asset. For example, a 
standard put option with a delta of times -.45 would have a delta of 
-45 shares, because the unit of trading is 100 shares.
    \6\ Assume, for example, an average daily trade volume of 250 
shares, a threshold of 2 times the average daily trade volume, and a 
delta of -300 shares for the options on a particular security in a 
particular account. A position of 700 shares that did not hedge any 
short options or futures would receive credit for only 500 shares 
(i.e., 2 times the average daily trade volume). If the net long 
position in the account, as adjusted for the delta of short option 
and futures positions, were only 400, credit would be given for the 
entire 700 shares since the delta equivalent position is below the 
500 share threshold. However, if the option delta were +300, the net 
long position would be 1000, and credit would only be given for 500 
shares because the delta equivalent position would exceed the 500 
share threshold.
---------------------------------------------------------------------------

    OCC staff has been monitoring concentrated securities positions and 
assessing the impact of the proposed change described in this rule 
filing. OCC believes that, with OCC's assistance by supplying 
additional information to clearing members, clearing members will be 
able to accommodate the proposed changes without undue hardship. 
Accordingly, after receiving regulatory approval for the proposed rule 
change, OCC will implement the change and work on an ``as needed'' 
manual basis with clearing members that are impacted until the limits 
are imposed systematically and the distribution of the applicable files 
and reports to clearing members is automated.
(2) Statutory Basis for the Proposed Rule Change
    The proposed rule change is consistent with the purposes and 
requirements of Section 17A(b)(3)(F) \7\ of the Act \8\ and the rules 
and regulations thereunder, including Rules 17Ad-22(b)(1),\9\ 17Ad-
22(b)(2)\10\ and 17Ad-22(d)(2)\11\ for the following reasons. It 
provides for the prompt and accurate clearance and settlement of 
securities transactions and the protection of investors and the public 
interest by improving OCC's risk management process related to deposits 
as margin collateral of concentrated equity securities positions by 
individual clearing members. The proposed rule change enhances OCC's 
ability to limit its risk exposure to potential losses from defaults by 
such clearing members under normal market conditions through the use of 
risk-based parameters and encourages clearing members to have 
sufficient financial resources to meet their obligations to OCC. The 
proposed rule change is not inconsistent with any existing OCC By-Laws 
or Rules, including those proposed to be amended.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78q-1(b)(3)(F).
    \8\ 15 U.S.C. 78a et seq.
    \9\ 17 CFR 240.17Ad-22(b)(1).
    \10\ 17 CFR 240.17Ad-22(b)(2).
    \11\ 17 CFR 240.17Ad-22(d)(2).
---------------------------------------------------------------------------

(B) Clearing Agency'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.\12\ The proposed change will be 
applied equally to every clearing member based on all the factors 
listed in proposed Interpretation and Policy .14 and would encourage 
clearing members to avoid depositing concentrated equity security 
positions as margin, particularly where the average daily trading 
volume of the deposited security is low, while taking into account the 
use of equity securities as a hedge against short positions in cleared 
options or futures contracts. By limiting margin credit granted as 
proposed, OCC will reduce its risk exposure to a concentrated position 
of equity securities posted as margin by any clearing member. 
Accordingly, the proposed rule change contributes to the goal of OCC's 
financial stability in the event of clearing member default, rendering 
not unreasonable or inappropriate any burden on competition that the 
changes could be regarded as imposing.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments on the proposed rule change 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.
    The proposal shall not take effect until all regulatory actions 
required

[[Page 54509]]

with respect to the proposal are completed.\13\
---------------------------------------------------------------------------

    \13\ OCC also filed the proposed rule change as an advance 
notice under Section 806(e)(1) of the Clearing Supervision Act. See 
supra note 3.
---------------------------------------------------------------------------

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 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 SR-OCC-2013-14 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-2013-14. 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 of submission. 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 filing also will 
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_14.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-2013-14 and 
should be submitted on or before September 25, 2013.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated Authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-21458 Filed 9-3-13; 8:45 am]
BILLING CODE 8011-01-P


