[Federal Register Volume 84, Number 64 (Wednesday, April 3, 2019)]
[Notices]
[Pages 13082-13087]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-06430]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85440; File No. SR-OCC-2019-002]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Related to The Options 
Clearing Corporation's Margin Methodology for Volatility Index Futures

March 28, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on March 18, 2019, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change is filed in connection with proposed 
changes to modify OCC's margin methodology for futures on indexes 
designed to measure volatilities implied by prices of options on a 
particular underlying interest (such indexes being ``Volatility 
Indexes,'' and futures contracts on such Volatility Indexes being 
``Volatility Index Futures''). The proposed methodology enhancements 
for Volatility Index Futures would include: (1) Introducing 
``synthetic'' futures (discussed below) into the daily re-estimation of 
prices and correlations for Volatility Index Futures; (2) an enhanced 
statistical distribution for modeling price returns of the 
``synthetic'' futures; and (3) a new anti-procyclical floor for 
variance estimates. The proposed changes are discussed in detail in 
Section II below.
    The proposed changes to OCC's Margins Methodology document are

[[Page 13083]]

contained in confidential Exhibit 5 of the filing. Material proposed to 
be added is marked by underlining and material proposed to be deleted 
is marked by strikethrough text. OCC also has included backtesting and 
impact analysis of the proposed model changes in confidential Exhibit 
3.
    The proposed rule change is available on OCC's website at https://www.theocc.com/about/publications/bylaws.jsp. 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.\3\
---------------------------------------------------------------------------

    \3\ OCC's By-Laws and Rules can be found on OCC's public 
website: http://optionsclearing.com/about/publications/bylaws.jsp.
---------------------------------------------------------------------------

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
    The purpose of the proposed rule change is to introduce 
enhancements to OCC's margin methodology for Volatility Index Futures 
so that OCC's margin model reflects more current market information for 
Volatility Index Futures and allows for more appropriate modeling of 
the risk attributes of such products. Specifically, the proposed 
methodology enhancements for Volatility Index Futures would include: 
(1) Introducing ``synthetic'' futures into the process for daily re-
estimation of prices and correlations for Volatility Index Futures; (2) 
an enhanced statistical distribution for modeling price returns for 
``synthetic'' futures; and (3) a new anti-procyclical floor for 
variance estimates. OCC's current model for Volatility Index Futures 
and the proposed changes thereto are described in further detail below.
Background
    OCC's margin methodology, the System for Theoretical Analysis and 
Numerical Simulations (``STANS''),\4\ is OCC's proprietary risk 
management system that calculates Clearing Member margin requirements. 
STANS utilizes large-scale Monte Carlo simulations to forecast price 
and volatility movements in determining a Clearing Member's margin 
requirement.\5\ The STANS margin requirement is calculated at the 
portfolio level of Clearing Member accounts with positions in 
marginable securities. The STANS margin requirement consists of an 
estimate of a 99% expected shortfall \6\ over a two-day time horizon 
and an add-on margin charge for model risk (the concentration/
dependence stress test charge).\7\ The STANS methodology is used to 
measure the exposure of portfolios of options, futures and cash 
instruments, including the Volatility Index Futures cleared by OCC.\8\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 53322 (February 15, 
2006), 71 FR 9403 (February 23, 2006) (SR-OCC-2004-20).
    \5\ See OCC Rule 601.
    \6\ The expected shortfall component is established as the 
estimated average of potential losses higher than the 99% value at 
risk threshold. The term ``value at risk'' or ``VaR'' refers to a 
statistical technique that, generally speaking, is used in risk 
management to measure the potential risk of loss for a given set of 
assets over a particular time horizon.
    \7\ A detailed description of the STANS methodology is available 
at http://optionsclearing.com/risk-management/margins/.
    \8\ Pursuant to OCC Rule 601(e)(1), OCC also calculates initial 
margin requirements for segregated futures accounts on a gross basis 
using the Standard Portfolio Analysis of Risk Margin Calculation 
System (``SPAN''). Commodity Futures Trading Commission (``CFTC'') 
Rule 39.13(g)(8), requires, in relevant part, that derivatives 
clearing organizations (``DCOs'') collect initial margin for 
customer segregated futures accounts on a gross basis. While OCC 
uses SPAN to calculate initial margin requirements for segregated 
futures accounts on a gross basis, OCC believes that margin 
requirements calculated on a net basis (i.e., permitting offsets 
between different customers' positions held by a Clearing Member in 
a segregated futures account using STANS) affords OCC additional 
protections at the clearinghouse level against risks associated with 
liquidating a Clearing Member's segregated futures account. As a 
result, OCC calculates margin requirements for segregated futures 
accounts using both SPAN on a gross basis and STANS on a net basis, 
and if at any time OCC staff observes a segregated futures account 
where initial margin calculated pursuant to STANS on a net basis 
exceeds the initial margin calculated pursuant to SPAN on a gross 
basis, OCC collateralizes this risk exposure by applying an 
additional margin charge in the amount of such difference to the 
account. See Securities Exchange Act Release No. 72331 (June 5, 
2014), 79 FR 33607 (June 11, 2014) (SR-OCC-2014-13).
---------------------------------------------------------------------------

