Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection to Advance Notice Concerning Extended and Overnight Trading Sessions, 8383-8387 [2015-03097]

Download as PDF Federal Register / Vol. 80, No. 31 / Tuesday, February 17, 2015 / Notices 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–EDGA– 2015–07, and should be submitted on or before March 10, 2015. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.17 Brent J. Fields, Secretary. [FR Doc. 2015–03078 Filed 2–13–15; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–74241; File No. SR–OCC– 2014–812] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection to Advance Notice Concerning Extended and Overnight Trading Sessions February 10, 2015. On December 12, 2014, The Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) advance notice SR–OCC–2014–812 (‘‘Advance Notice’’) 1 pursuant to Section 806(e)(1) of the Payment, Clearing, and Settlement Supervision Act of 2010 (‘‘Clearing Supervision Act’’) 2 and Rule 17 17 CFR 200.30–3(a)(12). initially filed a similar advance notice on September 17, 2014. Securities Exchange Act Release No. 73343 (October 14, 2014), 79 FR 62684 (October 20, 2014), (SR–OCC–2014–805). OCC withdrew that advance notice on October 28, 2104. Securities Exchange Act Release No. 73710 (December 1, 2014), 79 FR 72225 (December 5, 2014), (SR–OCC–2014–805). 2 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 tkelley on DSK3SPTVN1PROD with NOTICES 1 OCC VerDate Sep<11>2014 16:51 Feb 13, 2015 Jkt 235001 19b–4(n)(1)(i) under the Securities Exchange Act of 1934 (‘‘Exchange Act’’).3 The Advance Notice was published for comment in the Federal Register on January 22, 2015.4 The Commission did not receive any comments on the Advance Notice. This publication serves as a notice of no objection to the Advance Notice. I. Description of the Advance Notice Description of Change This advance notice was filed in connection with OCC’s proposed change to its operations concerning the clearance of confirmed trades executed in overnight trading sessions offered by exchanges for which OCC provides clearance and settlement services. OCC currently clears overnight trading activity for CBOE Futures Exchange, LLC (‘‘CFE’’).5 The total number of trades submitted to OCC from overnight trading sessions is nominal, typically less than 3,000 contracts per session. However, OCC has recently observed an industry trend whereby exchanges are offering overnight trading sessions beyond traditional hours. Exchanges offering overnight trading sessions have indicated to OCC that such sessions benefit market participants by providing additional price transparency and hedging opportunities for products traded in such sessions, which, in turn, promotes market stability.6 In light of this trend, OCC proposed to implement a framework for clearing trades executed in such sessions that includes: (1) Qualification criteria used to approve clearing members for overnight trading sessions, (2) systemic controls to identify trades executed during overnight trading sessions by clearing members not approved for such sessions, (3) enhancements to OCC’s overnight monitoring of trades submitted by exchanges during Act and file advance notices with the Commission. See 12 U.S.C. 5465(e). 3 17 CFR 240.19b–4(n)(1)(i). 4 See Securities Exchange Act Release No. 74073 (January 15, 2015), 80 FR 3287 (January 22, 2015) (SR–OCC–2014–812). 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 December 30, 2014. 15 U.S.C. 78s(b)(1); 17 CFR 240.19b–4. See Securities Exchange Act Release No. 73907 (December 22, 2014), 79 FR 78543 (December 30, 2014) (SR–OCC–2014–24). The Commission did not receive any comments on the proposed rule change. 5 ELX Futures LP (‘‘ELX’’) previously submitted overnight trading activity to OCC, but currently does not submit such trades. OCC will re-evaluate ELX’s risk controls in the event ELX re-institutes its overnight trading sessions. 6 See CFE–2014–010 at https://cfe.cboe.com/ publish/CFErulefilings/SR-CFE-2014-010.pdf. PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 8383 overnight trading sessions, (4) enhancements to OCC’s credit controls with respect to monitoring clearing members’ credit risk during overnight trading sessions, including procedures for contacting an exchange offering overnight trading sessions in order to invoke use of the exchange’s kill switch, and (5) taking appropriate disciplinary action against clearing members who attempt to clear during the overnight trading session without first obtaining requisite approvals. These changes (described in greater detail below) are designed to reduce and mitigate the risks associated with clearing trades executed in overnight trading sessions. In addition, the only products that will be eligible for clearing in overnight trading sessions are index options and index futures products. OCC’s framework for determining whether to provide clearing services for overnight trading sessions offered by an exchange is designed to work in conjunction with the risk controls of the exchange that offers overnight trading sessions. OCC will confirm an exchange’s risk controls as well as its staffing levels as they relate to overnight trading sessions to determine if OCC may reasonably rely on such risk controls to reduce the risk presented to OCC by the exchange’s overnight trading sessions. Such exchange risk controls will consist of: (1) Price reasonability checks, (2) controls to prevent orders from being executed beyond a certain percentage (determined by the exchange) from the initial execution price, (3) activity based protections which focus on risk beyond price, such as a high number of trades occurring in a set period of time, and (4) kill switch capabilities, which may be initiated by the exchange and can cancel all open quotes or all orders of a particular participant. OCC believes that confirming the existence of applicable pre-trade risk controls as well as overnight staffing at the relevant exchanges is essential to mitigating risks presented to OCC from overnight trading sessions.7 OCC believes that providing clearing services to exchanges offering such sessions is consistent with 7 Comparable controls are applied to futures and future option trades executed in overnight trading sessions currently cleared by OCC, although such controls have been implemented by clearing futures commission merchants (‘‘clearing FCMs’’) pursuant to Commodity Futures Trading Commission (‘‘CFTC’’) Regulation 1.73. This requires clearing FCMs to monitor for adherence to such controls during regular and overnight trading sessions. Some of these risk control measures are similar to those proposed by OCC for use in clearing securities trades in overnight trading sessions. For instance, OCC confirmed that CFE maintains kill switch capabilities. E:\FR\FM\17FEN1.SGM 17FEN1 8384 Federal Register / Vol. 80, No. 31 / Tuesday, February 17, 2015 / Notices tkelley on DSK3SPTVN1PROD with NOTICES OCC’s mission to provide market participants with clearing and risk management solutions that respond to changes in the marketplace. Qualification Criteria In order to mitigate risks associated with clearing for overnight trading sessions, clearing members that participate in such trading sessions will be required to provide contact information to OCC for operational and risk personnel available to be contacted by OCC during such sessions. In addition, OCC will require that clearing members participating in an overnight trading session post additional margin in a designated account in order to mitigate the risk that OCC cannot draft a clearing member’s bank account during an overnight trading session.8 OCC also will adopt a procedure whereby, on a quarterly basis, it confirms its record of clearing members eligible for overnight trading sessions with a similar record maintained by exchanges offering such overnight trading sessions. With respect to providing operational and risk contacts, under OCC Rule 201, each clearing member is required to maintain facilities for conducting business with OCC and to have a representative authorized in the name of the clearing member to take all action necessary for conducting business with OCC available at the facility during such hours as may be specified from time-totime by OCC. Similarly, OCC Rules 214(c) and (d) require clearing members to ensure that they have the appropriate number of qualified personnel and to maintain the ability to process anticipated volumes and values of transactions. OCC will use this existing authority to require clearing members trading during overnight trading sessions to maintain operational and risk staff that may be contacted by OCC during such sessions. OCC will impose upon clearing members qualified to participate in overnight trading sessions additional margin requirement in an amount of the lesser of $10 million or 10% of the clearing member’s net capital (‘‘Additional Margin’’), which will be equal to the first monitoring risk threshold (described below) and which will be collected the morning before each overnight trading sessions. Clearing members must identify the proprietary account that would be charged the Additional Margin amount. 