Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change Concerning the Options Clearing Corporation's Margin Coverage During Times of Increase Volatility, 78224-78228 [2016-26791]
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Federal Register / Vol. 81, No. 215 / Monday, November 7, 2016 / Notices
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
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should refer to File Number SR–
NYSEMKT–2016–98 and should be
submitted on or before November 28,
2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.44
Brent J. Fields,
Secretary.
[FR Doc. 2016–26795 Filed 11–4–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79212; File No. SR–OCC–
2016–013]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing of Proposed Rule Change
Concerning the Options Clearing
Corporation’s Margin Coverage During
Times of Increase Volatility
sradovich on DSK3GMQ082PROD with NOTICES
November 1, 2016.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on October
18, 2016, The Options Clearing
Corporation (‘‘OCC’’) filed with the
Securities and Exchange Commission
44 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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(‘‘Commission’’) the proposed rule
change as described in Items I, II and III
below, which Items have been prepared
by OCC. The Commission is publishing
this notice to solicit comments on the
rule change from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
This proposed rule change by OCC
would modify the current process for
systematically monitoring market
conditions and performing adjustments
to its margin coverage when current
market volatility increases beyond
historically observed levels.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission,
OCC included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. OCC has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of these statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
1. Purpose
OCC’s margin methodology, the
System for Theoretical Analysis and
Numerical Simulations (‘‘STANS’’), is
OCC’s proprietary risk management
system that calculates Clearing
Members’ 3 margin requirements.4
STANS utilizes large-scale Monte Carlo
simulations to forecast price movement
and correlations in determining a
Clearing Member’s margin
requirement.5 The STANS margin
requirement is a portfolio calculation at
the level of Clearing Member legal entity
marginable net positions tier account
(tiers can be customer, firm, or market
marker) and consists of an estimate of
99% 2-day expected shortfall and an
add-on for model risk (the
concentration/dependence stress test
charge).
The majority of risk factors utilized in
the STANS methodology are total
returns on individual equity securities.
Other risk factors considered include:
Returns on equity indices; changes in
3 See
OCC By-Laws Article 1(C)(14).
Securities Exchange Act Release No. 53322
(February 15, 2006), 71 FR 9403 (February 23, 2006)
(SR–OCC–2004–20). A detailed description of the
STANS methodology is available at https://
optionsclearing.com/risk-management/margins/.
5 See OCC Rule 601.
4 See
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the calibrated coefficients of a model
describing the yield curve for U.S.
government securities; ‘‘returns’’ on the
nearest-to-expiration futures contracts of
various kinds; and changes in foreign
exchange rates. For the volatility of each
risk factor, the Monte Carlo simulations
use the greater of: (i) The short-term
volatility level predicted by the model;
and (ii) an estimate of its longer-run
level. In between the monthly reestimations of all the models, volatilities
are automatically re-scaled to the greater
of the short-term or the longer-run levels
to mitigate pro-cyclicality 6 in the
margin levels. (This daily volatility
measure is called the ‘‘uniform scale
factor.’’) The uniform scale factor is a
multiplier used in connection with
STANS calculations to account for,
among other things, the difference
between short-term and long-term
volatility forecasts for equities. It is
specifically defined as the ratio of longrun volatility (10Y+) over short-run
volatility (2Y). It is used to ‘‘scale up’’
the short-run volatility of the securities
(e.g., IBM) that are subject to monthly
update, in order to estimate long-run
volatility. It is also used to capture data
gaps between monthly updates.
An approach employed by OCC to
mitigate pro-cyclicality within STANS
is to estimate market volatility based on
current market conditions (‘‘current
market estimate’’) and compare this
current market estimate to a long-run
estimate of market volatility (‘‘long-run
market estimate’’). This comparison
utilizes certain market benchmarks (or
factors), which serve as proxies for the
overall volatility of an asset class or
group of products. If the long-run
market estimate for a factor is found to
be greater than the current market
estimate, the volatility estimates for all
products tied to that factor are adjusted
(or scaled) up in a manner proportionate
to the relationship between the current
market volatility and the long-run
market volatility for that factor.
Current STANS includes a single
factor (‘‘uniform scale factor’’), which
serves as the proxy for the equity asset
class. This uniform scale factor is
calibrated based on changes in the
volatility of the Standard & Poor’s 500®
Index (‘‘SPX’’) and applied to all
‘‘equity-based products’’ in the manner
described above. Currently, the uniform
scale factor is the only scale factor used
in STANS. The proposed change is
intended to enhance the STANS margin
calculations by providing for the
capability to increase the number of
6 A quality that is positively correlated with the
overall state of the economy is deemed to be procyclical.
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scale factors used within STANS in
cases where a more appropriate proxy
has been identified for a particular asset
class or group of products to measure
the relationship between current vs.
long-run market volatility.
Summary of the Proposed Change
OCC believes that the current
approach to scale factors in STANS
would be improved by providing the
functionality to establish multiple scale
factors intended to more accurately
measure the relationship between
current and long-run market volatility
with proxies that correlate more closely
to groups of products within an asset
class (e.g., Russell 1000 Index and
Russell 1000 ETFs), which would
enhance the accuracy of the margin
requirements in STANS.7 Furthermore,
OCC can improve the resiliency of its
risk management framework for nonequity asset classes where open interest
cleared by OCC has grown, but where
scale factors currently do not exist. By
incorporating this process to scale
margin coverages when current market
volatility exceeds historically
heightened levels that have been
established to mitigate pro-cyclicality,
OCC’s margin methodology is able to
expeditiously respond to severe changes
in market volatility and thus better
protect the integrity of our financial
markets.