    Volatility Indexes are indexes designed to measure the volatility 
that is implied by the prices of options on a particular reference 
index or asset. For example, the Cboe Volatility Index (``VIX'') is an 
index designed to measure the 30-day expected volatility of the 
Standard & Poor's 500 index (``SPX'').\9\ OCC currently clears futures 
contracts on such Volatility Indexes. These Volatility Index Futures 
contracts can consequently be viewed as an indication of the market's 
future expectations of the volatility of a given Volatility Index's 
underlying reference index (e.g., in the case of the VIX, providing a 
snapshot of the expected market volatility of the underlying over the 
term of the options making up the index).
---------------------------------------------------------------------------

    \9\ Generally speaking, the implied volatility of an option is a 
measure of the expected future volatility of the value of the 
option's annualized standard deviation of the price of the 
underlying security, index, or future at exercise, which is 
reflected in the current option premium in the market. Using the 
Black-Scholes options pricing model, the implied volatility is the 
standard deviation of the underlying asset price necessary to arrive 
at the market price of an option of a given strike, time to 
maturity, underlying asset price and given the current risk-free 
rate. In effect, the implied volatility is responsible for that 
portion of the premium that cannot be explained by the then-current 
intrinsic value (i.e., the difference between the price of the 
underlying and the exercise price of the option) of the option, 
discounted to reflect its time value.
---------------------------------------------------------------------------

Current Model for Volatility Index Futures
    Under OCC's existing margin methodology, OCC models the potential 
final settlement prices of Volatility Index Futures using the 
underlying index as the risk factor.\10\ Final settlement prices are 
simulated under the assumption that the logarithm of the values of the 
risk factor (i.e., the underlying spot Volatility Index) follows a 
mean-reverting \11\ random walk \12\ with normally-distributed 
steps.\13\ The model is designed to calibrate the distribution that 
defines this mean-reversion behavior so that the expected final 
settlement prices of the futures match their currently-observed market 
prices to ensure that margin coverage is sufficient to limit credit 
exposures to OCC's participants under normal market conditions. OCC 
recalculates the Monte Carlo scenarios of the returns of each futures 
series over its remaining life so that the standard deviation of the 
scenarios matches two days' worth of the implied volatility of near-
the-money and contemporaneously expiring options on the Volatility 
Index, where available, in order to align with OCC's two-day 
liquidation period assumption. Currently, the calibration

[[Page 13084]]

for the distribution is performed on a daily basis.
---------------------------------------------------------------------------

    \10\ A ``risk factor'' within OCC's margin system may be defined 
as a product or attribute whose historical data is used to estimate 
and simulate the risk for an associated product.
    \11\ In finance, the term ``mean reversion'' describes a 
financial time series in which returns can be very unstable in the 
short run but very stable in the long run.
    \12\ A random walk is a continuous process with random 
increments drawn independently from a particular distribution.
    \13\ This is known as a Gaussian Ornstein-Uhlenbeck process. See 
Uhlenbeck, G.E. and L.S. Ornstein, ``On the Theory of Brownian 
Motion,'' Physical Review, 36, 823-841 (1930) (explaining the 
Gaussian Ornstein-Uhlenbeck process).
---------------------------------------------------------------------------