8 Clearing members will be required to designate a firm account to ensure that OCC has a general lien on the assets in the account and can use them to satisfy any obligation of the clearing member to OCC. VerDate Sep<11>2014 16:51 Feb 13, 2015 Jkt 235001 The Additional Margin requirement is intended to provide OCC with additional margin assets should a clearing member’s credit risk increase during overnight trading sessions.9 OCC proposes to adopt a process whereby each morning OCC Financial Risk Management staff will assess the Additional Margin requirement against clearing members eligible to participate in overnight trading sessions. Clearing members that do not have sufficient excess margin on deposit with OCC to meet the Additional Margin amount will be required to deposit additional funds with OCC to satisfy the Additional Margin requirement prior to participating in any future overnight trading sessions.10 This process will be adopted under existing rule authority. Moreover, OCC also will confirm that an exchange offering overnight trading sessions has adopted a procedure whereby such exchange would contact OCC when a trader requests trading privileges during overnight trading sessions. The purpose of this contact is to verify that the trader’s clearing firm (i.e., the OCC clearing member) is approved for overnight trading sessions. If the applicable OCC clearing member is not approved for overnight trading sessions, then the clearing member must receive OCC’s approval for overnight trading sessions, or the exchange will not provide the trader trading privileges during overnight trading sessions. Moreover, OCC will confirm that an exchange offering overnight trading sessions has implemented a procedure to periodically (i.e., quarterly) validate its record of approved clearing firms against OCC’s record of clearing members approved for overnight trading sessions.11 Any discrepancies between the two records will be promptly resolved by either the clearing member obtaining approval from OCC for overnight trading sessions or by the exchange revoking the clearing firm’s trading privileges for overnight trading sessions. Systemic Controls OCC will implement system changes so that trades submitted to OCC during 9 Clearing members approved for overnight trading sessions that do not meet the Additional Margin requirement for a given overnight trading session would be treated like a clearing member not approved for overnight trading sessions, as described below. 10 Under OCC Rule 601, OCC has the discretion to fix the margin requirement for any account at an amount that it deems necessary or appropriate under the circumstances to protect the interests of clearing members, OCC and the public. 11 As discussed in more detail below, clearing members that attempt to participate in overnight trading sessions without the necessary approval will be subject to a minor rule violation fine. PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 overnight trading sessions that have been executed by clearing members not approved for such trading sessions will be reviewed by OCC staff after acceptance but before being processed (each such trade being a ‘‘Reviewed Trade’’). OCC will contact the submitting exchange regarding each Reviewed Trade in order to determine if the trade is a valid trade. If the exchange determines that the Reviewed Trade was in error such that, as provided in Article VI, Section 7(c) of OCC’s By-laws, new or revised trade information is required to properly clear the transaction, OCC expects the exchange would instruct OCC to disregard or ‘‘bust’’ the trade. If the exchange determines that the Reviewed Trade was not in error, then OCC will clear the Reviewed Trade and take appropriate disciplinary action against the non-approved clearing member, as described below. OCC believes that clearing the Reviewed Trade is appropriate in order to avoid potentially harming the clearing member approved for overnight trading sessions that is on the opposite side of the transaction. Overnight Monitoring OCC will implement additional overnight monitoring in order to better monitor clearing members’ credit risk during overnight trading sessions. Such monitoring of credit risk is similar to existing OCC practices concerning futures cleared during overnight trading hours and includes automated processes within OCC’s ENCORE clearing system to measure, by clearing member: (i) The aggregate mark-to-market amounts of a clearing member’s positions, including positions created during overnight trading, based on current prices using OCC’s Portfolio Revaluation system, (ii) the aggregate incremental margin produced by all positions resulting from transactions executed during overnight trading, and (iii) with respect to options cleared during overnight trading hours, the aggregate net trade premium positions resulting from trades executed during overnight trading (each of these measures being a ‘‘Credit Risk Number’’). Hourly credit reports would be generated by ENCORE containing the Credit Risk Numbers expressed in terms of both dollars and, except for the markto-market position values, as a percentage of net capital for each clearing member trading during overnight trading sessions. The Credit Risk Numbers are the same information used by OCC staff to evaluate clearing member exposure during regular trading hours and, in addition to OCC’s knowledge of its clearing members’ businesses, are effective measures of the E:\FR\FM\17FEN1.SGM 17FEN1 tkelley on DSK3SPTVN1PROD with NOTICES Federal Register / Vol. 80, No. 31 / Tuesday, February 17, 2015 / Notices risk presented to OCC by each clearing member. OCC’s Operations staff will review such reports as they are generated and, in the event that any of the Credit Risk Numbers for positions established by a clearing member during an overnight trading session exceed established thresholds, staff will alert OCC’s Market Risk staff 12 of the exceedance in accordance with established procedures, as described below. Market Risk staff will follow a standardized process concerning such exceedances, including escalation to OCC’s management, if required by such process. Given the nominal volume of trades executed in overnight trading sessions that are presently submitted for clearance, OCC does not contemplate changes in its current staffing levels that support overnight clearing activities at this time, however, OCC will periodically assess and adjust such staffing levels as appropriate. As part of the overnight clearing activities, OCC has, however, designated an on-call Market Risk duty officer who would be responsible for reviewing issues that arise when clearing for overnight trading session and determining what measures to be taken as well as additional escalation, if necessary. With respect to OCC’s escalation thresholds, if any Credit Risk Number of a clearing member approved for overnight trading sessions is $10 million or more, or any Credit Risk Number equals 10% or more of the clearing member’s net capital, OCC’s Operations staff will be required to provide email notification to Market Risk and Member Services staff. If any Credit Risk Number of a clearing member not approved for overnight trading sessions is $10 million or more, or any Credit Risk Number equals 10% or more of the clearing member’s net capital, OCC’s Operations will also notify Market Risk and Member Services staff as well as its senior management. Such departments will take action to prevent additional trading by the non-approved clearing member, including contacting the exchange to invoke use of the exchange’s kill switch. If any Credit Risk Number of a clearing member approved for overnight trading sessions is $50 million or more, or equals 25% or more of the clearing member’s net capital, Operations staff will be required to contact, by telephone: (i) Market Risk and Member Services, (ii) the applicable exchange for secondary review, and (iii) the clearing 12 OCC’s Member Services staff will also receive alerts in order to contact clearing members as may be necessary. VerDate Sep<11>2014 16:51 Feb 13, 2015 Jkt 235001 member’s designated contacts. The oncall Market Risk duty officer also will consider if additional action is necessary, which may include contacting a designated executive officer in order to issue an intra-day margin call, increase the clearing member’s margin requirement in order to prevent the withdrawal of a specified amount of excess margin collateral, if any, the clearing member has on deposit with OCC, or contacting the exchange in order to invoke the use of its kill switch. If any Credit Risk Number is $75 million or more, or equals 50% or more of the clearing member’s net capital, Operations staff will be required to contact, by telephone, Market