Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection to Advance Notice Filing to Better Manage Risks Concentration and Other Risks Associated With Accepting Deposits of Common Stocks for Margin Purposes, 66018-66022 [2014-26344]

Download as PDF 66018 Federal Register / Vol. 79, No. 215 / Thursday, November 6, 2014 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES 6(b)(5) 15 requirements that the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. Additionally, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 16 requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. In particular, the Exchange believes that the automated handling of market orders to sell in no-bid series if the Exchange best offer is $0.50 or less assists with the maintenance of fair and orderly markets and protects investors and the public interest because it provides for automated handling of these orders, ultimately resulting in more efficient executions of these orders. The Exchange believes that the $0.50 threshold also protects investors and assists with the maintenance of fair and orderly markets by preventing executions of market orders to sell in no-bid series with higher offers at potentially extreme prices in series that are not truly no-bid. The Exchange believes this threshold appropriately reflects the interests of investors, as options in no-bid series with offers higher than $0.50 are less likely to be worthless, and manual handling of these orders will lead to better executions for investors than would occur through automatic handling. The Exchange also believes that the $0.50 threshold promotes fair and orderly markets because market orders to sell in no-bid series with offers of $0.50 or less are likely to be individuals seeking to close out a worthless position for which automatic handling is appropriate. B. Self-Regulatory Organization’s Statement on Burden on Competition CBOE 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. More specifically, the Exchange does not believe that the proposed rule changes will impose any burden on intramarket competition because it will be applicable to all TPHs trading on the 15 15 U.S.C. 78f(b)(5). C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange neither solicited nor received comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change does not: (i) significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act 17 and Rule 19b–4(f)(6) 18 thereunder. 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. If the Commission takes such action, the Commission will institute proceedings to determine whether the proposed rule change should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the 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– CBOE–2014–067 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange 17 15 16 Id. VerDate Sep<11>2014 Exchange trading floor. In addition, the Exchange does not believe the proposed changes will impose any intermarket burden because the Exchange will operate in a similar manner only with a more applicable no-bid series threshold. 18 17 19:46 Nov 05, 2014 Jkt 235001 PO 00000 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). Frm 00097 Fmt 4703 Sfmt 4703 Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–CBOE–2014–067. 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 (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 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 the Exchange. 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–CBOE– 2014–067 and should be submitted on or before November 28, 2014. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.19 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–26346 Filed 11–5–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–73482; File No. SR–OCC– 2014–803] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection to Advance Notice Filing to Better Manage Risks Concentration and Other Risks Associated With Accepting Deposits of Common Stocks for Margin Purposes October 31, 2014. On July 16, 2014, the Options Clearing Corporation (‘‘OCC’’) filed with 19 17 E:\FR\FM\06NON1.SGM CFR 200.30–3(a)(12). 06NON1 Federal Register / Vol. 79, No. 215 / Thursday, November 6, 2014 / Notices the Securities and Exchange Commission (‘‘Commission’’) advance notice SR–OCC–2014–803 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) under the Securities Exchange Act of 1934 (‘‘Act’’).2 The advance notice was published for comment in the Federal Register on August 15, 2014.3 On September 8, 2014, pursuant to Section 806(e)(1)(D) of the Payment, Clearing and Settlement Supervision Act, the Commission required OCC to provide additional information concerning this advance notice.4 The Commission did not receive any comments on the advance notice publication. This publication serves as a notice of no objection to the changes proposed in the advance notice. I. Description of the Advance Notice mstockstill on DSK4VPTVN1PROD with NOTICES According to OCC, the purpose of this change is to permit OCC to better manage concentration risk and wrongway risk associated with accepting deposits of common stock for margin purposes. In order to manage such risks, OCC is adding an Interpretation and Policy to Rule 604, which specifies the forms of margin assets accepted by OCC, that will provide OCC with discretion with respect to giving value to assets deposited by a single clearing member to satisfy its margin requirement(s). In addition, OCC is making clarifying amendments to an existing Interpretation and Policy under Rule 604 that gives OCC discretion to not 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, http:// www.treasury.gov/initiatives/fsoc/Documents/ 2012%20Annual%20Report.pdf. Therefore, OCC is required to comply with the Payment, Clearing and Settlement Supervision Act and file advance notices with the Commission. See 12 U.S.C. 5465(e). 2 17 CFR 240.19b–4(n)(1). 3 Securities Exchange Act Release No. 72803 (August 11, 2014), 79 FR 48285 (August 15, 2014) (SR–OCC–2014–803). OCC also filed the proposal contained in this advance notice as a proposed rule change under Section 19(b)(1) of the Act and Rule 19b–4 thereunder, which was published for comment in the Federal Register on August 5, 2014. 15 U.S.C. 78s(b)(1); 17 CFR 240.19b–4. See Securities Exchange Act Release No. 72717 (July 30, 2014), 79 FR 45523 (August 5, 2014) (SR–OCC– 2014–14). The Commission did not receive any comments on the proposed rule change. 4 12 U.S.C. 5465(e)(1)(D). The Commission received a response with further information for consideration of the advance notice on September 19, 2014, at which time a 60 day review period began pursuant to Sections 806(e)(1)(E) and (G) of the Payment, Clearing and Settlement Supervision Act. See 12 U.S.C. 5465(e)(1)(E) and 12 U.S.C. 5465(e)(1)(G). VerDate Sep<11>2014 19:46 Nov 05, 2014 Jkt 235001 give value to a particular type of margin collateral across all clearing members. a. Background OCC Rule 604 lists the types of assets that clearing members may deposit with OCC to satisfy their margin requirement(s) as well as sets forth eligibility criteria for such assets. According to OCC, common stocks, including Exchange Traded Funds (‘‘ETFs’’) and Exchange Traded Notes (‘‘ETNs’’), are the most common form of margin assets deposited by clearing members and currently comprise 68% of the $60.6 billion in clearing member margin deposits held by OCC (not including deposits in lieu of margin). According to OCC, since 2009, OCC has used its System for Theoretical Analysis and Numerical Simulations (‘‘STANS’’), which is OCC’s daily automated Monte Carlo simulation-based margining methodology, to value common stocks deposited by clearing members as margin.5 The value given to margin deposits depends on factors that include the price volatility and the price correlation relationship of common stock collateral to the balance of the cleared portfolio. The approach used by STANS incentivizes clearing members who chose to meet their margin obligations with deposits of common stocks to choose common stocks that hedge their related open positions. According to OCC, notwithstanding the value STANS gives to deposits of common stocks, certain factors warrant OCC adjusting the value STANS gives to all clearing member margin deposits of a particular type of margin collateral. Such factors are set forth in Rule 604, Interpretation and Policy .14, and include the number of outstanding shares, number of outstanding shareholders and overall trading volume. OCC is proposing to add a new Interpretation and Policy to Rule 604 (the ‘‘Interpretation’’) so that OCC has discretion to not give margin credit to a particular clearing member when such clearing member deposits a concentrated amount of any common stock and when a common stock, deposited as margin, presents ‘‘wrongway risk’’ to OCC. In addition, the Interpretation will provide OCC discretion to grant margin credit to a clearing member when it deposits shares of common stock that serve as a hedge to the clearing member’s related open positions and would otherwise be not be given margin credit.6 5 See Securities Exchange Act Release No. 58158 (July 15, 2008), 73 FR 42646 (July 22, 2008) (SR– OCC–2007–20). 