Scale Factor for Equity-Based Products
sradovich on DSK3GMQ082PROD with NOTICES
Current Uniform Scale Factor for
Equity-Based Products
The uniform scale factor for the SPX
roughly represents the ratio of OCC’s
estimates of the long-run market
volatility to the forecast market
volatility determined by most recent 24month daily historical returns.8 To
determine the estimate of current
market volatility, OCC relies on daily
pricing information for equity securities
and exchange-traded funds over a
twenty-four month period ending with
the last day of the immediately
preceding month. To populate this
twenty-four month time series, OCC
7 In this case, accuracy is measured against
backtesting results. Pursuant to OCC’s Model Risk
Management Policy, an accurate 99% value-at-risk
model should expect exceedances at a rate of 1%
per independent trial. If the exceedance rate is too
high, the model is missing key risks; if the
exceedance rate is too low, the model is not
consistent with the organization’s risk appetite. To
the extent that the conditional variances of not all
relevant risk factors move in lock-step to the
conditional variance of SPX, multiple scale factors
offers the opportunity to be more accurate.
8 The uniform scale factor has been a part of
STANS since it was installed in 2006. See
Securities Exchange Act Release No. 53322
(February 15, 2006), 71 FR 9403 (February 23, 2006)
(SR–OCC–2004–20).
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relies on external vendors, with which
it maintains redundant relationships for
resiliency,9 to adjust the daily pricing
information to account for corporate
actions involving these securities. This
daily pricing information is received
from its vendor(s) after the close of each
month, at which time OCC updates its
twenty-four month time series adding
the new month and dropping the last
month of data. This process of updating
the time series on a monthly basis is
referred to as a ‘‘pending’’ time series
due to the batch process used to update
the time series. The long-run time series
used by the uniform scale factor is
updated on a daily basis (i.e., nonpending update) with pricing
information for the SPX dating back to
January 1, 1946. OCC calculates the
uniform scale factor each business day
by comparing the current market
volatility, using pending price updates
to the long-run time series using nonpending, or current, market prices.
The uniform scale factor is applied to
all equity products and is used to adjust
individual equity current market
volatility estimates on a daily basis
based on the comparison of the current
market volatility and the long-run
volatility estimate, which is updated
daily. Should it be observed that the
current market volatility is less than the
long-run volatility, all products tied to
the uniform scale factor will be adjusted
higher based on the ratio of the long-run
volatility estimate to the current market
volatility estimate to account for the
observed change in volatility. In
addition, the uniform scale factor is also
used to account for the fact that the
distribution of returns for the SPX has
a ‘‘fat tail’’ 10 because the scale factor
seeks to match estimates of expected
margin shortfalls under the scenarios in
STANS for a hypothetical long position
in the SPX.
The uniform scale factor resulting
from the calculations described above is
applied as a multiplier to hypothetical
returns on a long portfolio of equities
produced during the Monte Carlo
market scenarios run within STANS. By
‘‘scaling up’’ hypothetical returns in this
way, the uniform scale factor relies on
an assumption that more recent
behavior of SPX returns will provide an
appropriate proxy for the volatility in
9 Specifically, OCC maintains both a primary and
backup data center that receive live price feeds from
multiple price vendors. In the event of service
disruption OCC is able to transition to an alternate
data center and/or pricing vendor, as applicable.
10 A fat-tailed distribution is a probability
distribution that exhibits large skewness or kurtosis.
Compared with a standard normal distribution or
bell curve, it has a higher probability of occurrence
of extreme events.
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equity price returns that occur between
monthly updates of price data for the
pending short-run time series.
Accordingly, the uniform scale factor
helps OCC set margin requirements that
account for this proxy to ensure that
Clearing Members maintain margin
assets that would be sufficient in light
of historical volatility of the SPX.
Proposed Changes to the Uniform Scale
Factor for Equity-Based Products
The average longer-run volatility
forecast used in OCC’s computation of
the uniform scale factor currently relies
on daily pricing information for
component securities of the SPX dating
back to January of 1946. This time series
predates, however, the 1957
introduction of the SPX. To accurately
account for the behavior of SPX returns
only since the inception of the index,
OCC proposes to adjust the longer-run
volatility forecast so that it would rely
only on the post-1957 information. OCC
believes that this approach would
reduce model risk 11 and improve the
quality of the data by avoiding the need
to make assumptions related to the
composition of the index before its
actual development.12
Proposed New Scale Factors for EquityBased Products
To more accurately measure the
relationship between current and longrun market volatility with proxies that
correlate more closely to certain
products carried within the equity asset
class, OCC proposes to expand the
number of scale factors to include: (1)
Russell 2000® Index (12/29/1978); (2)
Dow Jones Industrial Average Index (9/
23/1997); (3) NASDAQ–100 Index (2/4/
1985) and (4) S&P 100 Index (1/2/
1976).13 While the SPX scale factor will
continue to serve as the default scale
factor for most equity products, the
index options, futures and ETFs which
map to these indexes will be assigned to
these scale factors and whose current
volatility estimates will be adjusted
11 OCC defines ‘‘model risk’’ as the potential for
adverse consequences of incorrect or misused
model outputs and reports.
12 As defined in OCC’s Model Risk Management
Policy, Model Risk, in the sense of material
exposure to the consequences of poor assumptions,
is reduced by making models adhere accurately to
observed phenomena. In this case, by reducing the
role of the uniform scale factor as a proxy between
monthly updates of univariate models for risk
factors and by allowing certain risk factors to
bypass the monthly update process, as described
below, OCC believes that this proposed change
would reduce model risk.
13 The dates in parentheticals are the dates from
which OCC has historical data on the specified
index.
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based on the aforementioned
methodology.
Consistent with OCC’s existing
Margin Policy,14 OCC will evaluate the
performance and use of these scale
factors and determine if changes to the
mapping of products to scale factors or
the addition of new scale factors are
warranted. Prior to any changes being
implemented OCC would present its
findings to the Enterprise Risk
Management Committee and obtain
approval to make the recommended
enhancements.
Proposed Anti-Procylical [sic.] Measure
for Equity-Based Scale Factors
In order to mitigate against procyclicality, OCC intends to apply the
relevant scale factor to the greater of (i)
the estimated variance of the 1-day
return scenarios or (ii) the historical
variance of the daily return scenarios of
a particular instrument, as a floor. OCC
believes this floor would mitigate procyclicality in the relevant return
scenarios because it would result in a
higher estimate of volatility during
periods of relatively lower market
volatility than if only the estimated
variance in (i) above was used.
