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 Increased Volatility, 8455-8459 [2017-01605]

Download as PDF mstockstill on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 15 / Wednesday, January 25, 2017 / Notices has determined that it would be beneficial to customers and to the options market as a whole to approve on a permanent basis the provisions concerning early conclusion of the PIM. The Commission notes that there have been few instances of early termination of the PIM. The Commission believes that, particularly for Auctions for fewer than 50 contracts when the bid/ask differential is wider than $0.01, the data provided by the Exchange support its proposal to make the Pilot permanent. The data demonstrate that the Auction generally provides price improvement opportunities to orders, including orders of retail customers and particularly when the bid/ask differential is wider than $0.01; that there is meaningful competition for orders on the Exchange; and that there exists an active and liquid market functioning on the Exchange outside of the Auction.33 The Commission further believes that the proposed revisions to the eligibility requirements for orders of fewer than 50 contracts with respect to circumstances when the NBBO is no more than $0.01 wide should help to enhance the operation of the Auction by providing meaningful opportunities for price improvement in such circumstances, and should benefit investors and others in a manner that is consistent with the Act. The Commission further notes that, as discussed more fully above, ISE Mercury is initially proposing to implement is price improvement requirement for Agency Orders of fewer than 50 option contracts where the difference in the NBBO is $0.01 with a member conduct standard.34 As described in greater detail above, ISE Mercury proposes to enforce this requirement under ISE Rule 1614(d)(4). The Commission believes that ISE Mercury’s proposed member conduct standard and ISE Rule 1614(d)(4) are reasonable means to implement the price improvement requirement until implementation of its proposed systemsbased mechanism for this requirement, which will become effective following the migration of a symbol to INET, the platform operated by Nasdaq, Inc. that will also operate the PIM. The Commission further notes that the Exchange has represented that its proposed member conduct standard will be effective until the migration of all Exhibit 3 to SR–ISEMercury–2016–25. Exchange stated that it will conduct electronic surveillance of the PIM to ensure that members comply with the proposed price improvement requirements for option orders of fewer than 50 contracts. See Notice, supra note 3, at 91284. symbols to the INET platform, which shall be no later than September 15, 2017.35 Thus, the Commission has determined to approve the Exchange’s proposed revisions to ISE Mercury Rule 723(b) and Supplementary Material .03 and .05 to ISE Mercury Rule 723, and to approve the Pilot, as proposed to be modified, on a permanent basis. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,36 that the proposed rule change (SR–ISEMercury– 2016–25), be and hereby is approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.37 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–01619 Filed 1–24–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–79818; File No. SR–OCC– 2017–001] 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 Increased Volatility January 18, 2017. 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 January 4, 2017, 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 proposed 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. 33 See 34 The VerDate Sep<11>2014 20:29 Jan 24, 2017 Jkt 241001 35 See Notice, supra note 3, at 91284 & n.7. 36 15 U.S.C. 78s(b)(2). 37 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. PO 00000 Frm 00060 Fmt 4703 Sfmt 4703 8455 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 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 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 E:\FR\FM\25JAN1.SGM 25JAN1 8456 Federal Register / Vol. 82, No. 15 / Wednesday, January 25, 2017 / Notices mstockstill on DSK3G9T082PROD with NOTICES 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 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 Changes OCC proposes a number of enhancements to its STANS margin methodology that are designed to more accurately compute Clearing Member margin requirements to reflect the risk of Clearing Member portfolios. 6 A quality that is positively correlated with the overall state of the economy is deemed to be procyclical. VerDate Sep<11>2014 20:29 Jan 24, 2017 Jkt 241001 Specifically, OCC proposes to: (1) Adjust the longer-run volatility forecast used in OCC’s computation of the uniform scale factor so that it would rely only on post-1957 price information (i.e., price information since the introduction of the SPX) in order to more accurately account for the behavior of SPX returns only since the inception of the index; (2) expand the number of scale factors used for equitybased 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; (3) apply relevant scale factors to the greater of (i) the estimated variance of 1-day return scenarios or (ii) the historical variance of the daily return scenarios of a particular instrument, as a floor to mitigate procyclicality; and (4) implement processing changes that would update the statistical models for common factors related to Treasury securities on a daily basis. The proposed changes are discussed in more detail below. 