Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of a Proposed Rule Change To Establish Procedures Regarding the Monthly Resizing of its Clearing Fund and the Addition of Financial Resources, 17808-17812 [2015-07523]

Download as PDF 17808 Federal Register / Vol. 80, No. 63 / Thursday, April 2, 2015 / Notices November 19, 2013. Urban AG’s common stock (ticker ‘‘AQUM’’) is quoted on OTC Link (previously ‘‘Pink Sheets’’) operated by OTC Markets Group, Inc. The Commission is of the opinion that the public interest and the protection of investors require a suspension of trading in the securities of Urban AG. Therefore, it is ordered, pursuant to Section 12(k) of the Securities Exchange Act of 1934, that trading in the securities of Urban AG is suspended for the period from 9:30 a.m. EDT on March 31, 2015, through 11:59 p.m. EDT on April 14, 2015. By the Commission. Jill M. Peterson, Assistant Secretary. BILLING CODE CODE 8011–01–P [Release No. 34–74603; File No. SR–OCC– 2015–009] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of a Proposed Rule Change To Establish Procedures Regarding the Monthly Resizing of its Clearing Fund and the Addition of Financial Resources March 27, 2015. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on March 13, 2015, The Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II and III below, which Items have been prepared by OCC.3 The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. tkelley on DSK3SPTVN1PROD with NOTICES I. Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule Change OCC proposes to establish procedures regarding the monthly resizing of its Clearing Fund and the addition of financial resources through intra-day margin calls and/or an intra-month increase of the Clearing Fund to ensure that it maintains adequate financial U.S.C. 78s(b)(1). CFR 240.19b–4. 3 On March 13, 2015, OCC formally withdrew the proposed rule change filed as SR–OCC–2014–22, as modified by Amendment No. 1 and Amendment No. 2 thereto, the substance of which OCC has refiled as SR–OCC–2015–009. VerDate Sep<11>2014 18:52 Apr 01, 2015 Jkt 235001 In its filing with the Commission, OCC included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. OCC has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of these statements. 1. Purpose SECURITIES AND EXCHANGE COMMISSION 2 17 II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change (A) Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change [FR Doc. 2015–07672 Filed 3–31–15; 4:15 pm] 1 15 resources in the event of a default of a Clearing Member or group of affiliated Clearing Members presenting the largest exposure to OCC. The proposed rule change is intended to describe the situations in which OCC would exercise authority under its Rules to ensure that it maintains adequate Financial Resources 4 in the event that stress tests reveal a default of the Clearing Member or Clearing Member Group 5 presenting the largest exposure would threaten the then-current Financial Resources. This proposed rule change would establish procedures governing: (i) OCC’s resizing of the Clearing Fund on a monthly basis pursuant to Rule 1001(a) (the ‘‘Monthly Clearing Fund Sizing Procedure’’); and (ii) the addition of Financial Resources through an intra-day margin call on one or more Clearing Members under Rule 609 and, if necessary, an intra-month increase of the Clearing Fund pursuant to Rule 1001(a) (the ‘‘Financial Resource Monitoring and Call Procedure’’).6 The Monthly Clearing Fund Sizing Procedure would permit OCC to determine the size of the Clearing Fund by relying on a broader range of sound risk management practices than those 4 ‘‘Financial Resources’’ means, with respect to a projected loss attributable to a particular Clearing Member or Clearing Member Group, as defined below, the sum of the margin deposits (less any excess margin a Clearing Member or Clearing Member Group may have on deposit at OCC) and deposits in lieu of margin in respect of such Clearing Members’ or Clearing Member Groups’ accounts, and the value of OCC’s Clearing Fund, including both the Base Amount, as defined below, and the prudential margin of safety, as discussed below. 5 ‘‘Clearing Member Group’’ means a Clearing Member and any affiliated entities that control, are controlled by or are under common control with such Clearing Member. See OCC By-Laws, Article I, Sections 1.C.(15) and 1.M(11). 6 This proposed rule filing has also been filed as an advance notice filing (SR–OCC–2014–811). PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 historically used under Rule 1001(a).7 The Financial Resource Monitoring and Call Procedure would require OCC to collect additional Financial Resources in certain circumstances, establish how OCC calculates and collects such resources and provide the timing by which such resources would be required to be deposited by Clearing Members. Background OCC monitors the sufficiency of the Clearing Fund on a daily basis but, prior to emergency action taken on October 16, 2014,8 OCC had no express authority to increase the size of the Clearing Fund on an intra-month basis.9 During ordinary course daily monitoring on October 15, 2014, and as a result of increased volatility in the financial markets in October 2014, OCC determined that the Financial Resources needed to cover the potential loss associated with a default of the Clearing Member or Clearing Member Group presenting the largest exposure could have exceeded the Financial Resources then available to apply to such a default. To permit OCC to increase the size of its Clearing Fund prior to the next monthly resizing that was scheduled to take place on the first business day of November 2014, OCC’s Executive Chairman, on October 16, 2014, exercised certain emergency powers as set forth in Article IX, Section 14 of OCC’s By-Laws 10 to waive the effectiveness of the second sentence of Rule 1001(a), which states that OCC will 7 The procedures described herein would be in effect until the development of a new standard Clearing Fund sizing methodology. Following such development, which will include a quantitative approach to calculating the ‘‘prudential margin of safety,’’ as discussed below, OCC will file a separate rule change and advance notice with the Commission that will include a description of the new methodology as well as a revised Monthly Clearing Fund Sizing Procedure. 8 On October 16, 2014, OCC filed an emergency notice with the Commission to suspend the effectiveness of the second sentence of Rule 1001(a). See Securities Exchange Act Release No. 73579 (November 12, 2014), 79 FR 68747 (November 18, 2014) (SR–OCC–2014–807). On November 13, 2014, OCC filed SR–OCC–2014–21 with the Commission to delete the second sentence of Rule 1001(a), preserving the suspended effectiveness of that sentence until such time as the Commission approves or disapproves SR–OCC– 2014–21. See Securities Exchange Act Release No. 73685 (November 25, 2014) 79 FR 71479 (December 2, 2014) (SR–OCC–2014–21). 9 See Rule 1001(a). 10 OCC also has submitted an advance notice that would provide greater detail concerning conditions under which OCC would increase the size of the Clearing Fund intra-month. The change would permit an intra-month increase in the event that the five-day rolling average of projected draws are 150% or more of the Clearing Fund’s then current size. See Securities Exchange Act Release No. 72804 (August 11, 2014), 79 FR 48276 (August 15, 2014) (SR–OCC–2014–804). E:\FR\FM\02APN1.SGM 02APN1 Federal Register / Vol. 80, No. 63 / Thursday, April 2, 2015 / Notices adjust the size of the Clearing Fund monthly and that any resizing will be based on data from the preceding month. OCC then filed an emergency notice with the Commission pursuant to Section 806(e)(2) of the Payment, Clearing and Settlement Supervision Act of 2010 11 and increased the Clearing Fund size for the remainder of October 2014 as otherwise provided for in the first sentence of Rule 1001(a).12 Clearing Members were informed of the action taken by the Executive Chairman 13 and the amount of their additional Clearing Fund requirements, which were met without incident. As a result of these actions, OCC’s Clearing Fund for October 2014 was increased by $1.8 billion. In continued reliance on the emergency rule waiver and in accordance with the first sentence of Rule 1001(a), OCC set the November 2014 Clearing Fund size at $7.8 billion, which included an amount determined by OCC to be sufficient to protect OCC against loss under simulated default scenarios (i.e., $6 billion), plus a prudential margin of safety (the additional $1.8 billion collected in October).14 All required contributions to the November 2014 Clearing Fund were met by affected Clearing Members. Under Article IX, Section 14(c), absent the submission of a proposed rule change to the Commission seeking approval of OCC’s waiver of the provisions of the second sentence of Rule 1001(a), such waiver would not be permitted to continue for more than thirty calendar days from the date thereof.15 Accordingly, on November 13, 2014, OCC submitted SR–OCC– 2014–21 to delete the second sentence of Rule 1001(a) and, by the terms of Article IX, Section 14(c), preserve the suspended effectiveness of the second sentence of Rule 1001(a) beyond thirty calendar days.16 SR–OCC–2014–21 was submitted in part to permit OCC to determine the size of its Clearing Fund by relying on a broader range of sound risk management practices than considered in basing such 11 12 U.S.C. 5465(e)(2). supra, note 8. 13 See Information Memorandum #35397, dated October 16, 2014, available on OCC’s Web site, https://www.theocc.com/clearing/clearinginfomemos/infomemos1.jsp. Clearing members also were informed that a prudential margin of safety of $1.8 billion would be retained until a new Clearing Fund sizing formula has been approved and implemented. 14 See Information Memorandum # 35507, dated October 31, 2014, available on OCC’s Web site, https://www.theocc.com/clearing/clearinginfomemos/infomemos1.jsp. 15 See OCC By-Laws, Article IX, Section 14(c). 16 See supra, note 8. OCC also submitted this proposed rule change to the Commodity Futures Trading Commission. size on the average daily calculations under Rule 1001(a) that are performed during the preceding calendar month. The Monthly Clearing Fund Sizing Procedure, as described below, is based on such broader risk management practices and establishes the procedures OCC would use to determine the size of the Clearing Fund on a monthly basis. Similarly, SR–OCC–2014–21 was submitted in part to permit OCC to resize the Clearing Fund more frequently than monthly when the circumstances warrant an increase of the Clearing Fund. The Financial Resource Monitoring and Call Procedure, as described below, establishes the procedures that OCC would use to add Financial Resources through an intra-day margin call on one or more Clearing Members under Rule 609 and, if necessary, an intra-month increase of the Clearing Fund pursuant to Rule 1001(a).17 Monthly Clearing Fund Sizing Procedure Under the Monthly Clearing Fund Sizing Procedure, OCC would continue to calculate the size of the Clearing Fund based on its daily stress test exposures under simulated default scenarios as described in the first sentence of Rule 1001(a) and resize the Clearing Fund on the first business day of each month. However, instead of resizing the Clearing Fund based on the average of the daily calculations during the preceding calendar month, as stated in the suspended second sentence of Rule 1001, OCC would resize the Clearing Fund so that it is the sum of: (i) An amount equal to the peak five-day rolling average of Clearing Fund draws observed over the preceding three calendar months of daily idiosyncratic default and minor systemic default scenario calculations based on OCC’s daily Monte Carlo simulations (‘‘Base Amount’’) and (ii) a prudential margin of safety determined by OCC and currently set at $1.8 billion.18 OCC believes that the proposed Monthly Clearing Fund Sizing Procedure provides a sound and tkelley on DSK3SPTVN1PROD with NOTICES 12 See VerDate Sep<11>2014 18:52 Apr 01, 2015 Jkt 235001 17 As noted in SR–OCC–2014–21, OCC would use its intra-month resizing authority only to increase the size of the Clearing Fund where appropriate, not to decrease the size of the Clearing Fund. 18 On a daily basis, OCC computes its exposure under the idiosyncratic and minor systemic events. The greater of these two exposures is that day’s ‘‘peak exposure.’’ To calculate the ‘‘rolling five day average’’ OCC computes the average of the peak exposure for each consecutive five-day period observed over the prior three-month period. To determine the Base Amount, OCC would use the largest five-day rolling average observed over the past three-months. This methodology was used to determine the Base Amount of the Clearing Fund for November 2014 and December 2014. PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 17809 prudent approach to ensure that the Financial Resources are adequate to protect against the largest risk of loss presented by the default of a Clearing Member or Clearing Member Group. By virtue of using only the peak five-day rolling average and by extending the look-back period, the proposed Monthly Clearing Fund Sizing Procedure is both more responsive to sudden increases in exposure and less susceptible to recently observed decreases in exposure that would reduce the overall sizing of the Clearing Fund, thus mitigating procyclicality.19 Furthermore, the prudential margin of safety provides an additional buffer to absorb potential future exposures not previously observed during the look-back period. The proposed Monthly Clearing Fund Sizing Procedure would be supplemented by the Financial Resource Monitoring and Call Procedure, described below, to provide further assurance that the Financial Resources are adequate to protect against such risk of loss. Financial Resource Monitoring and Call Procedure Under the Financial Resource Monitoring and Call Procedure, OCC would use the same daily idiosyncratic default calculation as under the Monthly Clearing Fund Sizing Procedure to monitor daily the adequacy of the Financial Resources to withstand a default by the Clearing Member or Clearing Member Group presenting the largest exposure under extreme but plausible market conditions.20 If such a daily idiosyncratic default calculation projected a draw on the Clearing Fund (a ‘‘Projected Draw’’) that is at least 75% of the Clearing Fund maintained by OCC, OCC would be required to issue an intra-day margin call pursuant to Rule 609 against the Clearing Member or Clearing Member Group that caused such a draw (‘‘Margin Call Event’’).21 19 Considering only the peak exposures is a more conservative methodology that gives greater weighting to sudden increases in exposure experienced by Clearing Members, thus enhancing the responsiveness of the procedure to such sudden increases. By using a longer look-back period, the methodology would respond more slowly to recently observed decreases in peak exposures. 20 Since the minor systemic default scenario contemplates two Clearing Members’ simultaneously defaulting and OCC maintains Financial Resources sufficient to cover a default by a Clearing Member or Clearing Member Group representing the greatest exposure to OCC, OCC does not use the minor systemic default scenario to determine the adequacy of the Financial Resources under the Financial Resource Monitoring and Call Procedure. 21 Rule 609 authorizes OCC to require the deposit of additional margin in any account at any time E:\FR\FM\02APN1.SGM Continued 02APN1 17810 Federal Register / Vol. 80, No. 63 / Thursday, April 2, 2015 / Notices tkelley on DSK3SPTVN1PROD with NOTICES Subject to a limitation described below, the amount of the margin call would be the difference between the Projected Draw and the Base Clearing Fund (‘‘Exceedance Above Base Amount’’). In the case of a Clearing Member Group that causes the Exceedance Above Base Amount, the Exceedance Above Base Amount would be pro-rated among the individual Clearing Members that compose the Clearing Member Group based on each individual Clearing Member’s proportionate share of the ‘‘total risk’’ for such Clearing Member Group as defined in Rule 1001(b), i.e., the margin requirement with respect to all accounts of the Clearing Member Group exclusive of the net asset value of the positions in such accounts aggregated across all such accounts. However, in the case of an individual Clearing Member or a Clearing Member Group, the margin call would be subject to a limitation under which it could not exceed the lower 22 of: (a) $500 million, or (b) 100% of a Clearing Member’s net capital. Such limitation would be measured in aggregate with any funds remaining on deposit with OCC deposited by the same Clearing Member pursuant to a Margin Call Event within the same monthly period, as applicable until collection of all funds to satisfy the next regular monthly Clearing Fund resizing (the ‘‘500/100 Limitation’’).23 Upon satisfaction of the margin call, OCC would use its authority under Rule 608 to preclude the withdrawal of such additional margin amount until it collects all of the funds determined by the next Monthly Clearing Fund Sizing Procedure. Based on three years of back testing data, OCC determined that it would have had Margin Call Events in 10 of the months during this time during any business day by any Clearing Member for, inter alia, the protection of OCC, other Clearing Members or the general public. Clearing Members must meet a required deposit of intra-day margin in immediately available funds at a time prescribed by OCC or within one hour of OCC’s issuance of debit settlement instructions against the bank account(s) of the applicable Clearing Member(s), thereby ensuring the prompt deposit of additional Financial Resources. 22 ‘‘Capping’’ the intra-day margin call avoids placing a ‘‘liquidity squeeze’’ on the subject Clearing Member(s) based on exposures presented by a hypothetical stress test, which would have the potential for causing a default on the intra-day margin call. Back testing results determined that such calls would have been made against Clearing Members that are large, well-capitalized firms, with more than sufficient resources to satisfy the call for additional margin with the proposed limitations. 23 The Risk Committee would be notified, and could take action to address potential Financial Resource deficiencies, in the event that a Projected Draw resulted in a Margin Call Event and as a result of the 500/100 Limitation the margin call was less than the Exceedance Above Base Amount, but the Projected Draw was not so large as to result in an increase in the Clearing Fund as discussed below. VerDate Sep<11>2014 18:52 Apr 01, 2015 Jkt 235001 period. For each of these months, the maximum call amount would have been equal to $500 million, with one exception in which the maximum call amount for the month was $7.7 million.24 After giving effect to the intraday margin calls, i.e., by increasing the Financial Resources by $500 million, there was only one Margin Call Event where there was an observed stress test exceedance of the Financial Resources. To address this one observed instance, the Financial Resource Monitoring and Call Procedure also would require OCC to increase the size of the Clearing Fund (‘‘Clearing Fund Intra-month Increase Event’’) if a Projected Draw exceeds 90% of the Clearing Fund, after applying any funds then on deposit with OCC from the applicable Clearing Member or Clearing Member Group pursuant to a Margin Call Event. The amount of such increase (‘‘Clearing Fund Increase’’) would be the greater of: (a) $1 billion; or (b) 125% of the difference between (i) the Projected Draw, as reduced by the deposits resulting from the Margin Call Event and (ii) the Clearing Fund. Each Clearing Member’s proportionate share of the Clearing Fund Increase would equal its proportionate share of the variable portion of the Clearing Fund for the month in question as calculated pursuant to Rule 1001(b). OCC would notify the Risk Committee of the Board of Directors (the ‘‘Risk Committee’’), Clearing Members and appropriate regulatory authorities of the Clearing Fund Increase on the business day on which the Clearing Fund Intramonth Increase Event occurred. This ensures that OCC management maintains authority to address any potential Financial Resource deficiencies when compared to its Projected Draw estimates. The Risk Committee would then determine whether the Clearing Fund Increase was sufficient, and would retain authority to increase the Clearing Fund Increase or the margin call made pursuant to a Margin Call Event in its discretion. Clearing Members would be required to meet the call for additional Clearing Fund assets by 9:00 a.m. CT on the second business day following the Clearing Fund Intra-Month Increase Event. OCC believes that this collection process ensures additional Clearing Fund assets are promptly deposited by Clearing Members following notice of a Clearing Fund Increase, while also providing Clearing Members with a reasonable period of time to source such assets. Based on OCC’s back testing 24 The back testing analysis performed assumed a single Clearing Member caused the exceedance. PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 results, after giving effect to the intraday margin call in response to a Margin Call Event plus the prudential margin of safety, the Financial Resources would have been sufficient upon implementing the one instance of a Clearing Fund Intra-month Increase Event. OCC believes the Financial Resource Monitoring and Call Procedure strikes a prudent balance between mutualizing the burden of requiring additional Financial Resources and requiring the Clearing Member or Clearing Member Group causing the increased exposure to bear such burden. As noted above, in the event of a Margin Call Event, OCC limits the margin call until collection of all funds to satisfy the next regular monthly resizing to an aggregate of $500 million, or 100% of a Clearing Member’s net capital in order to avoid putting an undue liquidity strain on any one Clearing Member. However, where a Projected Draw exceeds 90% of OCC’s Clearing Fund, OCC must act to ensure that it has sufficient Financial Resources, and determined that it should mutualize the burden of the additional Financial Resources at this threshold through a Clearing Fund Increase. OCC believes that this balance would provide OCC with sufficient Financial Resources without increasing the likelihood that its procedures would, based solely on stress testing results, cause a liquidity strain on any on Clearing Member that could result in such member’s default. The following examples illustrate the manner in which the Financial Resource Monitoring and Call Procedure would be applied. All assume that the Clearing Fund size is $7.8 billion, $6 billion of which is the Base Amount and $1.8 billion of which is the prudential margin of safety. The 75% threshold in these examples is $5.85 billion. Example 1: Single CM Under OCC’s stress testing the Projected Draw attributable to Clearing Member ABC, a Clearing Member with