Risk staff, the on-call Market Risk duty officer, and a designated executive officer. Such officer will be responsible for reviewing the situation and determining whether to implement credit controls, which are described in greater detail below and include: Issuing an intra-day margin call, increasing a clearing member’s margin requirement in order to prevent the withdrawal of a specified amount of excess margin collateral, if any, the clearing member has on deposit with OCC, whether further escalation is warranted in order for OCC to take protective measures pursuant to OCC Rule 305, or contact the exchange in order to invoke use of its kill switch. OCC stated that it chose the above described escalation thresholds based on its analysis of historical overnight trading activity across the futures industry. OCC believes that these thresholds strike an appropriate balance between effective risk monitoring and operational efficiency. Credit Controls In order to address credit risk associated with trading during overnight trading sessions, and as described above, OCC will collect Additional Margin from clearing members as well as monitor and analyze the impact that positions established during such sessions have on a clearing member’s overall exposure. Should the need arise based on threshold breaches described above, and pursuant to OCC Rule 609, OCC may require the deposit of additional margin (‘‘intra-day margin’’) by any clearing member that increases its incremental risk as a result of trading activity during overnight trading sessions. Accordingly, a clearing member’s positions established during such sessions will be incorporated into OCC’s intra-day margin process. Should a clearing member’s exposure significantly increase while settlement banks are not open to process an intraday margin call, OCC has the authority PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 8385 under OCC Rule 601 to increase a clearing member’s margin requirement which will restrict its ability to withdraw excess margin collateral. The implementation of these measures is discussed more fully below. In the event that a clearing member’s exposure during overnight trading sessions causes a clearing member to exceed OCC’s intra-day margin call threshold for overnight trading sessions, OCC will require the clearing member to deposit intra-day margin equal to the increased incremental risk presented by the clearing member. Specifically, if a clearing member has a total risk charge 13 exceeding 25% (a reduction of the usual figure of 50%), as computed overnight by OCC’s STANS system, and a loss of greater than $50,000 from an overnight trading session(s), as computed by Portfolio Revaluation, OCC will initiate an intra-day margin call. OCC will know at approximately 8:30 a.m. (Central Time) if an intra-day margin call on a clearing member will be initiated based on breaches of these thresholds. This ‘‘start of business’’ margin call is in addition to daily margin OCC collects from clearing members pursuant to OCC Rule 605, any intra-day margin call that OCC may initiate as a result of regular trading sessions, or special margin call that OCC may initiate. In addition to, or instead of, requiring additional intra-day margin, OCC Rule 601 14 and OCC’s Clearing Member Margin Call Policy will work together to authorize Market Risk staff to increase a clearing member’s margin requirement which may be in an amount equal to an intra-day margin call.15 (Any increased margin requirement will remain in effect until the next business day.) This action will immediately prevent clearing members from withdrawing any excess margin collateral (in the amount of the increased margin requirement) the clearing member has deposited with OCC. With respect to clearing trades executed in overnight trading sessions, and in the event OCC requires additional margin from a clearing member, Market Risk staff may use increased margin requirements as a means of collateralizing the increase in 13 Total risk charge is a number derived from STANS outputs and is the sum of expected shortfall, stress test charges and any add-on charges computed by STANS. STANS is OCC’s proprietary margin methodology. 14 In addition, OCC Rule 601 provides OCC with the authority to fix the margin requirement for any account or any class of cleared contracts at such amount as it deems necessary or appropriate under the circumstances to protect the respective interests of clearing members, OCC, and the public. 15 Clearing members frequently deposit margin at OCC in excess of requirements. E:\FR\FM\17FEN1.SGM 17FEN1 8386 Federal Register / Vol. 80, No. 31 / Tuesday, February 17, 2015 / Notices incremental risk a clearing member incurred during such sessions without having to wait for banks to open to process an intra-day margin call.16 Such action may be taken by OCC instead of, or in addition to, issuing an intra-day margin call depending on the amount of excess margin a clearing member has on deposit with OCC and the amount of the incremental risk presented by such clearing member. OCC believes that the expansion of its intra-day margin call process as described in the preceding paragraph, including OCC’s ability to manually increase clearing members’ margin requirements, will mitigate the risk that OCC is under-collateralized as a result of overnight trading hours. Moreover, a designated executive officer may call an exchange offering overnight trading sessions to invoke the use of its kill switch. The kill switch prevents a clearing member (or the market participant clearing through a clearing member) from executing trades on the exchange during a given overnight trading session or, if needed, stop all trading during a given overnight trading session. Finally, pursuant to OCC Rule 305, the Executive Chairman or the President of OCC, in certain situations, has the authority to impose limitations and restrictions on the transactions, positions, and activities of a clearing member. This authority will be used, as needed, in the event a clearing member accumulates significant credit risk during overnight trading sessions, or a clearing member’s activities during such trading sessions otherwise warrant OCC taking protective action. tkelley on DSK3SPTVN1PROD with NOTICES Rule Enforcement Actions In order to deter clearing members from attempting to participate in overnight trading sessions without authorization as well as appropriately enforce the above described processes, OCC will ensure that any attempt by a clearing member to participate in overnight trading sessions without first obtaining the necessary approval will result in the initiation of a rule enforcement action against such clearing member. As described above, clearing members not approved for overnight trading sessions that trade during such overnight sessions will have their trades reviewed by OCC staff. Clearing members that attempt to participate in overnight trading sessions but do not obtain the necessary approval to do so will be subject to a minor rule 16 Clearing members will be able to substitute the locked-up collateral during normal time frames (i.e., 6:00 a.m. to 5:00 p.m. (Central Time) for equity securities). VerDate Sep<11>2014 16:51 Feb 13, 2015 Jkt 235001 violation fine.17 In addition, if a clearing member’s operational or risk contacts for overnight trading sessions were unavailable had OCC attempted to contact such individuals, the clearing member will be subject to a minor rule violation fine. OCC has existing processes in place to monitor for clearing member violations of OCC’s rules and such processes also will apply to clearing member activity during overnight trading sessions. Effect That OCC Anticipates on and Management of Risk Clearing transactions executed in overnight trading sessions may increase risk presented to OCC due to the period of time between trade acceptance and settlement, the staffing levels at clearing members during such trading sessions, and the deferment of executing intraday margin calls until banking settlement services are operational. However, OCC will expand its risk management practices in order to mitigate these risks by implementing, and expanding, the various tools discussed above. For example, OCC will enhance its monitoring practices in order to closely monitor clearing members’ credit risk from trades placed during overnight trading sessions as well as implement processes so that OCC takes appropriate action when such credit risk exceeds certain limits. OCC also will use its existing authority to require adequate clearing member staffing during such trading sessions, in order to mitigate the operational risk associated with clearing members trading while they are not fully staffed. These risk management functions will work in tandem with risk controls, including the implementation of kill switch capabilities, adopted by the exchanges operating overnight trading sessions or by clearing FCMs, as applicable. In addition to the above, OCC