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 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 Current Uniform Scale Factor for Equity-Based Products The uniform scale factor for the SPX roughly represents the ratio of OCC’s 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. PO 00000 Frm 00061 Fmt 4703 Sfmt 4703 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 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 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. 10 A fat-tailed distribution is a probability distribution that exhibits large skewness or kurtosis. Compared with a standard normal distribution or E:\FR\FM\25JAN1.SGM 25JAN1 Federal Register / Vol. 82, No. 15 / Wednesday, January 25, 2017 / Notices 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 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 mstockstill on DSK3G9T082PROD with NOTICES 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 bell curve, it has a higher probability of occurrence of extreme events. 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. VerDate Sep<11>2014 20:29 Jan 24, 2017 Jkt 241001 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 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-Procyclical 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. 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 13 The dates in parentheticals are the dates from which OCC has historical data on the specified index. 14 OCC’s Margin Policy describes OCC’s approach to prudently managing market and credit exposures presented by its Clearing Members. PO 00000 Frm 00062 Fmt 4703 Sfmt 4703 8457 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 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 approximately 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. In order to inform Clearing Members of the proposed change, OCC provided a general update at a recent OCC Roundtable 15 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 15 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. E:\FR\FM\25JAN1.SGM 25JAN1 8458 Federal Register / Vol. 82, No. 15 / Wednesday, January 25, 2017 / Notices 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.16 Finally, OCC would discuss the proposed change with its crossmargin clearing house partners to ensure they are aware of the proposed change.17 mstockstill on DSK3G9T082PROD with NOTICES 2. Statutory Basis OCC believes that the proposed rule change is consistent with Section 17A(b)(3)(F) of the Act 18 because it 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 equity and Treasury-based 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 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 daily statistical updates for the Treasury yield curve model would allow OCC to monitor and respond to material changes in the volatility of Treasury securities while also mitigating procyclicality. Taken together, the changes 16 Specifically, OCC will discuss with those Clearing Members how they plan to satisfy any increase in their margin requirements associated with the proposed change. 17 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. 18 15 U.S.C. 78q–1(b)(3)(F). VerDate Sep<11>2014 20:29 Jan 24, 2017 Jkt 241001 to the uniform scale factor, the addition of new equity-based scale factors, and the introduction of daily statistical updates for the Treasury yield curve model would 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 change 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 change is also consistent with Rule 17Ad–22(b)(2) 19 because it 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, and the 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.20 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, 19 17 20 15 PO 00000 CFR 240.17Ad–22(b)(2). U.S.C. 78q–1(b)(3)(I). Frm 00063 Fmt 4703 Sfmt 4703 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. (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–2017–001 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–2017–001. 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 E:\FR\FM\25JAN1.SGM 25JAN1 Federal Register / Vol. 82, No. 15 / Wednesday, January 25, 2017 / Notices 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 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_17_ 001.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–2017–001 and should be submitted on or before February 15, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated Authority.21 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–01605 Filed 1–24–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION mstockstill on DSK3G9T082PROD with NOTICES January 18, 2017. I. Introduction On November 29, 2016, Chicago Board Options Exchange, Incorporated (the ‘‘Exchange’’ or ‘‘CBOE’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant CFR 200.30–3(a)(12). VerDate Sep<11>2014 20:29 Jan 24, 2017 Jkt 241001 Three components of AIM were approved by the Commission on a pilot basis (the ‘‘Pilot’’): (1) That there is no minimum size requirement for orders to be eligible for the AIM; (2) that the AIM will conclude prematurely anytime there is a quote lock on the Exchange pursuant to Rule 6.45A(d); 7 and (3) that there is no minimum size requirement for orders to be eligible for the FLEX AIM.8 In