[Federal Register Volume 86, Number 92 (Friday, May 14, 2021)]
[Notices]
[Pages 26586-26588]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-10187]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91833; File No. SR-OCC-2021-005]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Concerning The Options Clearing Corporation's Synthetic Futures Model

May 10, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on April 29, 2021, The Options Clearing 
Corporation (``OCC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by OCC. OCC filed the 
proposed rule change pursuant to Section 19(b)(3)(A) \3\ of the Act and 
Rule 19b-4(f)(4)(ii) \4\ thereunder so that the proposal was effective 
upon filing with the Commission. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(4)(ii).
---------------------------------------------------------------------------

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

    OCC is filing a proposed rule change to expand the use of an 
existing OCC margin model. The proposed changes to OCC's STANS 
Methodology Description are contained in confidential Exhibit 5 of 
filing SR-OCC-2021-005. Material proposed to be added to the STANS 
Methodology Description as currently in effect is underlined and 
material proposed to be deleted is marked in strikethrough text. All 
capitalized terms not defined herein have the same meaning as set forth 
in the OCC By-Laws and Rules.\5\
---------------------------------------------------------------------------

    \5\ OCC's By-Laws and Rules can be found on OCC's public 
website: https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
---------------------------------------------------------------------------

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 2019, OCC implemented a new model for Volatility Index 
Futures.\6\ The enhanced model included: (1) The daily re-estimation of 
prices and correlations using ``synthetic'' futures; \7\ (2) an 
enhanced statistical distribution for modeling price returns for 
synthetic futures (i.e., an asymmetric Normal Reciprocal Inverse 
Gaussian (or ``NRIG'') distribution); and (3) a new anti-procyclical 
floor for variance estimates. The main feature of the enhanced model 
was the replacement of the use of the underlying index itself as a risk 
factor \8\ (e.g., the VIX) with risk factors that are based on observed 
futures prices (i.e., the ``synthetic'' futures contracts). These risk 
factors are then used in the generation of Monte Carlo scenarios for 
the futures by using volatility and correlations obtained from the 
existing simulation models in OCC's propriety margin system, the System 
for Theoretical Analysis and Numerical Simulations (``STANS'').\9\ 
Additionally, the model has the ability to accommodate negative prices 
and interest rates.
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 85870 (May 15, 
2019), 84 FR 23096 (May 21, 2019) (SR-OCC-2019-801) and Securities 
Exchange Act Release No. 85873 (May 16, 2019), 84 FR 23620 (May 16, 
2019) (SR-OCC-2019-002). Certain indices are designed to measure the 
volatility implied by the prices of options on a particular 
reference index or asset (``Volatility Indexes''). For example, the 
Cboe Volatility Index (``VIX'') is designed to measure the 30-day 
expected volatility of the Standard & Poor's 500 index (``SPX''). 
OCC clears futures contracts on Volatility Indexes. These futures 
contracts are referred to herein as ``Volatility Index Futures.''
    \7\ A ``synthetic'' futures time series, for the intended 
purposes of OCC, relates to a uniform substitute for a time series 
of daily settlement prices for actual futures contracts, which 
persists over many expiration cycles and thus can be used as a basis 
for econometric analysis.
    \8\ A ``risk factor'' within OCC's margin system may be defined 
as a product or attribute whose historical data is used to estimate 
and simulate the risk for an associated product.
    \9\ 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/.
---------------------------------------------------------------------------

    On July 10, 2020, OCC filed a proposed rule change to expand the 
use of the model, currently known as the ``Synthetic Futures Model,'' 
to Cboe's

[[Page 26587]]

