
[Federal Register Volume 80, Number 98 (Thursday, May 21, 2015)]
[Notices]
[Pages 29364-29367]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-12294]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74980; File No. SR-OCC-2015-009]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Establish Procedures Regarding 
the Monthly Resizing of Its Clearing Fund and the Addition of Financial 
Resources

May 15, 2015.
    On March 13, 2015, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2015-009 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 April 2, 2015.\3\ The Commission did not 
receive any comments on the proposed rule change. This order approves 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4. OCC also filed this change as an advance 
notice under Section 806(e)(1) of the Payment, Clearing, and 
Settlement Supervision Act of 2010. 12 U.S.C. 5465(e)(1). See 
Securities Exchange Act Release No. 74713 (April 10, 2015), 80 FR 
20534 (April 16, 2015) (SR-OCC-2014-811).
    \3\ Securities Exchange Act Release No. 74603 (March 27, 2015), 
80 FR 17808 (April 2, 2015) (SR-OCC-2015-009).

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[[Page 29365]]

I. Description

    The proposal establishes new procedures to govern: (i) OCC's 
resizing of the clearing fund on a monthly basis pursuant to OCC Rule 
1001(a) (``Monthly Clearing Fund Sizing Procedure''); and (ii) the 
addition of Financial Resources \4\ through an intra-day margin call on 
one or more Clearing Members \5\ pursuant to OCC Rule 609 and, if 
necessary, an intra-month increase of the clearing fund pursuant to OCC 
Rule 1001(a) to ensure that OCC maintains adequate Financial Resources 
in the event of a default of a Clearing Member or Clearing Member Group 
\6\ presenting the largest exposure to OCC (``Financial Resource 
Monitoring and Call Procedure'').\7\
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    \4\ For purposes of this proposed rule change, ``Financial 
Resources'' means, with respect to a projected loss that is 
attributable to a particular Clearing Member or Clearing Member 
Group, as defined hereinafter, the sum of (i) the margin deposits 
(less any excess margin a Clearing Member or Clearing Member Group 
may have on deposit at OCC) and deposits in lieu of margin with 
respect to the accounts of such Clearing Members or Clearing Member 
Groups, and (ii) the value of OCC's clearing fund, including both 
the Base Amount, as defined hereinafter, and the prudential margin 
of safety, as described below.
    \5\ ``Clearing Member'' is defined, in relevant part, as a 
person or organization that has been admitted to membership in the 
Corporation pursuant to the provisions of the By-Laws and Rules. See 
OCC By-Laws, Article I.
    \6\ ``Clearing Member Group'' is defined as a Clearing Member 
and any Member Affiliates of such Clearing Member. ``Member 
Affiliate'' is defined as an affiliated entity of a Clearing Member 
that controls, is controlled by, or under common control with, the 
Clearing Member. See OCC By-Laws, Article I.
    \7\ According to OCC, the procedures described herein will be in 
effect until the development of a new standard clearing fund sizing 
methodology and a revised methodology for the intra-month increase 
of Financial Resources. Following such development, OCC has stated 
that it will file a separate rule change and advance notice with the 
Commission that will include a description of the new and revised 
methodologies as well as a revised Monthly Clearing Fund Sizing 
Procedure and Financial Resource Monitoring and Call Procedure.
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a. Monthly Clearing Fund Sizing Procedure