connection with the Pilot, the Exchange has provided certain data to the Commission to provide supporting evidence that, among other things, there is meaningful competition for all size orders and that there is an active and liquid market functioning on the Exchange outside of the AIM.9 The Pilot is currently set to expire on January 18, 2017.10 The Exchange proposes to make the Pilot permanent. II. Description of the Proposal A. No Minimum Size Requirement Pilot In support of its proposal, and in addition to data submitted to the Commission on a monthly and confidential basis since the Pilot’s inception, the Exchange has provided the Commission with data for AIM executions from January through June 2015 (the ‘‘Report’’).11 The Exchange believes the data provides evidence that AIM offers meaningful competition for all size orders and that there is an active and liquid market functioning on the Exchange outside of AIM.12 The Exchange further notes that the data provided in the Report demonstrates the price improvement benefits of AIM.13 According to the Exchange, approving the no minimum size pilot on a permanent basis will allow AIM to continue to offer meaningful price improvement and will not have an adverse effect on the market functioning on the Exchange outside of AIM.14 Specifically, the Report contains eight categories of non-customer and customer auction data, as well as three categories of summary auction data, during the period from January through AIM exposes certain orders electronically to an auction process to provide these orders with the opportunity to receive an execution at an improved price.5 In addition, the AIM auction process for FLEX Options (‘‘FLEX AIM’’) exposes certain FLEX Options orders electronically to an auction process to provide these orders with the opportunity to receive an execution at an improved price.6 The AIM and FLEX AIM auctions are available only for orders that a Trading Permit Holder represents as agent (‘‘Agency Order’’) and for which a second order of the same size as the Agency Order (and on the opposite side of the market) is also submitted (effectively stopping the Agency Order at a given price). U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 79499 (December 7, 2016), 81 FR 90012 (‘‘Notice’’). 4 In Amendment No. 1, the Exchange described additional data relating to complex orders submitted through AIM and provided additional support for its proposal to approve the aspects of AIM currently operating on a pilot basis as applicable to complex orders. To promote transparency of its proposed amendment, when CBOE filed Amendment No. 1 with the Commission, it also submitted Amendment No. 1 as a comment letter to the file, which the Commission posted on its Web site and placed in the public comment file for SR–CBOE–2016–084 (available at https://www.sec.gov/comments/sr-cboe-2016-084/ cboe2016084-1475098-130456.pdf). The Exchange also posted a copy of its Amendment No. 1 on its Web site (https://www.cboe.com/aboutcboe/legal/ submittedsecfilings.aspx), when it filed it with the Commission. 5 See CBOE Rule 6.74A. See also Securities Exchange Release No. 53222 (February 3, 2006), 71 FR 7089 (February 10, 2006) (SR–CBOE–2005–60) (‘‘AIM Approval Order’’). 6 See Securities Exchange Release No. 66702 (March 30, 2012), 77 FR 20675 (April 5, 2012) (SR– CBOE–2011–123) (‘‘FLEX AIM Approval Order’’). 2 17 Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of Amendment No. 1, and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Amend Exchange Rules Related to the Automated Improvement Mechanism 21 17 to the provisions of Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to make permanent make permanent those aspects of its Automated Improvement Mechanism (‘‘AIM’’ or ‘‘Auction’’) that are currently operating on a pilot basis. The proposed rule change was published for comment in the Federal Register on December 13, 2016.3 The Commission received no comments regarding the proposal. On January 6, 2017, the Exchange filed Amendment No. 1 to the proposed rule change.4 The Commission is publishing this notice to solicit comments on Amendment No. 1 from interested persons, and is approving the proposed rule change, as modified by Amendment No. 1, on an accelerated basis. 1 15 [Release No. 34–79836; File No. SR–CBOE– 2016–084] 8459 PO 00000 Frm 00064 Fmt 4703 Sfmt 4703 7 A quote lock occurs when a CBOE MarketMaker’s quote interacts with the quote of another CBOE Market-Maker (i.e., when internal quotes lock). 8 The pilot for the FLEX AIM auction process was modeled after the pilot for non-FLEX Options. See FLEX AIM Approval Order, supra note 6. 9 See Interpretation and Policy .03 to CBOE Rule 6.74A and Interpretation and Policy .03 to CBOE Rule 24B.5A. 10 See Securities Exchange Act Release No. 78316 (July 13, 2016) 81 FR 46975 (July 19, 2016) (SR– CBOE–2016–056). 11 See Exhibit 3 to SR–CBOE–2016–084. 12 See Notice, supra note 3, at 90013–14. 13 See id. The Commission notes that AIM currently requires price improvement for Agency Orders of fewer than 50 contracts. See CBOE Rule 6.74A(a)(3). 14 See Notice, supra note 3, at 90014. E:\FR\FM\25JAN1.SGM 25JAN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 82, Number 15 (Wednesday, January 25, 2017)]
[Notices]
[Pages 8455-8459]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-01605]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79818; File No. SR-OCC-2017-001]