Scale Factor for Non-Equity-Based
Products
sradovich on DSK3GMQ082PROD with NOTICES
Proposed New Scale Factors for NonEquity-Based Products
In addition to equity products, OCC
has observed a growth in the open
interest in other asset classes, most
notably the volatility asset class, for
which an equity-based scale factor
would not be applicable based on
negligible correlations observed. To be
able to monitor and respond to material
changes in the volatility of these asset
classes while also mitigating procyclicality, OCC proposes to introduce
additional scale factors in STANS
related to volatility contracts.
For the volatility asset class, different
from equities, volatility characteristics
are differentiated based on the term of
an instrument. As a result, the
implementation of the scale factor will
be different from the implementation for
the equity asset class. Individual
products would be linked within
STANS to a particular scale factor not
only in accordance with price
correlations, but will also consider term
structure (i.e., non-equity futures
contracts of different maturities).15
14 OCC’s Margin Policy describes OCC’s approach
to prudently managing market and credit exposures
presented by its Clearing Members.
15 OCC would adopt scale factors specific to
existing volatility indices, which include volatility
indices on the S&P 500 (VIX and VXST), Russell
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With regard to the scale factor(s)
applicable to implied volatility indexes,
the data set would consist of index
closing prices for certain volatility
indices with a time series that would
run from October 1, 2004 (based on
available historical data). Applying
scale factors to hypothetical returns in
this asset class, as is done today for
equity-based products, will help ensure
that OCC’s margin requirements capture
shifts in market volatility in these nonequity asset classes, and OCC believes
these enhancements would generally
promote a more accurate approach to
margining within STANS,16 particularly
when markets are volatile.
Proposed Daily Statistical Updates for
the Treasury Yield Curve Model
In addition to implementing the scale
factors described above, OCC is also
proposing to implement processing
changes that would update the
statistical models for common factors
related to Treasury securities on a daily
basis. These model changes would
allow OCC to monitor and respond to
material changes in the volatility of
Treasury securities while also mitigating
pro-cyclicality without implementing a
scale factor specific to Treasury
securities. OCC believes that updating
its Treasury securities models on a daily
basis is a more appropriate way to
monitor and respond to material
changes in the volatility of Treasury
securities while also mitigating procyclicality since the Treasury yield
curve model is relatively less complex,
with only three factors, and the
structure of the Treasuries securities
model does not lend itself to a returnsbased scale factor (as is used with equity
and volatility derivatives, as described
above).
Specifically, OCC is proposing to
enhance its existing yield curve model
that OCC uses to project U.S. Treasury
security returns, which is updated
monthly. The model contains
underlying data set and time series
information for Treasury securities,
which run from February 4, 2008 (based
on available historical data) and, after
implementing the proposed
enhancements, the model would be
updated on a daily basis as new data
and time series information becomes
available. The proposed enhancements
would promote a more accurate
approach to margining within STANS,
as it relates to Treasury securities,
particularly when markets are volatile
2000 (RVX), gold (GVZ), oil (OVX), emerging
markets (VXEEM), Brazil (VXEWZ), Nasdaq 100
(VXN) and 10-year Treasury Notes (VXTYN).
16 See notes. 4 & 8, supra.
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because the daily statistical updates
would prevent the model from
becoming stale between monthly
updates.
Impact Analysis and Outreach
Based on simulation testing for the
period from January 14, 2015, to March
6, 2015, risk margins (i.e., expected
shortfall plus the concentration/
dependence add-on) would have been
5.2% higher in aggregate as a
consequence of these changes. This is
mostly due to higher coverage for the
Russell 2000 Index and index ETF
products under the new methodology.
The absolute variation in risk margins
relative to production was greater than
5% of Clearing Member capital for about
11% of Clearing Member-days over the
simulation period.
In order to inform Clearing Members
of the proposed change, OCC provided
a general update at a recent OCC
Roundtable 17 meeting and would
continue to provide updates at
Roundtable meetings on a quarterly
basis going forward. In addition, OCC
would publish an Information
Memorandum to all Clearing Members
describing the proposed change and will
provide additional periodic Information
Memoranda updates prior to the
implementation date. OCC would also
provide at least thirty days prior notice
to Clearing Members before
implementing the change. Additionally,
OCC would perform targeted and direct
outreach with Clearing Members that
would be most impacted by the
proposed change and OCC would work
closely with such Clearing Members to
coordinate the implementation and
associated funding for such Clearing
Members resulting from the proposed
change.18 Finally, OCC would discuss
the proposed change with its crossmargin clearing house partners to
ensure they are aware of the proposed
change.19
2. Statutory Basis
OCC believes that the proposed rule
changes are consistent with Section
17 The OCC Roundtable was established to bring
Clearing Members, exchanges and OCC together to
discuss industry and operational issues. It is
comprised of representatives of the senior OCC
staff, participant exchanges and Clearing Members,
representing the diversity of OCC’s membership in
industry segments, OCC-cleared volume, business
type, operational structure and geography.
18 Specifically, OCC will discuss with those
Clearing Members how they plan to satisfy any
increase in their margin requirements associated
with the proposed change.
19 Cross-margin accounts are not uniquely
affected by the proposed change and would be
affected by the proposed change in the same
manner as any other type of OCC account.
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17A(b)(3)(F) of the Act,20 because they
would assure the safeguarding of
securities and funds in the custody and
control of OCC by enhancing the current
approach for monitoring market
conditions and performing adjustments
to OCC’s margin coverage on both
equity and non-equity based derivatives
products for which OCC provides
clearance and settlement services when
current volatility increase beyond
historically observed levels. OCC uses
the margin it collects from a defaulting
Clearing Member to protect other
Clearing Members from loss as a result
of the defaulting Clearing Member. By
more accurately computing Clearing
Member margin requirements OCC can
assure the safeguarding of securities and
funds in its custody and control.
The proposed model changes
described above would enhance the
manner in which OCC computes margin
requirements for Clearing Members.