    According to OCC, under the Monthly Clearing Fund Sizing Procedure, 
OCC will continue to use its daily stress test exposures under 
simulated default scenarios (as described in the first sentence of OCC 
Rule 1001(a)) to calculate the size of the clearing fund and resize the 
clearing fund on the first business day of each month. However, instead 
of resizing the clearing fund based on the average of the daily 
calculations during the preceding calendar month, OCC intends to resize 
the clearing fund using a new formula, which is the sum of: (i) An 
amount equal to the peak five-day rolling average of clearing fund 
draws observed over the preceding three calendar months using the daily 
idiosyncratic default and minor systemic default scenario calculations 
based on OCC's daily Monte Carlo simulations (``Base Amount''); and 
(ii) a prudential margin of safety determined by OCC that is currently 
set at $1.8 billion.\8\
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    \8\ According to OCC, it computes its exposure under the 
idiosyncratic default scenario and minor systemic default scenario 
on a daily basis. The greater of these two exposures will be that 
day's peak exposure. To calculate the rolling five-day average, OCC 
will compute the average of the peak exposure for each consecutive 
five-day period observed over the prior three-month period. To 
determine the Base Amount, OCC will use the largest five-day rolling 
average observed over the past three-months.
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    OCC believes that the Monthly Clearing Fund Sizing Procedure 
provides a sound and prudent approach to ensure that it maintains 
adequate Financial Resources to protect against a default of a Clearing 
Member or Clearing Member Group presenting the largest exposure to OCC. 
By sizing the Base Amount of the clearing fund using the peak five-day 
rolling average over the preceding three month look-back period, rather 
than an average over the preceding month, OCC believes that the new 
resizing formula should be more responsive to sudden increases in 
exposure and less sensitive to short-run reductions in exposures that 
could inappropriately reduce the overall size of the clearing fund. OCC 
further asserts that the prudential margin of safety provides an 
additional buffer to absorb potential future exposures not previously 
observed during the look-back period. The Monthly Clearing Fund Sizing 
Procedure will be supplemented by the Financial Resource Monitoring and 
Call Procedure, which is described below, to provide further assurance 
that the Financial Resources are adequate to protect against such risk 
of loss.

b. Financial Resource Monitoring and Call Procedure

    According to OCC, under the Financial Resource Monitoring and Call 
Procedure, OCC will use the same daily idiosyncratic default 
calculation that is currently used under the Monthly Clearing Fund 
Sizing Procedure to monitor daily the adequacy of the Financial 
Resources to withstand a default by the Clearing Member or Clearing 
Member Group presenting the largest exposure under extreme but 
plausible market conditions.\9\ If such a daily idiosyncratic default 
calculation projected a draw on the clearing fund (``Projected Draw'') 
that is at least 75% of the clearing fund maintained by OCC, OCC will 
be required to issue an intra-day margin call pursuant to OCC Rule 609 
against the Clearing Member or Clearing Member Group that caused such a 
draw (``Margin Call Event'').\10\ The amount of the intra-day margin 
call made pursuant to a Margin Call Event will be the difference 
between the Projected Draw and the Base Amount of the clearing fund 
(``Exceedance Above Base Amount'').
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    \9\ According to OCC, since the minor systemic default scenario 
contemplates the simultaneous default of two Clearing Members and 
OCC maintains Financial Resources sufficient to cover a default by a 
Clearing Member or Clearing Member group presenting the greatest 
exposure to OCC, OCC does not use the minor systemic default 
scenario to determine the adequacy of the Financial Resources under 
the Financial Resource Monitoring and Call Procedure.
    \10\ OCC Rule 609 authorizes OCC to require the deposit of 
additional margin in any account at any time during any business day 
by any Clearing Member for, among other reasons, the protection of 
OCC, other Clearing Members or the general public. Under OCC Rule 
609, a Clearing Member must meet a required deposit of intra-day 
margin in immediately available funds at a time prescribed by OCC or 
within one hour of OCC's issuance of debit settlement instructions 
against the bank account of the applicable Clearing Member.
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    In the case of a Clearing Member Group that causes the Exceedance 
Above Base Amount, the Exceedance Above Base Amount will be pro-rated 
among the individual Clearing Members that compose the Clearing Member 
Group based on each individual Clearing Member's proportionate share of 
the total risk for such Clearing Member Group as defined in OCC Rule 
1001(b) (i.e., the margin requirement with respect to all accounts of 
the Clearing Member Group exclusive of the net asset value of the 
positions in such accounts aggregated across all such accounts). In the 
case of an individual Clearing Member or a Clearing Member Group, the 
intra-day margin call will be subject to a limitation under which it 
cannot exceed the lower of: (a) $500 million; or (b) 100% of the net 
capital of a Clearing Member (the ``500/100 Limitation'').\11\ This 
limitation will apply in aggregate to all Margin Call Events within the 
same monthly period. Therefore, if the same Clearing Member or Clearing 
Member Group is subject to more than one Margin Call Event in the same 
month, the total amount of funds