6 According to OCC, consistent with the language contained in existing Interpretation & Policy .14, PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 66019 b. Concentrated Deposits of Common Stock OCC has determined that in the event it is necessary to liquidate a clearing member’s positions (including the clearing member’s margin collateral), OCC may be exposed to risk arising from a large quantity of a particular common stock deposited as margin by a clearing member. Specifically, depending on the relationship between the average daily trading volume of a particular security and the number of outstanding shares of such security deposited by a clearing member as margin, it is possible that the listed equities markets may not be able to quickly absorb all of the common stock OCC seeks to sell, or OCC may not be able to auction such securities, without an appreciable negative price impact. This occurrence, referred to by OCC as ‘‘concentration risk,’’ is greatest when the number of shares being sold is large and the average daily trading volume is low. OCC’s existing authority to not give value to otherwise eligible forms of margin only provides OCC with the discretion to not give value across all clearing member deposits of a particular common stock. However, concentration risk may be a clearing member and account-specific risk. In order to mitigate the concentration risk of a single clearing member, OCC plans to implement automated processes to monitor the composition of a clearing member’s margin deposits. Such processes will identify concentration risk at both an account level and across all accounts of a clearing member. OCC is adding the Interpretation so that OCC has discretion to limit the margin credit granted to an individual clearing member that maintains a concentrated margin deposit of otherwise eligible common stock. According to OCC, for reasons stated above, OCC considers a common stock’s average daily trading volume and the number of shares a clearing member deposited as margin to be the two most significant factors when making a the Interpretation provides OCC with discretion in determining the amount of margin credit given to deposits of common stock by an individual clearing member as such determination would be based on positions held and common stock deposits made by such clearing member on a given business day. However, as discussed in the following two sections, OCC states that it also has developed certain automated processes as well as additional internal policies that describe how OCC presently intends to exercise such discretion. According to OCC, these additional internal policies are included in OCC’s collateral risk management policy, which will not be implemented until approval of this rule change with changes thereto being subject to additional rule filings. E:\FR\FM\06NON1.SGM 06NON1 66020 Federal Register / Vol. 79, No. 215 / Thursday, November 6, 2014 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES decision to limit margin credit due to concentration risk. Accordingly, OCC will not give margin credit to clearing member margin deposits of a particular common stock in respect of a particular account when the deposited amount of such common stock is in excess of two times the average daily trade volume of such common stock over the most recent three month period. OCC’s systems will continually assess the composition of clearing member margin deposits for each account maintained by the clearing member, including intraday collateral substitutions in such accounts, to determine if a clearing member has a margin deposit with a concentrated amount of common stock. With respect to a given account, OCC’s systems will automatically set appropriate limits on the amount of a particular common stock for which a clearing member may be given margin credit for any one of a its tier accounts. In addition, and with respect to all of a clearing member’s accounts, OCC will impose an add-on margin charge if, in aggregate, a clearing member deposits a concentrated amount of a particular common stock as margin across all of its accounts. The add-on margin charge will operate to negate the margin credit given to the concentrated margin deposit, and will be collected, when applicable, as part of OCC’s standard morning margin process. OCC will assess the add-on margin charge across all of a clearing member’s accounts on a pro-rata basis (based on the amount of the particular common stock in each of a clearing member’s accounts).7 According to OCC, OCC staff has been monitoring concentrated common stock positions, assessing the impact of the proposed change described in this filing and contacting clearing members affected by the proposed change. OCC believes that clearing members will be able to comply with the proposed change without making significant changes to their day-to-day business operations. In December 2013, an information memo was posted to inform all members of the upcoming change. According to OCC, since January 2014, 7 According to OCC, since a 2-day limit is first checked at each account, it is possible that a clearing member with multiple accounts may have more than 2-days of a given common stock on deposit in aggregate. To control this condition, a final check is done on the aggregate amount of shares held by a clearing member across all of its accounts. For example, if a particular clearing member has three accounts each holding 2-days volume of a specific common stock, the clearing member check would identify that the member was holding six days of volume in aggregate. To mitigate this risk, an add-on charge equal to the market value of four days of volume would be applied to all accounts holding that security on a pro-rata basis. VerDate Sep<11>2014 19:46 Nov 05, 2014 Jkt 235001 OCC staff has been in contact with any clearing member that would be affected by the proposed change. On a weekly basis, any clearing member that would see a reduction of 10% or more of its collateral value is contacted and provided an explanation of the policy and a list of concentrated positions observed in this analysis. On a monthly basis, all clearing members exhibiting any concentration risk are contacted to provide an explanation of the proposed policy and a list of concentrated positions. In both cases, clearing members are encouraged to proactively reduce concentrated positions to conform to the proposed policy. As of June 2014, twenty-five members would be affected. Implementation of the Interpretation would result in disallowing $1.2 billion in collateral value and result in margin calls for six members totaling $710 million. Moreover, in July 2014, OCC made an automated report concerning concentrated margin deposits of common stock available to all clearing members. c. Wrong-Way Risk OCC also will use the Interpretation to address the risk that the common stock a clearing member has deposited as margin and which is issued by the clearing member itself or an affiliate of the clearing member will lose value in the event the clearing member providing such margin defaults, which is known as ‘‘wrong-way risk.’’ According to OCC, wrong-way risk occurs when a clearing member makes a deposit of common stock issued by it or an affiliate and, in the event the clearing member defaults, the clearing member’s common stock margin deposit will also be losing value at the same time because there is likely to be a strong correlation between the clearing member’s creditworthiness and the value of such common stock. In order to address wrong-way risk, the Interpretation will implement automated systems that will not give margin credit to a clearing member that deposits common stock issued by such clearing member or an affiliate as margin collateral. OCC will define ‘‘affiliate’’ broadly in the Interpretation to include any entity with direct or indirect equity ownership of 10% of the clearing member, or any entity for which the clearing member holds 10% of the direct or indirect equity ownership.8 OCC has addressed the impact of the change designed to address wrong-way risk. As of June 2014, there were 73 8 This standard is based on the provisions of OCC Rule 215(a)(5). PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 clearing members whose parent or an affiliate has issued securities trading on U.S. exchanges. As of June 2014, there are six clearing members that would be affected by virtue of having made margin deposits of their own or an affiliate’s common stock. In total, these shares equaled $132 million and accounted for less than one half of one percent of the total market value of valued securities pledged as margin at OCC. In July 2014, OCC made information available to each clearing member that indicates which of its deposits of common stock would not receive margin credit under the proposed change due to wrong-way risk considerations, as described above.9 d. Deposits That Hedge Open Positions In addition to the above, OCC also will include language in the Interpretation so that it has discretion to give margin credit to common stock deposited as margin that would otherwise not be given margin credit in circumstances when such common stock acts as a hedge (i.e., the member holds an equivalent short position in cleared contracts on the same underlying security). This condition will be checked in both the account and clearing member level. For example, if a clearing member deposits the common stock of an affiliate as margin collateral, which, pursuant to the above, would ordinarily not be given value for the purposes of granting margin credit, OCC may nevertheless give value to such common stock for the purposes of granting margin credit to the extent such common stock acts as a hedge against open positions of the clearing member. In this case, a decline in the value of the margin deposit would be wholly or partially offset by an increase in the value in the open position. Moreover, in such a situation, OCC will systematically limit the margin credit granted to the lesser of a multiple of the daily trading volume or the ‘‘delta equivalent position’’ 10 for the particular 9 OCC believes that by providing such information clearing members will be better able to adjust their margin deposits at OCC to conform to the proposed change if it is approved. 