Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change To Establish Procedures Regarding the Monthly Resizing of Its Clearing Fund and the Addition of Financial Resources, 29364-29367 [2015-12294]
Download as PDF
<![CDATA[
29364
Federal Register / Vol. 80, No. 98 / Thursday, May 21, 2015 / Notices
quantitative information. Moreover,
prior to the commencement of trading,
the Exchange will inform its members in
an Information Circular of the special
characteristics and risks associated with
trading the Shares. Trading in Shares of
a Fund will be halted under the
conditions specified in Nasdaq Rules
4120 and 4121 or because of market
conditions or for reasons that, in the
view of the Exchange, make trading in
the Shares inadvisable, and trading in
the Shares will be subject to Nasdaq
Rule 5735(d)(2)(D), which sets forth
circumstances under which Shares of a
Fund may be halted. In addition, as
noted above, investors will have ready
access to information regarding each
Fund’s holdings, the Intraday Indicative
Value, the Disclosed Portfolio, and
quotation and last sale information for
the Shares.
The proposed rule change is designed
to perfect the mechanism of a free and
open market and, in general, to protect
investors and the public interest in that
it will facilitate the continued listing
and trading of additional types of
actively-managed exchange-traded
products that will enhance competition
among market participants, to the
benefit of investors and the marketplace.
For the above reasons, Nasdaq
believes the proposed rule change is
consistent with the requirements of
Section 6(b)(5) of the Act.
tkelley on DSK3SPTVN1PROD with NOTICES
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
instruments and asset types proposed to
be added by this rule change, in
connection with those approved in the
Prior Order, are consistent with the
instruments and asset types utilized by
other actively managed funds in the
marketplace. The investment strategies
utilized by the Funds, however, remain
different from other issues of Managed
Fund Shares traded on the Exchange,
and therefore provide investors with
another choice of Managed Fund
Shares. Moreover, the Exchange believes
that the proposed changes will enhance
competition among existing issues of
Managed Fund Shares and will facilitate
the trading of additional types of
actively-managed exchange-traded
funds, all to the benefit of investors and
the marketplace.
VerDate Sep<11>2014
20:28 May 20, 2015
Jkt 235001
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
Written comments were neither
solicited nor 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 such
proposed rule change; or (b) institute
proceedings to determine whether the
proposed rule change should be
disapproved.
provisions of 5 U.S.C. 552, will be
available for Web site 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 the
filing also will be available for
inspection and copying at the principal
office of Nasdaq. All comments received
will be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
NASDAQ–2015–049 and should be
submitted on or before June 11, 2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015–12284 Filed 5–20–15; 8:45 am]
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
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–74980; File No. SR–OCC–
2015–009]
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NASDAQ–2015–049 on the subject line.
Self-Regulatory Organizations; The
Options Clearing Corporation; Order
Approving Proposed Rule Change To
Establish Procedures Regarding the
Monthly Resizing of Its Clearing Fund
and the Addition of Financial
Resources
Paper Comments
May 15, 2015.
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, Station
Place, 100 F Street NE., Washington, DC
20549.
All submissions should refer to File
Number SR–NASDAQ–2015–049. 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 Web site https://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
On March 13, 2015, The Options
Clearing Corporation (‘‘OCC’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change SR–OCC–2015–
009 pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder.2
The proposed rule change was
published for comment in the Federal
Register on April 2, 2015.3 The
Commission did not receive any
comments on the proposed rule change.
This order approves the proposed rule
change.
PO 00000
Frm 00066
Fmt 4703
Sfmt 4703
23 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4. OCC also filed this change
as an advance notice under Section 806(e)(1) of the
Payment, Clearing, and Settlement Supervision Act
of 2010. 12 U.S.C. 5465(e)(1). See Securities
Exchange Act Release No. 74713 (April 10, 2015),
80 FR 20534 (April 16, 2015) (SR–OCC–2014–811).
3 Securities Exchange Act Release No. 74603
(March 27, 2015), 80 FR 17808 (April 2, 2015) (SR–
OCC–2015–009).
1 15
E:\FR\FM\21MYN1.SGM
21MYN1
Federal Register / Vol. 80, No. 98 / Thursday, May 21, 2015 / Notices
I. Description
The proposal establishes new
procedures to govern: (i) OCC’s resizing
of the clearing fund on a monthly basis
pursuant to OCC Rule 1001(a)
(‘‘Monthly Clearing Fund Sizing
Procedure’’); and (ii) the addition of
Financial Resources 4 through an intraday margin call on one or more Clearing
Members 5 pursuant to OCC Rule 609
and, if necessary, an intra-month
increase of the clearing fund pursuant to
OCC Rule 1001(a) to ensure that OCC
maintains adequate Financial Resources
in the event of a default of a Clearing
Member or Clearing Member Group 6
presenting the largest exposure to OCC
(‘‘Financial Resource Monitoring and
Call Procedure’’).7
tkelley on DSK3SPTVN1PROD with NOTICES
a. Monthly Clearing Fund Sizing
Procedure
According to OCC, under the Monthly
Clearing Fund Sizing Procedure, OCC
will continue to use its daily stress test
exposures under simulated default
scenarios (as described in the first
sentence of OCC Rule 1001(a)) to
calculate the size of the clearing fund
and resize the clearing fund on the first
business day of each month. However,
instead of resizing the clearing fund
based on the average of the daily
calculations during the preceding
calendar month, OCC intends to resize
the clearing fund using a new formula,
which is the sum of: (i) An amount
equal to the peak five-day rolling
4 For purposes of this proposed rule change,
‘‘Financial Resources’’ means, with respect to a
projected loss that is attributable to a particular
Clearing Member or Clearing Member Group, as
defined hereinafter, the sum of (i) the margin
deposits (less any excess margin a Clearing Member
or Clearing Member Group may have on deposit at
OCC) and deposits in lieu of margin with respect
to the accounts of such Clearing Members or
Clearing Member Groups, and (ii) the value of
OCC’s clearing fund, including both the Base
Amount, as defined hereinafter, and the prudential
margin of safety, as described below.
