
[Federal Register Volume 79, Number 150 (Tuesday, August 5, 2014)]
[Notices]
[Pages 45523-45526]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-18430]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72717; File No. SR-OCC-2014-14]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Better Manage Risks 
Concentration and Other Risks Associated With Accepting Deposits of 
Common Stocks for Margin Purposes

July 30, 2014.
    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 July 15, 2014, The Options Clearing Corporation (``OCC'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I and II below, which Items have been 
prepared by the clearing agency.\3\ 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.
    \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. 12 U.S.C. 5465(e)(1). See 
SR-OCC-2014-803.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    OCC proposes to amend its Rules to permit OCC to better manage 
concentration and other risks (i.e., wrong-way risk) associated with 
accepting deposits of common stock for margin purposes. In order to 
manage such risks, OCC proposes to add an proposed Interpretation and 
Policy that will provide OCC with discretion with respect to giving 
value to margin collateral deposited by a single clearing member.

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.

[[Page 45524]]

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

1. Purpose
    The purpose of this proposed rule change is to permit OCC to better 
manage concentration risk and other risks (i.e., wrong-way risk) 
associated with accepting deposits of common stock for margin 
purposes.\4\ Accordingly, in order to manage such risks, OCC proposes 
to add an Interpretation and Policy to Rule 604, which specifies the 
forms of margin assets accepted by OCC, that will provide OCC with 
discretion with respect to giving value to assets deposited by a single 
clearing member to satisfy its margin requirement(s). In addition, OCC 
proposes to make clarifying amendments to an existing Interpretation 
and Policy under Rule 604 that gives OCC discretion to not give value 
to a particular type of margin collateral across all clearing members.
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    \4\ This proposed rule change has also been filed as an advance 
notice filing (SR-OCC-2014-803).
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Background
    OCC Rule 604 lists the types of assets that clearing members may 
deposit with OCC to satisfy their margin requirement(s) as well as sets 
forth eligibility criteria for such assets. Common stocks, including 
Exchange Traded Funds (``ETFs'') and Exchange Traded Notes (``ETNs''), 
are the most common form of margin assets deposited by clearing members 
and currently comprise 68% of the $60.6 billion in clearing member 
margin deposits held by OCC (not including deposits in lieu of margin). 
Since 2009, OCC has used STANS, its daily automated Monte Carlo 
simulation-based margining methodology, to value common stocks 
deposited by clearing members as margin.\5\ The value given to margin 
deposits depends on factors that include the price volatility and the 
price correlation relationship of common stock collateral to the 
balance of the cleared portfolio. The approach used by STANS 
incentivizes clearing members who chose to meet their margin 
obligations with deposits of common stocks to choose common stocks that 
hedge their related open positions.
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    \5\ See Securities Exchange Act Release No. 58158 (July 15, 
2008), 73 FR 42646 (July 22, 2008) (SR-OCC-2007-20).
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    Notwithstanding the value STANS gives to deposits of common stocks, 
certain factors warrant OCC adjusting the value STANS gives to all 
clearing member margin deposits of a particular type of margin 
collateral. Such factors are set forth in Rule 604, Interpretation and 
Policy .14, and include the number of outstanding shares, number of 
outstanding shareholders and overall trading volume. OCC is proposing 
to add a new Interpretation and Policy to Rule 604 (the 
``Interpretation'') so that OCC has discretion to not give margin 
credit to a particular clearing member when such clearing member 
