Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection To Advance Notice Filing Concerning The Options Clearing Corporation's Margin Methodology, 24536-24541 [2018-11454]

Download as PDF 24536 Federal Register / Vol. 83, No. 103 / Tuesday, May 29, 2018 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–83305; File No. SR–OCC– 2017–811] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection To Advance Notice Filing Concerning The Options Clearing Corporation’s Margin Methodology May 23, 2018. daltland on DSKBBV9HB2PROD with NOTICES I. Introduction On November 13, 2017, The Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) advance notice SR–OCC–2017–811 (‘‘Advance Notice’’) pursuant to Section 806(e)(1) of the Payment, Clearing, and Settlement Supervision Act of 2010 (‘‘Payment Supervision Act’’) 1 and Rule 19b– 4(n)(1)(i) under the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 2 to propose several enhancements to OCC’s margin methodology, the System for Theoretical Analysis and Numerical Simulations (‘‘STANS’’), OCC’s proprietary risk management system that calculates clearing member margin requirements.3 The proposed changes would modify OCC’s margin methodology to: (1) Obtain daily price data for equity products (including daily corporate action-adjusted returns of equities where prices and thus returns of securities are adjusted for any dividends issued, stock splits, etc.) for use in the daily estimation of econometric model parameters; (2) enhance its econometric model for updating statistical parameters (e.g., parameters concerning correlations or volatility) for all risk factors that reflect the most recent data obtained; (3) improve the sensitivity and stability of correlation estimates across risk factors by using de-volatized 4 returns (but using a 500 day look back period); and (4) improve OCC’s methodology related to the treatment of defaulting securities 5 1 12 U.S.C. 5465(e)(1). The Financial Stability Oversight Council designated OCC a systemically important financial market utility (‘‘SIFMU’’) on July 18, 2012. See Financial Stability Oversight Council 2012 Annual Report, Appendix A, available at https://www.treasury.gov/initiatives/ fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, OCC is required to comply with the Payment Supervision Act and file advance notices with the Commission. See 12 U.S.C. 5465(e). 2 17 CFR 240.19b–4(n)(1)(i). 3 See Notice infra note 7, at 82 FR 61355. 4 De-volatization is a process of normalizing historical data with the associated volatility thus facilitating comparison between different sets of data. 5 Within the context of OCC’s margin system, securities that do not have enough historical data VerDate Sep<11>2014 16:39 May 25, 2018 Jkt 244001 that would result in stable and realistic risk estimates for such securities.6 The Advance Notice was published for comment in the Federal Register on December 27, 2017.7 On January 11, 2018, the Commission requested OCC provide it with additional information regarding the Advance Notice.8 OCC responded to this request for information on January 23, 2018.9 On March 22, 2018, the Commission determined that the Advance Notice raises complex issues because OCC proposes to make detailed, substantial, and numerous changes to its margin methodology.10 As such, the Commission extended review period of the Advance Notice until May 23, 2018.11 As of May 23, 2018, the Commission has received one comment letter on the proposal contained in the Advance Notice.12 This publication serves as notice of no objection to the Advance Notice. II. Background 13 OCC’s Current Margin Methodology OCC’s margin methodology, the System for Theoretical Analysis and Numerical Simulations (‘‘STANS’’), calculates clearing member margin for calibration are classified as ‘‘defaulting securities.’’ See Notice, 82 FR at 61355, note 15. 6 See Notice infra note 7, at 82 FR 61354. 7 Exchange Act Release No. 82371 (Dec. 20, 2017), 82 FR 61354 (Dec. 27, 2017) (SR–OCC–2017–811) (‘‘Notice’’). On November 13, 2017, OCC also filed a related proposed rule change (SR–OCC–2017–022) with the Commission pursuant to Exchange Act Section 19(b)(1) and Rule 19b-4 thereunder, seeking approval of changes to its rules necessary to implement the proposal contained in the Advance Notice (‘‘Proposed Rule Change’’). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b–4, respectively. The Proposed Rule Change was published in the Federal Register on December 4, 2017. Exchange Act Release No. 82161 (Nov. 28, 2017), 82 FR 57306 (Dec. 4, 2017) (SR–OCC–2017–022). 8 See Memorandum from Office of Clearance and Settlement, Division of Trading and Markets, dated January 12, 2018, available at https://www.sec.gov/ comments/sr-occ-2017-811/occ2017811.htm. 9 See Memorandum from Office of Clearance and Settlement, Division of Trading and Markets, dated March 6, 2018, available at https://www.sec.gov/ comments/sr-occ-2017-811/occ2017811.htm. 10 See Extension Notice, 82 FR at 13315. 11 Id. 12 See letter from Michael Kitlas, dated November 28, 2017, to Eduardo A. Aleman, Assistant Secretary, Commission, available at https:// www.sec.gov/comments/sr-occ-2017-022/ occ2017022.htm (‘‘Kitlas Letter’’). After reviewing the Kitlas Letter, the Commission believes that it is nonresponsive to the Advance Notice and therefore outside the scope of the proposal. Since the proposal contained in the Advance Notice was also filed as a proposed rule change, all public comments received on the proposal are considered regardless of whether the comments are submitted on the Proposed Rule Change or the Advance Notice. 13 The description of the background of the proposal is substantially excerpted from the Notice. See Notice, 82 FR at 61355. PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 requirements.14 STANS utilizes largescale Monte Carlo simulations to forecast price and volatility movements in determining a clearing member’s margin requirement.15 The STANS margin requirement is calculated at the portfolio level of clearing member accounts with positions in marginable securities and consists of an estimate of a 99% expected shortfall 16 over a twoday time horizon and an add-on margin charge for model risk (the concentration/dependence stress test charge).17 The STANS methodology is used to measure the exposure of portfolios of options and futures cleared by OCC and cash instruments in margin collateral.18 A ‘‘risk factor’’ within OCC’s margin system may be defined as a product or attribute whose historical data are used to estimate and simulate the risk for an associated product.19 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 indexes; returns on implied volatility risk factors that are a set of nine chosen volatility pivots per product; changes in foreign exchange rates; securities underlying equity-based products; and changes in model parameters that sufficiently capture the model dynamics from a larger set of data.20 Under OCC’s current margin methodology, OCC obtains monthly price data for most of its equity-based products from a third-party vendor.21 This data arrive around the second week of every month in arrears and require approximately four weeks for OCC to process prior to installing into OCC’s margin system.22 As a result, correlations and statistical parameters for risk factors at any point in time represent stale data and therefore may not be representative of the most recent market data.23 In the absence of daily updates, OCC employs an approach 14 See Exchange Act Release No. 53322 (Feb. 15, 2006), 71 FR 9403 (Feb. 23, 2006) (File No. SR– OCC–2004–20). 15 See OCC Rule 601; see also Notice, 82 FR at 61355. 16 See Notice, 82 FR at 61355. The expected shortfall component is established as the estimated average of potential losses higher than the 99% value at risk threshold. See Notice, 82 FR at 61355, note 8. 17 See Notice, 82 FR at 61355. A detailed description of the STANS methodology is available at https://optionsclearing.com/risk-management/ margins/. See Notice, 82 FR at 61355, note 9. 18 See Notice, 82 FR at 61355. 19 Id. 20 Id. 21 Id. 22 Id. 23 Id. E:\FR\FM\29MYN1.SGM 29MYN1 Federal Register / Vol. 83, No. 103 / Tuesday, May 29, 2018 / Notices where one or more identified market proxies (or ‘‘scale-factors’’) are used to incorporate day-to-day market volatility across all associated asset classes throughout.24 The scale-factor approach, however, assumes a perfect correlation of the volatilities between the security and its scale-factor, which gives little room to capture the idiosyncratic risk of a given security and is different from the broad market risk represented by the scale-factor.25 In addition, OCC imposes a floor on volatility estimates for its equity-based products using a 500-day look back period.26 OCC believes that using monthly price data, coupled with the dependency of margins on scale-factors and the volatility floor can result in imprecise changes in margins charged to clearing members, specifically across periods of heavy volatility when the correlation between the risk factor and a scale-factor fluctuate.27 OCC’s current methodology for estimating covariance and correlations between risk factors relies on the same monthly data described above, resulting in a similar lag time between updates.28 In addition, correlation estimates are based off historical returns series, with estimates between a pair of risk factors being highly sensitive to the volatility of either risk factor in the chosen pair.29 Accordingly, OCC believes that the current approach results in potentially less stable correlation estimates that may not be representative of current market conditions.30 Finally, under OCC’s existing margin methodology, theoretical price scenarios for ‘‘defaulting securities’’ 31 are simulated using uncorrelated return scenarios with an average zero return and a pre-specified volatility called ‘‘default variance.’’ 32 The default variance is estimated as the average of the top 25 percent quantile of the conditional variances of all securities.33 As a result, OCC believes that these default estimates may be impacted by extremely illiquid securities with discontinuous data.34 In addition, OCC believes that the default variance (and 24 Id. daltland on DSKBBV9HB2PROD with NOTICES 25 Id. 26 See Notice, 82 FR at 61355. In risk management, it is a common practice to establish a floor for volatility at a certain level in order to protect against procyclicality in the model. See Notice, 82 FR at 61355, note 14. 27 See Notice, 82 FR at 61355. 28 Id. 29 Id. 30 Id. 31 See supra note 5. 32 See Notice, 82 FR at 61355. 