10 According to OCC, the ‘‘delta equivalent position’’ is the equivalent number of underlying shares represented by the aggregation of cleared products on that same underlying instrument. This value is calculated using the ‘‘delta’’ of the option or futures contract, which is the ratio between the theoretical change in the price of the options or futures contract to the corresponding change in the price of an underlying asset. Thus, delta measures the sensitivity of an options or futures contract price to changes in the price of the underlying asset. For example, a delta of +0.7 means that for every $1 increase in the price of the underlying stock, the price of a call option will increase by $0.70. Delta for an option or future can be expressed in shares E:\FR\FM\06NON1.SGM 06NON1 Federal Register / Vol. 79, No. 215 / Thursday, November 6, 2014 / Notices common stock, taking into account the hedging position.11 OCC believes that this policy will further encourage clearing members to deposit margin collateral that hedges their related open positions and is in line with the valuation methods within STANS. This policy will also facilitate OCC’s management of its and its participants’ credit exposure as well as the liquidation of a clearing member’s portfolio should the need arise. e. Other Proposed Changes OCC also will make certain clarifying changes in order to accommodate the adoption of the Interpretation into its Rules. Primarily, OCC is adding language to OCC Rule 604, Interpretation and Policy .14, to clarify that such Interpretation and Policy concerns OCC’s authority to not give value to certain margin deposits for all clearing members (whereas the Interpretation applies to particular clearing member(s)). In addition, OCC is removing language from OCC Rule 604, Interpretation and Policy .14, to improve readability as well as to remove ‘‘factors’’ concerning number of shares and affiliates since OCC’s authority with respect to such factors will be more clearly described in the Interpretation. Finally, OCC is renumbering the Interpretations and Policies of Rule 604 in order to accommodate the adoption of the Interpretation. mstockstill on DSK4VPTVN1PROD with NOTICES II. Discussion and Commission Findings Although the Payment, Clearing and Settlement Supervision Act does not specify a standard of review for an advance notice, the Commission believes its stated purpose is instructive.12 The stated purpose is to mitigate systemic risk in the financial system and promote financial stability by, among other things, promoting uniform risk management standards for of the underlying asset. For example, a standard put option with a delta of ¥.45 would have a delta of ¥45 shares, because the unit of trading is 100 shares. 11 Assume, for example, an average daily trade volume of 250 shares, a threshold of 2 times the average daily trade volume, and a delta of ¥300 shares for the options on a particular security in a particular account. A position of 700 shares that did not hedge any short options or futures would receive credit for only 500 shares (i.e., 2 times the average daily trade volume). If the net long position in the account, when combined with the delta of short option and futures position, were only 400, credit would be given for the entire 700 shares since the delta equivalent position is below the 500 share threshold. However, if the option delta were +300, the net long position would be 1000, and credit would only be given for 500 shares because the delta equivalent position would exceed the 500 share threshold. 12 See 12 U.S.C. 5461(b). VerDate Sep<11>2014 19:46 Nov 05, 2014 Jkt 235001 systemically-important financial market utilities (‘‘FMU’’) and strengthening the liquidity of systemically important FMUs.13 Section 805(a)(2) of the Payment, Clearing and Settlement Supervision Act 14 authorizes the Commission to prescribe risk management standards for the payment, clearing, and settlement activities of designated clearing entities and financial institutions engaged in designated activities for which it is the supervisory agency or the appropriate financial regulator. Section 805(b) of the Payment, Clearing and Settlement Supervision Act 15 states that the objectives and principles for the risk management standards prescribed under Section 805(a) shall be to: • Promote robust risk management; • promote safety and soundness; • reduce systemic risks; and • support the stability of the broader financial system. The Commission has adopted risk management standards under Section 805(a)(2) of the Payment, Clearing and Settlement Supervision Act 16 and the Act (‘‘Clearing Agency Standards’’).17 The Clearing Agency Standards became effective on January 2, 2013 and establish, among other things, minimum requirements regarding how registered clearing agencies must maintain effective risk management procedures and controls.18 Therefore, it is appropriate for the Commission to review advance notices against these Clearing Agency Standards and the objectives and principles of these risk management standards as described in Section 805(b) of the Payment, Clearing and Settlement Supervision Act.19 The proposal in this advance notice is consistent with Clearing Agency Standards, Rule17Ad–22(b)(2) of the Act.20 Rule 17Ad–22(b)(2) of the Act 21 requires a registered clearing agency that performs central counterparty services to, among other things, establish, implement, maintain and enforce written policies and procedures reasonably designed to use margin requirements to limit its credit exposures to participants under normal market conditions. This proposal is 13 Id. 14 12 U.S.C. 5464(a)(2). U.S.C. 5464(b). 16 12 U.S.C. 5464(a)(2). 17 See Rule 17Ad–22 of the Act. 17 CFR 240.17Ad–22. Securities Exchange Act Release No. 68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7–08–11). 18 See Securities Exchange Act Release No. 68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7–08–11). 19 12 U.S.C. 5464(b). 20 17 CFR 240.17Ad–22(b)(2). 21 Id. 15 12 PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 66021 consistent with this rule because it is reasonably designed to permit OCC to use margin requirements to limit its credit exposures to clearing members under normal market conditions in two ways. First, it is reasonably designed to limit OCC’s credit exposures to clearing members whose collateral portfolios could present concentration risk. Specifically, it addresses concentration risk by particular clearing member and by particular account by giving OCC discretion to disapprove as margin collateral certain securities, based on the number of shares deposited, by particular clearing member and by particular account, while also considering deposits that hedge open positions. It also clarifies that OCC’s existing authority to not give value to certain margin deposits applies to all clearing members, as opposed to particular clearing members.22 Second, it is reasonably designed to limit OCC’s credit exposures to clearing members whose collateral portfolios could present wrong-way risk. Specifically, it addresses wrong-way risk presented by clearing members who deposit as margin securities that are issued by the clearing member itself or by an affiliate of the clearing member. It addresses this type of wrong-way risk by giving OCC discretion to disapprove as margin collateral, with respect to a particular clearing member, any security issued by such clearing member or by an affiliate of such clearing member, while also considering deposits that hedge open positions. Rule 17Ad–22(b)(2) of the Act 23 also requires a registered clearing agency that performs central counterparty services to, among other things, establish, implement, maintain and enforce written policies and procedures reasonably designed to use risk-based models and parameters to set margin requirements. This proposal is consistent with this rule because it permits OCC to use risk-based models and parameters to set margin requirements in a way that takes into account concentration risk and wrongway risk, as described above. The proposal in this advance notice meets the objectives and principles described in Section 805(b) of the Payment, Clearing and Settlement Supervision Act.24 The changes to 22 See Rule 604, Interpretation and Policy .15 (providing OCC discretion to disapprove as margin collateral securities that meet certain factors, including trading volume, number of outstanding shareholder, number of outstanding shares, volatility and liquidity). 