Specifically, the proposed changes to
the Uniform Scale Factor for equitybased products to rely only on post1957 information would reduce model
risk and improve the quality of data by
avoiding unnecessary assumptions
related to the composition of the SPX
before its inception. The proposed four
new scale factors for equity-based
products would more accurately
measure the relationship between
current and long-run market volatility
with proxies that are correlated more
closely to certain products within the
equity asset class. The proposed
introduction of new scale factors for
non-equity based products, for both the
volatility assets class and the implied
volatility indexes will promote a more
accurate approach to margining STANS,
when markets experience shifts in
volatility. The proposed daily statistical
updates for the Treasury yield curve
model would allow OCC to monitor and
response to material changes in the
volatility of Treasury securities while
also mitigating pro-cyclicality. Taken
together, the changes to the uniform
scale factor, the addition of new equitybased scale factors, the addition of nonequity based scale factors and
introduction of daily statistical updates
for the Treasury yield curve model
cause STANS to more accurately
compute Clearing Member margin
requirements to reflect the risk of
Clearing Member portfolios thereby
reducing the risk that Clearing Member
margin assets would be insufficient
should OCC need to use such assets to
close-out the positions of a defaulted
Clearing Member. Further, the proposed
rule changes would make it less likely
that the default of a Clearing Member
would stress the financial resources
available to OCC, which include
mutualized resource funds deposited by
non-defaulting Clearing Members as
Clearing Fund.
OCC believes that the proposed rule
changes are also consistent with Rule
17Ad–22(b)(2) 21 because they would
limit OCC’s credit exposures to its
participants under normal market
conditions and use risk-based models
and parameters to set OCC’s margin
requirements. As described above, the
risk-based model and parameter changes
to the uniform scale factor, the addition
of new equity-based scale factors, the
addition of non-equity based scale
factors and introduction of daily
statistical updates for the Treasury yield
curve model cause STANS to more
accurately compute Clearing Member
margin requirements. By more
accurately computing Clearing Member
margin requirements, OCC reduces its
credit exposure to its Clearing Members.
The proposed rule changes are not
inconsistent with the existing rules of
OCC, including any other rules
proposed to be amended.
(B) Clearing Agency’s Statement on
Burden on Competition
OCC does not believe that the
proposed rule change would impact or
impose any burden on competition.22
The proposed rule change would allow
OCC to adjust Clearing Member margin
requirements when current volatility
increases beyond historical levels.
While as a result of the proposed rule
change Clearing Members may
experience daily margin fluctuations of
up to ten percent, such fluctuations are
equal in amount to fluctuations Clearing
Members typically experience as a
result of changes in market price,
volatility or interest rates. Therefore,
OCC believes that the proposed rule
change would not unfairly inhibit
access to OCC’s services or disadvantage
or favor any particular user in
relationship to another user. In addition,
the proposed rule change would be
applied uniformly to all Clearing
Members in establishing their margin
requirements.
For the foregoing reasons, OCC
believes that the proposed rule change
is in the public interest, would be
consistent with the requirements of the
Act applicable to clearing agencies, and
would not impact or impose a burden
on competition.
21 17
20 15
U.S.C. 78q–1(b)(3)(F).
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CFR 240.17Ad–22(b)(2).
U.S.C. 78q–1(b)(3)(I).
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(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants or Others
Written comments were not and are
not intended to be solicited with respect
to the proposed rule change and none
have been received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
OCC–2016–013 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR–OCC–2016–013. 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
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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 such
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_
013.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–2016–013 and should
be submitted on or before November 28,
2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
Authority.23
Brent J. Fields,
Secretary
[FR Doc. 2016–26791 Filed 11–4–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79216; File No. SR–CHX–
2016–16]
Self-Regulatory Organizations;
Chicago Stock Exchange, Inc.; Notice
of Designation of a Longer Period for
Commission Action on a Proposed
Rule Change To Adopt the CHX
Liquidity Taking Access Delay
sradovich on DSK3GMQ082PROD with NOTICES
November 1, 2016.
On September 6, 2016, the Chicago
Stock Exchange, Inc. (‘‘CHX’’) 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 adopt the CHX Liquidity
Taking Access Delay. The proposed rule
change was published for comment in
the Federal Register on September 22,
2016.3 The Commission received
thirteen comment letters on the
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. 78860
(September 16, 2016), 81 FR 65442.
1 15
VerDate Sep<11>2014
16:02 Nov 04, 2016
Jkt 241001
proposed rule change 4 and a response
letter from the Exchange.5
Section 19(b)(2) of the Act 6 provides
that, within 45 days of the publication
of 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 either approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether the
proposed rule change should be
disapproved. The 45th day after
publication of the notice for this
proposed rule change is November 6,
2016. The Commission is extending this
45-day 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 proposed
rule change and the comment letters.
Accordingly, the Commission, pursuant
to Section 19(b)(2) of the Act,7
designates December 21, 2016, as the
date by which the Commission shall
either approve or disapprove or institute
proceedings to determine whether to
disapprove the proposed rule change
(File Number SR–CHX–2016–16).
4 See letters from: Douglas A. Cifu, Chief
Executive Officer, Virtu Financial, dated September
21, 2016; R.T. Leuchtkafer, dated September 29,
2016; Adam Nunes, Head of Business Development,
Hudson River Trading LLC, dated October 6, 2016;
Beste Bidd, Trader, dated October 9, 2016; Joanna
Mallers, Secretary, FIA Principal Traders Group,
dated October 13, 2016; John L. Thornton, Co-Chair,
Hal S. Scott, Director, and R. Glenn Hubbard, CoChair, Committee on Capital Markets Regulation,
dated October 13, 2016; Adam C. Cooper, Senior
Managing Director and Chief Legal Officer, Citadel
Securities, dated October 13, 2016; Tyler Gellasch,
Executive Director, Healthy Markets Association,
dated October 13, 2016; Eric Budish, Professor of
Economics, University of Chicago Booth School of
Business, dated October 13, 2016; Elizabeth K.