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 Increased 
Volatility

January 18, 2017.
    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 January 4, 2017, 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 proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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).
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    \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.
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    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

[[Page 8456]]

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.
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    \6\ A quality that is positively correlated with the overall 
state of the economy is deemed to be pro-cyclical.
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    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 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 Changes

    OCC proposes a number of enhancements to its STANS margin 
methodology that are designed to more accurately compute Clearing 
Member margin requirements to reflect the risk of Clearing Member 
portfolios. Specifically, OCC proposes to: (1) Adjust the longer-run 
volatility forecast used in OCC's computation of the uniform scale 
factor so that it would rely only on post-1957 price information (i.e., 
price information since the introduction of the SPX) in order to more 
accurately account for the behavior of SPX returns only since the 
inception of the index; (2) expand the number of scale factors used 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; (3) apply relevant scale factors to the greater of (i) the 
estimated variance of 1-day return scenarios or (ii) the historical 
variance of the daily return scenarios of a particular instrument, as a 
floor to mitigate procyclicality; and (4) implement processing changes 
that would update the statistical models for common factors related to 
Treasury securities on a daily basis. The proposed changes are 
discussed in more detail below.
    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\ 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.
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    \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.
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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.
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    \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

[[Page 8457]]

seeks to match estimates of expected margin shortfalls under the 
scenarios in STANS for a hypothetical long position in the SPX.
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    \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\
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    \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 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.
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    \14\ OCC's Margin Policy describes OCC's approach to prudently 
managing market and credit exposures presented by its Clearing 
Members.
---------------------------------------------------------------------------

Proposed Anti-Procyclical 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.

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 approximately 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.
    In order to inform Clearing Members of the proposed change, OCC 
provided a general update at a recent OCC Roundtable \15\ 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

[[Page 8458]]

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.\16\ Finally, OCC would discuss the proposed change 
with its cross-margin clearing house partners to ensure they are aware 
of the proposed change.\17\
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    \15\ 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.
    \16\ Specifically, OCC will discuss with those Clearing Members 
how they plan to satisfy any increase in their margin requirements 
associated with the proposed change.
    \17\ 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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2. Statutory Basis
    OCC believes that the proposed rule change is consistent with 
Section 17A(b)(3)(F) of the Act \18\ because it 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 equity and Treasury-
based 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.
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    \18\ 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 
daily statistical updates for the Treasury yield curve model would 
allow OCC to monitor and respond 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, and the introduction of daily statistical 
updates for the Treasury yield curve model would 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 change 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 change is also consistent with 
Rule 17Ad-22(b)(2) \19\ because it 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, and the 
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.
---------------------------------------------------------------------------

    \19\ 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.\20\ 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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    \20\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    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-2017-001 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-2017-001. 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

[[Page 8459]]

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 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_17_001.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-2017-001 and 
should be submitted on or before February 15, 2017.
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    \21\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated Authority.\21\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-01605 Filed 1-24-17; 8:45 am]
BILLING CODE 8011-01-P

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