will adapt existing processes so that such processes can be used to mitigate risk associated with overnight trading sessions. Specifically, OCC will exercise its authority to issue margin calls and prevent the withdrawal of excess margin on deposit at OCC, as a result of activity during such trading sessions as a means of reducing risk. OCC also will implement a systemic function to identify trades executed during overnight trading sessions by clearing members not approved for such trading sessions for further review prior to allowing such trades to proceed further through OCC’s clearance processing, and therefore mitigate the risk of losses 17 See PO 00000 OCC Rule 1201(b). Frm 00102 Fmt 4703 Sfmt 4703 from erroneous trades. Finally, OCC will be able to assess the need to take protective action pursuant to OCC Rule 305 as a result of clearing member activity during such sessions. II. Discussion and Commission Findings Although the Clearing Supervision Act does not specify a standard of review for an advance notice, the Commission believes that the stated purpose of the Clearing Supervision Act is instructive.18 The stated purpose of the Clearing Supervision Act 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 and strengthening the liquidity of systemically important financial market utilities.19 Section 805(a)(2) of the Clearing Supervision Act 20 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 Clearing Supervision Act 21 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 Clearing Supervision Act (‘‘Clearing Agency Standards’’).22 The Clearing Agency Standards became effective on January 2, 2013, and require registered clearing agencies that perform central counterparty services to establish, implement, maintain, and enforce written policies and procedures that are reasonably designed to meet certain minimum requirements for their operations and risk management practices on an ongoing basis.23 As 18 See 12 U.S.C. 5461(b). 19 Id. 20 12 U.S.C. 5464(a)(2). U.S.C. 5464(b). 22 17 CFR 240.17Ad–22. 23 The Clearing Agency Standards are substantially similar to the risk management standards established by the Board of Governors of the Federal Reserve System governing the operations of designated financial market utilities that are not clearing entities and financial institutions engaged in designated activities for which the Commission or the Commodity Futures Trading Commission is the Supervisory Agency. 21 12 E:\FR\FM\17FEN1.SGM 17FEN1 tkelley on DSK3SPTVN1PROD with NOTICES Federal Register / Vol. 80, No. 31 / Tuesday, February 17, 2015 / Notices such, 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 Clearing Supervision Act.24 The Commission believes that the proposal in this Advance Notice is designed to further the objectives and principles of Section 805(b) of the Clearing Supervision Act.25 The Commission notes that clearing transactions executed in overnight trading sessions may present additional risks to OCC and the markets in general; specifically, overnight trading sessions may create risk due to the gap between trade acceptance and settlement, the staffing levels at clearing members and OCC during such trading sessions, and the inability of clearing members to transfer funds to satisfy margin during overnight hours. However, OCC’s proposal is designed in a manner that should adequately monitor for the risks presented by accepting trades for clearance and settlement during these extended and overnight sessions, and should adequately mitigate these risks. As part of that design, OCC proposed to limit to the product set eligible for overnight trading sessions to index options and index futures products and to institute qualification criteria for determining whether to provide clearing services for overnight trading sessions offered by a particular exchange. These qualification criteria include price reasonability checks, controls to prevent orders from being executed at prices beyond a certain percentage of the initial execution price, activity based protections focused on risk beyond price, such as a high number of trades occurring in a set period of time, and kill switch capabilities. Limiting the eligible product set as well as confirming risk management controls by participating exchanges also should help promote robust risk management and safety, and soundness of the clearance of overnight trades. In addition, OCC’s proposed framework also incorporates a number of mechanisms designed to further control the risks posed by overnight trading, including (i) clearing member qualification criteria, (ii) systemic controls to identify trades executed by clearing members not approved for overnight trading, (iii) enhancements to OCC’s overnight monitoring of trades submitted by exchanges during See Financial Market Utilities, 77 FR 45907 (August 2, 2012). 24 12 U.S.C. 5464(b). 25 12 U.S.C. 5464(b). VerDate Sep<11>2014 16:51 Feb 13, 2015 Jkt 235001 overnight trading sessions, (iv) enhancements to OCC’s credit controls with respect to monitoring clearing members’ credit risk during overnight trading sessions, and (v) disciplinary actions for unapproved clearing members who attempt to clear during overnight trading sessions. Particularly, OCC’s overnight monitoring and escalation, including requiring additional intra-day margin, increasing a clearing member’s margin requirement, and/or invoking an exchange’s kill switch should serve to help mitigate the risks posed by the inability of clearing members to transfer funds to satisfy margin during overnight hours due to the, lack of availability of bank payment systems in the overnight hours and the period of time between trade acceptance and settlement. Moreover, requiring and enforcing adequate staffing at clearing members as well as at OCC through a designated an on-call Market Risk duty officer should help to mitigate the risks of overnight clearing. Accordingly, the Commission believes that the proposal should promote robust risk management, promote safety and soundness in the marketplace, reduce systemic risks, and support the stability of the broader financial system as it provides OCC with a range of mechanisms that help mitigate the risks posed by clearance trades from extended and overnight trading sessions. III. Conclusion It is therefore noticed, pursuant to Section 806(e)(1)(I) of the Clearing Supervision Act,26 that the Commission does not object to advance notice proposal (SR–OCC–2014–812) and that 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 this advance notice proposal (SR– OCC–2014–24), whichever is later. By the Commission. Brent J. Fields, Secretary. [FR Doc. 2015–03097 Filed 2–13–15; 8:45 am] BILLING CODE 8011–01–P 26 12 PO 00000 U.S.C. 5465(e)(1)(I). Frm 00103 Fmt 4703 Sfmt 4703 8387 DEPARTMENT OF TRANSPORTATION Federal Aviation Administration Notice of Release From Conveyance Deed Obligations for Superior Municipal Airport, Superior, Pinal County, Arizona Federal Aviation Administration, DOT. ACTION: Notice of request to release airport land. AGENCY: The Federal Aviation Administration (FAA) proposes to rule and invites public comment on the application for a release of approximately 15.09 acres of airport property at Superior Municipal Airport, Superior, Pinal County, Arizona from all conditions contained in the Conveyance Deed since the parcel of land is not needed for airport purposes. The property will be sold for its fair market value and the proceeds used for an airport purpose. The reuse of the land for a roadway improvement project by the State of Arizona represents a compatible land use that will not interfere with the airport, thereby protecting the interests of civil aviation. DATES: Comments must be received on or before March 19, 2015. FOR FURTHER INFORMATION CONTACT: Comments on the request may be mailed or delivered to the FAA at the following address: Mike N. Williams, Manager, Airports District Office, Federal Register Comment, Federal Aviation Administration, Phoenix Airports District Office, 3800 N. Central Avenue, Suite 1025, Phoenix, Arizona 85012. In addition, one copy of the comment submitted to the FAA must be mailed or delivered to David E. Edwards, Right of Way Project Coordinator, Arizona Department of Transportation, 205 South 17th Avenue, MD 612E, Phoenix, Arizona 85007–3212. SUPPLEMENTARY INFORMATION: In accordance with the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (AIR 21), Public Law 10–181 (Apr. 5, 2000; 114 Stat. 61), this notice must be published in the Federal Register 30 days before the Secretary may waive any condition imposed on a federally obligated airport by surplus property conveyance deeds or grant agreements. The following is a brief overview of the request: The Town of Superior, Pinal County, Arizona requested a release from the conditions contained in the Conveyance Deed for approximately 15.09 acres of airport land. The property is located on the north side of the airport adjacent to SUMMARY: E:\FR\FM\17FEN1.SGM 17FEN1