King, General Counsel and Corporate Secretary,
New York Stock Exchange, dated October 14, 2016;
James J. Angel, Associate Professor, McDonough
School of Business, Georgetown University, dated
October 16, 2016; Eric Swanson, EVP, General
Counsel, and Secretary, Bats Global Markets, Inc.,
dated October 25, 2016; and Eric Pritchett, Chief
Executive Officer, Potamus Trading LLC, dated
October 26, 2016. All of the comment letters are
available at: https://www.sec.gov/comments/sr-chx2016-16/chx201616.shtml.
5 See letter from James Ongena, Executive Vice
President and General Counsel, Chicago Stock
Exchange, dated October 28, 2016.
6 15 U.S.C. 78s(b)(2).
7 Id.
PO 00000
Frm 00122
Fmt 4703
Sfmt 4703
For the Commission, by the Division
of Trading and Markets, pursuant to
delegated authority.8
Brent J. Fields,
Secretary.
[FR Doc. 2016–26787 Filed 11–4–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
32351; 812–14633]
Prudential ETF Trust, et al.; Notice of
Application
November 1, 2016.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice of an application for an
order under section 6(c) of the
Investment Company Act of 1940 (the
‘‘Act’’) for an exemption from sections
2(a)(32), 5(a)(1), 22(d), and 22(e) of the
Act and rule 22c-1 under the Act, under
sections 6(c) and 17(b) of the Act for an
exemption from sections 17(a)(1) and
17(a)(2) of the Act, and under section
12(d)(1)(J) for an exemption from
sections 12(d)(1)(A) and 12(d)(1)(B) of
the Act. The requested order would
permit (a) index-based series of certain
open-end management investment
companies (‘‘Funds’’) to issue shares
redeemable in large aggregations only
(‘‘Creation Units’’); (b) secondary market
transactions in Fund shares to occur at
negotiated market prices rather than at
net asset value (‘‘NAV’’); (c) certain
Funds to pay redemption proceeds,
under certain circumstances, more than
seven days after the tender of shares for
redemption; (d) certain affiliated
persons of a Fund to deposit securities
into, and receive securities from, the
Fund in connection with the purchase
and redemption of Creation Units; (e)
certain registered management
investment companies and unit
investment trusts outside of the same
group of investment companies as the
Funds (‘‘Funds of Funds’’) to acquire
shares of the Funds; and (f) certain
Funds (‘‘Feeder Funds’’) to create and
redeem Creation Units in-kind in a
master-feeder structure.
AGENCY:
Prudential ETF Trust (the
‘‘Trust’’), a Maryland statutory trust that
will be registered under the Act as an
open-end management investment
company with multiple series,
Prudential Investments LLC (the ‘‘Initial
Adviser’’), a New York limited liability
company registered as an investment
APPLICANTS:
8 17
CFR 200.30–3(a)(31).
E:\FR\FM\07NON1.SGM
07NON1
]]>Agencies
[Federal Register Volume 81, Number 215 (Monday, November 7, 2016)]
[Notices]
[Pages 78224-78228]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-26791]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-79212; File No. SR-OCC-2016-013]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change Concerning the Options
Clearing Corporation's Margin Coverage During Times of Increase
Volatility
November 1, 2016.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on October 18, 2016, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by OCC. The Commission is publishing this
notice to solicit comments on the rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
This proposed rule change by OCC would modify the current process
for systematically monitoring market conditions and performing
adjustments to its margin coverage when current market volatility
increases beyond historically observed levels.
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. OCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
OCC's margin methodology, the System for Theoretical Analysis and
Numerical Simulations (``STANS''), is OCC's proprietary risk management
system that calculates Clearing Members' \3\ margin requirements.\4\
STANS utilizes large-scale Monte Carlo simulations to forecast price
movement and correlations in determining a Clearing Member's margin
requirement.\5\ The STANS margin requirement is a portfolio calculation
at the level of Clearing Member legal entity marginable net positions
tier account (tiers can be customer, firm, or market marker) and
consists of an estimate of 99% 2-day expected shortfall and an add-on
for model risk (the concentration/dependence stress test charge).
---------------------------------------------------------------------------
\3\ See OCC By-Laws Article 1(C)(14).
\4\ See Securities Exchange Act Release No. 53322 (February 15,
2006), 71 FR 9403 (February 23, 2006) (SR-OCC-2004-20). A detailed
description of the STANS methodology is available at https://optionsclearing.com/risk-management/margins/.
\5\ See OCC Rule 601.
---------------------------------------------------------------------------
The majority of risk factors utilized in the STANS methodology are
total returns on individual equity securities. Other risk factors
considered include: Returns on equity indices; changes in the
calibrated coefficients of a model describing the yield curve for U.S.
government securities; ``returns'' on the nearest-to-expiration futures
contracts of various kinds; and changes in foreign exchange rates. For
the volatility of each risk factor, the Monte Carlo simulations use the
greater of: (i) The short-term volatility level predicted by the model;
and (ii) an estimate of its longer-run level. In between the monthly
re-estimations of all the models, volatilities are automatically re-
scaled to the greater of the short-term or the longer-run levels to
mitigate pro-cyclicality \6\ in the margin levels. (This daily
volatility measure is called the ``uniform scale factor.'') The uniform
scale factor is a multiplier used in connection with STANS calculations
to account for, among other things, the difference between short-term
and long-term volatility forecasts for equities. It is specifically
defined as the ratio of long-run volatility (10Y+) over short-run
volatility (2Y). It is used to ``scale up'' the short-run volatility of
the securities (e.g., IBM) that are subject to monthly update, in order
to estimate long-run volatility. It is also used to capture data gaps
between monthly updates.
---------------------------------------------------------------------------
\6\ A quality that is positively correlated with the overall
state of the economy is deemed to be pro-cyclical.
---------------------------------------------------------------------------
An approach employed by OCC to mitigate pro-cyclicality within
STANS is to estimate market volatility based on current market
conditions (``current market estimate'') and compare this current
market estimate to a long-run estimate of market volatility (``long-run
market estimate''). This comparison utilizes certain market benchmarks
(or factors), which serve as proxies for the overall volatility of an
asset class or group of products. If the long-run market estimate for a
factor is found to be greater than the current market estimate, the
volatility estimates for all products tied to that factor are adjusted
(or scaled) up in a manner proportionate to the relationship between
the current market volatility and the long-run market volatility for
that factor.