[[Page 29366]]

that are collected cannot exceed the 500/100 Limitation. The 500/100 
Limitation will remain in place until OCC has collected all funds to 
satisfy the next monthly clearing fund resizing.\12\
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    \11\ According to OCC, implementing the 500/100 Limitation on 
the intra-day margin call avoids placing a ``liquidity squeeze'' on 
the subject Clearing Member or Clearing Member Group based on 
exposures presented by a hypothetical stress test, which otherwise 
could cause a default on the intra-day margin call. OCC back-testing 
results determined that intra-day margin calls resulting from a 
Margin Call Event would have been made against Clearing Members or 
Clearing Member Groups that are large, well-capitalized firms, with 
more than sufficient resources to satisfy the call for additional 
margin subject to the 500/100 Limitation.
    \12\ The Risk Committee of the Board of Directors (``Risk 
Committee'') will be notified, and can take action to address 
potential Financial Resource deficiencies, in the event that a 
Projected Draw resulted in a Margin Call Event and, as a result of 
the 500/100 Limitation, the intra-day margin call is less than the 
Exceedance Above Base Amount, but the Projected Draw is not large 
enough to result in an increase in the clearing fund as discussed 
below.
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    Additionally, OCC will rely on OCC Rule 608 to preclude the 
withdrawal of such additional margin amount until all of the funds from 
the next monthly clearing fund resizing have been collected. Based on 
three years of back-testing data, OCC determined that a Margin Call 
Event would have occurred in 10 of the months during this period. 
During each of these 10 months, the maximum call amount would have been 
equal to $500 million.\13\ After giving effect to the intra-day margin 
calls (i.e., increasing the Financial Resources by $500 million), there 
was only one Margin Call Event where there was still an observed stress 
test exceedance of Financial Resources.
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    \13\ The back-testing analysis performed by OCC assumed that a 
single Clearing Member caused the Exceedance Above Base Amount.
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    To address this one observed instance, the Financial Resource 
Monitoring and Call Procedure will require OCC to increase the size of 
the clearing fund, if a Projected Draw exceeds 90% of the clearing fund 
(``Clearing Fund Intra-month Increase Event''), after applying any 
funds then on deposit with OCC from the applicable Clearing Member or 
Clearing Member Group pursuant to a Margin Call Event. The amount of 
such increase (``Clearing Fund Increase'') will be the greater of: (a) 
$1 billion; or (b) 125% of the difference between (i) the Projected 
Draw, as reduced by the deposits resulting from the Margin Call Event, 
and (ii) the clearing fund. Each Clearing Member's proportionate share 
of the Clearing Fund Increase will equal its proportionate share of the 
variable portion of the clearing fund for the month in question as 
calculated pursuant to OCC Rule 1001(b).
    According to OCC, it will notify the Risk Committee, Clearing 
Members and appropriate regulatory authorities of the Clearing Fund 
Increase on the business day that the Clearing Fund Intra-month 
Increase Event occurs. OCC believes that this will ensure that OCC 
management maintains authority to address any potential Financial 
Resource deficiencies when compared to its Projected Draw estimates. 
The Risk Committee will then determine whether the Clearing Fund 
Increase is sufficient, and will retain authority under the Risk 
Committee charter to increase the Clearing Fund Increase or the intra-
day margin call made pursuant to a Margin Call Event in its discretion. 
Clearing Members will be required to meet the call for additional 
clearing fund assets by 9:00 a.m. CT on the second business day 
following the Clearing Fund Intra-Month Increase Event. OCC believes 
that this collection process ensures that additional clearing fund 
assets are promptly deposited by Clearing Members following notice of a 
Clearing Fund Increase, while also providing Clearing Members with a 
reasonable period of time to source such assets. According to OCC, 
based on its back-testing results, after giving effect to the intra-day 
margin call in response to a Margin Call Event plus the prudential 
margin of safety, the Financial Resources would have been sufficient 
upon implementing the one instance of a Clearing Fund Intra-month 
Increase Event.
    OCC believes the Financial Resource Monitoring and Call Procedure 
strikes a prudent balance between mutualizing the burden of requiring 
additional Financial Resources and requiring the Clearing Member or 
Clearing Member Group causing the increased exposure to bear such 
burden. In the event a Projected Draw exceeds 75% of the clearing fund, 
the Clearing Member or Clearing Member Group that triggers the 
exceedance will be assessed an intra-day margin call to address the 
increase in exposure. However, where a Projected Draw exceeds 90% of 
OCC's clearing fund, OCC determined that it should mutualize the burden 
of the additional Financial Resources at this threshold through a 
Clearing Fund Increase. OCC believes that this balance will provide OCC 
with sufficient Financial Resources without increasing the likelihood 
that its procedures, based solely on stress testing results, will cause 
a liquidity strain that could result in the default of a Clearing 
Member or Clearing Member Group.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \14\ 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.
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    \14\ 15 U.S.C. 78s(b)(2)(C).
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    The Commission finds that the proposed rule change is consistent 
with Section 17A(b)(3)(F) of the Act, which requires the rules of a 
registered clearing agency be designed to, among other things, assure 
the safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible, to 
remove impediments to and perfect the mechanism of a national system 
for the prompt and accurate clearance and settlement of securities 
transactions, and, in general, to protect investors and the public 
interest.\15\ By establishing procedures that govern the monthly 
resizing of the clearing fund and the addition of Financial Resources, 
as proposed in OCC's rule change, OCC should be in a better position to 
ensure that it maintains sufficient financial resources to withstand a 
default of the Clearing Member or Clearing Member Group to which it has 
the largest exposure, thereby reducing the likelihood that a default 
would create losses that disrupt OCC's operations and adversely affect 
the clearing agency's non-defaulting participants. In so doing, the 
rule change, as approved, should enhance OCC's ability to assure the 
safeguarding of securities and funds which are in its custody or 
control or for which it is responsible, to remove impediments to and 
perfect the mechanism of a national system for the prompt and accurate 
clearance and settlement of securities transactions, and, in general, 
to protect investors and the public interest.
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    \15\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission finds that the proposed rule change is consistent 
with Rule 17Ad-22(b)(3), promulgated under the Act,\16\ which requires, 
among other things, registered clearing agencies that perform central 
counterparty services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to maintain 
sufficient financial resources to withstand, at a minimum, a default by 
the participant family to which it has the largest exposure in extreme 
but plausible market conditions. By using a peak five-day rolling 
average and extending the look-back period from one to three calendar 
months, the Monthly Clearing Fund Sizing Procedure should be more 
responsive than OCC's existing clearing fund resizing formula to sudden 
increases in exposure and less sensitive to short-run reductions in 
exposure that could inappropriately reduce the overall size of the 
clearing

