
[Federal Register Volume 80, Number 87 (Wednesday, May 6, 2015)]
[Notices]
[Pages 26127-26130]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-10504]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74853; File No. SR-OCC-2015-006]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change Concerning the Provision of 
Clearance and Settlement Services for Energy Futures and Options on 
Energy Futures

April 30, 2015.
    On March 2, 2015, The Options Clearing Corporation (``OCC'') filed 
with

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the Securities and Exchange Commission (``Commission'') the proposed 
rule change OCC-2015-006 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 March 20, 2015.\3\ The Commission received no comments on the 
proposed rule change. This order approves the rule change as proposed.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Release No. 74511 (March 16, 2015), 80 
FR 15042 (March 20, 2015).
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I. Description

    OCC is amending its rules to provide clearance and settlement 
services to NASDAQ Futures, Inc. (``NFX'') for certain enumerated 
Energy Futures contracts and options on Energy Futures. OCC further 
proposed to add new risk models to its System for Theoretical Analysis 
and Numerical Simulations (``STANS'') methodology \4\ to risk manage 
Energy Futures contracts. OCC's STANS methodology already accommodates 
the margining of futures and futures options, and after adopting the 
models described more fully in the proposed rule change, Energy Futures 
contracts will be risk managed using the same methodology as futures 
products currently cleared and settled by OCC.\5\
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    \4\ OCC's STANS methodology is used to measure the exposure of 
portfolios of options, futures and cash instruments cleared and 
carried by OCC on behalf of its clearing member firms. STANS allows 
clearing institutions to measure, monitor and manage the level of 
risk exposure of their members' portfolios. For more information, 
see www.optionsclearing.com/risk-management/margins.
    \5\ OCC will compute initial margin requirements for segregated 
futures accounts Through the Standard Portfolio Analysis of Risk 
(``SPAN''[supreg]) margin calculation system without further 
modification, subject to OCC's collection of enhanced margin to be 
deposited in the segregated futures account in the event that the 
margin requirement as calculated under STANS would exceed the 
requirement calculated under SPAN. See Securities Exchange Act 
Release No. 72331 (June 5, 2014), 79 FR 33607 (June 11, 2014) (SR-
OCC-2014-13). See also Securities Exchange Act Release No. 74268 
(February 12, 2015), 80 FR 8917 (February 19, 2015) (SR-OCC-2014-
24). This rule change has been approved by the Commission.
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    Because these Energy Futures contracts and options on Energy 
Futures do not fall within the scope of contracts for which OCC has 
previously agreed to provide clearance and settlement services to 
NFX,\6\ OCC also added a new ``Schedule C'' to its Agreement for 
Clearing and Settlement Services (``Clearing Agreement'') with NFX. The 
Schedule C to the Clearing Agreement has been approved by the 
Commission.\7\
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    \6\ NFX previously operated as a designated contract market 
(``DCM'') regulated by the Commodity Futures Trading Commission 
(``CFTC''), and OCC provided clearing and settlement services 
pursuant to a January 13, 2012 agreement (``Previous Agreement''). 
NFX became a dormant contract market and ceased operations as a DCM 
as of January 31, 2014, thus terminating the Previous Agreement. The 
CFTC later approved NFX as a DCM and the Clearing Agreement permits 
OCC to once again provide clearing services to NFX.
    \7\ See Securities Exchange Act Release No. 74432 (March 4, 
2015), 80 FR 12652 (March 10, 2015) (SR-OCC-2015-03)(notice of 
filing of proposed rule change concerning execution of a clearing 
and settlement agreement between OCC and NFX); See also Securities 
Exchange Act Release No. 74747(April 16, 2015), 80 FR 22591 (April 
22, 2015)(order approving the proposed clearing and settlement 
agreement between OCC and NFX).
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Background

