[Federal Register Volume 84, Number 209 (Tuesday, October 29, 2019)]
[Notices]
[Pages 57911-57920]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23550]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87386; File No. SR-OCC-2019-009]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Related to Proposed Changes to 
The Options Clearing Corporation's Rules, Clearing Fund Methodology 
Policy, and Clearing Fund and Stress Testing Methodology

October 23, 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 October 10, 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 primarily 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

    The proposed rule change is filed in connection with proposed 
enhancements to OCC's Clearing Fund and stress testing rules and 
methodology designed to: (1)

[[Page 57912]]

Incorporate a new set of stress test scenarios to be used in the 
monthly sizing of OCC's Clearing Fund that are designed to capture the 
risks of extreme moves in individual or small subsets of securities; 
(2) enhance OCC's stress testing methodology for modeling certain 
volatility index futures; (3) modify OCC's methodology for allocating 
Clearing Fund contribution requirements to standardize the margin risk 
component of the allocation formula for all Clearing Members; (4) adopt 
an additional threshold for notifying senior management of intra-day 
margin calls based on certain stress test results; (5) correct certain 
rules concerning OCC's cooling-off period and replenishment/assessment 
powers; and (6) make other clarifying and conforming changes to OCC's 
Rules, Clearing Fund Methodology Policy (``Policy''), and Stress 
Testing and Clearing Fund Methodology Description (``Methodology 
Description'')
    The proposed amendments to OCC's Rules can be found in Exhibit 
5A.\3\ Proposed changes to the Policy can be found in Exhibit 5B. 
Proposed changes to the Methodology Description can be found in Exhibit 
5C. Material proposed to be added to the Rules, Policy, and Methodology 
Description as currently in effect is marked by underlining, and 
material proposed to be deleted is marked in strikethrough text.\4\ The 
proposed changes are described in detail in Item II below.
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    \3\ The Commission notes that exhibits referenced herein are 
included in the filing submitted by OCC to the Commission, but are 
not included in this Notice.
    \4\ OCC also has filed an advance notice with the Commission in 
connection with the proposed changes. See SR-OCC-2019-806.
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    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.\5\
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    \5\ OCC's By-Laws and Rules can be found on OCC's public 
website: 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
    In September 2018, OCC implemented new rules for sizing and 
monitoring its Clearing Fund and overall Pre-Funded Financial 
Resources,\6\ which included the adoption of a new Policy and 
Methodology Description.\7\ Under the requirements of the Policy, OCC 
bases its determination of the Clearing Fund size on the results of 
stress tests conducted daily using standard predetermined parameters 
and assumptions. These daily stress tests consider a range of relevant 
stress scenarios and possible price changes in liquidation periods, 
including but not limited to: (1) Relevant peak historic price 
volatilities; (2) shifts in other market factors including, as 
appropriate, price determinants and yield curves; and (3) the default 
of one or multiple Clearing Members. OCC also conducts reverse stress 
tests for informational purposes aimed at identifying extreme default 
scenarios and extreme market conditions for which the OCC's financial 
resources may be insufficient.
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    \6\ The Policy defines OCC's ``Pre-Funded Financial Resources'' 
to mean margin of the defaulted Clearing Member and the required 
Clearing Fund less any deficits, exclusive of OCC's assessment 
powers.
    \7\ On July 26, 2018, the Commission issued a Notice of No 
Objection to an advance notice by OCC concerning the adoption of a 
new stress testing and Clearing Fund methodology. See Securities 
Exchange Act Release No. 83714 (July 26, 2018), 83 FR 37570 (August 
1, 2018) (SR-OCC-2018-803). On July 27, 2018, the Commission 
approved a proposed rule change by OCC concerning the same proposal. 
See Securities Exchange Act Release No. 83735 (July 27, 2018), 83 FR 
37855 (August 2, 2018) (SR-OCC-2018-008).
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    As described in the Methodology Description, the newly adopted 
methodology includes two types of scenarios: ``Historical Scenarios'' 
and ``Hypothetical Scenarios.'' Historical Scenarios intend to 
replicate historical events in current market conditions, which 
includes the set of currently existing securities, their prices, and 
volatility levels. These scenarios provide OCC with information 
regarding pre-defined reference points determined to be relevant 
benchmarks for assessing OCC's exposure to Clearing Members and the 
adequacy of its financial resources. Hypothetical Scenarios represent 
events in which market conditions change in ways that have not yet been 
observed. The Hypothetical Scenarios are derived using statistical 
methods (e.g., draws from estimated multivariate distributions) or 
created based on a mix of statistical techniques and expert judgment 
(e.g., a 15% decline in market prices and 50% increase in volatility). 
These scenarios give OCC the ability to change the distribution and 
level of stress in ways necessary to produce an effective forward-
looking stress testing methodology. OCC uses these pre-determined 
stress scenarios in stress tests, conducted on a daily basis, to 
determine OCC's risk exposure to each Clearing Member Group by 
simulating the profits and losses of the positions in their respective 
account portfolios under each such stress scenario.
    Under the Policy and Methodology Description, OCC performs daily 
stress testing using a wide range of scenarios, both Hypothetical and 
Historical, designed to serve multiple purposes. OCC's proposed stress 
testing inventory contains scenarios designed to: (1) Determine whether 
the financial resources collected from all Clearing Members 
collectively are adequate to cover OCC's risk tolerance (``Adequacy 
Scenarios,'' and such scenarios collectively constituting ``Adequacy 
Stress Tests''); (2) establish the monthly size of the Clearing Fund 
necessary for OCC to maintain sufficient Pre-Funded Financial Resources 
to cover losses arising from the default of the two Clearing Member 
Groups that would potentially cause the largest aggregate credit 
exposure to OCC as a result of a 1-in-80 year hypothetical market event 
(``Sizing Scenarios,'' and such scenarios collectively constituting 
``Sizing Stress Tests''); (3) measure the exposure of the Clearing Fund 
to the portfolios of individual Clearing Member Groups, and determine 
whether any such exposure is sufficiently large as to necessitate OCC 
calling for additional resources so that OCC continues to maintain 
sufficient financial resources to guard against potential losses under 
a wide range of stress scenarios, including extreme but plausible 
market conditions (``Sufficiency Scenarios,'' and such scenarios 
collectively constituting ``Sufficiency Stress Tests''); \8\ and (4) 
monitor and assess the