Current STANS includes a single factor (``uniform scale factor''),
which serves as the proxy for the equity asset class. This uniform
scale factor is calibrated based on changes in the volatility of the
Standard & Poor's 500[supreg] Index (``SPX'') and applied to all
``equity-based products'' in the manner described above. Currently, the
uniform scale factor is the only scale factor used in STANS. The
proposed change is intended to enhance the STANS margin calculations by
providing for the capability to increase the number of
[[Page 78225]]
scale factors used within STANS in cases where a more appropriate proxy
has been identified for a particular asset class or group of products
to measure the relationship between current vs. long-run market
volatility.
Summary of the Proposed Change
OCC believes that the current approach to scale factors in STANS
would be improved by providing the functionality to establish multiple
scale factors intended to more accurately measure the relationship
between current and long-run market volatility with proxies that
correlate more closely to groups of products within an asset class
(e.g., Russell 1000 Index and Russell 1000 ETFs), which would enhance
the accuracy of the margin requirements in STANS.\7\ Furthermore, OCC
can improve the resiliency of its risk management framework for non-
equity asset classes where open interest cleared by OCC has grown, but
where scale factors currently do not exist. By incorporating this
process to scale margin coverages when current market volatility
exceeds historically heightened levels that have been established to
mitigate pro-cyclicality, OCC's margin methodology is able to
expeditiously respond to severe changes in market volatility and thus
better protect the integrity of our financial markets.
---------------------------------------------------------------------------
\7\ In this case, accuracy is measured against backtesting
results. Pursuant to OCC's Model Risk Management Policy, an accurate
99% value-at-risk model should expect exceedances at a rate of 1%
per independent trial. If the exceedance rate is too high, the model
is missing key risks; if the exceedance rate is too low, the model
is not consistent with the organization's risk appetite. To the
extent that the conditional variances of not all relevant risk
factors move in lock-step to the conditional variance of SPX,
multiple scale factors offers the opportunity to be more accurate.
---------------------------------------------------------------------------
Scale Factor for Equity-Based Products
Current Uniform Scale Factor for Equity-Based Products
The uniform scale factor for the SPX roughly represents the ratio
of OCC's estimates of the long-run market volatility to the forecast
market volatility determined by most recent 24-month daily historical
returns.\8\ To determine the estimate of current market volatility, OCC
relies on daily pricing information for equity securities and exchange-
traded funds over a twenty-four month period ending with the last day
of the immediately preceding month. To populate this twenty-four month
time series, OCC relies on external vendors, with which it maintains
redundant relationships for resiliency,\9\ to adjust the daily pricing
information to account for corporate actions involving these
securities. This daily pricing information is received from its
vendor(s) after the close of each month, at which time OCC updates its
twenty-four month time series adding the new month and dropping the
last month of data. This process of updating the time series on a
monthly basis is referred to as a ``pending'' time series due to the
batch process used to update the time series. The long-run time series
used by the uniform scale factor is updated on a daily basis (i.e.,
non-pending update) with pricing information for the SPX dating back to
January 1, 1946. OCC calculates the uniform scale factor each business
day by comparing the current market volatility, using pending price
updates to the long-run time series using non-pending, or current,
market prices.
---------------------------------------------------------------------------
\8\ The uniform scale factor has been a part of STANS since it
was installed in 2006. See Securities Exchange Act Release No. 53322
(February 15, 2006), 71 FR 9403 (February 23, 2006) (SR-OCC-2004-
20).
\9\ Specifically, OCC maintains both a primary and backup data
center that receive live price feeds from multiple price vendors. In
the event of service disruption OCC is able to transition to an
alternate data center and/or pricing vendor, as applicable.
---------------------------------------------------------------------------
The uniform scale factor is applied to all equity products and is
used to adjust individual equity current market volatility estimates on
a daily basis based on the comparison of the current market volatility
and the long-run volatility estimate, which is updated daily. Should it
be observed that the current market volatility is less than the long-
run volatility, all products tied to the uniform scale factor will be
adjusted higher based on the ratio of the long-run volatility estimate
to the current market volatility estimate to account for the observed
change in volatility. In addition, the uniform scale factor is also
used to account for the fact that the distribution of returns for the
SPX has a ``fat tail'' \10\ because the scale factor seeks to match
estimates of expected margin shortfalls under the scenarios in STANS
for a hypothetical long position in the SPX.
---------------------------------------------------------------------------
\10\ A fat-tailed distribution is a probability distribution
that exhibits large skewness or kurtosis. Compared with a standard
normal distribution or bell curve, it has a higher probability of
occurrence of extreme events.
---------------------------------------------------------------------------
The uniform scale factor resulting from the calculations described
above is applied as a multiplier to hypothetical returns on a long
portfolio of equities produced during the Monte Carlo market scenarios
run within STANS. By ``scaling up'' hypothetical returns in this way,
the uniform scale factor relies on an assumption that more recent
behavior of SPX returns will provide an appropriate proxy for the
volatility in equity price returns that occur between monthly updates
of price data for the pending short-run time series. Accordingly, the
uniform scale factor helps OCC set margin requirements that account for
this proxy to ensure that Clearing Members maintain margin assets that
would be sufficient in light of historical volatility of the SPX.
Proposed Changes to the Uniform Scale Factor for Equity-Based Products
The average longer-run volatility forecast used in OCC's
computation of the uniform scale factor currently relies on daily
pricing information for component securities of the SPX dating back to
January of 1946. This time series predates, however, the 1957
introduction of the SPX. To accurately account for the behavior of SPX
returns only since the inception of the index, OCC proposes to adjust
the longer-run volatility forecast so that it would rely only on the
post-1957 information. OCC believes that this approach would reduce
model risk \11\ and improve the quality of the data by avoiding the
need to make assumptions related to the composition of the index before
its actual development.\12\
---------------------------------------------------------------------------
\11\ OCC defines ``model risk'' as the potential for adverse
consequences of incorrect or misused model outputs and reports.
