[Federal Register Volume 86, Number 3 (Wednesday, January 6, 2021)]
[Notices]
[Pages 659-662]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-29217]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90827; File No. SR-OCC-2020-015]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Accelerated Approval of Proposed Rule Change Concerning 
the Implementation of New Sufficiency Scenarios in the Options Clearing 
Corporation's Stress Testing Inventory

December 30, 2020.

I. Introduction

    On December 2, 2020, the Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2020-015 (``Proposed Rule Change'') 
pursuant to Section 19(b) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to implement 
additional stress test scenarios to OCC's Comprehensive Stress Testing 
& Clearing Fund Methodology, and to its Liquidity Risk Management 
Description.\3\ The Proposed Rule Change was published for public 
comment in the Federal Register on December 14, 2020.\4\ The Commission 
has received no comments regarding the Proposed Rule Change. This order 
approves the Proposed Rule Change on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Notice of Filing infra note 4, 85 FR at 80829.
    \4\ Securities Exchange Act Release No. 90603 (Dec. 8, 2020), 85 
FR 80829 (Dec. 14, 2020) (File No. SR-OCC-2020-015) (``Notice of 
Filing'').
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II. Background

    The Proposed Rule Change by OCC would take existing informational 
stress test scenarios and add them to the list of stress test scenarios 
designed to test the sufficiency of OCC's prefunded financial 
resources. The proposed changes are to OCC's Comprehensive Stress 
Testing & Clearing Fund Methodology, and to its Liquidity Risk 
Management Description (``Methodology Description'').
    In 2018, OCC established its current clearing fund methodology, 
using a stress testing framework to measure its credit exposure at a 
level sufficient to cover potential losses under extreme but plausible 
market conditions.\5\ OCC performs daily stress testing using a wide 
range of scenarios, both hypothetical and historical. Its stress 
testing scenario inventory includes four

[[Page 660]]