deposits a concentrated amount of any common stock and when a common 
stock, deposited as margin, presents ``wrong-way risk'' to OCC. In 
addition, the Interpretation will provide OCC discretion to grant 
margin credit to a clearing member when it deposits shares of common 
stock that serve as a hedge to the clearing member's related open 
positions and would otherwise be not be given margin credit.\6\
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    \6\ Consistent with the language contained in existing 
Interpretation & Policy .14, the Interpretation provides OCC with 
discretion in determining the amount of margin credit given to 
deposits of common stock by an individual clearing member as such 
determination would be based on positions held and common stock 
deposits made by such clearing member on a given business day. 
However, as discussed in the following two sections, OCC also has 
developed certain automated processes as well as additional internal 
policies that describe how OCC presently intends to exercise such 
discretion. These additional internal policies are included in OCC's 
collateral risk management policy, which will not be implemented 
until approval of this rule change with changes thereto being 
subject to additional rule filings.
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Concentrated Deposits of Common Stock
    OCC has determined that in the event it is necessary to liquidate a 
clearing member's positions (including the clearing member's margin 
collateral), OCC may be exposed to risk arising from a large quantity 
of a particular common stock deposited as margin by a clearing member. 
Specifically, 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 all of the common stock OCC seeks to sell, or OCC may not be 
able to auction such securities, without an appreciable negative price 
impact. This occurrence, referred to as ``concentration risk,'' is 
greatest when the number of shares being sold is large and the average 
daily trading volume is low.
    OCC's existing authority to not give value to otherwise eligible 
forms of margin is broad in its application since such authority only 
provides OCC with the discretion to not give value across all clearing 
member deposits of a particular common stock. However, concentration 
risk may be a clearing member and account-specific risk. In order to 
mitigate the concentration risk of a single clearing member, OCC plans 
to implement automated processes to monitor the composition of a 
clearing member's margin deposits. Such processes will identify 
concentration risk at both an account level and across all accounts of 
a clearing member. OCC proposes to add the Interpretation so that OCC 
has discretion to limit the margin credit granted to an individual 
clearing member that maintains a concentrated margin deposit of 
otherwise eligible common stock.
    For the reasons stated above, OCC considers a common stock'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. 
Accordingly, OCC will not give margin credit to clearing member margin 
deposits of a particular common stock in respect of a particular 
account when the deposited amount of such common stock is in excess of 
two times the average daily trade volume of such common stock over the 
most recent three month period. OCC's systems will continually assess 
the composition of clearing member margin deposits for each account 
maintained by the clearing member, including intra-day collateral 
substitutions in such accounts, to determine if a clearing member has a 
margin deposit with a concentrated amount of common stock. With respect 
to a given account, OCC's systems will automatically set appropriate 
limits on the amount of a particular common stock for which a clearing 
member may be given margin credit for any one of a its tier accounts. 
In addition, and with respect to all of a clearing member's accounts, 
OCC will impose an add-on margin charge if, in aggregate, a clearing 
member deposits a concentrated amount of a particular common stock as 
margin across all of its accounts.\7\ The add-on margin charge will 
operate to negate the margin credit given to the concentrated margin 
deposit, and will be collected, when applicable, as part of OCC's 
standard morning margin process.\8\ OCC