Agencies

[Federal Register Volume 80, Number 31 (Tuesday, February 17, 2015)]
[Notices]
[Pages 8383-8387]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-03097]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74241; File No. SR-OCC-2014-812]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of No Objection to Advance Notice Concerning Extended and 
Overnight Trading Sessions

February 10, 2015.
    On December 12, 2014, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') 
advance notice SR-OCC-2014-812 (``Advance Notice'') \1\ pursuant to 
Section 806(e)(1) of the Payment, Clearing, and Settlement Supervision 
Act of 2010 (``Clearing Supervision Act'') \2\ and Rule 19b-4(n)(1)(i) 
under the Securities Exchange Act of 1934 (``Exchange Act'').\3\ The 
Advance Notice was published for comment in the Federal Register on 
January 22, 2015.\4\ The Commission did not receive any comments on the 
Advance Notice. This publication serves as a notice of no objection to 
the Advance Notice.
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    \1\ OCC initially filed a similar advance notice on September 
17, 2014. Securities Exchange Act Release No. 73343 (October 14, 
2014), 79 FR 62684 (October 20, 2014), (SR-OCC-2014-805). OCC 
withdrew that advance notice on October 28, 2104. Securities 
Exchange Act Release No. 73710 (December 1, 2014), 79 FR 72225 
(December 5, 2014), (SR-OCC-2014-805).
    \2\ 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).
    \3\ 17 CFR 240.19b-4(n)(1)(i).
    \4\ See Securities Exchange Act Release No. 74073 (January 15, 
2015), 80 FR 3287 (January 22, 2015) (SR-OCC-2014-812). 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 December 30, 2014. 15 U.S.C. 78s(b)(1); 17 CFR 240.19b-4. See 
Securities Exchange Act Release No. 73907 (December 22, 2014), 79 FR 
78543 (December 30, 2014) (SR-OCC-2014-24). The Commission did not 
receive any comments on the proposed rule change. 
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I. Description of the Advance Notice

Description of Change

    This advance notice was filed in connection with OCC's proposed 
change to its operations concerning the clearance of confirmed trades 
executed in overnight trading sessions offered by exchanges for which 
OCC provides clearance and settlement services. OCC currently clears 
overnight trading activity for CBOE Futures Exchange, LLC (``CFE'').\5\ 
The total number of trades submitted to OCC from overnight trading 
sessions is nominal, typically less than 3,000 contracts per session. 
However, OCC has recently observed an industry trend whereby exchanges 
are offering overnight trading sessions beyond traditional hours. 
Exchanges offering overnight trading sessions have indicated to OCC 
that such sessions benefit market participants by providing additional 
price transparency and hedging opportunities for products traded in 
such sessions, which, in turn, promotes market stability.\6\ In light 
of this trend, OCC proposed to implement a framework for clearing 
trades executed in such sessions that includes: (1) Qualification 
criteria used to approve clearing members for overnight trading 
sessions, (2) systemic controls to identify trades executed during 
overnight trading sessions by clearing members not approved for such 
sessions, (3) enhancements to OCC's overnight monitoring of trades 
submitted by exchanges during overnight trading sessions, (4) 
enhancements to OCC's credit controls with respect to monitoring 
clearing members' credit risk during overnight trading sessions, 
including procedures for contacting an exchange offering overnight 
trading sessions in order to invoke use of the exchange's kill switch, 
and (5) taking appropriate disciplinary action against clearing members 
who attempt to clear during the overnight trading session without first 
obtaining requisite approvals. These changes (described in greater 
detail below) are designed to reduce and mitigate the risks associated 
with clearing trades executed in overnight trading sessions. In 
addition, the only products that will be eligible for clearing in 
overnight trading sessions are index options and index futures 
products.
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    \5\ ELX Futures LP (``ELX'') previously submitted overnight 
trading activity to OCC, but currently does not submit such trades. 
OCC will re-evaluate ELX's risk controls in the event ELX re-
institutes its overnight trading sessions.
    \6\ See CFE-2014-010 at https://cfe.cboe.com/publish/CFErulefilings/SR-CFE-2014-010.pdf.
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    OCC's framework for determining whether to provide clearing 
services for overnight trading sessions offered by an exchange is 
designed to work in conjunction with the risk controls of the exchange 
that offers overnight trading sessions. OCC will confirm an exchange's 
risk controls as well as its staffing levels as they relate to 
overnight trading sessions to determine if OCC may reasonably rely on 
such risk controls to reduce the risk presented to OCC by the 
exchange's overnight trading sessions. Such exchange risk controls will 
consist of: (1) Price reasonability checks, (2) controls to prevent 
orders from being executed beyond a certain percentage (determined by 
the exchange) from the initial execution price, (3) activity based 
protections which focus on risk beyond price, such as a high number of 
trades occurring in a set period of time, and (4) kill switch 
capabilities, which may be initiated by the exchange and can cancel all 
open quotes or all orders of a particular participant. OCC believes 
that confirming the existence of applicable pre-trade risk controls as 
well as overnight staffing at the relevant exchanges is essential to 
mitigating risks presented to OCC from overnight trading sessions.\7\ 
OCC believes that providing clearing services to exchanges offering 
such sessions is consistent with

[[Page 8384]]

OCC's mission to provide market participants with clearing and risk 
management solutions that respond to changes in the marketplace.
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    \7\ Comparable controls are applied to futures and future option 
trades executed in overnight trading sessions currently cleared by 
OCC, although such controls have been implemented by clearing 
futures commission merchants (``clearing FCMs'') pursuant to 
Commodity Futures Trading Commission (``CFTC'') Regulation 1.73. 
This requires clearing FCMs to monitor for adherence to such 
controls during regular and overnight trading sessions. Some of 
these risk control measures are similar to those proposed by OCC for 
use in clearing securities trades in overnight trading sessions. For 
instance, OCC confirmed that CFE maintains kill switch capabilities.
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Qualification Criteria