    OCC's current model for Volatility Index Futures, which utilizes 
the underlying Volatility Index as the sole risk factor, is subject to 
certain limitations, which would be addressed by the proposed changes 
described herein. Volatility Indexes, unlike futures contracts, are not 
investible (i.e., they cannot be replicated by static portfolios of 
traded contracts). In addition, the futures market has a term structure 
that cannot be modeled using just the underlying index. Finally, 
futures on a Volatility Index are less volatile and less fat-tailed 
\14\ than the index itself, and these features are term-dependent. The 
current model was developed before sufficient data on the futures was 
available, so a model based on ``synthetic'' futures,\15\ as proposed 
herein, was not an option at the time. Also, the current model does not 
account for certain strategies Clearing Members might employ involving 
spreads between delivery dates, which may result in under-margining of 
those positions.
---------------------------------------------------------------------------

    \14\ A data set with a ``fat tail'' is one in which extreme 
price returns have a higher probability of occurrence than would be 
the case in a normal distribution.
    \15\ As discussed in further detail below, a ``synthetic'' 
futures time series, for the intended purposes of OCC, relates to a 
uniform substitute for a time series of daily settlement prices for 
actual futures contracts, which persists over many expiration cycles 
and thus can be used as a basis for econometric analysis.
---------------------------------------------------------------------------

    In recent years, OCC has seen significant growth in trading volume 
for Volatility Index Futures. As a result, OCC is proposing a number of 
enhancements to its margin methodology designed to provide for more 
accurate and responsive margin requirements for Volatility Index 
Futures.
Proposed Changes
    The purpose of the proposed rule change is to introduce 
enhancements to OCC's margin methodology so that OCC's margin models 
reflect more current market information for Volatility Index Futures, 
introduce asymmetry into the statistical distribution used to model 
price returns of the ``synthetic'' futures, and reduce procyclicality 
\16\ in the model.
---------------------------------------------------------------------------

    \16\ A quality that is positively correlated with the overall 
state of the market is deemed to be ``procyclical.'' For example, 
procyclicality may be evidenced by increasing margin or Clearing 
Fund requirements in times of stressed market conditions and low 
margin or Clearing Fund requirements when markets are calm. Hence, 
anti-procyclical features in a model are measures intended to 
prevent risk-based models from fluctuating too drastically in 
response to changing market conditions.
---------------------------------------------------------------------------

    The proposed changes would specifically include: (1) The daily re-
estimation of prices and correlations using ``synthetic'' futures; (2) 
an enhanced statistical distribution for modeling price returns for 
``synthetic'' futures; and (3) a new anti-procyclical floor for 
variance estimates.\17\ The main feature of the proposed model, 
relative to the current model, is the replacement of the underlying 
Volatility Index itself as a risk factor by risk factors that are based 
on observed futures prices (i.e., the ``synthetic'' futures contracts). 
The proposed change would introduce a new set of risk factors and 
method for generating scenarios for those risk factors, and hence 
Volatility Index Futures settlement prices, to be incorporated into the 
STANS margin calculations. OCC believes its proposed methodology would 
provide for more accurate and responsive margin requirements and that 
the imposition of a floor for variance estimates would mitigate 
procyclicality in OCC's margin methodology for Volatility Index 
Futures. The proposed changes are described in further detail below.
---------------------------------------------------------------------------

    \17\ OCC would also make a number of conforming changes 
throughout it Margins Methodology so that the document arcuately 
reflects the adoption of the new model.
---------------------------------------------------------------------------