23 17 CFR 240.17Ad–22(b)(2). 24 12 U.S.C 5464(b); See also 12 U.S.C. 5464(a). E:\FR\FM\06NON1.SGM 06NON1 66022 Federal Register / Vol. 79, No. 215 / Thursday, November 6, 2014 / Notices OCC’s margin policy, as described above, are designed to reduce the risk that clearing member margin assets would be insufficient should OCC need to use such assets to close-out positions of a defaulted clearing member. The changes are also designed to facilitate OCC to timely meet its settlement obligations because the change will diminish the likelihood that a large percentage of the value of a defaulting clearing member’s margin assets would not be available to OCC to cover losses in the event of a clearing member default. Therefore, the proposal (i) promotes robust risk management (including risk management of concentration risk and wrong-way risk), (ii) promotes safety and soundness, (iii) reduces systemic risks (including those caused by concentration risk and wrongway risk), and (iv) supports the stability of the broader financial system. III. Conclusion It is therefore noticed, pursuant to Section 806(e)(1)(I) of the Payment, Clearing and Settlement Supervision Act,25 that the Commission DOES NOT OBJECT to the proposal in OCC’s advance notice (SR–OCC–2014–803) and OCC is AUTHORIZED to implement the proposal as of the date of this notice or the date of an order by the Commission approving a proposed rule change that reflects rule changes that are consistent with the proposal in this advance notice (SR–OCC–2014–14), whichever is later. By the Commission. Kevin O’Neill, Deputy Secretary. [FR Doc. 2014–26344 Filed 11–5–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–73480; File No. SR– NASDAQ–2014–090] mstockstill on DSK4VPTVN1PROD with NOTICES Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Granting Approval of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Relating to the Listing and Trading of Shares of the Validea Market Legends ETF of the ETF Series Solutions ETF Trust October 31, 2014. I. Introduction On September 11, 2014, The NASDAQ Stock Market LLC (‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission 25 12 U.S.C. 5465(e)(1)(I). VerDate Sep<11>2014 19:46 Nov 05, 2014 Jkt 235001 (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to list and trade the shares (‘‘Shares’’) of the Validea Market Legends ETF (‘‘Fund’’) under Nasdaq Rule 5735. The proposed rule change was published for comment in the Federal Register on September 26, 2014.3 The Commission received no comments on the proposed rule change. On October 28, 2014, the Exchange filed Amendment No. 1 to the proposed rule change.4 The Commission is approving the proposed rule change, as modified by Amendment No. l thereto. II. Description of Proposed Rule Change The Exchange proposes to list and trade the Shares pursuant to Nasdaq Rule 5735, which governs the listing and trading of Managed Fund Shares on the Exchange. The Shares will be offered by the ETF Series Solutions Trust (‘‘Trust’’), which was established as a Delaware business trust on February 9, 2012.5 The Fund is a series of the Trust. Validea Capital Management, LLC will be the investment adviser (‘‘Adviser’’) to the Fund.6 Quasar Distributors, LLC will be 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 73178 (Sep. 22, 2014), 79 FR 58012 (‘‘Notice’’). 4 In Amendment No. 1, Nasdaq corrected a typographical error, deleting the second use of the word ‘‘not’’ in the following statement throughout the filing: ‘‘ADRs not listed on an exchange that is not a member of ISG or a party to a comprehensive surveillance sharing agreement with the Exchange.’’ See infra note 10 (setting forth the full representation, as amended). Because Amendment No. 1 is a technical amendment that does not raise unique or novel regulatory issues, Amendment No. 1 is not subject to notice and comment. 5 According to the Exchange, the Trust is registered with the Commission as an investment company under the Investment Company Act of 1940 (‘‘1940 Act’’) and has filed a registration statement on Form N–1A (‘‘Registration Statement’’) with the Commission. The Exchange states that the Trust has obtained, or will obtain prior to listing Shares of the Fund on the Exchange, an order from the Commission granting certain exemptive relief to the Trust under the 1940 Act. See Post-Effective Amendment No. 14 to the Registration Statement on Form N–1A for the Trust, dated July 16, 2014 (File Nos. 333–179562 and 811–22668). See Application for an Order (Jun. 16, 2014) (File No. 812–14322). 6 The Exchange states that the Adviser is not a broker-dealer and is not affiliated with the any broker-dealer. The Exchange represents that in the event (a) the Adviser becomes newly affiliated with a broker-dealer or registers as a broker-dealer, or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated with a brokerdealer, the Adviser, new adviser, or new subadviser, as the case may be, will implement a fire wall with respect to its relevant personnel and/or such broker-dealer affiliate, as applicable, regarding access to information concerning the composition or changes to the portfolio, and the Adviser, new adviser, or new sub-adviser, as the case may be, will be subject to procedures designed to prevent the use 2 17 PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 the principal underwriter and distributor of the Fund’s Shares. U.S. Bancorp Fund Services, LLC (‘‘USBFS’’) will act as the administrator, accounting agent, and transfer agent to the Fund. U.S. Bank National Association will act as the custodian to the Fund. The Exchange has made the following representations and statements in describing the Fund and its principal investments, other investments, and investment restrictions.7 Principal Investments of the Fund According to the Exchange, the Fund’s primary investment objective is to achieve capital appreciation, with a secondary focus on income. The Fund is a non-diversified, actively-managed exchange-traded fund (‘‘ETF’’) that will pursue its objectives by investing primarily at least 80% of its assets under normal market conditions,8 in U.S. exchange-listed equity securities of U.S. companies and foreign equity securities traded on a U.S. exchange as American Depositary Receipts (‘‘ADRs’’).9 The Fund’s investment in ADRs may include ADRs representing companies in emerging markets. With respect to its investments in exchangelisted common stocks and ADRs, the Fund will invest in such securities that trade in markets that are members of the Intermarket Surveillance Group (‘‘ISG’’). and dissemination of material, non-public information regarding the portfolio. The Exchange also states that the Adviser does not currently intend to become newly affiliated with any brokerdealer, and the Fund does not currently intend to use a sub-adviser. 7 The Commission notes that additional information regarding the Trust, the Fund, and the Shares, including investment strategies, risks, creation and redemption procedures, calculation of net asset value (‘‘NAV’’), fees, portfolio holdings disclosure policies, distributions, and taxes, among other things, can be found in the Notice and Registration Statement, as applicable. See supra notes 3 and 5, respectively. 8 The term ‘‘under normal market conditions’’ as used herein includes, but is not limited to, the absence of adverse market, economic, political or other conditions, including extreme volatility or trading halts in the securities markets or the financial markets generally; operational issues causing dissemination of inaccurate market information; or force majeure type events such as systems failure, natural or man-made disaster, act of God, armed conflict, act of terrorism, riot or labor disruption, or any similar intervening circumstance. In periods of extreme market disturbance, the Fund may take temporary defensive positions by overweighting its portfolio in cash/cash-like instruments; however, to the extent possible, the Adviser would continue to seek to achieve the Fund’s investment objectives. 9 ADRs are receipts, typically issued by a bank or trust issuer, which evidence ownership of underlying securities issued by a non-U.S. issuer. For ADRs, the depository is typically a U.S. financial institution and the underlying securities are issued by a non-U.S. issuer. ADRs are not necessarily denominated in the same currency as their underlying securities. E:\FR\FM\06NON1.SGM 06NON1