no affiliated Clearing Members and net capital of $500 million, is $6.4 billion, or 82% of the Clearing Fund. OCC would make a margin call for $400 million, which represents the Exceedance Above Base Amount. In this case the 500/100 Limitation would not be applicable because the Exceedance Above Base Amount is less than $500 million and 100% of the Clearing Member’s net capital. The Clearing Member would be required to meet the $400 million call within one hour unless OCC prescribed a different time, and OCC would retain the $400 million until collection of all the funds to satisfy E:\FR\FM\02APN1.SGM 02APN1 Federal Register / Vol. 80, No. 63 / Thursday, April 2, 2015 / Notices the next monthly Clearing Fund sizing calculation. If, on a different day within the same month, CM ABC’s Projected Draw minus the $400 million already deposited with OCC results in an Exceedance above Base Amount, another Margin Call Event would be triggered, with the amount currently deposited with OCC applying toward the 500/100 Limitation. tkelley on DSK3SPTVN1PROD with NOTICES Example 2: Clearing Member Group Under OCC’s stress testing the Projected Draw attributable to Clearing Member Group DEF, comprised of two Clearing Members each with net capital of $800 million, is $6.2 billion, or 79% of OCC’s Clearing Fund. OCC would initiate a margin call on Clearing Member Group DEF for $200 million. The call would be allocated to the two Clearing Members that compose the Clearing Member Group based on each Clearing Member’s risk margin allocation. In this case the 500/100 Limitation would not be applicable because the Exceedance Above Base Amount is less than $500 million and 100% of net capital. The margin call would be required to be met within one hour of the call unless OCC prescribed a different time. For example, in the case where one Clearing Member accounts for 75% of the risk margin for the Clearing Member Group, that Clearing Member would be allocated $150 million of the call and the other Clearing Member, accounting for 25% of the risk margin for the Clearing Member Group, would be allocated $50 million of the call. The funds would remain deposited with OCC until collection of all the funds to satisfy the next monthly Clearing Fund sizing calculation. Example 3: Clearing Member Group With $500 Million Cap Under OCC’s stress testing the Projected Draw attributable to Clearing Member Group GHI, comprised of two Clearing Members each with net capital of $800 million, is $6.8 billion, or 87% of the Clearing Fund. The Exceedance Above Base Amount would be $800 million, allocated to the two Clearing Members that compose the Clearing Member Group based on each Clearing Member’s risk margin allocation. Using the 75/25 risk margin allocation from Example 2, one Clearing Member would be allocated $600 million and the other Clearing Member would be allocated $200 million. The first Clearing Member would be required to deposit $500 million with OCC, which is the lowest of $500 million, that member’s net capital, or that member’s share of the Exceedance Above Base Amount, and VerDate Sep<11>2014 18:52 Apr 01, 2015 Jkt 235001 the other Clearing Member would be required to deposit $200 million with OCC. After collecting the additional margin, OCC would determine whether the Projected Draw would exceed 90% of the Clearing Fund after reducing the Projected Draw by the additional margin. This calculation would divide a Projected Draw of $6.1 billion, which is the original Projected Draw of $6.8 billion reduced by the additional margin, by the Clearing Fund of $7.8 billion. The resulting percentage of 78% would be below the 90% threshold, and accordingly there would not be a Clearing Fund Intra-month Increase Event. Example 4: Margin Call and Increase in Size of Clearing Fund Under OCC’s stress testing the Projected Draw attributable to Clearing Member JKL, a Clearing Member with no affiliated Clearing Members and net capital of $600 million, is $10.0 billion, or 128% of the Clearing Fund. OCC would make a margin call for $500 million, which represents the lowest of the Exceedance Above Base Amount, $500 million and 100% of net capital. The Clearing Member would be required to meet the $500 million call within one hour unless OCC prescribed a different time, and OCC would retain the $500 million until collection of all the funds to satisfy the next monthly Clearing Fund sizing calculation. After collecting the additional margin, OCC would determine whether the Projected Draw would exceed 90% of the Clearing Fund after reducing the Projected Draw by the additional margin. This calculation would divide a Projected Draw of $9.5 billion, which is the original Projected Draw of $10 billion reduced by the additional margin, by the Clearing Fund of $7.8 billion. The resulting percentage of 122%, while lower, would still exceed the 90% threshold, and accordingly OCC would declare a Clearing Fund Intra-month Increase Event. To calculate the Clearing Fund Increase, OCC would first determine the difference between the modified Projected Draw ($9.5 billion) and the Clearing Fund ($7.8 billion), which in this case would be $1.7 billion, OCC would then multiply this by 1.25, resulting in $2.125 billion. Because this amount is greater than $1 billion, the Clearing Fund Increase would be $2.125 billion and a modified Clearing Fund of OCC totaling $9.925 billion ($425 million in excess of the modified Projected Draw of $9.5 billion). PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 17811 2. Statutory Basis OCC believes the proposed rule change is consistent with Section 17A(b)(3)(F) of the Act,25 and the rules and regulations thereunder. By establishing sound procedures governing the monthly resizing of the Clearing Fund and how OCC would add Financial Resources in response to a Margin Call Event and a Clearing Fund Intra-month Increase Event, the proposed modifications would further ensure that OCC is capable of safeguarding securities and funds which are in the custody or control of OCC or for which it is responsible and protecting investors and the public interest. The development of the Monthly Clearing Fund Sizing Procedure and the Financial Resource Monitoring and Call Procedure also ensures that OCC has procedures designed to maintain sufficient financial resources to withstand, at a minimum, a default by the participant family to which it has the largest exposure in extreme but plausible market conditions, in compliance with Rule 17Ad-22(b)(3).26 (B) Clearing Agency’s Statement on Burden on Competition OCC does not believe that the proposed rule change would impose any burden on competition.27 OCC believes the proposed rule change would not unfairly inhibit access to OCC’s services or disadvantage or favor any particular user in relationship to another user because OCC would establish the size of the Clearing Fund in accordance with the Monthly Clearing Fund Sizing Procedure and without regard to any particular user or Clearing Member that makes Clearing Fund contributions. Furthermore, OCC would respond to a Margin Call Event and Clearing Fund Intra-month Increase Event in accordance with the Financial Resource Monitoring and Call Procedure without regard to any particular user or Clearing Member. For the foregoing reasons, OCC believes that the proposed rule change is in the public interest, would be consistent with the requirements of the Act applicable to clearing agencies, and would not impose a burden on competition. 25 15 U.S.C. 78q-1(b)(3)(F). CFR 240.17Ad-22(b)(3). 27 15 U.S.C. 78-q1(b)(3)(I). 26 17 E:\FR\FM\02APN1.SGM 02APN1 17812 Federal Register / Vol. 80, No. 63 / Thursday, April 2, 2015 / Notices (C) Clearing Agency’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments on the proposed rule change were not and are not intended to be solicited with respect to the proposed rule change and none have been received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self- regulatory organization consents, the Commission will: (A) by order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be 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 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 OCC and on OCC’s Web site at https://www.theocc.com/components/ docs/legal/rules_and_bylaws/sr_occ_15_ 009.pdf. 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–OCC–2015–009 and should be submitted on or before April 23, 2015. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.28 Brent J. Fields, Secretary. [FR Doc. 2015–07523 Filed 4–1–15; 8:45 am] BILLING CODE CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–74599; File No. SR–BYX– 2015–19] Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Fees for the BATS One Market Data Product Paper Comments tkelley on DSK3SPTVN1PROD with NOTICES • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– OCC–2015–009 on the subject line. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on March 17, 2015, BATS Y-Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BYX’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Exchange has designated the proposed rule change as one establishing or changing a member due, fee, or other charge imposed by the Exchange under Section 19(b)(3)(A)(ii) of the Act 3 and Rule 19b–4(f)(2) thereunder,4 which renders the proposed rule change effective upon • Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–OCC–2015–009. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than VerDate Sep<11>2014 18:52 Apr 01, 2015 Jkt 235001 28 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(ii). 4 17 CFR 240.19b–4(f)(2). 1 15 Frm 00099 Fmt 4703 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange filed a proposal to amend the market data section of its fee schedule to: (i) Establish a Digital Media Enterprise Fee for the BATS One Feed; and (ii) make a non-substantive change to the description of the BATS One Feed Enterprise fee. The text of the proposed rule change is available at the Exchange’s Web site at www.batstrading.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose March 27, 2015. PO 00000 filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. Sfmt 4703 The Exchange proposes to amend the market data section of its fee schedule to: (i) Establish a Digital Media Enterprise Fee for the BATS One Feed; and (ii) make a non-substantive change to the description of the BATS One Feed Enterprise fee.5 The Commission recently approved a proposed rule change by the Exchange to establish a new market data product called the BATS One Feed 6 as well as published proposed rule changes to 5 The Exchange notes that the date of the fee schedule was amended to March 17, 2015 in a previously filed proposed rule change. See SR– BYX–2015–18 (filed March 17, 2015). 6 See Securities Exchange Act Release No. 73918 (December 23, 2014), 79 FR 78920 (December 31, 2014) (File Nos. SR–EDGX–2014–25; SR–EDGA– 2014–25; SR–BATS–2014–055; SR–BYX–2014–030) (Notice of Amendments No. 2 and Order Granting Accelerated Approval to Proposed Rule Changes, as Modified by Amendments Nos. 1 and 2, to Establish a New Market Data Product called the BATS One Feed) (‘‘BATS One Approval Order’’). E:\FR\FM\02APN1.SGM 02APN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 80, Number 63 (Thursday, April 2, 2015)]
[Notices]
[Pages 17808-17812]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-07523]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74603; File No. SR-OCC-2015-009]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change To Establish Procedures 
Regarding the Monthly Resizing of its Clearing Fund and the Addition of 
Financial Resources