[[Page 57913]]

size of OCC's Pre-Funded Financial Resources against a wide range of 
stress scenarios that may include extreme but implausible and reverse 
stress testing scenarios (``Informational Scenarios,'' and such 
scenarios collectively constituting ``Informational Stress Tests'').\9\
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    \8\ Under OCC Rule 609, the Policy, and the Methodology 
Description, if a Sufficiency Stress Test identifies exposures that 
exceed 75% of the current Clearing Fund requirement less deficits 
(the ``75% threshold'' or ``Sufficiency Stress Test Threshold 1''), 
OCC may require additional margin deposits from the Clearing Member 
Group(s) driving the breach. All such margin calls must be approved 
by a Vice President (or higher) of OCC's Financial Risk Management 
department (``FRM''); however, if the margin call imposed on an 
individual Clearing Member exceeds $500 million, OCC's Stress 
Testing and Liquidity Risk Management group (``STLRM'') must provide 
written notification to OCC's Executive Chairman, Chief Executive 
Officer, and Chief Operating Officer (collectively referred to as 
the ``Office of the Chief Executive Officer'' or ``OCEO''). 
Additionally, under Rule 1001(c) (and as described in the Policy and 
Methodology Description), if a Sufficiency Stress Test were to 
identify a Clearing Fund Draw for any one or two Clearing Member 
Groups that exceed 90% of the current Clearing Fund size (after 
subtracting any monies deposited as a result of a margin call in 
accordance with a breach of Sufficiency Stress Test Threshold 1), 
OCC has the authority to effect an intra-month resizing of the 
Clearing Fund to ensure that it continues to maintain sufficient 
prefunded financial resources. See supra note 7.
    \9\ OCC notes that its Adequacy and Informational Stress Tests 
are not used to size the Clearing Fund or drive calls for additional 
financial resources.
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    In addition, under the Rules, Policy, and Methodology Description, 
individual Clearing Members' Clearing Fund contribution requirements 
are determined using a risk-based allocation methodology of 70% ``total 
risk,'' 15% volume, and 15% open interest using a one-month look-back 
period. For purposes of allocating Clearing Fund contributions, ``total 
risk'' is defined to mean the margin requirement calculated and 
reported by OCC with respect to all accounts of a Clearing Member less 
the net asset value of the positions in such accounts aggregated across 
all such accounts.
Proposed Changes
    OCC proposes to enhance its Clearing Fund and stress testing 
framework by: (1) Adopting a new set of stress scenarios to be used in 
the monthly sizing of OCC's Clearing Fund that are designed to capture 
the risks of extreme moves in individual or small subsets of securities 
(``Idiosyncratic Scenarios''); (2) improving its model for determining 
price shocks for futures on the Cboe Volatility Index (``VIX'') \10\ 
(such futures contracts hereinafter referred to as ``VIX futures''); 
(3) modifying the methodology for allocating Clearing Fund contribution 
requirements to standardize the margin risk component of the allocation 
formula for all Clearing Members; (4) adopting an additional threshold 
for notifying senior management of certain intra-day margin calls based 
on Sufficiency Stress Test results; (5) correcting certain rules 
concerning OCC's cooling-off period and replenishment/assessment 
powers; and (6) making certain other clarifying and conforming changes 
to OCC's Rules, Policy, and Methodology Description. The proposed 
changes are described in detail below.
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    \10\ The VIX is an index designed to measure the 30-day expected 
volatility of the Standard & Poor's 500 index (``SPX'').
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1. Introduction of Idiosyncratic Scenarios in Sizing Stress Tests
    OCC proposes to revise its Policy and Methodology Description to 
incorporate into its inventory of Sizing Stress Tests a new set of 
Idiosyncratic Scenarios that are designed to capture the risks of 
extreme moves in individual or small subsets of securities. As noted 
above, OCC's Sizing Stress Tests are used to establish the monthly size 
of the Clearing Fund necessary for OCC to maintain sufficient Pre-
Funded Financial Resources to cover losses arising from the default of 
the two Clearing Member Groups that would potentially cause the largest 
aggregate credit exposure to OCC in extreme but plausible market 
conditions. The proposed Idiosyncratic Scenarios would supplement OCC's 
current set of Sizing Scenarios (which are generally designed to 
estimate risk exposures arising from more broad-based market and 
systemic shocks (``Systemic Scenarios'') and would allow OCC to 
identify forward-looking, non-systemic market events that may impact 
its Pre-Funded Financial Resource requirements. Like other Sizing 
Scenarios, the proposed Idiosyncratic Scenarios may be used to 
determine the monthly size of Clearing Fund when projected exposures 
from the Idiosyncratic Scenarios are greater than OCC's other Sizing 
Scenarios.
    The proposed Idiosyncratic Scenarios are designed to capture the 
risk of extreme non-systemic market moves on single-name securities 
through individual rally and decline shocks. Under the proposed 
methodology for Idiosyncratic Scenarios, every single-name equity 
(i.e., excluding exchange-traded funds, exchange-traded notes, indices, 
and non-equity products) in a portfolio is shocked by a fixed extreme 
idiosyncratic up and down move. In order to determine these fixed 
shocks, single-name equities would be classified as either large or 
small capitalization (referred to herein as ``large cap'' and ``small 
cap,'' respectively) and the shocks would be constructed based on the 
market capitalization classification and direction of the price (e.g., 
the four potential idiosyncratic moves would be large cap up, large cap 
down, small cap up, and small cap down. The fixed price shocks would be 
calibrated from historical price return data such that the probability 
of the idiosyncratic moves is comparable to OCC's Systemic Sizing 
Scenarios and the probability in all four scenarios would be 
approximately equal. The profit and loss (P/L) contribution for each 
name is then calculated for the portfolio using both up and down moves, 
and the worst loss from the two P/L moves is chosen as the direction of 
the idiosyncratic move for each name. Next, the four names with the 
worst P/L (along with the direction of extreme move) are chosen for the 
portfolio, providing the four names for every portfolio within a 
Clearing Member Group. Then the risk exposure (P/L) is aggregated at 
the Clearing Member Group-level using each set of four names. The worst 
shortfall generated is the idiosyncratic risk of the Clearing Member 
Group, and the largest two Clearing Member Group exposures are used to 
determine the Cover 2 Idiosyncratic Scenario Clearing Fund size.
    OCC believes that implementing the proposed Idiosyncratic Scenarios 
would enhance OCC's stress testing methodology and overall resiliency 
by providing a more comprehensive suite of Sizing Stress Tests to 
ensure that OCC maintains an appropriate level of Pre-Funded Financial 
Resources to cover its credit exposures under scenarios addressing both 
systemic market risks and idiosyncratic risks.
2. Enhancements for Modeling Shocks on VIX Futures
    OCC also proposes to enhance its methodology for modeling price 
shocks for VIX futures. Under OCC's current stress testing methodology, 
prices shocks for VIX futures are equivalent to the price shock for the 
underlying VIX index. OCC believes that this approach is unrealistic in 
that it produces a uniform shock across expirations of the VIX futures 
contract, which leads to an overestimation of VIX futures price shocks, 
particularly in market decline scenarios. Futures contracts for 
different expirations generally trade at different prices reflecting 
the differing future price expectations of the underlying asset.\11\ 
Accordingly, OCC believes that the size of the price shocks produced by 
its stress testing methodology should

