
[Federal Register Volume 78, Number 179 (Monday, September 16, 2013)]
[Notices]
[Pages 56953-56955]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-22405]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70366; File No. SR-OCC-2013-805]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of an Advance Notice 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

September 10, 2013.
    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\ of the Securities Exchange Act of 1934 
(``Act''), notice is hereby given that on August 15, 2013, The Options 
Clearing Corporation (``OCC'') filed with the Securities and Exchange 
Commission (``Commission'') the advance notice 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 advance 
notice from interested persons.


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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ OCC is a designated financial market utility and is required 
to file advance notices with the Commission. See 12 U.S.C. 5465(e). 
OCC also filed the proposal 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) and 17 CFR 240.19b-4, 
respectively. See SR-OCC-2013-14.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Advance Notice

    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 Advance Notice

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the proposed advance notice and 
discussed any comments it received on the proposed 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) 
and (B) below, of the most significant aspects of these statements.

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

    The purpose of the proposed advance notice 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 advance notice 
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 of concentrated security positions by 
identifying the two

[[Page 56954]]

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 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\
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    \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 -.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.
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    OCC staff has been monitoring concentrated securities positions and 
assessing the impact of the proposed change described in this advance 
notice 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 
advance notice, 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.
    The proposed advance notice is consistent with Section 806(e)(1)(A) 
\7\ of the Payment, Clearing, and Settlement Supervision Act of 2010 
because the proposed change could be deemed to materially affect the 
nature or level of risks presented by OCC. The proposed advance notice 
enhances OCC's ability to limit its risk exposure to potential losses 
from defaults by 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 advance notice is not inconsistent 
with any existing OCC By-Laws or Rules, including those proposed to be 
amended.
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    \7\ 12 U.S.C. 5465(e)(l)(A).
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(B) Clearing Agency's Statement on Comments on the Proposed Advance 
Notice Received From Members, Participants, or Others

    Written comments on the proposed advance notice were not and are 
not intended to be solicited with respect to the proposed advance 
notice and none have been received.

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

    The clearing agency may implement the proposed change pursuant to 
Section 806(e)(1)(G) of the Clearing Supervision Act \8\ if it has not 
received an objection to the proposed change within 60 days of the 
later of (i) the date that the Commission received the advance notice 
or (ii) the date the Commission receives any further information it 
requested for consideration of the notice. The clearing agency shall 
not implement the proposed change if the Commission objects to the 
proposed change within the required time period.
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    \8\ 12 U.S.C. 5465(e)(1)(G).
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    The Commission may extend the period for review by an additional 60 
days if the proposed change raises novel or complex issues, subject to 
the Commission providing the clearing agency with prompt written notice 
of the extension. A proposed change may be implemented in less than 60 
days from the date of receipt of the advance notice, or the date the 
Commission receives any further information it requested, if the 
Commission notifies the clearing agency in writing that it does not 
object to the proposed change and authorizes the clearing agency to 
implement the proposed change on an earlier date, subject to any 
conditions imposed by the Commission.
    The clearing agency shall post notice on its Web site of proposed 
changes that are implemented.
    The proposal shall not take effect until all regulatory actions 
required

[[Page 56955]]

with respect to the proposal are completed.

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 SR-OCC-2013-805 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-2013-805. 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 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 the 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_805.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-2013-805 and should be submitted on or before 
October 7, 2013.

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-22405 Filed 9-13-13; 8:45 am]
BILLING CODE 8011-01-P