    In order to mitigate risks associated with clearing for overnight 
trading sessions, clearing members that participate in such trading 
sessions will be required to provide contact information to OCC for 
operational and risk personnel available to be contacted by OCC during 
such sessions. In addition, OCC will require that clearing members 
participating in an overnight trading session post additional margin in 
a designated account in order to mitigate the risk that OCC cannot 
draft a clearing member's bank account during an overnight trading 
session.\8\ OCC also will adopt a procedure whereby, on a quarterly 
basis, it confirms its record of clearing members eligible for 
overnight trading sessions with a similar record maintained by 
exchanges offering such overnight trading sessions.
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    \8\ Clearing members will be required to designate a firm 
account to ensure that OCC has a general lien on the assets in the 
account and can use them to satisfy any obligation of the clearing 
member to OCC.
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    With respect to providing operational and risk contacts, under OCC 
Rule 201, each clearing member is required to maintain facilities for 
conducting business with OCC and to have a representative authorized in 
the name of the clearing member to take all action necessary for 
conducting business with OCC available at the facility during such 
hours as may be specified from time-to-time by OCC. Similarly, OCC 
Rules 214(c) and (d) require clearing members to ensure that they have 
the appropriate number of qualified personnel and to maintain the 
ability to process anticipated volumes and values of transactions. OCC 
will use this existing authority to require clearing members trading 
during overnight trading sessions to maintain operational and risk 
staff that may be contacted by OCC during such sessions.
    OCC will impose upon clearing members qualified to participate in 
overnight trading sessions additional margin requirement in an amount 
of the lesser of $10 million or 10% of the clearing member's net 
capital (``Additional Margin''), which will be equal to the first 
monitoring risk threshold (described below) and which will be collected 
the morning before each overnight trading sessions. Clearing members 
must identify the proprietary account that would be charged the 
Additional Margin amount. The Additional Margin requirement is intended 
to provide OCC with additional margin assets should a clearing member's 
credit risk increase during overnight trading sessions.\9\ OCC proposes 
to adopt a process whereby each morning OCC Financial Risk Management 
staff will assess the Additional Margin requirement against clearing 
members eligible to participate in overnight trading sessions. Clearing 
members that do not have sufficient excess margin on deposit with OCC 
to meet the Additional Margin amount will be required to deposit 
additional funds with OCC to satisfy the Additional Margin requirement 
prior to participating in any future overnight trading sessions.\10\ 
This process will be adopted under existing rule authority.
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    \9\ Clearing members approved for overnight trading sessions 
that do not meet the Additional Margin requirement for a given 
overnight trading session would be treated like a clearing member 
not approved for overnight trading sessions, as described below.
    \10\ Under OCC Rule 601, OCC has the discretion to fix the 
margin requirement for any account at an amount that it deems 
necessary or appropriate under the circumstances to protect the 
interests of clearing members, OCC and the public.
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    Moreover, OCC also will confirm that an exchange offering overnight 
trading sessions has adopted a procedure whereby such exchange would 
contact OCC when a trader requests trading privileges during overnight 
trading sessions. The purpose of this contact is to verify that the 
trader's clearing firm (i.e., the OCC clearing member) is approved for 
overnight trading sessions. If the applicable OCC clearing member is 
not approved for overnight trading sessions, then the clearing member 
must receive OCC's approval for overnight trading sessions, or the 
exchange will not provide the trader trading privileges during 
overnight trading sessions. Moreover, OCC will confirm that an exchange 
offering overnight trading sessions has implemented a procedure to 
periodically (i.e., quarterly) validate its record of approved clearing 
firms against OCC's record of clearing members approved for overnight 
trading sessions.\11\ Any discrepancies between the two records will be 
promptly resolved by either the clearing member obtaining approval from 
OCC for overnight trading sessions or by the exchange revoking the 
clearing firm's trading privileges for overnight trading sessions.
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    \11\ As discussed in more detail below, clearing members that 
attempt to participate in overnight trading sessions without the 
necessary approval will be subject to a minor rule violation fine.
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Systemic Controls

    OCC will implement system changes so that trades submitted to OCC 
during overnight trading sessions that have been executed by clearing 
members not approved for such trading sessions will be reviewed by OCC 
staff after acceptance but before being processed (each such trade 
being a ``Reviewed Trade''). OCC will contact the submitting exchange 
regarding each Reviewed Trade in order to determine if the trade is a 
valid trade. If the exchange determines that the Reviewed Trade was in 
error such that, as provided in Article VI, Section 7(c) of OCC's By-
laws, new or revised trade information is required to properly clear 
the transaction, OCC expects the exchange would instruct OCC to 
disregard or ``bust'' the trade. If the exchange determines that the 
Reviewed Trade was not in error, then OCC will clear the Reviewed Trade 
and take appropriate disciplinary action against the non-approved 
clearing member, as described below. OCC believes that clearing the 
Reviewed Trade is appropriate in order to avoid potentially harming the 
clearing member approved for overnight trading sessions that is on the 
opposite side of the transaction.

Overnight Monitoring

    OCC will implement additional overnight monitoring in order to 
better monitor clearing members' credit risk during overnight trading 
sessions. Such monitoring of credit risk is similar to existing OCC 
practices concerning futures cleared during overnight trading hours and 
includes automated processes within OCC's ENCORE clearing system to 
measure, by clearing member: (i) The aggregate mark-to-market amounts 
of a clearing member's positions, including positions created during 
overnight trading, based on current prices using OCC's Portfolio 
Revaluation system, (ii) the aggregate incremental margin produced by 
all positions resulting from transactions executed during overnight 
trading, and (iii) with respect to options cleared during overnight 
trading hours, the aggregate net trade premium positions resulting from 
trades executed during overnight trading (each of these measures being 
a ``Credit Risk Number''). Hourly credit reports would be generated by 
ENCORE containing the Credit Risk Numbers expressed in terms of both 
dollars and, except for the mark-to-market position values, as a 
percentage of net capital for each clearing member trading during 
overnight trading sessions. The Credit Risk Numbers are the same 
information used by OCC staff to evaluate clearing member exposure 
during regular trading hours and, in addition to OCC's knowledge of its 
clearing members' businesses, are effective measures of the

[[Page 8385]]