[[Page 45525]]

will assess the add-on margin charge across all of a clearing member's 
accounts on a pro-rata basis (based on the amount of the particular 
common stock in each of a clearing member's accounts).
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    \7\ OCC believes that this policy is consistent with proposed 
Rule 17Ad-22(e)(5), which requires covered clearing agencies to set 
and enforce concentration limits to manage its or its participant's 
credit exposure. See 79 FR 16866, 16972 (March 26, 2014).
    \8\ Since the 2-day limit is first checked at each account, it 
is possible that a clearing member with multiple accounts may have 
more than 2-days of a given common stock on deposit in aggregate. To 
control this condition, a final check is done on the aggregate 
amount of shares held by a clearing member across all of its 
accounts. For example, if a particular clearing member has three 
accounts each holding 2-days volume of a specific common stock, the 
clearing member check would identify that the member was holding six 
days of volume in aggregate. To mitigate this risk, an add-on charge 
equal to the market value of four days of volume would be applied to 
all accounts holding that security on a pro-rata basis.
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    OCC staff has been monitoring concentrated common stock positions, 
assessing the impact of the proposed rule change described in this 
filing and contacting clearing members affected by the proposed rule 
change. OCC believes that clearing members will be able to comply with 
the proposed rule change without making significant changes to their 
day-to-day business operations. In December 2013, an information memo 
was posted to inform all members of the upcoming change. Since January 
2014, staff has been in contact with any clearing member that would be 
affected by the proposed rule change. On a weekly basis, any clearing 
member that would see a reduction of 10% or more of its collateral 
value is contacted and provided an explanation of the policy and a list 
of concentrated positions observed in this analysis. On a monthly 
basis, all clearing members exhibiting any concentration risk are 
contacted to provide an explanation of the proposed policy and a list 
of concentrated positions. In both cases, clearing members are 
encouraged to proactively reduce concentrated positions to conform to 
the proposed policy. As of June 2014, twenty-five members would be 
affected. Implementation of the Interpretation would result in 
disallowing $1.2 billion in collateral value and result in margin calls 
for six members totaling $710 million. Moreover, in July 2014, OCC made 
an automated report concerning concentrated margin deposits of common 
stock available to all clearing members.
Wrong-Way Risk
    OCC is also proposing to use the Interpretation to address the risk 
that the common stock a clearing member has deposited as margin and 
which is issued by the clearing member itself or an affiliate of the 
clearing member will lose value in the event the clearing member 
providing such margin defaults, which is known as ``wrong-way risk.'' 
Wrong-way risk occurs when a clearing member makes a deposit of common 
stock issued by it or an affiliate and, in the event the clearing 
member defaults, the clearing member's common stock margin deposit will 
also be losing value at the same time because there is likely to be a 
strong correlation between the clearing member's creditworthiness and 
the value of such common stock. In order to address wrong-way risk, the 
Interpretation will implement automated systems that will not give 
margin credit to a clearing member that deposits common stock issued by 
such clearing member or an affiliate as margin collateral. OCC proposes 
to define ``affiliate'' broadly in the Interpretation to include any 
entity with direct or indirect equity ownership of 10% of the clearing 
member, or any entity for which the clearing member holds 10% of the 
direct or indirect equity ownership.\9\
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    \9\ This standard is based on the provisions of OCC Rule 
215(a)(5).
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    OCC has addressed the impact of the change designed to address 
wrong-way risk. As of June 2014, there were 73 clearing members whose 
parent or an affiliate has issued securities trading on U.S. exchanges. 
There are six clearing members that would be affected by virtue of 
having made margin deposits of their own or an affiliate's common 
stock. In total, these shares equaled $132 million and accounted for 
less than one half of one percent of the total market value of valued 
securities pledged as margin at OCC. In July 2014, OCC made information 
available to each clearing member that indicates which of its deposits 
of common stock would not receive margin credit due to wrong-way risk 
considerations, as described above.\10\
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    \10\ OCC believes that by providing such information clearing 
members will be better able to adjust their margin deposits at OCC 
to conform to the proposed rule change once it is approved.
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Deposits That Hedge Open Positions
    In addition to the above, OCC also proposes to include language in 
the Interpretation so that it has discretion to give margin credit to 
common stock deposited as margin that would otherwise not be given 
margin credit in circumstances when such common stock acts as a hedge 
(i.e., the member holds an equivalent short position in cleared 
contracts on the same underlying security). This condition will be 
checked in both the account and clearing member level. For example, if 
a clearing member deposits the common stock of an affiliate as margin 
collateral, which, pursuant to the above, would ordinarily not be given 
value for the purposes of granting margin credit, OCC may nevertheless 
give value to such common stock for the purposes of granting margin 
credit to the extent such common stock acts as a hedge against open 
positions of the clearing member. In this case, a decline in the value 
of the margin deposit would be wholly or partially offset by an 
increase in the value in the open position. Moreover, in such a 
situation, OCC will systematically limit the margin credit granted to 
the lesser of a multiple of the daily trading volume or the ``delta 
equivalent position'' \11\ for the particular common stock, taking into 
account the hedging position.\12\ OCC believes that this policy will 
further encourage clearing members to deposit margin collateral that 
hedges their related open positions and is in line with the valuation 
methods within STANS. This policy will also facilitate OCC's management 
of its and its participants' credit exposure \13\ as well as the 
liquidation of a clearing member's portfolio should the need arise.
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    \11\ The ``delta equivalent position'' is the equivalent number 
of underlying shares represented by the aggregation of cleared 
products on that same underlying instrument. 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 
the options or futures contract to the corresponding change in the 
price of an underlying asset. 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.
    \12\ 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, when combined with the delta of short 
option and futures position, 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.
    \13\ OCC also believes that this policy is consistent with 
proposed Rule 17Ad-22(e)(5). See Fn.6, supra.
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Other Proposed Changes
    OCC is also proposing to make certain clarifying changes in order 
to accommodate the adoption of the Interpretation into its Rules. 
Primarily, OCC proposes to add language to OCC Rule 604, Interpretation 
and Policy .14, to clarify that such Interpretation and Policy concerns 
OCC's authority to not give value to certain margin deposits for all 
clearing members (whereas the Interpretation applies to particular 
clearing member(s)). In addition, OCC