33 Id. 34 Id. VerDate Sep<11>2014 16:39 May 25, 2018 Jkt 244001 the associated scale-factors used to scale up volatility) is also subject to sudden jumps across successive months because it is derived from monthly data updates, as opposed to daily updates, which are prone to wider fluctuations and are subject to adjustments using scalefactors.35 III. Description of the Proposal in the Advance Notice 36 The Advance Notice proposes changes to OCC’s margin methodology, STANS. More specifically, OCC proposes to: (1) Obtain daily price data for equity products (including daily corporate action-adjusted returns of equities where price and thus returns of securities are adjusted for any dividends issued, stock splits, etc.) for use in the daily estimation of econometric model parameters; (2) enhance its econometric model for updating statistical parameters (e.g., parameters concerning correlations or volatility) for all risk factors that reflect the most recent data obtained; (3) improve the sensitivity and stability of correlation estimates across risk factors by using de-volatized 37 returns (but using a 500 day look back period); and (4) improve OCC’s methodology related to the treatment of defaulting securities 38 that would result in stable and realistic risk estimates for such securities. As a general matter, OCC believes that introducing daily updates for price data would result in more accurate margin requirements that are based off of the most recent market data. OCC also believes that the other model enhancements would, among other things, improve OCC’s approach to estimating covariance and correlations between risk factors in an effort to achieve more accurate and timely correlation estimations.39 OCC further represents that the proposed changes would improve OCC’s methodology 35 Id. 36 The description of the proposal is substantially excerpted from the Notice. See Notice, 82 FR at 61356–61358. In addition to the proposed methodology changes described herein, OCC also would make some clarifying and clean-up changes, unrelated to the proposed changes described herein, to update its margin methodology to reflect existing practices for the daily calibration of seasonal and non-seasonal energy models and the removal of methodology language for certain products that are no longer cleared by OCC. See Notice, 82 FR at 61356, note 17. 37 De-volatization is a process of normalizing historical data with the associated volatility thus facilitating comparison between different sets of data. 38 See supra note 5. 39 OCC’s covariance and correlation analytics estimate whether risk factors are positively or inversely related and to what extent any relationship exists. PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 24537 related to the treatment of defaulting securities by reducing the impact that illiquid securities with discontinuous data have on default variance estimates. Each of these proposals is discussed in more detail below. 1. Daily Updates of Price Data OCC proposes to introduce daily updates for price data for equity products, including daily corporate action-adjusted returns of equities, Exchange Traded Funds (‘‘ETFs’’), Exchange Traded Notes (‘‘ETNs’’) and certain indexes.40 OCC believes that the proposed change would help ensure that OCC’s margin methodology is reliant on data that is more representative of current market conditions, thereby resulting in more accurate and responsive margin requirements.41 In addition, OCC believes that the introduction of daily price updates would enable OCC’s margin methodology to better capture both market and idiosyncratic risk by allowing for daily updates to the parameters associated with the econometric model (discussed below) that captures the risk associated with a particular product, and therefore help ensure that OCC’s margin requirements are based on more current market conditions.42 As a result, OCC would also reduce its reliance on the use of scale-factors to incorporate day-to-day market volatility, which OCC believes give little room to capture the idiosyncratic risk of a given security and is different from the broad market risk represented by the scale-factor.43 2. Proposed Enhancements to the Econometric Model In addition to introducing daily updates for price and corporate actionadjusted returns data, OCC is proposing enhancements to its econometric model for calculating statistical parameters for all qualifying risk factors that reflect the most recent data obtained (e.g., OCC would be able to calculate parameters such as volatility and correlations on a daily basis using the new daily price data discussed above). More specifically, OCC proposes to enhance its econometric model by: (i) Introducing daily updates for statistical parameters; (ii) introducing features in its econometric model that are designed to take into account asymmetry in the model used to forecast volatility associated with a risk factor ; (iii) modifying the statistical distribution 40 See Notice, 82 FR at 61356. 41 Id. 42 Id. 43 Id. E:\FR\FM\29MYN1.SGM 29MYN1 24538 Federal Register / Vol. 83, No. 103 / Tuesday, May 29, 2018 / Notices used to model the returns of equity prices; (iv) introducing a second-day forecast for volatility into the model to estimate the two-day scenario distributions for risk factors; and (v) imposing a floor on volatility estimates using a 10-year look back period. These proposed model enhancements are described in detail below. i. Daily Updates for Statistical Parameters Under the proposal, the statistical parameters for the model would be updated on a daily basis using the new daily price data obtained by OCC from a reliable third-party (as described above).44 As a result, OCC would no longer need to rely on scale-factors to approximate day-to-day market volatility for equity-based products.45 OCC believes that calibrating statistical parameters on a daily basis would allow OCC to calculate more accurate margin requirements that represent the most recent market data.46 ii. Proposed Enhancements To Capture Asymmetry in Conditional Variance The current approach for forecasting the conditional variance for a given risk factor does not consider the asymmetric volatility phenomenon observed in financial markets (also called the ‘‘leverage effect’’) where volatility is more accurate and timely and reactive to market downturns.47 Under the proposal, OCC would amend its econometric model to include new features (i.e., incorporating asymmetry into its forecast volatility) designed to allow the conditional volatility forecast to be more accurate and timely to market downturns and thereby capture the most significant dynamics of the relationship between price and volatility observed in financial markets.48 OCC believes the proposed enhancement would result in more accurate and responsive margin requirements, particularly in market downturns.49 daltland on DSKBBV9HB2PROD with NOTICES iii. Proposed Change in Statistical Distribution OCC also proposes to change the statistical distribution used to model the returns of equity prices. OCC’s current methodology uses a fat tailed 44 See Notice, 82 FR at 61356. OCC notes that this change would apply to most risk factors with the exception of certain equity indexes, Treasury securities, and energy futures products, which are already updated on a daily basis. See Notice, 82 FR 61356, at note 18. 45 See Notice, 82 FR at 61356. 46 Id. 47 See Notice, 82 FR at 61357. 48 Id. 49 Id. VerDate Sep<11>2014 16:39 May 25, 2018 Jkt 244001 distribution 50 (the Student’s tdistribution) to model returns; 51 however, price scenarios generated using very large log-return scenarios (positive) that follow this distribution can approach infinity and could potentially result in excessively large price jumps, a known limitation of this distribution.52 Under the proposal, OCC would adopt a more defined distribution (Standardized Normal Reciprocal Inverse Gaussian or NRIG) for modeling returns, which OCC believes would more appropriately simulate future returns based on the historical price data for the products in question and allows for more appropriate modeling of fat tails.53 As a result, OCC believes that the proposed change would lead to more consistent treatment of log returns both on the upside as well as downside of the distribution.54 iv. Second Day Volatility Forecast OCC further proposes to introduce a second-day forecast for volatility into the econometric model to estimate the two-day scenario distributions for risk factors.55 Under the current methodology, OCC typically uses a twoday horizon to determine its risk exposure to a given portfolio.56 This is done by simulating 10,000 theoretical price scenarios for the two-day horizon using a one-day forecast conditional variance; the value at risk and expected shortfall components of the margin requirement are then determined from the simulated profit/loss distributions.57 These one-day and two-day returns scenarios are both simulated using the one-day forecast conditional variance estimate.58 OCC believes that this could lead to a risk factor’s coverage differing substantially on volatile trading days.59 As a result, OCC proposes to introduce a second-day forecast variance for all equity-based risk factors.60 The secondday conditional variance forecast would be estimated for each of the 10,000 Monte Carlo returns scenarios, resulting 50 A data set with a ‘‘fat tail’’ is one in which extreme price returns have a higher probability of occurrence than would be the case in a normal distribution. See Notice, 82 FR at 61357, note 21. 51 See Notice, 82 FR at 61357. 52 Id. 53 Id. 54 Id. 55 Id. This proposed change would not apply to STANS implied volatility scenario risk factors. For those risk factors, OCC’s existing methodology would continue to apply. See Notice, 82 FR at 61357, note 23. 56 See Notice, 82 FR at 61357. 