Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of an Advance Notice Related to the Adoption of an Options Exchange Risk Control Standards Policy, 23536-23542 [2016-09201]
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Federal Register / Vol. 81, No. 77 / Thursday, April 21, 2016 / Notices
of the Act 21 and paragraph (f) of Rule
19b–4 thereunder.22 At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
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:
jstallworth on DSK7TPTVN1PROD with NOTICES
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–
BatsBZX–2016–06 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–BatsBZX–2016–06. 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 the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
21 15
U.S.C. 78s(b)(3)(A).
22 17 CFR 240.19b–4(f).
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submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
BatsBZX–2016–06 and should be
submitted on or before May 12, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
Brent J. Fields,
Secretary.
[FR Doc. 2016–09204 Filed 4–20–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77635; File No. SR–FINRA–
2016–010]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Designation
of Longer Period for Commission
Action on a Proposed Rule Change To
Adopt FINRA Rule 4554 (Alternative
Trading Systems—Recording and
Reporting Requirements of Order and
Execution Information for NMS Stocks)
April 15, 2016.
On February 29, 2016, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to require
alternative trading systems (‘‘ATSs’’) to
submit additional order information to
FINRA. The proposed rule change was
published for comment in the Federal
Register on March 7, 2016.3 The
Commission received one comment
letter on the proposal.4
Section 19(b)(2) of the Act 5 provides
that, within 45 days of the publication
of the notice of the filing of a proposed
rule change, or within such longer
period up to 90 days as the Commission
may designate if it finds such longer
period to be appropriate and publishes
its reasons for so finding or as to which
the self-regulatory organization
consents, the Commission shall approve
the proposed rule change, disapprove
the proposed rule change, or institute
23 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 77269
(March 1, 2016), 81 FR 11851 (March 7, 2016).
4 See Letter to the Secretary from Theodore R.
Lazo, Managing Director and Associate General
Counsel, Securities Industry and Financial Markets
Association (‘‘SIFMA’’), dated April 1, 2016
(‘‘SIFMA Letter’’).
5 15 U.S.C. 78s(b)(2).
1 15
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proceedings to determine whether the
proposed rule change should be
disapproved. The 45th day for this filing
is April 21, 2016.
The Commission is extending this 45day time period. The Commission finds
that it is appropriate to designate a
longer period within which to take
action on the proposed rule change so
that it has sufficient time to consider the
comment received on the proposal.
Accordingly, pursuant to Section
19(b)(2) of the Act,6 the Commission
designates June 3, 2016, as the date by
which the Commission should approve,
disapprove, or institute proceedings to
determine whether to disapprove the
proposed rule change (File No. SR
FINRA–2016–010).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.7
Brent J. Fields,
Secretary.
[FR Doc. 2016–09207 Filed 4–20–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77628; File No. SR–OCC–
2016–801]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing of an Advance Notice Related
to the Adoption of an Options
Exchange Risk Control Standards
Policy
April 15, 2016.
Pursuant to Section 806(e)(1) of Title
VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act,
entitled the Payment, Clearing, and
Settlement Supervision Act of 2010 1
(‘‘Payment, Clearing and Settlement
Supervision Act’’) and Rule 19b–
4(n)(1)(i) under the Securities Exchange
Act of 1934,2 notice is hereby given that
on March 4, 2016, The Options Clearing
Corporation (‘‘OCC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the advance notice as
described in Items I and II below, which
Items have been prepared by OCC. The
Commission is publishing this notice to
solicit comments on the advance notice
from interested persons.
6 Id.
7 17
CFR 200.30–3(a)(31).
U.S.C. 5465(e)(1).
2 17 CFR 240.19b–4(n)(1)(i).
1 12
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Federal Register / Vol. 81, No. 77 / Thursday, April 21, 2016 / Notices
I. Clearing Agency’s Statement of the
Terms of Substance of the Advance
Notice
(B) Advance Notice Filed Pursuant to
Section 806(e) of the Payment, Clearing
and Settlement Supervision Act
This advance notice by The Options
Clearing Corporation (‘‘OCC’’) would
adopt a new Options Exchange Risk
Control Standards Policy (‘‘Policy’’),
which details OCC’s policy for
addressing the potential risks arising
from erroneous trades executed on an
options exchange (‘‘Options Exchange’’
or ‘‘Options Exchanges,’’ as applicable) 3
that has not demonstrated the existence
of certain risk controls (‘‘Risk Controls’’)
that are consistent with a set of
principles-based risk control standards
(‘‘Risk Control Standards’’) developed
by OCC in consultation with the
exchanges. The proposed change would
also revise OCC’s Schedule of Fees in
accordance with the proposed policy to
charge and collect from Clearing
Members 4 a fee of two cents per each
cleared options contract (per side)
(‘‘Fee’’) executed on an Options
Exchange that did not demonstrate
sufficient Risk Controls designed to
meet the proposed Risk Control
Standards.
Purpose of the Proposed Change
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Advance Notice
In its filing with the Commission,
OCC included statements concerning
the purpose of and basis for the advance
notice and discussed any comments it
received on the advance notice. 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) and (B) below, of the
most significant aspects of these
statements.
(A) Clearing Agency’s Statement on
Comments on the Advance Notice
Received From Members, Participants or
Others
jstallworth on DSK7TPTVN1PROD with NOTICES
Written comments were not and are
not intended to be solicited with respect
to the proposed change and none have
been received.
3 Current Options Exchanges are: (i) BATS
Options Market, (ii) Box Options Exchange LLC,
(iii) C2 Options Exchange, Inc., (iv) Chicago Board
Options Exchange, Inc., (v) EDGX Options
Exchange, (vi) International Securities Exchange,
LLC, (vii) ISE Gemini LLC, (viii) ISE Mercury, LLC,
(ix) MIAX Options Exchange, (x) NASDAQ OMX
BX, Inc., (xi) NASDAQ OMX PHLX, LLC, (xii)
NASDAQ Options Market, (xiii) NYSE Amex
Options, and (xiv) NYSE Arca Options.
4 See Article I, Section 1 of OCC’s By-Laws.
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Background
OCC proposes to adopt a new Options
Exchange Risk Control Standards
Policy, which is designed to better
protect OCC against risks related to
erroneous transactions that may occur
on Options Exchanges that have not
implemented Risk Controls that are
consistent with a defined set of
principles-based Risk Control
Standards, which were developed by
OCC in consultation with the
exchanges, and that are sent to OCC for
a guarantee. The proposed Policy
would, among other things, impose an
additional Fee on cleared trades that are
executed on an Options Exchange that
has not certified the existence of Risk
Controls that meet the Risk Control
Standards in the following categories: (i)
‘‘Price Reasonability Checks;’’ (ii) ‘‘DrillThrough Protections;’’ (iii) ‘‘ActivityBased Protections;’’ and (iv) ‘‘KillSwitch Protections’’ (in each case
discussed more thoroughly below) along
with OCC’s review to determine if the
Risk Controls are consistent with the
Risk Control Standards. The Policy
would also require that any funds
collected from the Fee be retained as
earnings and, as such, be eligible for use
for Clearing Member defaults under
Article VIII, Section 5(d) of OCC’s ByLaws but prohibit such funds from
being used for any other purpose. OCC
also proposes revisions to its Schedule
of Fees to implement the Fee.
OCC believes that the implementation
of Risk Controls that are consistent with
the proposed principles-based Risk
Control Standards at Options Exchanges
would guard against risks attendant to
erroneous transactions on such Options
Exchanges and serve OCC, its Clearing
Members, and the financial markets
OCC serves by helping to ensure the
potential significant financial impact
and elevated risk of disruption resulting
from erroneous transactions is limited to
the greatest extent possible. As a
systemically important financial market
utility and the sole clearing agency for
the US listed options markets, OCC
seeks to control risks presented to it that
might have the effect of disrupting
routine processes at OCC, and thus
threatening the stability of the financial
system of the United States. As
described in more detail below, there
have been numerous cases in the recent
past where erroneous transactions have
occurred that could have caused
substantial damage to financial market
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23537
entities and resultant damage to OCC.
The options market is not immune to
the harmful effects of erroneous
transactions, and in fact OCC is more
susceptible than other financial market
entities to the risks attendant thereto by
virtue of: (i) Its role as a guarantor of all
options transactions that are novated,
and (ii) its lack of discretion to elect not
to clear transactions executed on
Options Exchanges. OCC believes that
Options Exchanges that apply the Risk
Control Standards to all transactions
executed on such Options Exchanges
are better equipped to capture and
eradicate erroneous and potentially
disruptive transactions at the Options
Exchange level, thereby reducing the
likelihood that the risk inherent in such
erroneous and potentially disruptive
trades is transferred to OCC, its other
Clearing Members, and the financial
markets served by OCC. Furthermore,
and as discussed in more detail below,
OCC believes this proposal is
complementary to efforts undertaken by
the Commission to strengthen critical
market infrastructure and improve its
resilience, consistent with current
Commission requirements 5 and
international guidance,6 and in
furtherance of remarks made by Chair
White after the latest in a series of
prominent market disruptions to
encourage self-regulatory organizations
to consider such complementary
efforts.7
5 See Clearing Agency Standards, Securities
Exchange Act Release No. 68080 (Oct. 22, 2012), 77
FR 66220 (Nov. 2, 2012). More specifically, the
Release states,
‘‘The Commission notes however that under
Section 17A(b)(3)(F) of the Exchange Act, a clearing
agency is charged with responsibility to coordinate
with persons engaged in the clearance and
settlement of securities transactions, not just other
clearing agencies. . . Further, the Commission notes
that during the clearance and settlement process, a
registered clearing agency is confronted with a
variety of risks that must be identified and
understood if they are to be effectively controlled.