March 27, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 13, 2015, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by OCC.\3\ The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On March 13, 2015, OCC formally withdrew the proposed rule 
change filed as SR-OCC-2014-22, as modified by Amendment No. 1 and 
Amendment No. 2 thereto, the substance of which OCC has refiled as 
SR-OCC-2015-009.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    OCC proposes to establish procedures regarding the monthly resizing 
of its Clearing Fund and the addition of financial resources through 
intra-day margin calls and/or an intra-month increase of the Clearing 
Fund to ensure that it maintains adequate financial resources in the 
event of a default of a Clearing Member or group of affiliated Clearing 
Members presenting the largest exposure to OCC.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. OCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    The proposed rule change is intended to describe the situations in 
which OCC would exercise authority under its Rules to ensure that it 
maintains adequate Financial Resources \4\ in the event that stress 
tests reveal a default of the Clearing Member or Clearing Member Group 
\5\ presenting the largest exposure would threaten the then-current 
Financial Resources. This proposed rule change would establish 
procedures governing: (i) OCC's resizing of the Clearing Fund on a 
monthly basis pursuant to Rule 1001(a) (the ``Monthly Clearing Fund 
Sizing Procedure''); and (ii) the addition of Financial Resources 
through an intra-day margin call on one or more Clearing Members under 
Rule 609 and, if necessary, an intra-month increase of the Clearing 
Fund pursuant to Rule 1001(a) (the ``Financial Resource Monitoring and 
Call Procedure'').\6\ The Monthly Clearing Fund Sizing Procedure would 
permit OCC to determine the size of the Clearing Fund by relying on a 
broader range of sound risk management practices than those 
historically used under Rule 1001(a).\7\ The Financial Resource 
Monitoring and Call Procedure would require OCC to collect additional 
Financial Resources in certain circumstances, establish how OCC 
calculates and collects such resources and provide the timing by which 
such resources would be required to be deposited by Clearing Members.
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    \4\ ``Financial Resources'' means, with respect to a projected 
loss attributable to a particular Clearing Member or Clearing Member 
Group, as defined below, the sum of the margin deposits (less any 
excess margin a Clearing Member or Clearing Member Group may have on 
deposit at OCC) and deposits in lieu of margin in respect of such 
Clearing Members' or Clearing Member Groups' accounts, and the value 
of OCC's Clearing Fund, including both the Base Amount, as defined 
below, and the prudential margin of safety, as discussed below.
    \5\ ``Clearing Member Group'' means a Clearing Member and any 
affiliated entities that control, are controlled by or are under 
common control with such Clearing Member. See OCC By-Laws, Article 
I, Sections 1.C.(15) and 1.M(11).
    \6\ This proposed rule filing has also been filed as an advance 
notice filing (SR-OCC-2014-811).
    \7\ The procedures described herein would be in effect until the 
development of a new standard Clearing Fund sizing methodology. 
Following such development, which will include a quantitative 
approach to calculating the ``prudential margin of safety,'' as 
discussed below, OCC will file a separate rule change and advance 
notice with the Commission that will include a description of the 
new methodology as well as a revised Monthly Clearing Fund Sizing 
Procedure.
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Background

