[Federal Register Volume 82, Number 216 (Thursday, November 9, 2017)]
[Notices]
[Pages 52079-52082]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-24369]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82009; File No. SR-OCC-2017-008]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Related to The Options 
Clearing Corporation's Collateral Risk Management Policy

November 3, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934,\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on 
October 27, 2017, The Options Clearing Corporation (``OCC'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I, II, and III below, which Items 
have been prepared by OCC. 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.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    This proposed rule change by The Options Clearing Corporation 
(``OCC'') would formalize and update OCC's Collateral Risk Management 
Policy (``CRM Policy''). This policy would promote compliance with Rule 
17Ad-22(e)(5), which generally requires a covered clearing agency to 
have policies and procedures reasonably designed to, among other 
things, limit the assets it accepts as collateral to those with low 
credit, liquidity, and market risks and subject such assets to 
appropriate haircuts and concentration limits that are reviewed for 
continued sufficiency not less than annually.\3\ The Collateral Risk 
Management Policy is included as confidential Exhibit 5 of the filing.
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    \3\ 17 CFR 240.17Ad-22(e)(5).
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    The proposed rule change does not require any changes to the text 
of OCC's By-Laws or Rules. All terms with initial capitalization that 
are not otherwise defined herein have the same meaning as set forth in 
the OCC By-Laws and Rules.\4\
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    \4\ OCC's By-Laws and Rules can be found on OCC's public Web 
site: http://optionsclearing.com/about/publications/bylaws.jsp.
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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.

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

(1) Purpose
Background
    On September 28, 2016, the Commission adopted amendments to Rule 
17Ad-22 \5\ and added new Rule 17Ab2-2 \6\ pursuant to Section 17A of 
the Securities Exchange Act of 1934, as amended, (``Act'') \7\ and the 
Payment, Clearing, and Settlement Supervision Act of 2010 (``Payment, 
Clearing and Settlement Supervision Act'') \8\ to establish enhanced 
standards for the operation and governance of those clearing agencies 
registered with the Commission that meet the definition of a ``covered 
clearing agency,'' as defined by Rule 17Ad-22(a)(5) \9\ (collectively, 
the new and amended rules are herein referred to as ``CCA'' rules). The 
CCA rules require that a covered clearing agency, among other things, 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to:
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    \5\ 17 CFR 240.17Ad-22.
    \6\ 17 CFR 240.17Ab2-2.
    \7\ 15 U.S.C. 78q-1.
    \8\ 12 U.S.C. 5461 et seq.
    \9\ 17 CFR 240.17Ad-22(a)(5).

    ``[l]imit the assets it accepts as collateral to those with low 
credit, liquidity, and market risks, and set and enforce 
appropriately conservative haircuts and concentration limits if the 
covered clearing agency requires

[[Page 52080]]

collateral to manage its or its participants' credit exposure; and 
require a review of the sufficiency of its collateral haircuts and 
concentration limits to be performed not less than annually.'' \10\
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    \10\ 17 CFR 240.17Ad-22(e)(5).