5 ‘‘Clearing Member’’ is defined, in relevant part,
as a person or organization that has been admitted
to membership in the Corporation pursuant to the
provisions of the By-Laws and Rules. See OCC ByLaws, Article I.
6 ‘‘Clearing Member Group’’ is defined as a
Clearing Member and any Member Affiliates of such
Clearing Member. ‘‘Member Affiliate’’ is defined as
an affiliated entity of a Clearing Member that
controls, is controlled by, or under common control
with, the Clearing Member. See OCC By-Laws,
Article I.
7 According to OCC, the procedures described
herein will be in effect until the development of a
new standard clearing fund sizing methodology and
a revised methodology for the intra-month increase
of Financial Resources. Following such
development, OCC has stated that it will file a
separate rule change and advance notice with the
Commission that will include a description of the
new and revised methodologies as well as a revised
Monthly Clearing Fund Sizing Procedure and
Financial Resource Monitoring and Call Procedure.
VerDate Sep<11>2014
20:28 May 20, 2015
Jkt 235001
average of clearing fund draws observed
over the preceding three calendar
months using the daily idiosyncratic
default and minor systemic default
scenario calculations based on OCC’s
daily Monte Carlo simulations (‘‘Base
Amount’’); and (ii) a prudential margin
of safety determined by OCC that is
currently set at $1.8 billion.8
OCC believes that the Monthly
Clearing Fund Sizing Procedure
provides a sound and prudent approach
to ensure that it maintains adequate
Financial Resources to protect against a
default of a Clearing Member or Clearing
Member Group presenting the largest
exposure to OCC. By sizing the Base
Amount of the clearing fund using the
peak five-day rolling average over the
preceding three month look-back
period, rather than an average over the
preceding month, OCC believes that the
new resizing formula should be more
responsive to sudden increases in
exposure and less sensitive to short-run
reductions in exposures that could
inappropriately reduce the overall size
of the clearing fund. OCC further asserts
that the prudential margin of safety
provides an additional buffer to absorb
potential future exposures not
previously observed during the lookback period. The Monthly Clearing
Fund Sizing Procedure will be
supplemented by the Financial
Resource Monitoring and Call
Procedure, which is described below, to
provide further assurance that the
Financial Resources are adequate to
protect against such risk of loss.
b. Financial Resource Monitoring and
Call Procedure
According to OCC, under the
Financial Resource Monitoring and Call
Procedure, OCC will use the same daily
idiosyncratic default calculation that is
currently used under the Monthly
Clearing Fund Sizing Procedure to
monitor daily the adequacy of the
Financial Resources to withstand a
default by the Clearing Member or
Clearing Member Group presenting the
largest exposure under extreme but
plausible market conditions.9 If such a
8 According to OCC, it computes its exposure
under the idiosyncratic default scenario and minor
systemic default scenario on a daily basis. The
greater of these two exposures will be that day’s
peak exposure. To calculate the rolling five-day
average, OCC will compute the average of the peak
exposure for each consecutive five-day period
observed over the prior three-month period. To
determine the Base Amount, OCC will use the
largest five-day rolling average observed over the
past three-months.
9 According to OCC, since the minor systemic
default scenario contemplates the simultaneous
default of two Clearing Members and OCC
maintains Financial Resources sufficient to cover a
default by a Clearing Member or Clearing Member
PO 00000
Frm 00067
Fmt 4703
Sfmt 4703
29365
daily idiosyncratic default calculation
projected a draw on the clearing fund
(‘‘Projected Draw’’) that is at least 75%
of the clearing fund maintained by OCC,
OCC will be required to issue an intraday margin call pursuant to OCC Rule
609 against the Clearing Member or
Clearing Member Group that caused
such a draw (‘‘Margin Call Event’’).10
The amount of the intra-day margin call
made pursuant to a Margin Call Event
will be the difference between the
Projected Draw and the Base Amount of
the clearing fund (‘‘Exceedance Above
Base Amount’’).
In the case of a Clearing Member
Group that causes the Exceedance
Above Base Amount, the Exceedance
Above Base Amount will be pro-rated
among the individual Clearing Members
that compose the Clearing Member
Group based on each individual
Clearing Member’s proportionate share
of the total risk for such Clearing
Member Group as defined in OCC Rule
1001(b) (i.e., the margin requirement
with respect to all accounts of the
Clearing Member Group exclusive of the
net asset value of the positions in such
accounts aggregated across all such
accounts). In the case of an individual
Clearing Member or a Clearing Member
Group, the intra-day margin call will be
subject to a limitation under which it
cannot exceed the lower of: (a) $500
million; or (b) 100% of the net capital
of a Clearing Member (the ‘‘500/100
Limitation’’).11 This limitation will
apply in aggregate to all Margin Call
Events within the same monthly period.
