
[Federal Register Volume 82, Number 45 (Thursday, March 9, 2017)]
[Notices]
[Pages 13163-13166]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-04599]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80147; File No. SR-OCC-2017-001]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change Concerning The Options Clearing 
Corporation's Margin Coverage During Times of Increased Volatility

March 3, 2017.
    On January 4, 2017, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2017-001 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 January 25, 2017.\3\ The

[[Page 13164]]

Commission received one comment letter on the Notice.\4\ 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.
    \3\ Securities Exchange Act Release No. 79818 (January 18, 2017) 
82 FR 8455 (January 25, 2017 (SR-OCC-2017-001) (``Notice'').
    \4\ See comment from Tressifa S. Moore (January 19, 2017). The 
comment appears to be an excerpt from the EDGAR Filer Manual, 
available at www.sec.gov/info/edgar/edmanuals.htm, and does not have 
any substantive relevance to the proposed rule change.
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I. Description of the Proposed Rule Change

A. Background

    OCC protects itself against potential losses that could result from 
the default of a clearing member by requiring margin to be posted in 
connection with each member's positions. The amount of margin 
calculated and collected from OCC's clearing members, along with 
mutualized clearing-fund resources, is intended to make available to 
OCC sufficient financial resources for the orderly transfer or 
liquidation of a defaulting clearing member's positions. OCC's 
proprietary risk management system, the System for Theoretical Analysis 
and Numerical Simulations (``STANS''), calculates each clearing 
member's margin requirement by utilizing Monte Carlo simulations to 
forecast price movements related to the positions in each clearing 
member's portfolio. The STANS margin requirement is intended to be 
sufficient to collateralize the member's losses across its portfolio 
over a two-day period, under normal market conditions.
    To determine margin requirements, STANS utilizes time-series data, 
including pricing data on assets underlying the options contracts that 
OCC clears, and performs calculations related to, among other things, 
the volatilities of these underliers. The margin amount collected from 
each clearing member also accounts for expected changes in the value of 
collateral posted in connection with that member's portfolio.
    According to OCC, one of the primary risk drivers in the STANS 
methodology relates to the volatilities of individual equity 
securities, which are derived from pricing data imported monthly into 
STANS. Between data feeds, the STANS margin methodology relies on a 
process that adjusts the individual volatility measures of equity-based 
option underliers (e.g., GE or IBM) by a multiplier derived from the 
volatility of the Standard &Poor's[supreg] 500 index (``SPX''). OCC 
refers to that multiplier as the uniform scale factor. To account for 
intra-month changes in volatility, the uniform scale factor adjusts 
individual volatilities of applicable underliers by a factor tied to 
the relationship between the short-term and long term volatility of the 
SPX. Specifically, the uniform scale factor is used as a proxy to 
``scale up'' volatilities of equity-based option underliers \5\ when 
near-term volatility estimates fall below a certain ratio relative to 
long-term average volatility, in each case based on the SPX. OCC 
asserts that, by applying a scale factor in this way, margin 
requirements better account for intra-month volatility risks for 
individual equity-based option underliers and thereby better ensure 
that clearing members maintain sufficient margin assets in connection 
with option positions based upon those underliers.
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    \5\ The uniform scale factor applies to the volatility measures 
for single-name and index underliers. It does not apply to exchange-
traded funds, futures, or volatility-based underliers. For the 
latter types of options, STANS uses a constant volatility measure 
calculated from monthly data feeds.
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B. The Proposed Rule Change