    OCC meets the definition of a covered clearing agency, and is 
therefore subject to the requirements of the CCA rules, including Rule 
17Ad-22(e)(5).\11\
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    \11\ Id.
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Collateral Risk Management Policy
    OCC proposes to formalize and update its CRM Policy. The purpose of 
the CRM Policy is to describe OCC's framework for collateral 
acceptability, valuations and haircuts, and collateral maintenance. The 
CRM Policy, as proposed, is designed to promote compliance with the 
Rule 17Ad-22(e)(5) \12\ requirements that mandate that covered clearing 
agencies have written policies and procedures that are reasonably 
designed to limit collateral to assets with low credit, liquidity, and 
market risks, and that establish appropriately conservative haircuts 
and concentration limits that are reviewed no less than annually. OCC 
notes that the CRM Policy is part of a broader framework regarding 
collateral risk management, including OCC's By-Laws, Rules, and other 
policies, that are designed to ensure that OCC accepts appropriate 
collateral to remain resilient in times of market stress.\13\
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    \12\ Id.
    \13\ Securities Exchange Act Release No. 78961 (September 28, 
2016), 81 FR 70786, 70812 (October 13, 2016) (``CCA Adopting 
Release'') (noting that the requirements of Rule 17Ad-22(e)(5) are 
``intended to ``help ensure that a covered clearing agency is 
resilient in times of market stress . . . .'').
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    With regard to a covered clearing agency's policies and procedures 
that address collateral, the Commission noted in the release adopting 
the CCA rules that such policies and procedures generally should take 
into account whether the covered clearing agency has: (1) Limited the 
assets it accepts to those with low credit, liquidity, and market 
risks; (2) established prudent valuation practices and developed 
haircuts that are regularly tested and take into account stressed 
market conditions; (3), established stable and conservative haircuts to 
reduce the need for pro-cyclical adjustments; (4) avoided concentrated 
holdings of certain assets where such holdings would significantly 
impair the ability to liquidate the assets quickly and without 
significant adverse price affects; (5) mitigated risks associated with 
the use of cross-border collateral, as applicable, and ensured that the 
collateral can be used in a timely manner; and (6) uses a collateral 
management system that is well designed and operationally flexible.\14\
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    \14\ Id. at 70816.
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    Certain descriptions in the CRM Policy are included to promote 
compliance with the Commission's guidance and Rule 17Ad-22(e)(5). For 
example, consistent with the guidance regarding cross-border 
collateral, the CRM Policy provides that OCC has the authority to 
reduce the haircut value of Canadian government securities if it 
observes increased credit risk, and that OCC applies an additional 
haircut to such securities to cover exchange rate risk. Consistent with 
the Commission's guidance that collateral risk management systems 
should remain operationally flexible, the CRM Policy also describes the 
authority of the Financial Risk Management department (``FRM'') to 
reject a collateral withdrawal request if OCC determines that a 
Clearing Member's reasonably anticipated settlement obligations exceed 
available liquidity resources.
    The descriptions below provide a general overview of the three 
substantive sections of OCC's CRM Policy.
Collateral Acceptability
    The CRM Policy describes the categories of risk that are considered 
by OCC in determining which asset classes should be acceptable forms of 
collateral as margin assets and Clearing Fund contributions. OCC's 
assessment of an asset class generally includes an evaluation of market 
risk, credit risk, liquidity risk. This assessment is conducted by the 
Credit and Liquidity Risk Working Group (``CLRWG''), which is a cross 
functional group comprised of representatives from multiple departments 
as noted in the Credit and Liquidity Risk Working Group Procedure. The 
CRM Policy further provides that the CLRWG establishes criteria for 
each asset class considered an acceptable form of collateral that 
evaluates additional risks with respect to the asset class such as 
execution risk, custody risk, and operational risk. With respect to 
market risks, the CRM Policy provides that eligible assets classes are 
accepted after consideration of their liquidity, price transparency, 
price volatility, offset potential with contracts cleared by OCC, 
modeling implications and projected inventories.
    With respect to credit risk, the CRM Policy separately considers 
counterparty risk and sovereign credit risk. For example, to safeguard 
against counterparty risk, the CRM Policy provides that FRM evaluates 
the creditworthiness of counterparties, including custodial agents and 
settlement banks, against existing qualification standards and monitors 
the health of such counterparties on an ongoing basis through 
established processes, supported by a separate policy within OCC.\15\ 
With respect to sovereign credit risk,\16\ the CRM Policy provides that 
CLRWG assess such risks against existing minimum sovereign ratings and 
by evaluating, among other characteristics, credit, market, liquidity, 
and exchange rate risks.
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    \15\ Specifically, evaluations of OCC's counterparties are 
supported by the Counterparty Credit Risk Management Policy.
    \16\ Sovereign credit risk refers primarily to the risk 
associated with accepting a foreign country's debt as collateral or 
the impact sovereign risk could have on the credit risk of OCC's 
counterparties.
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    Pursuant to the CRM Policy, OCC mitigates liquidity risk \17\ by 
limiting acceptable collateral to asset classes with low liquidity 
risk, giving no value to a participant for its own (or its affiliate's) 
debt or equity securities\18\ and limiting the amount of a particular 
asset type that a participant may pledge.\19\ The CRM Policy also 
provides that OCC takes other risks, such as execution risk,\20\ 
custody risk,\21\ and operational risk,\22\ into consideration when 
managing collateral risk.
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    \17\ Liquidity risk generally refers to the potential price 
impact that may be observed when selling a collateral position whose 
size surpasses the market's current depth.
    \18\ Giving no value to a participant's own securities or its 
affiliate's securities is a means of addressing wrong-way risk. See 
CCA Adopting Release, supra note 11, at n.317 (discussing wrong-way 
risk). Notwithstanding this prohibition, equity securities of 
participants can be used to hedge options positions on such equity 
securities. See OCC Rules 601 and 610.
    \19\ Limiting the amount of a particular asset type a 
participant may pledge is also a means of addressing concentration 
risk. Specifically, the CRM Policy provides that OCC mitigates 
concentration risk by limiting the aggregation or concentration of 
large positions relative to market depth for a security and, 
consistent with OCC's liquidation assumptions, restricts the value 
given to collateral assets beyond amounts that are determined to 
serve as a hedge to a Clearing Member's portfolio.
    \20\ Execution risk generally refers to the risk that a 
counterparty fails to deliver cash or securities when required.
    \21\ Custody risk refers to, for example, the risk that a 
custodian holding OCC collateral becomes insolvent.
    \22\ Operational risk generally refers to the risk that 
collateral cannot be delivered on a timely basis.
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Valuations and Haircuts
    The CRM Policy describes OCC's approach to valuing collateral and 
setting and applying haircuts. With respect to valuation, the CRM 
Policy provides that OCC's key considerations focus on its pricing 
process, the period of time between collateral revaluations