Agencies

[Federal Register Volume 79, Number 215 (Thursday, November 6, 2014)]
[Notices]
[Pages 66018-66022]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-26344]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73482; File No. SR-OCC-2014-803]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of No Objection to Advance Notice Filing to Better Manage Risks 
Concentration and Other Risks Associated With Accepting Deposits of 
Common Stocks for Margin Purposes

October 31, 2014.
    On July 16, 2014, the Options Clearing Corporation (``OCC'') filed 
with

[[Page 66019]]

the Securities and Exchange Commission (``Commission'') advance notice 
SR-OCC-2014-803 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) under the 
Securities Exchange Act of 1934 (``Act'').\2\ The advance notice was 
published for comment in the Federal Register on August 15, 2014.\3\ On 
September 8, 2014, pursuant to Section 806(e)(1)(D) of the Payment, 
Clearing and Settlement Supervision Act, the Commission required OCC to 
provide additional information concerning this advance notice.\4\ The 
Commission did not receive any comments on the advance notice 
publication. This publication serves as a notice of no objection to the 
changes proposed in the advance notice.
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    \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, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, OCC is 
required to comply with the Payment, Clearing and Settlement 
Supervision Act and file advance notices with the Commission. See 12 
U.S.C. 5465(e).
    \2\ 17 CFR 240.19b-4(n)(1).
    \3\ Securities Exchange Act Release No. 72803 (August 11, 2014), 
79 FR 48285 (August 15, 2014) (SR-OCC-2014-803). OCC also filed the 
proposal contained in this advance notice as a proposed rule change 
under Section 19(b)(1) of the Act and Rule 19b-4 thereunder, which 
was published for comment in the Federal Register on August 5, 2014. 
15 U.S.C. 78s(b)(1); 17 CFR 240.19b-4. See Securities Exchange Act 
Release No. 72717 (July 30, 2014), 79 FR 45523 (August 5, 2014) (SR-
OCC-2014-14). The Commission did not receive any comments on the 
proposed rule change.
    \4\ 12 U.S.C. 5465(e)(1)(D). The Commission received a response 
with further information for consideration of the advance notice on 
September 19, 2014, at which time a 60 day review period began 
pursuant to Sections 806(e)(1)(E) and (G) of the Payment, Clearing 
and Settlement Supervision Act. See 12 U.S.C. 5465(e)(1)(E) and 12 
U.S.C. 5465(e)(1)(G).
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I. Description of the Advance Notice

    According to OCC, the purpose of this change is to permit OCC to 
better manage concentration risk and wrong-way risk associated with 
accepting deposits of common stock for margin purposes. In order to 
manage such risks, OCC is adding an Interpretation and Policy to Rule 
604, which specifies the forms of margin assets accepted by OCC, that 
will provide OCC with discretion with respect to giving value to assets 
deposited by a single clearing member to satisfy its margin 
requirement(s). In addition, OCC is making clarifying amendments to an 
existing Interpretation and Policy under Rule 604 that gives OCC 
discretion to not give value to a particular type of margin collateral 
across all clearing members.