    In its filing, OCC proposed a number of enhancements to its STANS 
margin methodology that it believes would result in more accurate 
clearing member margin requirements. Specifically, OCC proposed the 
following: (1) To change the length of time-series data used to 
calculate the uniform scale factor; (2) to introduce new equity index-
based scale factors; (3) to anchor individual risk factor volatilities 
to longer-term averages; and (4) to implement daily data updates of 
risk factors in OCC's statistical models used to value U.S. Treasury 
securities for collateral and margin purposes.
    First, OCC proposed to change the time-series data period and 
thereby the data set used to calculate the uniform scale factor. One 
aspect of the uniform scale factor calculation relies on pricing 
information, or time-series data, relating to the individual components 
of the SPX index dating back to 1946, which pre-dates the 1957 
introduction of the SPX. Because the time-series data pre-dates the 
SPX's publication, OCC's current practice is to supplement the 
published SPX data with additional pricing information that relies upon 
assumptions about what theoretically could have been the index's 
composition prior to 1957. OCC proposed to discontinue that practice 
going forward, and instead rely on post-1957 information only. OCC 
stated that this change would improve the quality of data used in the 
uniform scale factor calculation.
    Second, OCC proposed to introduce four new scale factors for 
equity-based options. OCC stated that the uniform scale factor is 
derived from SPX pricing information and currently serves as OCC's sole 
volatility proxy used to scale equity-based option underliers. 
According to OCC, the new scale factors would be based upon indices 
whose volatility characteristics more closely correlate with the 
volatility characteristics of the underliers to which they will be 
applied. Accordingly, OCC believes the new scale factors would serve as 
more appropriate volatility proxies than the uniform scale factor 
currently in use. Specifically, OCC proposed to introduce new scale 
factors based upon the following indices: (1) The Russell 2000[supreg] 
Index (12/29/1978); (2) the Dow Jones Industrial Average Index (9/23/
1997); (3) the NASDAQ-100 Index (2/4/1985); and (4) the S&P 100 Index 
(1/2/1976).\6\ OCC stated that although the SPX-based uniform scale 
factor would continue to serve as the default scale factor for most 
equity-based products, the new scale factors would apply to a number of 
index options, options on exchange-traded funds, and options on 
exchange-traded notes that more closely correlate to the indices used 
in the proposed scale factor calculations.
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    \6\ The dates in parentheticals are the dates from which OCC has 
historical data on the specified index.
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    Third, OCC proposed to anchor risk factor volatilities to longer-
term trends by applying either the uniform scale factor or the 
applicable proposed new scale factor to the greater of two volatility 
estimates: (i) An observed, historical average; or (ii) a forecasted 
volatility measure. The proposed change would modify OCC's current 
practice of applying the uniform scale factor solely to the forecasted 
volatility measure for applicable underliers. OCC stated that its 
revised methodology would better ensure that short-term or temporary 
decreases in forecasted volatility do not result in significant margin 
reductions, thereby improving risk management in those cases where 
observed, historical average volatilities exceed forecasted volatility 
measures.
    Finally, OCC proposed to implement daily updates to risk factors 
used to construct the U.S. Treasury yield curve and value U.S. Treasury 
securities for collateral and margin purposes. According to OCC, daily 
updates to the U.S. Treasury yield curve would better ensure that the 
STANS margin calculations accurately reflect the current state of the 
U.S. Treasury market, particularly during periods of heightened 
volatility, which would lead to more accurate margin calculations.

[[Page 13165]]