1. Daily Re-Estimations Using Synthetic Futures
    As noted above, OCC currently models the potential final settlement 
prices of Volatility Index Futures based on the underlying index 
itself. OCC proposes to modify its modeling approach for Volatility 
Index Futures by modeling the price distributions of ``synthetic'' 
futures on a daily basis based on the historical returns of futures 
contracts with approximately the same tenor (as opposed to OCC's 
current approach of calibrating the distribution based on the 
Volatility Index itself). A ``synthetic'' futures time series for the 
intended purposes of OCC relates to a uniform substitute for a time 
series of daily settlement prices for actual futures contracts, which 
persists over many expiration cycles and thus can be used as a basis 
for econometric analysis. One feature of futures contracts is that each 
contract may have a different expiration date, and at any one point in 
time there may be a variety of futures contracts on the same underlying 
interest, all with varying dates of expiry, so that there is no one 
continuous time series for those futures. ``Synthetic'' futures can be 
used to generate a continuous time series of futures contract prices 
across multiple expirations. These ``synthetic'' futures price return 
histories would be inputted into the existing Copula simulation process 
in STANS alongside the underlying interests of OCC's other cleared and 
cross-margin products and collateral. The purpose of this use of 
``synthetic'' futures is to allow the margin system to better 
approximate correlations between futures contracts of different tenors 
by creating more price data points and their margin offsets.
    Under the proposal, the historical ``synthetic'' time series for 
these Volatility Indexes would be updated daily and mapped to their 
corresponding futures contracts. By construction, the first 
``synthetic'' time series would always contain returns of the front 
contract (i.e., the contract closest to maturity, on any given day), 
the second, which would correspond to the next month out, and the 
remaining series would follow the same pattern. Following the 
expiration date of the front contract, each contract within a time 
series would be replaced with a contract maturing one month later. 
While ``synthetic'' time series contain returns from different 
contracts, a return on any given date is constructed from prices of the 
same contract (e.g., as the front month futures contract ``rolls'' from 
the current month to the subsequent month, returns on the roll date 
would be constructed by using the same contract and not by calculating 
returns across months). The marginal probability distribution 
parameters for the ``synthetic'' time series (i.e., marginal 
probabilities of various values of the variables in the distribution 
without reference to the values of the other variables) would be 
estimated daily using recent historical observations.\18\ In cases in 
which the GARCH variance \19\ forecast falls below the sample variance, 
in addition to being floored by the sample variance, the ``synthetic'' 
time series would additionally be ``scaled up'' through the 
introduction of a new floor on variance estimates based on the 
corresponding underlying index in order to reduce

[[Page 13085]]

procyclicality in the model (as discussed in further detail below).
---------------------------------------------------------------------------

    \18\ However, for any tenor extension or new contract that does 
not have enough historical data for the associated ``synthetic'' 
security, the scenarios for the longest tenor ``synthetic'' with 
enough history would be used as a proxy for generating futures 
theoretical price scenarios. In this case, the long run floor 
(discussed below) would be borrowed from the proxy ``synthetic.''
    \19\ See generally Tim Bollerslev, ``Generalized Autoregressive 
Conditional Heteroskedasticity,'' Journal of Econometrics, 31(3), 
307-327 (1986). The acronym ``GARCH'' refers to an econometric model 
that can be used to estimate volatility based on historical data. 
The general distinction between the ``GARCH variance'' and the 
``sample variance'' for a given time series is that the GARCH 
variance uses the underlying time series data to forecast 
volatility.
---------------------------------------------------------------------------

    OCC believes that using synthetic futures in its daily re-
estimation process would allow OCC's econometric model for Volatility 
Index Futures to reflect more current market information and achieve 
better coverage across the term curve.\20\ As a result, OCC believes 
the proposed changes would result more accurate margin requirements for 
Clearing Members under the current market conditions.
---------------------------------------------------------------------------

    \20\ In 2018, the Commission approved, and issued a Notice of 
No-Objection to, proposed changes to OCC's margin methodology 
designed to enable OCC to: (1) Obtain daily price data for equity 
products for use in the daily estimation of econometric model 
parameters; (2) enhance OCC's econometric model for updating 
statistical parameters for all risk factors that reflect the most 
recent data obtained; (3) improve the sensitivity and stability of 
correlation estimates across risk factors by using de-volatized 
returns; and (4) improve OCC's methodology related to the treatment 
of defaulting securities. See Securities Exchange Act Release No. 
83326 (May 24, 2018), 83 FR 25081 (May 31, 2018) (SR-OCC-2017-022) 
and Securities Exchange Act Release No. 83305 (May 23, 2018), 83 FR 
24536 (May 29, 2018) (SR-OCC-2017-811). Under the proposal, 
correlation updates for ``synthetic'' futures would be done daily 
with a one-day lag.
---------------------------------------------------------------------------