57 Id. 58 Id. 59 Id. 60 Id. PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 in more accurately estimated two-day scenario distributions, and therefore more accurate and responsive margin requirements.61 v. Anti-Procyclical Floor for Volatility Estimates In addition, OCC proposes to modify its floor for volatility estimates. OCC currently imposes a floor on volatility estimates for its equity-based products using a 500-day look back period.62 Under the proposal, OCC would extend this look back period to 10 years (2520 days) in the enhanced model and apply this floor to volatility estimates for other products (excluding implied volatility risk factor scenarios).63 OCC believes that using a longer 10-year look back period will help ensure that OCC captures sufficient historical events/ market shocks in the calculation of its anti-procyclical floor.64 3. Proposed Enhancements to Correlation Estimates As described above, OCC’s current methodology for estimating covariance and correlations between risk factors relies on the same monthly price data feeding the econometric model, resulting in a similar lag time between updates.65 In addition, correlation estimates are based off historical returns series, with estimates between a pair of risk factors being highly sensitive to the volatility of either risk factor in the chosen pair.66 The current approach therefore results in correlation estimates being sensitive to volatile historical data.67 In order to address these limitations, OCC proposes to enhance its methodology for calculating correlation estimates by moving to a daily process for updating correlations (with a minimum of one week’s lag) to help ensure clearing member account margins are more current and thus more accurate.68 Moreover, OCC proposes to enhance its approach to modeling correlation estimates by de-volatizing 69 the returns series to estimate the correlations.70 Under the proposed approach, OCC would first consider the returns excess of the mean (i.e., the average estimated from historical data sample) and then further scale them by the corresponding estimated conditional 61 Id. 62 Id. 63 Id. 64 Id. 65 Id. 66 Id. 67 Id. 68 Id. 69 Id. 70 Id. E:\FR\FM\29MYN1.SGM 29MYN1 Federal Register / Vol. 83, No. 103 / Tuesday, May 29, 2018 / Notices variances.71 OCC believes that using devolatized returns would lead to normalizing returns across a variety of asset classes and make the correlation estimator less sensitive to sudden market jumps and therefore more stable.72 4. Defaulting Securities Methodology Under the proposal, OCC would enhance its methodology for estimating the defaulting variance in its model.73 OCC’s margin system is dependent on market data to determine clearing member margin requirements.74 Securities that do not have enough historical data are classified as ‘‘defaulting securities’’ within OCC systems.75 As noted above, within current STANS systems, the theoretical price scenarios for defaulting securities are simulated using uncorrelated return scenarios with a zero mean and a default variance, with the default variance being estimated as the average of the top 25 percent quantile of the conditional variances of all securities.76 As a result, these default estimates may be impacted by extremely illiquid securities with discontinuous data.77 In addition, the default variance (and the associated scale-factors used to scale up volatility) is also subject to sudden jumps across volatile months.78 To mitigate these concerns, OCC proposes to: (i) Use only optionable equity securities to estimate the defaulting variance; (ii) use a shorter time series to enable calibration of the model for all securities; and (iii) simulate default correlations with the driver Russell 2000 index (‘‘RUT’’).79 i. Proposed Modifications to Securities and Quantile Used in Estimation Under the proposal, only optionable equity securities, which are typically more liquid, would be considered while estimating the default variance.80 This limitation would eliminate from the estimation almost all illiquid securities with discontinuous data that could contribute to high conditional variance estimates and thus a high default variance.81 In addition, OCC proposes to estimate the default variance as the lowest estimate of the top 10% of the floored conditional variance across the 71 Id. daltland on DSKBBV9HB2PROD with NOTICES 72 Id. 73 Id. 74 See 75 See Notice, 82 FR at 61357–61358. Notice, 82 FR at 61358. 76 Id. 77 Id. 78 Id. 79 Id. 80 Id. 81 Id. VerDate Sep<11>2014 16:39 May 25, 2018 Jkt 244001 risk factors.82 OCC believes that this change in methodology would help ensure that while the estimate is aggressive it is also robust to the presence of outliers caused by a few extremely volatile securities that influence the location parameter of a distribution.83 Moreover, as a consequence of the daily updates described above, the default variances would change daily and there would be no scale-factor to amplify the effect of the variance on risk factor coverage.84 ii. Proposed Change in Time Series Under the proposal, OCC would use a shorter time series to enable calibration of the model for all securities.85 Currently, OCC does not calibrate parameters for defaulting securities that have historical data of less than two years.86 OCC is proposing to shorten this time period to approximately 6 months (180 days) to enable calibration of the model for all securities within OCC systems.87 OCC believes that this shorter time series is sufficient to produce stable calibrated parameters.88 iii. Proposed Default Correlation Under the proposal, returns scenarios for defaulting securities 89 would be simulated using a default correlation with the driver RUT.90 The default correlation of the RUT index is roughly equal to the median of all positively correlated securities with the index.91 Since 90% of the risk factors in OCC systems correlate positively to the RUT index, OCC would only consider those risk factors to determine the median.92 OCC believes that the median of the correlation distribution has been steady over a number of simulations and is therefore proposing that it replace the current methodology of simulating 82 Id. 83 Id. IV. Discussion and Commission Findings Although the Act does not specify a standard of review for an advance notice, the stated purpose of the Act is instructive: To mitigate systemic risk in the financial system and promote financial stability by, among other things, promoting uniform risk management standards for SIFMUs and strengthening the liquidity of SIFMUs.94 Section 805(a)(2) of the Act 95 authorizes the Commission to prescribe regulations containing risk-management standards for the payment, clearing, and settlement activities of designated clearing entities engaged in designated activities for which the Commission is the supervisory agency. Section 805(b) of the Act 96 provides the following objectives and principles for the Commission’s risk-management standards prescribed under Section 805(a): • To promote robust risk management; • to promote safety and soundness; • to reduce systemic risks; and • to support the stability of the broader financial system. Section 805(c) provides, in addition, that the Commission’s risk-management standards may address such areas as risk-management and default policies and procedures, among others areas.97 The Commission has adopted riskmanagement standards under Section 805(a)(2) of the Act and the Exchange Act (the ‘‘Clearing Agency Rules’’).98 The Clearing Agency Rules require, among other things, each covered clearing agency to establish, implement, maintain, and enforce written policies and procedures that are reasonably designed to meet certain minimum requirements for operations and riskmanagement practices on an ongoing 94 See 85 Id. 12 U.S.C. 5461(b). U.S.C. 5464(a)(2). 96 12 U.S.C. 5464(b). 97 12 U.S.C. 5464(c). 98 17 CFR 240.17Ad–22. See Securities Exchange Act Release No. 68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7–08–11). See also Securities Exchange Act Release No. 78961 (September 28, 2016), 81 FR 70786 (October 13, 2016) (S7–03–14) (‘‘Covered Clearing Agency Standards’’). The Commission established an effective date of December 12, 2016, and a compliance date of April 11, 2017, for the Covered Clearing Agency Standards. On March 4, 2017, the Commission granted covered clearing agencies a temporary exemption from compliance with Rule 17Ad–22(e)(3)(ii) and certain requirements in Rules 17Ad–22(e)(15)(i) and (ii) until December 31, 2017, subject to certain conditions. OCC is a ‘‘covered clearing agency’’ as defined in Rule 17Ad–22(a)(5). 95 12 86 Id. 87 Id. 88 Id. 89 See supra note 5. Notice, 82 FR at 61358. OCC notes that, in certain limited circumstances where there are reasonable grounds backed by the existing return history to support an alternative approach in which the returns are strongly correlated with those of an existing risk factor (a ‘‘proxy’’) with a full price history, OCC’s margin methodology allows its Financial Risk Management staff to construct a ‘‘conditional’’ simulation to override any default treatment that would have otherwise been applied to the defaulting security. See Notice, 82 FR at 61358, note 26. 91 See Notice, 82 FR at 61358. 92 Id. 90 See Frm 00083 uncorrelated scenarios, which OCC believes is not a realistic approach.93 93 Id. 84 Id. PO 00000 24539 Fmt 4703 Sfmt 4703 E:\FR\FM\29MYN1.SGM 29MYN1 24540 Federal Register / Vol. 83, No. 103 / Tuesday, May 29, 2018 / Notices daltland on DSKBBV9HB2PROD with NOTICES basis.99 As such, it is appropriate for the Commission to review advance notices for consistency with the objectives and principles for risk-management standards described in the Clearing Agency Rules. A. Consistency With Section 805(b) of the Act The Commission believes that the proposal contained in OCC’s Advance Notice is consistent with the stated objectives and principles of Section 805(b) of the Act. Specifically, as discussed below, the Commission believes that the changes proposed in the Advance Notice are consistent with promoting robust risk management in the area of credit risk and promoting safety and soundness, which in turn, would help reduce systemic risks and support the stability of the broader financial system.100 The Commission believes that the proposed changes promote robust risk management by enhancing OCC’s margin methodology for the reasons set forth below. First, as noted above, the STANS methodology is used to measure the exposure of portfolios of options and futures cleared by OCC and cash instruments in margin collateral on behalf of its clearing members, which allows OCC to calculate its clearing members’ margin requirements. Currently, STANS makes these calculation based on monthly price data obtained from a third-party vendor. To make the calculations more accurate and representative of recent market data, OCC proposes to amend its margin methodology to require the use of daily updates for equity price data instead of monthly updates, thereby reducing OCC’s reliance on scale-factors.101 Accordingly, the Commission believes that changing to daily price data updates would result in more accurate and timely estimations of OCC’s clearing members’ margin requirements. Second, the proposal discussed above to amend OCC’s margin methodology to require the use of daily updates for price data would allow for updates to the margin model’s statistical parameters on a daily, instead of monthly, basis.102 Similarly, the proposal would also amend STANS to introduce other features that would improve the accuracy of its models and, consequently, produce risk exposure and margin requirement calculations that better reflect current market 99 17 CFR 240.17Ad–22. U.S.C. 5464(b). 