[Federal Register Volume 83, Number 43 (Monday, March 5, 2018)]
[Notices]
[Pages 9345-9347]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-04338]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82785; File No. SR-OCC-2017-011]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change Related to The Options Clearing 
Corporation's Model Risk Management Policy

February 27, 2018.

I. Introduction

    On December 28, 2017, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities and Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change (SR-
OCC-2017-011) to formalize and update OCC's Model Risk Management 
Policy (``MRM Policy''). The proposed rule change was published for 
comment in the Federal Register on January 16, 2018.\3\ The Commission 
did not receive any comments regarding the proposed rule change. For 
the reasons discussed below, the Commission is approving 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. 82473 (Jan. 9, 2018), 83 
FR 2271 (Jan. 16, 2018) (SR-OCC-2017-011) (``Notice'').
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II. Description of the Proposed Rule Change \4\
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    \4\ 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.
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    OCC uses quantitative methods to make estimates, forecasts, and 
projections.\5\ Specifically, OCC employs such methods in the context 
of its credit risk models, margin system and related models, and 
liquidity risk models.\6\ OCC refers to the use of such quantitative 
methods in this context as Risk Models.\7\ OCC's use of models 
inherently exposes OCC to model risk.\8\ Such risk includes the 
consequences of decisions based on incorrect or misused model 
outputs.\9\ The proposed MRM Policy will apply to all Risk Models that 
OCC uses to determine, quantify, or measure actual or potential risk 
exposures or risk mitigating actions.\10\
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    \5\ Notice, 83 FR at 2271, n. 6.
    \6\ Id.
    \7\ Id.
    \8\ Notice, 83 FR at 2271.
    \9\ Notice, 83 FR at 2271, n. 5.
    \10\ Notice, 83 FR at 2271.
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    The MRM Policy details the general framework for OCC's model risk 
management practices, including describing and outlining the roles and 
responsibilities of OCC's Quantitative Risk Management department 
(``QRM''), Model Validation Group (``MVG''), and Model Risk Working 
Group (``MRWG'').\11\ The MRM Policy also addresses the roles of OCC's 
Legal department, Management Committee (``MC'') and Board Risk 
Committee (``RC'') in the review and approval of OCC's Risk Models.\12\ 
The proposed rule change would formalize and update OCC's MRM Policy.
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    \11\ Id.
    \12\ Notice, 83 FR at 2272.
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    Under the MRM Policy, QRM will be responsible for developing, 
implementing, and monitoring OCC's Risk Models.\13\ Regarding model 
development, QRM will maintain documentation of the design, theory, and 
logic of each Risk Model, including a description of the model, its 
intended purpose, assumptions, supporting data, limitations, and other 
details.\14\ As part of model implementation, QRM will review, 
evaluate, and propose model changes, including model decommissioning, 
make recommendations to the MRWG for approval of changes, and seek 
review by the Legal department regarding the regulatory filing 
requirements related to

[[Page 9346]]