2. Enhancements to Statistical Distribution for Volatility Index 
Futures
    In addition to using a ``synthetic'' futures price return history 
in the process for daily re-estimation of model parameters, OCC is 
proposing additional enhancements to its margin methodology for 
Volatility Index Futures to introduce asymmetry into the statistical 
distribution used to model price returns of the ``synthetic'' futures. 
The econometric model currently used in STANS for all price risk 
factors is an asymmetric GARCH(1,1) with symmetric Standardized Normal 
Reciprocal Inverse Gaussian (or ``NRIG'')-distributed logarithmic 
returns.\21\ OCC proposes to move to an asymmetric NRIG distribution 
for purposes of modeling proportionate returns of the ``synthetic'' 
futures. OCC believes the asymmetric NRIG distribution has a better 
``goodness of fit'' \22\ to the historical data and allows for more 
appropriate modeling of observed asymmetry of the distribution. As a 
result, OCC believes that the proposed change would lead to more 
consistent treatment of returns both on the upside as well as downside 
of the distribution. Accordingly, OCC believes that the proposed 
changes would result in margin requirements for Volatility Index 
Futures that respond more appropriately to changes in market volatility 
and therefore are more accurate.
---------------------------------------------------------------------------

    \21\ See id.
    \22\ The goodness of fit of a statistical model describes the 
extent to which observed data match the values generated by the 
model.
---------------------------------------------------------------------------

3. Introduction of Anti-Procyclical Floor for Variance Estimates
    OCC also proposes to introduce a new floor for variance estimates 
of the Volatility Index Futures that would be modeled under the newly 
proposed approach to mitigate procyclicality in OCC's margin model. In 
order to incorporate a variance level implied by a longer time series 
of data, OCC would calculate a floor for variance estimates based on 
the underlying index (e.g., VIX) which is expected to have a longer 
history that is more reflective of the long-run variance level that 
cannot be otherwise captured using the ``synthetic'' futures data. The 
floor would therefore reduce the impact of a sudden increase in margin 
requirements from a low level and therefore mitigate procyclicality in 
the model.
Clearing Member Outreach
    In order to inform Clearing Members of the proposed change, OCC has 
provided updates to members at OCC Roundtable \23\ and Financial Risk 
Advisory Council (or ``FRAC'') \24\ meetings and will provide 
additional reminders about the proposed changes at its next FRAC 
meeting. In addition, OCC will publish an Information Memo to all 
Clearing Members describing the proposed changes and will provide 
additional periodic Information Memo updates prior to the 
implementation date. Additionally, OCC will perform targeted and direct 
outreach with Clearing Members that would be most impacted by the 
proposed change, and OCC would work closely with such Clearing Members 
to coordinate the implementation and to discuss the impact and timing 
of any required collateral deposits that may result from the proposed 
change.\25\
---------------------------------------------------------------------------

    \23\ The OCC Roundtable was established to bring Clearing 
Members, exchanges and OCC together to discuss industry and 
operational issues. It is comprised of representatives of senior OCC 
staff, participant exchanges and Clearing Members, representing the 
diversity of OCC's membership in industry segments, OCC-cleared 
volume, business type, operational structure and geography.
    \24\ The Financial Risk Advisory Council is a working group 
comprised of exchanges, Clearing Members and indirect participants 
of OCC.
    \25\ Specifically, OCC will discuss with those Clearing Members 
how they plan to satisfy any increase in their margin requirements 
associated with the proposed change.
---------------------------------------------------------------------------