    As proposed in its rule change OCC will clear and settle Energy 
Futures contracts and options on Energy Futures that are to be traded 
on NFX.\8\ They include nine futures contracts on petrol and natural 
gas products, three of which will have related options contracts, along 
with 16 electricity futures contracts. The Energy Futures contracts are 
all cash-settled, and the options contracts will settle into the 
underlying futures contract. All of the Energy Futures contracts are 
``look-alike'' products to futures products already traded on U.S. 
futures exchanges and cleared by other Derivatives Clearing 
Organizations (``DCOs'').\9\
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    \8\ In addition to trading in the regular session, Energy 
Futures and options on Energy Futures will also trade during 
overnight trading sessions. See Securities Exchange Act Release No. 
74241 (February 10, 2015), 80 FR 8383 (February 17, 2015) SR-OCC-
2014-812.
    \9\ More specifically, Energy Futures contracts are look-alike 
products to futures products that are currently traded on the New 
York Mercantile Exchange, Inc. and ICE Futures, U.S., and cleared by 
the Chicago Mercantile Exchange Inc. and ICE Clear U.S., Inc., 
respectively.
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Petrol and Natural Gas Futures Products
    NFX will list petrol and natural gas Energy Futures contracts and 
options on petrol Energy Futures. These Energy Futures contracts are 
based on a variety of refined oil fuels and natural gasses that are 
commonly used for hedging market participants' portfolios. 
Specifically, NFX will list the following cash-settled petrol and 
natural gas Energy Futures contracts: NFX Brent Crude Financial Futures 
(BFQ), NFX Gasoil Financial Futures (GOQ), NFX Heating Oil Financial 
Futures (HOQ), NFX WTI Crude Oil Financial Futures (CLQ), NFX RBOB 
Gasoline Financial Futures (RBQ), NFX Henry Hub Natural Gas Financial 
Futures--10,000 (HHQ), NFX Henry Hub Natural Gas Financial Futures--
2,500 (NNQ), NFX Henry Hub Natural Gas Penultimate Financial Futures--
2,500 (NPQ) and NFX Henry Hub Natural Gas Penultimate Financial 
Futures--10,000 (HUQ). Further, NFX will list options on NFX WTI Crude 
Financial Futures (LOQ), NFX Brent Crude Financial Futures (BCQ) and 
the NFX Henry Hub Penultimate Financial Futures (LNQ) that settle 
directly into the referenced futures contract.
Electricity Futures Products
    NFX will also list electricity Energy Futures contracts, which are 
based on electricity prices at different hubs and smaller nodes from 
across the United States reflecting different power distribution grids 
and circuits and are look-alike products to products traded on ICE 
Futures, U.S. and cleared by ICE Clear U.S., Inc. For each of these 
nodes, there is a ``peak'' and ``off-peak'' future representing prices 
at time periods in the day when electricity usage is high compared to 
when the demand on the grid is lower. The electricity Energy Futures 
contracts NFX selected for listing are the most popular nodes and hubs 
within the electricity futures market. More specifically, NFX will list 
the following electricity contracts, to be settled on final settlement 
prices based on an average regional transmission organization, 
independent system operator (``ISO'') published real-time or day-ahead 
locational marginal prices (``LMPs'') \10\ for a pre-determined set of 
peak or off-peak hours for a contract month:
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    \10\ Locational marginal pricing reflects the value of the 
energy at the specific location and time it is delivered.
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     NFX ISO-NE Massachusetts Hub Day-Ahead Off-Peak Financial 
Future (NOPQ), settling on final settlement prices based on average 
day-ahead hourly off-peak LMPs for the contract month for the 
Massachusetts Hub.
     NFX ISO-NE Massachusetts Hub Day-Ahead Peak Financial 
Futures (NEPQ), settling on final settlement prices based on average 
day-ahead hourly peak LMPs for the contract month for the Massachusetts 
Hub.
     NFX MISO Indiana Hub Real-Time Peak Financial Futures 
(CINQ), settling on final settlement prices based on average real-time 
hourly peak LMPs for the contract month for the Indiana Hub as 
published by the Midcontinent Independent System Operator, Inc. 
(``MISO'').
     NFX MISO Indiana Hub Real-Time Off-Peak Financial Futures 
(CPOQ), settling on final settlement prices based on average real-time 
hourly off-peak LMPs for the contract month for the Indiana Hub as 
published by MISO.
     NFX PJM AEP Dayton Hub Real-Time Peak Financial Futures 
(MSOQ), settling on final settlement prices based

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on average real-time hourly peak LMPs for the contract month for the 
AEP Dayton Hub.
     NFX PJM AEP Dayton Hub Real-Time Off-Peak Financial 
Futures (AODQ), settling on final settlement prices based on average 
real-time hourly off-peak LMPs for the contract month for the AEP 
Dayton Hub.
     NFX PJM Northern Illinois Hub Real-Time Peak Financial 
Futures (PNLQ), settling on final settlement prices based on average 
real-time hourly peak LMPs for the contract month for the Northern 
Illinois Hub.
     NFX PJM Northern Illinois Hub Real-Time Off-Peak Financial 
Futures (NIOQ), settling on final settlement prices based on average 
real-time hourly off-peak LMPs for the contract month for the Northern 
Illinois Hub.
     NFX PJM Western Hub Day-Ahead Off-Peak Financial Futures 
(PJDQ), settling on final settlement prices based on average day-ahead 
hourly off-peak LMPs for the contract month for the Western Hub.
     NFX PJM Western Hub Day-Ahead Peak Financial Futures 
(PJCQ), settling on final settlement prices based on average day-ahead 
hourly peak LMPs for the contract month for the Western Hub.
     NFX PJM Western Hub Real-Time Off- Peak Financial Futures 
(OPJQ), settling on final settlement prices based on average real-time 
hourly off-peak LMPs for the contract month for the Western Hub.
     NFX PJM Western Hub Real-Time Peak Financial Future 
(PJMQ), settling on final settlement prices based on average real-time 
hourly peak LMPs for the contract month for the Western Hub.
     NFX CAISO NP-15 Hub Day-Ahead Off-Peak Financial Futures 
(ONPQ), settling on final settlement prices based on average day-ahead 
hourly off-peak LMPs for the contract month for the NP-15 Hub.
     NFX CAISO NP-15 Hub Day-Ahead Peak Financial Futures 
(NPMQ), settling on final settlement prices based on average day-ahead 
hourly peak LMPs for the contract month for the NP-15 Hub.
     NFX CAISO SP-15 Hub Day-Ahead Off-Peak Financial Futures 
(OFPQ), settling on final settlement prices based on average day-ahead 
hourly off-peak LMPs for the contract month for the SP-15 Hub.
     NFX CAISO SP-15 Hub Day-Ahead Peak Financial Futures 
(SPMQ), settling on final settlement prices based on average day-ahead 
hourly peak LMPs for the contract month for the SP-15 Hub.