101 See supra note 40. 102 See supra note 40. 100 12 VerDate Sep<11>2014 16:39 May 25, 2018 conditions. For example, the proposal would: (i) Amend STANS to account for the asymmetric volatility phenomenon observed in financial markets and allow for conditional volatility forecast to be more accurate and timely to market downturns;103 (ii) amend the statistical distribution for modeling equity price returns to more appropriately model fat tails and, consequently, more accurately model returns; (iii) introduce a secondday volatility forecast into the model to provide for more accurate and timely estimations of its two-day scenario distributions then currently provided by its one-day forecast variance; and (iv) amend STANS to impose a volatility floor using a 10-year look back period to reduce procyclicality in the margin model by capturing sufficient market events in its calculations. Accordingly, the Commission believes that the introduction of enhancements to improve the accuracy of the STANS margin models would enable OCC to more effectively calculate clearing members’ margin requirements. Third, as described earlier, OCC proposes to enhance its approach to model correlation estimates by moving to a daily process for updating correlations and by de-volatizing the return series to estimate the correlations. This change is intended to lead to normalized returns across a variety of asset classes and make the correlation estimator less sensitive to sudden market jumps and therefore more stable. Accordingly, the Commission believes that updating the correlations daily and de-volatizing the return series to reduce the estimator’s sensitivity to market jumps promotes more accurate and robust models within the STANS methodology. Finally, to enhance its methodology for estimating the defaulting securities in its model, OCC proposes to: (i) Modify the method for estimating the default variance to include only optionable equity securities; (ii) use a shorter time series of six months instead of two years to enable calibration of the model for all securities within OCC systems; and (iii) simulate return scenarios for defaulting securities assuming a default correlation with the driver RUT. Accordingly, the Commission believes these changes will mitigate the effect that extremely illiquid securities with discontinuous data can have on OCC’s default estimates, while further decreasing the degree to which the default variance is subject to sudden jumps across volatile months. Taken together, the Commission believes that these proposals would improve the accuracy of OCC’s credit exposure calculations and, consequently, OCC’s calculations of its clearing members’ margin requirements. Therefore, the Commission believes the changes proposed in the Advance Notice would promote robust risk management, consistent with Section 805(b) of the Act.104 The Commission further believes that the proposed changes would help promote safety and soundness, reduce systemic risk and support the stability of the broader financial system. As described above, the proposed changes are designed to better limit OCC’s credit exposure to the clearing members in the event of a clearing member default. More specifically, the daily updates of the pricing data, the enhancements to the econometric model, and the enhancements to the correlation estimates promote more accurate and stable model measurements that have less volatility. Moreover, the enhancements to the defaulting securities methodology will decrease the manner in which the default estimates are affected by illiquid securities and reducing the amount to which the default variance is subject to sudden jumps. By better limiting credit exposure to its clearing members, OCC’s proposed changes are designed to help ensure that, in the event of a clearing member default, OCC’s operations would not be disrupted and that its SIFMU functions would therefore be able to continue in a safe and sound manner. Furthermore, the ongoing safe and sound functioning of OCC via an enhanced ability to determine margin requirements should help ensure that non-defaulting clearing members would not be exposed to losses that they cannot anticipate or control. As such, the Commission finds that the proposed changes are consistent with the promotion of safety and soundness, which in turn, would reduce systemic risks and support the stability of the broader financial system, consistent with Section 805(b) of the Act.105 Therefore, the Commission believes the changes proposed in the Advance Notice are consistent with Section 805(b) of the Act.106 B. Consistency With Exchange Act Rule 17Ad–22(e)(6) The Commission believes that the changes proposed in the Advance 104 12 U.S.C. 5464(b). 105 Id. 103 See Jkt 244001 PO 00000 Notice, 82 FR at 61357. Frm 00084 Fmt 4703 Sfmt 4703 106 Id. E:\FR\FM\29MYN1.SGM 29MYN1 Federal Register / Vol. 83, No. 103 / Tuesday, May 29, 2018 / Notices Notice are consistent with Rule 17Ad– 22(e)(6) under the Exchange Act, which requires that OCC establish, implement, maintain, and enforce written policies and procedures reasonably designed to cover its credit exposures to its participants by establishing a risk-based margin system that, among other things: (i) Considers, and produces margin levels commensurate with the risks and particular attributes of each relevant product, portfolio, and market; (ii) calculates margin sufficient to cover its potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default; and (iii) uses reliable sources of timely price data and uses procedures and sound valuation models for addressing circumstances in which pricing data is not readily available or reliable.107 As described above, the proposal contained in the Advance Notice would make several amendments to OCC’s margin methodology designed to improve how it: (i) Accounts for asymmetry in conditional variance; 108 (ii) models the statistical distribution of price returns; 109 (iii) models second-day volatility forecasts; 110 (iv) estimates covariance and correlations between risk factors to provide for stable and sensitive correlation estimations; 111 and (v) treats defaulting securities by reducing the impact that illiquid securities with discontinuous data have on default variance estimates.112 The Commission believes the modifications proposed are designed to improve the manner in which STANS would calculate daily margin requirements for OCC’s clearing members. Consequently, the Commission believes that the proposal is designed both (i) to consider, and produce margin levels commensurate with, the risks and particular attributes of each relevant product, portfolio, and market 113 and (ii) to calculate margin sufficient to cover OCC’s potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default.114 Additionally, as discussed in the Advance Notice,115 the proposal would introduce daily updates for price data 107 17 CFR 240.17AD–22(e)(6). Notice of Filing of Advance Notice, 82 FR at 61357. 109 Id. 110 Id. 111 Id. 112 See Notice of Filing of Advance Notice, 82 FR at 61357–61358. 113 See 17 CFR 240.17Ad–22(e)(6)(i). 114 See 17 CFR 240.17Ad–22(e)(6)(iii). 115 See Notice, 82 FR at 61356. daltland on DSKBBV9HB2PROD with NOTICES 108 See VerDate Sep<11>2014 16:39 May 25, 2018 Jkt 244001 for equity products. This data would be obtained from a reliable industry vendor. Consequently, the Commission believes that the proposal contained in the Advance Notice would help ensure that OCC’s margin methodology would utilize a reliable source of timely price data, which would better reflect current market conditions than the current monthly updates, and thereby result in more accurate and responsive margin requirements.116 Consequently, the Commission finds that the proposal is consistent with Exchange Act Rule 17Ad–22(e)(6). V. Conclusion It is therefore noticed, pursuant to Section 806(e)(1)(I) of the Payment Supervision Act,117 that the Commission does not object to Advance Notice (SR–OCC–2017–811) and that OCC is authorized to implement the proposed change. By the Commission. Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–11454 Filed 5–25–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–83302; File No. SR– CboeBZX–2018–034] Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to the Listing and Trading of the iShares Gold Strategy ETF, a Series of the iShares U.S. ETF Trust May 22, 2018. 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 May 9, 2018, Cboe BZX Exchange, Inc. (‘‘Exchange’’ or ‘‘BZX’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Exchange has designated this proposal as a ‘‘noncontroversial’’ proposed rule change pursuant to Section 19(b)(3)(A) of the Act 3 and Rule 19b–4(f)(6)(iii) 4 thereunder, which renders it effective upon filing with the Commission. The 116 See 17 CFR 240.17Ad–22(e)(6)(iv). U.S.C. 5465(e)(1)(G). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b–4(f)(6)(iii). 117 12 PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 24541 Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange filed a proposal to amend a representation made in a rule change previously approved by the Commission relating to the listing and trading of the iShares Gold Strategy ETF (the ‘‘Fund’’), a series of the iShares U.S. ETF Trust (the ‘‘Trust’’). The text of the proposed rule change is available at the Exchange’s website at www.markets.cboe.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The shares of the Fund (the ‘‘Shares’’) were approved for listing and trading on the Exchange under Exchange Rule 14.11(i), which governs the listing and trading of Managed Fund Shares.5 The Shares have not yet commenced trading on the Exchange. The Fund is a series of the Trust, which was established as a Delaware statutory trust on June 21, 2011. BlackRock Fund Advisors (the ‘‘Adviser’’) will serve as the investment adviser to the Fund. The Trust is registered with the Commission as an open-end management investment company and has filed a registration statement on behalf of the Fund on Form N–1A (‘‘Registration Statement’’) with the Commission.6 5 See Securities Exchange Act Release No. 83014 (April 9, 2018), 83 FR 16150 (April 13, 2018) (SR– CboeBZX–2017–023) (the ‘‘Approval Order’’). 6 See Registration Statement on Form N–1A for the Trust, filed with the Commission on November 1, 2017 (File Nos. 333–179904 and 811–22649). The descriptions of the Fund and the Shares contained herein are based, in part, on information in the E:\FR\FM\29MYN1.SGM Continued 29MYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 83, Number 103 (Tuesday, May 29, 2018)]
[Notices]
[Pages 24536-24541]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-11454]