\12\ As defined in OCC's Model Risk Management Policy, Model
Risk, in the sense of material exposure to the consequences of poor
assumptions, is reduced by making models adhere accurately to
observed phenomena. In this case, by reducing the role of the
uniform scale factor as a proxy between monthly updates of
univariate models for risk factors and by allowing certain risk
factors to bypass the monthly update process, as described below,
OCC believes that this proposed change would reduce model risk.
---------------------------------------------------------------------------
Proposed New Scale Factors for Equity-Based Products
To more accurately measure the relationship between current and
long-run market volatility with proxies that correlate more closely to
certain products carried within the equity asset class, OCC proposes to
expand the number of scale factors to include: (1) Russell 2000[supreg]
Index (12/29/1978); (2) Dow Jones Industrial Average Index (9/23/1997);
(3) NASDAQ-100 Index (2/4/1985) and (4) S&P 100 Index (1/2/1976).\13\
While the SPX scale factor will continue to serve as the default scale
factor for most equity products, the index options, futures and ETFs
which map to these indexes will be assigned to these scale factors and
whose current volatility estimates will be adjusted
[[Page 78226]]
based on the aforementioned methodology.
---------------------------------------------------------------------------
\13\ The dates in parentheticals are the dates from which OCC
has historical data on the specified index.
---------------------------------------------------------------------------
Consistent with OCC's existing Margin Policy,\14\ OCC will evaluate
the performance and use of these scale factors and determine if changes
to the mapping of products to scale factors or the addition of new
scale factors are warranted. Prior to any changes being implemented OCC
would present its findings to the Enterprise Risk Management Committee
and obtain approval to make the recommended enhancements.
---------------------------------------------------------------------------
\14\ OCC's Margin Policy describes OCC's approach to prudently
managing market and credit exposures presented by its Clearing
Members.
---------------------------------------------------------------------------
Proposed Anti-Procylical [sic.] Measure for Equity-Based Scale Factors
In order to mitigate against pro-cyclicality, OCC intends to apply
the relevant scale factor to the greater of (i) the estimated variance
of the 1-day return scenarios or (ii) the historical variance of the
daily return scenarios of a particular instrument, as a floor. OCC
believes this floor would mitigate pro-cyclicality in the relevant
return scenarios because it would result in a higher estimate of
volatility during periods of relatively lower market volatility than if
only the estimated variance in (i) above was used.
Scale Factor for Non-Equity-Based Products
Proposed New Scale Factors for Non-Equity-Based Products
In addition to equity products, OCC has observed a growth in the
open interest in other asset classes, most notably the volatility asset
class, for which an equity-based scale factor would not be applicable
based on negligible correlations observed. To be able to monitor and
respond to material changes in the volatility of these asset classes
while also mitigating pro-cyclicality, OCC proposes to introduce
additional scale factors in STANS related to volatility contracts.
For the volatility asset class, different from equities, volatility
characteristics are differentiated based on the term of an instrument.
As a result, the implementation of the scale factor will be different
from the implementation for the equity asset class. Individual products
would be linked within STANS to a particular scale factor not only in
accordance with price correlations, but will also consider term
structure (i.e., non-equity futures contracts of different
maturities).\15\
---------------------------------------------------------------------------
\15\ OCC would adopt scale factors specific to existing
volatility indices, which include volatility indices on the S&P 500
(VIX and VXST), Russell 2000 (RVX), gold (GVZ), oil (OVX), emerging
markets (VXEEM), Brazil (VXEWZ), Nasdaq 100 (VXN) and 10-year
Treasury Notes (VXTYN).
---------------------------------------------------------------------------
With regard to the scale factor(s) applicable to implied volatility
indexes, the data set would consist of index closing prices for certain
volatility indices with a time series that would run from October 1,
2004 (based on available historical data). Applying scale factors to
hypothetical returns in this asset class, as is done today for equity-
based products, will help ensure that OCC's margin requirements capture
shifts in market volatility in these non-equity asset classes, and OCC
believes these enhancements would generally promote a more accurate
approach to margining within STANS,\16\ particularly when markets are
volatile.
---------------------------------------------------------------------------
\16\ See notes. 4 & 8, supra.
---------------------------------------------------------------------------
Proposed Daily Statistical Updates for the Treasury Yield Curve Model
In addition to implementing the scale factors described above, OCC
is also proposing to implement processing changes that would update the
statistical models for common factors related to Treasury securities on
a daily basis. These model changes would allow OCC to monitor and
respond to material changes in the volatility of Treasury securities
while also mitigating pro-cyclicality without implementing a scale
factor specific to Treasury securities. OCC believes that updating its
Treasury securities models on a daily basis is a more appropriate way
to monitor and respond to material changes in the volatility of
Treasury securities while also mitigating pro-cyclicality since the
Treasury yield curve model is relatively less complex, with only three
factors, and the structure of the Treasuries securities model does not
lend itself to a returns-based scale factor (as is used with equity and
volatility derivatives, as described above).
Specifically, OCC is proposing to enhance its existing yield curve
model that OCC uses to project U.S. Treasury security returns, which is
updated monthly. The model contains underlying data set and time series
information for Treasury securities, which run from February 4, 2008
(based on available historical data) and, after implementing the
proposed enhancements, the model would be updated on a daily basis as
new data and time series information becomes available. The proposed
enhancements would promote a more accurate approach to margining within
STANS, as it relates to Treasury securities, particularly when markets
are volatile because the daily statistical updates would prevent the
model from becoming stale between monthly updates.
Impact Analysis and Outreach
Based on simulation testing for the period from January 14, 2015,
to March 6, 2015, risk margins (i.e., expected shortfall plus the
concentration/dependence add-on) would have been 5.2% higher in
aggregate as a consequence of these changes. This is mostly due to
higher coverage for the Russell 2000 Index and index ETF products under
the new methodology. The absolute variation in risk margins relative to
production was greater than 5% of Clearing Member capital for about 11%
of Clearing Member-days over the simulation period.