Therefore, if the same Clearing Member
or Clearing Member Group is subject to
more than one Margin Call Event in the
same month, the total amount of funds
group presenting the greatest exposure to OCC, OCC
does not use the minor systemic default scenario to
determine the adequacy of the Financial Resources
under the Financial Resource Monitoring and Call
Procedure.
10 OCC Rule 609 authorizes OCC to require the
deposit of additional margin in any account at any
time during any business day by any Clearing
Member for, among other reasons, the protection of
OCC, other Clearing Members or the general public.
Under OCC Rule 609, a Clearing Member must meet
a required deposit of intra-day margin in
immediately available funds at a time prescribed by
OCC or within one hour of OCC’s issuance of debit
settlement instructions against the bank account of
the applicable Clearing Member.
11 According to OCC, implementing the 500/100
Limitation on the intra-day margin call avoids
placing a ‘‘liquidity squeeze’’ on the subject
Clearing Member or Clearing Member Group based
on exposures presented by a hypothetical stress
test, which otherwise could cause a default on the
intra-day margin call. OCC back-testing results
determined that intra-day margin calls resulting
from a Margin Call Event would have been made
against Clearing Members or Clearing Member
Groups that are large, well-capitalized firms, with
more than sufficient resources to satisfy the call for
additional margin subject to the 500/100 Limitation.
E:\FR\FM\21MYN1.SGM
21MYN1
29366
Federal Register / Vol. 80, No. 98 / Thursday, May 21, 2015 / Notices
that are collected cannot exceed the
500/100 Limitation. The 500/100
Limitation will remain in place until
OCC has collected all funds to satisfy
the next monthly clearing fund
resizing.12
Additionally, OCC will rely on OCC
Rule 608 to preclude the withdrawal of
such additional margin amount until all
of the funds from the next monthly
clearing fund resizing have been
collected. Based on three years of backtesting data, OCC determined that a
Margin Call Event would have occurred
in 10 of the months during this period.
During each of these 10 months, the
maximum call amount would have been
equal to $500 million.13 After giving
effect to the intra-day margin calls (i.e.,
increasing the Financial Resources by
$500 million), there was only one
Margin Call Event where there was still
an observed stress test exceedance of
Financial Resources.
To address this one observed
instance, the Financial Resource
Monitoring and Call Procedure will
require OCC to increase the size of the
clearing fund, if a Projected Draw
exceeds 90% of the clearing fund
(‘‘Clearing Fund Intra-month Increase
Event’’), after applying any funds then
on deposit with OCC from the
applicable Clearing Member or Clearing
Member Group pursuant to a Margin
Call Event. The amount of such increase
(‘‘Clearing Fund Increase’’) will be the
greater of: (a) $1 billion; or (b) 125% of
the difference between (i) the Projected
Draw, as reduced by the deposits
resulting from the Margin Call Event,
and (ii) the clearing fund. Each Clearing
Member’s proportionate share of the
Clearing Fund Increase will equal its
proportionate share of the variable
portion of the clearing fund for the
month in question as calculated
pursuant to OCC Rule 1001(b).
According to OCC, it will notify the
Risk Committee, Clearing Members and
appropriate regulatory authorities of the
Clearing Fund Increase on the business
day that the Clearing Fund Intra-month
Increase Event occurs. OCC believes that
this will ensure that OCC management
maintains authority to address any
potential Financial Resource
deficiencies when compared to its
tkelley on DSK3SPTVN1PROD with NOTICES
12 The
Risk Committee of the Board of Directors
(‘‘Risk Committee’’) will be notified, and can take
action to address potential Financial Resource
deficiencies, in the event that a Projected Draw
resulted in a Margin Call Event and, as a result of
the 500/100 Limitation, the intra-day margin call is
less than the Exceedance Above Base Amount, but
the Projected Draw is not large enough to result in
an increase in the clearing fund as discussed below.
13 The back-testing analysis performed by OCC
assumed that a single Clearing Member caused the
Exceedance Above Base Amount.
VerDate Sep<11>2014
20:28 May 20, 2015
Jkt 235001
Projected Draw estimates. The Risk
Committee will then determine whether
the Clearing Fund Increase is sufficient,
and will retain authority under the Risk
Committee charter to increase the
Clearing Fund Increase or the intra-day
margin call made pursuant to a Margin
Call Event in its discretion. Clearing
Members will be required to meet the
call for additional clearing fund assets
by 9:00 a.m. CT on the second business
day following the Clearing Fund IntraMonth Increase Event. OCC believes
that this collection process ensures that
additional clearing fund assets are
promptly deposited by Clearing
Members following notice of a Clearing
Fund Increase, while also providing
Clearing Members with a reasonable
period of time to source such assets.
According to OCC, based on its backtesting results, after giving effect to the
intra-day margin call in response to a
Margin Call Event plus the prudential
margin of safety, the Financial
Resources would have been sufficient
upon implementing the one instance of
a Clearing Fund Intra-month Increase
Event.