[[Page 24536]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83305; File No. SR-OCC-2017-811]

Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of No Objection To Advance Notice Filing Concerning The Options
Clearing Corporation's Margin Methodology

May 23, 2018.

I. Introduction

On November 13, 2017, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'')
advance notice SR-OCC-2017-811 (``Advance Notice'') pursuant to Section
806(e)(1) of the Payment, Clearing, and Settlement Supervision Act of
2010 (``Payment Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) under
the Securities Exchange Act of 1934 (``Exchange Act'') \2\ to propose
several enhancements to OCC's margin methodology, the System for
Theoretical Analysis and Numerical Simulations (``STANS''), OCC's
proprietary risk management system that calculates clearing member
margin requirements.\3\ The proposed changes would modify OCC's margin
methodology to: (1) Obtain daily price data for equity products
(including daily corporate action-adjusted returns of equities where
prices and thus returns of securities are adjusted for any dividends
issued, stock splits, etc.) for use in the daily estimation of
econometric model parameters; (2) enhance its econometric model for
updating statistical parameters (e.g., parameters concerning
correlations or volatility) for all risk factors that reflect the most
recent data obtained; (3) improve the sensitivity and stability of
correlation estimates across risk factors by using de-volatized \4\
returns (but using a 500 day look back period); and (4) improve OCC's
methodology related to the treatment of defaulting securities \5\ that
would result in stable and realistic risk estimates for such
securities.\6\ The Advance Notice was published for comment in the
Federal Register on December 27, 2017.\7\ On January 11, 2018, the
Commission requested OCC provide it with additional information
regarding the Advance Notice.\8\ OCC responded to this request for
information on January 23, 2018.\9\ On March 22, 2018, the Commission
determined that the Advance Notice raises complex issues because OCC
proposes to make detailed, substantial, and numerous changes to its
margin methodology.\10\ As such, the Commission extended review period
of the Advance Notice until May 23, 2018.\11\ As of May 23, 2018, the
Commission has received one comment letter on the proposal contained in
the Advance Notice.\12\ This publication serves as notice of no
objection to the Advance Notice.
---------------------------------------------------------------------------

\1\ 12 U.S.C. 5465(e)(1). The Financial Stability Oversight
Council designated OCC a systemically important financial market
utility (``SIFMU'') on July 18, 2012. See Financial Stability
Oversight Council 2012 Annual Report, Appendix A, available at
https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, OCC is required to comply
with the Payment Supervision Act and file advance notices with the
Commission. See 12 U.S.C. 5465(e).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ See Notice infra note 7, at 82 FR 61355.
\4\ De-volatization is a process of normalizing historical data
with the associated volatility thus facilitating comparison between
different sets of data.
\5\ Within the context of OCC's margin system, securities that
do not have enough historical data for calibration are classified as
``defaulting securities.'' See Notice, 82 FR at 61355, note 15.
\6\ See Notice infra note 7, at 82 FR 61354.
\7\ Exchange Act Release No. 82371 (Dec. 20, 2017), 82 FR 61354
(Dec. 27, 2017) (SR-OCC-2017-811) (``Notice''). On November 13,
2017, OCC also filed a related proposed rule change (SR-OCC-2017-
022) with the Commission pursuant to Exchange Act Section 19(b)(1)
and Rule 19b-4 thereunder, seeking approval of changes to its rules
necessary to implement the proposal contained in the Advance Notice
(``Proposed Rule Change''). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-
4, respectively. The Proposed Rule Change was published in the
Federal Register on December 4, 2017. Exchange Act Release No. 82161
(Nov. 28, 2017), 82 FR 57306 (Dec. 4, 2017) (SR-OCC-2017-022).
\8\ See Memorandum from Office of Clearance and Settlement,
Division of Trading and Markets, dated January 12, 2018, available
at https://www.sec.gov/comments/sr-occ-2017-811/occ2017811.htm.
\9\ See Memorandum from Office of Clearance and Settlement,
Division of Trading and Markets, dated March 6, 2018, available at
https://www.sec.gov/comments/sr-occ-2017-811/occ2017811.htm.
\10\ See Extension Notice, 82 FR at 13315.
\11\ Id.
\12\ See letter from Michael Kitlas, dated November 28, 2017, to
Eduardo A. Aleman, Assistant Secretary, Commission, available at
https://www.sec.gov/comments/sr-occ-2017-022/occ2017022.htm
(``Kitlas Letter''). After reviewing the Kitlas Letter, the
Commission believes that it is nonresponsive to the Advance Notice
and therefore outside the scope of the proposal.
Since the proposal contained in the Advance Notice was also
filed as a proposed rule change, all public comments received on the
proposal are considered regardless of whether the comments are
submitted on the Proposed Rule Change or the Advance Notice.
---------------------------------------------------------------------------

II. Background \13\
---------------------------------------------------------------------------

\13\ The description of the background of the proposal is
substantially excerpted from the Notice. See Notice, 82 FR at 61355.
---------------------------------------------------------------------------

OCC's Current Margin Methodology

OCC's margin methodology, the System for Theoretical Analysis and
Numerical Simulations (``STANS''), calculates clearing member margin
requirements.\14\ STANS utilizes large-scale Monte Carlo simulations to
forecast price and volatility movements in determining a clearing
member's margin requirement.\15\ The STANS margin requirement is
calculated at the portfolio level of clearing member accounts with
positions in marginable securities and consists of an estimate of a 99%
expected shortfall \16\ over a two-day time horizon and an add-on
margin charge for model risk (the concentration/dependence stress test
charge).\17\ The STANS methodology is used to measure the exposure of
portfolios of options and futures cleared by OCC and cash instruments
in margin collateral.\18\
---------------------------------------------------------------------------

\14\ See Exchange Act Release No. 53322 (Feb. 15, 2006), 71 FR
9403 (Feb. 23, 2006) (File No. SR-OCC-2004-20).
\15\ See OCC Rule 601; see also Notice, 82 FR at 61355.
\16\ See Notice, 82 FR at 61355.
The expected shortfall component is established as the
estimated average of potential losses higher than the 99% value at
risk threshold. See Notice, 82 FR at 61355, note 8.
\17\ See Notice, 82 FR at 61355. A detailed description of the
STANS methodology is available at https://optionsclearing.com/risk-management/margins/. See Notice, 82 FR at 61355, note 9.
\18\ See Notice, 82 FR at 61355.
---------------------------------------------------------------------------

A ``risk factor'' within OCC's margin system may be defined as a
product or attribute whose historical data are used to estimate and
simulate the risk for an associated product.\19\ 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 indexes; returns on implied volatility risk factors
that are a set of nine chosen volatility pivots per product; changes in
foreign exchange rates; securities underlying equity-based products;
and changes in model parameters that sufficiently capture the model
dynamics from a larger set of data.\20\
---------------------------------------------------------------------------

\19\ Id.
\20\ Id.
---------------------------------------------------------------------------

Under OCC's current margin methodology, OCC obtains monthly price
data for most of its equity-based products from a third-party
vendor.\21\ This data arrive around the second week of every month in
arrears and require approximately four weeks for OCC to process prior
to installing into OCC's margin system.\22\ As a result, correlations
and statistical parameters for risk factors at any point in time
represent stale data and therefore may not be representative of the
most recent market data.\23\ In the absence of daily updates, OCC
employs an approach

[[Page 24537]]

where one or more identified market proxies (or ``scale-factors'') are
used to incorporate day-to-day market volatility across all associated
asset classes throughout.\24\ The scale-factor approach, however,
assumes a perfect correlation of the volatilities between the security
and its scale-factor, which gives little room to capture the
idiosyncratic risk of a given security and is different from the broad
market risk represented by the scale-factor.\25\
---------------------------------------------------------------------------

\21\ Id.
\22\ Id.
\23\ Id.
\24\ Id.
\25\ Id.
---------------------------------------------------------------------------

In addition, OCC imposes a floor on volatility estimates for its
equity-based products using a 500-day look back period.\26\ OCC
believes that using monthly price data, coupled with the dependency of
margins on scale-factors and the volatility floor can result in
imprecise changes in margins charged to clearing members, specifically
across periods of heavy volatility when the correlation between the
risk factor and a scale-factor fluctuate.\27\
---------------------------------------------------------------------------

\26\ See Notice, 82 FR at 61355.
In risk management, it is a common practice to establish a
floor for volatility at a certain level in order to protect against
procyclicality in the model. See Notice, 82 FR at 61355, note 14.
\27\ See Notice, 82 FR at 61355.
---------------------------------------------------------------------------

OCC's current methodology for estimating covariance and
correlations between risk factors relies on the same monthly data
described above, resulting in a similar lag time between updates.\28\
In addition, correlation estimates are based off historical returns
series, with estimates between a pair of risk factors being highly
sensitive to the volatility of either risk factor in the chosen
pair.\29\ Accordingly, OCC believes that the current approach results
in potentially less stable correlation estimates that may not be
representative of current market conditions.\30\
---------------------------------------------------------------------------

\28\ Id.
\29\ Id.
\30\ Id.
---------------------------------------------------------------------------