[[Page 29367]]

fund. Furthermore, the prudential margin of safety, which is currently 
$1.8 billion, will provide an additional buffer to absorb potential 
future exposures that may not be observed during the look-back period. 
In addition, the Financial Resource Monitoring and Call Procedure will 
establish a process by which OCC will be able to respond to increases 
in exposure on an intra-month basis. As a result, the Monthly Clearing 
Fund Sizing Procedure and Financial Resource Monitoring and Call 
Procedure should ensure that OCC is capable of obtaining sufficient 
financial resources in a timely manner to withstand a default of the 
Clearing Member or Clearing Member Group presenting it the largest 
exposure.
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    \16\ 17 CFR 240.17Ad-22(b)(3).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the rule 
change is consistent with the requirements of the Act and in particular 
with the requirements of Section 17A of the Act \17\ and the rules and 
regulations thereunder.
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    \17\ 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,\18\ that the proposed rule change (SR-OCC-2015-009) be, and it 
hereby is, approved as of the date of this order or the date of an 
order by the Commission authorizing OCC to implement OCC's advance 
notice proposal that is consistent with this proposed rule change (SR-
OCC-2014-811), whichever is later.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
Robert W. Errett,
Deputy Secretary.
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    \19\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2015-12294 Filed 5-20-15; 8:45 am]
BILLING CODE 8011-01-P