To the extent that these risks arise as a result of a
registered clearing agency’s links with another
entity involved in the clearance and settlement
process, Rule 17Ad–22(d)(7) should help ensure
that clearing agencies have policies and procedures
designed to identify those risks.’’
Id. at 66251.
6 See Principle 20 of the Committee on Payment
and Settlement Systems and Technical Committee
of the International Organization of Securities
Commissions (‘‘CPSS–IOSCO’’), Principles for
Financial Market Infrastructures (April 16, 2012),
available at https://www.bis.org/publ/cpss101a.pdf
(‘‘PFMI Report’’).
7 See SEC Chair White Statement on Meeting with
Leaders of Exchanges, September 12, 2013.
(‘‘Today’s meeting was very constructive. I stressed
the need for all market participants to work
collaboratively—together and with the
Commission—to strengthen critical market
infrastructure and improve its resilience when
technology falls short.’’) See also Chair White,
Statement on Nasdaq Trading Interruption, August
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Federal Register / Vol. 81, No. 77 / Thursday, April 21, 2016 / Notices
Proposed Options Exchange Risk
Control Standards Policy
Under the proposed Policy, if an
Options Exchange does not submit a
signed certification sufficiently
demonstrating that it has certain Risk
Controls in place that are consistent
with the proposed Risk Control
Standards, OCC will charge and collect
a fee 8 in accordance with its Schedule
of Fees for each trade executed on such
Options Exchange until such time that
the Options Exchange completes the
certification process, which is described
in more detail below. Funds collected
through the imposition of the Fee are
segregated for recordkeeping purposes
from other funds generated by clearing
fees and would not be available for a
Clearing Member refund or Stockholder
Exchange dividend under OCC’s
approved Capital Plan. These funds
would be available for use by OCC, with
unanimous approval by the Stockholder
Exchanges, in accordance with Article
VIII, Section 5(d) of OCC’s By-Laws 9
and as provided for in the Policy.
Risk Control Standards
The proposed Options Exchange Risk
Control Standards Policy details each of
the Risk Control Standards to which an
Options Exchange must attest so that the
proposed Fee would not be applied to
trades executed on that Options
Exchange. The proposed Risk Control
Standards, which were developed by
OCC in consultation with the Options
Exchanges, are principle-based and
designed to provide the flexibility for
each Options Exchange to develop
specific Risk Controls that best suit its
own marketplace while still guarding
against the types of risks contemplated
by the Policy. The proposed Risk
Control Standards are described below.
jstallworth on DSK7TPTVN1PROD with NOTICES
1. Price Reasonability Checks
Mandatory Price Reasonability Checks
prevent limit orders,10 complex
22, 2013. (‘‘The continuous and orderly functioning
of the securities markets is critically important to
the health of our financial system and the
confidence of investors. Today’s interruption in
trading, while resolved before the end of the day,
was nonetheless serious and should reinforce our
collective commitment to addressing technological
vulnerabilities of exchanges and other market
participants.’’)
8 OCC is proposing to collect a fee of two cents
per each cleared options contract (per side). Any
changes to this fee would be subject to a future rule
filing with the Commission.
9 See Article VIII, Section 5(d). Under Article VIII,
Section 5(d), usage of current or retained earnings
may be considered after the defaulting clearing
member’s margin has been exhausted, and it may
be used to reduce in whole or in part the pro rata
contribution otherwise made from the Clearing
Fund to cover the loss. Id.
10 A limit order is an order placed on an Options
Exchange to buy or sell a specific amount of options
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orders,11 and market maker quotes from
being entered and displayed on an
Options Exchange if the price on such
order or quote is outside a defined
threshold set in relation to the current
market price or National Best Bid or
Offer (‘‘NBBO’’). For example,12 an
Options Exchange may set a Price
Reasonability Check that would reject
an order that is priced at a certain
percentage above the set parameter or a
quote entered by a market maker that is
priced a certain dollar amount higher
than the set threshold.13 Options
Exchanges’ Price Reasonability Checks
would include:
(i) Mandatory limit order, complex
order and quote Price Reasonability
Checks;
(ii) Application to all trading sessions,
including market openings; and
(iii) If the checks do not prevent the
display and execution of quotes, the
Options Exchange would have other
means by which it mitigates the risks
associated with the display and
execution of quotes outside the specific
threshold.
Trades executed on an Options
Exchange that occur at prices that were
input erroneously and are substantially
removed from other trades executed in
the same product have the potential to
result in large trading losses. In 2013, a
trading firm’s internal algorithm used to
satisfy market demand for equity
options inadvertently produced orders
with inaccurate price limits and sent
those orders to Options Exchanges
(‘‘2013 Trading Firm Error’’). Though
many of the erroneous trades were later
canceled, it has been estimated that the
trading firm could have faced
approximately $500 million in losses.14
contracts at a specified price or better. (See, e.g.,
International Securities Exchange Rule 715(b).)
11 A complex order is an order involving the
execution of two or more different options series in
the same underlying security occurring at or near
the same time. (See, e.g., Chicago Board Options
Exchange Rule 6.53C(a)(1).)
12 Examples herein are illustrative only, and the
specifics of such examples are not necessarily
required for an Options Exchange to certify having
specific Risk Controls sufficient to meet the Risk
Control Standards.
13 By way of example, assume the market is $1.00
bid at $1.10. An Options Exchange Price
Reasonability Check could reject orders greater than
5 cents above the offer or below the bid.
Accordingly, if a broker wanted to buy an option
for $1.10, but inadvertently ‘‘fat fingers’’ the limit
price for $11.00 on the order, the Options Exchange
would reject the order prior to execution because
the limit on the order is greater than the Price
Reasonability Check limit.
14 See In the Matter of Goldman, Sachs & Co.,
Order Instituting Administrative and Cease-andDesist Proceedings, Pursuant to Sections 15(9b) and
21C of the Securities Exchange Act of 1934, Making
Findings, and Imposing Remedial Sanctions and a
Cease-and-Desist Order (Jun. 30, 2015) (Release No.
34–75331).
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If these potential losses were realized
and if the OCC Clearing Member
clearing and settling those trades was
unable to honor them, OCC and its
remaining Clearing Members would
have been exposed to significant losses
and a potential disruption to the
operations of OCC.
2. Drill-Through Protections
Drill-Through Protections are closely
related to Price Reasonability Checks
and would require all orders, including
market orders,15 limit orders, and
complex orders, to be executed within
pre-determined price increments of the
NBBO. Drill-Through Protections also
restrict orders from immediately trading
up or down an unlimited number of
price intervals and allow market
liquidity to be refreshed prior to the
execution of further trades.16 Options
Exchanges’ Drill-Through Protections
would include:
(i) Mandatory Drill-Through
Protections with reasonably quantifiable
limits;
(ii) Application to all orders; and
(iii) Application to all trading
sessions, including market openings.
Options orders that are large in size
may, due to the available contra orders,
be partially executed at reasonable
prices with the remainder of the same
order executed at prices that are far from
the NBBO, and thus have the potential
to result in large trading losses. For
example, in 2012, a trading firm
erroneously sent more than 4 million
orders to equity exchanges over a period
of forty-five minutes, creating a loss of
over $450 million that nearly resulted in
the trading firm’s insolvency (‘‘2012
Trading Firm Error’’ and collectively
with the 2013 Trading Firm Error, the
‘‘Trading Firm Errors’’).17 If the trading
firm was unable to absorb the loss and
honor the trades, the clearing agency
15 A market order is an order to buy or sell a
stated number of options contracts at the best price
obtainable when the order reaches the Options
Exchange in which the order was sent to. (See, e.g.
Chicago Board Options Exchange Rule 6.53.)
16 By way of example, assume the market is $1.00
bid at $1.10 and the size, or liquidity provided on
the bid, or offered on the ask, is 100 contracts by
100 contracts. Assume an order is entered as a
market order to buy 1000 contracts and the DrillThrough Protection is set at 5 cents and 500
milliseconds (or half a second). The Drill-Through
Protection would allow the order to trade up to the
price limit set, or $1.15. At $1.15, the order would
be halted by the Options Exchange and either
routed to another Options Exchange or manually
executed. Also, after executing 100 contracts for
$1.10, the Drill-Through Protection would
temporarily halt the order for 500 milliseconds (or
half a second) to allow market makers to refresh
their market and size.
17 See https://www.reuters.com/article/2012/10/
17/us-knightcapital-resultsidUSBRE89G0HI20121017.
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Federal Register / Vol. 81, No. 77 / Thursday, April 21, 2016 / Notices
and its surviving Clearing Members
would have been exposed to significant
losses and a potential disruption to their
operations. While detailed facts
surrounding the incident are not
publicly known, Drill-Through
Protections could have helped limit the
losses by preventing execution of orders
that would have traded through a large
number of price increments in a short
period of time.
jstallworth on DSK7TPTVN1PROD with NOTICES
3. Activity-Based Protections
Activity-Based Protections extend an
Options Exchange’s Risk Controls to
factors beyond price and are most
commonly designed to address risks
associated with a high frequency of
trades in a short period of time.
Activity-Based Protections may address
the maximum number of contracts that
may be entered as one order, the
maximum number of contacts that may
be entered or executed by one firm over
a certain period of time, and the
maximum number of messages that may
be entered over a certain period of time.