    OCC monitors the sufficiency of the Clearing Fund on a daily basis 
but, prior to emergency action taken on October 16, 2014,\8\ OCC had no 
express authority to increase the size of the Clearing Fund on an 
intra-month basis.\9\ During ordinary course daily monitoring on 
October 15, 2014, and as a result of increased volatility in the 
financial markets in October 2014, OCC determined that the Financial 
Resources needed to cover the potential loss associated with a default 
of the Clearing Member or Clearing Member Group presenting the largest 
exposure could have exceeded the Financial Resources then available to 
apply to such a default.
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    \8\ On October 16, 2014, OCC filed an emergency notice with the 
Commission to suspend the effectiveness of the second sentence of 
Rule 1001(a). See Securities Exchange Act Release No. 73579 
(November 12, 2014), 79 FR 68747 (November 18, 2014) (SR-OCC-2014-
807). On November 13, 2014, OCC filed SR-OCC-2014-21 with the 
Commission to delete the second sentence of Rule 1001(a), preserving 
the suspended effectiveness of that sentence until such time as the 
Commission approves or disapproves SR-OCC-2014-21. See Securities 
Exchange Act Release No. 73685 (November 25, 2014) 79 FR 71479 
(December 2, 2014) (SR-OCC-2014-21).
    \9\ See Rule 1001(a).
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    To permit OCC to increase the size of its Clearing Fund prior to 
the next monthly resizing that was scheduled to take place on the first 
business day of November 2014, OCC's Executive Chairman, on October 16, 
2014, exercised certain emergency powers as set forth in Article IX, 
Section 14 of OCC's By-Laws \10\ to waive the effectiveness of the 
second sentence of Rule 1001(a), which states that OCC will