Implementation Timeframe
    OCC plans to implement the proposed changes on May 20, 2019, 
provided that all necessary regulatory approvals are received by that 
date. If all regulatory approvals are not received by May 20, 2019, or 
if implementation on that date becomes otherwise impractical, OCC will 
implement the proposed changes within thirty (30) days after the date 
that OCC receives all necessary regulatory approvals for the proposed 
changes. OCC will announce any alternative implementation date of the 
proposed changes by an Information Memo posted to its public website at 
least one week prior to implementation.
(2) Statutory Basis
    OCC believes that the proposed rule change is consistent with 
Section 17A of the Act \26\ and the rules thereunder applicable to OCC. 
Section 17A(b)(3)(F) of Act \27\ requires that the rules of a clearing 
agency be designed to promote the prompt and accurate clearance and 
settlement of securities and derivatives transactions and assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible. The 
purpose of the proposed rule change is to introduce enhancements to 
OCC's margin methodology so that OCC's margin models reflect more 
current market information for Volatility Index Futures; use a 
statistical distribution for modeling proportionate returns of the 
``synthetic'' futures, which OCC believes has a better ``goodness of 
fit'' to the historical data and allows for more appropriate modeling 
of observed asymmetry of the distribution; and reduce procyclicality in 
the model.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78q-1.
    \27\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The main feature of the proposed model, relative to the current 
model, is the replacement of the underlying Volatility Index itself as 
a risk factor by risk factors that are based on observed futures prices 
(i.e., the ``synthetic'' futures contracts). OCC believes that using 
``synthetic'' futures in its daily re-estimation process would allow 
OCC's econometric model for Volatility Index Futures to reflect more 
current market information and achieve better coverage across the term 
curve. As a result, OCC believes the proposed changes would result more 
accurate margin requirements for Clearing Members under the current 
market conditions that respond more appropriately to changes in market 
volatility. In addition, OCC believes that the proposed change to an 
asymmetrical NRIG statistical distribution would lead to more 
consistent treatment of returns both on the upside as well as downside 
of the distribution and therefore result in margin requirements for 
Volatility Index Futures that respond more appropriately to changes in 
market

[[Page 13086]]

volatility and therefore are more accurate. Finally, the proposed rule 
change would also enhance OCC's approach for modeling Volatility Index 
Futures by introducing a floor on variance estimates in the model to 
mitigate procyclicality.
    The proposed model would be used by OCC to calculate margin 
requirements designed to limit its credit exposures to participants, 
and OCC uses the margin it collects from a defaulting Clearing Member 
to protect other Clearing Members from losses as a result of the 
default and ensure that OCC is able to continue the prompt and accurate 
clearance and settlement of its cleared products. As a result, OCC 
believes the proposed rule changed is designed to promote the prompt 
and accurate clearance and settlement of securities and derivatives 
transactions and assure the safeguarding of securities and funds in its 
custody or control in accordance with Section 17A(b)(3)(F) of the 
Act.\28\
---------------------------------------------------------------------------

    \28\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(b)(1) \29\ requires that a registered clearing agency 
that performs central counterparty services establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to measure its credit exposures to its participants at least 
once a day and 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. As described above, the proposed rule change would 
introduce new model enhancements for OCC's cleared Volatility Index 
Futures. OCC would use the risk-based model enhancements described 
herein to measure its credit exposures to its participants on a daily 
basis and determine margin requirements based on such calculations. OCC 
believes that the proposed enhancements would result in more accurate 
and responsive margin requirements by ensuring that OCC's margin models 
reflect more current market information for Volatility Index Futures 
and using an asymmetric distribution in its model that has a better 
``goodness of fit'' to the historical data and allows for more 
appropriate modeling of observed asymmetry of the distribution. The 
proposed rule change would also introduce a new floor on variance 
estimates in the model to mitigate procyclicality. OCC believes the 
proposed rule change is therefore designed to ensure that OCC sets 
margin requirements that would serve to limit OCC's exposures to 
potential losses from defaults by its participants under normal market 
conditions so that the operations of OCC would not be disrupted, and 
non-defaulting participants would not be exposed to losses that they 
cannot anticipate or control. Accordingly, OCC believes the proposed 
rule change is consistent with Rule 17Ad-22(b)(1).\30\
---------------------------------------------------------------------------