Options Exchanges’ Activity-Based
Protections would include:
(i) Application to all traded products
available on the Options Exchange;
(ii) Mandatory use of available
Activity-Based Protections by its
members where the use of such
protections is consistent with sound risk
management practice; and
(iii) Maximum number of contracts or
orders that may be executed over a
certain period of time.
Options Exchanges that don’t have
Activity-Based Protections have a
greater likelihood of facilitating
erroneous trades by not imposing limits
based on factors other than price.
Trading errors that result in a large
number of orders or quotes could
magnify the trading losses that result
from the error and could cause the
default of a Clearing Member if the
Clearing Member cannot meet its
obligations due to such losses. For
example, Activity-Based Protections
could have limited the loss associated
with the 2013 Trading Firm Error
mentioned above.
4. Kill-Switch Protections
Kill-Switch Protections provide
Options Exchanges, and their market
participants, with the ability to cancel
existing orders and quotes and/or block
new orders and quotes on an exchangewide or more tailored basis (e.g., symbol
specific, by Clearing Member, etc.) with
a single message to the Options
Exchange after established trigger events
are detected. A trigger event may
include a situation where a market
participant is disconnected from an
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Options Exchange due to an abnormally
large order or manual errors in the
system by a market participant causing
multiple erroneous trades to occur. KillSwitch Protections are considered a last
line of defense, applicable where, for
example, a severe trading problem
occurs or an Options Exchange market
participant loses connectivity to the
Options Exchange. Options Exchanges’
Kill-Switch Protections would include:
(i) The availability, and required use
in the case of Options Exchange market
makers, of ‘‘heartbeat monitoring,’’ a
function that periodically sends an
electronic signal between the Options
Exchange and the market participant
that subsequently cancels all quotes
and/or orders if the market participant
does not respond to the signal in a
certain period of time;
(ii) The ability for participants of the
Options Exchange to ‘‘cancel-ondisconnect’’;
(iii) The ability to cancel all quotes
and/or orders with a single message to
the Options Exchange, with the
availability of backup alternative
messaging systems; and
(iv) Restricted automated reentry to
trading after the activation of a killswitch.
Trades executed on Options
Exchanges without Kill-Switch
Protections increase the risk that trading
malfunctions or other harmful events
could lead to erroneous trades being
executed on an Options Exchange and
sent to OCC for clearance and
settlement. If the Clearing Member for
these trades was not able to absorb
losses associated with them, it could
potentially expose OCC and its
surviving Clearing Members to
significant losses and a disruption of
operations. For example, the potential
severity of the 2012 Trading Firm Error
could have been substantially limited if
a Kill-Switch Protection temporarily
restricted the trading firm’s ability to
trade.
Certification Process 18
OCC has developed, in conjunction
with the Options Exchanges, the
following process to evaluate each
Options Exchange’s Risk Controls.
Under the proposal, each Options
Exchange would certify to OCC that the
Options Exchange implemented Risk
Controls consistent with the Risk
Control Standards using a form
provided by OCC and signed by an
executive officer of the Options
18 OCC intends to begin the collection of
certifications from the Options Exchanges after
appropriate regulatory approvals/non objection has
been obtained.
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23539
Exchange.19 Provided notice of no
objection and all regulatory approvals
are received, Options Exchanges that
submit documentation would receive a
determination from OCC regarding their
Risk Controls by a date not sooner than
June 30 of each year (‘‘Evaluation
Completion Date’’).20
Under the Policy, OCC would
evaluate each Options Exchange’s Risk
Controls and the Risk Controls’
compliance with the Risk Control
Standards by the Evaluation Completion
Date based on a review of its
certification and supporting materials,
which will include, but will not be
limited to, proposed rule changes filed
with the Commission, approved Options
Exchange rules, information circulars,
and/or written procedures, if any, in
each case consistent with the date of
receipt of the certification. If OCC is
unable to determine that an Options
Exchange has Risk Controls sufficient to
meet Risk Control Standards, OCC
would furnish the Options Exchange
with a concise written statement of the
reason(s) as soon as reasonably
practicable. The Options Exchange may,
within 30 days of receipt of the written
statement providing the reason OCC was
unable to find the Options Exchange
maintained sufficient Risk Controls to
meet the proposed Risk Control
Standards, present further evidence of
such sufficient Risk Controls to OCC.
OCC would then conduct a second
review and make a recommendation to
OCC’s Risk Committee 21 whether the
Options Exchange has sufficient Risk
Controls within 30 days of receiving the
evidence of such Risk Controls from the
Options Exchange. OCC’s Risk
19 The signed certification signed by an executive
officer of the Options Exchange will attest to the
validity, efficacy and implementation of Risk
Controls satisfying each of the above described Risk
Control Standards. As part of the certification, the
executive officer of the Options Exchange will
certify that the Options Exchange has met the Risk
Control Standards as described in this Advance
Notice.
20 OCC notes that the implementation of the
Policy and resulting Evaluation Completion Date for
2016 are subject to receiving no objection from the
Commission and all necessary regulatory approvals.
After receiving no objection and all necessary
regulatory approvals, OCC will notify Options
Exchanges, its Clearing Members, and market
participants of the Evaluation Completion Date for
2016 by issuing an Information Memo on its public
Web site. The Evaluation Completion Date for 2016
will be set for a date not sooner than 30 days after
issuing the Information Memo (which may be later
than June 30, 2016).
21 OCC’s Risk Committee is chaired by a public
Director and it does not currently have an Options
Exchange representative. In the event OCC’s Risk
Committee has an exchange representative at some
time in the future, such representative would be
recused from a decision on the appeal of a
determination of an Options Exchange’s compliance
with the Risk Control Standards.
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Committee would, within 30 days of
receipt of the recommendation, review
the recommendation and the Options
Exchange’s supporting materials, as
appropriate, to determine whether the
Options Exchange has Risk Controls
sufficient to meet the Risk Control
Standards (‘‘Risk Committee Review’’).
OCC would furnish the Options
Exchange with a concise written
statement of the Risk Committee
determination and the reason for such
determination as soon as reasonably
practicable following the Risk
Committee Review.
Pursuant to the proposed Policy, on
June 30 of each year (with the potential
exception of 2016, as noted above),22
OCC would post a notice to its Web site
to which Clearing Members (but not the
general public) have access advising
Clearing Members, with respect to each
Options Exchange, whether: (1) The
Options Exchange has implemented
sufficient Risk Controls to meet the Risk
Control Standards; (2) OCC was unable
to determine the Options Exchange has
sufficient Risk Controls that meet the
Risk Control Standards; or (3) a
certification has not been submitted by
the Options Exchange.23
Collection of Proposed Fee
Beginning on the first business day
that is at least 60 days after OCC posts
such notice, OCC would charge and
collect the Fee in accordance with the
Policy for trades executed on an Options
Exchange that was determined not to
have sufficient Risk Controls to satisfy
the Policy.24 In the event the Fee is
charged, it would continue to be
charged to and collected from Clearing
Members,25 and the notice would
22 See
supra note 20.
annual certifications commencing in 2017
and thereafter, beginning June 30 of the calendar
year for which the certification is being made, OCC
would post a notice to its Web site to which
Clearing Members (but not the general public) have
access advising members, with respect to each
Options Exchange, whether: (i) OCC has determined
the Options Exchange has sufficient Risk Controls
that meet the Risk Control Standards; (ii) OCC was
unable to determine the Options Exchange has
sufficient Risk Controls that meet the Risk Control
Standards; or (iii) a certification has not been
submitted by the Options Exchange. In addition,
OCC will continue to keep a record posted of the
history of each Options Exchange’s compliance
submission status, and any changes made to that
status, with the Risk Control Standards on the same
OCC Web site to which Clearing Members (but not
the general public) have access in order for Clearing
Members to properly keep internal records.
24 Exhibit 5A contains an updated Schedule of
Fees reflecting the Fee. As proposed, the Fee will
be applied to all trades executed on an Options
Exchange that has not completed the certification
process.
25 The Accounting and Finance Department is
responsible for the collection of the Fee and
segregation of those funds from other monies
collected by OCC.
jstallworth on DSK7TPTVN1PROD with NOTICES
23 For
VerDate Sep<11>2014
13:27 Apr 20, 2016
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remain posted on OCC’s Web site to
which Clearing Members (but not the
general public) have access, until the
Options Exchange has demonstrated it
has Risk Controls that satisfy the
Policy.26 OCC believes that
implementing this Fee may incentivize
Options Exchanges to maintain Risk
Controls that are consistent with the
proposed Risk Control Standards,
thereby reducing the likelihood that
erroneous trades are submitted to OCC
and the attendant risk identified above
comes to fruition.27 However, the
primary reason for the Fee is to provide
additional funds for OCC to manage the
elevated risk that would be presented to
OCC absent the Risk Control Standards
and for which OCC has no reasonable
means to predict, measure, or consider
otherwise. OCC believes the Fee is
reasonable, as it represents less than
half but more than a third of a premium
over the base rate of five cents per
contract, and, since clearing fees
represent two percent or less of the total
execution cost, should not materially
impact a Clearing Member that chooses
to execute a transaction on an Options
Exchange that has not certified its Risk
Control Standards.
OCC believes ensuring that funds
collected through imposition of the Fee
are available for use as current or
retained earnings in accordance with
Article VIII Section 5(d) of OCC’s ByLaws is an integral component of the
proposed change, as it provides OCC
with increased financial means to cover
potential losses stemming from a default
caused by erroneous trades that would
be presented to OCC absent the Risk
Controls and for which OCC has no
reasonable means to predict, measure,
or consider.