[[Page 57914]]

vary based on the expiration of each contract as is more realistically 
observed in the market.
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    \11\ When there is a large shock to the VIX it has consistently 
been observed that the change in price of near-term VIX future 
contracts is much larger than for further out expirations. For 
instance, on 2/5/2018 when the near-term VIX future contract 
expiring on 2/16/2018 increased by 113% the following standard 
expirations increased by less: 87% for 3/21/2018; 64% for 4/18/2018; 
37% for 5/16/2018; and less than 30% for all further expirations. 
For all other days within the past 5 years with one-day VIX 
increases of over 45%, similar patterns were observed of a 
decreasing VIX future term structure of shocks (8/21/2015, 8/24/
2015, 6/24/2016 and 5/17/2017).
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    OCC proposes to enhance its stress testing methodology (and 
specifically, Section 3.4 of the Methodology Description) by using SPX 
at-the-money implied volatility shocks across different expirations to 
model forward volatility to generate shocks for VIX futures contracts 
for the corresponding expirations. OCC believes the proposed model 
enhancements would produce more appropriate VIX futures price shocks in 
its stress scenarios because it would produce differing price shocks 
across the term structure as is generally observed in the market.\12\ 
For example, OCC has observed that VIX futures price shocks obtained 
from the enhanced model for varying expirations is similar to the 
actual VIX futures market prices when tested on historical stress 
periods. Additionally, because VIX futures are used to calculate 
theoretical values for VIX options, OCC believes the proposed 
enhancement would improve the pricing of both VIX futures and VIX 
options in OCC's stress testing methodology.
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    \12\ Id.
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3. Modifications to Clearing Fund Allocation Weighting Methodology
    OCC proposes to modify its allocation methodology for determining 
individual Clearing Members' Clearing Fund requirements. As part of 
OCC's recently adopted stress testing and Clearing Fund methodology, 
OCC moved to a more risk-based method for allocating Clearing Fund 
requirements.\13\ Clearing Fund allocations are currently based on a 
weighting of 70% margin risk, 15% open interest, and 15% cleared 
volume. The margin risk component of the allocation formula, known as 
``total risk,'' is based on the total margin requirement calculated and 
reported by OCC with respect to all accounts of a Clearing Member less 
the net asset value of the positions in such accounts aggregated across 
all such accounts over a one-month look-back period compared to the 
aggregate of total risk across all Clearing Members.\14\ While the 
majority of margin requirements used in the allocation formula are 
STANS-based margin requirements,\15\ certain Clearing Members' accounts 
(and thus their allocations) are more heavily impacted by margin 
requirements calculated using the Standard Portfolio Analysis of Risk 
Margin Calculation System (``SPAN'') that reflects customer gross 
margining, which may result in higher risk charges than net margining 
with STANS for the same account.\16\
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    \13\ See supra note 7.
    \14\ See OCC Rule 1003(b)(i). OCC removes net asset value from 
the ``total risk'' component of the allocation formula because it 
does not reflect a risk measure but rather represents the value of 
contracts and collateral held in a Clearing Member's accounts.
    \15\ The System for Theoretical Analysis and Numerical 
Simulations (or ``STANS'') is OCC's proprietary risk management 
system for calculating Clearing Member margin requirements. See 
Securities Exchange Act Release No. 53322 (February 15, 2006), 71 FR 
9403 (February 23, 2006) (SR-OCC-2004-20). A detailed description of 
the STANS methodology is available at http://optionsclearing.com/risk-management/margins/.
    \16\ Pursuant to OCC Rule 601(e)(1), in additions to STANS-based 
requirements, OCC calculates initial margin requirements for 
segregated futures accounts on a gross basis using 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). SPAN is a methodology developed by the Chicago Mercantile 
Exchange and used by many clearinghouses and exchanges around the 
world to calculate margin requirements on futures and options on 
futures.
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    OCC proposes to standardize the margin or ``total risk'' component 
of its Clearing Fund allocation formula for all members by using only 
the STANS base amount, plus certain add-on charges \17\ as may be 
determined by OCC pursuant to its policies and procedures. OCC believes 
it is more appropriate to use the same margin risk measurement for all 
Clearing Members/accounts when determining Clearing Fund allocations 
since this allows for a more equitable comparison across all accounts 
through the utilization of a consistent margin methodology. 
Accordingly, OCC proposes to modify the definition of ``total risk'' in 
Rule 1003(b)(i) to mean ``a risk measure aggregated across all accounts 
of a Clearing Member determined using the Corporation's margin 
methodology and such add-on charges as may be determined pursuant to 
the Corporation's policies and procedures.'' OCC also proposes to make 
conforming to changes to its Policy and Methodology Description to 
reflect the new definition of ``total risk.''
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    \17\ Under OCC's Margin Policy, OCC may collateralize certain 
exposures that may be modeled outside of STANS using add-on charges.
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4. New Sufficiency Stress Test Notification Threshold
    OCC also proposes to adopt a new internal notification threshold 
for intra-day margin calls resulting from its Sufficiency Stress Tests. 
Under existing Rule 609, the Policy, and the Methodology Description, 
if a Sufficiency Stress Test identifies a Clearing Fund Draw \18\ for 
any one or two Clearing Member Groups that exceeds Sufficiency Stress 
Test Threshold 1, OCC is authorized to issue a margin call against the 
Clearing Member Group(s) and/or Clearing Member(s) causing the 
breach.\19\ All Sufficiency Stress Test margin calls are required to be 
approved by a Vice President (or higher) of FRM; however, if the margin 
call imposed on an individual Clearing Member exceeds $500 million, the 
STLRM group must provide written notification to the Office of the CEO. 
If the margin call imposed on an individual Clearing Member would 
exceed 100% an individual Clearing Member's net capital, the issue is 
then escalated to the Office of the CEO, and each of the Executive 
Chairman, Chief Executive Officer, and Chief Operating Officer have the 
authority to determine whether OCC should continue calling for 
additional margin in excess of this amount.
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    \18\ The term ``Clearing Fund Draw'' refers to an estimated 
stress loss exposure in excess of margin requirements.
    \19\ See supra notes 7 and 8.
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    OCC proposes to revise the Policy to require that STLRM provide 
written notification to the Office of the CEO whenever a Sufficiency 
Stress Test margin call imposed on an individual Clearing Member 
exceeds 75% of the Clearing Member's excess net capital (in addition to 
the current requirement to provide notification for any margin call 
exceeding $500 million). OCC believes that this additional notification 
requirement is appropriate because it will allow OCC's senior 
management to be informed as soon as practicable of, and to 
subsequently monitor, circumstances where a margin call may strain a 
particular Clearing Member's ability to meet such requirements based on 
its financial condition or the amount of collateral it has available to 
pledge when certain pre-identified thresholds have been exceeded.\20\
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    \20\ For example, if a Sufficiency Stress Test margin call 
imposed on an individual Clearing Member exceeds 75% of the Clearing 
Member's excess net capital, and such Sufficiency Stress Test also 
results in Clearing Fund draws for any one or two Clearing Member 
Groups that exceed 90% of the current Clearing Fund size, OCC may 
choose to resize the Clearing Fund on an intra-month basis rather 
than continuing to call for additional margin from a Clearing Member 
whose ability to meet such a call may be strained. See supra notes 7 
and 8.