[[Page 17809]]

adjust the size of the Clearing Fund monthly and that any resizing will 
be based on data from the preceding month. OCC then filed an emergency 
notice with the Commission pursuant to Section 806(e)(2) of the 
Payment, Clearing and Settlement Supervision Act of 2010 \11\ and 
increased the Clearing Fund size for the remainder of October 2014 as 
otherwise provided for in the first sentence of Rule 1001(a).\12\
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    \10\ OCC also has submitted an advance notice that would provide 
greater detail concerning conditions under which OCC would increase 
the size of the Clearing Fund intra-month. The change would permit 
an intra-month increase in the event that the five-day rolling 
average of projected draws are 150% or more of the Clearing Fund's 
then current size. See Securities Exchange Act Release No. 72804 
(August 11, 2014), 79 FR 48276 (August 15, 2014) (SR-OCC-2014-804).
    \11\ 12 U.S.C. 5465(e)(2).
    \12\ See supra, note 8.
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    Clearing Members were informed of the action taken by the Executive 
Chairman \13\ and the amount of their additional Clearing Fund 
requirements, which were met without incident. As a result of these 
actions, OCC's Clearing Fund for October 2014 was increased by $1.8 
billion. In continued reliance on the emergency rule waiver and in 
accordance with the first sentence of Rule 1001(a), OCC set the 
November 2014 Clearing Fund size at $7.8 billion, which included an 
amount determined by OCC to be sufficient to protect OCC against loss 
under simulated default scenarios (i.e., $6 billion), plus a prudential 
margin of safety (the additional $1.8 billion collected in 
October).\14\ All required contributions to the November 2014 Clearing 
Fund were met by affected Clearing Members.
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    \13\ See Information Memorandum #35397, dated October 16, 2014, 
available on OCC's Web site, https://www.theocc.com/clearing/clearing-infomemos/infomemos1.jsp. Clearing members also were 
informed that a prudential margin of safety of $1.8 billion would be 
retained until a new Clearing Fund sizing formula has been approved 
and implemented.
    \14\ See Information Memorandum # 35507, dated October 31, 2014, 
available on OCC's Web site, https://www.theocc.com/clearing/clearing-infomemos/infomemos1.jsp.
---------------------------------------------------------------------------

    Under Article IX, Section 14(c), absent the submission of a 
proposed rule change to the Commission seeking approval of OCC's waiver 
of the provisions of the second sentence of Rule 1001(a), such waiver 
would not be permitted to continue for more than thirty calendar days 
from the date thereof.\15\ Accordingly, on November 13, 2014, OCC 
submitted SR-OCC-2014-21 to delete the second sentence of Rule 1001(a) 
and, by the terms of Article IX, Section 14(c), preserve the suspended 
effectiveness of the second sentence of Rule 1001(a) beyond thirty 
calendar days.\16\
---------------------------------------------------------------------------

    \15\ See OCC By-Laws, Article IX, Section 14(c).
    \16\ See supra, note 8. OCC also submitted this proposed rule 
change to the Commodity Futures Trading Commission.
---------------------------------------------------------------------------

    SR-OCC-2014-21 was submitted in part to permit OCC to determine the 
size of its Clearing Fund by relying on a broader range of sound risk 
management practices than considered in basing such size on the average 
daily calculations under Rule 1001(a) that are performed during the 
preceding calendar month. The Monthly Clearing Fund Sizing Procedure, 
as described below, is based on such broader risk management practices 
and establishes the procedures OCC would use to determine the size of 
the Clearing Fund on a monthly basis. Similarly, SR-OCC-2014-21 was 
submitted in part to permit OCC to resize the Clearing Fund more 
frequently than monthly when the circumstances warrant an increase of 
the Clearing Fund. The Financial Resource Monitoring and Call 
Procedure, as described below, establishes the procedures that OCC 
would use to add Financial Resources through an intra-day margin call 
on one or more Clearing Members under Rule 609 and, if necessary, an 
intra-month increase of the Clearing Fund pursuant to Rule 1001(a).\17\
---------------------------------------------------------------------------

    \17\ As noted in SR-OCC-2014-21, OCC would use its intra-month 
resizing authority only to increase the size of the Clearing Fund 
where appropriate, not to decrease the size of the Clearing Fund.
---------------------------------------------------------------------------

Monthly Clearing Fund Sizing Procedure

    Under the Monthly Clearing Fund Sizing Procedure, OCC would 
continue to calculate the size of the Clearing Fund based on its daily 
stress test exposures under simulated default scenarios as described in 
the first sentence of Rule 1001(a) and resize the Clearing Fund on the 
first business day of each month. However, instead of resizing the 
Clearing Fund based on the average of the daily calculations during the 
preceding calendar month, as stated in the suspended second sentence of 
Rule 1001, OCC would resize the Clearing Fund so that it is the sum of: 
(i) An amount equal to the peak five-day rolling average of Clearing 
Fund draws observed over the preceding three calendar months of daily 
idiosyncratic default and minor systemic default scenario calculations 
based on OCC's daily Monte Carlo simulations (``Base Amount'') and (ii) 
a prudential margin of safety determined by OCC and currently set at 
$1.8 billion.\18\
---------------------------------------------------------------------------

    \18\ On a daily basis, OCC computes its exposure under the 
idiosyncratic and minor systemic events. The greater of these two 
exposures is that day's ``peak exposure.'' To calculate the 
``rolling five day average'' OCC computes the average of the peak 
exposure for each consecutive five-day period observed over the 
prior three-month period. To determine the Base Amount, OCC would 
use the largest five-day rolling average observed over the past 
three-months. This methodology was used to determine the Base Amount 
of the Clearing Fund for November 2014 and December 2014.
---------------------------------------------------------------------------

    OCC believes that the proposed Monthly Clearing Fund Sizing 
Procedure provides a sound and prudent approach to ensure that the 
Financial Resources are adequate to protect against the largest risk of 
loss presented by the default of a Clearing Member or Clearing Member 
Group. By virtue of using only the peak five-day rolling average and by 
extending the look-back period, the proposed Monthly Clearing Fund 
Sizing Procedure is both more responsive to sudden increases in 
exposure and less susceptible to recently observed decreases in 
exposure that would reduce the overall sizing of the Clearing Fund, 
thus mitigating procyclicality.\19\ Furthermore, the prudential margin 
of safety provides an additional buffer to absorb potential future 
exposures not previously observed during the look-back period. The 
proposed Monthly Clearing Fund Sizing Procedure would be supplemented 
by the Financial Resource Monitoring and Call Procedure, described 
below, to provide further assurance that the Financial Resources are 
adequate to protect against such risk of loss.
---------------------------------------------------------------------------

    \19\ Considering only the peak exposures is a more conservative 
methodology that gives greater weighting to sudden increases in 
exposure experienced by Clearing Members, thus enhancing the 
responsiveness of the procedure to such sudden increases. By using a 
longer look-back period, the methodology would respond more slowly 
to recently observed decreases in peak exposures.
---------------------------------------------------------------------------

Financial Resource Monitoring and Call Procedure

    Under the Financial Resource Monitoring and Call Procedure, OCC 
would use the same daily idiosyncratic default calculation as under the 
Monthly Clearing Fund Sizing Procedure to monitor daily the adequacy of 
the Financial Resources to withstand a default by the Clearing Member 
or Clearing Member Group presenting the largest exposure under extreme 
but plausible market conditions.\20\ If such a daily idiosyncratic 
default calculation projected a draw on the Clearing Fund (a 
``Projected Draw'') that is at least 75% of the Clearing Fund 
maintained by OCC, OCC would be required to issue an intra-day margin 
call pursuant to Rule 609 against the Clearing Member or Clearing 
Member Group that caused such a draw (``Margin Call Event'').\21\

[[Page 17810]]