[[Page 45526]]

proposes to remove language from OCC Rule 604, Interpretation and 
Policy .14, to improve readability as well as to remove ``factors'' 
concerning number of shares and affiliates since OCC's authority with 
respect to such factors will be more clearly described in the 
Interpretation. Finally, OCC proposes to renumber the Interpretations 
and Policies of Rule 604 in order to accommodate the adoption of the 
Interpretation.
2. Statutory Basis
    OCC believes that the proposed rule change is consistent with 
Section 17A(b)(3)(F) of the Act \14\ because it will assure the 
safeguarding of securities and funds which are in the custody and 
control of OCC. In addition, the proposed rule change will promote the 
prompt and accurate clearance and settlement of securities transactions 
for which it is responsible. OCC believes that the proposed changes to 
its margin policy, as described above, will reduce the risk that 
clearing member margin assets would be insufficient should OCC need to 
use such assets to close-out positions of a defaulted clearing member. 
For the same reasons, the proposed rule change will promote confidence 
that OCC will be able to timely meet its settlement obligations because 
the proposed rule change will diminish the likelihood a large 
percentage of a defaulting clearing member's margin assets would not be 
available to OCC in the event of a clearing member default. The 
proposed rule change is not inconsistent with any existing OCC By-Laws 
or Rules, including those proposed to be amended.
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    \14\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Clearing Agency's Statement on Burden on Competition

    OCC believes that the proposed rule change would impose a burden on 
competition, and that such burden is appropriate in furtherance of the 
purposes of the Act.\15\ As state [sic] above, the proposed rule change 
will affect the composition of certain clearing members' margin 
deposits. Clearing members may be required to modify their business 
practices and potentially incur costs in doing so. However, the 
proposed rule change will not place a significant burden on clearing 
members, will better assure the safeguarding of securities and funds in 
OCC's custody and control and promote the prompt and accurate clearance 
and settlement of securities transactions for which it is responsible. 
By implementing the proposed rule change, it is less likely OCC will 
experience negative consequences due to exposure to a concentrated 
position of common stock deposited as margin by any clearing member as 
well as due to any wrong-way risk presented by a clearing member 
default. Accordingly, the proposed rule change contributes to the goal 
of OCC's financial stability in the event of clearing member default.
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    \15\ 15 U.S.C. 78q-1(b)(3)(I).
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    Moreover, and after implementation of the proposed rule change, OCC 
will still accept a large variety of common stocks as margin 
collateral, and no clearing member has indicated to OCC that it will 
have difficulty satisfying its margin requirement(s) once OCC 
implements the proposed rule change. Therefore, OCC believes that any 
burden on competition imposed by the proposed rule change is 
appropriate in furtherance of the purposes of the Act.

(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 such 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 with respect to the proposal are completed.\16\
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    \16\ 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. See supra note 3.
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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-2014-14 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-OCC-2014-14. 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. 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 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 (http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_14_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-2014-14 and should be submitted on or before August 
26, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-18430 Filed 8-4-14; 8:45 am]
BILLING CODE 8011-01-P