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[[Page 57915]]

5. Correction of Cooling-Off Period and Replenishment/Assessment Power 
Rules
    OCC proposes several corrections to its Rules and Policy concerning 
its cooling-off period and Clearing Fund replenishment/assessment 
powers. As part of OCC's recently approved filings to implement 
enhanced and new recovery tools (``Recovery Tools Filings''), OCC 
adopted a minimum 15-day ``cooling-off period'' with a cap on Clearing 
Fund assessments.\21\ OCC Rule 1006(h) currently provides that the 
cooling-off period is triggered when any amount is paid out of the 
Clearing Fund as a result of a proportionate charge resulting from any 
of the events described in clauses (i) through (iv) of Rule 
1006(a).\22\ The actual intention of the Recovery Tools Filings, 
however, was to capture any proportionate charges related to the 
default of a Clearing Member,\23\ which would also include any use of 
the Clearing Fund to make good losses or expenses suffered by OCC or as 
a result of a borrowing by OCC: (1) In connection with protective 
transactions effected for the account of OCC pursuant to Chapter XI of 
the Rules and (2) as a result of a failure of any Clearing Member to 
make any other required payment or render any other required 
performance (as provided in clauses (v) and (vi) of Rule 1006(a)). OCC 
therefore proposes to revise its Rules and Policy to more correctly 
reflect that the cooling-off period and associated assessment caps 
apply for any proportionate charge resulting from any of the events 
described in clauses (i) through (vi) of Rule 1006(a). The proposed 
rule change would ensure that all proportionate charges associated with 
a Clearing Member default are treated consistently as was originally 
intended with the adoption of the cooling-off period and modification 
of OCC's replenishment/assessment powers in the Recovery Tools Filings.
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    \21\ On August 23, 2018, the Commission issued a Notice of No 
Objection to an advance notice by OCC concerning changes to OCC's 
Rules and By-Laws to enhance OCC's existing tools to address the 
risks of liquidity shortfalls and credit losses and to establish new 
tools by which OCC could re-establish a matched book and, if 
necessary, allocate uncovered losses following the default of a 
Clearing Member as well as provide for additional financial 
resources. See Securities Exchange Act Release No. 83927 (August 23, 
2018), 83 FR 44083 (August 29, 2018) (SR-OCC-2017-809). On August 
23, 2018, the Commission approved a proposed rule change by OCC 
concerning the same proposal. See Securities Exchange Act Release 
No. 83916 (August 23, 2018), 83 FR 44076 (August 29, 2018) (SR-OCC-
2017-020).
    \22\ These clauses include the following events: (i) Failure of 
any Clearing Member to discharge duly any obligation on or arising 
from any confirmed trade accepted by the Corporation; (ii) failure 
of any Clearing Member (including any Appointed Clearing Member) or 
of CDS to perform its obligations (including its obligations to the 
correspondent clearing corporation) under or arising from any 
exercised or assigned option contract or matured future or any other 
contract or obligation issued, undertaken, or guaranteed by the 
Corporation or in respect of which the Corporation is otherwise 
liable; (iii) failure of any Clearing Member to perform any of its 
obligations to the Corporation in respect of the stock loan and 
borrow positions of such Clearing Member; and (iv) any liquidation 
of a Clearing Member's open positions.
    \23\ See e.g., Securities Exchange Act Release No. 83927 (August 
23, 2018), 83 FR 44083, 44077 (August 29, 2018) (SR-OCC-2017-809) 
(providing that ``[t]he proposal would introduce a minimum fifteen 
calendar day `cooling-off' period that automatically begins when OCC 
imposes a proportionate charge related to the default of a Clearing 
Member against non-defaulting Clearing Members' Clearing Fund 
contributions.'').
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6. Other Clarifying and Conforming Changes
    Finally, OCC proposes a number of clarifying, streamlining, and 
organizational changes to the Methodology Description that are not 
intended to change the substance of OCC's stress testing and Clearing 
Fund methodology, but that OCC believes would improve the clarity and 
readability of the document. The proposed changes to the Methodology 
Description are described below.
Proposed Changes to the Executive Summary
    OCC proposes to revise the model scope discussion of the executive 
summary to provide a summary of the netting rules and positions sets 
used for stress testing and to break out different sections for the 
discussion of Systemic Scenarios and Idiosyncratic Scenarios. The 
executive summary would also be revised to provide additional 
information regarding the key assumptions of OCC's stress testing and 
Clearing Fund methodology. In addition, the Model Performance section 
of the executive summary would be revised to provide further 
information on supporting documentation for OCC's stress testing.
Proposed Changes to the Description of Stress Test Portfolio 
Construction
    OCC also proposes to revise its Methodology Description to provide 
additional details regarding the construction of stress testing 
portfolios. For example, the proposed revisions would discuss OCC's 
process for creating the ``Synthetic Accounts'' used in stress testing. 
Clearing Member positions are initially held in ``Tier Accounts'' that 
have the same business type (e.g., omnibus customer accounts, combined 
market maker accounts, firm accounts) and cross-margining relationship 
with other clearinghouses (if applicable). For the purpose of stress 
testing, OCC considers liquidation positions, where Tier Account level 
positions are further aggregated into Synthetic Accounts. The rules 
that govern the netting process and permissible offsets are based on 
account structures outlined in OCC's By-Laws and Rules.\24\ The 
proposed revisions would also remove the discussion of ``marginable 
positions,'' which are used to calculate margin requirements, since 
marginable positions are not relevant to OCC's Clearing Fund and stress 
testing methodology requirements and OCC's various account structures 
and the manner in which such accounts are margined is covered in OCC's 
By-Laws, Rules, and Margin Policy. In addition, the proposed revisions 
would restate in descriptive terms the calculation for determining 
total credit loss shortfalls.
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    \24\ See e.g., OCC Rules 601, 602, 611.
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    The proposed revisions would also provide further clarity and 
detail concerning the aggregation of account-level stress test results. 
A key aspect of the aggregation of business type accounts is that some 
accounts have a restricted lien, in which assets in that account can 
only be used to offset losses in that business type account, while 
other accounts have a general lien, in which assets or gains in that 
account can be used to offset losses in any business type account of 
the same Clearing Member. The Methodology Description would be revised 
to summarize OCC's process for determining if an account is a general 
lien account or restricted lien account and for ensuring that such 
accounts receive proper netting treatment.
Proposed Changes to the Description of OCC's Stress Testing Model
    In addition, OCC proposes a number of changes to its Methodology 
Description to improve the description of the models used in OCC's 
stress testing and Clearing Fund methodology. For example, the 
Methodology Description would be revised to provide additional context 
around the types of scenarios (e.g., Systemic Scenarios and 
Idiosyncratic Scenarios) that stress testing models are used to create. 
The proposed changes would also provide a more straightforward 
discussion around the use and selection of risk drivers used to 
represent risk factors in OCC's

[[Page 57916]]

one-factor stress testing model.\25\ OCC notes that under the current 
Methodology Description, risk drivers and their mappings are subject to 
periodic review and change by OCC's Stress Test Working Group 
(``STWG''). The Methodology Description currently contains a non-
exhaustive, sample set of risk drivers as of March 2018. OCC is 
proposing to replace the sample set of risk drivers with a more general 
list of risk drivers that may be used per risk factor type to ensure 
the ongoing accuracy and clarity of OCC's methodology documentation as 
the risk drivers change through the STWG governance process. The 
proposed revisions would also provide additional details around STWG's 
process for approving the addition, change or retiring of risk drivers. 
Changes to risk drivers may be based on, among other things: Changing 
business needs, new product launches, open interest, or other changes 
in product mix. Moreover, when adding, changing, or retiring risk 
drivers, STWG would consider factors including, but not limited to: 
Contract specifications (e.g. a derivative's underlying asset, the 
asset classification of a product), the relationship between proposed 
new products and existing risk drivers, the correlation between risk 
drivers and risk factors, and/or quality of available data. STWG may 
also approve the retirement and removal of a risk driver that has no 
risk factors mapped to it or if the risk driver itself is delisted. In 
addition, OCC would revise the methodology description to further 
clarify that, unlike annual recalibrations, the STWG would only approve 
quarterly recalibration of risk driver shocks when warranted (and not 
as a matter of course). The Methodology Description would also be 
updated to note that risk drivers and their mappings are maintained by 
the STLRM group and are available in the stress testing system. OCC 
does not believe that these proposed changes constitutes a material or 
substantive change in OCC's Methodology Description but rather more 
appropriately documents OCC's process for maintaining and updating risk 
drivers.\26\
---------------------------------------------------------------------------