In order to inform Clearing Members of the proposed change, OCC
provided a general update at a recent OCC Roundtable \17\ meeting and
would continue to provide updates at Roundtable meetings on a quarterly
basis going forward. In addition, OCC would publish an Information
Memorandum to all Clearing Members describing the proposed change and
will provide additional periodic Information Memoranda updates prior to
the implementation date. OCC would also provide at least thirty days
prior notice to Clearing Members before implementing the change.
Additionally, OCC would perform targeted and direct outreach with
Clearing Members that would be most impacted by the proposed change and
OCC would work closely with such Clearing Members to coordinate the
implementation and associated funding for such Clearing Members
resulting from the proposed change.\18\ Finally, OCC would discuss the
proposed change with its cross-margin clearing house partners to ensure
they are aware of the proposed change.\19\
---------------------------------------------------------------------------
\17\ The OCC Roundtable was established to bring Clearing
Members, exchanges and OCC together to discuss industry and
operational issues. It is comprised of representatives of the senior
OCC staff, participant exchanges and Clearing Members, representing
the diversity of OCC's membership in industry segments, OCC-cleared
volume, business type, operational structure and geography.
\18\ Specifically, OCC will discuss with those Clearing Members
how they plan to satisfy any increase in their margin requirements
associated with the proposed change.
\19\ Cross-margin accounts are not uniquely affected by the
proposed change and would be affected by the proposed change in the
same manner as any other type of OCC account.
---------------------------------------------------------------------------
2. Statutory Basis
OCC believes that the proposed rule changes are consistent with
Section
[[Page 78227]]
17A(b)(3)(F) of the Act,\20\ because they would assure the safeguarding
of securities and funds in the custody and control of OCC by enhancing
the current approach for monitoring market conditions and performing
adjustments to OCC's margin coverage on both equity and non-equity
based derivatives products for which OCC provides clearance and
settlement services when current volatility increase beyond
historically observed levels. OCC uses the margin it collects from a
defaulting Clearing Member to protect other Clearing Members from loss
as a result of the defaulting Clearing Member. By more accurately
computing Clearing Member margin requirements OCC can assure the
safeguarding of securities and funds in its custody and control.
---------------------------------------------------------------------------
\20\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The proposed model changes described above would enhance the manner
in which OCC computes margin requirements for Clearing Members.
Specifically, the proposed changes to the Uniform Scale Factor for
equity-based products to rely only on post-1957 information would
reduce model risk and improve the quality of data by avoiding
unnecessary assumptions related to the composition of the SPX before
its inception. The proposed four new scale factors for equity-based
products would more accurately measure the relationship between current
and long-run market volatility with proxies that are correlated more
closely to certain products within the equity asset class. The proposed
introduction of new scale factors for non-equity based products, for
both the volatility assets class and the implied volatility indexes
will promote a more accurate approach to margining STANS, when markets
experience shifts in volatility. The proposed daily statistical updates
for the Treasury yield curve model would allow OCC to monitor and
response to material changes in the volatility of Treasury securities
while also mitigating pro-cyclicality. Taken together, the changes to
the uniform scale factor, the addition of new equity-based scale
factors, the addition of non-equity based scale factors and
introduction of daily statistical updates for the Treasury yield curve
model cause STANS to more accurately compute Clearing Member margin
requirements to reflect the risk of Clearing Member portfolios thereby
reducing the risk that Clearing Member margin assets would be
insufficient should OCC need to use such assets to close-out the
positions of a defaulted Clearing Member. Further, the proposed rule
changes would make it less likely that the default of a Clearing Member
would stress the financial resources available to OCC, which include
mutualized resource funds deposited by non-defaulting Clearing Members
as Clearing Fund.
OCC believes that the proposed rule changes are also consistent
with Rule 17Ad-22(b)(2) \21\ because they would limit OCC's credit
exposures to its participants under normal market conditions and use
risk-based models and parameters to set OCC's margin requirements. As
described above, the risk-based model and parameter changes to the
uniform scale factor, the addition of new equity-based scale factors,
the addition of non-equity based scale factors and introduction of
daily statistical updates for the Treasury yield curve model cause
STANS to more accurately compute Clearing Member margin requirements.
By more accurately computing Clearing Member margin requirements, OCC
reduces its credit exposure to its Clearing Members.
---------------------------------------------------------------------------
\21\ 17 CFR 240.17Ad-22(b)(2).
---------------------------------------------------------------------------
The proposed rule changes are not inconsistent with the existing
rules of OCC, including any other rules proposed to be amended.
(B) Clearing Agency's Statement on Burden on Competition
OCC does not believe that the proposed rule change would impact or
impose any burden on competition.\22\ The proposed rule change would
allow OCC to adjust Clearing Member margin requirements when current
volatility increases beyond historical levels. While as a result of the
proposed rule change Clearing Members may experience daily margin
fluctuations of up to ten percent, such fluctuations are equal in
amount to fluctuations Clearing Members typically experience as a
result of changes in market price, volatility or interest rates.
Therefore, OCC believes that the proposed rule change would not
unfairly inhibit access to OCC's services or disadvantage or favor any
particular user in relationship to another user. In addition, the
proposed rule change would be applied uniformly to all Clearing Members
in establishing their margin requirements.
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\22\ 15 U.S.C. 78q-1(b)(3)(I).
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For the foregoing reasons, OCC believes that the proposed rule
change is in the public interest, would be consistent with the
requirements of the Act applicable to clearing agencies, and would not
impact or impose a burden on competition.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments were not and are not intended to be solicited with
respect to the proposed rule change and none have been received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-OCC-2016-013 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2016-013. 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
[[Page 78228]]
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
such 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_013.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-2016-013 and
should be submitted on or before November 28, 2016.
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\23\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated Authority.\23\
Brent J. Fields,
Secretary
[FR Doc. 2016-26791 Filed 11-4-16; 8:45 am]
BILLING CODE 8011-01-P