Risk Model Changes

    As noted above, the Energy Futures contracts that OCC will clear 
are look-alike products to energy futures traded on other futures 
exchanges and cleared by other DCOs. According to OCC, there is a 
significant amount of historical data and academic literature 
concerning risk models for energy futures, and OCC has used such data 
and literature in the development of its risk models for Energy Futures 
contracts. Based on its analysis of that information, OCC stated that 
it has identified two characteristics specific to Energy Futures 
contracts (compared to futures contracts already cleared, settled and 
risk managed by OCC) for which new risk models needed to be added to 
the STANS methodology: \11\
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    \11\ In developing its risk models for Energy Futures, OCC 
stated in its proposed rule change that it had also considered a 
third characteristic, namely that electricity markets are known to 
be geographically segmented, which can cause abrupt and 
unanticipated changes in spot prices. However, after reviewing 
relevant academic literature and performing internal testing, OCC 
determined that adjusting its futures risk models to account for 
changes in the spot price of electricity was not appropriate. 
Securities Exchange Release No. 74511 (March 16, 2015), 80 FR 15042 
(March 20, 2015). See Kholopova, M. (2006) ``Estimating a two-factor 
model for the forward curve of electricity,'' Ph.D. dissertation.
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     Energy Futures prices are known to be more volatile as 
contracts approach delivery because of the convergence with cash-market 
prices and the potential for real-life trading and delivery 
complications of the underlying commodity. This phenomenon is known as 
the ``Samuelson effect,'' \12\ and
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    \12\ See Samuelson, Paul A., ``Proof that Properly Anticipated 
Prices Fluctuate Randomly,'' Industrial Management Review, Vol. 6 
(1965). OCC stated that no other futures contracts for which it 
provides clearance and settlement services exhibit the Samuelson 
effect.
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     The price volatility of certain energy futures display a 
seasonal pattern (a/k/a ``seasonality'').
    To address these characteristics, OCC designed multi-factor risk 
modeling capabilities that can risk model based on up to three factors: 
a short-run factor, a seasonal factor and a long-run factor. The short-
run factor is designed to account for the Samuelson effect, which 
becomes more pronounced the closer the contract is to maturity (i.e., 
delivery). The seasonal factor accounts for Energy Futures contracts 
that display volatility in a seasonal pattern, and the long-run factor 
accounts for the risk of a given Energy Future contract not addressed 
by either the short-run factor or the seasonal factor. Pursuant to its 
rule change as proposed, OCC's multi-factor models can be further 
categorized as either a two-factor model or three-factor model, with 
the two factor model consisting of a short-run and long-run factor, 
while the three-factor model consists of a short-run factor, a long-run 
factor, and a seasonality factor.
Two-Factor Model
    OCC will use a two-factor risk model to compute theoretical prices 
for NFX Brent Crude Financial Futures contracts and NFX WTI Crude Oil 
Financial Futures contracts because such futures do not exhibit 
seasonality.\13\ The two-factor risk model will derive a given Energy 
Future contract's price based on a long-run factor and a short-run 
factor. The long-run factor component captures changes to the 
equilibrium price (i.e., the prevailing market price at a point in 
time) of a given Energy Future contract based on factors such as 
expectations of the exhaustion of existing supply, improving technology 
for production, the discovery of additional supply of the commodity, 
inflation and political and regulatory effects. Using historical data, 
OCC assumed that such long-run factors cause the equilibrium price for 
a given Energy Future contract to evolve according to a stochastic 
process that accounts for asymmetric skewness and excess kurtosis.\14\ 
The short-run component captures short-run changes in demand or supply 
due to real-life factors such as variation in the weather or 
intermittent supply disruptions as well as increased volatility (i.e., 
the Samuelson effect).\15\ The short-run component of the model is mean 
reverting; therefore, in the absence of such short-term changes in 
demand or supply the long-run factor should determine the price for a 
given Energy Future contract. Additionally, the short-run factor is 
less noticeable as the tenor of the Energy Futures contract increases.
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    \13\ See Schwartz, E. and J. Smith (2000) ``Short-term 
variations and long-term dynamics in commodity prices,'' Management 
Science, vol. 46, pp. 893-911. OCC provided that the supply of Brent 
Crude Oil and WTI Crude Oil is not affected by seasonal variation in 
demand because there are low-cost transportation methods for Brent 
Crude Oil and WTI Crude Oil as well as the ability to store Brent 
Crude Oil and WTI Crude Oil.
    \14\ The model assumes that past price information is already 
incorporated into the current price and the next price movement is 
conditionally independent of past price movements. Additionally, the 
long-run factor accounts for ``fat tail'' events.
    \15\ This is often observed as shorter dated futures contracts 
exhibit greater volatility than longer dated futures contracts.
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Three-Factor Model
    OCC will use a three-factor risk model in order to compute 
theoretical prices for the remainder of the Energy Futures 
contracts.\16\ The three-factor model uses