    \25\ ``Risk factors'' refer broadly to all of the individual 
underlying securities (such as Google, IBM and Standard & Poor's 
Depositary Receipts (``SPDR''), S&P 500 Exchange Traded Funds 
(``SPY''), etc.) listed on a market. ``Risk drivers'' are a selected 
set of securities or market indices (e.g., SPX or VIX) that are used 
to represent the main sources or drivers for the price changes of 
the risk factors.
    \26\ OCC notes that the Methodology Description would continue 
to specify that SPX and VIX are the main risk drivers for shocks of 
equity risk factors as equity risk factors make up the vast majority 
of volume, open interest, and risk at OCC. Due to the nature of 
equity risk factors, OCC's stress testing methodology treats equity 
risk factors in a standard and consistent fashion with respect to 
the mapping of risk drivers. Non-equity products, such as commodity 
futures and certain exchange-traded products (e.g., ETFs and ETNs), 
may have different risk drivers or risk drivers may change due to 
the evolving nature of the securities markets and the products OCC 
clears. Consequently, OCC believes it is necessary to maintain 
appropriate flexibility to adjust risk drivers as evolving 
circumstances warrant through the established STWG governance 
process.
---------------------------------------------------------------------------

    In addition, OCC proposes to revise the Methodology Description to 
provide a more straightforward discussion of the modeling of risk 
factor returns and price shocks for Hypothetical and Historical 
Scenarios and for OCC's various cleared products. Specifically, OCC 
proposes clarifying, streamlining, and organizational changes to the 
description of its modeling of volatility shocks for risk factors with 
SPX as the risk driver and for non-SPX driven risk factors. The 
proposed changes would also provide additional details on OCC's 
volatility modeling for flexibly structured options (or ``flex 
options''),\27\ for which shocked implied volatility is calculated from 
shocked implied volatilities of regular options.
---------------------------------------------------------------------------

    \27\ Flex options are options that give investors the ability to 
customize basic option features including size, expiration date, 
exercise style, and certain exercise prices that do not correspond 
to the terms of any series of non-flexibly structured options 
previously opened for trading on an Exchange. See OCC By-Laws, 
Article I., Section 1.F.(8).
---------------------------------------------------------------------------

    OCC also proposes to replace a section specifically discussing 
price shocks for products where the underlying security is a basket of 
deliverable obligation securities with a more generalized discussion of 
OCC's approach to modeling price shocks for products with multiple risk 
factors as the underlying. In this case, the Methodology Description 
would describe how the underlyings are shocked by applying the one-
factor model to each component risk factor. In addition, this proposed 
change would eliminate a restriction limiting the methodology to an 
``all or none'' approach where price shocks are modeled using either 
all historical shocks or all shocks derived from OCC's beta methodology 
\28\ to provide appropriate flexibility for OCC to determine price 
shocks on an individual risk factor basis depending on whether 
historical data is available. This allows for consistency between the 
shocks of the basket and the shocks used to price products on the 
basket's components. The Methodology Description would also be revised 
to describe how, in the case of a leveraged product, shocks are 
determined using a leverage ratio with respect to its tracking index 
used as the default beta. OCC believes the proposed changes are more 
generally aligned with the intended purpose of the Methodology 
Description, which is designed, in general, to provide a general 
description of the materials aspects of OCC's stress testing and 
Clearing Fund methodologies.
---------------------------------------------------------------------------

    \28\ The ``beta'' is the sensitivity of a security with respect 
to its corresponding risk driver (i.e., the sensitivity of the price 
of the security relative to the price of the risk driver).
---------------------------------------------------------------------------

    Additionally, OCC proposes to correct a reference to the use of log 
returns in the calculation of volatility shocks to more accurately 
state that these calculations are currently made using two-day 
arithmetic returns. OCC's stress testing methodology utilizes two-day 
arithmetic returns to calculate these shocks to align with OCC's two-
day liquidation horizon assumption for its margin methodology and the 
arithmetic returns used in its dynamic VIX calibration process.\29\
---------------------------------------------------------------------------

    \29\ See supra note 7.
---------------------------------------------------------------------------

    OCC also proposes to clarify that implied volatility shocks for 
Systemic Scenarios are based on the expected risk, or ``variance,'' of 
the risk factor in a forward-looking period after the price shock as 
opposed to the ``standard deviation.'' OCC believes that using the 
terms ``variance'' or ``standard deviation'' are essentially equivalent 
ways to describe the equation; however, the term ``variance'' would 
more accurately reflect the terms of equation used in the document.
Proposed Changes to Description of Calibrations
    OCC proposes to revise its Methodology Description to more 
correctly describe the approach for generating shocks for U.S. 
Treasuries and Canadian Government Bond by replacing the term 
``covariance'' with ``correlation.'' While the calibration does use a 
covariance matrix, the inputs to the calibration are normalized by 
their standard deviation and so the resulting matrix actually contains 
correlations. The correlation matrix is then scaled by standard 
deviation terms to generate interest rate shocks.\30\
---------------------------------------------------------------------------

    \30\ OCC notes that this is a standard practice. See Litterman, 
Robert and Sheinkman, Jose, ``Common Factors Affecting Bond 
Returns,'' Journal of Fixed Income, 1991.
---------------------------------------------------------------------------

Proposed Changes to Description of Stress Test Scenarios
    Finally, OCC proposes to revise the Methodology Description to 
provide additional clarity around the use and calibration of risk 
driver shocks in Hypothetical, Historical and Idiosyncratic Scenarios. 
OCC would

[[Page 57917]]

also remove specific references to certain risk drivers and parameters 
that are subject to periodic review and change through its internal 
governance processes. OCC would also update the sample table of stress 
test scenarios in the document to: (1) Reflect the addition of the 
proposed Idiosyncratic Scenarios; (2) remove Informational Scenarios 
from the table, which do not drive financial resource determinations 
and are subject to periodic change; and (3) provide additional 
information on the type of price shock used for each scenario in the 
table. In addition, OCC proposes to remove certain language from the 
document that provides qualitative justification for OCC's Clearing 
Fund allocation methodology but does not have any relevance to the 
actual calculation of Clearing Fund allocations.
Clearing Member Outreach
    To inform Clearing Members of the proposed changes, OCC has 
provided an overview of the proposed changes to the Financial Risk 
Advisory Council (``FRAC''), a working group comprised of exchanges, 
Clearing Members and indirect participants of OCC. OCC has also 
performed direct outreach to Clearing Members that would be most 
impacted by the proposed changes. To-date, OCC has not received any 
material objections or concerns in response to this outreach.
Implementation Timing
    OCC expects to implement the proposed changes within sixty (60) 
days after the date that OCC receives all necessary regulatory 
approvals for the proposed changes. OCC will announce the 
implementation date of the proposed change by an Information Memorandum 
posted to its public website at least two (2) weeks prior to 
implementation.\31\
---------------------------------------------------------------------------