[[Page 52081]]

(which are at least daily), established haircuts to mitigate market 
risk, and the periodic re-evaluation of the adequacy of existing 
haircuts. OCC's pricing information, as described in the CRM Policy, 
feeds into OCC's processes for establishing margin levels or haircuts, 
daily mark-to-market valuation of collateral, and intraday valuation of 
collateral. Given the importance of pricing data to inform these 
processes, OCC maintains redundant information feeds from multiple 
sources to ensure accuracy and quality. The CRM Policy further 
summarizes OCC's two approaches for valuing collateral: Collateral in 
Margins (``CiM'') and haircuts.\23\ For collateral that is not managed 
using the CiM process, the CRM Policy provides that OCC subjects such 
collateral to percentage haircuts established at the time the 
collateral is accepted by OCC and that are monitored regularly to 
ensure the haircuts remain adequate.
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    \23\ Under the CiM approach, the current market value of margin 
assets is included as a positive asset value in the calculation of a 
portfolio's net asset value within OCC's System for Theoretical 
Analysis and Numerical Simulations (``STANS''). OCC then offsets 
this positive asset value based on, among other things, the expected 
shortfall and stress test charges associated with an account, 
resulting in a net excess or net deficit.
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Collateral Management Process
    The CRM Policy also outlines the three parts of OCC's collateral 
management processes: (1) Systems and processing; (2) reconciliation; 
and (3) reporting. With respect to systems and processing, the CRM 
Policy provides, among other things, that OCC's collateral management 
system has controls intended to ensure that no Clearing Member goes 
into collateral deficit and that it is designed to report the excess/
deficit status for each account in real-time. OCC also stress tests the 
system annually to ensure that it can accommodate a large number of 
automated transactions. With respect to reconciliation, the CRM Policy 
provides that OCC performs daily balancing of collateral against 
activity and inventory data from custodial banks and depositories. The 
CRM Policy further provides that OCC regularly reviews collateral 
deposited pursuant to a letter of credit or depository receipt, and the 
escrow deposit banks, to ensure that acceptable and sufficient 
collateral is maintained. With respect to reporting, the CRM Policy 
provides that OCC systematically delivers end-of-day activity and 
inventory reports to Clearing Members and custody banks and that 
reports regarding intraday activity can also be obtained.
    Finally, the CRM Policy provides an overview of OCC's collateral 
re-investment options, collateral re-hypothecation and substitution 
ability, existing cross-margining agreements and margin offsets, which 
are detailed separately in OCC's Cash and Investment Management Policy.
Governance and Annual Review
    The CRM Policy provides that the CLRWG reviews the policy's 
performance and adequacy on at least an annual basis, including with 
respect to collateral eligibility, concentration limits, collateral 
haircuts and monitoring processes. Recommendations for changes are 
presented to OCC's Management Committee and then the Risk Committee. 
The CRM Policy also specifies that collateral haircuts and 
concentration limits are reviewed on an annual basis by persons who are 
independent of OCC management and that adding a new asset class as 
acceptable collateral requires approval from OCC's Management 
Committee, Board of Directors and the Commission.
(2) Statutory Basis
    Section 17A(b)(3)(F) of the Act \24\ requires, among other things, 
that the rules of a clearing agency be designed to promote the prompt 
and accurate clearance and settlement of securities transactions, and, 
in general, protect investors and the public interest. The CRM Policy 
sets forth the processes that OCC uses to limit collateral to assets 
with low credit, liquidity, and market risks, and to establish 
appropriately conservative haircuts and concentration limits. OCC 
believes that the proposed rule change is consistent with Section 
17A(b)(3)(F) because the CRM Policy is reasonably designed to protect 
investors and the public interest by setting forth the processes that 
OCC uses to limit the collateral assets that OCC accepts to 
appropriate, risk-adjusted assets that, in turn, promote the prompt and 
accurate clearance and settlement of securities transactions by 
supporting OCC's ability to use the collateral to meet settlement 
obligations, as necessary, even in times of market stress.
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    \24\ 15 U.S.C. 78q-1(b)(3)(F).
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    Rule 17Ad-22(e)(5) \25\ requires that OCC establish, implement, 
maintain and enforce written policies and procedures that are 
reasonably designed to ``[l]imit the assets it accepts as collateral to 
those with low credit, liquidity, and market risks.'' As described in 
more detail above in the subsection discussing Collateral 
Acceptability, the CRM Policy provides that in determining assets that 
are acceptable as collateral OCC evaluates market, credit and liquidity 
risk as well as additional risks, such as execution, custody and 
operational risk. Rule 17Ad-22(e)(5) \26\ also requires OCC to set and 
enforce appropriately conservative haircuts and concentration limits. 
In this regard, the CRM Policy describes that, with respect to 
collateral valuation, OCC's key considerations focus on its pricing 
process, the period between collateral revaluations (which are at least 
daily), established haircuts to mitigate market risk and the periodic 
re-evaluation of the adequacy of existing haircuts. Moreover, OCC 
mitigates concentration risk by limiting the aggregation or 
concentration of large positions relative to market depth for a 
security and, consistent with OCC's liquidation assumptions, restricts 
the value given to collateral assets beyond amounts that are determined 
to serve as a hedge to a Clearing Member's portfolio. Finally, Rule 
17Ad-22(e)(5) \27\ provides that OCC must require a review of the 
sufficiency of its collateral haircuts and concentration limits to be 
performed not less than annually. The CRM Policy is consistent with 
this provision because it requires its performance and adequacy to be 
reviewed on at least an annual basis, including with regard to 
collateral eligibility, concentration limits, collateral haircuts and 
related monitoring processes. For these reasons, OCC believes that the 
proposed rule change is consistent with Rule 17Ad-22(e)(5).\28\
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    \25\ 17 CFR 240.17Ad-22(e)(5).
    \26\ Id.
    \27\ Id.
    \28\ Id.
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    The proposed rule change is not inconsistent with the existing 
rules of OCC, including any other rules proposed to be amended.