risk presented to OCC by each clearing member. OCC's Operations staff 
will review such reports as they are generated and, in the event that 
any of the Credit Risk Numbers for positions established by a clearing 
member during an overnight trading session exceed established 
thresholds, staff will alert OCC's Market Risk staff \12\ of the 
exceedance in accordance with established procedures, as described 
below.
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    \12\ OCC's Member Services staff will also receive alerts in 
order to contact clearing members as may be necessary.
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    Market Risk staff will follow a standardized process concerning 
such exceedances, including escalation to OCC's management, if required 
by such process. Given the nominal volume of trades executed in 
overnight trading sessions that are presently submitted for clearance, 
OCC does not contemplate changes in its current staffing levels that 
support overnight clearing activities at this time, however, OCC will 
periodically assess and adjust such staffing levels as appropriate. As 
part of the overnight clearing activities, OCC has, however, designated 
an on-call Market Risk duty officer who would be responsible for 
reviewing issues that arise when clearing for overnight trading session 
and determining what measures to be taken as well as additional 
escalation, if necessary.
    With respect to OCC's escalation thresholds, if any Credit Risk 
Number of a clearing member approved for overnight trading sessions is 
$10 million or more, or any Credit Risk Number equals 10% or more of 
the clearing member's net capital, OCC's Operations staff will be 
required to provide email notification to Market Risk and Member 
Services staff. If any Credit Risk Number of a clearing member not 
approved for overnight trading sessions is $10 million or more, or any 
Credit Risk Number equals 10% or more of the clearing member's net 
capital, OCC's Operations will also notify Market Risk and Member 
Services staff as well as its senior management. Such departments will 
take action to prevent additional trading by the non-approved clearing 
member, including contacting the exchange to invoke use of the 
exchange's kill switch.
    If any Credit Risk Number of a clearing member approved for 
overnight trading sessions is $50 million or more, or equals 25% or 
more of the clearing member's net capital, Operations staff will be 
required to contact, by telephone: (i) Market Risk and Member Services, 
(ii) the applicable exchange for secondary review, and (iii) the 
clearing member's designated contacts. The on-call Market Risk duty 
officer also will consider if additional action is necessary, which may 
include contacting a designated executive officer in order to issue an 
intra-day margin call, increase the clearing member's margin 
requirement in order to prevent the withdrawal of a specified amount of 
excess margin collateral, if any, the clearing member has on deposit 
with OCC, or contacting the exchange in order to invoke the use of its 
kill switch.
    If any Credit Risk Number is $75 million or more, or equals 50% or 
more of the clearing member's net capital, Operations staff will be 
required to contact, by telephone, Market Risk staff, the on-call 
Market Risk duty officer, and a designated executive officer. Such 
officer will be responsible for reviewing the situation and determining 
whether to implement credit controls, which are described in greater 
detail below and include: Issuing an intra-day margin call, increasing 
a clearing member's margin requirement in order to prevent the 
withdrawal of a specified amount of excess margin collateral, if any, 
the clearing member has on deposit with OCC, whether further escalation 
is warranted in order for OCC to take protective measures pursuant to 
OCC Rule 305, or contact the exchange in order to invoke use of its 
kill switch. OCC stated that it chose the above described escalation 
thresholds based on its analysis of historical overnight trading 
activity across the futures industry. OCC believes that these 
thresholds strike an appropriate balance between effective risk 
monitoring and operational efficiency.

Credit Controls

    In order to address credit risk associated with trading during 
overnight trading sessions, and as described above, OCC will collect 
Additional Margin from clearing members as well as monitor and analyze 
the impact that positions established during such sessions have on a 
clearing member's overall exposure. Should the need arise based on 
threshold breaches described above, and pursuant to OCC Rule 609, OCC 
may require the deposit of additional margin (``intra-day margin'') by 
any clearing member that increases its incremental risk as a result of 
trading activity during overnight trading sessions. Accordingly, a 
clearing member's positions established during such sessions will be 
incorporated into OCC's intra-day margin process. Should a clearing 
member's exposure significantly increase while settlement banks are not 
open to process an intra-day margin call, OCC has the authority under 
OCC Rule 601 to increase a clearing member's margin requirement which 
will restrict its ability to withdraw excess margin collateral. The 
implementation of these measures is discussed more fully below.
    In the event that a clearing member's exposure during overnight 
trading sessions causes a clearing member to exceed OCC's intra-day 
margin call threshold for overnight trading sessions, OCC will require 
the clearing member to deposit intra-day margin equal to the increased 
incremental risk presented by the clearing member. Specifically, if a 
clearing member has a total risk charge \13\ exceeding 25% (a reduction 
of the usual figure of 50%), as computed overnight by OCC's STANS 
system, and a loss of greater than $50,000 from an overnight trading 
session(s), as computed by Portfolio Revaluation, OCC will initiate an 
intra-day margin call. OCC will know at approximately 8:30 a.m. 
(Central Time) if an intra-day margin call on a clearing member will be 
initiated based on breaches of these thresholds. This ``start of 
business'' margin call is in addition to daily margin OCC collects from 
clearing members pursuant to OCC Rule 605, any intra-day margin call 
that OCC may initiate as a result of regular trading sessions, or 
special margin call that OCC may initiate.
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    \13\ Total risk charge is a number derived from STANS outputs 
and is the sum of expected shortfall, stress test charges and any 
add-on charges computed by STANS. STANS is OCC's proprietary margin 
methodology.
---------------------------------------------------------------------------

    In addition to, or instead of, requiring additional intra-day 
margin, OCC Rule 601 \14\ and OCC's Clearing Member Margin Call Policy 
will work together to authorize Market Risk staff to increase a 
clearing member's margin requirement which may be in an amount equal to 
an intra-day margin call.\15\ (Any increased margin requirement will 
remain in effect until the next business day.) This action will 
immediately prevent clearing members from withdrawing any excess margin 
collateral (in the amount of the increased margin requirement) the 
clearing member has deposited with OCC. With respect to clearing trades 
executed in overnight trading sessions, and in the event OCC requires 
additional margin from a clearing member, Market Risk staff may use 
increased margin requirements as a means of collateralizing the 
increase in

[[Page 8386]]

incremental risk a clearing member incurred during such sessions 
without having to wait for banks to open to process an intra-day margin 
call.\16\ Such action may be taken by OCC instead of, or in addition 
to, issuing an intra-day margin call depending on the amount of excess 
margin a clearing member has on deposit with OCC and the amount of the 
incremental risk presented by such clearing member. OCC believes that 
the expansion of its intra-day margin call process as described in the 
preceding paragraph, including OCC's ability to manually increase 
clearing members' margin requirements, will mitigate the risk that OCC 
is under-collateralized as a result of overnight trading hours.
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    \14\ In addition, OCC Rule 601 provides OCC with the authority 
to fix the margin requirement for any account or any class of 
cleared contracts at such amount as it deems necessary or 
appropriate under the circumstances to protect the respective 
interests of clearing members, OCC, and the public.
    \15\ Clearing members frequently deposit margin at OCC in excess 
of requirements.
    \16\ Clearing members will be able to substitute the locked-up 
collateral during normal time frames (i.e., 6:00 a.m. to 5:00 p.m. 
(Central Time) for equity securities).
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    Moreover, a designated executive officer may call an exchange 
offering overnight trading sessions to invoke the use of its kill 
switch. The kill switch prevents a clearing member (or the market 
participant clearing through a clearing member) from executing trades 
on the exchange during a given overnight trading session or, if needed, 
stop all trading during a given overnight trading session. Finally, 
pursuant to OCC Rule 305, the Executive Chairman or the President of 
OCC, in certain situations, has the authority to impose limitations and 
restrictions on the transactions, positions, and activities of a 
clearing member. This authority will be used, as needed, in the event a 
clearing member accumulates significant credit risk during overnight 
trading sessions, or a clearing member's activities during such trading 
sessions otherwise warrant OCC taking protective action.