Exception and Escalation Processes
The proposed Policy also provides
that, on rare occasion, OCC may grant
exceptions to the Policy in order to
appropriately address immediate
business issues and provides for an
escalation process to report breaches of
the Policy.
Commission Rules and Statements on
Critical Market Infrastructure
Exchange Act Rule 15c3–5 (‘‘Market
Access Rule’’) 28 and Regulation
Systems Compliance and Integrity
26 The National Operations Group is responsible
for operationally updating each Options Exchange’s
certification status, and associated Fee date, as
applicable, within the OCC system.
27 OCC notes, however, that an Options Exchange
that does not maintain Risk Controls consistent
with the Risk Control Standards is not prevented
from submitting transactions to OCC.
28 See 17 CFR 240.15c3–5.
PO 00000
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Fmt 4703
Sfmt 4703
(‘‘Regulation SCI,’’ collectively with
‘‘Market Access Rule,’’ ‘‘Market Integrity
Rules’’) 29 provide some requirements
for the resiliency of critical market
infrastructures. The Market Access Rule,
which was adopted in November, 2010,
generally prohibits broker-dealers from
providing ‘‘unfiltered’’ or ‘‘naked
access’’ to the securities markets
through an exchange or automated
trading system. To comply, brokerdealers must establish and maintain a
system of risk management controls and
supervisory procedures that are
reasonably designed to systematically
limit the financial, regulatory, and other
risks related to the business activity of
any customer utilizing the broker-dealer
for access to the national market system.
OCC believes that the Risk Control
Standards contemplated by the Policy
are in no way designed to interfere with,
contradict, or undermine the Market
Access Rule and are in fact designed to
be complementary to the Market Access
Rule. The proposed Risk Control
Standards, which are based upon
calculated prices of orders, bids, and
offers, and activity of each Options
Exchange participant, as described in
more detail above, would provide an
additional layer of protections at the
Options Exchange level to guard against
the risks associated with erroneous
trades and would thereby complement
the Market Access Rule, which is
primarily aimed at controlling access to
the marketplace at the firm level. While
the Market Access Rule has no doubt
contributed to a more resilient market
infrastructure, OCC believes there
remain gaps in critical market
infrastructure with respect to erroneous
transactions that should be addressed;
in fact, each of the Trading Firm Errors
discussed above occurred while the
Market Access Rule was in place.
In addition, OCC believes that the
Risk Control Standards complement
Regulation SCI. Regulation SCI is
focused on the need for market
participants to bolster the operational
integrity of automated systems, whereas
the Risk Control Standards are designed
to adopt more granular controls around
the actual entry of an order that occurs
outside the four walls of OCC before a
trade is settled or cleared by OCC. As
such, OCC believes the Risk Control
Standards set specific standards to
better further the intent of Regulation
SCI. Regulation SCI mandates that an
applicable entity have reasonable
policies, procedures, and controls in
place to ensure the integrity of its
29 See Securities Exchange Act Release No. 73639
(November 19, 2014), 79 FR 72252 (December 5,
2014) (Reg SCI Adopting Release).
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systems, but the rule doesn’t necessarily
prescribe what those controls should be.
As proposed, the Risk Control Standards
complement the objectives of Regulation
SCI by applying specific risk controls
related to the execution of trades on
Options Exchanges. Because the Risk
Control Standards would act to further
the intentions of the Market Integrity
Rules, rather than undermine or act
contrary to them, OCC believes the
implementation of the Risk Controls by
Options Exchanges consistent with the
proposed Risk Control Standards would
promote market resiliency when
working alongside these Market
Integrity Rules.
Finally, OCC believes the proposed
Risk Control Standards are consistent
with Commission rules requiring
clearing agencies to establish and
enforce written policies reasonably
designed to evaluate the potential
sources of risks that can arise when the
clearing agency establishes links to clear
and settle trades, and to ensure that
these risks are managed prudently on an
ongoing basis.30
OCC also notes that the proposed Risk
Control Standards are principle-based in
nature and do not prescribe any specific
method for satisfying the standards,
which would allow each Options
Exchange to develop specific Risk
Controls that are best suited for its
marketplace. Moreover, the adoption of
any Risk Control that would be deemed
to be a ‘‘rule of an exchange’’ 31 under
the Securities Exchange Act of 1934, as
amended (the ‘‘Act’’), would be subject
to the rule filing requirements of Section
19(b) of the Act 32 and thereby subject to
review by the Commission before it
could be implemented by the Options
Exchange.33
jstallworth on DSK7TPTVN1PROD with NOTICES
Consistency With the Payment, Clearing
and Settlement Supervision Act
OCC believes that the proposed
change concerning Risk Control
30 See 17 CFR 240.17Ad–22(d)(7). OCC notes that
these links are not limited in scope to linkages
between clearing agencies. See supra note 5 at
66250–66251.
31 See 15 U.S.C. 78c(a)(27).
32 15 U.S.C. 78(s)(b).
33 Certain Options Exchanges have already filed
proposed rule changes, and received approval for
such rule changes, with the Commission to
implement risk controls that are designed to guard
against the same types of risks contemplated by the
Risk Control Standards. See, e.g., Securities
Exchange Act Release No. 76123 (October 16, 2015),
80 FR 62591 (October 16, 2015) (SR–NASDAQ–
2015–096) (Order Approving Proposed Rule Change
to Adopt a Kill Switch for NOM). See also
Securities Exchange Act Release No. 77092
(February 9, 2016), 81 FR 7873 (February 16, 2016)
(SR–BOX–2016–03) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
to Add Rule 7310 (Drill-through Protection) to
Implement a New Price Protection Feature).
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13:27 Apr 20, 2016
Jkt 238001
Standards described above is consistent
with Section 805(b)(1) of the Payment,
Clearing and Settlement Supervision
Act 34 because the proposed change
would promote robust risk management.
By imposing a Fee on trades executed
on Options Exchanges that do not have
adequate Risk Control Standards, OCC
is attempting to protect itself against the
risks associated with clearing and
settling trades that have an increased
risk of being erroneous and potentially
disruptive to OCC. With the proposed
Fee and Risk Control Standards, OCC is
attempting to prevent market
disruptions at the exchange level by
implementing consistent Risk Control
Standards across all Options Exchanges,
thereby promoting robust risk
management.
Anticipated Effect on and Management
of Risk
As discussed above and throughout
the rule proposal, OCC believes that
charging an additional fee for trades
executed on Options Exchanges that
have not implemented Risk Controls
consistent with the proposed Risk
Control Standards would mitigate
potential risks to OCC, its Clearing
Members, and the financial markets
OCC serves, and mitigate any threat to
the stability of the financial system of
the United States. OCC believes the
potential harm from the recent market
disruptions described above would have
been limited if Risk Control Standards
were in place on the exchanges on
which they occurred. As discussed
above, OCC believes that market
disruptions of this nature present
additional risk to OCC for which it has
no other means to reasonably predict,
measure, or consider, and as a result
presents otherwise uncovered risk to
OCC’s Clearing Members and the
financial markets OCC serves and, if left
unchecked, could threaten the stability
of the financial system of the United
States. The imposition of the proposed
Fee would provide additional financial
resources to help OCC mitigate such
risks.
III. Date of Effectiveness of the Advance
Notice and Timing for Commission
Action
The advance notice may be
implemented if the Commission does
not object to the advance notice within
60 days of the later of (i) the date that
the advance notice was filed with the
Commission or (ii) the date that any
additional information requested by the
Commission is received. OCC shall not
implement the advance notice if the
34 12
PO 00000
U.S.C. 5464(b)(1).
Frm 00086
Fmt 4703
Sfmt 4703
23541
Commission has any objection to the
advance notice.
The Commission may extend the
period for review by an additional 60
days if the advance notice raises novel
or complex issues, subject to the
Commission providing OCC with
prompt written notice of the extension.
An advance notice may be implemented
in less than 60 days from the date the
advance notice is filed, or the date
further information requested by the
Commission is received, if the
Commission notifies OCC in writing
that it does not object to the advance
notice and authorizes OCC to
implement the advance notice on an
earlier date, subject to any conditions
imposed by the Commission.
The clearing agency shall post notice
on its Web site of proposed changes that
are implemented.
The proposal shall not take effect
until all regulatory actions required
with respect to the proposal are
completed.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing.
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–2016–801 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–OCC–2016–801. 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 advance notice that
are filed with the Commission, and all
written communications relating to the
advance notice 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
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Federal Register / Vol. 81, No. 77 / Thursday, April 21, 2016 / Notices
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_16_
801.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–2016–801 and should
be submitted on or before May 12, 2016.
[FR Doc. 2016–09048 Filed 4–20–16; 8:45 am]
BILLING CODE 8025–01–P
SMALL BUSINESS ADMINISTRATION
Data Collection Available for Public
Comments
AGENCY:
Small Business Administration.
SMALL BUSINESS ADMINISTRATION
[Disaster Declaration #14665 and #14666]
Virginia Disaster Number VA–00063
U.S. Small Business
Administration.
ACTION: Amendment 1.
AGENCY:
This is an amendment of the
Presidential declaration of a major
disaster for Public Assistance Only for
the Commonwealth of VIRGINIA
(FEMA–4262–DR), dated 03/07/2016.
Incident: Severe Winter Storm and
Snowstorm.
Incident Period: 01/22/2016 through
01/23/2016.
DATES: Effective 04/11/2016.
Physical Loan Application Deadline
Date: 05/06/2016.