    \31\ OCC notes that the impact of certain changes, such as the 
proposed changes to the Clearing Fund allocation formula and 
potential for a new Idiosyncratic Scenario to set the size of the 
Clearing Fund, will not occur until the first monthly resizing of 
the Clearing Fund following the announced implementation date.
---------------------------------------------------------------------------

(1) Statutory Basis
    OCC believes the proposed rule change is consistent with 
requirements of the Act and rules and regulations thereunder applicable 
to registered clearing agencies. Specifically, OCC believes the 
proposed rule change is consistent with Section 17A(b)(3)(F) of the Act 
\32\ and Rule 17Ad-22(b)(3) \33\ and Rule 17Ad-22(e)(4) \34\ 
thereunder, as described in further detail below.
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78q-1(b)(3)(F).
    \33\ 17 CFR 240.17Ad-22(b)(3).
    \34\ 17 CFR 240.17Ad-22(e)(4).
---------------------------------------------------------------------------

Consistency With the Section 17A(b)(3)(F) of the Exchange Act
    Section 17A(b)(3)(F) of the Act \35\ requires, among other things, 
that the rules of a clearing agency be designed to promote the prompt 
and accurate clearance and settlement of securities and derivatives 
transactions. Taken together, OCC believes the proposed changes are 
designed to enhance OCC's overall framework for managing credit risk 
and are consistent with Section 17A(b)(3)(F) of the Act \36\ for the 
reasons set forth below.
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78q-1(b)(3)(F).
    \36\ Id.
---------------------------------------------------------------------------

    OCC believes that implementing the proposed Idiosyncratic Scenarios 
would enhance OCC's stress testing methodology and overall resiliency 
by providing a more comprehensive suite of Sizing Stress Tests to 
ensure that OCC maintains appropriate level of Pre-Funded Financial 
Resources to cover its credit exposures under scenarios addressing both 
systemic market risks and idiosyncratic risks. As noted above, OCC's 
Sizing Stress Tests are used to establish the monthly size of the 
Clearing Fund necessary for OCC to maintain sufficient Pre-Funded 
Financial Resources to cover losses arising from the default of the two 
Clearing Member Groups that would potentially cause the largest 
aggregate credit exposure to OCC in extreme but plausible market 
conditions. The proposed Idiosyncratic Scenarios would supplement OCC's 
current set of Sizing Scenarios (which are generally designed to 
estimate risk exposures arising from more broad-based market and 
systemic shocks reflected in OCC's Systemic Scenarios) by enabling OCC 
to appropriately consider the risks of extreme moves in individual or 
small subsets of securities. OCC therefore believes that the proposed 
rule change would enhance OCC's overall framework for managing credit 
risks and reduce the risk that its Pre-Funded Financial Resources would 
be insufficient in an actual default so that it can continue to provide 
prompt and accurate clearance and settlement of securities and 
derivatives transactions consistent with Section 17A(b)(3)(F) of the 
Act.\37\
---------------------------------------------------------------------------

    \37\ Id.
---------------------------------------------------------------------------

    In addition, OCC proposes to enhance its stress testing methodology 
to more accurately and appropriately model price shocks for VIX 
futures. Under OCC's current stress testing methodology, prices shocks 
for VIX futures are equivalent to the price shock for the underlying 
VIX index. OCC believes that this approach is unrealistic in that it 
produces a uniform shock across expirations of the VIX futures 
contract, which leads to an overestimation of VIX futures price shocks, 
particularly in market decline scenarios. OCC therefore proposes to 
enhance its stress testing methodology to produce more appropriate VIX 
futures price shocks that would vary based on the expiration of 
contracts as is more realistically observed in the market.\38\ OCC 
believes the proposed changes would enhance OCC's framework for 
managing credit risk because it would result in more accurate and 
realistic stress testing results and are therefore designed to promote 
the prompt and accurate clearance and settlement of securities and 
derivatives transactions consistent with Section 17A(b)(3)(F) of the 
Act.\39\
---------------------------------------------------------------------------

    \38\ Additionally, because VIX futures are used to calculate 
theoretical values for VIX options, the proposed enhancement would 
improve the pricing of both VIX futures and VIX options in OCC's 
stress testing methodology.
    \39\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    OCC also proposes to revise the Policy to require that STLRM 
provide written notification to the Office of the CEO whenever a 
Sufficiency Stress Test margin call imposed on an individual Clearing 
Member exceeds 75% of the Clearing Member's excess net capital. The 
proposed change would allow OCC's senior management to be informed of, 
and to subsequently monitor, circumstances where a margin call may 
strain a particular Clearing Member's ability to meet such requirements 
based on its financial condition or the amount of collateral it has 
available to pledge when certain pre-identified thresholds have been 
exceeded. OCC believes the proposed rule change would improve its 
process for monitoring and managing credit risk, particularly those 
identified through Sufficiency Stress Test margin calls, and take steps 
to reduce potential default risks so that it can continue to promote 
the prompt and accurate clearance and settlement of securities and 
derivatives transactions consistent with Section 17A(b)(3)(F) of the 
Act.\40\
---------------------------------------------------------------------------

    \40\ Id.
---------------------------------------------------------------------------

    Additionally, OCC proposes to standardize the margin risk component 
of its Clearing Fund allocation formula by using only STANS-based 
margin requirements for all Clearing Members. OCC believes it is 
appropriate to use the same margin risk measurement for all Clearing 
Members/accounts when determining Clearing Fund allocations since this 
allows for a more equitable comparison across all accounts through the 
utilization of a consistent margin methodology. OCC believes that the

[[Page 57918]]

proposed changes would result in an allocation formula that determines 
Clearing Member contribution requirements that are commensurate to the 
risks posed by each Clearing Member. As a result, OCC believes the 
proposed rule change is designed to assure the safeguarding of 
securities and funds which are in its custody or control or for which 
it is responsible, and, in general, to protect investors and the public 
interest consistent with Section 17A(b)(3)(F) of the Act.\41\
---------------------------------------------------------------------------

    \41\ Id. OCC also believes that by standardizing the margin risk 
component of its Clearing Fund allocation formula the proposed rule 
change promotes compliance with the requirement of Section 
17A(b)(3)(F) of the Act that a clearing agency's rules not be 
designed to permit unfair discrimination among participants in the 
use of the clearing agency.
---------------------------------------------------------------------------