different categories: (1) Scenarios that determine whether the 
financial resources collected from all Clearing Members collectively 
are adequate to cover OCC's risk tolerance (``Adequacy Scenarios''); 
(2) scenarios that establish the monthly size of the Clearing Fund at 
an amount necessary to cover losses arising from the default of the two 
Clearing Member Groups that would potentially cause the largest 
aggregate credit exposure as a result of a 1-in-80 year hypothetical 
market event (``Sizing Scenarios''); (3) scenarios that 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 to guard 
against potential losses under a wide range of stress scenarios, 
including extreme but plausible market conditions (``Sufficiency 
Scenarios''); \6\ and (4) scenarios that monitor and assess the size of 
OCC's prefunded financial resources against a wide range of stress 
scenarios that may include newly developed stress scenarios for 
evaluation as well as extreme but implausible scenarios 
(``Informational Scenarios''). Adequacy and Informational Scenarios are 
not used directly to size the Clearing Fund or drive calls for 
additional financial resources from OCC's Clearing Members.
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    \5\ Securities Exchange Act Release No. 83735 (Jul. 27. 2018), 
83 FR 37855 (Aug. 2, 2018) (File No. SR-OCC-2018-008).
    \6\ Pursuant to OCC Rule 609 and OCC's Clearing Fund Methodology 
Policy, if any of OCC's Sufficiency Scenarios identifies exposures 
that exceed 75% of the current Clearing Fund requirement less 
deficits, OCC may require additional margin deposits from the 
Clearing Member Group(s) driving the breach. Additionally, pursuant 
to Rule 1001(c) and the Clearing Fund Methodology Policy, if a 
Sufficiency Scenario identifies a Clearing Fund draw for any one or 
two Clearing Member Groups that exceeds 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 the 75% threshold), OCC 
has the authority to reset the size of the Clearing Fund on an 
intra-month basis to ensure that it continues to maintain sufficient 
prefunded financial resources. See Notice of Filing supra note 4, 85 
FR at 80829-30.
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    As described in the Notice of Filing, OCC proposes to elevate four 
of its current Informational Scenarios to Sufficiency Scenarios. These 
Informational Scenarios are historical scenarios designed to represent 
recent market events from March 2020. The proposed Sufficiency 
Scenarios would include price shocks representing the most extreme 
market decline and rally moves in March 2020, and would include 
variations of these scenarios designed to account for specific wrong-
way risk exposures arising from cleared positions on issued exchange 
traded notes (``ETNs'').\7\
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    \7\ See Notice of Filing supra note 4, 85 FR at 80830.
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    These four scenarios, as Informational Scenarios, currently do not 
drive the size of the Clearing Fund or calls for additional resources. 
Once elevated to Sufficiency Scenarios, they would be used to measure 
OCC's Clearing Fund exposure to the portfolios of individual Clearing 
Member Groups and determine whether any such exposure is sufficiently 
large where it would necessitate OCC calling for additional resources 
in the form of margin or an intra-month resizing of the Clearing Fund. 
OCC asserts that by adding these four Sufficiency Scenarios, it would 
be able to test the sufficiency of its financial resources under a 
wider range of relevant stress scenarios and respond quickly when OCC 
believes additional financial resources are necessary.\8\
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    \8\ Id.
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III. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    Section 19(b)(2)(C) of the Exchange Act directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to such organization.\9\ After carefully 
considering the Proposed Rule Change, the Commission finds that the 
proposal is consistent with the requirements of the Exchange Act and 
the rules and regulations thereunder applicable to OCC. More 
specifically, the Commission finds that the proposal is consistent with 
Section 17A(b)(3)(F) of the Exchange Act,\10\ and Rule 17Ad-22(e)(4) 
\11\ thereunder, as described in detail below.
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    \9\ 15 U.S.C. 78s(b)(2)(C).
    \10\ 15 U.S.C. 78q-1(b)(3)(F).
    \11\ 17 CFR 240.17Ad-22(e)(4).
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A. Consistency With Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Exchange Act requires that the rules of 
a clearing agency be designed to, among other things, promote the 
prompt and accurate clearance and settlement of securities 
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.\12\ In 2018, the Commission approved a Proposed Rule 
Change to formalize OCC's current Clearing Fund Methodology Policy, 
including OCC's current stress testing methodology, and the 
Commission's approval was based in part on the same Section 
17A(b)(3)(F) requirements above.\13\ Based on its review of the record, 
and for the reasons described below, the Commission believes that the 
proposed addition of more stress test scenarios designed to test the 
sufficiency of OCC's prefunded financial resources as described above 
is consistent with the promotion of prompt and accurate clearance and 
settlement of securities transactions, and the assurance of the 
safeguarding of securities and funds which are in OCC's custody or 
control or for which OCC is responsible.
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    \12\ 15 U.S.C. 78q-1(b)(3)(F).
    \13\ See supra note 5, 83 FR at 37861-62.
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    First, the proposal to elevate four Informational Scenarios to 
Sufficiency Scenarios would expand upon the scope of stress scenarios 
against which OCC monitors its financial resources. The Commission 
continues to believe that the historical scenarios replicating the 1987 
market crash and financial crisis provide additional depth to the 
monitoring of OCC's financial resources.\14\ Similarly, for the present 
proposal, the Commission believes that the introduction of new 
historical scenarios replicating the market events of March 2020 would 
provide stress exposure estimates that would be meaningful for the 
monitoring of OCC's total financial resources. Elevating these 
Informational Scenarios to become Sufficiency Scenarios would increase 
the likelihood that OCC will have sufficient financial resources in 
excess of margin to address credit losses that could arise from the 
default of a Clearing Member, and this would in turn enhance OCC's 
ability to continue to promptly and accurately clear and settle 
securities transactions for participants in the options markets during 
periods of market stress. Therefore, the Commission believes that the 
proposal is consistent with promoting the prompt and accurate clearance 
and settlement of securities transactions.
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    \14\ See supra note 5, 83 FR at 37861.
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    Second, adding the proposed Sufficiency Scenarios would be 
consistent with assuring the safeguarding of securities and funds 
currently in OCC's custody and control by creating a wider range of 
stress scenarios that would improve the likelihood of the Clearing Fund 
having sufficient resources to cover potential credit losses under 
adverse market conditions. As noted above, Sufficiency Scenarios are 
used to determine whether any exposure of the Clearing Fund to the 
portfolios of individual