AMERIBOR Futures.\10\ On September 30, 2020, OCC filed another proposed 
rule change to further expand the use of the Synthetic Futures Model to 
Treasury yield index futures listed by Small Exchange Inc. 
(``Small'').\11\ OCC now proposes to extend the use of the Synthetic 
Futures Model to certain other products planned to be listed by Small.
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release No. 89392 (July 24, 
2020), 85 FR 45938 (July 30, 2020) (SR-OCC-2020-007).
    \11\ See Securities Exchange Act Release No. 90139 (October 9, 
2020), 85 FR 65886 (October 16, 2020) (SR-OCC-2020-012). On December 
6, 2019, OCC filed a proposed rule change to execute an Agreement 
for Clearing and Settlement Services between OCC and Small in 
connection with Small's intention to operate as a designated 
contract market regulated by the Commodity Futures Trading 
Commission (``CFTC''). See Securities Exchange Act Release No. 87774 
(December 17, 2019), 84 FR 70602 (December 23, 2019) (SR-OCC-2019-
011).
---------------------------------------------------------------------------

Proposed Changes
    Small plans to launch new futures products linked to Light Sweet 
Crude Oil (WTI) (``Crude Oil Futures''). OCC proposes to extend the use 
of its Synthetic Futures Model to these Small Crude Oil Futures. The 
Synthetic Futures Model maps the price risk factor of a traded futures 
product to a synthetic time series constructed from the traded prices 
of similar tenor futures in history. This allows the model to capture 
differences in volatility of futures across the term structure. Such 
differences in volatility are exhibited for futures products whose 
underlying deliverable is linked to a different tenor of a market 
observable risk factor such as interest rates, volatility or commodity 
prices such as crude oil. As a result, OCC believes that the Synthetic 
Futures Model would provide more appropriate margin coverage for Small 
Crude Oil Futures than other models in OCC's inventory.\12\
---------------------------------------------------------------------------

    \12\ For example, OCC also maintains a ``Generic Futures 
Model,'' which is a simple model based on the cost of carry that is 
primarily used to margin equity-like futures such as SPX futures and 
can be used to model certain interest rates futures. This model has 
certain limitations (e.g., the model cannot currently accommodate 
negative prices and rates).
---------------------------------------------------------------------------

    OCC proposes to make minor modifications to the STANS Methodology 
Description to note that the STANS methodology generally, and Synthetic 
Futures Model specifically, would be used to generate margin 
requirements for Small Crude Oil Futures. Consistent with the existing 
STANS Methodology Description, OCC would use a fixed NRIG asymmetry 
parameter for Crude Oil Futures, which OCC believes is better suited to 
the risk profile of the product as the asymmetry of returns is 
primarily on the left-tail (or negative returns) and already captured 
by the GARCH model specifications. Consistent with the original 
implementation of the Synthetic Futures Model, the Small Crude Oil 
Futures will also use proportional returns in the calibration. OCC 
would initially use a fixed scale factor for purposes of determining 
the long-run variance floor until sufficient data for the Small Crude 
Oil Futures is available for this scale factor to be calibrated on a 
regular basis. The scale factor setting will be reviewed periodically 
based on the futures data and adjusted, if appropriate. Finally, the 
model will use market prices of futures after the product launch and 
use proxy data \13\ for historical dates prior to product launch to 
support the model calibration.
---------------------------------------------------------------------------

    \13\ The proxy data for Small Crude Oil futures will be 
constructed from similar tenor ICE WTI futures.
---------------------------------------------------------------------------

(2) Statutory Basis
    OCC believes the proposed rule change is consistent with Section 
17A of the Act \14\ and the rules thereunder applicable to OCC. Section 
17A(b)(3)(F) of the Act \15\ requires, in part, that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of derivative agreements, contracts, and 
transactions and to assure the safeguarding of securities and funds 
which are in its custody or control or for which it is responsible. The 
proposed rule change would make minor changes to the STANS Methodology 
Description so that the Synthetic Futures Model can be used to model 
Small Crude Oil Futures. OCC believes the Synthetic Futures Model may 
provide better margin coverage for these products than other margin 
models maintained by OCC. OCC uses the margin it collects from a 
defaulting Clearing Member to protect other Clearing Members from 
losses that may result from the default and ensure that OCC is able to 
continue the prompt and accurate clearance and settlement of its 
cleared products. Moreover, OCC believes that accurate calculation of 
margin requirements is necessary to help OCC manage the risk of a 
Clearing Member default without recourse to the assets of non-
defaulting Clearing Members, which supports the safeguarding of 
securities and funds in OCC's custody or control. OCC therefore 
believes that the proposed rule change is consistent with the 
requirements of Section 17A(b)(3)(F) of the Act.\16\
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78q-1.
    \15\ 15 U.S.C. 78q-1(b)(3)(F).
    \16\ Id.
---------------------------------------------------------------------------