II. Discussion and Findings

    Section 19(b)(2)(C) \7\ of the Act directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that the rule change, as proposed, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such organization.
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    \7\ 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, among other 
things, that the rules of a clearing agency assure the safeguarding of 
securities and funds that are in the custody or control of the clearing 
agency or for which it is responsible.\8\ As described above, the 
proposed rule changes are designed to improve the accuracy, and ensure 
the sufficiency, of margin collateral posted by clearing members. 
First, OCC's proposed change to rely only on published SPX index data 
to calculate the uniform scale factor is an appropriate improvement to 
the process for performing intra-month volatility adjustments in STANS; 
in turn, having more accurate margin calculations should better ensure 
that OCC has sufficient financial resources to protect itself in the 
event of a clearing member default, thereby supporting the safeguarding 
of securities and funds in OCC's custody and control.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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    Second, OCC's proposed change to introduce new scale factors for 
equity-based products whose underliers correlate more closely with the 
indices used in the proposed scale factor calculations appropriately 
improves the accuracy of STANS calculations relating to volatility 
risks. More accurately accounting for volatility risks in margin 
calculations, as above, should better ensure that OCC has sufficient 
financial resources in the event of a clearing-member default, in turn 
supporting the safeguarding of securities and funds in OCC's custody 
and control.
    Third, the proposed change to apply the relevant scale factor to 
the greater of the historical and forecasted volatility measures will 
support OCC in safeguarding securities and funds in its control by 
better ensuring that reductions in forecasted volatility do not result 
in commensurate reductions in margin requirements. By mitigating 
procyclical reductions in margin requirements, the proposed change is 
designed to ensure that OCC maintains sufficient margin to protect 
itself against losses in the event of a clearing member default. This, 
in turn, better safeguards the securities and funds in OCC's custody 
and control.
    Fourth, the proposed change to incorporate daily updates into the 
time-series data used to construct the U.S. Treasury yield curve serves 
to better ensure that the STANS margin calculations for U.S. Treasury 
securities accurately reflect their value as collateral, especially 
during periods of heightened volatility. By ensuring that U.S. Treasury 
securities are accurately valued for collateral and margin purposes, 
the proposed change is designed to ensure that clearing member accounts 
do not become under-margined and to protect OCC's non-defaulting 
members against the potential loss of securities and funds in OCC's 
custody and control. The proposed rule changes are designed to ensure 
that OCC is better able to accurately compute and collect sufficient 
margin from its clearing members, thereby better ensuring that OCC 
appropriately estimates and manages its credit exposures. For these 
reasons, the Commission finds that the proposed change is consistent 
with Section 17A(b)(3)(F) of the Act.
    Additionally, the Commission finds that the proposed rule change is 
consistent with the Clearing Agency Standards, specifically rules 17Ad-
22(b)(1) and (b)(2) under the Act.\9\ Rule 17Ad-22(b)(1) requires OCC 
to establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to, among other things, limit its 
exposures to potential losses from defaults by its participants under 
normal market conditions so that the operations of the clearing agency 
would not be disrupted and non-defaulting participants would not be 
exposed to losses that they cannot anticipate or control.\10\ Rule 
17Ad-22(b)(2) requires OCC to establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to, among 
other things, use margin requirements to limit its credit exposures to 
participants under normal market conditions and use risk-based models 
and parameters to set such margin requirements.\11\
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    \9\ 17 CFR 240.17Ad-22(b)(1) and (b)(2).
    \10\ 17 CFR 240.17Ad-22(b)(1).
    \11\ 17 CFR 240.17Ad-22(b)(2).
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    The Commission finds that the proposed rule change is consistent 
with rules 17Ad-22(b)(1) and (b)(2) under the Act. The proposed rule 
change is designed to better enable OCC to limit its potential losses 
from clearing-member defaults under normal market conditions by 
improving the data, scale factors, and methodology used to derive 
certain volatility and other estimates for purposes of margin 
calculations. By improving these estimates, the STANS margin 
requirements would better ensure that OCC's members post sufficient 
collateral in connection with their options positions, thereby 
protecting OCC against the potential losses from a clearing-member 
default. Furthermore, by limiting OCC's exposure to such losses, the 
proposed rule change better ensures that OCC would continue operations 
without disruption and that non-defaulting clearing members would not 
be exposed to losses they cannot anticipate or control.
    The proposed rule change also would improve the risk-based models 
and parameters that OCC uses to set margin requirements and limit its 
credit exposures to clearing members under normal market conditions. 
STANS, as discussed above, is a risk-based, forecasting tool that OCC 
currently uses to calculate margin requirements that are intended to be 
sufficient to collateralize each clearing member's losses over a two-
day period under normal market conditions. The proposed change 
incrementally enhances STANS by improving the data, scale factors, and 
methodology used to derive certain volatility and other estimates 
relevant to risk-based margin calculations. The proposed rule change 
would improve the quality of data used to estimate risk drivers in the 
STANS margin calculations, for example, by relying solely on published 
index data throughout the uniform scale factor time-series data period. 
In addition, the four new scale factors would more accurately reflect 
intra-month volatility risks associated with applicable option 
underliers in the STANS margin calculations. The proposed rule change 
would better ensure that the STANS margin requirements remain anchored 
to historical average volatilities, thereby mitigating procyclical 
reductions in margin requirements, by applying the relevant scale 
factor to the greater of an observed, historical average and a 
forecasted volatility measure. Finally, incorporating daily updates 
into time-series data used to construct the U.S. Treasury yield curve 
would improve valuation of U.S. Treasury collateral and the accuracy of 
STANS margin calculations, because margin requirements account for 
expected changes in the value of posted U.S. Treasury collateral. For 
the reasons stated above, the Commission finds that the proposed change 
is consistent with Rules 17Ad-22(b)(1) and (b)(2) under the Act.

[[Page 13166]]

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed change is consistent with the requirements of the Act, and in 
particular, with the requirements of Section 17A of the Act \12\ and 
the rules and regulations thereunder.
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    \12\ 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 
Exchange Act,\13\ that the proposed rule change (SR-OCC-2017-001) be, 
and it hereby is, approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-04599 Filed 3-8-17; 8:45 am]
BILLING CODE 8011-01-P