proposed model changes.\15\ The MC will review, and as appropriate, 
recommend model change proposals to the RC for review and, if 
appropriate, to OCC's Board for final approval.\16\ Finally, QRM will 
monitor the use and performance of Risk Models, and will report its 
findings to the MRWG for potential escalation to the MC or RC as 
necessary.\17\
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    \13\ Notice, 83 FR at 2272-73.
    \14\ Notice, 83 FR at 2272.
    \15\ Id.
    \16\ Notice, 83 FR at 2273.
    \17\ Id.
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    Under the MRM Policy, MVG will be responsible for maintaining an 
inventory of OCC's Risk Models, and validating such models no less than 
annually.\18\ Each model validation must include a review of the 
model's performance, parameters, and assumptions.\19\ Such validations 
must be independent, which is defined by the MRM Policy as an 
evaluation performed by a qualified person who is free from influence 
from the persons responsible for the development or operation of the 
models being validated.\20\ Under the proposed MRM Policy, the MRWG is 
responsible for assisting the MC to oversee and govern OCC's model-
related risk issues.\21\ Specifically, the MRM Policy requires MRWG to 
provide, among other things, adequate support and legal expertise as it 
relates to model risk.\22\
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    \18\ Id.
    \19\ Id.
    \20\ Notice, 83 FR at 2273, n. 15.
    \21\ Notice, 83 FR at 2273.
    \22\ Id.
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    Additionally, the MRM Policy provides arrangements governing 
updates and exceptions to, as well as violations of, the MRM 
Policy.\23\ Specifically, updates to the MRM Policy may be approved by 
the RC upon recommendation from the MC. Exceptions to the MRM Policy 
require written approval from OCC's Office of the Executive 
Chairman.\24\ Finally, all violations of the MRM Policy must be 
reported to OCC's Chief Compliance Officer.\25\
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    \23\ Notice, 83 FR at 2273-74.
    \24\ Notice, 83 FR at 2274.
    \25\ Id. Violations involving the Chief Compliance Officer must 
be reported to the head of Internal Audit or a member of the Office 
of the Executive Chairman.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\26\ After carefully considering the proposed rule change, 
the Commission finds the proposal is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to OCC. 
More specifically, the Commission finds that the proposal is consistent 
with Section 17A(b)(3)(F) of the Act \27\ and Rules 17Ad-22(e)(2) \28\ 
17Ad-22(e)(4)(vii),\29\ 17Ad-22(e)(6)(vii),\30\ and 17Ad-22(e)(7)(vii) 
\31\ thereunder.
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    \26\ 15 U.S.C. 78s(b)(2)(C).
    \27\ 15 U.S.C. 78q-1(b)(3)(F).
    \28\ 17 CFR 240.17Ad-22(e)(2).
    \29\ 17 CFR 240.17Ad-22(e)(4)(vii).
    \30\ 17 CFR 240.17Ad-22(e)(6)(vii).
    \31\ 17 CFR 240.17Ad-22(e)(7)(vii).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires that 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.\32\
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    \32\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above, the MRM Policy is designed to reduce the model 
risk inherent in OCC's use of credit risk models, margin models, and 
liquidity risk models. Such model risk includes the consequences of 
decisions based on incorrect or misused model outputs. The Commission 
believes that decisions based on incorrect or misused model outputs 
could lead OCC to suffer credit losses or liquidity shortfalls arising 
out of the default of a clearing member, and that such losses or 
shortfalls could negatively affect the securities and funds that have 
been posted by non-defaulting clearing members and are within OCC's 
custody or control. For example, if an OCC risk model were to 
underestimate the risks posed by a clearing member's positions, the 
default of such a clearing member could cause OCC to face losses in 
excess of the collateral collected from the defaulting clearing member. 
Where OCC faces losses in excess of a defaulter's collateral, it may be 
forced to cover such losses with the securities and funds posted as 
collateral by non-defaulting clearing members.
    The Commission believes that measures that reduce model risk may 
allow OCC to better manage its credit and liquidity risk exposures by 
more accurately estimating the collateral OCC must collect from its 
clearing members to cover those risks. Such increased accuracy may, in 
turn, help OCC avoid credit losses or liquidity shortfalls in excess of 
collateral posted by a clearing member in the event of a default, and, 
thus, avoid the need to use non-defaulting clearing members' collateral 
to cover such losses or shortfalls. Therefore, because the 
formalization of the MRM Policy would incorporate into OCC's rules 
measures intended to reduce the likelihood that OCC would have to use 
non-defaulting clearing members' collateral to manage a clearing member 
default, the Commission finds that proposal is consistent with Section 
17A(b)(3)(F) of the Act.\33\
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    \33\ Id.
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B. Consistency With Rule 17Ad-22(e)(2)