Subject to a limitation described below, the amount of the margin call 
would be the difference between the Projected Draw and the Base 
Clearing Fund (``Exceedance Above Base Amount''). In the case of a 
Clearing Member Group that causes the Exceedance Above Base Amount, the 
Exceedance Above Base Amount would be pro-rated among the individual 
Clearing Members that compose the Clearing Member Group based on each 
individual Clearing Member's proportionate share of the ``total risk'' 
for such Clearing Member Group as defined in Rule 1001(b), i.e., the 
margin requirement with respect to all accounts of the Clearing Member 
Group exclusive of the net asset value of the positions in such 
accounts aggregated across all such accounts. However, in the case of 
an individual Clearing Member or a Clearing Member Group, the margin 
call would be subject to a limitation under which it could not exceed 
the lower \22\ of: (a) $500 million, or (b) 100% of a Clearing Member's 
net capital. Such limitation would be measured in aggregate with any 
funds remaining on deposit with OCC deposited by the same Clearing 
Member pursuant to a Margin Call Event within the same monthly period, 
as applicable until collection of all funds to satisfy the next regular 
monthly Clearing Fund resizing (the ``500/100 Limitation'').\23\
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    \20\ Since the minor systemic default scenario contemplates two 
Clearing Members' simultaneously defaulting and OCC maintains 
Financial Resources sufficient to cover a default by a Clearing 
Member or Clearing Member Group representing the greatest exposure 
to OCC, OCC does not use the minor systemic default scenario to 
determine the adequacy of the Financial Resources under the 
Financial Resource Monitoring and Call Procedure.
    \21\ Rule 609 authorizes OCC to require the deposit of 
additional margin in any account at any time during any business day 
by any Clearing Member for, inter alia, the protection of OCC, other 
Clearing Members or the general public. Clearing Members must meet a 
required deposit of intra-day margin in immediately available funds 
at a time prescribed by OCC or within one hour of OCC's issuance of 
debit settlement instructions against the bank account(s) of the 
applicable Clearing Member(s), thereby ensuring the prompt deposit 
of additional Financial Resources.
    \22\ ``Capping'' the intra-day margin call avoids placing a 
``liquidity squeeze'' on the subject Clearing Member(s) based on 
exposures presented by a hypothetical stress test, which would have 
the potential for causing a default on the intra-day margin call. 
Back testing results determined that such calls would have been made 
against Clearing Members that are large, well-capitalized firms, 
with more than sufficient resources to satisfy the call for 
additional margin with the proposed limitations.
    \23\ The Risk Committee would be notified, and could take action 
to address potential Financial Resource deficiencies, in the event 
that a Projected Draw resulted in a Margin Call Event and as a 
result of the 500/100 Limitation the margin call was less than the 
Exceedance Above Base Amount, but the Projected Draw was not so 
large as to result in an increase in the Clearing Fund as discussed 
below.
---------------------------------------------------------------------------

    Upon satisfaction of the margin call, OCC would use its authority 
under Rule 608 to preclude the withdrawal of such additional margin 
amount until it collects all of the funds determined by the next 
Monthly Clearing Fund Sizing Procedure. Based on three years of back 
testing data, OCC determined that it would have had Margin Call Events 
in 10 of the months during this time period. For each of these months, 
the maximum call amount would have been equal to $500 million, with one 
exception in which the maximum call amount for the month was $7.7 
million.\24\ After giving effect to the intra-day margin calls, i.e., 
by increasing the Financial Resources by $500 million, there was only 
one Margin Call Event where there was an observed stress test 
exceedance of the Financial Resources.
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    \24\ The back testing analysis performed assumed a single 
Clearing Member caused the exceedance.
---------------------------------------------------------------------------

    To address this one observed instance, the Financial Resource 
Monitoring and Call Procedure also would require OCC to increase the 
size of the Clearing Fund (``Clearing Fund Intra-month Increase 
Event'') if a Projected Draw exceeds 90% of the Clearing Fund, after 
applying any funds then on deposit with OCC from the applicable 
Clearing Member or Clearing Member Group pursuant to a Margin Call 
Event. The amount of such increase (``Clearing Fund Increase'') would 
be the greater of: (a) $1 billion; or (b) 125% of the difference 
between (i) the Projected Draw, as reduced by the deposits resulting 
from the Margin Call Event and (ii) the Clearing Fund. Each Clearing 
Member's proportionate share of the Clearing Fund Increase would equal 
its proportionate share of the variable portion of the Clearing Fund 
for the month in question as calculated pursuant to Rule 1001(b).
    OCC would notify the Risk Committee of the Board of Directors (the 
``Risk Committee''), Clearing Members and appropriate regulatory 
authorities of the Clearing Fund Increase on the business day on which 
the Clearing Fund Intra-month Increase Event occurred. This ensures 
that OCC management maintains authority to address any potential 
Financial Resource deficiencies when compared to its Projected Draw 
estimates. The Risk Committee would then determine whether the Clearing 
Fund Increase was sufficient, and would retain authority to increase 
the Clearing Fund Increase or the margin call made pursuant to a Margin 
Call Event in its discretion. Clearing Members would be required to 
meet the call for additional Clearing Fund assets by 9:00 a.m. CT on 
the second business day following the Clearing Fund Intra-Month 
Increase Event. OCC believes that this collection process ensures 
additional Clearing Fund assets are promptly deposited by Clearing 
Members following notice of a Clearing Fund Increase, while also 
providing Clearing Members with a reasonable period of time to source 
such assets. Based on OCC's back testing results, after giving effect 
to the intra-day margin call in response to a Margin Call Event plus 
the prudential margin of safety, the Financial Resources would have 
been sufficient upon implementing the one instance of a Clearing Fund 
Intra-month Increase Event.
    OCC believes the Financial Resource Monitoring and Call Procedure 
strikes a prudent balance between mutualizing the burden of requiring 
additional Financial Resources and requiring the Clearing Member or 
Clearing Member Group causing the increased exposure to bear such 
burden. As noted above, in the event of a Margin Call Event, OCC limits 
the margin call until collection of all funds to satisfy the next 
regular monthly resizing to an aggregate of $500 million, or 100% of a 
Clearing Member's net capital in order to avoid putting an undue 
liquidity strain on any one Clearing Member. However, where a Projected 
Draw exceeds 90% of OCC's Clearing Fund, OCC must act to ensure that it 
has sufficient Financial Resources, and determined that it should 
mutualize the burden of the additional Financial Resources at this 
threshold through a Clearing Fund Increase. OCC believes that this 
balance would provide OCC with sufficient Financial Resources without 
increasing the likelihood that its procedures would, based solely on 
stress testing results, cause a liquidity strain on any on Clearing 
Member that could result in such member's default.
    The following examples illustrate the manner in which the Financial 
Resource Monitoring and Call Procedure would be applied. All assume 
that the Clearing Fund size is $7.8 billion, $6 billion of which is the 
Base Amount and $1.8 billion of which is the prudential margin of 
safety. The 75% threshold in these examples is $5.85 billion.