a. Background

    OCC Rule 604 lists the types of assets that clearing members may 
deposit with OCC to satisfy their margin requirement(s) as well as sets 
forth eligibility criteria for such assets. According to OCC, common 
stocks, including Exchange Traded Funds (``ETFs'') and Exchange Traded 
Notes (``ETNs''), are the most common form of margin assets deposited 
by clearing members and currently comprise 68% of the $60.6 billion in 
clearing member margin deposits held by OCC (not including deposits in 
lieu of margin). According to OCC, since 2009, OCC has used its System 
for Theoretical Analysis and Numerical Simulations (``STANS''), which 
is OCC's daily automated Monte Carlo simulation-based margining 
methodology, to value common stocks deposited by clearing members as 
margin.\5\ The value given to margin deposits depends on factors that 
include the price volatility and the price correlation relationship of 
common stock collateral to the balance of the cleared portfolio. The 
approach used by STANS incentivizes clearing members who chose to meet 
their margin obligations with deposits of common stocks to choose 
common stocks that hedge their related open positions.
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    \5\ See Securities Exchange Act Release No. 58158 (July 15, 
2008), 73 FR 42646 (July 22, 2008) (SR-OCC-2007-20).
---------------------------------------------------------------------------

    According to OCC, notwithstanding the value STANS gives to deposits 
of common stocks, certain factors warrant OCC adjusting the value STANS 
gives to all clearing member margin deposits of a particular type of 
margin collateral. Such factors are set forth in Rule 604, 
Interpretation and Policy .14, and include the number of outstanding 
shares, number of outstanding shareholders and overall trading volume. 
OCC is proposing to add a new Interpretation and Policy to Rule 604 
(the ``Interpretation'') so that OCC has discretion to not give margin 
credit to a particular clearing member when such clearing member 
deposits a concentrated amount of any common stock and when a common 
stock, deposited as margin, presents ``wrong-way risk'' to OCC. In 
addition, the Interpretation will provide OCC discretion to grant 
margin credit to a clearing member when it deposits shares of common 
stock that serve as a hedge to the clearing member's related open 
positions and would otherwise be not be given margin credit.\6\
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    \6\ According to OCC, consistent with the language contained in 
existing Interpretation & Policy .14, the Interpretation provides 
OCC with discretion in determining the amount of margin credit given 
to deposits of common stock by an individual clearing member as such 
determination would be based on positions held and common stock 
deposits made by such clearing member on a given business day. 
However, as discussed in the following two sections, OCC states that 
it also has developed certain automated processes as well as 
additional internal policies that describe how OCC presently intends 
to exercise such discretion. According to OCC, these additional 
internal policies are included in OCC's collateral risk management 
policy, which will not be implemented until approval of this rule 
change with changes thereto being subject to additional rule 
filings.
---------------------------------------------------------------------------

b. Concentrated Deposits of Common Stock

    OCC has determined that in the event it is necessary to liquidate a 
clearing member's positions (including the clearing member's margin 
collateral), OCC may be exposed to risk arising from a large quantity 
of a particular common stock deposited as margin by a clearing member. 
Specifically, depending on the relationship between the average daily 
trading volume of a particular security and the number of outstanding 
shares of such security deposited by a clearing member as margin, it is 
possible that the listed equities markets may not be able to quickly 
absorb all of the common stock OCC seeks to sell, or OCC may not be 
able to auction such securities, without an appreciable negative price 
impact. This occurrence, referred to by OCC as ``concentration risk,'' 
is greatest when the number of shares being sold is large and the 
average daily trading volume is low.
    OCC's existing authority to not give value to otherwise eligible 
forms of margin only provides OCC with the discretion to not give value 
across all clearing member deposits of a particular common stock. 
However, concentration risk may be a clearing member and account-
specific risk. In order to mitigate the concentration risk of a single 
clearing member, OCC plans to implement automated processes to monitor 
the composition of a clearing member's margin deposits. Such processes 
will identify concentration risk at both an account level and across 
all accounts of a clearing member. OCC is adding the Interpretation so 
that OCC has discretion to limit the margin credit granted to an 
individual clearing member that maintains a concentrated margin deposit 
of otherwise eligible common stock.
    According to OCC, for reasons stated above, OCC considers a common 
stock's average daily trading volume and the number of shares a 
clearing member deposited as margin to be the two most significant 
factors when making a

[[Page 66020]]

decision to limit margin credit due to concentration risk. Accordingly, 
OCC will not give margin credit to clearing member margin deposits of a 
particular common stock in respect of a particular account when the 
deposited amount of such common stock is in excess of two times the 
average daily trade volume of such common stock over the most recent 
three month period. OCC's systems will continually assess the 
composition of clearing member margin deposits for each account 
maintained by the clearing member, including intra-day collateral 
substitutions in such accounts, to determine if a clearing member has a 
margin deposit with a concentrated amount of common stock. With respect 
to a given account, OCC's systems will automatically set appropriate 
limits on the amount of a particular common stock for which a clearing 
member may be given margin credit for any one of a its tier accounts. 
In addition, and with respect to all of a clearing member's accounts, 
OCC will impose an add-on margin charge if, in aggregate, a clearing 
member deposits a concentrated amount of a particular common stock as 
margin across all of its accounts. The add-on margin charge will 
operate to negate the margin credit given to the concentrated margin 
deposit, and will be collected, when applicable, as part of OCC's 
standard morning margin process. OCC will assess the add-on margin 
charge across all of a clearing member's accounts on a pro-rata basis 
(based on the amount of the particular common stock in each of a 
clearing member's accounts).\7\
---------------------------------------------------------------------------

    \7\ According to OCC, since a 2-day limit is first checked at 
each account, it is possible that a clearing member with multiple 
accounts may have more than 2-days of a given common stock on 
deposit in aggregate. To control this condition, a final check is 
done on the aggregate amount of shares held by a clearing member 
across all of its accounts. For example, if a particular clearing 
member has three accounts each holding 2-days volume of a specific 
common stock, the clearing member check would identify that the 
member was holding six days of volume in aggregate. To mitigate this 
risk, an add-on charge equal to the market value of four days of 
volume would be applied to all accounts holding that security on a 
pro-rata basis.
---------------------------------------------------------------------------