(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act \29\ requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. OCC does not 
believe that the proposed rule change would impact or impose any burden 
on competition.\30\ The proposed rule change sets forth the framework, 
as described in the CRM Policy, that OCC already uses pursuant to its 
approved By-Laws and Rules to accept collateral with low credit, 
liquidity, and market risks, and to set and enforce

[[Page 52082]]

appropriately conservative haircuts and concentration limits. The 
framework further requires that a review of the sufficiency of OCC's 
collateral haircuts and concentration limits be performed not less than 
annually. Under this framework, and as provided for in its By-Laws and 
Rules, all Clearing Members are subject to the same limitations on 
acceptable collateral as well as to the same haircuts and concentration 
limits. Consequently, no Clearing Member is provided a competitive 
advantage over any other Clearing Member. Further, the proposed rule 
change would not affect Clearing Member's access to OCC's services or 
impose any direct burdens on Clearing Members. Accordingly, the 
proposed rule change would not unfairly inhibit access to OCC's 
services or disadvantage or favor any particular user in relationship 
to another user.
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    \29\ 15 U.S.C. 78q-1(b)(3)(I).
    \30\ Id.
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    For the foregoing reasons, OCC believes that the proposed rule 
change is in the public interest, would be consistent with the 
requirements of the Act applicable to clearing agencies, and would not 
impact or impose a burden on competition.

(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 the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 [email protected]. Please include 
File Number SR-OCC-2017-008 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-2017-008. 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 such 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_17_008.pdf. All comments received will be 
posted without change. Persons submitting comments are cautioned that 
we do not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-OCC-
2017-008 and should be submitted on or before November 30, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated Authority.\31\
Eduardo A. Aleman,
Assistant Secretary.
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    \31\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2017-24369 Filed 11-8-17; 8:45 am]
 BILLING CODE 8011-01-P