OCC believes the Financial Resource
Monitoring and Call Procedure strikes a
prudent balance between mutualizing
the burden of requiring additional
Financial Resources and requiring the
Clearing Member or Clearing Member
Group causing the increased exposure to
bear such burden. In the event a
Projected Draw exceeds 75% of the
clearing fund, the Clearing Member or
Clearing Member Group that triggers the
exceedance will be assessed an intraday margin call to address the increase
in exposure. However, where a
Projected Draw exceeds 90% of OCC’s
clearing fund, OCC determined that it
should mutualize the burden of the
additional Financial Resources at this
threshold through a Clearing Fund
Increase. OCC believes that this balance
will provide OCC with sufficient
Financial Resources without increasing
the likelihood that its procedures, based
solely on stress testing results, will
cause a liquidity strain that could result
in the default of a Clearing Member or
Clearing Member Group.
II. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Act 14
directs the Commission to approve a
proposed rule change of a selfregulatory organization if it finds that
the proposed rule change is consistent
with the requirements of the Act and the
rules and regulations thereunder
applicable to such organization.
The Commission finds that the
proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act, which
requires the rules of a registered clearing
agency be designed to, among other
things, assure the safeguarding of
securities and funds which are in the
custody or control of the clearing agency
or for which it is responsible, to remove
impediments to and perfect the
mechanism of a national system for the
prompt and accurate clearance and
settlement of securities transactions,
and, in general, to protect investors and
the public interest.15 By establishing
procedures that govern the monthly
resizing of the clearing fund and the
addition of Financial Resources, as
proposed in OCC’s rule change, OCC
should be in a better position to ensure
that it maintains sufficient financial
resources to withstand a default of the
Clearing Member or Clearing Member
Group to which it has the largest
exposure, thereby reducing the
likelihood that a default would create
losses that disrupt OCC’s operations and
adversely affect the clearing agency’s
non-defaulting participants. In so doing,
the rule change, as approved, should
enhance OCC’s ability to assure the
safeguarding of securities and funds
which are in its custody or control or for
which it is responsible, to remove
impediments to and perfect the
mechanism of a national system for the
prompt and accurate clearance and
settlement of securities transactions,
and, in general, to protect investors and
the public interest.
The Commission finds that the
proposed rule change is consistent with
Rule 17Ad–22(b)(3), promulgated under
the Act,16 which requires, among other
things, registered clearing agencies that
perform 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. By using a
peak five-day rolling average and
extending the look-back period from one
to three calendar months, the Monthly
Clearing Fund Sizing Procedure should
be more responsive than OCC’s existing
clearing fund resizing formula to
sudden increases in exposure and less
sensitive to short-run reductions in
exposure that could inappropriately
reduce the overall size of the clearing
15 15
14 15
PO 00000
U.S.C. 78s(b)(2)(C).
Frm 00068
Fmt 4703
16 17
Sfmt 4703
E:\FR\FM\21MYN1.SGM
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(b)(3).
21MYN1
Federal Register / Vol. 80, No. 98 / Thursday, May 21, 2015 / Notices
fund. Furthermore, the prudential
margin of safety, which is currently $1.8
billion, will provide an additional buffer
to absorb potential future exposures that
may not be observed during the lookback period. In addition, the Financial
Resource Monitoring and Call Procedure
will establish a process by which OCC
will be able to respond to increases in
exposure on an intra-month basis. As a
result, the Monthly Clearing Fund
Sizing Procedure and Financial
Resource Monitoring and Call Procedure
should ensure that OCC is capable of
obtaining sufficient financial resources
in a timely manner to withstand a
default of the Clearing Member or
Clearing Member Group presenting it
the largest exposure.
III. Conclusion
On the basis of the foregoing, the
Commission finds that the rule change
is consistent with the requirements of
the Act and in particular with the
requirements of Section 17A of the
Act 17 and the rules and regulations
thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,18 that the
proposed rule change (SR–OCC–2015–
009) be, and it hereby is, approved as of
the date of this order or the date of an
order by the Commission authorizing
OCC to implement OCC’s advance
notice proposal that is consistent with
this proposed rule change (SR–OCC–
2014–811), whichever is later.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.19
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015–12294 Filed 5–20–15; 8:45 am]
tkelley on DSK3SPTVN1PROD with NOTICES
BILLING CODE 8011–01–P
17 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
18 15 U.S.C. 78s(b)(2).
19 17 CFR 200.30–3(a)(12).
VerDate Sep<11>2014
20:28 May 20, 2015
Jkt 235001
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–74981; File No. SR–OCC–
2014–811]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of No Objection to an Advance Notice,
as Modified by Amendment No. 1 and
Amendment No. 2, To Establish
Procedures Regarding the Monthly
Resizing of Its Clearing Fund and the
Addition of Financial Resources
May 15, 2015.
On December 1, 2014, The Options
Clearing Corporation (‘‘OCC’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) advance
notice SR–OCC–2014–811 (‘‘Advance
Notice’’) pursuant to Section 806(e)(1) of
the Payment, Clearing, and Settlement
Supervision Act of 2010 (‘‘Payment,
Clearing and Settlement Supervision
Act’’) 1 and Rule 19b–4(n)(1)(i) under
the Securities Exchange Act of 1934
(‘‘Exchange Act’’).2 On December 16,
2014, OCC filed amendment number 1
to the Advance Notice (‘‘Amendment
No. 1’’), which amended and replaced,
in its entirety, the Advance Notice as
originally filed on December 1, 2014.3
The Advance Notice, as modified by
Amendment No. 1, was published for
comment in the Federal Register on
January 26, 2015.4 On January 27, 2015,
pursuant to section 806(e)(1)(D) of the
Payment, Clearing and Settlement
Supervision Act,5 the Commission
required OCC to provide additional
information concerning the Advance
Notice.6 On March 4, 2015, OCC filed
1 12 U.S.C. 5465(e)(1). The Financial Stability
Oversight Council designated OCC a systemically
important financial market utility on July 18, 2012.