Economic Injury (EIDL) Loan
Application Deadline Date: 12/07/2016.
ADDRESSES: Submit completed loan
applications to: U.S. Small Business
Administration, Processing and
Disbursement Center, 14925 Kingsport
Road, Fort Worth, TX 76155.
FOR FURTHER INFORMATION CONTACT:
A. Escobar, Office of Disaster
Assistance, U.S. Small Business
Administration, 409 3rd Street SW.,
Suite 6050, Washington, DC 20416.
SUPPLEMENTARY INFORMATION: The notice
of the President’s major disaster
declaration for Private Non-Profit
organizations in the Commonwealth of
VIRGINIA, dated 03/07/2016, is hereby
amended to include the following areas
as adversely affected by the disaster.
Primary Counties: Fairfax City,
Fredericksburg City, Greene, Henrico,
Shenandoah
SUMMARY:
Jkt 238001
The Small Business
Administration (SBA) intends to request
approval, from the Office of
Management and Budget (OMB) for the
collection of information described
below. The Paperwork Reduction Act
(PRA) of 1995, 44 U.S.C. Chapter 35
requires federal agencies to publish a
notice in the Federal Register
concerning each proposed collection of
information before submission to OMB,
and to allow 60 days for public
comment in response to the notice. This
notice complies with that requirement.
SUMMARY:
BILLING CODE 8011–01–P
jstallworth on DSK7TPTVN1PROD with NOTICES
Lisa Lopez-Suarez,
Acting Associate Administrator for Disaster
Assistance.
60-Day notice and request for
comments.
[FR Doc. 2016–09201 Filed 4–20–16; 8:45 am]
13:27 Apr 20, 2016
(Catalog of Federal Domestic Assistance
Number 59008)
ACTION:
By the Commission.
Brent J. Fields,
Secretary.
VerDate Sep<11>2014
All other information in the original
declaration remains unchanged.
Submit comments on or before
June 20, 2016.
DATES:
Send all comments to Mary
Frias, Loan Specialist, Office of
Financial Assistance, Small Business
Administration, 409 3rd Street SW.,
Washington, DC 20416.
ADDRESSES:
FOR FURTHER INFORMATION CONTACT:
Mary Frias, Loan Specialist, Office of
Financial Assistance, mary.frias@
sba.gov 202–401–8234, or Curtis B.
Rich, Management Analyst, 202–205–
7030, curtis.rich@sba.gov.
This
information collection, as approved by
OMB for use in SBA’s Certified
Development Company (504) loan
program, consists of SBA Form 1244
Application for Section 504 Loans and
Form 2450, Eligibility Information
Required for 504 Submission (Non
PCLP). A statutory change on December
22, 2015 in the Consolidated
Appropriations Act, 2016, made debt
refinance a permanent part of the 504
loan program. Slight revisions to the
currently approved forms are required
to reinstate the debt refinance program
requirements that were previously
removed due to the expiration of the
authority for that program in 2012.
SUPPLEMENTARY INFORMATION:
PO 00000
Frm 00087
Fmt 4703
Sfmt 4703
Solicitation of Public Comments
SBA is requesting comments on (a)
Whether the collection of information is
necessary for the agency to properly
perform its functions; (b) whether the
burden estimates are accurate; (c)
whether there are ways to minimize the
burden, including through the use of
automated techniques or other forms of
information technology; and (d) whether
there are ways to enhance the quality,
utility, and clarity of the information.
Summary of Information Collection
Title: Application for Section 504
Loan.
Description of Respondents: Small
Business Lending Companies.
Form Number: SBA Form 1244.
Total Estimated Annual Responses:
9,100.
Total Estimated Annual Hour Burden:
21,749.
Curtis B. Rich,
Management Analyst.
[FR Doc. 2016–09044 Filed 4–20–16; 8:45 am]
BILLING CODE 8025–01–P
SMALL BUSINESS ADMINISTRATION
[Disaster Declaration #14667 and #14668]
Louisiana Disaster Number LA–00062
U.S. Small Business
Administration.
ACTION: Amendment 6.
AGENCY:
This is an amendment of the
Presidential declaration of a major
disaster for the State of LOUISIANA
(FEMA–4263–DR), dated 03/13/2016.
Incident: Severe Storms and Flooding.
Incident Period: 03/08/2016 through
04/08/2016.
DATES: Effective 04/08/2016.
Physical Loan Application Deadline
Date: 05/12/2016.
EIDL Loan Application Deadline Date:
12/13/2016.
ADDRESSES: Submit completed loan
applications to: U.S. Small Business
Administration, Processing and
Disbursement Center, 14925 Kingsport
Road, Fort Worth, TX 76155.
FOR FURTHER INFORMATION CONTACT:
A. Escobar, Office of Disaster
Assistance, U.S. Small Business
Administration, 409 3rd Street SW.,
Suite 6050, Washington, DC 20416.
SUPPLEMENTARY INFORMATION: The notice
of the President’s major disaster
declaration for the State of LOUISIANA,
dated 03/13/2016 is hereby amended to
establish the incident period for this
disaster as beginning 03/08/2016 and
continuing through 04/08/2016.
SUMMARY:
E:\FR\FM\21APN1.SGM
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]]>Agencies
[Federal Register Volume 81, Number 77 (Thursday, April 21, 2016)]
[Notices]
[Pages 23536-23542]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-09201]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77628; File No. SR-OCC-2016-801]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of an Advance Notice Related to the Adoption of an
Options Exchange Risk Control Standards Policy
April 15, 2016.
Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, entitled the Payment,
Clearing, and Settlement Supervision Act of 2010 \1\ (``Payment,
Clearing and Settlement Supervision Act'') and Rule 19b-4(n)(1)(i)
under the Securities Exchange Act of 1934,\2\ notice is hereby given
that on March 4, 2016, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') the
advance notice as described in Items I and II below, which Items have
been prepared by OCC. The Commission is publishing this notice to
solicit comments on the advance notice from interested persons.
---------------------------------------------------------------------------
\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
---------------------------------------------------------------------------
[[Page 23537]]
I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice
This advance notice by The Options Clearing Corporation (``OCC'')
would adopt a new Options Exchange Risk Control Standards Policy
(``Policy''), which details OCC's policy for addressing the potential
risks arising from erroneous trades executed on an options exchange
(``Options Exchange'' or ``Options Exchanges,'' as applicable) \3\ that
has not demonstrated the existence of certain risk controls (``Risk
Controls'') that are consistent with a set of principles-based risk
control standards (``Risk Control Standards'') developed by OCC in
consultation with the exchanges. The proposed change would also revise
OCC's Schedule of Fees in accordance with the proposed policy to charge
and collect from Clearing Members \4\ a fee of two cents per each
cleared options contract (per side) (``Fee'') executed on an Options
Exchange that did not demonstrate sufficient Risk Controls designed to
meet the proposed Risk Control Standards.
---------------------------------------------------------------------------
\3\ Current Options Exchanges are: (i) BATS Options Market, (ii)
Box Options Exchange LLC, (iii) C2 Options Exchange, Inc., (iv)
Chicago Board Options Exchange, Inc., (v) EDGX Options Exchange,
(vi) International Securities Exchange, LLC, (vii) ISE Gemini LLC,
(viii) ISE Mercury, LLC, (ix) MIAX Options Exchange, (x) NASDAQ OMX
BX, Inc., (xi) NASDAQ OMX PHLX, LLC, (xii) NASDAQ Options Market,
(xiii) NYSE Amex Options, and (xiv) NYSE Arca Options.
\4\ See Article I, Section 1 of OCC's By-Laws.
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Advance Notice
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the advance notice and
discussed any comments it received on the advance notice. 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) and (B)
below, of the most significant aspects of these statements.
(A) Clearing Agency's Statement on Comments on the Advance Notice
Received From Members, Participants or Others
Written comments were not and are not intended to be solicited with
respect to the proposed change and none have been received.
(B) Advance Notice Filed Pursuant to Section 806(e) of the Payment,
Clearing and Settlement Supervision Act
Purpose of the Proposed Change
Background
OCC proposes to adopt a new Options Exchange Risk Control Standards
Policy, which is designed to better protect OCC against risks related
to erroneous transactions that may occur on Options Exchanges that have
not implemented Risk Controls that are consistent with a defined set of
principles-based Risk Control Standards, which were developed by OCC in
consultation with the exchanges, and that are sent to OCC for a
guarantee. The proposed Policy would, among other things, impose an
additional Fee on cleared trades that are executed on an Options
Exchange that has not certified the existence of Risk Controls that
meet the Risk Control Standards in the following categories: (i)
``Price Reasonability Checks;'' (ii) ``Drill-Through Protections;''
(iii) ``Activity-Based Protections;'' and (iv) ``Kill-Switch
Protections'' (in each case discussed more thoroughly below) along with
OCC's review to determine if the Risk Controls are consistent with the
Risk Control Standards. The Policy would also require that any funds
collected from the Fee be retained as earnings and, as such, be
eligible for use for Clearing Member defaults under Article VIII,
Section 5(d) of OCC's By-Laws but prohibit such funds from being used
for any other purpose. OCC also proposes revisions to its Schedule of
Fees to implement the Fee.