Finally, under OCC's existing margin methodology, theoretical price
scenarios for ``defaulting securities'' \31\ are simulated using
uncorrelated return scenarios with an average zero return and a pre-
specified volatility called ``default variance.'' \32\ The default
variance is estimated as the average of the top 25 percent quantile of
the conditional variances of all securities.\33\ As a result, OCC
believes that these default estimates may be impacted by extremely
illiquid securities with discontinuous data.\34\ In addition, OCC
believes that the default variance (and the associated scale-factors
used to scale up volatility) is also subject to sudden jumps across
successive months because it is derived from monthly data updates, as
opposed to daily updates, which are prone to wider fluctuations and are
subject to adjustments using scale-factors.\35\
---------------------------------------------------------------------------

\31\ See supra note 5.
\32\ See Notice, 82 FR at 61355.
\33\ Id.
\34\ Id.
\35\ Id.
---------------------------------------------------------------------------

III. Description of the Proposal in the Advance Notice \36\
---------------------------------------------------------------------------

\36\ The description of the proposal is substantially excerpted
from the Notice. See Notice, 82 FR at 61356-61358.
In addition to the proposed methodology changes described
herein, OCC also would make some clarifying and clean-up changes,
unrelated to the proposed changes described herein, to update its
margin methodology to reflect existing practices for the daily
calibration of seasonal and non-seasonal energy models and the
removal of methodology language for certain products that are no
longer cleared by OCC. See Notice, 82 FR at 61356, note 17.
---------------------------------------------------------------------------

The Advance Notice proposes changes to OCC's margin methodology,
STANS. More specifically, OCC proposes to: (1) Obtain daily price data
for equity products (including daily corporate action-adjusted returns
of equities where price and thus returns of securities are adjusted for
any dividends issued, stock splits, etc.) for use in the daily
estimation of econometric model parameters; (2) enhance its econometric
model for updating statistical parameters (e.g., parameters concerning
correlations or volatility) for all risk factors that reflect the most
recent data obtained; (3) improve the sensitivity and stability of
correlation estimates across risk factors by using de-volatized \37\
returns (but using a 500 day look back period); and (4) improve OCC's
methodology related to the treatment of defaulting securities \38\ that
would result in stable and realistic risk estimates for such
securities.
---------------------------------------------------------------------------

\37\ De-volatization is a process of normalizing historical data
with the associated volatility thus facilitating comparison between
different sets of data.
\38\ See supra note 5.
---------------------------------------------------------------------------

As a general matter, OCC believes that introducing daily updates
for price data would result in more accurate margin requirements that
are based off of the most recent market data. OCC also believes that
the other model enhancements would, among other things, improve OCC's
approach to estimating covariance and correlations between risk factors
in an effort to achieve more accurate and timely correlation
estimations.\39\ OCC further represents that the proposed changes would
improve OCC's methodology related to the treatment of defaulting
securities by reducing the impact that illiquid securities with
discontinuous data have on default variance estimates. Each of these
proposals is discussed in more detail below.
---------------------------------------------------------------------------

\39\ OCC's covariance and correlation analytics estimate whether
risk factors are positively or inversely related and to what extent
any relationship exists.
---------------------------------------------------------------------------

1. Daily Updates of Price Data

OCC proposes to introduce daily updates for price data for equity
products, including daily corporate action-adjusted returns of
equities, Exchange Traded Funds (``ETFs''), Exchange Traded Notes
(``ETNs'') and certain indexes.\40\ OCC believes that the proposed
change would help ensure that OCC's margin methodology is reliant on
data that is more representative of current market conditions, thereby
resulting in more accurate and responsive margin requirements.\41\ In
addition, OCC believes that the introduction of daily price updates
would enable OCC's margin methodology to better capture both market and
idiosyncratic risk by allowing for daily updates to the parameters
associated with the econometric model (discussed below) that captures
the risk associated with a particular product, and therefore help
ensure that OCC's margin requirements are based on more current market
conditions.\42\ As a result, OCC would also reduce its reliance on the
use of scale-factors to incorporate day-to-day market volatility, which
OCC believes give little room to capture the idiosyncratic risk of a
given security and is different from the broad market risk represented
by the scale-factor.\43\
---------------------------------------------------------------------------

\40\ See Notice, 82 FR at 61356.
\41\ Id.
\42\ Id.
\43\ Id.
---------------------------------------------------------------------------

2. Proposed Enhancements to the Econometric Model

In addition to introducing daily updates for price and corporate
action-adjusted returns data, OCC is proposing enhancements to its
econometric model for calculating statistical parameters for all
qualifying risk factors that reflect the most recent data obtained
(e.g., OCC would be able to calculate parameters such as volatility and
correlations on a daily basis using the new daily price data discussed
above). More specifically, OCC proposes to enhance its econometric
model by: (i) Introducing daily updates for statistical parameters;
(ii) introducing features in its econometric model that are designed to
take into account asymmetry in the model used to forecast volatility
associated with a risk factor ; (iii) modifying the statistical
distribution

[[Page 24538]]

used to model the returns of equity prices; (iv) introducing a second-
day forecast for volatility into the model to estimate the two-day
scenario distributions for risk factors; and (v) imposing a floor on
volatility estimates using a 10-year look back period. These proposed
model enhancements are described in detail below.
i. Daily Updates for Statistical Parameters
Under the proposal, the statistical parameters for the model would
be updated on a daily basis using the new daily price data obtained by
OCC from a reliable third-party (as described above).\44\ As a result,
OCC would no longer need to rely on scale-factors to approximate day-
to-day market volatility for equity-based products.\45\ OCC believes
that calibrating statistical parameters on a daily basis would allow
OCC to calculate more accurate margin requirements that represent the
most recent market data.\46\
---------------------------------------------------------------------------

\44\ See Notice, 82 FR at 61356. OCC notes that this change
would apply to most risk factors with the exception of certain
equity indexes, Treasury securities, and energy futures products,
which are already updated on a daily basis. See Notice, 82 FR 61356,
at note 18.
\45\ See Notice, 82 FR at 61356.
\46\ Id.
---------------------------------------------------------------------------

ii. Proposed Enhancements To Capture Asymmetry in Conditional Variance
The current approach for forecasting the conditional variance for a
given risk factor does not consider the asymmetric volatility
phenomenon observed in financial markets (also called the ``leverage
effect'') where volatility is more accurate and timely and reactive to
market downturns.\47\ Under the proposal, OCC would amend its
econometric model to include new features (i.e., incorporating
asymmetry into its forecast volatility) designed to allow the
conditional volatility forecast to be more accurate and timely to
market downturns and thereby capture the most significant dynamics of
the relationship between price and volatility observed in financial
markets.\48\ OCC believes the proposed enhancement would result in more
accurate and responsive margin requirements, particularly in market
downturns.\49\
---------------------------------------------------------------------------

\47\ See Notice, 82 FR at 61357.
\48\ Id.
\49\ Id.
---------------------------------------------------------------------------

iii. Proposed Change in Statistical Distribution
OCC also proposes to change the statistical distribution used to
model the returns of equity prices. OCC's current methodology uses a
fat tailed distribution \50\ (the Student's t-distribution) to model
returns; \51\ however, price scenarios generated using very large log-
return scenarios (positive) that follow this distribution can approach
infinity and could potentially result in excessively large price jumps,
a known limitation of this distribution.\52\ Under the proposal, OCC
would adopt a more defined distribution (Standardized Normal Reciprocal
Inverse Gaussian or NRIG) for modeling returns, which OCC believes
would more appropriately simulate future returns based on the
historical price data for the products in question and allows for more
appropriate modeling of fat tails.\53\ As a result, OCC believes that
the proposed change would lead to more consistent treatment of log
returns both on the upside as well as downside of the distribution.\54\
---------------------------------------------------------------------------

\50\ A data set with a ``fat tail'' is one in which extreme
price returns have a higher probability of occurrence than would be
the case in a normal distribution. See Notice, 82 FR at 61357, note
21.
\51\ See Notice, 82 FR at 61357.
\52\ Id.
\53\ Id.
\54\ Id.
---------------------------------------------------------------------------

iv. Second Day Volatility Forecast
OCC further proposes to introduce a second-day forecast for
volatility into the econometric model to estimate the two-day scenario
distributions for risk factors.\55\ Under the current methodology, OCC
typically uses a two-day horizon to determine its risk exposure to a
given portfolio.\56\ This is done by simulating 10,000 theoretical
price scenarios for the two-day horizon using a one-day forecast
conditional variance; the value at risk and expected shortfall
components of the margin requirement are then determined from the
simulated profit/loss distributions.\57\ These one-day and two-day
returns scenarios are both simulated using the one-day forecast
conditional variance estimate.\58\ OCC believes that this could lead to
a risk factor's coverage differing substantially on volatile trading
days.\59\ As a result, OCC proposes to introduce a second-day forecast
variance for all equity-based risk factors.\60\ The second-day
conditional variance forecast would be estimated for each of the 10,000
Monte Carlo returns scenarios, resulting in more accurately estimated
two-day scenario distributions, and therefore more accurate and
responsive margin requirements.\61\
---------------------------------------------------------------------------