See Financial Stability Oversight Council 2012
Annual Report, Appendix A, https://
www.treasury.gov/initiatives/fsoc/Documents/
2012%20Annual%20Report.pdf. Therefore, OCC is
required to comply with the Clearing Supervision
Act and file advance notices with the Commission.
See 12 U.S.C. 5465(e).
2 17 CFR 240.19b–4(n)(1)(i).
3 In Amendment No. 1, OCC amended the
Advance Notice to include the Monthly Clearing
Fund Sizing Procedure and the Financial Resource
Monitoring and Call Procedure as exhibits to the
filing, both defined hereinafter, as Exhibit 5A and
Exhibit 5B, respectively. OCC requested
confidential treatment for Exhibit 5A and Exhibit
5B pursuant to the Rule 24b–2 under the Exchange
Act.
4 Securities Exchange Act Release No. 74091
(January 20, 2015), 80 FR 4001 (January 26, 2015)
(SR–OCC–2014–811).
5 12 U.S.C. 5465(e)(1)(D).
6 The Commission received a response from OCC
with the further information for consideration on
March 17, 2015, which, pursuant to Sections
806(e)(1)(E) and (G) of the Payment, Clearing and
Settlement Supervision Act, initiated a new 60 day
period of review. See 12 U.S.C. 5465(e)(1)(E) and 12
U.S.C. 5465(e)(1)(G).
PO 00000
Frm 00069
Fmt 4703
Sfmt 4703
29367
amendment number 2 to the Advance
Notice (‘‘Amendment No. 2’’), which
amended and replaced, in its entirety,
Amendment No. 1.7 Notice of
Amendment No. 2 was published for
comment in the Federal Register on
April 16, 2015.8 The Commission did
not receive any comments on the
Advance Notice or any of the
amendments thereto. This publication
serves as a notice of no objection to the
Advance Notice.
I. Description of the Advance Notice
The proposal establishes new
procedures to govern: (i) OCC’s resizing
of the clearing fund on a monthly basis
pursuant to OCC Rule 1001(a)
(‘‘Monthly Clearing Fund Sizing
Procedure’’); and (ii) the addition of
Financial Resources 9 through an intraday margin call on one or more Clearing
Members 10 pursuant to OCC Rule 609
and, if necessary, an intra-month
increase of the clearing fund pursuant to
OCC Rule 1001(a) to ensure that OCC
maintains adequate Financial Resources
7 Amendment No. 2 amended and replaced, in its
entirety, Amendment No. 1. OCC filed Amendment
No. 2 to clarify the operation of a Margin Call Event,
as that term is defined and used hereinafter. To
accommodate these clarifications, OCC made
conforming changes to Exhibit 5B, the Financial
Resources Monitoring and Call Procedure, and
added the Clearing Fund Intra-Month Re-sizing
Procedure as Exhibit 5C to provide additional
clarity regarding the resizing of the clearing fund.
OCC requested confidential treatment for Exhibit
5A, Exhibit 5B, and Exhibit 5C pursuant to the Rule
24b–2 under the Exchange Act. In Amendment No.
2, OCC also clarified that the definition of Financial
Resources, hereinafter defined, takes into account
the margin deposits of a Clearing Member or a
Clearing Member Group, as applicable.
8 Securities Exchange Act Release No. 74713
(April 10, 2015), 80 FR 20534 (April 16, 2015) (SR–
OCC–2014–811). OCC also filed the proposal
contained in the Advance Notice as a proposed rule
change under Section 19(b)(1) of the Exchange Act
and Rule 19b–4 thereunder. See Securities
Exchange Act Release No. 73853 (December 16,
2014), 79 FR 76417 (December 22, 2014) (SR–OCC–
2014–22). On March 13, 2015, OCC withdrew SR–
OCC–2014–22 and filed the proposal previously
contained therein as SR–OCC–2015–009. See
Securities Exchange Act Release No. 74603 (March
27, 2015), 80 FR 17808 (April 2, 2015) (SR–OCC–
2015–009). The Commission did not receive any
comments on the proposed rule change.
9 For purposes of this Advance Notice, ‘‘Financial
Resources’’ means, with respect to a projected loss
that is attributable to a particular Clearing Member
or Clearing Member Group, as defined hereinafter,
the sum of (i) the margin deposits (less any excess
margin a Clearing Member or Clearing Member
Group may have on deposit at OCC) and deposits
in lieu of margin with respect to the accounts of
such Clearing Members or Clearing Member
Groups, and (ii) the value of OCC’s clearing fund,
including both the Base Amount, as defined
hereinafter, and the prudential margin of safety, as
described below.
10 ‘‘Clearing Member’’ is defined, in relevant part,
as a person or organization that has been admitted
to membership in the Corporation pursuant to the
provisions of the By-Laws and Rules. See OCC ByLaws, Article I.
E:\FR\FM\21MYN1.SGM
21MYN1
]]>Agencies
[Federal Register Volume 80, Number 98 (Thursday, May 21, 2015)]
[Notices]
[Pages 29364-29367]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-12294]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-74980; File No. SR-OCC-2015-009]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving Proposed Rule Change To Establish Procedures Regarding
the Monthly Resizing of Its Clearing Fund and the Addition of Financial
Resources
May 15, 2015.