    \29\ 17 CFR 240.17Ad-22(b)(1).
    \30\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(b)(2) \31\ further requires, in part, that a 
registered clearing agency that performs central counterparty services 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed use margin requirements to limit its 
credit exposures to participants under normal market conditions and use 
risk-based models and parameters to set margin requirements. As noted 
above, OCC would use the proposed model enhancements to calculate 
margin requirements for Volatility Index Futures in a manner designed 
to limit its credit exposures to participants under normal market 
conditions. Moreover, OCC believes that the proposed risk-based model 
enhancements for Volatility Index Futures would result in more accurate 
and responsive margin requirements for OCC's Clearing Members and would 
introduce an asymmetric distribution into its model that has a better 
``goodness of fit'' to the historical data and allows for more 
appropriate modeling of observed asymmetry of the distribution. The 
proposed floor on variance estimates would also help to reduce 
procyclicality in margin requirements for Volatility Index Futures. The 
risk-based model would therefore be used to calculate margin 
requirements designed to limit OCC's credit exposures to participants 
under normal market conditions in a manner consistent with Rule 17Ad-
22(b)(2).\32\
---------------------------------------------------------------------------

    \31\ 17 CFR 240.17Ad-22(b)(2).
    \32\ Id.
---------------------------------------------------------------------------

    Rules 17Ad-22(e)(6)(i), (iii), and (v) \33\ further require that a 
covered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to cover its Credit 
exposures to its participants by establishing a risk-based margin 
system that, among other things: (1) Considers, and produces margin 
levels commensurate with, the risks and particular attributes of each 
relevant product, portfolio, and market; (2) calculates margin 
sufficient to cover its potential future exposure to participants in 
the interval between the last margin collection and the close out of 
positions following a participant default; and (3) uses an appropriate 
method for measuring credit exposure that accounts for relevant product 
risk factors and portfolio effects across products.
---------------------------------------------------------------------------

    \33\ 17 CFR 240.17Ad-22(e)(6)(i), (iii), and (v).
---------------------------------------------------------------------------

    As described in detail above, OCC believes that the proposed model 
enhancements would result in more accurate, more responsive, and less 
procyclical margin requirements for OCC's Clearing Members clearing 
Volatility Index Futures, with such margin serving to protect other 
Clearing Members from losses arising as a result of a Clearing Member 
default. The proposed changes are intended to ensure that OCC's margin 
models reflect more current market information for Volatility Index 
Futures and would introduce an asymmetric distribution into its model 
that has a better ``goodness of fit'' to the historical data and allows 
for more appropriate modeling of the observed asymmetry of the 
distribution. Additionally, OCC would introduce a floor on variance 
estimates in the model to limit procyclicality. OCC therefore believes 
the proposed changes are reasonably designed to consider and produce 
margin levels commensurate with the risks and particular attributes of 
OCC's cleared Volatility Index Futures, calculate margin sufficient to 
cover its potential future exposure to participants in the interval 
between the last margin collection and the close out of positions 
following a participant default, and apply an appropriate method for 
measuring credit exposure that accounts for risk factors and portfolio 
effects of Volatility Index Futures in a manner consistent with Rules 
17Ad-22(e)(6)(i), (iii), and (v).\34\
---------------------------------------------------------------------------

    \34\ Id.
---------------------------------------------------------------------------

    The proposed rule changes are 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) requires that the rules of a clearing agency 
do not impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of Act.\35\ OCC does not believe that the 
proposed rule change would impact or impose any burden on competition. 
The proposed risk model enhancements would apply to all Clearing 
Members clearing Volatility Index Futures at OCC. The overall impact of 
the proposed changes will be

[[Page 13087]]

mixed and depend on the composition of the portfolio in question. For 
instance, if a Clearing Member's portfolio is comprised of hedged 
spread positions in Volatility Index Futures along the term structure, 
then margins could be much lower when compared to a portfolio that is 
heavily short the front month futures contract. While at a product 
level, margins are identical for futures contracts, it is the increased 
term structure correlations that aid in providing increased offsets 
depending on the portfolio. OCC does not believe that the proposed rule 
change would unfairly inhibit access to OCC's services or disadvantage 
or favor any particular user in relationship to another user. In 
addition, the proposed rule change would be applied uniformly to all 
Clearing Members in establishing their margin requirements.
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    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 Exchange 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-2019-002 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-2019-002. 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 website (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 website 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 website at 
https://www.theocc.com/about/publications/bylaws.jsp.
    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-2019-002 and 
should be submitted on or before April 24, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
---------------------------------------------------------------------------

    \36\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-06430 Filed 4-2-19; 8:45 am]
BILLING CODE 8011-01-P