    OCC proposes to revise its Rules and Policy to provide that the 
cooling-off period and associated assessment caps apply to any 
proportionate charge related to a Clearing Member default, including 
any use of the Clearing Fund to make good losses or expenses suffered 
by OCC or as a result of a borrowing by OCC (1) in connection with 
protective transactions effected for the account of OCC pursuant to 
Chapter XI of the Rules and (2) as a result of a failure of any 
Clearing Member to make any other required payment or render any other 
required performance, and are not limited to a certain subset of 
Clearing Member default-related events. The proposed rule change would 
ensure that the cooling-off period and associated assessment caps are 
consistently applied for any proportionate charge resulting from any of 
the events described in clauses (i) through (vi) of Rule 1006(a) and 
thereby ensure that OCC can fully access and utilize its Clearing Fund 
resources to continue to provide prompt and accurate clearance and 
settlement of securities and derivatives transactions consistent with 
Section 17A(b)(3)(F) of the Act \42\ if such events were to occur.
---------------------------------------------------------------------------

    \42\ Id.
---------------------------------------------------------------------------

    OCC also proposes to make clarifying, streamlining, and 
organizational changes to the Methodology Description that are not 
intended to change the substance of OCC's stress testing and Clearing 
Fund methodology, but that OCC believes would improve the clarity and 
readability of the document. OCC believes that by improving the clarity 
of the primary documents governing OCC's Clearing and stress testing 
requirements the proposed changes are designed, in general, to protect 
the investors and the public interest in a manner consistent with 
Section 17A(b)(3)(F) of the Act.\43\
---------------------------------------------------------------------------

    \43\ Id.
---------------------------------------------------------------------------

Consistency With Rule 17Ad-22 Under the Exchange Act
    Rule 17Ad-22(b)(3) \44\ requires a registered clearing agency that 
performs central counterparty services to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to maintain sufficient financial resources to withstand, at a 
minimum, a default by the participant family to which it has the 
largest exposure in extreme but plausible market conditions. Rules 
17Ad-22(e)(4)(iii) and (iv) \45\ further require, in part, that a 
covered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to effectively 
identify, measure, monitor, and manage its credit exposures to 
participants and those arising from its payment, clearing, and 
settlement processes, including by maintaining additional financial 
resources (beyond those collected as margin or otherwise maintained to 
meet the requirements of Rule 17Ad-22(e)(4)(i)) \46\ at the minimum to 
enable it to cover a wide range of foreseeable stress scenarios that 
include, but are not limited to, the default of the participant family 
that would potentially cause the largest aggregate credit exposure for 
the covered clearing agency in extreme but plausible market conditions 
and do so exclusive of assessments for additional guaranty fund 
contributions or other resources that are not prefunded.
---------------------------------------------------------------------------

    \44\ 17 CFR 240.17Ad-22(b)(3).
    \45\ 17 CFR 240.17Ad-22(e)(4)(iii) and (iv).
    \46\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    The proposed rule change would enhance OCC's stress testing 
methodology and overall resiliency by providing a more comprehensive 
suite of Sizing Stress Tests to ensure that OCC maintains an 
appropriate level of Pre-Funded Financial Resources to cover its credit 
exposures under scenarios addressing both systemic market risks and 
idiosyncratic risks. The proposed Idiosyncratic Scenarios would 
supplement OCC's current set of Sizing Scenarios, which are generally 
designed to estimate risk exposures arising from more broad-based 
market and systemic shocks reflected in OCC's Systemic Scenarios, by 
enabling OCC to appropriately consider the risks of extreme moves in 
individual or small subsets of securities. OCC therefore believes that 
the proposed rule change would enhance OCC's overall framework for 
managing credit risks and reduce the risk that its Pre-Funded Financial 
Resources would be insufficient in an actual default.
    In addition, OCC proposes to enhance its stress testing methodology 
by using SPX at-the-money implied volatility shocks across different 
expirations to model price shocks for VIX futures contracts for 
corresponding expirations as opposed to using a uniform shock for all 
expirations. The proposed rule change is designed to more accurately 
measure OCC's credit exposure in its stress scenarios by producing 
price shocks for VIX futures that would vary based on the expiration as 
is more realistically observed in the market.
    Taken together, OCC believes the proposed changes are reasonably 
designed so that OCC can measure its credit exposures to its 
participants and manage such exposures by maintaining sufficient 
financial resources at a minimum to enable it to cover a wide range of 
foreseeable stress scenarios that include, but are not limited to, the 
default of the participant family that would potentially cause the 
largest aggregate credit exposure for OCC in extreme but plausible 
market conditions (and do so exclusive of assessments for additional 
Clearing Fund contributions or other resources that are not prefunded). 
For these reasons, OCC believes the proposed changes are consistent 
with Rule 17Ad-22(b)(3) and Rules 17Ad-22(e)(4)(iii) and (iv).\47\
---------------------------------------------------------------------------

    \47\ 17 CFR 240.17Ad-22(b)(3) and (e)(4)(iii) and (iv).
---------------------------------------------------------------------------

    Furthermore, Rule 17Ad-22(e)(4) \48\ generally requires that a 
covered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to effectively 
identify, measure, monitor, and manage its credit exposures to 
participants and those arising from its payment, clearing, and 
settlement processes. OCC believes the proposed changes to its 
Sufficiency Stress Test monitoring process would improve its overall 
processes for monitoring and managing credit risk. OCC would revise the 
Policy to require that STLRM provide written notification to the Office 
of the CEO whenever a Sufficiency Stress Test margin call imposed on an 
individual Clearing Member exceeds 75% of the Clearing Member's excess 
net capital (in addition to the current requirement to provide 
notification for any margin call exceeding $500 million). The proposed 
change would allow OCC's senior management to be informed of, and to 
subsequently monitor, circumstances where a margin call may strain a 
particular Clearing Member's ability to meet such requirements based on 
its financial condition or the amount of

[[Page 57919]]

collateral it has available to pledge when certain pre-identified 
thresholds have been exceeded. OCC therefore believes the proposed rule 
change is reasonably designed to help OCC identify, measure, and 
monitor its credit exposures to participants, particularly those 
identified through Sufficiency Stress Test margin calls, consistent 
with Rule 17Ad-22(e)(4).\49\
---------------------------------------------------------------------------

    \48\ 17 CFR 240.17Ad-22(e)(4).
    \49\ Id. OCC also believes that the proposed change to the 
Policy would: (1) Provide for governance arrangements that specify 
clear and direct lines of responsibility consistent with the 
requirements of Rule 17Ad-22(e)(2)(v) and (2) contribute to a sound 
risk management framework for identifying, measuring, monitoring and 
managing credit and other risks that arise in or are borne by OCC in 
furtherance of the requirements of Rule 17Ad-22(e)(3)(i). See 17 CFR 
240.17Ad-22(e)(2)(v) and 17 CFR 240.17Ad-22(e)(3)(i).
---------------------------------------------------------------------------

    OCC also believes that the proposed changes to standardize the 
margin risk component of its Clearing Fund allocation formula by using 
only STANS-based margin requirements for all Clearing Members are 
reasonably designed to measure and manage its credit exposures to 
participants. With respect to the use of Clearing Funds and the 
requirements of Rule 17Ad-22(e)(4),\50\ the Commission has noted that, 
to the extent that a clearing agency uses guaranty or clearing fund 
contributions to mutualize risk across participants, the clearing 
agency generally should value margin and guaranty fund contributions so 
that the contributions are commensurate to the risks posed by the 
participants' activity.\51\ OCC believes it is appropriate to use the 
same margin risk measurement for all Clearing Members/accounts when 
determining Clearing Fund allocations since this allows for a more 
equitable comparison across all accounts and would result in 
contribution requirements that are commensurate to the risks posed by 
each Clearing Member. As a result, OCC believes the proposed changes 
are reasonably designed to comply with the requirements of Rule 17Ad-
22(e)(4).\52\
---------------------------------------------------------------------------