On March 13, 2015, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2015-009 pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder.\2\ The proposed rule change was published for comment in
the Federal Register on April 2, 2015.\3\ The Commission did not
receive any comments on the proposed rule change. This order approves
the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4. OCC also filed this change as an advance
notice under Section 806(e)(1) of the Payment, Clearing, and
Settlement Supervision Act of 2010. 12 U.S.C. 5465(e)(1). See
Securities Exchange Act Release No. 74713 (April 10, 2015), 80 FR
20534 (April 16, 2015) (SR-OCC-2014-811).
\3\ Securities Exchange Act Release No. 74603 (March 27, 2015),
80 FR 17808 (April 2, 2015) (SR-OCC-2015-009).
---------------------------------------------------------------------------
[[Page 29365]]
I. Description
The proposal establishes new procedures to govern: (i) OCC's
resizing of the clearing fund on a monthly basis pursuant to OCC Rule
1001(a) (``Monthly Clearing Fund Sizing Procedure''); and (ii) the
addition of Financial Resources \4\ through an intra-day margin call on
one or more Clearing Members \5\ pursuant to OCC Rule 609 and, if
necessary, an intra-month increase of the clearing fund pursuant to OCC
Rule 1001(a) to ensure that OCC maintains adequate Financial Resources
in the event of a default of a Clearing Member or Clearing Member Group
\6\ presenting the largest exposure to OCC (``Financial Resource
Monitoring and Call Procedure'').\7\
---------------------------------------------------------------------------
\4\ For purposes of this proposed rule change, ``Financial
Resources'' means, with respect to a projected loss that is
attributable to a particular Clearing Member or Clearing Member
Group, as defined hereinafter, the sum of (i) the margin deposits
(less any excess margin a Clearing Member or Clearing Member Group
may have on deposit at OCC) and deposits in lieu of margin with
respect to the accounts of such Clearing Members or Clearing Member
Groups, and (ii) the value of OCC's clearing fund, including both
the Base Amount, as defined hereinafter, and the prudential margin
of safety, as described below.
\5\ ``Clearing Member'' is defined, in relevant part, as a
person or organization that has been admitted to membership in the
Corporation pursuant to the provisions of the By-Laws and Rules. See
OCC By-Laws, Article I.
\6\ ``Clearing Member Group'' is defined as a Clearing Member
and any Member Affiliates of such Clearing Member. ``Member
Affiliate'' is defined as an affiliated entity of a Clearing Member
that controls, is controlled by, or under common control with, the
Clearing Member. See OCC By-Laws, Article I.
\7\ According to OCC, the procedures described herein will be in
effect until the development of a new standard clearing fund sizing
methodology and a revised methodology for the intra-month increase
of Financial Resources. Following such development, OCC has stated
that it will file a separate rule change and advance notice with the
Commission that will include a description of the new and revised
methodologies as well as a revised Monthly Clearing Fund Sizing
Procedure and Financial Resource Monitoring and Call Procedure.
---------------------------------------------------------------------------
a. Monthly Clearing Fund Sizing Procedure
According to OCC, under the Monthly Clearing Fund Sizing Procedure,
OCC will continue to use its daily stress test exposures under
simulated default scenarios (as described in the first sentence of OCC
Rule 1001(a)) to calculate the size of the clearing fund and resize the
clearing fund on the first business day of each month. However, instead
of resizing the clearing fund based on the average of the daily
calculations during the preceding calendar month, OCC intends to resize
the clearing fund using a new formula, which is the sum of: (i) An
amount equal to the peak five-day rolling average of clearing fund
draws observed over the preceding three calendar months using the daily
idiosyncratic default and minor systemic default scenario calculations
based on OCC's daily Monte Carlo simulations (``Base Amount''); and
(ii) a prudential margin of safety determined by OCC that is currently
set at $1.8 billion.\8\
---------------------------------------------------------------------------
\8\ According to OCC, it computes its exposure under the
idiosyncratic default scenario and minor systemic default scenario
on a daily basis. The greater of these two exposures will be that
day's peak exposure. To calculate the rolling five-day average, OCC
will compute the average of the peak exposure for each consecutive
five-day period observed over the prior three-month period. To
determine the Base Amount, OCC will use the largest five-day rolling
average observed over the past three-months.
---------------------------------------------------------------------------
OCC believes that the Monthly Clearing Fund Sizing Procedure
provides a sound and prudent approach to ensure that it maintains
adequate Financial Resources to protect against a default of a Clearing
Member or Clearing Member Group presenting the largest exposure to OCC.