    Rule 17Ad-22(e)(2) under the Act requires, among other things, that 
a covered clearing agency establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to provide for 
governance arrangements that are clear and transparent and specify 
clear and direct lines of responsibility.\34\
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    \34\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
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    As described above, the MRM Policy provides for arrangements 
governing updates and exceptions to, as well as violations of, the MRM 
Policy. Such arrangements provide clarity to OCC staff regarding the 
operation of the MRM Policy generally, and provide for unforeseen 
circumstances requiring changes to OCC's practices. Because 
formalization of the MRM Policy would incorporate into OCC's rules a 
policy intended to provide such clarity, the Commission finds that the 
proposal is consistent with Rule 17Ad-22(e)(2)(i).\35\
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    \35\ 17 CFR 240.17Ad-22(e)(2)(i).
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    As described above, the MRM Policy outlines the roles and 
responsibilities of departments, a working group, and management and 
board committees within the framework of OCC's model risk management 
practices. The MRM Policy states that the Board has final authority to 
approve changes to OCC's Risk Models. The MRM Policy also describes the 
escalation path for issues arising out of routine performance 
monitoring. The Commission believes that this aspect of the MRM Policy, 
which defines approval authority and escalation processes within OCC's 
governance structure, supports the specification of clear and direct 
lines of responsibility, and, therefore, is consistent with Rule 17Ad-
22(e)(2)(v).\36\
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    \36\ 17 CFR 240.17Ad-22(e)(2)(v).
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C. Consistency With Rules 17Ad-22(e)(4)(vii), (e)(6)(vii) and 17Ad-
22(e)(7)(vii)

    Rules 17Ad-22(e)(4)(vii), (e)(6)(vii) and (e)(7)(vii) under the Act 
require a covered clearing agency to establish, implement, maintain, 
and enforce written policies and procedures

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reasonably designed to, among other things, require the performance of 
a model validation for its credit risk models, margin system and 
related models, and liquidity risk models not less than annually, or 
more frequently as may be contemplated by the covered clearing agency's 
risk management framework established pursuant to Rule 17Ad-22(e)(3) 
under the Act.\37\
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    \37\ 17 CFR 240.17Ad-22(e)(4)(vii), (e)(6)(vii) and (e)(7)(vii). 
The requirements of Rule 17Ad-22(e)(4) pertain to the effective 
identification, measurement, monitoring, and management of credit 
exposures. 17 CFR 240.17Ad-22(e)(4). The requirements of Rule 17Ad-
22(e)(6), which apply to a covered clearing agency that performs 
central counterparty services, pertain to the covering of a covered 
clearing agency's credit exposures to its participants. 17 CFR 
240.17Ad-22(e)(6). The requirements of Rule 17Ad-22(e)(7) pertain to 
the effective measurement, monitoring, and management of liquidity 
risk. 17 CFR 240.17Ad-22(e)(7).
    Rule 17Ad-22 defines model validation to mean an evaluation of 
the performance of each material risk management model used by a 
covered clearing agency (and the related parameters and assumptions 
associated with such models), including initial margin models, 
liquidity risk models, and models used to generate clearing or 
guaranty fund requirements, performed by a qualified person who is 
free from influence from the persons responsible for the development 
or operation of the models or policies being validated. 17 CFR 
240.17Ad-22(a)(9).
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    As described above, the MRM Policy provides for the annual 
validation of OCC's Risk Models, which include credit risk, margin, and 
liquidity risk models. Under the MRM Policy, a model validation must 
include a review of the model's performance, parameters, and 
assumptions. Further, the MRM Policy clarifies that each model 
validation must be performed by a qualified person who is free from 
influence from the persons responsible for the development or operation 
of the models being validated. Therefore, because the Commission 
believes that the MRM Policy requires the annual validations of the 
performance, parameters, and assumptions of OCC's credit risk, margin, 
and liquidity risk models, the Commission finds that the proposed rule 
change is consistent with Rules 17Ad-22(e)(4)(vii), (e)(6)(vii), and 
(e)(7)(vii).

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act, 
and in particular, with the requirements of Section 17A of the Act \38\ 
and the rules and regulations thereunder.
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    \38\ 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 
\39\ that the proposed rule change (SR-OCC-2017-011) be, and hereby is, 
approved.
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    \39\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-04338 Filed 3-2-18; 8:45 am]
 BILLING CODE 8011-01-P