[[Page 661]]

Clearing Member Groups is sufficiently large as to necessitate OCC 
calling for additional resources in the form of margin to guard against 
potential losses. Collecting this additional margin reduces the 
likelihood that OCC must mutualize the risk associated with these 
potential losses through the use of surviving Clearing Members' 
contributions to the Clearing Fund. The Commission continues to believe 
that reducing the potentiality of loss mutualization during periods of 
market stress, while unavoidable in certain circumstances, could reduce 
the potential knock-on effects to non-defaulting Clearing Members, 
their customers and the broader options market.\15\ The addition of the 
four scenarios representing recent market events, previously uncaptured 
in OCC's Sufficiency stress testing, would widen the set of Sufficiency 
Scenarios to include such events, and further reduce the likelihood of 
drawing upon surviving Clearing Members' Clearing Fund collateral in 
the event that similar market scenarios occur. Therefore, the 
Commission believes that the proposal is consistent with assuring the 
safeguarding of securities and funds which are in OCC's custody or 
control.
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    \15\ See e.g., Securities Exchange Act Release No. 86119 (Jun. 
17. 2019), 84 FR 29267, 29269 (Jun. 21, 2019) (File No. SR-OCC-2019-
004) (noting a new liquidation cost model's impact on reducing 
potential loss mutualization).
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    The Commission believes, therefore, that the proposal to elevate 
the four Informational Scenarios to Sufficiency Scenarios is consistent 
with the requirements of Section 17A(b)(3)(F) of the Exchange Act.\16\
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    \16\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(4) Under the Exchange Act

    Rule 17Ad-22(e)(4)(vi) under the Exchange Act requires OCC to 
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 by testing 
the sufficiency of its total financial resources available to meet the 
minimum financial resource requirements under paragraphs Rules 17Ad-
22(e)(4)(i) through (iii).\17\ Such testing must include, among other 
things, conducting stress testing of OCC's total financial resources 
once each day using standard predetermined parameters and 
assumptions.\18\
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    \17\ 17 CFR 240.17Ad-22(e)(4)(vi) (citing 17 CFR 240.17Ad-
22(e)(4)(i)-(iii)).
    \18\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
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    After reviewing and assessing the proposal, the Commission believes 
that the proposed changes described above are consistent with Rule 
17Ad-22(e)(4)(vi) under the Exchange Act. As it stated in 2018, the 
Commission believes that expanding the scope of stress scenarios 
against which OCC monitors its financial resources would increase the 
likelihood that OCC maintains sufficient financial resources at all 
times.\19\ Similarly, the Commission believes that the elevation of the 
four Informational Scenarios to Sufficiency Scenarios is consistent 
with Rule 17Ad-22(e)(4)(vi) because the addition of the four 
Sufficiency Scenarios would enhance OCC's financial resources testing, 
and the broader scope of stress scenarios would increase the chances 
that OCC maintains sufficient financial resources. The Commission also 
believes that the daily testing of OCC's financial resources against 
the Sufficiency Scenarios, including the four proposed Sufficiency 
Scenarios based on the March 2020 market events, would be consistent 
with the daily stress testing requirements of Rule 17Ad-
22(e)(4)(vi)(A), as described above.
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    \19\ See supra note 5, 83 FR at 37863.
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    The Commission also believes that the proposed introduction of 
stress scenario variations accounting for specific wrong-way risk 
exposures arising from cleared positions on issued ETNs would be 
consistent with the requirements of Rules 17Ad-22(e)(4)(i), (iii), and 
(vi).\20\ These Rules require 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: (1) 
Maintaining sufficient financial resources to cover its credit exposure 
to each participant fully with a high degree of confidence; (2) 
maintaining additional financial resources 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 (3) 
testing the sufficiency of its total financial resources available to 
meet these minimum financial resource requirements. In its 2019 
approval of enhancements to OCC's Clearing Fund and stress testing 
methodology, the Commission noted that OCC's introduction of new stress 
test scenarios designed to capture single wrong-way risk exposures for 
Clearing Member-issued ETNs would be consistent with the requirements 
of Rules 17Ad-22(e)(4)(i), (iii), and (vi), because it would enable OCC 
to test its total financial resources and to call for additional 
resources as necessary to ensure the resources it holds would be 
sufficient to enable OCC to cover exposures arising under the relevant 
stress scenarios.\21\ Likewise, for the current proposal, the 
Commission believes that OCC's introduction of four Sufficiency 
Scenarios reflecting the market events of March 2020, including its 
specific wrong-way risk exposure variations, would also enable OCC to 
more accurately measure its credit risks and better test the 
sufficiency of its overall financial resources. The proposed rule 
change would thus enhance OCC's overall framework for measuring and 
managing its credit risks and would reduce the risk that OCC's 
financial resources would be insufficient in the event of a Clearing 
Member default consistent with Rules 17Ad-22(e)(4)(i), (iii), and (vi).
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    \20\ 17 CFR 240.17Ad-22(e)(4)(i), (iii), and (vi).
    \21\ Securities Exchange Act Release No. 87718 (Dec. 11, 2019), 
84 FR 68992, 68995 (Dec. 17, 2019) (File No. SR-OCC-2019-010).
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    The Commission believes, therefore, that the proposal to elevate 
the four Informational Scenarios to Sufficiency Scenarios is consistent 
with the requirements of Rule 17Ad-22(e)(4) under the Exchange Act.\22\
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    \22\ 17 CFR 240.17Ad-22(e)(4).
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C. Accelerated Approval of the Proposed Rule Change