Example 1: Single CM

    Under OCC's stress testing the Projected Draw attributable to 
Clearing Member ABC, a Clearing Member with no affiliated Clearing 
Members and net capital of $500 million, is $6.4 billion, or 82% of the 
Clearing Fund. OCC would make a margin call for $400 million, which 
represents the Exceedance Above Base Amount. In this case the 500/100 
Limitation would not be applicable because the Exceedance Above Base 
Amount is less than $500 million and 100% of the Clearing Member's net 
capital. The Clearing Member would be required to meet the $400 million 
call within one hour unless OCC prescribed a different time, and OCC 
would retain the $400 million until collection of all the funds to 
satisfy

[[Page 17811]]

the next monthly Clearing Fund sizing calculation.
    If, on a different day within the same month, CM ABC's Projected 
Draw minus the $400 million already deposited with OCC results in an 
Exceedance above Base Amount, another Margin Call Event would be 
triggered, with the amount currently deposited with OCC applying toward 
the 500/100 Limitation.

Example 2: Clearing Member Group

    Under OCC's stress testing the Projected Draw attributable to 
Clearing Member Group DEF, comprised of two Clearing Members each with 
net capital of $800 million, is $6.2 billion, or 79% of OCC's Clearing 
Fund. OCC would initiate a margin call on Clearing Member Group DEF for 
$200 million. The call would be allocated to the two Clearing Members 
that compose the Clearing Member Group based on each Clearing Member's 
risk margin allocation. In this case the 500/100 Limitation would not 
be applicable because the Exceedance Above Base Amount is less than 
$500 million and 100% of net capital. The margin call would be required 
to be met within one hour of the call unless OCC prescribed a different 
time. For example, in the case where one Clearing Member accounts for 
75% of the risk margin for the Clearing Member Group, that Clearing 
Member would be allocated $150 million of the call and the other 
Clearing Member, accounting for 25% of the risk margin for the Clearing 
Member Group, would be allocated $50 million of the call. The funds 
would remain deposited with OCC until collection of all the funds to 
satisfy the next monthly Clearing Fund sizing calculation.

Example 3: Clearing Member Group With $500 Million Cap

    Under OCC's stress testing the Projected Draw attributable to 
Clearing Member Group GHI, comprised of two Clearing Members each with 
net capital of $800 million, is $6.8 billion, or 87% of the Clearing 
Fund. The Exceedance Above Base Amount would be $800 million, allocated 
to the two Clearing Members that compose the Clearing Member Group 
based on each Clearing Member's risk margin allocation. Using the 75/25 
risk margin allocation from Example 2, one Clearing Member would be 
allocated $600 million and the other Clearing Member would be allocated 
$200 million. The first Clearing Member would be required to deposit 
$500 million with OCC, which is the lowest of $500 million, that 
member's net capital, or that member's share of the Exceedance Above 
Base Amount, and the other Clearing Member would be required to deposit 
$200 million with OCC. After collecting the additional margin, OCC 
would determine whether the Projected Draw would exceed 90% of the 
Clearing Fund after reducing the Projected Draw by the additional 
margin. This calculation would divide a Projected Draw of $6.1 billion, 
which is the original Projected Draw of $6.8 billion reduced by the 
additional margin, by the Clearing Fund of $7.8 billion. The resulting 
percentage of 78% would be below the 90% threshold, and accordingly 
there would not be a Clearing Fund Intra-month Increase Event.

Example 4: Margin Call and Increase in Size of Clearing Fund

    Under OCC's stress testing the Projected Draw attributable to 
Clearing Member JKL, a Clearing Member with no affiliated Clearing 
Members and net capital of $600 million, is $10.0 billion, or 128% of 
the Clearing Fund. OCC would make a margin call for $500 million, which 
represents the lowest of the Exceedance Above Base Amount, $500 million 
and 100% of net capital. The Clearing Member would be required to meet 
the $500 million call within one hour unless OCC prescribed a different 
time, and OCC would retain the $500 million until collection of all the 
funds to satisfy the next monthly Clearing Fund sizing calculation.
    After collecting the additional margin, OCC would determine whether 
the Projected Draw would exceed 90% of the Clearing Fund after reducing 
the Projected Draw by the additional margin. This calculation would 
divide a Projected Draw of $9.5 billion, which is the original 
Projected Draw of $10 billion reduced by the additional margin, by the 
Clearing Fund of $7.8 billion. The resulting percentage of 122%, while 
lower, would still exceed the 90% threshold, and accordingly OCC would 
declare a Clearing Fund Intra-month Increase Event. To calculate the 
Clearing Fund Increase, OCC would first determine the difference 
between the modified Projected Draw ($9.5 billion) and the Clearing 
Fund ($7.8 billion), which in this case would be $1.7 billion, OCC 
would then multiply this by 1.25, resulting in $2.125 billion. Because 
this amount is greater than $1 billion, the Clearing Fund Increase 
would be $2.125 billion and a modified Clearing Fund of OCC totaling 
$9.925 billion ($425 million in excess of the modified Projected Draw 
of $9.5 billion).
2. Statutory Basis
    OCC believes the proposed rule change is consistent with Section 
17A(b)(3)(F) of the Act,\25\ and the rules and regulations thereunder. 
By establishing sound procedures governing the monthly resizing of the 
Clearing Fund and how OCC would add Financial Resources in response to 
a Margin Call Event and a Clearing Fund Intra-month Increase Event, the 
proposed modifications would further ensure that OCC is capable of 
safeguarding securities and funds which are in the custody or control 
of OCC or for which it is responsible and protecting investors and the 
public interest. The development of the Monthly Clearing Fund Sizing 
Procedure and the Financial Resource Monitoring and Call Procedure also 
ensures that OCC has procedures designed to maintain sufficient 
financial resources to withstand, at a minimum, a default by the 
participant family to which it has the largest exposure in extreme but 
plausible market conditions, in compliance with Rule 17Ad-22(b)(3).\26\
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    \25\ 15 U.S.C. 78q-1(b)(3)(F).
    \26\ 17 CFR 240.17Ad-22(b)(3).
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(B) Clearing Agency's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would impose any 
burden on competition.\27\ OCC believes the proposed rule change would 
not unfairly inhibit access to OCC's services or disadvantage or favor 
any particular user in relationship to another user because OCC would 
establish the size of the Clearing Fund in accordance with the Monthly 
Clearing Fund Sizing Procedure and without regard to any particular 
user or Clearing Member that makes Clearing Fund contributions. 
Furthermore, OCC would respond to a Margin Call Event and Clearing Fund 
Intra-month Increase Event in accordance with the Financial Resource 
Monitoring and Call Procedure without regard to any particular user or 
Clearing Member.
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    \27\ 15 U.S.C. 78-q1(b)(3)(I).
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    For the foregoing reasons, OCC believes that the proposed rule 
change is in the public interest, would be consistent with the 
requirements of the Act applicable to clearing agencies, and would not 
impose a burden on competition.

[[Page 17812]]

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    Written comments on the proposed rule change were not and are not 
intended to be solicited with respect to the proposed rule change and 
none have been received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self- regulatory organization consents, the Commission will:
    (A) by order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be 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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-OCC-2015-009 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2015-009. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
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 OCC and on OCC's 
Web site at https://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_15_009.pdf. 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-OCC-2015-009 and 
should be submitted on or before April 23, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-07523 Filed 4-1-15; 8:45 am]
BILLING CODE CODE 8011-01-P

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