OCC believes that the implementation of Risk Controls that are
consistent with the proposed principles-based Risk Control Standards at
Options Exchanges would guard against risks attendant to erroneous
transactions on such Options Exchanges and serve OCC, its Clearing
Members, and the financial markets OCC serves by helping to ensure the
potential significant financial impact and elevated risk of disruption
resulting from erroneous transactions is limited to the greatest extent
possible. As a systemically important financial market utility and the
sole clearing agency for the US listed options markets, OCC seeks to
control risks presented to it that might have the effect of disrupting
routine processes at OCC, and thus threatening the stability of the
financial system of the United States. As described in more detail
below, there have been numerous cases in the recent past where
erroneous transactions have occurred that could have caused substantial
damage to financial market entities and resultant damage to OCC. The
options market is not immune to the harmful effects of erroneous
transactions, and in fact OCC is more susceptible than other financial
market entities to the risks attendant thereto by virtue of: (i) Its
role as a guarantor of all options transactions that are novated, and
(ii) its lack of discretion to elect not to clear transactions executed
on Options Exchanges. OCC believes that Options Exchanges that apply
the Risk Control Standards to all transactions executed on such Options
Exchanges are better equipped to capture and eradicate erroneous and
potentially disruptive transactions at the Options Exchange level,
thereby reducing the likelihood that the risk inherent in such
erroneous and potentially disruptive trades is transferred to OCC, its
other Clearing Members, and the financial markets served by OCC.
Furthermore, and as discussed in more detail below, OCC believes this
proposal is complementary to efforts undertaken by the Commission to
strengthen critical market infrastructure and improve its resilience,
consistent with current Commission requirements \5\ and international
guidance,\6\ and in furtherance of remarks made by Chair White after
the latest in a series of prominent market disruptions to encourage
self-regulatory organizations to consider such complementary
efforts.\7\
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\5\ See Clearing Agency Standards, Securities Exchange Act
Release No. 68080 (Oct. 22, 2012), 77 FR 66220 (Nov. 2, 2012). More
specifically, the Release states,
``The Commission notes however that under Section 17A(b)(3)(F)
of the Exchange Act, a clearing agency is charged with
responsibility to coordinate with persons engaged in the clearance
and settlement of securities transactions, not just other clearing
agencies. . . Further, the Commission notes that during the
clearance and settlement process, a registered clearing agency is
confronted with a variety of risks that must be identified and
understood if they are to be effectively controlled. To the extent
that these risks arise as a result of a registered clearing agency's
links with another entity involved in the clearance and settlement
process, Rule 17Ad-22(d)(7) should help ensure that clearing
agencies have policies and procedures designed to identify those
risks.''
Id. at 66251.
\6\ See Principle 20 of the Committee on Payment and Settlement
Systems and Technical Committee of the International Organization of
Securities Commissions (``CPSS-IOSCO''), Principles for Financial
Market Infrastructures (April 16, 2012), available at https://www.bis.org/publ/cpss101a.pdf (``PFMI Report'').
\7\ See SEC Chair White Statement on Meeting with Leaders of
Exchanges, September 12, 2013. (``Today's meeting was very
constructive. I stressed the need for all market participants to
work collaboratively--together and with the Commission--to
strengthen critical market infrastructure and improve its resilience
when technology falls short.'') See also Chair White, Statement on
Nasdaq Trading Interruption, August 22, 2013. (``The continuous and
orderly functioning of the securities markets is critically
important to the health of our financial system and the confidence
of investors. Today's interruption in trading, while resolved before
the end of the day, was nonetheless serious and should reinforce our
collective commitment to addressing technological vulnerabilities of
exchanges and other market participants.'')
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[[Page 23538]]
Proposed Options Exchange Risk Control Standards Policy
Under the proposed Policy, if an Options Exchange does not submit a
signed certification sufficiently demonstrating that it has certain
Risk Controls in place that are consistent with the proposed Risk
Control Standards, OCC will charge and collect a fee \8\ in accordance
with its Schedule of Fees for each trade executed on such Options
Exchange until such time that the Options Exchange completes the
certification process, which is described in more detail below. Funds
collected through the imposition of the Fee are segregated for
recordkeeping purposes from other funds generated by clearing fees and
would not be available for a Clearing Member refund or Stockholder
Exchange dividend under OCC's approved Capital Plan. These funds would
be available for use by OCC, with unanimous approval by the Stockholder
Exchanges, in accordance with Article VIII, Section 5(d) of OCC's By-
Laws \9\ and as provided for in the Policy.
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\8\ OCC is proposing to collect a fee of two cents per each
cleared options contract (per side). Any changes to this fee would
be subject to a future rule filing with the Commission.
\9\ See Article VIII, Section 5(d). Under Article VIII, Section
5(d), usage of current or retained earnings may be considered after
the defaulting clearing member's margin has been exhausted, and it
may be used to reduce in whole or in part the pro rata contribution
otherwise made from the Clearing Fund to cover the loss. Id.
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Risk Control Standards
The proposed Options Exchange Risk Control Standards Policy details
each of the Risk Control Standards to which an Options Exchange must
attest so that the proposed Fee would not be applied to trades executed
on that Options Exchange. The proposed Risk Control Standards, which
were developed by OCC in consultation with the Options Exchanges, are
principle-based and designed to provide the flexibility for each
Options Exchange to develop specific Risk Controls that best suit its
own marketplace while still guarding against the types of risks
contemplated by the Policy. The proposed Risk Control Standards are
described below.
1. Price Reasonability Checks
Mandatory Price Reasonability Checks prevent limit orders,\10\
complex orders,\11\ and market maker quotes from being entered and
displayed on an Options Exchange if the price on such order or quote is
outside a defined threshold set in relation to the current market price
or National Best Bid or Offer (``NBBO''). For example,\12\ an Options
Exchange may set a Price Reasonability Check that would reject an order
that is priced at a certain percentage above the set parameter or a
quote entered by a market maker that is priced a certain dollar amount
higher than the set threshold.\13\ Options Exchanges' Price
Reasonability Checks would include:
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\10\ A limit order is an order placed on an Options Exchange to
buy or sell a specific amount of options contracts at a specified
price or better. (See, e.g., International Securities Exchange Rule
715(b).)
\11\ A complex order is an order involving the execution of two
or more different options series in the same underlying security
occurring at or near the same time. (See, e.g., Chicago Board
Options Exchange Rule 6.53C(a)(1).)
\12\ Examples herein are illustrative only, and the specifics of
such examples are not necessarily required for an Options Exchange
to certify having specific Risk Controls sufficient to meet the Risk
Control Standards.
\13\ By way of example, assume the market is $1.00 bid at $1.10.
An Options Exchange Price Reasonability Check could reject orders
greater than 5 cents above the offer or below the bid. Accordingly,
if a broker wanted to buy an option for $1.10, but inadvertently
``fat fingers'' the limit price for $11.00 on the order, the Options
Exchange would reject the order prior to execution because the limit
on the order is greater than the Price Reasonability Check limit.
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(i) Mandatory limit order, complex order and quote Price
Reasonability Checks;
(ii) Application to all trading sessions, including market
openings; and
(iii) If the checks do not prevent the display and execution of
quotes, the Options Exchange would have other means by which it
mitigates the risks associated with the display and execution of quotes
outside the specific threshold.
Trades executed on an Options Exchange that occur at prices that
were input erroneously and are substantially removed from other trades
executed in the same product have the potential to result in large
trading losses. In 2013, a trading firm's internal algorithm used to
satisfy market demand for equity options inadvertently produced orders
with inaccurate price limits and sent those orders to Options Exchanges
(``2013 Trading Firm Error''). Though many of the erroneous trades were
later canceled, it has been estimated that the trading firm could have
faced approximately $500 million in losses.\14\ If these potential
losses were realized and if the OCC Clearing Member clearing and
settling those trades was unable to honor them, OCC and its remaining
Clearing Members would have been exposed to significant losses and a
potential disruption to the operations of OCC.
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\14\ See In the Matter of Goldman, Sachs & Co., Order
Instituting Administrative and Cease-and-Desist Proceedings,
Pursuant to Sections 15(9b) and 21C of the Securities Exchange Act
of 1934, Making Findings, and Imposing Remedial Sanctions and a
Cease-and-Desist Order (Jun. 30, 2015) (Release No. 34-75331).
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2. Drill-Through Protections
Drill-Through Protections are closely related to Price
Reasonability Checks and would require all orders, including market
orders,\15\ limit orders, and complex orders, to be executed within
pre-determined price increments of the NBBO. Drill-Through Protections
also restrict orders from immediately trading up or down an unlimited
number of price intervals and allow market liquidity to be refreshed
prior to the execution of further trades.\16\ Options Exchanges' Drill-
Through Protections would include:
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\15\ A market order is an order to buy or sell a stated number
of options contracts at the best price obtainable when the order
reaches the Options Exchange in which the order was sent to. (See,
e.g. Chicago Board Options Exchange Rule 6.53.)
\16\ By way of example, assume the market is $1.00 bid at $1.10
and the size, or liquidity provided on the bid, or offered on the
ask, is 100 contracts by 100 contracts. Assume an order is entered
as a market order to buy 1000 contracts and the Drill-Through
Protection is set at 5 cents and 500 milliseconds (or half a
second). The Drill-Through Protection would allow the order to trade
up to the price limit set, or $1.15. At $1.15, the order would be
halted by the Options Exchange and either routed to another Options
Exchange or manually executed. Also, after executing 100 contracts
for $1.10, the Drill-Through Protection would temporarily halt the
order for 500 milliseconds (or half a second) to allow market makers
to refresh their market and size.
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(i) Mandatory Drill-Through Protections with reasonably
quantifiable limits;
(ii) Application to all orders; and
(iii) Application to all trading sessions, including market
openings.