    In its filing, OCC requests that the Commission grant accelerated 
approval of the Proposed Rule Change pursuant to Secton 19(b)(C)(iii) 
of the Exchange Act.\23\ Under Section 19(b)(2)(C)(iii) of the Exchange 
Act, the Commission may grant accelerated approval of a proposed rule 
change if the Commission finds good cause for doing so.\24\ OCC 
believes that there is good cause for the Commission to accelerate 
effectiveness because the proposed changes are designed to improve 
OCC's ability to measure, monitor and manage its credit exposures to 
its participants.\25\ Further, OCC believes that implementation of the 
proposed Sufficiency Scenarios would promote the protection of 
investors and the public interest by enabling OCC to test the 
sufficiency of its prefunded financial resources against a recent and 
significant period of market volatility and enhancing OCC's ability to 
manage

[[Page 662]]

the risks it faces as a systemically important financial market 
utility.\26\
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    \23\ 15 U.S.C. 78s(b)(2)(C)(iii).
    \24\ Id.
    \25\ See Notice of Filing, 85 FR at 80830.
    \26\ Id.
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    The Commission finds good cause, pursuant to Section 
19(b)(2)(C)(iii) of the Exchange Act,\27\ for approving the Proposed 
Rule Change on an accelerated basis, prior to the 30th day after the 
date of publication of notice in the Federal Register, because 
accelerated approval of this proposed rule change will facilitate the 
prompt and accurate clearance and settlement of options contracts by 
ensuring that OCC has expanded the range of stress scenarios to 
measure, monitor, and manage its credit exposures to its participants 
in a timely fashion, thereby immediately putting OCC in a better 
position to manage the risks it faces as a systemically important 
financial market utility.
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    \27\ 15 U.S.C. 78s(b)(2)(C)(iii).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the 
Exchange Act, and in particular, the requirements of Section 17A of the 
Exchange Act \28\ and the rules and regulations thereunder.
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    \28\ In approving this Proposed Rule Change, the Commission has 
considered the proposed rules' impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\29\ that the Proposed Rule Change (SR-OCC-2020-015) be, 
and hereby is, approved.
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    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-29217 Filed 1-5-21; 8:45 am]
BILLING CODE 8011-01-P