    According to OCC, OCC staff has been monitoring concentrated common 
stock positions, assessing the impact of the proposed change described 
in this filing and contacting clearing members affected by the proposed 
change. OCC believes that clearing members will be able to comply with 
the proposed change without making significant changes to their day-to-
day business operations. In December 2013, an information memo was 
posted to inform all members of the upcoming change. According to OCC, 
since January 2014, OCC staff has been in contact with any clearing 
member that would be affected by the proposed change. On a weekly 
basis, any clearing member that would see a reduction of 10% or more of 
its collateral value is contacted and provided an explanation of the 
policy and a list of concentrated positions observed in this analysis. 
On a monthly basis, all clearing members exhibiting any concentration 
risk are contacted to provide an explanation of the proposed policy and 
a list of concentrated positions. In both cases, clearing members are 
encouraged to proactively reduce concentrated positions to conform to 
the proposed policy. As of June 2014, twenty-five members would be 
affected. Implementation of the Interpretation would result in 
disallowing $1.2 billion in collateral value and result in margin calls 
for six members totaling $710 million. Moreover, in July 2014, OCC made 
an automated report concerning concentrated margin deposits of common 
stock available to all clearing members.

c. Wrong-Way Risk

    OCC also will use the Interpretation to address the risk that the 
common stock a clearing member has deposited as margin and which is 
issued by the clearing member itself or an affiliate of the clearing 
member will lose value in the event the clearing member providing such 
margin defaults, which is known as ``wrong-way risk.'' According to 
OCC, wrong-way risk occurs when a clearing member makes a deposit of 
common stock issued by it or an affiliate and, in the event the 
clearing member defaults, the clearing member's common stock margin 
deposit will also be losing value at the same time because there is 
likely to be a strong correlation between the clearing member's 
creditworthiness and the value of such common stock. In order to 
address wrong-way risk, the Interpretation will implement automated 
systems that will not give margin credit to a clearing member that 
deposits common stock issued by such clearing member or an affiliate as 
margin collateral. OCC will define ``affiliate'' broadly in the 
Interpretation to include any entity with direct or indirect equity 
ownership of 10% of the clearing member, or any entity for which the 
clearing member holds 10% of the direct or indirect equity 
ownership.\8\
---------------------------------------------------------------------------

    \8\ This standard is based on the provisions of OCC Rule 
215(a)(5).
---------------------------------------------------------------------------

    OCC has addressed the impact of the change designed to address 
wrong-way risk. As of June 2014, there were 73 clearing members whose 
parent or an affiliate has issued securities trading on U.S. exchanges. 
As of June 2014, there are six clearing members that would be affected 
by virtue of having made margin deposits of their own or an affiliate's 
common stock. In total, these shares equaled $132 million and accounted 
for less than one half of one percent of the total market value of 
valued securities pledged as margin at OCC. In July 2014, OCC made 
information available to each clearing member that indicates which of 
its deposits of common stock would not receive margin credit under the 
proposed change due to wrong-way risk considerations, as described 
above.\9\
---------------------------------------------------------------------------

    \9\ OCC believes that by providing such information clearing 
members will be better able to adjust their margin deposits at OCC 
to conform to the proposed change if it is approved.
---------------------------------------------------------------------------

d. Deposits That Hedge Open Positions

    In addition to the above, OCC also will include language in the 
Interpretation so that it has discretion to give margin credit to 
common stock deposited as margin that would otherwise not be given 
margin credit in circumstances when such common stock acts as a hedge 
(i.e., the member holds an equivalent short position in cleared 
contracts on the same underlying security). This condition will be 
checked in both the account and clearing member level. For example, if 
a clearing member deposits the common stock of an affiliate as margin 
collateral, which, pursuant to the above, would ordinarily not be given 
value for the purposes of granting margin credit, OCC may nevertheless 
give value to such common stock for the purposes of granting margin 
credit to the extent such common stock acts as a hedge against open 
positions of the clearing member. In this case, a decline in the value 
of the margin deposit would be wholly or partially offset by an 
increase in the value in the open position. Moreover, in such a 
situation, OCC will systematically limit the margin credit granted to 
the lesser of a multiple of the daily trading volume or the ``delta 
equivalent position'' \10\ for the particular

[[Page 66021]]

common stock, taking into account the hedging position.\11\ OCC 
believes that this policy will further encourage clearing members to 
deposit margin collateral that hedges their related open positions and 
is in line with the valuation methods within STANS. This policy will 
also facilitate OCC's management of its and its participants' credit 
exposure as well as the liquidation of a clearing member's portfolio 
should the need arise.
---------------------------------------------------------------------------

    \10\ According to OCC, the ``delta equivalent position'' is the 
equivalent number of underlying shares represented by the 
aggregation of cleared products on that same underlying instrument. 
This value is calculated using the ``delta'' of the option or 
futures contract, which is the ratio between the theoretical change 
in the price of the options or futures contract to the corresponding 
change in the price of an underlying asset. Thus, delta measures the 
sensitivity of an options or futures contract price to changes in 
the price of the underlying asset. For example, a delta of +0.7 
means that for every $1 increase in the price of the underlying 
stock, the price of a call option will increase by $0.70. Delta for 
an option or future can be expressed in shares of the underlying 
asset. For example, a standard put option with a delta of -.45 would 
have a delta of -45 shares, because the unit of trading is 100 
shares.
    \11\ Assume, for example, an average daily trade volume of 250 
shares, a threshold of 2 times the average daily trade volume, and a 
delta of -300 shares for the options on a particular security in a 
particular account. A position of 700 shares that did not hedge any 
short options or futures would receive credit for only 500 shares 
(i.e., 2 times the average daily trade volume). If the net long 
position in the account, when combined with the delta of short 
option and futures position, were only 400, credit would be given 
for the entire 700 shares since the delta equivalent position is 
below the 500 share threshold. However, if the option delta were 
+300, the net long position would be 1000, and credit would only be 
given for 500 shares because the delta equivalent position would 
exceed the 500 share threshold.
---------------------------------------------------------------------------

e. Other Proposed Changes

    OCC also will make certain clarifying changes in order to 
accommodate the adoption of the Interpretation into its Rules. 
Primarily, OCC is adding language to OCC Rule 604, Interpretation and 
Policy .14, to clarify that such Interpretation and Policy concerns 
OCC's authority to not give value to certain margin deposits for all 
clearing members (whereas the Interpretation applies to particular 
clearing member(s)). In addition, OCC is removing language from OCC 
Rule 604, Interpretation and Policy .14, to improve readability as well 
as to remove ``factors'' concerning number of shares and affiliates 
since OCC's authority with respect to such factors will be more clearly 
described in the Interpretation. Finally, OCC is renumbering the 
Interpretations and Policies of Rule 604 in order to accommodate the 
adoption of the Interpretation.