    \50\ Id.
    \51\ See Securities Exchange Act Release No. 78961 (September 
28, 2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (``Standards 
for Covered Clearing Agencies'') at 70813.
    \52\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(4)(ix) \53\ requires that a covered clearing agency 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to effectively identify, measure, 
monitor, and manage its credit exposures to participants and those 
arising from its payment, clearing, and settlement processes, including 
by describing its process to replenish any financial resources it may 
use following a default or other event in which use of such resources 
is contemplated. OCC believes the proposed changes to its cooling-off 
period and associated assessment cap Rules would ensure that the 
cooling-off period and associated assessment caps are consistently 
applied for any proportionate charge resulting from any of the events 
described in clauses (i) through (vi) of Rule 1006(a) and thereby 
ensure that OCC can fully access, utilize, and replenish its Clearing 
Fund resources to address any losses chargeable against the Clearing 
Fund and manage its credit exposures to participants and those arising 
from its payment, clearing, and settlement processes in a manner 
consistent with Rule 17Ad-22(e)(4)(ix).\54\
---------------------------------------------------------------------------

    \53\ 17 CFR 240. 17Ad-22(e)(4).
    \54\ Id.
---------------------------------------------------------------------------

    Finally, OCC believes the proposed clarifying, organizational, and 
streamlining changes to its Rules, Policy, and Methodology Description 
would improve the clarity and readability of its stress testing and 
Clearing Fund-related rules and policies are therefore consistent with 
the Rule 17Ad-22(e)(4) \55\ requirement that OCC maintain policies and 
procedures that are reasonably designed to effectively identify, 
measure, monitor, and manage its credit exposures to participants and 
those arising from its payment, clearing, and settlement processes.
---------------------------------------------------------------------------

    \55\ 17 CFR 240. 17Ad-22(e)(4).
---------------------------------------------------------------------------

B. Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act \56\ 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 the proposed rule change would impose any burden on 
competition. First, OCC proposes to introduce new Idiosyncratic 
Scenarios for OCC's inventory of Sizing Stress Tests. OCC does not 
believe that introducing the Idiosyncratic Scenarios would have an 
impact on competition. As part of OCC's Sizing Stress Tests, the 
Idiosyncratic Scenarios would impact all Clearing Members similarly and 
would not impact individual Clearing Member allocations. In addition, 
based on analysis performed by OCC, OCC expects that the worst-case 
Cover 2 Idiosyncratic Scenario shortfall amounts would generally fall 
below OCC's current 1-in-80 year market event Sizing Scenarios and 
therefore would not ordinarily have a material impact on the size of 
the Clearing Fund.\57\ Accordingly, OCC does not believe the proposed 
change would have any impact or burden on competition.
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78q-1(b)(3)(I).
    \57\ OCC has observed that there were certain circumstances 
where the Idiosyncratic Scenarios generated the largest shortfalls 
among OCC's Sizing Scenarios due to position increases relating to 
corporate action activity in very liquid securities; however, in 
these circumstances the size of the Clearing Fund would have been 
established at the minimum requirement of $6.3 billion under Rule 
1001(b).
---------------------------------------------------------------------------

    OCC does not believe the proposed changes to its methodology for 
modeling VIX futures price shocks would have a material impact on 
competition. The proposed changes are designed to generate more 
realistic price shocks that better reflect observed market conditions, 
which could generally result in lower shortfalls in market decline 
scenarios. OCC expects that the proposed VIX futures changes would have 
minimal impact on the monthly sizing of the Clearing Fund; however, the 
proposed change may result in reduced shortfalls in OCC's Sufficiency 
Scenarios (particularly the historical 1987 market event scenario) and 
therefore result in less frequent Sufficiency Stress Test margin calls 
(or margin calls of a lower magnitude). The impact of the proposed 
change would depend on the composition of a Clearing Member's portfolio 
at a given time. Generally, Clearing Members with longer tenor 
positions in VIX future contracts or VIX options will experience a 
change in the profit and loss on the contracts. Where these positions 
are driving the shortfall in an account, the account would experience a 
change in shortfall due to the decrease in the amount of the shock, 
dependent on the position and direction of the shock for the scenario 
in question. When shortfalls increase, a large Clearing Member may be 
more likely to be subject to more frequent and/or larger Sufficiency 
Stress Test margin calls than under the current model. When shortfalls 
decrease, Clearing Members may be less likely to breach Sufficiency 
Thresholds and/or may experience smaller Sufficiency Stress Test margin 
calls as a result of the change. OCC does not believe that this would 
present an impact or burden from a competitive standpoint, however. The 
proposed approach is simply intended to more accurately reflects the 
risks carried by Clearing Members and align any potential margins calls 
with this more accurate risk measure.
    OCC also proposes to modify its Clearing Fund allocation 
methodology to standardize the margin risk component of the allocation 
formula for

[[Page 57920]]

all members by using only the STANS base amount, plus certain add-on 
charges, in the Clearing Fund allocation process. Under the proposed 
change, Clearing Members with segregated futures accounts would 
typically see their Clearing Fund requirements decrease, while other 
Clearing Members' requirements would generally increase to balance out 
the full allocation of the Clearing Fund. While OCC acknowledges the 
impact of the proposed change on individual Clearing Member 
contribution requirements, OCC believes that using the same margin risk 
measurement for all Clearing Members/accounts when determining Clearing 
Fund allocations allows for a more equitable comparison across all 
accounts. As a result, OCC believes the proposed change would promote 
competition by standardizing its Clearing Fund allocation formula and 
treating all Clearing Members similarly in the allocation process.
    In addition, OCC proposes changes to its cooling-off period and 
associated assessment cap rules that would ensure that the cooling-off 
period and associated assessment caps are consistently applied for any 
proportionate charge resulting from any of the events described in 
clauses (i) through (vi) of Rule 1006(a). These changes would apply 
equally to all Clearing Members and therefore OCC does not believe the 
proposed changes would have any impact or burden on competition.
    Finally, OCC proposes to make clarifying changes to its Methodology 
Description, which are not expected to have any impact on competition. 
The proposed changes are not intended to materially change OCC's 
Clearing Fund or stress testing rules but are simply designed to 
provide more accuracy and clarity in OCC's methodology documentation. 
As a result, OCC does not believe the proposed changes would have any 
impact or burden on competition.
    For the reasons set forth above, OCC believes that the proposed 
rule change would not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act

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 rule-comments@sec.gov. Please include 
File Number SR-OCC-2019-009 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-2019-009. 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-2019-009 and 
should be submitted on or before November 19, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\58\
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    \58\ 17 CFR 200.30-3(a)(12).
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Jill M. Petersen,
Assistant Secretary.
[FR Doc. 2019-23550 Filed 10-28-19; 8:45 am]
BILLING CODE 8011-01-P