    Exchange Act Rules 17Ad-22(e)(6)(i), (iii), and (v) \17\ further 
require that a covered clearing agency establish, implement, maintain 
and enforce written policies and procedures reasonably designed to 
cover its credit exposures to its participants by establishing a risk-
based margin system that, among other things: (1) Considers, and 
produces margin levels commensurate with, the risks and particular 
attributes of each relevant product, portfolio, and market; (2) 
calculates margin sufficient to cover its potential future exposure to 
participants in the interval between the last margin collection and the 
close out of positions following a participant default; and (3) uses an 
appropriate method for measuring credit exposure that accounts for 
relevant product risk factors and portfolio effects across products. 
OCC believes that using the Synthetic Futures Model for Small Crude Oil 
Futures would produce margin levels commensurate with the risks and 
particular attributes of the product in question, generate margin 
requirements to cover OCC's potential future exposure to its 
participants, and appropriately take into account relevant product risk 
factors for Small Crude Oil Futures.\18\ In this way, OCC believes the 
proposed rule change is consistent with the requirements of Rules 17Ad-
22(e)(6)(i), (iii), and (v).\19\
---------------------------------------------------------------------------

    \17\ 17 CFR 240.17Ad-22(e)(6)(i), (iii), and (v).
    \18\ OCC has provided backtesting analysis for the proposed 
change in confidential Exhibit 3 to File No. SR-OCC-2021-005.
    \19\ 17 CFR 240.17Ad-22(e)(6)(i), (iii), and (v).
---------------------------------------------------------------------------

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

    Section 17A(b)(3)(I) of the Act \20\ requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. OCC does not 
believe that the proposed rule change would have any impact or impose a 
burden on competition. The Synthetic Futures Model would be used for 
Small Crude Oil Futures for all Clearing Members upon the launch of the 
new products. As a result, OCC does not believe that the proposed rule 
change would unfairly inhibit access to OCC's services or disadvantage 
or favor any particular user in relationship to another user. Moreover, 
OCC expects that the Small Crude Oil Futures would account for a small 
part of OCC's overall clearing activity given the newness of the 
product and the size of OCC's futures clearing business as a share of 
OCC's total cleared product set. OCC therefore does not believe that 
the proposed rule change would have any

[[Page 26588]]

impact or impose a burden on competition.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

(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

    Pursuant to Section 19(b)(3)(A) of the Act,\21\ and Rule 19b-
4(f)(4)(ii) thereunder,\22\ the proposed rule change is filed for 
immediate effectiveness because it effects a change in an existing 
service of OCC that (i) primarily affects the clearing operations of 
OCC with respect to products that are not securities and (ii) does not 
significantly affect any securities clearing operations of OCC or any 
rights or obligations of OCC with respect to securities clearing or 
persons using such securities clearing services.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78s(b)(3)(A).
    \22\ 17 CFR 240.19b-4(f)(4)(ii).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.\23\
---------------------------------------------------------------------------

    \23\ Notwithstanding its immediate effectiveness, implementation 
of this rule change will be delayed until this change is deemed 
certified under CFTC Rule 40.6.
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-OCC-2021-005 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-2021-005. 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/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
    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-2021-005 and 
should be submitted on or before June 4, 2021.
---------------------------------------------------------------------------

    \24\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-10187 Filed 5-13-21; 8:45 am]
BILLING CODE 8011-01-P