\55\ Id. This proposed change would not apply to STANS implied
volatility scenario risk factors. For those risk factors, OCC's
existing methodology would continue to apply. See Notice, 82 FR at
61357, note 23.
\56\ See Notice, 82 FR at 61357.
\57\ Id.
\58\ Id.
\59\ Id.
\60\ Id.
\61\ Id.
---------------------------------------------------------------------------

v. Anti-Procyclical Floor for Volatility Estimates
In addition, OCC proposes to modify its floor for volatility
estimates. OCC currently imposes a floor on volatility estimates for
its equity-based products using a 500-day look back period.\62\ Under
the proposal, OCC would extend this look back period to 10 years (2520
days) in the enhanced model and apply this floor to volatility
estimates for other products (excluding implied volatility risk factor
scenarios).\63\ OCC believes that using a longer 10-year look back
period will help ensure that OCC captures sufficient historical events/
market shocks in the calculation of its anti-procyclical floor.\64\
---------------------------------------------------------------------------

\62\ Id.
\63\ Id.
\64\ Id.
---------------------------------------------------------------------------

3. Proposed Enhancements to Correlation Estimates

As described above, OCC's current methodology for estimating
covariance and correlations between risk factors relies on the same
monthly price data feeding the econometric model, resulting in a
similar lag time between updates.\65\ In addition, correlation
estimates are based off historical returns series, with estimates
between a pair of risk factors being highly sensitive to the volatility
of either risk factor in the chosen pair.\66\ The current approach
therefore results in correlation estimates being sensitive to volatile
historical data.\67\
---------------------------------------------------------------------------

\65\ Id.
\66\ Id.
\67\ Id.
---------------------------------------------------------------------------

In order to address these limitations, OCC proposes to enhance its
methodology for calculating correlation estimates by moving to a daily
process for updating correlations (with a minimum of one week's lag) to
help ensure clearing member account margins are more current and thus
more accurate.\68\ Moreover, OCC proposes to enhance its approach to
modeling correlation estimates by de-volatizing \69\ the returns series
to estimate the correlations.\70\ Under the proposed approach, OCC
would first consider the returns excess of the mean (i.e., the average
estimated from historical data sample) and then further scale them by
the corresponding estimated conditional

[[Page 24539]]

variances.\71\ OCC believes that using de-volatized returns would lead
to normalizing returns across a variety of asset classes and make the
correlation estimator less sensitive to sudden market jumps and
therefore more stable.\72\
---------------------------------------------------------------------------

\68\ Id.
\69\ Id.
\70\ Id.
\71\ Id.
\72\ Id.
---------------------------------------------------------------------------

4. Defaulting Securities Methodology

Under the proposal, OCC would enhance its methodology for
estimating the defaulting variance in its model.\73\ OCC's margin
system is dependent on market data to determine clearing member margin
requirements.\74\ Securities that do not have enough historical data
are classified as ``defaulting securities'' within OCC systems.\75\ As
noted above, within current STANS systems, the theoretical price
scenarios for defaulting securities are simulated using uncorrelated
return scenarios with a zero mean and a default variance, with the
default variance being estimated as the average of the top 25 percent
quantile of the conditional variances of all securities.\76\ As a
result, these default estimates may be impacted by extremely illiquid
securities with discontinuous data.\77\ In addition, the default
variance (and the associated scale-factors used to scale up volatility)
is also subject to sudden jumps across volatile months.\78\ To mitigate
these concerns, OCC proposes to: (i) Use only optionable equity
securities to estimate the defaulting variance; (ii) use a shorter time
series to enable calibration of the model for all securities; and (iii)
simulate default correlations with the driver Russell 2000 index
(``RUT'').\79\
---------------------------------------------------------------------------

\73\ Id.
\74\ See Notice, 82 FR at 61357-61358.
\75\ See Notice, 82 FR at 61358.
\76\ Id.
\77\ Id.
\78\ Id.
\79\ Id.
---------------------------------------------------------------------------

i. Proposed Modifications to Securities and Quantile Used in Estimation
Under the proposal, only optionable equity securities, which are
typically more liquid, would be considered while estimating the default
variance.\80\ This limitation would eliminate from the estimation
almost all illiquid securities with discontinuous data that could
contribute to high conditional variance estimates and thus a high
default variance.\81\ In addition, OCC proposes to estimate the default
variance as the lowest estimate of the top 10% of the floored
conditional variance across the risk factors.\82\ OCC believes that
this change in methodology would help ensure that while the estimate is
aggressive it is also robust to the presence of outliers caused by a
few extremely volatile securities that influence the location parameter
of a distribution.\83\ Moreover, as a consequence of the daily updates
described above, the default variances would change daily and there
would be no scale-factor to amplify the effect of the variance on risk
factor coverage.\84\
---------------------------------------------------------------------------

\80\ Id.
\81\ Id.
\82\ Id.
\83\ Id.
\84\ Id.
---------------------------------------------------------------------------

ii. Proposed Change in Time Series
Under the proposal, OCC would use a shorter time series to enable
calibration of the model for all securities.\85\ Currently, OCC does
not calibrate parameters for defaulting securities that have historical
data of less than two years.\86\ OCC is proposing to shorten this time
period to approximately 6 months (180 days) to enable calibration of
the model for all securities within OCC systems.\87\ OCC believes that
this shorter time series is sufficient to produce stable calibrated
parameters.\88\
---------------------------------------------------------------------------

\85\ Id.
\86\ Id.
\87\ Id.
\88\ Id.
---------------------------------------------------------------------------

iii. Proposed Default Correlation
Under the proposal, returns scenarios for defaulting securities
\89\ would be simulated using a default correlation with the driver
RUT.\90\ The default correlation of the RUT index is roughly equal to
the median of all positively correlated securities with the index.\91\
Since 90% of the risk factors in OCC systems correlate positively to
the RUT index, OCC would only consider those risk factors to determine
the median.\92\ OCC believes that the median of the correlation
distribution has been steady over a number of simulations and is
therefore proposing that it replace the current methodology of
simulating uncorrelated scenarios, which OCC believes is not a
realistic approach.\93\
---------------------------------------------------------------------------

\89\ See supra note 5.
\90\ See Notice, 82 FR at 61358. OCC notes that, in certain
limited circumstances where there are reasonable grounds backed by
the existing return history to support an alternative approach in
which the returns are strongly correlated with those of an existing
risk factor (a ``proxy'') with a full price history, OCC's margin
methodology allows its Financial Risk Management staff to construct
a ``conditional'' simulation to override any default treatment that
would have otherwise been applied to the defaulting security. See
Notice, 82 FR at 61358, note 26.
\91\ See Notice, 82 FR at 61358.
\92\ Id.
\93\ Id.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

Although the Act does not specify a standard of review for an
advance notice, the stated purpose of the Act is instructive: To
mitigate systemic risk in the financial system and promote financial
stability by, among other things, promoting uniform risk management
standards for SIFMUs and strengthening the liquidity of SIFMUs.\94\
---------------------------------------------------------------------------

\94\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------

Section 805(a)(2) of the Act \95\ authorizes the Commission to
prescribe regulations containing risk-management standards for the
payment, clearing, and settlement activities of designated clearing
entities engaged in designated activities for which the Commission is
the supervisory agency. Section 805(b) of the Act \96\ provides the
following objectives and principles for the Commission's risk-
management standards prescribed under Section 805(a):
---------------------------------------------------------------------------

\95\ 12 U.S.C. 5464(a)(2).
\96\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

To promote robust risk management;
to promote safety and soundness;
to reduce systemic risks; and
to support the stability of the broader financial system.
Section 805(c) provides, in addition, that the Commission's risk-
management standards may address such areas as risk-management and
default policies and procedures, among others areas.\97\
---------------------------------------------------------------------------

\97\ 12 U.S.C. 5464(c).
---------------------------------------------------------------------------

The Commission has adopted risk-management standards under Section
805(a)(2) of the Act and the Exchange Act (the ``Clearing Agency
Rules'').\98\ The Clearing Agency Rules require, among other things,
each covered clearing agency to establish, implement, maintain, and
enforce written policies and procedures that are reasonably designed to
meet certain minimum requirements for operations and risk-management
practices on an ongoing

[[Page 24540]]

basis.\99\ As such, it is appropriate for the Commission to review
advance notices for consistency with the objectives and principles for
risk-management standards described in the Clearing Agency Rules.
---------------------------------------------------------------------------

\98\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No.
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11).
See also Securities Exchange Act Release No. 78961 (September 28,
2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing
Agency Standards''). The Commission established an effective date of
December 12, 2016, and a compliance date of April 11, 2017, for the
Covered Clearing Agency Standards. On March 4, 2017, the Commission
granted covered clearing agencies a temporary exemption from
compliance with Rule 17Ad-22(e)(3)(ii) and certain requirements in
Rules 17Ad-22(e)(15)(i) and (ii) until December 31, 2017, subject to
certain conditions. OCC is a ``covered clearing agency'' as defined
in Rule 17Ad-22(a)(5).
\99\ 17 CFR 240.17Ad-22.
---------------------------------------------------------------------------