Options orders that are large in size may, due to the available
contra orders, be partially executed at reasonable prices with the
remainder of the same order executed at prices that are far from the
NBBO, and thus have the potential to result in large trading losses.
For example, in 2012, a trading firm erroneously sent more than 4
million orders to equity exchanges over a period of forty-five minutes,
creating a loss of over $450 million that nearly resulted in the
trading firm's insolvency (``2012 Trading Firm Error'' and collectively
with the 2013 Trading Firm Error, the ``Trading Firm Errors'').\17\ If
the trading firm was unable to absorb the loss and honor the trades,
the clearing agency
[[Page 23539]]
and its surviving Clearing Members would have been exposed to
significant losses and a potential disruption to their operations.
While detailed facts surrounding the incident are not publicly known,
Drill-Through Protections could have helped limit the losses by
preventing execution of orders that would have traded through a large
number of price increments in a short period of time.
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\17\ See https://www.reuters.com/article/2012/10/17/us-knightcapital-results-idUSBRE89G0HI20121017.
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3. Activity-Based Protections
Activity-Based Protections extend an Options Exchange's Risk
Controls to factors beyond price and are most commonly designed to
address risks associated with a high frequency of trades in a short
period of time. Activity-Based Protections may address the maximum
number of contracts that may be entered as one order, the maximum
number of contacts that may be entered or executed by one firm over a
certain period of time, and the maximum number of messages that may be
entered over a certain period of time. Options Exchanges' Activity-
Based Protections would include:
(i) Application to all traded products available on the Options
Exchange;
(ii) Mandatory use of available Activity-Based Protections by its
members where the use of such protections is consistent with sound risk
management practice; and
(iii) Maximum number of contracts or orders that may be executed
over a certain period of time.
Options Exchanges that don't have Activity-Based Protections have a
greater likelihood of facilitating erroneous trades by not imposing
limits based on factors other than price. Trading errors that result in
a large number of orders or quotes could magnify the trading losses
that result from the error and could cause the default of a Clearing
Member if the Clearing Member cannot meet its obligations due to such
losses. For example, Activity-Based Protections could have limited the
loss associated with the 2013 Trading Firm Error mentioned above.
4. Kill-Switch Protections
Kill-Switch Protections provide Options Exchanges, and their market
participants, with the ability to cancel existing orders and quotes
and/or block new orders and quotes on an exchange-wide or more tailored
basis (e.g., symbol specific, by Clearing Member, etc.) with a single
message to the Options Exchange after established trigger events are
detected. A trigger event may include a situation where a market
participant is disconnected from an Options Exchange due to an
abnormally large order or manual errors in the system by a market
participant causing multiple erroneous trades to occur. Kill-Switch
Protections are considered a last line of defense, applicable where,
for example, a severe trading problem occurs or an Options Exchange
market participant loses connectivity to the Options Exchange. Options
Exchanges' Kill-Switch Protections would include:
(i) The availability, and required use in the case of Options
Exchange market makers, of ``heartbeat monitoring,'' a function that
periodically sends an electronic signal between the Options Exchange
and the market participant that subsequently cancels all quotes and/or
orders if the market participant does not respond to the signal in a
certain period of time;
(ii) The ability for participants of the Options Exchange to
``cancel-on-disconnect'';
(iii) The ability to cancel all quotes and/or orders with a single
message to the Options Exchange, with the availability of backup
alternative messaging systems; and
(iv) Restricted automated reentry to trading after the activation
of a kill-switch.
Trades executed on Options Exchanges without Kill-Switch
Protections increase the risk that trading malfunctions or other
harmful events could lead to erroneous trades being executed on an
Options Exchange and sent to OCC for clearance and settlement. If the
Clearing Member for these trades was not able to absorb losses
associated with them, it could potentially expose OCC and its surviving
Clearing Members to significant losses and a disruption of operations.
For example, the potential severity of the 2012 Trading Firm Error
could have been substantially limited if a Kill-Switch Protection
temporarily restricted the trading firm's ability to trade.
Certification Process \18\
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\18\ OCC intends to begin the collection of certifications from
the Options Exchanges after appropriate regulatory approvals/non
objection has been obtained.
---------------------------------------------------------------------------
OCC has developed, in conjunction with the Options Exchanges, the
following process to evaluate each Options Exchange's Risk Controls.
Under the proposal, each Options Exchange would certify to OCC that the
Options Exchange implemented Risk Controls consistent with the Risk
Control Standards using a form provided by OCC and signed by an
executive officer of the Options Exchange.\19\ Provided notice of no
objection and all regulatory approvals are received, Options Exchanges
that submit documentation would receive a determination from OCC
regarding their Risk Controls by a date not sooner than June 30 of each
year (``Evaluation Completion Date'').\20\
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\19\ The signed certification signed by an executive officer of
the Options Exchange will attest to the validity, efficacy and
implementation of Risk Controls satisfying each of the above
described Risk Control Standards. As part of the certification, the
executive officer of the Options Exchange will certify that the
Options Exchange has met the Risk Control Standards as described in
this Advance Notice.
\20\ OCC notes that the implementation of the Policy and
resulting Evaluation Completion Date for 2016 are subject to
receiving no objection from the Commission and all necessary
regulatory approvals. After receiving no objection and all necessary
regulatory approvals, OCC will notify Options Exchanges, its
Clearing Members, and market participants of the Evaluation
Completion Date for 2016 by issuing an Information Memo on its
public Web site. The Evaluation Completion Date for 2016 will be set
for a date not sooner than 30 days after issuing the Information
Memo (which may be later than June 30, 2016).
---------------------------------------------------------------------------
Under the Policy, OCC would evaluate each Options Exchange's Risk
Controls and the Risk Controls' compliance with the Risk Control
Standards by the Evaluation Completion Date based on a review of its
certification and supporting materials, which will include, but will
not be limited to, proposed rule changes filed with the Commission,
approved Options Exchange rules, information circulars, and/or written
procedures, if any, in each case consistent with the date of receipt of
the certification. If OCC is unable to determine that an Options
Exchange has Risk Controls sufficient to meet Risk Control Standards,
OCC would furnish the Options Exchange with a concise written statement
of the reason(s) as soon as reasonably practicable. The Options
Exchange may, within 30 days of receipt of the written statement
providing the reason OCC was unable to find the Options Exchange
maintained sufficient Risk Controls to meet the proposed Risk Control
Standards, present further evidence of such sufficient Risk Controls to
OCC. OCC would then conduct a second review and make a recommendation
to OCC's Risk Committee \21\ whether the Options Exchange has
sufficient Risk Controls within 30 days of receiving the evidence of
such Risk Controls from the Options Exchange. OCC's Risk
[[Page 23540]]
Committee would, within 30 days of receipt of the recommendation,
review the recommendation and the Options Exchange's supporting
materials, as appropriate, to determine whether the Options Exchange
has Risk Controls sufficient to meet the Risk Control Standards (``Risk
Committee Review''). OCC would furnish the Options Exchange with a
concise written statement of the Risk Committee determination and the
reason for such determination as soon as reasonably practicable
following the Risk Committee Review.
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\21\ OCC's Risk Committee is chaired by a public Director and it
does not currently have an Options Exchange representative. In the
event OCC's Risk Committee has an exchange representative at some
time in the future, such representative would be recused from a
decision on the appeal of a determination of an Options Exchange's
compliance with the Risk Control Standards.
---------------------------------------------------------------------------
Pursuant to the proposed Policy, on June 30 of each year (with the
potential exception of 2016, as noted above),\22\ OCC would post a
notice to its Web site to which Clearing Members (but not the general
public) have access advising Clearing Members, with respect to each
Options Exchange, whether: (1) The Options Exchange has implemented
sufficient Risk Controls to meet the Risk Control Standards; (2) OCC
was unable to determine the Options Exchange has sufficient Risk
Controls that meet the Risk Control Standards; or (3) a certification
has not been submitted by the Options Exchange.\23\
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\22\ See supra note 20.
\23\ For annual certifications commencing in 2017 and
thereafter, beginning June 30 of the calendar year for which the
certification is being made, OCC would post a notice to its Web site
to which Clearing Members (but not the general public) have access
advising members, with respect to each Options Exchange, whether:
(i) OCC has determined the Options Exchange has sufficient Risk
Controls that meet the Risk Control Standards; (ii) OCC was unable
to determine the Options Exchange has sufficient Risk Controls that
meet the Risk Control Standards; or (iii) a certification has not
been submitted by the Options Exchange. In addition, OCC will
continue to keep a record posted of the history of each Options
Exchange's compliance submission status, and any changes made to
that status, with the Risk Control Standards on the same OCC Web
site to which Clearing Members (but not the general public) have
access in order for Clearing Members to properly keep internal
records.
---------------------------------------------------------------------------
Collection of Proposed Fee
Beginning on the first business day that is at least 60 days after
OCC posts such notice, OCC would charge and collect the Fee in
accordance with the Policy for trades executed on an Options Exchange
that was determined not to have sufficient Risk Controls to satisfy the
Policy.\24\ In the event the Fee is charged, it would continue to be
charged to and collected from Clearing Members,\25\ and the notice
would remain posted on OCC's Web site to which Clearing Members (but
not the general public) have access, until the Options Exchange has
demonstrated it has Risk Controls that satisfy the Policy.\26\ OCC
believes that implementing this Fee may incentivize Options Exchanges
to maintain Risk Controls that are consistent with the proposed Risk
Control Standards, thereby reducing the likelihood that erroneous
trades are submitted to OCC and the attendant risk identified above
comes to fruition.\27\ However, the primary reason for the Fee is to
provide additional funds for OCC to manage the elevated risk that would
be presented to OCC absent the Risk Control Standards and for which OCC
has no reasonable means to predict, measure, or consider otherwise. OCC
believes the Fee is reasonable, as it represents less than half but
more than a third of a premium over the base rate of five cents per
contract, and, since clearing fees represent two percent or less of the
total execution cost, should not materially impact a Clearing Member
that chooses to execute a transaction on an Options Exchange that has
not certified its Risk Control Standards.