II. Discussion and Commission Findings

    Although the Payment, Clearing and Settlement Supervision Act does 
not specify a standard of review for an advance notice, the Commission 
believes its stated purpose is instructive.\12\ The stated purpose is 
to mitigate systemic risk in the financial system and promote financial 
stability by, among other things, promoting uniform risk management 
standards for systemically-important financial market utilities 
(``FMU'') and strengthening the liquidity of systemically important 
FMUs.\13\
---------------------------------------------------------------------------

    \12\ See 12 U.S.C. 5461(b).
    \13\ Id.
---------------------------------------------------------------------------

    Section 805(a)(2) of the Payment, Clearing and Settlement 
Supervision Act \14\ authorizes the Commission to prescribe risk 
management standards for the payment, clearing, and settlement 
activities of designated clearing entities and financial institutions 
engaged in designated activities for which it is the supervisory agency 
or the appropriate financial regulator. Section 805(b) of the Payment, 
Clearing and Settlement Supervision Act \15\ states that the objectives 
and principles for the risk management standards prescribed under 
Section 805(a) shall be to:
---------------------------------------------------------------------------

    \14\ 12 U.S.C. 5464(a)(2).
    \15\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

     Promote robust risk management;
     promote safety and soundness;
     reduce systemic risks; and
     support the stability of the broader financial system.
    The Commission has adopted risk management standards under Section 
805(a)(2) of the Payment, Clearing and Settlement Supervision Act \16\ 
and the Act (``Clearing Agency Standards'').\17\ The Clearing Agency 
Standards became effective on January 2, 2013 and establish, among 
other things, minimum requirements regarding how registered clearing 
agencies must maintain effective risk management procedures and 
controls.\18\ Therefore, it is appropriate for the Commission to review 
advance notices against these Clearing Agency Standards and the 
objectives and principles of these risk management standards as 
described in Section 805(b) of the Payment, Clearing and Settlement 
Supervision Act.\19\
---------------------------------------------------------------------------

    \16\ 12 U.S.C. 5464(a)(2).
    \17\ See Rule 17Ad-22 of the Act. 17 CFR 240.17Ad-22. Securities 
Exchange Act Release No. 68080 (October 22, 2012), 77 FR 66220 
(November 2, 2012) (S7-08-11).
    \18\ See Securities Exchange Act Release No. 68080 (October 22, 
2012), 77 FR 66220 (November 2, 2012) (S7-08-11).
    \19\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    The proposal in this advance notice is consistent with Clearing 
Agency Standards, Rule17Ad-22(b)(2) of the Act.\20\ Rule 17Ad-22(b)(2) 
of the Act \21\ requires a registered clearing agency that performs 
central counterparty services to, among other things, establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to use margin requirements to limit its credit 
exposures to participants under normal market conditions. This proposal 
is consistent with this rule because it is reasonably designed to 
permit OCC to use margin requirements to limit its credit exposures to 
clearing members under normal market conditions in two ways. First, it 
is reasonably designed to limit OCC's credit exposures to clearing 
members whose collateral portfolios could present concentration risk. 
Specifically, it addresses concentration risk by particular clearing 
member and by particular account by giving OCC discretion to disapprove 
as margin collateral certain securities, based on the number of shares 
deposited, by particular clearing member and by particular account, 
while also considering deposits that hedge open positions. It also 
clarifies that OCC's existing authority to not give value to certain 
margin deposits applies to all clearing members, as opposed to 
particular clearing members.\22\ Second, it is reasonably designed to 
limit OCC's credit exposures to clearing members whose collateral 
portfolios could present wrong-way risk. Specifically, it addresses 
wrong-way risk presented by clearing members who deposit as margin 
securities that are issued by the clearing member itself or by an 
affiliate of the clearing member. It addresses this type of wrong-way 
risk by giving OCC discretion to disapprove as margin collateral, with 
respect to a particular clearing member, any security issued by such 
clearing member or by an affiliate of such clearing member, while also 
considering deposits that hedge open positions.
---------------------------------------------------------------------------

    \20\ 17 CFR 240.17Ad-22(b)(2).
    \21\ Id.
    \22\ See Rule 604, Interpretation and Policy .15 (providing OCC 
discretion to disapprove as margin collateral securities that meet 
certain factors, including trading volume, number of outstanding 
shareholder, number of outstanding shares, volatility and 
liquidity).
---------------------------------------------------------------------------

    Rule 17Ad-22(b)(2) of the Act \23\ also requires a registered 
clearing agency that performs central counterparty services to, among 
other things, establish, implement, maintain and enforce written 
policies and procedures reasonably designed to use risk-based models 
and parameters to set margin requirements. This proposal is consistent 
with this rule because it permits OCC to use risk-based models and 
parameters to set margin requirements in a way that takes into account 
concentration risk and wrong-way risk, as described above.
---------------------------------------------------------------------------

    \23\ 17 CFR 240.17Ad-22(b)(2).
---------------------------------------------------------------------------

    The proposal in this advance notice meets the objectives and 
principles described in Section 805(b) of the Payment, Clearing and 
Settlement Supervision Act.\24\ The changes to

[[Page 66022]]

OCC's margin policy, as described above, are designed to reduce the 
risk that clearing member margin assets would be insufficient should 
OCC need to use such assets to close-out positions of a defaulted 
clearing member. The changes are also designed to facilitate OCC to 
timely meet its settlement obligations because the change will diminish 
the likelihood that a large percentage of the value of a defaulting 
clearing member's margin assets would not be available to OCC to cover 
losses in the event of a clearing member default. Therefore, the 
proposal (i) promotes robust risk management (including risk management 
of concentration risk and wrong-way risk), (ii) promotes safety and 
soundness, (iii) reduces systemic risks (including those caused by 
concentration risk and wrong-way risk), and (iv) supports the stability 
of the broader financial system.
---------------------------------------------------------------------------

    \24\ 12 U.S.C 5464(b); See also 12 U.S.C. 5464(a).
---------------------------------------------------------------------------

III. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Payment, Clearing and Settlement Supervision Act,\25\ that the 
Commission DOES NOT OBJECT to the proposal in OCC's advance notice (SR-
OCC-2014-803) and OCC is AUTHORIZED to implement the proposal as of the 
date of this notice or the date of an order by the Commission approving 
a proposed rule change that reflects rule changes that are consistent 
with the proposal in this advance notice (SR-OCC-2014-14), whichever is 
later.
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    \25\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2014-26344 Filed 11-5-14; 8:45 am]
BILLING CODE 8011-01-P