By sizing the Base Amount of the clearing fund using the peak five-day
rolling average over the preceding three month look-back period, rather
than an average over the preceding month, OCC believes that the new
resizing formula should be more responsive to sudden increases in
exposure and less sensitive to short-run reductions in exposures that
could inappropriately reduce the overall size of the clearing fund. OCC
further asserts that the prudential margin of safety provides an
additional buffer to absorb potential future exposures not previously
observed during the look-back period. The Monthly Clearing Fund Sizing
Procedure will be supplemented by the Financial Resource Monitoring and
Call Procedure, which is described below, to provide further assurance
that the Financial Resources are adequate to protect against such risk
of loss.
b. Financial Resource Monitoring and Call Procedure
According to OCC, under the Financial Resource Monitoring and Call
Procedure, OCC will use the same daily idiosyncratic default
calculation that is currently used under the Monthly Clearing Fund
Sizing Procedure to monitor daily the adequacy of the Financial
Resources to withstand a default by the Clearing Member or Clearing
Member Group presenting the largest exposure under extreme but
plausible market conditions.\9\ If such a daily idiosyncratic default
calculation projected a draw on the clearing fund (``Projected Draw'')
that is at least 75% of the clearing fund maintained by OCC, OCC will
be required to issue an intra-day margin call pursuant to OCC Rule 609
against the Clearing Member or Clearing Member Group that caused such a
draw (``Margin Call Event'').\10\ The amount of the intra-day margin
call made pursuant to a Margin Call Event will be the difference
between the Projected Draw and the Base Amount of the clearing fund
(``Exceedance Above Base Amount'').
---------------------------------------------------------------------------
\9\ According to OCC, since the minor systemic default scenario
contemplates the simultaneous default of two Clearing Members and
OCC maintains Financial Resources sufficient to cover a default by a
Clearing Member or Clearing Member group presenting the greatest
exposure to OCC, OCC does not use the minor systemic default
scenario to determine the adequacy of the Financial Resources under
the Financial Resource Monitoring and Call Procedure.
\10\ OCC Rule 609 authorizes OCC to require the deposit of
additional margin in any account at any time during any business day
by any Clearing Member for, among other reasons, the protection of
OCC, other Clearing Members or the general public. Under OCC Rule
609, a Clearing Member must meet a required deposit of intra-day
margin in immediately available funds at a time prescribed by OCC or
within one hour of OCC's issuance of debit settlement instructions
against the bank account of the applicable Clearing Member.
---------------------------------------------------------------------------
In the case of a Clearing Member Group that causes the Exceedance
Above Base Amount, the Exceedance Above Base Amount will be pro-rated
among the individual Clearing Members that compose the Clearing Member
Group based on each individual Clearing Member's proportionate share of
the total risk for such Clearing Member Group as defined in OCC Rule
1001(b) (i.e., the margin requirement with respect to all accounts of
the Clearing Member Group exclusive of the net asset value of the
positions in such accounts aggregated across all such accounts). In the
case of an individual Clearing Member or a Clearing Member Group, the
intra-day margin call will be subject to a limitation under which it
cannot exceed the lower of: (a) $500 million; or (b) 100% of the net
capital of a Clearing Member (the ``500/100 Limitation'').\11\ This
limitation will apply in aggregate to all Margin Call Events within the
same monthly period. Therefore, if the same Clearing Member or Clearing
Member Group is subject to more than one Margin Call Event in the same
month, the total amount of funds
[[Page 29366]]
that are collected cannot exceed the 500/100 Limitation. The 500/100
Limitation will remain in place until OCC has collected all funds to
satisfy the next monthly clearing fund resizing.\12\
---------------------------------------------------------------------------
\11\ According to OCC, implementing the 500/100 Limitation on
the intra-day margin call avoids placing a ``liquidity squeeze'' on
the subject Clearing Member or Clearing Member Group based on
exposures presented by a hypothetical stress test, which otherwise
could cause a default on the intra-day margin call. OCC back-testing
results determined that intra-day margin calls resulting from a
Margin Call Event would have been made against Clearing Members or
Clearing Member Groups that are large, well-capitalized firms, with
more than sufficient resources to satisfy the call for additional
margin subject to the 500/100 Limitation.
\12\ The Risk Committee of the Board of Directors (``Risk
Committee'') will be notified, and can take action to address
potential Financial Resource deficiencies, in the event that a
Projected Draw resulted in a Margin Call Event and, as a result of
the 500/100 Limitation, the intra-day margin call is less than the
Exceedance Above Base Amount, but the Projected Draw is not large
enough to result in an increase in the clearing fund as discussed
below.
---------------------------------------------------------------------------
Additionally, OCC will rely on OCC Rule 608 to preclude the
withdrawal of such additional margin amount until all of the funds from
the next monthly clearing fund resizing have been collected. Based on
three years of back-testing data, OCC determined that a Margin Call
Event would have occurred in 10 of the months during this period.
During each of these 10 months, the maximum call amount would have been
equal to $500 million.\13\ After giving effect to the intra-day margin
calls (i.e., increasing the Financial Resources by $500 million), there
was only one Margin Call Event where there was still an observed stress
test exceedance of Financial Resources.
---------------------------------------------------------------------------
\13\ The back-testing analysis performed by OCC assumed that a
single Clearing Member caused the Exceedance Above Base Amount.
---------------------------------------------------------------------------
To address this one observed instance, the Financial Resource
Monitoring and Call Procedure will require OCC to increase the size of
the clearing fund, if a Projected Draw exceeds 90% of the clearing fund
(``Clearing Fund Intra-month Increase Event''), after applying any
funds then on deposit with OCC from the applicable Clearing Member or
Clearing Member Group pursuant to a Margin Call Event. The amount of
such increase (``Clearing Fund Increase'') will be the greater of: (a)
$1 billion; or (b) 125% of the difference between (i) the Projected
Draw, as reduced by the deposits resulting from the Margin Call Event,
and (ii) the clearing fund. Each Clearing Member's proportionate share
of the Clearing Fund Increase will equal its proportionate share of the
variable portion of the clearing fund for the month in question as
calculated pursuant to OCC Rule 1001(b).