A. Consistency With Section 805(b) of the Act

The Commission believes that the proposal contained in OCC's
Advance Notice is consistent with the stated objectives and principles
of Section 805(b) of the Act. Specifically, as discussed below, the
Commission believes that the changes proposed in the Advance Notice are
consistent with promoting robust risk management in the area of credit
risk and promoting safety and soundness, which in turn, would help
reduce systemic risks and support the stability of the broader
financial system.\100\
---------------------------------------------------------------------------

\100\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

The Commission believes that the proposed changes promote robust
risk management by enhancing OCC's margin methodology for the reasons
set forth below.
First, as noted above, the STANS methodology is used to measure the
exposure of portfolios of options and futures cleared by OCC and cash
instruments in margin collateral on behalf of its clearing members,
which allows OCC to calculate its clearing members' margin
requirements. Currently, STANS makes these calculation based on monthly
price data obtained from a third-party vendor. To make the calculations
more accurate and representative of recent market data, OCC proposes to
amend its margin methodology to require the use of daily updates for
equity price data instead of monthly updates, thereby reducing OCC's
reliance on scale-factors.\101\ Accordingly, the Commission believes
that changing to daily price data updates would result in more accurate
and timely estimations of OCC's clearing members' margin requirements.
---------------------------------------------------------------------------

\101\ See supra note 40.
---------------------------------------------------------------------------

Second, the proposal discussed above to amend OCC's margin
methodology to require the use of daily updates for price data would
allow for updates to the margin model's statistical parameters on a
daily, instead of monthly, basis.\102\ Similarly, the proposal would
also amend STANS to introduce other features that would improve the
accuracy of its models and, consequently, produce risk exposure and
margin requirement calculations that better reflect current market
conditions. For example, the proposal would: (i) Amend STANS to account
for the asymmetric volatility phenomenon observed in financial markets
and allow for conditional volatility forecast to be more accurate and
timely to market downturns;\103\ (ii) amend the statistical
distribution for modeling equity price returns to more appropriately
model fat tails and, consequently, more accurately model returns; (iii)
introduce a second-day volatility forecast into the model to provide
for more accurate and timely estimations of its two-day scenario
distributions then currently provided by its one-day forecast variance;
and (iv) amend STANS to impose a volatility floor using a 10-year look
back period to reduce procyclicality in the margin model by capturing
sufficient market events in its calculations. Accordingly, the
Commission believes that the introduction of enhancements to improve
the accuracy of the STANS margin models would enable OCC to more
effectively calculate clearing members' margin requirements.
---------------------------------------------------------------------------

\102\ See supra note 40.
\103\ See Notice, 82 FR at 61357.
---------------------------------------------------------------------------

Third, as described earlier, OCC proposes to enhance its approach
to model correlation estimates by moving to a daily process for
updating correlations and by de-volatizing the return series to
estimate the correlations. This change is intended to lead to
normalized returns across a variety of asset classes and make the
correlation estimator less sensitive to sudden market jumps and
therefore more stable. Accordingly, the Commission believes that
updating the correlations daily and de-volatizing the return series to
reduce the estimator's sensitivity to market jumps promotes more
accurate and robust models within the STANS methodology.
Finally, to enhance its methodology for estimating the defaulting
securities in its model, OCC proposes to: (i) Modify the method for
estimating the default variance to include only optionable equity
securities; (ii) use a shorter time series of six months instead of two
years to enable calibration of the model for all securities within OCC
systems; and (iii) simulate return scenarios for defaulting securities
assuming a default correlation with the driver RUT. Accordingly, the
Commission believes these changes will mitigate the effect that
extremely illiquid securities with discontinuous data can have on OCC's
default estimates, while further decreasing the degree to which the
default variance is subject to sudden jumps across volatile months.
Taken together, the Commission believes that these proposals would
improve the accuracy of OCC's credit exposure calculations and,
consequently, OCC's calculations of its clearing members' margin
requirements. Therefore, the Commission believes the changes proposed
in the Advance Notice would promote robust risk management, consistent
with Section 805(b) of the Act.\104\
---------------------------------------------------------------------------

\104\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

The Commission further believes that the proposed changes would
help promote safety and soundness, reduce systemic risk and support the
stability of the broader financial system. As described above, the
proposed changes are designed to better limit OCC's credit exposure to
the clearing members in the event of a clearing member default. More
specifically, the daily updates of the pricing data, the enhancements
to the econometric model, and the enhancements to the correlation
estimates promote more accurate and stable model measurements that have
less volatility. Moreover, the enhancements to the defaulting
securities methodology will decrease the manner in which the default
estimates are affected by illiquid securities and reducing the amount
to which the default variance is subject to sudden jumps.
By better limiting credit exposure to its clearing members, OCC's
proposed changes are designed to help ensure that, in the event of a
clearing member default, OCC's operations would not be disrupted and
that its SIFMU functions would therefore be able to continue in a safe
and sound manner. Furthermore, the ongoing safe and sound functioning
of OCC via an enhanced ability to determine margin requirements should
help ensure that non-defaulting clearing members would not be exposed
to losses that they cannot anticipate or control. As such, the
Commission finds that the proposed changes are consistent with the
promotion of safety and soundness, which in turn, would reduce systemic
risks and support the stability of the broader financial system,
consistent with Section 805(b) of the Act.\105\
---------------------------------------------------------------------------

\105\ Id.
---------------------------------------------------------------------------

Therefore, the Commission believes the changes proposed in the
Advance Notice are consistent with Section 805(b) of the Act.\106\
---------------------------------------------------------------------------

\106\ Id.
---------------------------------------------------------------------------

B. Consistency With Exchange Act Rule 17Ad-22(e)(6)

The Commission believes that the changes proposed in the Advance

[[Page 24541]]

Notice are consistent with Rule 17Ad-22(e)(6) under the Exchange Act,
which requires that OCC establish, implement, maintain, and enforce
written policies and procedures reasonably designed to cover its credit
exposures to its participants by establishing a risk-based margin
system that, among other things: (i) Considers, and produces margin
levels commensurate with the risks and particular attributes of each
relevant product, portfolio, and market; (ii) calculates margin
sufficient to cover its potential future exposure to participants in
the interval between the last margin collection and the close out of
positions following a participant default; and (iii) uses reliable
sources of timely price data and uses procedures and sound valuation
models for addressing circumstances in which pricing data is not
readily available or reliable.\107\
---------------------------------------------------------------------------

\107\ 17 CFR 240.17AD-22(e)(6).
---------------------------------------------------------------------------

As described above, the proposal contained in the Advance Notice
would make several amendments to OCC's margin methodology designed to
improve how it: (i) Accounts for asymmetry in conditional variance;
\108\ (ii) models the statistical distribution of price returns; \109\
(iii) models second-day volatility forecasts; \110\ (iv) estimates
covariance and correlations between risk factors to provide for stable
and sensitive correlation estimations; \111\ and (v) treats defaulting
securities by reducing the impact that illiquid securities with
discontinuous data have on default variance estimates.\112\
---------------------------------------------------------------------------

\108\ See Notice of Filing of Advance Notice, 82 FR at 61357.
\109\ Id.
\110\ Id.
\111\ Id.
\112\ See Notice of Filing of Advance Notice, 82 FR at 61357-
61358.
---------------------------------------------------------------------------

The Commission believes the modifications proposed are designed to
improve the manner in which STANS would calculate daily margin
requirements for OCC's clearing members. Consequently, the Commission
believes that the proposal is designed both (i) to consider, and
produce margin levels commensurate with, the risks and particular
attributes of each relevant product, portfolio, and market \113\ and
(ii) to calculate margin sufficient to cover OCC's potential future
exposure to participants in the interval between the last margin
collection and the close out of positions following a participant
default.\114\ Additionally, as discussed in the Advance Notice,\115\
the proposal would introduce daily updates for price data for equity
products. This data would be obtained from a reliable industry vendor.
Consequently, the Commission believes that the proposal contained in
the Advance Notice would help ensure that OCC's margin methodology
would utilize a reliable source of timely price data, which would
better reflect current market conditions than the current monthly
updates, and thereby result in more accurate and responsive margin
requirements.\116\ Consequently, the Commission finds that the proposal
is consistent with Exchange Act Rule 17Ad-22(e)(6).
---------------------------------------------------------------------------

\113\ See 17 CFR 240.17Ad-22(e)(6)(i).
\114\ See 17 CFR 240.17Ad-22(e)(6)(iii).
\115\ See Notice, 82 FR at 61356.
\116\ See 17 CFR 240.17Ad-22(e)(6)(iv).
---------------------------------------------------------------------------

V. Conclusion

It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Payment Supervision Act,\117\ that the Commission does not object to
Advance Notice (SR-OCC-2017-811) and that OCC is authorized to
implement the proposed change.
---------------------------------------------------------------------------

\117\ 12 U.S.C. 5465(e)(1)(G).

By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-11454 Filed 5-25-18; 8:45 am]
BILLING CODE 8011-01-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.