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the same long-run and short-fun factor components as the two-factor 
model and adds a seasonality factor. Using historical data, OCC asserts 
that Energy Futures contracts, except for Energy Futures contracts on 
Brent Crude Oil and WTI Crude Oil, experience seasonality.\17\ To 
address seasonality, OCC will employ a trigonometric function,\18\ 
which it states will capture price dynamics in different seasons.
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    \16\ OCC's proposed model is based upon recent academic 
literature on energy futures. See Mirantes, A., J. Poblacion and G. 
Serna (2012) ``The stochastic seasonal behavior of natural gas 
prices,'' European Financial Management, vol. 18, pp. 410-443.
    \17\ OCC provides that this is due to the lack of low-cost 
transportation and limited, or no ability to store the commodity.
    \18\ See note 14 supra.
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    OCC stated its belief that the proposed enhancements to STANS are 
appropriately designed to support the clearance and settlement of 
Energy Futures contracts, based on model back testing results. 
Moreover, OCC asserts that the Energy Futures contracts are not new or 
novel contracts, and that the clearance and settlement of Energy 
Futures contracts will not present material risk to OCC.\19\
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    \19\ OCC provides that cleared futures contracts account for 
less than two percent of its total overall volume and, in 2011, OCC 
cleared 1,388 contracts traded on NFX. In 2012, OCC cleared 518,360 
contracts traded on NFX (NFX did not have any cleared futures 
contract volume in 2013 and 2014). By way of reference, OCC's 
average daily cleared contract volume in through February 19, 2015, 
is 17 million contracts.
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Schedule C to the Clearing Agreement

    Pursuant to approved rule change 2015-OCC-03, OCC added a Schedule 
C to the Clearing Agreement to support the clearance and settlement of 
Energy Futures contracts and options on Energy Futures. Pursuant to the 
Clearing Agreement between OCC and NFX, OCC has agreed to clear the 
specifically enumerated contracts and may agree to clear and settle 
additional types of contracts should both parties execute a new 
Schedule C to the Clearing Agreement. This was necessary because Energy 
Futures contracts and options on Energy Futures were not enumerated in 
either the Previous Agreement, or in any existing Schedule C to the 
Previous Agreement. The approved rule change adds this new Schedule C 
to allow OCC to provide for the clearance and settlement of Energy 
Futures contracts and options on Energy Futures.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \20\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that the proposed rule change is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to such 
organization. The Commission finds that the proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act \21\ because it assures 
the safeguarding of securities and funds in the custody and control of 
OCC and permits OCC to risk manage Energy Futures contracts and options 
on Energy Futures through appropriate risk models as described above. 
Such risk models should reduce the risk that clearing members' margin 
assets will be insufficient in the event that OCC needs such assets to 
close-out the positions of a defaulted clearing member and, in turn 
also help protect investors and the public interest. Furthermore, the 
proposed rule change is also consistent with Rule 17Ad-22(b)(2) under 
the Act,\22\ because it will allow OCC to implement risk-based models 
and parameters to set margin requirements for clearing members who 
trade Energy Futures contracts and Energy Futures Options.
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    \20\ 15 U.S.C. 78s(b)(2)(C).
    \21\ 15 U.S.C. 78q-1(b)(3)(F).
    \22\ 17 CFR 240.17Ad-22(b)(2).
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III. 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 \23\ and the 
rules and regulations thereunder.
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    \23\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-OCC-2015-006) be, and it 
hereby is, approved.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-10504 Filed 5-5-15; 8:45 am]
BILLING CODE 8011-01-P