According to OCC, it will notify the Risk Committee, Clearing
Members and appropriate regulatory authorities of the Clearing Fund
Increase on the business day that the Clearing Fund Intra-month
Increase Event occurs. OCC believes that this will ensure that OCC
management maintains authority to address any potential Financial
Resource deficiencies when compared to its Projected Draw estimates.
The Risk Committee will then determine whether the Clearing Fund
Increase is sufficient, and will retain authority under the Risk
Committee charter to increase the Clearing Fund Increase or the intra-
day margin call made pursuant to a Margin Call Event in its discretion.
Clearing Members will be required to meet the call for additional
clearing fund assets by 9:00 a.m. CT on the second business day
following the Clearing Fund Intra-Month Increase Event. OCC believes
that this collection process ensures that additional clearing fund
assets are promptly deposited by Clearing Members following notice of a
Clearing Fund Increase, while also providing Clearing Members with a
reasonable period of time to source such assets. According to OCC,
based on its back-testing results, after giving effect to the intra-day
margin call in response to a Margin Call Event plus the prudential
margin of safety, the Financial Resources would have been sufficient
upon implementing the one instance of a Clearing Fund Intra-month
Increase Event.
OCC believes the Financial Resource Monitoring and Call Procedure
strikes a prudent balance between mutualizing the burden of requiring
additional Financial Resources and requiring the Clearing Member or
Clearing Member Group causing the increased exposure to bear such
burden. In the event a Projected Draw exceeds 75% of the clearing fund,
the Clearing Member or Clearing Member Group that triggers the
exceedance will be assessed an intra-day margin call to address the
increase in exposure. However, where a Projected Draw exceeds 90% of
OCC's clearing fund, OCC determined that it should mutualize the burden
of the additional Financial Resources at this threshold through a
Clearing Fund Increase. OCC believes that this balance will provide OCC
with sufficient Financial Resources without increasing the likelihood
that its procedures, based solely on stress testing results, will cause
a liquidity strain that could result in the default of a Clearing
Member or Clearing Member Group.
II. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \14\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that the proposed rule change is consistent with the requirements
of the Act and the rules and regulations thereunder applicable to such
organization.
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------
The Commission finds that the proposed rule change is consistent
with Section 17A(b)(3)(F) of the Act, which requires the rules of a
registered clearing agency be designed to, among other things, assure
the safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible, to
remove impediments to and perfect the mechanism of a national system
for the prompt and accurate clearance and settlement of securities
transactions, and, in general, to protect investors and the public
interest.\15\ By establishing procedures that govern the monthly
resizing of the clearing fund and the addition of Financial Resources,
as proposed in OCC's rule change, OCC should be in a better position to
ensure that it maintains sufficient financial resources to withstand a
default of the Clearing Member or Clearing Member Group to which it has
the largest exposure, thereby reducing the likelihood that a default
would create losses that disrupt OCC's operations and adversely affect
the clearing agency's non-defaulting participants. In so doing, the
rule change, as approved, should enhance OCC's ability to assure the
safeguarding of securities and funds which are in its custody or
control or for which it is responsible, to remove impediments to and
perfect the mechanism of a national system for the prompt and accurate
clearance and settlement of securities transactions, and, in general,
to protect investors and the public interest.
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The Commission finds that the proposed rule change is consistent
with Rule 17Ad-22(b)(3), promulgated under the Act,\16\ which requires,
among other things, registered clearing agencies that perform 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. By using a peak five-day rolling
average and extending the look-back period from one to three calendar
months, the Monthly Clearing Fund Sizing Procedure should be more
responsive than OCC's existing clearing fund resizing formula to sudden
increases in exposure and less sensitive to short-run reductions in
exposure that could inappropriately reduce the overall size of the
clearing
[[Page 29367]]
fund. Furthermore, the prudential margin of safety, which is currently
$1.8 billion, will provide an additional buffer to absorb potential
future exposures that may not be observed during the look-back period.
In addition, the Financial Resource Monitoring and Call Procedure will
establish a process by which OCC will be able to respond to increases
in exposure on an intra-month basis. As a result, the Monthly Clearing
Fund Sizing Procedure and Financial Resource Monitoring and Call
Procedure should ensure that OCC is capable of obtaining sufficient
financial resources in a timely manner to withstand a default of the
Clearing Member or Clearing Member Group presenting it the largest
exposure.
---------------------------------------------------------------------------
\16\ 17 CFR 240.17Ad-22(b)(3).
---------------------------------------------------------------------------
III. Conclusion
On the basis of the foregoing, the Commission finds that the rule
change is consistent with the requirements of the Act and in particular
with the requirements of Section 17A of the Act \17\ and the rules and
regulations thereunder.
---------------------------------------------------------------------------
\17\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\18\ that the proposed rule change (SR-OCC-2015-009) be, and it
hereby is, approved as of the date of this order or the date of an
order by the Commission authorizing OCC to implement OCC's advance
notice proposal that is consistent with this proposed rule change (SR-
OCC-2014-811), whichever is later.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
Robert W. Errett,
Deputy Secretary.
---------------------------------------------------------------------------
\19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
[FR Doc. 2015-12294 Filed 5-20-15; 8:45 am]
BILLING CODE 8011-01-P