---------------------------------------------------------------------------
\24\ Exhibit 5A contains an updated Schedule of Fees reflecting
the Fee. As proposed, the Fee will be applied to all trades executed
on an Options Exchange that has not completed the certification
process.
\25\ The Accounting and Finance Department is responsible for
the collection of the Fee and segregation of those funds from other
monies collected by OCC.
\26\ The National Operations Group is responsible for
operationally updating each Options Exchange's certification status,
and associated Fee date, as applicable, within the OCC system.
\27\ OCC notes, however, that an Options Exchange that does not
maintain Risk Controls consistent with the Risk Control Standards is
not prevented from submitting transactions to OCC.
---------------------------------------------------------------------------
OCC believes ensuring that funds collected through imposition of
the Fee are available for use as current or retained earnings in
accordance with Article VIII Section 5(d) of OCC's By-Laws is an
integral component of the proposed change, as it provides OCC with
increased financial means to cover potential losses stemming from a
default caused by erroneous trades that would be presented to OCC
absent the Risk Controls and for which OCC has no reasonable means to
predict, measure, or consider.
Exception and Escalation Processes
The proposed Policy also provides that, on rare occasion, OCC may
grant exceptions to the Policy in order to appropriately address
immediate business issues and provides for an escalation process to
report breaches of the Policy.
Commission Rules and Statements on Critical Market Infrastructure
Exchange Act Rule 15c3-5 (``Market Access Rule'') \28\ and
Regulation Systems Compliance and Integrity (``Regulation SCI,''
collectively with ``Market Access Rule,'' ``Market Integrity Rules'')
\29\ provide some requirements for the resiliency of critical market
infrastructures. The Market Access Rule, which was adopted in November,
2010, generally prohibits broker-dealers from providing ``unfiltered''
or ``naked access'' to the securities markets through an exchange or
automated trading system. To comply, broker-dealers must establish and
maintain a system of risk management controls and supervisory
procedures that are reasonably designed to systematically limit the
financial, regulatory, and other risks related to the business activity
of any customer utilizing the broker-dealer for access to the national
market system. OCC believes that the Risk Control Standards
contemplated by the Policy are in no way designed to interfere with,
contradict, or undermine the Market Access Rule and are in fact
designed to be complementary to the Market Access Rule. The proposed
Risk Control Standards, which are based upon calculated prices of
orders, bids, and offers, and activity of each Options Exchange
participant, as described in more detail above, would provide an
additional layer of protections at the Options Exchange level to guard
against the risks associated with erroneous trades and would thereby
complement the Market Access Rule, which is primarily aimed at
controlling access to the marketplace at the firm level. While the
Market Access Rule has no doubt contributed to a more resilient market
infrastructure, OCC believes there remain gaps in critical market
infrastructure with respect to erroneous transactions that should be
addressed; in fact, each of the Trading Firm Errors discussed above
occurred while the Market Access Rule was in place.
---------------------------------------------------------------------------
\28\ See 17 CFR 240.15c3-5.
\29\ See Securities Exchange Act Release No. 73639 (November 19,
2014), 79 FR 72252 (December 5, 2014) (Reg SCI Adopting Release).
---------------------------------------------------------------------------
In addition, OCC believes that the Risk Control Standards
complement Regulation SCI. Regulation SCI is focused on the need for
market participants to bolster the operational integrity of automated
systems, whereas the Risk Control Standards are designed to adopt more
granular controls around the actual entry of an order that occurs
outside the four walls of OCC before a trade is settled or cleared by
OCC. As such, OCC believes the Risk Control Standards set specific
standards to better further the intent of Regulation SCI. Regulation
SCI mandates that an applicable entity have reasonable policies,
procedures, and controls in place to ensure the integrity of its
[[Page 23541]]
systems, but the rule doesn't necessarily prescribe what those controls
should be. As proposed, the Risk Control Standards complement the
objectives of Regulation SCI by applying specific risk controls related
to the execution of trades on Options Exchanges. Because the Risk
Control Standards would act to further the intentions of the Market
Integrity Rules, rather than undermine or act contrary to them, OCC
believes the implementation of the Risk Controls by Options Exchanges
consistent with the proposed Risk Control Standards would promote
market resiliency when working alongside these Market Integrity Rules.
Finally, OCC believes the proposed Risk Control Standards are
consistent with Commission rules requiring clearing agencies to
establish and enforce written policies reasonably designed to evaluate
the potential sources of risks that can arise when the clearing agency
establishes links to clear and settle trades, and to ensure that these
risks are managed prudently on an ongoing basis.\30\
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\30\ See 17 CFR 240.17Ad-22(d)(7). OCC notes that these links
are not limited in scope to linkages between clearing agencies. See
supra note 5 at 66250-66251.
---------------------------------------------------------------------------
OCC also notes that the proposed Risk Control Standards are
principle-based in nature and do not prescribe any specific method for
satisfying the standards, which would allow each Options Exchange to
develop specific Risk Controls that are best suited for its
marketplace. Moreover, the adoption of any Risk Control that would be
deemed to be a ``rule of an exchange'' \31\ under the Securities
Exchange Act of 1934, as amended (the ``Act''), would be subject to the
rule filing requirements of Section 19(b) of the Act \32\ and thereby
subject to review by the Commission before it could be implemented by
the Options Exchange.\33\
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\31\ See 15 U.S.C. 78c(a)(27).
\32\ 15 U.S.C. 78(s)(b).
\33\ Certain Options Exchanges have already filed proposed rule
changes, and received approval for such rule changes, with the
Commission to implement risk controls that are designed to guard
against the same types of risks contemplated by the Risk Control
Standards. See, e.g., Securities Exchange Act Release No. 76123
(October 16, 2015), 80 FR 62591 (October 16, 2015) (SR-NASDAQ-2015-
096) (Order Approving Proposed Rule Change to Adopt a Kill Switch
for NOM). See also Securities Exchange Act Release No. 77092
(February 9, 2016), 81 FR 7873 (February 16, 2016) (SR-BOX-2016-03)
(Notice of Filing and Immediate Effectiveness of a Proposed Rule
Change to Add Rule 7310 (Drill-through Protection) to Implement a
New Price Protection Feature).
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Consistency With the Payment, Clearing and Settlement Supervision Act
OCC believes that the proposed change concerning Risk Control
Standards described above is consistent with Section 805(b)(1) of the
Payment, Clearing and Settlement Supervision Act \34\ because the
proposed change would promote robust risk management. By imposing a Fee
on trades executed on Options Exchanges that do not have adequate Risk
Control Standards, OCC is attempting to protect itself against the
risks associated with clearing and settling trades that have an
increased risk of being erroneous and potentially disruptive to OCC.
With the proposed Fee and Risk Control Standards, OCC is attempting to
prevent market disruptions at the exchange level by implementing
consistent Risk Control Standards across all Options Exchanges, thereby
promoting robust risk management.
---------------------------------------------------------------------------
\34\ 12 U.S.C. 5464(b)(1).
---------------------------------------------------------------------------
Anticipated Effect on and Management of Risk
As discussed above and throughout the rule proposal, OCC believes
that charging an additional fee for trades executed on Options
Exchanges that have not implemented Risk Controls consistent with the
proposed Risk Control Standards would mitigate potential risks to OCC,
its Clearing Members, and the financial markets OCC serves, and
mitigate any threat to the stability of the financial system of the
United States. OCC believes the potential harm from the recent market
disruptions described above would have been limited if Risk Control
Standards were in place on the exchanges on which they occurred. As
discussed above, OCC believes that market disruptions of this nature
present additional risk to OCC for which it has no other means to
reasonably predict, measure, or consider, and as a result presents
otherwise uncovered risk to OCC's Clearing Members and the financial
markets OCC serves and, if left unchecked, could threaten the stability
of the financial system of the United States. The imposition of the
proposed Fee would provide additional financial resources to help OCC
mitigate such risks.
III. Date of Effectiveness of the Advance Notice and Timing for
Commission Action
The advance notice may be implemented if the Commission does not
object to the advance notice within 60 days of the later of (i) the
date that the advance notice was filed with the Commission or (ii) the
date that any additional information requested by the Commission is
received. OCC shall not implement the advance notice if the Commission
has any objection to the advance notice.
The Commission may extend the period for review by an additional 60
days if the advance notice raises novel or complex issues, subject to
the Commission providing OCC with prompt written notice of the
extension. An advance notice may be implemented in less than 60 days
from the date the advance notice is filed, or the date further
information requested by the Commission is received, if the Commission
notifies OCC in writing that it does not object to the advance notice
and authorizes OCC to implement the advance notice on an earlier date,
subject to any conditions imposed by the Commission.
The clearing agency shall post notice on its Web site of proposed
changes that are implemented.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. 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-2016-801 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2016-801. 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 advance notice that are filed
with the Commission, and all written communications relating to the
advance notice 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
[[Page 23542]]
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_16_801.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-2016-801 and should be
submitted on or before May 12, 2016.
By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2016-09201 Filed 4-20-16; 8:45 am]
BILLING CODE 8011-01-P