Rule Enforcement Actions

    In order to deter clearing members from attempting to participate 
in overnight trading sessions without authorization as well as 
appropriately enforce the above described processes, OCC will ensure 
that any attempt by a clearing member to participate in overnight 
trading sessions without first obtaining the necessary approval will 
result in the initiation of a rule enforcement action against such 
clearing member. As described above, clearing members not approved for 
overnight trading sessions that trade during such overnight sessions 
will have their trades reviewed by OCC staff. Clearing members that 
attempt to participate in overnight trading sessions but do not obtain 
the necessary approval to do so will be subject to a minor rule 
violation fine.\17\ In addition, if a clearing member's operational or 
risk contacts for overnight trading sessions were unavailable had OCC 
attempted to contact such individuals, the clearing member will be 
subject to a minor rule violation fine. OCC has existing processes in 
place to monitor for clearing member violations of OCC's rules and such 
processes also will apply to clearing member activity during overnight 
trading sessions.
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    \17\ See OCC Rule 1201(b).
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Effect That OCC Anticipates on and Management of Risk

    Clearing transactions executed in overnight trading sessions may 
increase risk presented to OCC due to the period of time between trade 
acceptance and settlement, the staffing levels at clearing members 
during such trading sessions, and the deferment of executing intra-day 
margin calls until banking settlement services are operational. 
However, OCC will expand its risk management practices in order to 
mitigate these risks by implementing, and expanding, the various tools 
discussed above. For example, OCC will enhance its monitoring practices 
in order to closely monitor clearing members' credit risk from trades 
placed during overnight trading sessions as well as implement processes 
so that OCC takes appropriate action when such credit risk exceeds 
certain limits. OCC also will use its existing authority to require 
adequate clearing member staffing during such trading sessions, in 
order to mitigate the operational risk associated with clearing members 
trading while they are not fully staffed. These risk management 
functions will work in tandem with risk controls, including the 
implementation of kill switch capabilities, adopted by the exchanges 
operating overnight trading sessions or by clearing FCMs, as 
applicable.
    In addition to the above, OCC will adapt existing processes so that 
such processes can be used to mitigate risk associated with overnight 
trading sessions. Specifically, OCC will exercise its authority to 
issue margin calls and prevent the withdrawal of excess margin on 
deposit at OCC, as a result of activity during such trading sessions as 
a means of reducing risk. OCC also will implement a systemic function 
to identify trades executed during overnight trading sessions by 
clearing members not approved for such trading sessions for further 
review prior to allowing such trades to proceed further through OCC's 
clearance processing, and therefore mitigate the risk of losses from 
erroneous trades. Finally, OCC will be able to assess the need to take 
protective action pursuant to OCC Rule 305 as a result of clearing 
member activity during such sessions.

II. Discussion and Commission Findings

    Although the Clearing Supervision Act does not specify a standard 
of review for an advance notice, the Commission believes that the 
stated purpose of the Clearing Supervision Act is instructive.\18\ The 
stated purpose of the Clearing Supervision Act 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 and strengthening the 
liquidity of systemically important financial market utilities.\19\
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    \18\ See 12 U.S.C. 5461(b).
    \19\ Id.
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    Section 805(a)(2) of the Clearing Supervision Act \20\ 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 Clearing Supervision Act \21\ states that the objectives 
and principles for the risk management standards prescribed under 
Section 805(a) shall be to:
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    \20\ 12 U.S.C. 5464(a)(2).
    \21\ 12 U.S.C. 5464(b).
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     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 Clearing Supervision Act (``Clearing Agency 
Standards'').\22\ The Clearing Agency Standards became effective on 
January 2, 2013, and require registered clearing agencies that perform 
central counterparty services to establish, implement, maintain, and 
enforce written policies and procedures that are reasonably designed to 
meet certain minimum requirements for their operations and risk 
management practices on an ongoing basis.\23\ As

[[Page 8387]]

such, 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 Clearing Supervision Act.\24\
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    \22\ 17 CFR 240.17Ad-22.
    \23\ The Clearing Agency Standards are substantially similar to 
the risk management standards established by the Board of Governors 
of the Federal Reserve System governing the operations of designated 
financial market utilities that are not clearing entities and 
financial institutions engaged in designated activities for which 
the Commission or the Commodity Futures Trading Commission is the 
Supervisory Agency. See Financial Market Utilities, 77 FR 45907 
(August 2, 2012).
    \24\ 12 U.S.C. 5464(b).
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    The Commission believes that the proposal in this Advance Notice is 
designed to further the objectives and principles of Section 805(b) of 
the Clearing Supervision Act.\25\ The Commission notes that clearing 
transactions executed in overnight trading sessions may present 
additional risks to OCC and the markets in general; specifically, 
overnight trading sessions may create risk due to the gap between trade 
acceptance and settlement, the staffing levels at clearing members and 
OCC during such trading sessions, and the inability of clearing members 
to transfer funds to satisfy margin during overnight hours. However, 
OCC's proposal is designed in a manner that should adequately monitor 
for the risks presented by accepting trades for clearance and 
settlement during these extended and overnight sessions, and should 
adequately mitigate these risks.
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    \25\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    As part of that design, OCC proposed to limit to the product set 
eligible for overnight trading sessions to index options and index 
futures products and to institute qualification criteria for 
determining whether to provide clearing services for overnight trading 
sessions offered by a particular exchange. These qualification criteria 
include price reasonability checks, controls to prevent orders from 
being executed at prices beyond a certain percentage of the initial 
execution price, activity based protections focused on risk beyond 
price, such as a high number of trades occurring in a set period of 
time, and kill switch capabilities. Limiting the eligible product set 
as well as confirming risk management controls by participating 
exchanges also should help promote robust risk management and safety, 
and soundness of the clearance of overnight trades.
    In addition, OCC's proposed framework also incorporates a number of 
mechanisms designed to further control the risks posed by overnight 
trading, including (i) clearing member qualification criteria, (ii) 
systemic controls to identify trades executed by clearing members not 
approved for overnight trading, (iii) enhancements to OCC's overnight 
monitoring of trades submitted by exchanges during overnight trading 
sessions, (iv) enhancements to OCC's credit controls with respect to 
monitoring clearing members' credit risk during overnight trading 
sessions, and (v) disciplinary actions for unapproved clearing members 
who attempt to clear during overnight trading sessions.
    Particularly, OCC's overnight monitoring and escalation, including 
requiring additional intra-day margin, increasing a clearing member's 
margin requirement, and/or invoking an exchange's kill switch should 
serve to help mitigate the risks posed by the inability of clearing 
members to transfer funds to satisfy margin during overnight hours due 
to the, lack of availability of bank payment systems in the overnight 
hours and the period of time between trade acceptance and settlement. 
Moreover, requiring and enforcing adequate staffing at clearing members 
as well as at OCC through a designated an on-call Market Risk duty 
officer should help to mitigate the risks of overnight clearing. 
Accordingly, the Commission believes that the proposal should promote 
robust risk management, promote safety and soundness in the 
marketplace, reduce systemic risks, and support the stability of the 
broader financial system as it provides OCC with a range of mechanisms 
that help mitigate the risks posed by clearance trades from extended 
and overnight trading sessions.

III. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act,\26\ that the Commission does not object to 
advance notice proposal (SR-OCC-2014-812) and that 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 this advance notice proposal (SR-
OCC-2014-24), whichever is later.
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    \26\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2015-03097 Filed 2-13-15; 8:45 am]
BILLING CODE 8011-01-P
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